-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ChUo0Jv79pUdD20E+tc7QmS8k/YUFt1KxBwBWsUE5IUCpKEZ/FoK4YT8xJhBvQGd EfaRCKuNNyfLLq3X9AJdrA== 0000950133-96-002164.txt : 19961011 0000950133-96-002164.hdr.sgml : 19961011 ACCESSION NUMBER: 0000950133-96-002164 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19961010 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCLEOD INC CENTRAL INDEX KEY: 0000919943 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 584214072 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-13885 FILM NUMBER: 96641997 BUSINESS ADDRESS: STREET 1: TOWN CENTRE STREET 2: 221 THIRD AVENUE S E SUITE 500 CITY: CEDAR RAPIDS STATE: IA ZIP: 52401-1522 BUSINESS PHONE: 319-398-70 MAIL ADDRESS: STREET 1: TOWNE CENTRE STREET 2: 221 THIRD AVENUE SE SUITE 500 CITY: CEDAR RAPIDS STATE: IA ZIP: 52401-1522 S-1 1 MCLEOD, INC. FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ MCLEOD, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 4812 58-421407240 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
221 THIRD AVENUE SE, SUITE 500 CEDAR RAPIDS, IA 52401 (319) 364-0000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ CLARK E. MCLEOD CHAIRMAN AND CHIEF EXECUTIVE OFFICER MCLEOD, INC. 221 THIRD AVENUE SE, SUITE 500 CEDAR RAPIDS, IA 52401 (319) 364-0000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JOSEPH G. CONNOLLY, JR., ESQ. NANCY J. KELLNER, ESQ. JAMES J. JUNEWICZ, ESQ. HOGAN & HARTSON L.L.P. MAYER, BROWN & PLATT 555 THIRTEENTH STREET, N.W. 190 SOUTH LASALLE STREET WASHINGTON, D.C. 20004 CHICAGO, IL 60603 (202) 637-5600 (312) 782-0600
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------ CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE - ----------------------------------------------------------------------------------------------------------- Class A Common Stock, $.01 par value..................... 6,900,000 $32.50 $224,250,000 $67,955 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION OCTOBER , 1996 PROSPECTUS 6,000,000 SHARES MCLEOD, INC. [MCLEOD LOGO] CLASS A COMMON STOCK ($.01 PAR VALUE) Of the 6,000,000 shares of Class A Common Stock, $.01 par value per share (the "Class A Common Stock"), offered hereby (the "Offering"), 5,471,000 shares are being sold by McLeod, Inc. (the "Company") and 529,000 shares are being sold by certain stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of shares of Class A Common Stock by the Selling Stockholders. The Company has two classes of common stock, the Class A Common Stock and Class B Common Stock, $.01 par value per share (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock"). The rights of the Class A Common Stock and the Class B Common Stock are substantially identical, except that holders of the Class A Common Stock are entitled to one vote per share and holders of the Class B Common Stock are entitled to .40 vote per share. The Class B Common Stock is fully convertible into Class A Common Stock, at the option of the holder, on a one-for-one basis. Both classes of Common Stock vote together as one class on all matters generally submitted to a vote of stockholders, including the election of directors. See "Description of Capital Stock." The Class A Common Stock is quoted on the Nasdaq National Market under the symbol "MCLD." On October 7, 1996, the last reported sale price of the Class A Common Stock on the Nasdaq National Market was $32.50 per share. See "Price Range of Class A Common Stock and Dividend Policy." SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS(2) Per Share................... $ $ $ $ Total(3).................... $ $ $ $
- -------------------------------------------------------------------------------- (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting offering expenses payable by the Company, estimated at $1,000,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to an aggregate of 900,000 additional shares of Class A Common Stock at the Price to Public, less Underwriting Discount, solely to cover over-allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." The shares of Class A Common Stock are offered subject to receipt and acceptance by the Underwriters, to prior sale and to the Underwriters' right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of the shares of Class A Common Stock offered hereby will be made at the office of Salomon Brothers Inc, Seven World Trade Center, New York, New York or through the facilities of The Depository Trust Company, on or about , 1996. SALOMON BROTHERS INC BEAR, STEARNS & CO. INC. MORGAN STANLEY & CO. INCORPORATED The date of this Prospectus is , 1996. 3 [MCLEOD LOGO] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S CLASS A COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements of the Company, the Notes thereto and the other financial data contained elsewhere in this Prospectus. Prospective investors should carefully consider the factors set forth herein under the caption "Risk Factors" and are urged to read this Prospectus in its entirety. Unless otherwise indicated, references herein to the "Company" include the Company's predecessor, the Company and the Company's wholly owned subsidiaries. Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. 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. This Prospectus includes product names and trademarks of the Company and of other organizations. See the "Glossary" appearing elsewhere herein for definitions of certain terms used in this Prospectus. THE COMPANY The Company is a provider of integrated telecommunications services to small and medium-sized businesses and, since June 1996, residential customers, primarily in Iowa and Illinois. The Company derives its telecommunications revenue from (i) the sale of "bundled" local, long distance and other telecommunications services to end users, (ii) telecommunications network maintenance services, (iii) competitive access services, including special access and private line services, and (iv) ancillary services, including direct marketing and telemarketing services and the sale of advertising space in telephone directories. As of June 30, 1996, the Company served over 11,550 telecommunications customers in 54 cities and towns. The Company offers "one-stop" integrated telecommunications services, including local, long distance, voice mail, paging and Internet access services, tailored to the customer's specific needs. For business customers, this approach simplifies telecommunications procurement and management and makes available customized services, such as "least-cost" long distance pricing and enhanced calling features, that might not otherwise be directly available to such customers on a cost-effective basis. For residential customers, this approach provides integrated local, long distance and other telecommunications services, flat-rate long distance pricing and enhanced calling features as part of the Company's basic PrimeLine(R) residential service. The Company also operates a competitive access provider that offers a variety of special access and private line services to 75 large businesses, institutional customers and interexchange carriers. In addition, the Company provides network maintenance services for the State of Iowa's fiber optic network. See "Business -- Current Products and Services." The Company believes it is the first telecommunications provider in most of its current markets to offer "bundled" local, long distance and other telecommunications services. As a result, the Company believes that it is well-positioned to take advantage of fundamental changes occurring in the telecommunications industry resulting from the Telecommunications Act of 1996 (the "Telecommunications Act") and to challenge incumbent local exchange carriers. See "Business -- Market Potential" and "Business -- Regulation." The Company provides local service using existing telephone lines obtained from incumbent local exchange carriers, which allows customers to switch to local service provided by the Company without changing existing telephone numbers. The Company provides long distance services by purchasing bulk capacity from a long distance carrier. Using the Company's sophisticated proprietary software, known as Raterizer(R), each business customer receives the lowest long distance rate available each month from among the pricing plans of AT&T Corp. ("AT&T"), MCI Communications Corporation ("MCI") and Sprint Corporation ("Sprint") that currently are most popular with the Company's business customers, and, in certain cases, rates specifically identified by a business customer and agreed to by the Company. The Company also provides paging and Internet access services. See "Business -- Current Products and Services." 1 5 Since the Company completed its initial public offering of Class A Common Stock in June 1996, it has actively pursued its strategy of increasing market penetration and expanding into new markets in the following ways: (i) in June 1996, the Company began offering to residential customers in Cedar Rapids, Iowa and Iowa City, Iowa an integrated package of telecommunications services, marketed under the name PrimeLine(R), that includes local and long distance service, voice mail, paging, Internet access and travel card services; PrimeLine(R) services are expected to be available in other residential markets in the near future; (ii) the Company has positioned itself to enter the Minnesota and Wisconsin markets in late 1996 in addition to the Iowa and Illinois markets currently served; (iii) in July 1996, the Company acquired Ruffalo, Cody & Associates, Inc. ("Ruffalo, Cody"), which specializes in direct marketing and telemarketing services, to enhance the Company's marketing of its telecommunications services; (iv) in September 1996, the Company acquired Telecom*USA Publishing Group, Inc. ("Telecom*USA Publishing"), which publishes and distributes "white page" and "yellow page" telephone directories in fifteen states in the midwestern and Rocky Mountain regions of the United States, to increase the Company's penetration of its current markets and to accelerate its entry into new markets; (v) the Company has constructed approximately 1,000 new route miles of fiber optic network at a cost of approximately $22.9 million; and (vi) the Company is bidding for certain personal communications services ("PCS") licenses as part of its strategy to increase the range of services provided to customers in its target markets. BUSINESS STRATEGY The Company's objective is to become a leading provider of integrated telecommunications services in Iowa, Illinois, Nebraska, Minnesota, Wisconsin, South Dakota, North Dakota, Colorado, Wyoming, Montana, Utah and Idaho. The Company intends to increase its penetration of its current markets and expand into new markets by: (i) aggressively capturing market share and generating revenues using leased network capacity and (ii) concurrently constructing additional network infrastructure to more cost-effectively serve its customers. The Company estimates that as of September 30, 1996 it had a market share of approximately 20.1% of business local telephone lines in its Iowa markets (based on 1994 market data) and a market share of approximately 12.3% of business local telephone lines in its Illinois markets (based on 1994 Iowa market data, assuming that the Company's Illinois markets are substantially similar to the Company's Iowa markets). There can be no assurance that the Company will attain similar market share in other markets. The principal elements of the Company's business strategy include: PROVIDE INTEGRATED TELECOMMUNICATIONS SERVICES. The Company believes that there is substantial demand among business and residential customers in its target markets for an integrated package of telecommunications services that meets all of the customer's telecommunications needs. The Company believes that, by bundling a variety of telecommunications services, it will position itself to become an industry leader in offering "one-stop" integrated telecommunications services, to penetrate rapidly its target markets and to build customer loyalty. BUILD MARKET SHARE THROUGH BRANDING AND CUSTOMER SERVICE. The Company believes that the key to revenue growth in its target markets is capturing and retaining customers through an emphasis on marketing, sales and customer service. The Company's customer-focused software and network architecture allow immediate access to the Company's customer data by Company personnel, enabling a quick and effective response to customer requests and needs at any time. This software permits the Company to present its customers with one fully integrated monthly billing statement for local, long distance, 800, international, voice mail, paging, Internet access and travel card services. The Company believes that its customer-focused software platform is an important element in the marketing of its telecommunications services and gives it a competitive advantage in the marketplace. The Company has been successful in obtaining long-term commitments from its business customers and responding rapidly and creatively to customer needs. See "Business -- Current Products and Services" and "Business -- Sales and Marketing." FOCUS ON SMALL AND MID-SIZED MARKETS. The Company principally targets small and mid-sized markets (cities and towns with a population between 8,000 and 350,000) in its service areas. The 2 6 Company estimates that its current and planned target markets have a combined population of approximately 9.5 million. The Company strives to be the first to market integrated telecommunications services in its principal markets and expects that intense competition in bundled telecommunications services will be slower to develop in these markets than in larger markets. EXPAND ITS FIBER OPTIC NETWORK. The Company is constructing a state-of-the-art digital fiber optic telecommunications network designed to serve markets in Iowa. In the future, the Company expects to expand its fiber optic network to include additional markets. The Company's decision to expand its fiber optic network will be based on various economic factors, including: (i) the number of its customers in a market; (ii) the anticipated operating cost savings associated with such construction; and (iii) any strategic relationships with owners of existing infrastructure (e.g., utilities and cable operators). The Company currently owns approximately 1,700 route miles of fiber network and expects to construct approximately 6,000 route miles of fiber network during the next five years. Through its strategic relationships with its electric utility stockholders and its contracts to build and lease the final links of the Iowa Communications Network to the State of Iowa, the Company believes that it will be able to achieve capital efficiencies in constructing its fiber optic network in a rapid and cost-effective manner. The Iowa Communications Network is a fiber optic network that links certain of the state's schools, libraries and other public buildings. The Company also believes that its fiber optic network in combination with its proprietary software will create an attractive customer-focused platform for the provision of local, long distance, wireless and enhanced services. See "Business -- Network Facilities." TRANSITION INTO LOCAL SWITCHED SERVICES BUSINESS. When regulatory authorities complete certain proceedings, and assuming the economics are favorable to the Company, the Company intends to begin offering local facilities-based switched services by using its existing high-capacity digital AT&T switch and installing additional switches. These regulatory proceedings are currently ongoing before the Federal Communications Commission (the "FCC") and many state public utilities commissions, including that of Iowa, for the purpose of establishing most of the economic and technical terms of interconnection. The Company believes that these proceedings should be substantially completed and that the Company could begin offering local facilities-based switched services over the next three years. In March 1995 and April 1996, respectively, the Company received state regulatory approval in Iowa and Illinois to offer local switched services in Cedar Rapids, Iowa and in Illinois cities other than Chicago. The Company intends to seek regulatory approval to provide such services in other cities and towns in Iowa and other states targeted by the Company when the economic terms of interconnection with the incumbent local exchange carrier make the provision of local switched services cost-effective. See "Business -- Expansion of Certain Facilities-based Services" and "Business -- Regulation." EXPLORE POTENTIAL ACQUISITIONS AND STRATEGIC ALLIANCES. The Company believes that its strategic alliances with two utilities in its current markets provide it with access to rights-of-way and other resources on favorable terms. The Company believes that its recent acquisitions of Ruffalo, Cody and Telecom*USA Publishing will increase the Company's penetration of its current markets and accelerate its entry into new markets. As part of its expansion strategy, the Company contemplates additional acquisitions, joint ventures and strategic alliances with businesses that are related or complementary to its current operations. The Company believes that the addition of such related or complementary businesses will help it to expand its operations into its target markets. As a result, the Company plans to consider acquisitions, joint ventures and strategic alliances in areas such as wireless services, directory publishing, network construction and infrastructure and Internet access. In undertaking these transactions, the Company may use proceeds from the Offering, credit facilities and other borrowings, and additional debt and equity issuances. LEVERAGE PROVEN MANAGEMENT TEAM. The Company has recruited a team of veteran competitive telecommunications managers, led by entrepreneur Clark McLeod, who have together in the past successfully implemented a similar customer-focused telecommunications strategy in the same regions. Eight of the 11 executive officers of the Company served as officers of Teleconnect Company ("Teleconnect") or of Teleconnect's successor, Telecom*USA, Inc. ("Telecom*USA"). Teleconnect began providing long distance services in Iowa in 1982 and rapidly expanded into 3 7 dozens of cities and towns in the Midwest. Telecom*USA was the fourth-largest U.S. long distance provider when MCI purchased it in 1990 for $1.25 billion. See "Management." The Company was incorporated as an Iowa corporation on June 6, 1991 and was reincorporated in the State of Delaware on August 1, 1993. The Company's principal executive offices are located at 221 Third Avenue SE, Suite 500, Cedar Rapids, Iowa 52401, and its phone number is (319) 364-0000. RECENT DEVELOPMENTS On September 20, 1996, the Company acquired Telecom*USA Publishing for approximately $74.1 million in cash and an additional amount currently estimated to be approximately $1.6 million to be paid to certain employees of Telecom*USA Publishing as part of an incentive plan. At the time of the acquisition, Telecom*USA Publishing had outstanding debt of approximately $6.6 million. Telecom*USA Publishing publishes and distributes "white page" and "yellow page" telephone directories in fifteen states in the midwestern and Rocky Mountain regions of the United States. In fiscal year 1996, Telecom*USA Publishing published and distributed over 7 million directories and had revenues of $52.1 million. The Company believes that the acquisition of Telecom*USA Publishing furthers the Company's business plan in several ways. First, it gives the Company an immediate presence in states where it is initiating service (Minnesota and Wisconsin) and also in states where it does not yet provide service but expects to do so in the future (such as Colorado, Wyoming, Montana, Utah and Idaho). Second, the Company believes that the acquisition will increase the Company's penetration of its current markets and accelerate its entry into new markets. The directories published by Telecom*USA Publishing will serve as "direct mail" advertising for the Company's telecommunications products. The directories will contain detailed product descriptions and step-by-step instructions on the use of the Company's telecommunications products. The Company believes that telephone directories are commonly used sources of information that potentially provide the Company with a long-term marketing presence in millions of households and businesses that receive a Telecom*USA Publishing directory. By using the directories to market its products, the Company can reach more customers than would be possible if the acquisition had not occurred. Third, the Company believes that combining the directories' distinctive black-and-gold motif with the McLeod name will create in all of the Company's markets the brand awareness that the McLeod name now enjoys in Iowa. On July 15, 1996, the Company acquired Ruffalo, Cody for an aggregate of approximately $4.8 million in cash, 361,420 shares of Class A Common Stock, and options to purchase 158,009 shares of Class A Common Stock. An additional $50,782 in cash and 113,387 shares of Class A Common Stock were placed into escrow and will be delivered to certain of the shareholders of Ruffalo, Cody over a period of 18 months, contingent upon the fulfillment of certain conditions relating to Ruffalo, Cody's ongoing revenues. Ruffalo, Cody specializes in direct marketing and telemarketing services, including telecommunications sales. The Company believes that, as with the acquisition of Telecom*USA Publishing, the acquisition of Ruffalo, Cody has great strategic significance for the Company. The Company plans to use Ruffalo, Cody's information database to identify attractive sales opportunities and to pursue those opportunities through a variety of methods, including calls from Ruffalo, Cody's telemarketing personnel. See "Risk Factors -- Risks Associated with Acquisitions," "Business -- Recent Transactions" and "Business -- Sales and Marketing." 4 8 THE OFFERING Class A Common Stock offered by the Company.................................... 5,471,000 shares Class A Common Stock offered by the Selling Stockholders............................... 529,000 shares Total Class A Common Stock offered hereby.... 6,000,000 shares Common Stock outstanding after the Offering(1)................................ 36,439,390 shares of Class A Common Stock 15,625,929 shares of Class B Common Stock Use of Proceeds.............................. The net proceeds to the Company from the Offering will be used to fund certain development and construction costs of the Company's fiber optic network; market expansion activities of the Company's telecommunications business; potential acquisitions, joint ventures and strategic alliances; the acquisition of PCS licenses and related development, construction and operations; construction of the Company's network operations center and corporate headquarters; and for additional working capital and general corporate purposes, including funding operating deficits and net losses. See "Use of Proceeds." Nasdaq National Market Symbol................ MCLD Dividend Policy.............................. The Company has never declared or paid any cash dividends on its capital stock and does not anticipate paying cash dividends in the foreseeable future. See "Price Range of Class A Common Stock and Dividend Policy."
- --------------- (1) Based on the number of shares of Class A Common Stock and Class B Common Stock outstanding as of September 30, 1996 and the consummation of the Offering. Assumes the issuance of 124,530 shares of Class A Common Stock pursuant to the exercise of options by certain Selling Stockholders anticipated to occur immediately prior to the date of this Prospectus. Excludes (a) 7,535,579 shares of Class A Common Stock issuable upon exercise of stock options granted to directors, officers and employees of the Company and (b) 1,300,688 shares of Class B Common Stock issuable upon exercise of stock options granted to a principal stockholder of the Company in connection with the guarantee and support by such stockholder of certain portions of a bank credit facility maintained by the Company from May 1994 until June 1996 (the "Credit Facility"). See "Management -- Stock Option Plans." RISK FACTORS POTENTIAL INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE CLASS A COMMON STOCK. SEE "RISK FACTORS." 5 9 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS EXCEPT PER SHARE AND OPERATING DATA) The following table summarizes certain selected financial and operating data of the Company and should be read in conjunction with and is qualified by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements of the Company, the Notes thereto and the other financial data contained elsewhere in this Prospectus. The unaudited pro forma information reflects the acquisitions by the Company of MWR Telecom, Inc. ("MWR"), Ruffalo, Cody and Telecom*USA Publishing on April 28, 1995, July 15, 1996 and September 20, 1996, respectively, using the purchase method of accounting, assuming, for purposes of the pro forma statement of operations data, that such acquisitions were consummated at the beginning of the periods presented. The unaudited pro forma information should be read in conjunction with the Financial Statements of MWR, Ruffalo, Cody and Telecom*USA Publishing and the Notes thereto included elsewhere in this Prospectus. The financial and operating data presented below are derived from the records of the Company, MWR, Ruffalo, Cody and Telecom*USA Publishing.
PERIOD FROM JUNE 6, 1991 TO YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------------------------------------------------- 1991(1) 1992 1993 1994 1995(2)(3) --------------- ----- ------ ------- ---------- OPERATIONS STATEMENT DATA: Revenue..................................... $ -- $ 250 $ 1,550 $ 8,014 $ 28,998 ---- ----- ------- -------- -------- OPERATING EXPENSES: Cost of service........................... -- 262 1,528 6,212 19,667 Selling, general and administrative....... 56 219 2,390 12,373 18,054 Depreciation and amortization............. 2 6 235 772 1,835 ---- ----- ------- -------- -------- Total operating expenses............... 58 487 4,153 19,357 39,556 ---- ----- ------- -------- -------- Operating loss.............................. (58) (237) (2,603) (11,343) (10,558) Interest income (expense), net.............. -- -- 163 (73) (771) Other non-operating expenses................ -- -- -- -- -- Income taxes................................ -- -- -- -- -- ---- ----- ------- -------- -------- Net loss.................................... $ (58) $(237) $(2,440) $(11,416) $(11,329) ==== ===== ======= ======== ======== Loss per common and common equivalent share..................................... $ -- $(.02) $ (.08) $ (.31) $ (.31) ==== ===== ======= ======== ======== SIX MONTHS ENDED JUNE 30, -------------------------------------------- PRO FORMA PRO FORMA 1995(4)(5) 1995 1996 1996(6) ---------- -------------- ------------- --------- OPERATIONS STATEMENT DATA: Revenue..................................... $ 86,476 $ 11,419 $ 26,406 $64,946 -------- -------- -------- ------- OPERATING EXPENSES: Cost of service........................... 47,461 7,628 18,724 36,372 Selling, general and administrative....... 45,605 8,290 13,976 31,836 Depreciation and amortization............. 8,018 763 2,573 5,725 -------- -------- -------- ------- Total operating expenses............... 101,084 16,681 35,273 73,933 -------- -------- -------- ------- Operating loss.............................. (14,608) (5,262) (8,867) (8,987) Interest income (expense), net.............. (1,049) (460) (16) (139) Other non-operating expenses................ (997) -- -- (483) Income taxes................................ -- -- -- -- -------- -------- -------- ------- Net loss.................................... $(16,654) $ (5,722) $ (8,883) $(9,609) ======== ======== ======== ======= Loss per common and common equivalent share..................................... $ (0.45) $ (.15) $ (.23) $ (0.25) ======== ======== ======== =======
DECEMBER 31, ------------------------------------------------------------------ 1991 1992 1993 1994 1995(2)(7) ------------ ----- ------ ------- ---------- BALANCE SHEET DATA: Current assets.............................. $ 2 $ 544 $ 7,077 $ 4,862 $ 9,624 Working capital (deficit)................... $ (72) $(440) $ 5,962 $ 1,659 $ (92) Property and equipment, net................. -- $ 135 $ 1,958 $ 4,716 $ 15,078 Total assets................................ $ 21 $ 694 $ 9,051 $ 10,687 $ 28,986 Long-term debt.............................. -- -- -- $ 3,500 $ 3,600 Stockholders' equity (deficit).............. $ (53) $(290) $ 7,936 $ 3,291 $ 14,958 JUNE 30, 1996 --------------------------------------------- ACTUAL AS ADJUSTED(8) PRO FORMA(9) ---------- -------------- ------------- BALANCE SHEET DATA: Current assets.............................. $249,528 $415,228 $ 365,771 Working capital (deficit)................... $229,920 $395,620 $ 324,365 Property and equipment, net................. $ 35,223 $ 35,223 $ 40,140 Total assets................................ $289,299 $454,999 $ 492,348 Long-term debt.............................. -- -- $ 2,959 Stockholders' equity (deficit).............. $265,929 $431,629 $ 443,875
PERIOD FROM JUNE 6, 1991 TO YEAR ENDED DECEMBER 31, DECEMBER 31, --------------------------------------------------- 1991(1) 1992 1993 1994 1995(2)(3) --------------- ----- ------ ------- ---------- OTHER FINANCIAL DATA: Capital expenditures, including acquisition of business............................... -- $ 138 $ 2,052 $ 3,393 $ 14,697 EBITDA (10)................................. $ (56) $(231) $ (2,368) $ (10,571) $ (8,723) SIX MONTHS ENDED JUNE 30, -------------------------------------------- PRO FORMA PRO FORMA 1995(4)(5) 1995 1996 1996(6) ---------- -------------- ------------- --------- OTHER FINANCIAL DATA: Capital expenditures, including acquisition of business............................... $ 17,489 $ 8,822 $ 21,337 $22,534 EBITDA (10)................................. $ (6,590) $ (4,499) $ (6,294) $(3,262)
DECEMBER 31, ---------------------------------- JUNE 30, 1994 1995 1996 --------------- ------ ------ OTHER OPERATING DATA: Local lines................................. 17,112 35,795 47,699 Number of telecommunications customers...... 5,137 8,776 11,556 Markets served.............................. 26 50 54 Route miles................................. 8 218 832 Employees................................... 302 419 603
(Footnotes on following page) 6 10 - --------------- (1) The Company was organized on June 6, 1991. (2) The acquisition of MWR in April 1995 affects the comparability of the historical data presented for 1995 to the historical data for prior periods shown. (3) Includes operations of MWR from April 29, 1995 to December 31, 1995. (4) The acquisitions of MWR, Ruffalo, Cody and Telecom*USA Publishing in April 1995, July 1996 and September 1996, respectively, affect the comparability of the pro forma data presented for 1995 to the data for prior periods shown. (5) Includes operations of MWR, Ruffalo, Cody and Telecom*USA Publishing from January 1, 1995 to December 31, 1995 and certain adjustments attributable to the acquisitions of MWR, Ruffalo, Cody and Telecom*USA Publishing by the Company. (6) Includes operations of Ruffalo, Cody and Telecom*USA Publishing from January 1, 1996 to June 30, 1996 and certain adjustments attributable to the acquisitions of Ruffalo, Cody and Telecom*USA Publishing by the Company. (7) Includes MWR, which was acquired by the Company on April 28, 1995. (8) Adjusted to reflect the application of the estimated net proceeds to the Company from the sale of the Class A Common Stock offered hereby. (9) Adjusted to reflect the application of the estimated net proceeds to the Company from the sale of the Class A Common Stock offered hereby. Includes Ruffalo, Cody and Telecom*USA Publishing, which were acquired by the Company on July 15, 1996 and September 20, 1996, respectively. (10) EBITDA consists of operating loss before depreciation and amortization. The Company 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. 7 11 RISK FACTORS An investment in the Class A Common Stock involves a significant degree of risk. In determining whether to make an investment in the Class A Common Stock, potential investors should consider carefully all of the information set forth in this Prospectus and, in particular, the following factors. LIMITED OPERATING HISTORY; OPERATING LOSSES AND NEGATIVE CASH FLOW FROM OPERATIONS The Company began operations in 1992 and has only a limited operating history upon which investors may base an evaluation of its performance. As a result of operating expenses and development expenditures, the Company has incurred significant operating and net losses to date. Net losses for 1993, 1994, 1995 and the six months ended June 30, 1996 were approximately $2.4 million, $11.4 million, $11.3 million and $8.9 million, respectively. At June 30, 1996, the Company had an accumulated deficit of $34.4 million. Although its revenue has increased substantially in each of the last three years, the Company also has experienced significant increases in expenses associated with the development and expansion of its fiber optic network and its customer base. The Company expects to incur significant operating losses and to generate negative cash flows from operating and construction activities during the next several years, while it develops its businesses and installs and expands its fiber optic network. There can be no assurance that the Company will achieve or sustain profitability or positive cash flows from operating activities in the future. If the Company cannot achieve operating profitability or positive cash flows from operating activities, it may not be able to meet its debt service or working capital requirements, which could have a material adverse effect on the Company. See "-- Significant Capital Requirements," "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." SIGNIFICANT CAPITAL REQUIREMENTS Expansion of the Company's operations, facilities, network and services will require significant capital expenditures. As of September 30, 1996, the Company estimates that its aggregate capital requirements for the remainder of 1996, 1997 and 1998 will be approximately $ million. The Company's estimated capital requirements include the estimated cost of (i) developing and constructing its fiber optic network, (ii) market expansion activities, (iii) constructing its network operations center and corporate headquarters, and (iv) obtaining PCS licenses and related capital expenditures, including those licenses described below for which the Company currently has bids outstanding. These capital requirements are expected to be funded, in large part, out of the net proceeds from the Offering and the net proceeds remaining from the Company's initial public offering of Class A Common Stock (estimated to be $122 million as of September 30, 1996), and lease payments to the Company for portions of the Company's networks. The Company may require additional capital in the future for business activities related to those specified above and also for acquisitions, joint ventures and strategic alliances, as well as to fund operating deficits and net losses. These activities could require significant additional capital not included in the foregoing estimated aggregate capital requirements of $ million. The Company is currently bidding for certain PCS licenses being auctioned by the FCC and expects to explore alternatives to permit it to provide other wireless services, which may require substantial additional capital. As of September 30, 1996, the Company had submitted bids totaling approximately $21.8 million for "D" and "E" block frequency licenses covering areas of Iowa, Illinois, Nebraska and Minnesota in the FCC's auctions of PCS licenses. If the Company is successful in obtaining PCS licenses, it will be required to make significant expenditures to develop, construct and operate a PCS system. The Company expects to meet its additional capital needs with the proceeds from credit facilities and other borrowings, and additional debt and equity issuances. The Company currently plans to obtain one or more lines of credit, although no such lines of credit have yet been negotiated. 8 12 There can be no assurance, however, that the Company will be successful in producing sufficient cash flows or raising sufficient debt or equity capital to meet its strategic objectives or that such funds, if available at all, will be available on a timely basis or on terms that are acceptable to the Company. Failure to generate or raise sufficient funds may require the Company to delay or abandon some of its future expansion plans or expenditures, which could have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." WIRELINE COMPETITION The telecommunications industry is highly competitive. The Company faces intense competition from local exchange carriers, including the Regional Bell Operating Companies (primarily U S WEST Communications, Inc. ("U S WEST") and Ameritech Corporation ("Ameritech")) and the General Telephone Operating Companies, which currently dominate their local telecommunications markets. The Company also competes with long distance carriers in the provision of long distance services. The long distance market is dominated by three major competitors, AT&T, MCI and Sprint. Hundreds of other companies also compete in the long distance marketplace. Other competitors of the Company may include cable television companies, competitive access providers, microwave and satellite carriers and private networks owned by large end users. In addition, the Company competes with the Regional Bell Operating Companies and other local exchange carriers, numerous direct marketers and telemarketers, equipment vendors and installers and telecommunications management companies with respect to certain portions of its business. Many of the Company's existing and potential competitors have financial and other resources far greater than those of the Company. The local and access telephone services offered by the Company compete principally with the services offered by the incumbent local exchange carrier serving each of the Company's markets. Incumbent local exchange carriers have long-standing relationships with their customers and have the potential to subsidize competitive services from less competitive service revenues. In addition, a continuing trend toward business combinations and strategic alliances in the telecommunications industry may create significant new competitors. For example, the national long distance carrier WorldCom, Inc. ("WorldCom") recently announced its agreement to acquire MFS Communications Company, Inc., a competitive access provider. The ability of these or other competitors of the Company to enter into strategic alliances could put the Company at a significant disadvantage. The Company may, in the future, face competition in the markets in which it operates from one or more competitive access providers operating fiber optic networks, in many cases in conjunction with the local cable television operator. Each of AT&T, MCI and Sprint has indicated its intention to offer local telecommunications services, either directly or in conjunction with other competitive access providers or cable television operators. There can be no assurance that these firms, and others, will not enter the small and mid-sized markets where the Company focuses its sales efforts. Like the Company, MCI currently holds a certificate of public convenience and necessity to offer local and long distance service in Iowa through partitioning of U S WEST's central office switch. Two small telecommunication companies also hold such certificates in Iowa. On February 29, 1996, AT&T filed an application before the Iowa Utilities Board to offer local service in Iowa on both a resale and facilities-based basis. On July 26, 1996, the Iowa Utilities Board approved AT&T's application, subject to certain additional filing requirements. The Company believes that the Telecommunications Act and state legislative initiatives in Illinois, Iowa and other states within the Company's target markets, as well as a recent series of transactions and proposed transactions between telephone companies, long distance carriers and cable companies, increase the likelihood that barriers to local exchange competition will be substantially reduced or removed. These initiatives include requirements that the Regional Bell 9 13 Operating Companies permit entities such as the Company to interconnect to the existing telephone network, to purchase, at cost-based rates, access to unbundled network elements, to enjoy dialing parity, to access rights-of-way and to resell services offered by the incumbent local exchange carriers. See "Business -- Regulation." However, incumbent local exchange carriers also have new competitive opportunities. The Telecommunications Act removes previous restrictions concerning the provision of long distance service by the Regional Bell Operating Companies and also provides them with increased pricing flexibility. Under the Telecommunications Act, the Regional Bell Operating Companies will, upon the satisfaction of certain conditions, be able to offer long distance services that would enable them to duplicate the "one-stop" integrated telecommunications approach used by the Company. The Company believes that it has certain advantages over these companies in providing its telecommunications services, including management's prior experience in the competitive telecommunications industry and the Company's emphasis on marketing (primarily using a direct sales force for sales to business customers and telemarketing for sales to residential customers) and on responsive customer service. However, there can be no assurance that the anticipated increased competition will not have a material adverse effect on the Company. The Telecommunications Act provides that rates charged by incumbent local exchange carriers for interconnection to the incumbent carrier's network are to be nondiscriminatory and based upon the cost of providing such interconnection, and may include a "reasonable profit," which terms are subject to interpretation by regulatory authorities. If the incumbent local exchange carriers, particularly the Regional Bell Operating Companies, charge alternative providers such as the Company unreasonably high fees for interconnection to the local exchange carriers' networks, significantly lower their rates for access and private line services or offer significant volume and term discount pricing options to their customers, the Company could be at a significant competitive disadvantage. DEPENDENCE ON REGIONAL BELL OPERATING COMPANIES; U S WEST CENTREX ACTION The Company is dependent on the Regional Bell Operating Companies for provision of its local and certain of its long distance services. U S WEST and Ameritech are currently the Company's sole suppliers of access to local central office switches. The Company uses such access to partition the local switch and provide local service to its customers. The Company purchases such access in the form of a product generally known as "Centrex." Without such access, the Company could not currently provide bundled local and long distance services, although it could provide stand-alone long distance service. Since the Company believes its ability to offer bundled local and long distance services is critical to its current sales efforts, any successful effort by U S WEST or Ameritech to deny or substantially limit the Company's access to partitioned switches would have a material adverse effect on the Company. On February 5, 1996, U S WEST filed tariffs and other notices announcing its intention to limit future Centrex access to its switches by Centrex customers (including the Company) throughout U S WEST's fourteen-state service region, effective February 5, 1996 (the "U S WEST Centrex Action"). Although U S WEST stated that it would "grandfather" existing Centrex agreements with the Company and permit the Company to continue to use U S WEST's central office switches through April 29, 2005, it also indicated that it would not permit the Company to expand to new cities and would severely limit the number of new lines it would permit the Company to partition onto U S WEST's portion of the switches in cities currently served by the Company. Because of U S WEST's commitment to "grandfather" service to the Company, the Company does not believe its current customers are at risk that service will be interrupted. The Company has challenged, or is challenging, the U S WEST Centrex Action before the public utilities commissions in certain of the states served by U S WEST where the Company is doing business or currently plans to do business. The Company bases such challenges on various state and federal laws, regulations and regulatory policies, including Sections 251(b)(1) and 251(c)(4)(B) of the Telecommunications Act, which the Company believes impose upon the Regional Bell Operating Companies the duty not to prohibit, and not to impose unreasonable or discriminatory conditions or limitations on, the resale of their 10 14 telecommunications services, and Section 251(c)(4)(A) of the Telecommunications Act, which the Company believes obligates the Regional Bell Operating Companies to offer for resale at wholesale rates any telephone communications services that are provided at retail to subscribers who are not telecommunications carriers. Additional statutes cited in the Company's challenges include provisions of the laws of Iowa, Minnesota, Nebraska, South Dakota, North Dakota and Colorado, which the Company believes prohibit restrictions on the resale of local exchange services, functions or capabilities; prohibit local exchange carriers from refusing access by other carriers to essential facilities on the same terms and conditions as the local exchange carrier provides to itself; and prohibit the provision of carrier services pursuant to rates, terms and conditions that are unreasonably discriminatory. In Iowa, the Company filed a complaint with the Iowa Utilities Board against U S WEST's actions and was granted interim relief on an ex parte basis that allowed the Company to continue to expand to new cities and expand the number of new lines partitioned onto U S WEST's switches. Subsequent to the grant of interim relief, the Company on March 18, 1996 agreed to a settlement agreement with U S WEST that permits the Company to continue to expand, without restrictions, the number of new lines it serves in Iowa through March 18, 2001. In addition, the settlement agreement provides that the Company may expand to seven new markets (central offices) in Iowa per year through March 18, 2001. As a result of the settlement agreement, the Company withdrew its complaint before the Iowa Utilities Board. Because MCI, AT&T and others also challenged U S WEST's action, the Iowa Utilities Board continued to review the U S WEST Centrex Action and on June 14, 1996 issued an order rejecting U S WEST's filing. The order of the Iowa Utilities Board was appealed by U S WEST to the Iowa District Court for Polk County on July 12, 1996. The appeal remains pending. In Nebraska and North Dakota, complaints filed by the Company with respect to the U S WEST Centrex Action are awaiting decision by the public utilities commissions in those states. In Minnesota, U S WEST's initial filing was rejected on procedural grounds by the Public Utilities Commission. Nevertheless, on April 30, 1996, U S WEST refiled its proposed limitations on Centrex service in Minnesota, proposing to "grandfather" the service to existing customers as of July 9, 1996. The Company opposed this filing in a letter to the Minnesota Public Utilities Commission on May 20, 1996. On May 21, 1996, the Minnesota Public Utilities Commission voted to suspend the new U S WEST filing and schedule a contested-case proceeding to consider it. The Minnesota Public Utilities Commission is expected to render a ruling in the proceeding by December 20, 1996. In South Dakota, the Public Utilities Commission rejected the U S WEST Centrex Action on August 22, 1996. U S WEST has appealed the unfavorable decision of the Public Utilities Commission in South Dakota state court and has been granted a stay of the decision pending appeal. The Company anticipates that U S WEST will appeal other unfavorable decisions by public utilities commissions in other states with respect to the U S WEST Centrex Action. There can be no assurance that the Company will succeed in its legal challenges to the U S WEST Centrex Action, or that this action by U S WEST, or similar actions by other Regional Bell Operating Companies, will not have a material adverse effect on the Company. See "Business -- Legal Proceedings." REFUSAL OF U S WEST TO IMPROVE ITS PROCESSING OF SERVICE ORDERS As a result of its use of the Centrex product, the Company depends upon U S WEST to process service orders placed by the Company to transfer new customers to the Company's local service. U S WEST has imposed a limit of processing one new local service order of the Company per hour for each U S WEST central office. Furthermore, according to the Company's records, U S WEST commits an error on one of every three lines ordered by the Company, thereby further delaying the transition of new customers to the Company's local service. The Company has repeatedly requested that U S WEST increase its local service order processing rate and improve the accuracy of such processing. U S WEST has refused to change its service order processing practices. 11 15 On July 12, 1996, the Company filed a complaint with the Iowa Utilities Board against U S WEST in connection with such actions. At a hearing held to consider the complaint, U S WEST acknowledged that it had not dedicated resources to improve its processing of the Company's service orders to switch new customers to the Company's local service because of its desire to limit Centrex service. See "-- Dependence on Regional Bell Operating Companies; U S WEST Centrex Action." On October 2, 1996, the Iowa Utilities Board determined that U S WEST's limitation on the processing of service orders constituted an unlawful discriminatory practice under Iowa law. There can be no assurance, however, that the decision of the Iowa Utilities Board will adequately resolve the service order problems or that such problems will not impair the Company's ability to expand or to attract new customers, which could have a material adverse effect on the Company. FAILURE OF U S WEST TO FURNISH CALL DETAIL RECORDS The Company depends on certain call detail records provided by U S WEST with respect to long distance services, and Ameritech with respect to both local and long distance services, in order to verify its customers' bills for both local and long distance service. The Company has in the past experienced certain omissions in the call detail records it receives from U S WEST on a monthly basis. For example, during the period from January 1995 through January 1996, U S WEST failed to furnish, on average, monthly call detail records for 2.5% of the long distance calls placed by the Company's customers in Iowa. Thus, the Company was unable to verify with certainty that a given long distance call placed by a customer and known by the Company to have been terminated by the Company's wholesale long distance supplier was, in fact, placed by the customer. These call detail omissions typically occur in connection with new customers of the Company. The telephone numbers of such customers, on the date they begin service with the Company, are transferred to the portion of the U S WEST central office switch partitioned for use by the Company. This transfer is effected by a U S WEST technician, who makes certain keystroke entries in the software database controlling the switch in order to transfer the telephone number to the Company's portion of the switch. At that time, an additional keystroke entry is required in order to activate the software (or "set the flag") that records and stores both the telephone number originating a long distance call and the beginning time and duration of the call. Occasionally, this additional keystroke entry is not made and, therefore, the call detail records are not captured, and cannot be recovered, for the period during which the flag is not set. The Company receives a weekly report from U S WEST listing all telephone numbers assigned to the Company's portion of the switch, which the Company compares to its own list of customers. When the telephone number of a customer of the Company does not appear on the weekly U S WEST list, the Company contacts U S WEST to ascertain whether the flag has been set for such customer and, if the flag has not been set, the Company requests that U S WEST make the necessary keystroke entry. On a monthly basis, the Company receives a report from its wholesale long distance supplier listing all long distance calls originating from the Company's portion of the U S WEST switch and the telephone number to which the call was terminated, as well as the time and the duration of the call. The long distance supplier's records do not, however, provide the telephone number from which the call was originated. Therefore, if there has been an omission by U S WEST in setting the flag in connection with a particular customer of the Company, the Company is unable to verify with complete certainty the long distance calls originating from such customer until the flag has been set. Absent such verification, the Company does not bill its customer for the call. The Company does not believe this impediment to billing certain customers for a small percentage of calls in a given month materially adversely affects its relationships with or contractual obligations to its customers. The failure to bill the customer does have a negative effect on the Company's gross margins, because the Company incurs expenses for calls it does not bill. During 12 16 the year ended December 31, 1995, the Company estimates that it was unable to bill approximately $126,000 in long distance calls due to this situation. The Company believes that U S WEST is contractually obligated to provide the Company with such call detail records. Accordingly, in paying its invoices from U S WEST, the Company withholds amounts representing the cost of the lines with respect to which call detail records were not provided, together with a pro rata amount of the central office and related costs associated therewith. During the year ended December 31, 1995, the Company withheld approximately $216,000 from payments of amounts invoiced by U S WEST due to the failure by U S WEST to furnish 100% of the call detail records. U S WEST disputes the Company's right to make these withholdings, and the Company and U S WEST have agreed to undertake non-binding mediation in an effort to resolve the financial aspects of the dispute. No date for such mediation has been set. The Company has expensed the amounts withheld from U S WEST on its financial statements. As a result, in the event U S WEST prevails in its dispute with the Company, there will be no effect on the Company's historical financial condition or results of operations. However, if U S WEST prevails in the dispute and continues to fail to provide call detail records for a significant percentage of calls, there could be a material adverse effect on the Company's future financial condition and results of operations. In January 1996, U S WEST advised the Company that it had instituted certain new procedures, primarily involving data entry protocols, in an effort to "capture" 100% of call detail records. Since implementing the protocol changes, U S WEST has furnished the Company with approximately 99% of the requisite call detail records for March through September 1996. There can be no assurance, however, that U S WEST will not continue to experience difficulties in furnishing complete call detail records to the Company, that the percentage of call detail records not provided to the Company will not increase, or that the resulting negative effect on gross margins will not have a material adverse effect on the Company. WIRELESS COMPETITION The Company believes that the market for wireless telecommunications services is likely to expand significantly as equipment costs and service rates continue to decline, equipment becomes more convenient and functional and wireless services become more diverse. The Company also believes that providers of wireless services increasingly will offer, in addition to products that supplement a customer's landline communications (similar to cellular telephone services in use today), wireline replacement products that may result in wireless services becoming the customer's primary mode of communication. The Company anticipates that in the future there could potentially be eight wireless competitors in each of its current and/or target markets: two existing cellular providers and, in view of the ongoing PCS auctions for spectrum in these markets, as many as six additional PCS providers. Principal cellular providers in the Company's current and target markets include Ameritech Mobile Communications, Inc., AT&T Wireless Services, Inc., Southwestern Bell Mobile Systems, Inc., Western Wireless Corporation, CommNet Cellular Incorporated, GTE Mobilnet Service Corporation, 360() Communications Company, Airtouch Cellular, United States Cellular Corporation and BellSouth Corporation. Principal PCS licensees in the Company's current and target markets include AT&T Wireless PCS, Inc., PRIMECO Personal Communications, L.P., WirelessCo, L.P. d/b/a Sprint Spectrum, American Portable Telecommunications, Inc., Western PCS Corp., Cox Communications, Inc., AerForce Communications, L.P., BRK WIRELESS CO., INC., DCR PCS, Inc. and Wireless PCS, Inc. The Company does not currently offer PCS or cellular services. The Company is, however, currently bidding for "D" and "E" block frequency licenses covering areas of Iowa, Illinois, Nebraska and Minnesota in the FCC's auctions of PCS licenses. As of September 30, 1996, the Company had submitted bids totaling approximately $21.8 million for such licenses. If the Company is successful in obtaining PCS licenses, it will be required to make significant expenditures to develop, construct and operate a PCS system. There can be no assurance that the Company will be 13 17 successful in acquiring any PCS licenses. Nevertheless, as the wireline and wireless markets converge, the Company believes that it can identify opportunities to generate revenues from the wireless industry on a wholesale and a retail basis. On a wholesale basis, these opportunities may include leasing tower sites to wireless providers or switching wireless traffic through the Company's switching platform. On a retail basis, the Company believes that it will be able to enter into "bundling/branding" arrangements with both cellular and PCS companies on favorable economic terms. However, except for its participation in the FCC auction of PCS licenses, the Company has no current or pending negotiations, arrangements or agreements to acquire the ability to provide wireless services. There can be no assurance that the Company will identify any such opportunities, or that competition from PCS and other providers of wireless telecommunications services will not have a material adverse effect on the Company. See "Business -- Wireless Services." PCS SYSTEM IMPLEMENTATION RISKS The Company's proposed investment in the ownership, development, construction and operation of a PCS system involves a high degree of risk. In the event the Company is successful in acquiring one or more PCS licenses, and in the absence of FCC mandated technology protocols, the Company would be required to choose from among several competing and potentially incompatible technologies in order to build and operate a PCS system. Currently, PCS providers must select a digital protocol for their PCS systems. The selection of a particular digital protocol technology could adversely affect the ability of the Company to successfully offer PCS service. For example, in order for the Company's potential PCS subscribers to roam in markets served by other PCS licensees, at least one of the other PCS licensees must utilize a digital protocol technology that is compatible with that of the Company. To the extent that PCS providers outside the Company's potential PCS service area use an incompatible technology, the Company's PCS business would be adversely affected. The Company does not own or operate any facilities for providing wireless telecommunication services to the public. The successful implementation of a PCS system would require the Company to develop such facilities. The Company would need to, among other things, lease or acquire sites for the Company's base stations, construct the base stations, install the necessary equipment and conduct system testing. Each stage of implementing PCS service involves various risks and contingencies, many of which are not in the Company's control. In the event the Company encountered delays or other problems, the Company's plans for providing PCS services could be adversely affected. If the Company is successful in acquiring one or more PCS licenses, the Company will be required to abide by various FCC rules governing PCS license holders, such as rules limiting the percentage of the Company's capital stock that may be owned, directly or indirectly, or voted by non-U.S. citizens, by a foreign government or by a foreign corporation to 20%, except in extraordinary circumstances. See "-- Regulation." Failure on the part of the Company to abide by the FCC rules could lead to the Company being fined or losing its PCS licenses. Furthermore, certain of the FCC rules would require the Company to meet certain buildout and population coverage requirements. Such requirements may limit the markets in which the Company could implement PCS service. Finally, the ownership, development, construction and operation of a PCS system is expected to impose significant demands on the Company's management, operational and financial resources. There can be no assurance that the Company will be able to successfully manage the implementation and operation of a PCS system. Any failure to effectively manage the implementation and operation of any future PCS system (including implementing adequate systems, procedures and controls in a timely manner) could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Wireless Services." 14 18 DEPENDENCE ON KEY PERSONNEL The Company's business is dependent upon a small number of key executive officers, particularly Clark E. McLeod, the Company's Chairman and Chief Executive Officer, and Stephen C. Gray, the Company's President and Chief Operating Officer. The Company does not currently have any term employment agreements with these or any other employees. However, the Company has entered into employment, confidentiality and non-competition agreements with Messrs. McLeod and Gray and certain other key employees of the Company providing for employment by the Company for an indefinite period, subject to termination by either party (with or without cause) on 30 days' prior written notice, and an agreement not to compete with the Company for a period of one or two years, depending on the employee, following termination for cause or voluntary termination of employment. The Company maintains "key man" insurance on Mr. McLeod, in the amount of $2,000,000, and on Mr. Gray, in the amount of $1,000,000. Proceeds from both policies had been pledged as security for the Credit Facility. As a result of the termination of the Credit Facility, the Company is currently changing both policies to designate the Company as the beneficiary. There can be no assurance that the employment, confidentiality and non-competition agreements will improve the Company's ability to retain its key managers or employees or that the Company can attract or retain other skilled management personnel in the future. The loss of the services of key personnel, or the inability to attract additional qualified personnel, could have a material adverse effect on the Company. See "Management -- Management Agreements." REGULATION The Company is subject to varying degrees of federal, state and local regulation relating to its local, long distance and access telecommunications services. McLeod Telemanagement, Inc., a wholly owned subsidiary of the Company ("McLeod Telemanagement"), is required by federal and state regulation to file tariffs listing the rates, terms and conditions of certain services provided. In most states, McLeod Telemanagement also is required to obtain certification from the relevant state public utilities commission prior to the initiation of intrastate or interstate interexchange service. Any failure to maintain proper federal and state tariffing or state certification, or noncompliance with federal or state laws or regulations, could have a material adverse effect on the Company. The Company has never experienced difficulties in receiving certification or maintaining such tariffing. McLeod Telemanagement also has obtained authority from the FCC to provide international services. The FCC's rules applicable to the provision of international services may, under certain conditions, limit the size of investments in the Company by foreign telecommunications carriers. The Company does not currently hold any common carrier radio licenses issued by the FCC, although it may obtain or acquire radio licenses in the future in connection with the provision of wireless services. The Telecommunications Act limits the ownership of non-U.S. citizens, foreign governments, and corporations organized under the laws of a foreign country in radio licensees. The Company, through its wholly owned subsidiary MWR, provides certain competitive access services as a private carrier on a non-regulated basis. The Company believes that MWR's private carrier status is consistent with applicable federal and state laws, as well as regulatory decisions interpreting and implementing those laws as of the date of this Prospectus. Should such laws and/or regulatory interpretations change in the future to reclassify MWR's regulatory status, the Company believes that compliance with such reclassification would not have a material adverse effect on the Company. In addition, the recently enacted Telecommunications Act has significantly altered regulation of the telecommunications industry by preempting state and local laws to the extent that they prevent competition and by imposing a variety of new duties on incumbent local exchange carriers in order to promote competition in local exchange and access services. The Telecommunications Act also eliminates previous prohibitions on the provision of long distance services by the Regional Bell Operating Companies and the General Telephone Operating Companies. Although the Company believes that the enactment of the Telecommunications Act and other trends in federal and state legislation and regulation that favor increased competition are to the 15 19 advantage of the Company, there can be no assurance that the resulting increased competitive opportunities or other changes in current regulations or future regulations at the federal or state level will not have a material adverse effect on the Company. See "-- Wireline Competition" and "Business -- Regulation." The Company, through its wholly owned subsidiary Ruffalo, Cody, is also subject to certain federal and state regulatory requirements due to its direct marketing, telemarketing and fund-raising activities, including, in certain states, bonding requirements. There can be no assurance that any failure on the part of Ruffalo, Cody to abide by applicable direct marketing, telemarketing and fund-raising rules would not have a material adverse effect on the Company. See "Business -- Regulation." CONTRACT WITH THE STATE OF IOWA The Company's telecommunications network maintenance services revenue is derived almost exclusively from the State of Iowa under a fiber optic maintenance contract (the "Iowa Communications Network Maintenance Contract") expiring in 2004. Revenues from the Company's services performed for the State of Iowa under the Iowa Communications Network Maintenance Contract and related contracts totaled $1.6 million, $3.4 million and $4.9 million in 1993, 1994 and 1995, respectively, or 100%, 42% and 17%, of the Company's total revenues in 1993, 1994 and 1995, respectively. Revenues from these contracts totaled $2.3 million and $3 million, respectively, or 20% and 11% of the Company's total revenues during the six months ended June 30, 1995 and 1996, respectively. The State of Iowa has the right to terminate the Iowa Communications Network Maintenance Contract in the event of a lack of funding as well as for material breach by the Company. The Company does not believe that there are currently grounds for terminating the Iowa Communications Network Maintenance Contract or that the State of Iowa currently intends to do so. However, termination of the Iowa Communications Network Maintenance Contract by the State of Iowa could have a material adverse effect on the Company. RISKS OF EXPANSION The Company is engaged in the expansion and development of its network and services. The expansion and development of its network and services will depend on, among other things, its ability to partition the incumbent local exchange company's central office switch, enter markets, design fiber optic network routes, install facilities and obtain rights-of-way, building access and any required government authorizations and/or permits, all in a timely manner, at reasonable costs and on satisfactory terms and conditions. Implementation of the Company's current and future expansion plans will also depend on factors such as: (i) the availability of financing and regulatory approvals; (ii) the number of potential customers in a target market; (iii) the existence of strategic alliances or relationships; (iv) technological, regulatory or other developments in the Company's business; (v) changes in the competitive climate in which the Company operates; and (vi) the emergence of future opportunities. There can be no assurances that the Company will be able to expand its existing network or services. Furthermore, the Company's ability to manage its expansion effectively also will require it to continue to implement and improve its operating, financial and accounting systems and to expand, train and manage its employee base. The inability to manage its planned expansion effectively could have a material adverse effect on the Company. Finally, if the Company's challenges to the U S WEST Centrex Action fail and no favorable settlement agreement is reached, there could be a material adverse effect on the Company's planned expansions and business prospects. See "-- Dependence on Regional Bell Operating Companies; U S WEST Centrex Action" and "Business -- Legal Proceedings." 16 20 RISKS ASSOCIATED WITH ACQUISITIONS As part of its business strategy, the Company has recently acquired Ruffalo, Cody and Telecom*USA Publishing and will continue to evaluate additional strategic acquisitions principally relating to its current operations. Such transactions commonly involve certain risks including, among others: the difficulty of assimilating the acquired operations and personnel; the potential disruption of the Company's ongoing business; the possible inability of management to maximize the financial and strategic position of the Company through the successful incorporation of acquired assets and rights into the Company's service offerings and the maintenance of uniform standards, controls, procedures and policies; the risks of entering markets in which the Company has little or no direct prior experience; and the potential impairment of relationships with employees or customers as a result of changes in management. For example, over 40% of Ruffalo, Cody's revenues in 1995 were derived from an agreement with a major long distance carrier to provide telemarketing services. Both Ruffalo, Cody and the major long distance carrier can terminate this agreement after giving notice to the other party. The major long distance carrier has informed the Company that it intends to terminate this agreement effective December 31, 1996. Upon termination of this agreement, the Company intends to redirect resources towards selling the Company's local and long distance telecommunications services. There can be no assurance that the Company will be successful in overcoming these risks or any other problems encountered in connection with the acquisitions of Ruffalo, Cody and Telecom*USA Publishing or other future transactions. In addition, any such transactions could materially adversely affect the Company's operating results due to dilutive issuances of equity securities, the incurrence of additional debt and the amortization of expenses related to goodwill and other intangible assets, if any. Except as described in this Prospectus, the Company has no definitive agreement with respect to any material acquisition, although from time to time it has discussions with other companies and assesses acquisition opportunities on an on-going basis. See "Business -- Recent Transactions." NEED TO OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY In order to develop and construct its network, the Company must obtain local franchises and other licenses and permits, as well as rights to utilize underground conduit and aerial pole space and other rights-of-way and easements from entities such as local exchange carriers and other utilities, railroads, interexchange carriers, state highway authorities, local governments and transit authorities. The Company has entered into long-term agreements with its two principal electric utility stockholders, IES Industries Inc. (collectively with its subsidiaries, "IES"), and MidAmerican Energy Company (collectively with its predecessors and subsidiaries, "MidAmerican"), pursuant to which the Company generally has access to the electric utilities' rights-of-way, poles and towers, primarily located in Iowa, for so long as the utilities maintain their franchises to provide electrical services in a given locality. There can be no assurance that the Company will be able to maintain its existing franchises, permits and rights-of-way or to obtain and maintain the other franchises, permits and rights-of-way needed to implement its business plan on acceptable terms. Although the Company believes that its existing arrangements will not be canceled and will be renewed as needed in the near future, if any of the existing franchises, license agreements or rights-of-way were terminated or not renewed and the Company were forced to remove its facilities or abandon its network in place, such cancellation or non-renewal of certain of such arrangements could have a material adverse effect on the Company. See "Business -- Network Facilities" and "Business -- Regulation." RAPID TECHNOLOGICAL CHANGES The telecommunications industry is subject to rapid and significant changes in technology. While the Company believes that for the foreseeable future these changes will neither materially affect the continued use of fiber optic telecommunications network nor materially hinder the Company's ability to acquire necessary technologies, the effect of technological changes on the 17 21 business of the Company cannot be predicted. There can be no assurance that technological developments in telecommunications will not have a material adverse effect on the Company. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock and does not anticipate paying cash dividends in the foreseeable future. See "Price Range of Class A Common Stock and Dividend Policy." CONTROL OF THE COMPANY Upon completion of the Offering, IES, MidAmerican, and Clark and Mary McLeod will own, directly or indirectly, in the aggregate approximately 29% of the outstanding Class A Common Stock and all of the Class B Common Stock, which will represent approximately 39% of the combined voting power of the Common Stock. The Class B Common Stock is convertible into Class A Common Stock at any time at the option of the holders of Class B Common Stock. If all of the Class B Common Stock were converted into Class A Common Stock, upon completion of the Offering, IES, MidAmerican and Mr. and Mrs. McLeod would hold approximately 50% of the Class A Common Stock and voting power of the Company. IES, MidAmerican and Mr. and Mrs. McLeod also have entered into a voting agreement with respect to the election of directors. Accordingly, upon completion of the Offering, such stockholders will collectively be able to control the management policy of the Company and all fundamental corporate actions, including mergers, substantial acquisitions and dispositions, and election of the Board of Directors of the Company (the "Board"). The Company's Amended and Restated Certificate of Incorporation (the "Restated Certificate") contains provisions that may make it more difficult to effect a hostile takeover of the Company or to remove members of the Board. See "Management -- Investor Agreement," "Principal and Selling Stockholders" and "Description of Capital Stock." VARIABILITY OF OPERATING RESULTS As a result of the significant expenses associated with the construction and expansion of its network and services, including, without limitation, the possible acquisition of PCS licenses, the Company anticipates that its operating results could vary significantly from period to period. Such variability could have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." VOLATILITY OF STOCK PRICE Since the Class A Common Stock has been publicly traded, the market price of the Class A Common Stock has fluctuated over a wide range and may continue to do so in the future. See "Price Range of Class A Common Stock and Dividend Policy." In the future, the market price of the Class A Common Stock could be subject to significant fluctuations in response to various factors and events, including, among other things: the depth and liquidity of the trading market of the Class A Common Stock; quarterly variations in the Company's actual or anticipated operating results or growth rates; changes in estimates by analysts; market conditions in the industry; announcements by competitors; regulatory actions; and general economic conditions. In addition, the stock market has from time to time experienced significant price and volume fluctuations, which have particularly affected the market prices of the stocks of high growth companies, and which may be unrelated to the operating performance of particular companies. As a result of the foregoing, there can be no assurance that the price of the Class A Common Stock will not continue to fluctuate or will not decline below the price to the public set forth on the cover of this Prospectus. 18 22 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have approximately 52,065,319 shares of Common Stock outstanding, including 5,471,000 shares of Class A Common Stock offered hereby and 32,455,005 "restricted" shares of Common Stock. The shares of Class A Common Stock offered hereby will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), by persons other than "affiliates" of the Company within the meaning of Rule 144 promulgated under the Securities Act. The holders of restricted shares generally will be entitled to sell these shares in the public securities market without registration under the Securities Act to the extent permitted by Rule 144 (or Rule 145, as applicable) promulgated under the Securities Act or any exemption under the Securities Act. Of the 32,455,005 restricted shares, 22,070,187 shares of Common Stock generally are currently eligible for sale under Rule 144 as currently in effect, and 10,384,818 shares of Common Stock generally will be eligible for sale under Rule 144 as currently in effect beginning in January 1997 through July 1998. The Company, its directors and officers, the Selling Stockholders and certain other stockholders have entered into "lock-up" agreements with the Underwriters, providing that, subject to certain exceptions, they will not, for a period of 120 days after the date of this Prospectus, without the prior written consent of Salomon Brothers Inc, offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce the offering of, any shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock. See "Underwriting." In addition, certain directors, executive officers and stockholders have agreed that, for a period of two years commencing on June 10, 1996, the date of the Company's initial public offering of the Class A Common Stock, they will not sell or otherwise dispose of any equity securities of the Company without the consent of the Board. See "Management -- Investor Agreement." At September 30, 1996, the Company had reserved 11,738,945 shares of Class A Common Stock for issuance under the Company's employee stock purchase plan and upon exercise of options outstanding or to be granted pursuant to the Company's stock option plans. No shares have been issued under the Company's employee stock purchase plan and options to purchase 7,660,109 shares of Class A Common Stock are currently outstanding and unexercised under the Company's stock option plans. The Company has registered the shares of Class A Common Stock reserved for issuance under the Company's stock purchase plan and stock option plans. See "Management -- Stock Option Plans" and "Management -- The Employee Stock Purchase Plan." In addition, options to purchase 1,300,688 shares of Class B Common Stock, which were granted to IES in connection with its guarantee and/or support of certain portions of the Credit Facility, were outstanding as of September 30, 1996. Future sales of a substantial amount of Class A Common Stock in the public market, or the perception that such sales may occur, could adversely affect the market price of the Class A Common Stock prevailing from time to time in the public market and could impair the Company's ability to raise additional capital through the sale of its equity securities. Several of the Company's principal stockholders hold a significant portion of the Company's Class A Common Stock, and a decision by one or more of these stockholders to sell their shares could adversely affect the market price of the Class A Common Stock. See "Principal and Selling Stockholders" and "Shares Eligible for Future Sale." 19 23 USE OF PROCEEDS The net proceeds to the Company from the Offering are estimated to be approximately $165.7 million, after deducting the underwriting discount and estimated offering expenses payable by the Company. The Company will not receive any of the proceeds from the sale of shares of Class A Common Stock by the Selling Stockholders. The Company intends to use the net proceeds of the Offering as follows: (i) to fund development and construction costs of the Company's fiber optic network; (ii) to fund market expansion activities as well as potential acquisitions, joint ventures and strategic alliances; (iii) to bid for PCS licenses and fund related development, construction and operating costs; (iv) to fund the construction of the Company's network operations center and corporate headquarters; and (v) for additional working capital and other general corporate purposes, including funding operating deficits and net losses. The Company currently intends to allocate substantial proceeds to each of the foregoing categories. However, the precise allocation of funds among these uses will depend on future technological, regulatory and other developments in or affecting the Company's business, the competitive climate in which it operates and the emergence of future opportunities. As part of its business strategy, the Company intends to continue to evaluate potential acquisitions, joint ventures and strategic alliances in areas such as wireless services, directory publishing, network construction and infrastructure and Internet access. Except as described elsewhere in this Prospectus, the Company has no definitive agreement with respect to any material acquisition, although from time to time it has discussions with other companies and assesses acquisition opportunities on an on-going basis. A portion of the proceeds of the Offering, as well as additional sources of capital such as credit facilities and other borrowings, and additional debt and equity issuances, may be used to fund any such acquisitions, joint ventures and strategic alliances. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Recent Transactions." Prior to the application of the net proceeds to the Company from the Offering as described above, such funds will be invested in short-term, investment grade securities. PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDEND POLICY The Company completed its initial public offering of Class A Common Stock on June 10, 1996, at a price per share of Class A Common Stock of $20.00. Since that date, the Class A Common Stock has been quoted on the Nasdaq National Market under the symbol "MCLD." The following table sets forth for the periods indicated the high and low sales price per share of the Class A Common Stock as reported by the Nasdaq National Market.
1996 HIGH LOW ----------------------------------------------------------- ------- ------- Second Quarter (from June 10, 1996)........................ $ 26.75 $ 22.25 Third Quarter.............................................. $ 39.50 $ 23.50 Fourth Quarter (through October 7, 1996)................... $ 33.00 $ 30.50
On October 7, 1996, the last reported sale price of the Class A Common Stock on the Nasdaq National Market was $32.50 per share. On October 7, 1996, there were 366 holders of record of the Class A Common Stock. The Company has never declared or paid any cash dividends on its capital stock and does not anticipate paying dividends in the foreseeable future. Future dividends, if any, will be at the discretion of the Board and will depend upon, among other things, the Company's operations, capital requirements and surplus, general financial condition, contractual restrictions in financing agreements and such other factors as the Board may deem relevant. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 20 24 CAPITALIZATION The following table sets forth, as of June 30, 1996, the actual capitalization of the Company and the capitalization of the Company as adjusted for the Offering, including application of the net proceeds to the Company therefrom as set forth under "Use of Proceeds." This table should be read in conjunction with the Selected Consolidated Financial Data, the Consolidated Financial Statements of the Company, the Notes thereto and the other financial data included elsewhere in this Prospectus.
JUNE 30, 1996 ------------------------- ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS) Short-term debt..................................................... $ -- $ -- -------- -------- Long-term debt...................................................... -- -- -------- -------- Stockholders' equity: Preferred Stock, $.01 par value, 2,000,000 shares authorized; none outstanding................................... -- -- Preferred Stock, Class A, $5.50 par value, 1,150,000 shares authorized; none outstanding................................... -- -- Class A Common Stock, $.01 par value, 75,000,000 shares authorized; 30,210,519 shares issued and outstanding and 35,806,049 shares, as adjusted for the Offering................ 302 358 Class B Common Stock, convertible, $.01 par value, 22,000,000 shares authorized; 15,625,929 shares issued and outstanding......................................... 156 156 Additional paid-in capital........................................ 299,833 465,477 Accumulated deficit............................................... (34,362) (34,362) -------- -------- Total stockholders' equity................................ 265,929 431,629 -------- -------- Total capitalization...................................... $ 265,929 $ 431,629 ======== ========
21 25 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA) The following table sets forth selected consolidated financial data and should be read in conjunction with and is qualified by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements of the Company, the Notes thereto and the other financial data contained elsewhere in this Prospectus. All of the financial data as of and for each of the five periods ended December 31, 1991, 1992, 1993, 1994 and 1995 have been derived from Consolidated Financial Statements of the Company that have been audited by McGladrey & Pullen, LLP, independent auditors. The information as of and for the six month periods ended June 30, 1995 and 1996 is unaudited, but in the opinion of the Company reflects all adjustments necessary for the fair presentation of the Company's financial position and results of operations for such periods, and may not be indicative of the results of operations for a full year. The unaudited pro forma information reflects the acquisitions by the Company of MWR, Ruffalo, Cody and Telecom*USA Publishing on April 28, 1995, July 15, 1996 and September 20, 1996, respectively, using the purchase method of accounting, assuming, for purposes of the pro forma statement of operations data, that such acquisitions were consummated at the beginning of the periods presented. The unaudited pro forma information should be read in conjunction with the Financial Statements of MWR, Ruffalo, Cody and Telecom*USA Publishing and the Notes thereto included elsewhere in this Prospectus. The financial and operating data presented below are derived from the records of the Company, MWR, Ruffalo, Cody and Telecom*USA Publishing.
PERIOD FROM JUNE 6, 1991 TO YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------------------------------------------- 1991(1) 1992 1993 1994 --------------- ------ ------ ------- OPERATIONS STATEMENT DATA: Revenue................................................ $ -- $ 250 $ 1,550 $ 8,014 ------- ------- ------- -------- Operating expenses: Cost of service...................................... -- 262 1,528 6,212 Selling, general and administrative.................. 56 219 2,390 12,373 Depreciation and amortization........................ 2 6 235 772 ------- ------- ------- -------- Total operating expenses.......................... 58 487 4,153 19,357 ------- ------- ------- -------- Operating loss......................................... (58) (237) (2,603) (11,343) Interest income (expense), net......................... -- -- 163 (73) Other non-operating expenses........................... -- -- -- -- Income taxes........................................... -- -- -- -- ------- ------- ------- -------- Net loss............................................... $ (58) $ (237) $(2,440) $(11,416) ======= ======= ======= ======== Loss per common and common equivalent share............ $ -- $ (.02) $ (.08) $ (.31) ======= ======= ======= ======== Weighted average common and common equivalent shares outstanding.......................................... 14,925 14,925 29,655 36,370 ======= ======= ======= ======== YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------ --------------------------------- PRO FORMA PRO FORMA 1995(2)(3) 1995(4)(5) 1995 1996 1996(6) ---------- ---------- -------- -------- --------- OPERATIONS STATEMENT DATA: Revenue................................................ $ 28,998 $ 86,476 $11,419 $ 26,406 $64,946 ------- -------- ------- ------- -------- Operating expenses: Cost of service...................................... 19,667 47,461 7,628 18,724 36,372 Selling, general and administrative.................. 18,054 45,605 8,290 13,976 31,836 Depreciation and amortization........................ 1,835 8,018 763 2,573 5,725 ------- -------- ------- ------- -------- Total operating expenses.......................... 39,556 101,084 16,681 35,273 73,933 ------- -------- ------- ------- -------- Operating loss......................................... (10,558) (14,608) (5,262) (8,867) (8,987) Interest income (expense), net......................... (771) (1,049) (460) (16) (139) Other non-operating expenses........................... -- (997) -- -- (483) Income taxes........................................... -- -- -- -- -- ------- -------- ------- ------- -------- Net loss............................................... $(11,329) $(16,654) $(5,722) $ (8,883) $(9,609) ======= ======== ======= ======= ======== Loss per common and common equivalent share............ $ (.31) $ (0.45) $ (.15) $ (.23) $ (0.25) ======= ======== ======= ======= ======== Weighted average common and common equivalent shares outstanding.......................................... 37,055 37,416 37,055 38,512 38,873 ======= ======== ======= ======= ========
AS OF DECEMBER 31, ------------------------------------------------------------------------ 1991 1992 1993 1994 --------------- ------ ------ ------- BALANCE SHEET DATA Current assets........................................ $ 2 $ 544 $ 7,077 $ 4,862 Working capital (deficit)............................. (72) $ (440) $ 5,962 $ 1,659 Property and equipment, net........................... $ -- $ 135 $ 1,958 $ 4,716 Total assets.......................................... $ 21 $ 694 $ 9,051 $ 10,687 Long-term debt........................................ -- -- -- $ 3,500 Stockholders' equity (deficit)........................ $ (53) $ (290) $ 7,936 $ 3,291 AS OF DECEMBER 31, JUNE 30, 1996 ------------ ----------------------- PRO 1995(2)(7) ACTUAL FORMA(8) ------------ ---------- --------- BALANCE SHEET DATA Current assets........................................ $ 9,624 $249,528 $ 200,071 Working capital (deficit)............................. $ (92) $229,920 $ 158,665 Property and equipment, net........................... $ 15,078 $ 35,223 $ 40,140 Total assets.......................................... $ 28,986 $289,299 $ 326,648 Long-term debt........................................ $ 3,600 -- $ 2,959 Stockholders' equity (deficit)........................ $ 14,958 $265,929 $ 278,175
PERIOD FROM JUNE 6, 1991 TO YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------- 1991(1) 1992 1993 1994 --------------- ------ ------ ------- OTHER FINANCIAL DATA: Capital expenditures, including acquisition of business............................................. -- $ 138 $ 2,052 $ 3,393 EBITDA(9).............................................. $(56) $ (231) $ (2,368) $ (10,571) YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------- --------------------------------- PRO FORMA PRO FORMA 1995(2)(3) 1995(4)(5) 1995 1996 1996(6) ---------- ---------- -------- -------- --------- OTHER FINANCIAL DATA: Capital expenditures, including acquisition of business............................................. $ 14,697 $ 17,489 $ 8,822 $ 21,337 $22,534 EBITDA(9).............................................. $ (8,723) $ (6,590) $(4,499) $ (6,294) $(3,262)
(Footnotes on following page) 22 26 - --------------- (1) The Company was organized on June 6, 1991. (2) The acquisition of MWR in April 1995 affects the comparability of the historical data presented for 1995 to the historical data for prior periods shown. (3) Includes operations of MWR from April 29, 1995 to December 31, 1995. (4) The acquisitions of MWR, Ruffalo, Cody and Telecom*USA Publishing in April 1995, July 1996 and September 1996, respectively, affect the comparability of the pro forma data presented for 1995 to the data for prior periods shown. (5) Includes operations of MWR, Ruffalo, Cody and Telecom*USA Publishing from January 1, 1995 to December 31, 1995 and certain adjustments attributable to the acquisitions of MWR, Ruffalo, Cody and Telecom*USA Publishing by the Company. (6) Includes operations of Ruffalo, Cody and Telecom*USA Publishing from January 1, 1996 to June 30, 1996 and certain adjustments attributable to the acquisitions of Ruffalo, Cody and Telecom*USA Publishing by the Company. (7) Includes MWR, which was acquired by the Company on April 28, 1995. (8) Includes Ruffalo, Cody and Telecom*USA Publishing, which were acquired by the Company on July 15, 1996 and September 20, 1996, respectively. (9) EBITDA consists of operating loss before depreciation and amortization. The Company 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. 23 27 PRO FORMA FINANCIAL DATA The following unaudited pro forma financial information has been prepared to give effect to the acquisitions of MWR, Ruffalo, Cody and Telecom*USA Publishing by the Company in April 1995, July 1996 and September 1996, respectively. The unaudited pro forma financial statements reflect such acquisitions using the purchase method of accounting, assuming, for the pro forma statements of operations data, that such acquisitions were consummated at the beginning of the periods presented. The unaudited pro forma financial information is derived from and should be read in conjunction with the Consolidated Financial Statements of the Company, Ruffalo, Cody and Telecom*USA Publishing and the Financial Statements of MWR and the related Notes thereto included elsewhere in this Prospectus. The pro forma adjustments are based upon available information and certain assumptions that management believes to be reasonable. Final purchase adjustments may differ from the pro forma adjustments herein. The unaudited pro forma financial information is provided for informational purposes only and is not necessarily indicative of the financial position or operating results that would have occurred had the acquisitions been consummated on the date presented or at the beginning of the periods presented, nor is it necessarily indicative of future operating results or financial position. The unaudited historical information as of and for the six month period ended June 30, 1996 may not be indicative of the results of operations for a full year. Specifically, due primarily to seasonal factors generally resulting in higher revenues during the first six months of a given year, the unaudited historical information presented for Telecom*USA Publishing for such periods is not indicative of the results of operations for a full year. MCLEOD, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1996 (IN THOUSANDS)
RUFFALO, CODY & MCLEOD, INC. ASSOCIATES, INC. --------------- ---------------- ASSETS Current Assets Cash and cash equivalents...................................................... $ 232,019 $ 47 Trade receivables, net......................................................... 12,975 2,602 Inventory...................................................................... 3,075 -- Deferred expenses.............................................................. -- -- Prepaid expenses and other..................................................... 1,458 141 -------- ------- Total current assets......................................................... 249,527 2,790 -------- ------- Property and Equipment, net..................................................... 35,223 1,151 -------- ------- Intangibles, net................................................................ 2,436 -- -------- ------- Other assets.................................................................... 2,113 575 -------- ------- $ 289,299 $ 4,516 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable.................................................................. $ -- $ 200 Current maturities of long-term debt........................................... -- -- Accounts payable............................................................... 14,848 372 Other current liabilities...................................................... 4,760 1,579 -------- ------- Total current liabilities.................................................... 19,608 2,151 -------- ------- Long-Term Debt, less current maturities......................................... -- -- -------- ------- Deferred Revenue, less current portion.......................................... 3,762 -- -------- ------- Minority interest in consolidated subsidiary.................................... -- -- -------- ------- Redeemable Common Stock and Warrants Capital stock, common.......................................................... -- 2,227 Common stock held by the 401(k) profit sharing plan............................ -- 140 Warrants....................................................................... -- 546 -------- ------- -- 2,913 -------- ------- Common Stockholders' Equity (Deficit) Capital stock, common.......................................................... 458 619 Additional paid-in capital..................................................... 299,833 -- Accumulated earnings (deficit)................................................. (34,362) (1,027) -------- ------- 265,929 (408) Less treasury stock............................................................. -- -- Less maximum cash obligation related to 401(k) profit sharing plan shares....... -- (140) -------- ------- 265,929 (548) -------- ------- $ 289,299 $ 4,516 ======== ======= TELECOM*USA ADJUSTMENTS PRO FORMA PUBLISHING FOR FOR GROUP, INC. ACQUISITIONS ACQUISITIONS ----------- ----------- ------------ ASSETS Current Assets Cash and cash equivalents...................................................... $ 207 $(4,808)(1) $154,111 90 (2) 616 (3) (74,060)(4) Trade receivables, net......................................................... 12,877 -- 28,454 Inventory...................................................................... -- -- 3,075 Deferred expenses.............................................................. 7,635 4,288 (4) 11,923 Prepaid expenses and other..................................................... 3,079 (2,170)(5) 2,508 ------- ------- -------- Total current assets......................................................... 23,798 (76,044) 200,071 ------- ------- -------- Property and Equipment, net..................................................... 3,830 (64)(1) 40,140 ------- ------- -------- Intangibles, net................................................................ 13,518 14,947 (1) 83,363 52,462 (4) ------- ------- -------- Other assets.................................................................... 1,340 (208)(1) 3,074 (746)(5) ------- ------- -------- $42,486 $(9,653) $326,648 ======= ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable.................................................................. $ 2,959 $ -- $ 3,159 Current maturities of long-term debt........................................... 1,764 -- 1,764 Accounts payable............................................................... 2,958 -- 18,178 Other current liabilities...................................................... 10,356 1,610 (4) 18,305 ------- ------- -------- Total current liabilities.................................................... 18,037 1,610 41,406 ------- ------- -------- Long-Term Debt, less current maturities......................................... 16,623 (13,664)(3) 2,959 ------- ------- -------- Deferred Revenue, less current portion.......................................... -- -- 3,762 ------- ------- -------- Minority interest in consolidated subsidiary.................................... 346 -- 346 ------- ------- -------- Redeemable Common Stock and Warrants Capital stock, common.......................................................... -- (2,227)(6) -- Common stock held by the 401(k) profit sharing plan............................ 220 (360)(6) -- Warrants....................................................................... -- (546)(6) -- ------- ------- -------- 220 (3,133) -- ------- ------- -------- Common Stockholders' Equity (Deficit) Capital stock, common.......................................................... 4,202 (19,101)(6) 462 4 (1) 14,280 (3) Additional paid-in capital..................................................... -- 12,242 (1) 312,075 Accumulated earnings (deficit)................................................. 3,391 (2,364)(6) (34,362) ------- ------- -------- 7,593 5,061 278,175 Less treasury stock............................................................. (113) 113 (6) -- Less maximum cash obligation related to 401(k) profit sharing plan shares....... (220) 360 (6) -- ------- ------- -------- 7,260 5,534 278,175 ------- ------- -------- $42,486 $(9,653) $326,648 ======= ======= ========
(Footnotes on following page) 24 28 - --------------- (1) To record the preliminary allocation of the net purchase price for the acquisition of Ruffalo, Cody by the Company to assets acquired, including goodwill and customer lists, and to record the issuance of the Company's Class A Common Stock and options to purchase Class A Common Stock valued at $24.75 per share, the average closing sales prices of the Class A Common Stock on the Nasdaq National Market during the five business days before and after July 15, 1996, the date the Company acquired Ruffalo, Cody. Assumes none of the conditions for the payment of certain additional consideration are met and that the total net purchase price for the Ruffalo, Cody acquisition is $17,053,860, which is computed as follows, assuming all options to purchase shares of Class A Common Stock granted in connection with the acquisition will be exercised upon vesting: Cash................................................................................ $ 4,807,898 361,420 shares of Class A Common Stock valued at $24.75 per share................... 8,945,145 Options to purchase 158,009 shares of Class A Common Stock valued at $24.75 per share............................................................................. 3,910,723 Less cash to be received upon exercise of vested options............................ (609,906) ----------- Total net purchase price............................................................ $ 17,053,860 ===========
If all of the conditions for the payment of the additional consideration were met, the total net purchase price would include additional cash of $50,782 and 113,387 additional shares of Class A Common Stock valued at the market price at the time of issuance. This additional consideration would be allocated to intangible assets, common stock and additional paid-in capital. See "Business -- Recent Transactions." (2) To record cash received for conversion of Ruffalo, Cody warrants to common stock. (3) To record the conversion of Telecom*USA Publishing convertible debentures into shares of Telecom*USA Publishing common stock and the exercise of options and warrants to purchase Telecom*USA Publishing common stock. (4) To record the preliminary allocation of the purchase price for the acquisition of Telecom*USA Publishing by the Company to assets acquired, including intangibles. The Company paid $74,060,427 in cash to the shareholders of Telecom*USA Publishing and established an incentive plan for the holders of non-vested options to purchase shares of Telecom*USA Publishing common stock. (5) To record a valuation allowance on deferred tax assets acquired due to the uncertainty of realizing the benefit of the Company's loss carryforwards. (6) To eliminate Ruffalo, Cody and Telecom*USA Publishing equity components, including common stock, warrants, additional paid-in capital, accumulated earnings (deficit) and treasury stock. This adjustment includes the elimination of the additional Telecom*USA Publishing Common Stock issued upon conversion of convertible debentures and the exercise of warrants and options to purchase Telecom*USA Publishing common stock. 25 29 MCLEOD, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE INFORMATION)
YEAR ENDED DECEMBER 31, 1995 -------------------------------------------------------------------------------------- MWR TELECOM*USA ADJUSTMENTS PRO FORMA MCLEOD, TELECOM, RUFFALO, CODY & PUBLISHING FOR FOR INC.(1) INC.(2) ASSOCIATES, INC. GROUP, INC. ACQUISITIONS ACQUISITIONS --------- -------- ---------------- ----------- ------------ ------------ Operations Statement Data: Revenue.............................. $ 28,998 $873 $ 13,286(3) $43,319 $ -- $ 86,476 --------- ------ -------- ------- -------- -------- Operating expenses: Cost of service.................... 19,667 376 6,619 18,226 2,573 (4) 47,461 Selling, general and administrative................... 18,054 98 5,376 20,362 1,715 (4) 45,605 Depreciation and amortization...... 1,835 220 475 2,104 3,396 (5) 8,018 (12)(6) --------- ------ -------- ------- -------- -------- Total operating expenses....... 39,556 694 12,470 40,692 7,672 101,084 --------- ------ -------- -------- -------- -------- Operating income (loss).............. (10,558) 179 816 2,627 (7,672) (14,608) Interest income (expenses), net...... (771) (55) (77) (1,546) 1,400 (7) (1,049) Other non-operating expenses......... -- -- -- (997) -- (997) Income taxes......................... -- (51) (274) (34) 359 (8) -- --------- ------ -------- ------- -------- -------- Net income (loss).................... $ (11,329) $ 73 $ 465 $ 50 $ (5,913) $(16,654) ========= ====== ======== ======= ======== ======== Loss per common and common equivalent share.............................. $ (0.31) $ (0.45) ========= ======== Weighted average common and common equivalent shares outstanding...... 37,055 37,416 ========= ======== Other Financial Data: EBITDA (9)........................... $ (8,723) $399 $ 1,291 $ 4,731 $ (4,288) $ (6,590)
SIX MONTHS ENDED JUNE 30, 1996 ----------------------------------------------------------------------- RUFFALO, CODY & TELECOM*USA ADJUSTMENTS PRO FORMA MCLEOD, ASSOCIATES, PUBLISHING FOR FOR INC. INC. GROUP, INC. ACQUISITIONS ACQUISITIONS -------- ------------- ----------- ------------ ------------ Operations Statement Data: Revenue.......................................... $ 26,406 $ 8,278(3) $30,262 $ -- $ 64,946 -------- ------- ------- -------- -------- Operating expenses: Cost of service................................ 18,724 4,225 11,218 2,205 (4) 36,372 Selling, general and administrative............ 13,976 3,253 13,137 1,470 (4) 31,836 Depreciation and amortization.................. 2,573 269 1,184 1,699 (5) 5,725 -------- ------- ------- -------- -------- Total operating expenses................... 35,273 7,747 25,539 5,374 73,933 -------- ------- ------- -------- -------- Operating income (loss).......................... (8,867) 531 4,723 (5,374) (8,987) Interest income (expenses), net.................. (16) (6) (817) 700 (7) (139) Other non-operating expenses..................... -- -- (483) -- (483) Income taxes..................................... -- (194) (1,360) 1,554 (8) -- -------- ------- ------- -------- -------- Net income (loss)................................ $ (8,883) $ 331 $ 2,063 $ (3,120) $ (9,609) ======== ======= ======= ======== ======== Loss per common and common equivalent share...... $ (0.23) $ (0.25) ======== ======== Weighted average common and common equivalent shares outstanding............................. 38,512 38,873 ======== ======== Other Financial Data: EBITDA (9)....................................... $ (6,294) $ 800 $ 5,907 $ (3,675) $ (3,262)
(Footnotes on following page) 26 30 - --------------- (1) Includes operations of MWR from April 29, 1995 to December 31, 1995. (2) Includes operations of MWR from January 1, 1995 to April 28, 1995. (3) Includes revenue from an agreement with a major long distance carrier to provide telemarketing services. Over 40% of Ruffalo, Cody's revenues in 1995 and a significant portion of its revenues in 1996 were derived from this agreement. The major long distance carrier has informed the Company that it intends to terminate this agreement effective December 31, 1996. (4) To recognize the costs associated with the directories in progress at the time of the Company's acquisition of Telecom*USA Publishing. (5) To adjust depreciation and amortization to include amortization of intangibles acquired in the Company's acquisitions of Ruffalo, Cody and Telecom*USA Publishing. Intangibles acquired in these acquisitions will be amortized over periods ranging from 5 years to 25 years. These adjustments assume that none of the conditions for the payment of certain additional consideration in the Ruffalo, Cody acquisition are met. If all such conditions were met, amortization of the intangibles would be increased over their estimated remaining lives. (6) To adjust depreciation and amortization to include amortization of intangibles and to reflect the estimated depreciation of the purchase price allocated to MWR's property and equipment from January 1, 1995 to April 28, 1995, the date of the Company's acquisition of MWR. Intangibles acquired in the Company's acquisition of MWR are being amortized over 15 years. (7) To eliminate the interest expense recorded on Telecom*USA Publishing convertible debentures that were converted to shares of Telecom*USA Publishing common stock immediately prior to the acquisition of Telecom*USA Publishing by the Company. (8) Net income (loss) does not include a pro forma adjustment for income taxes due to the availability of net operating loss carryforwards and a valuation allowance. (9) EBITDA consists of operating loss before depreciation and amortization. The Company 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. 27 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto and the other financial data appearing elsewhere in this Prospectus. OVERVIEW The Company has historically derived its telecommunications revenue from (i) the sale of local and long distance telecommunications services to end users, (ii) telecommunications network maintenance services and (iii) special access and private line services. The table set forth below summarizes the Company's percentage of revenues from these sources:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, -------------------------- ----------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- Local and long distance telecommunications services......... -- % 58% 74% 76% 68% Telecommunications network maintenance services............................ 100 42 17 20 11 Special access and private line services............................ -- -- 9 4 21 ---- ---- ---- ---- ---- 100% 100% 100% 100% 100% ==== ==== ==== ==== ====
The Company also derives revenue from ancillary services as a result of its acquisitions of Ruffalo, Cody and Telecom*USA Publishing in July 1996 and September 1996, respectively. The Company began deriving revenue from direct marketing and telemarketing services on July 15, 1996, the date the Company acquired Ruffalo, Cody. The Company also began deriving revenue from the sale of advertising space in telephone directories published by Telecom*USA Publishing on September 20, 1996, the date the Company acquired Telecom*USA Publishing. See "-- Liquidity and Capital Resources" and "Business -- Recent Transactions." The Company began offering "bundled" local and long distance services to business customers in January 1994. At the end of 1995, the Company began providing, on a test basis, long distance services to residential customers. In June 1996, the Company began marketing and providing to residential customers in Cedar Rapids, Iowa and Iowa City, Iowa an integrated package of telecommunications services, marketed under the name PrimeLine(R), that includes local and long distance service, voice mail, paging, Internet access and travel card services. The Company plans to continue its efforts to market and provide local, long distance and other telecommunications services to business customers and plans to accelerate its efforts to market its PrimeLine(R) service to residential customers. The Company believes its efforts to market its integrated telecommunications services will be enhanced by its July 1996 acquisition of Ruffalo, Cody, which specializes in direct marketing and telemarketing services, including telecommunications sales, and its September 1996 acquisition of Telecom*USA Publishing, which publishes and distributes "white page" and "yellow page" telephone directories in fifteen states in the midwestern and Rocky Mountain regions of the United States, including most of the Company's target markets. Because its revenue from network maintenance is derived almost exclusively from the Iowa Communications Network Maintenance Contract and such revenue is expected to increase more slowly than the Company's other types of revenue, the Company expects that revenue derived from network maintenance services will continue to constitute a decreasing percentage of the Company's revenue in the future. Special access and private line services as a percentage of the Company's total revenue increased in 1995 due to the revenue generated by MWR, which was acquired in April 1995. The percentage increase in revenue from this source for the six months ended June 30, 1996 was primarily due to the revenue from a one-time construction and sale of a fiber optic network. Excluding the revenue 28 32 from this project, the percentage of total revenues from the three historical sources would have been 76%, 12% and 12%, respectively. The Company's principal operating expenses consist of cost of service; selling, general and administrative expenses ("SG&A"); and depreciation and amortization. Cost of service primarily includes local services purchased from two Regional Bell Operating Companies, costs to terminate the long distance calls of the Company's customers through an interexchange carrier, costs associated with maintaining the Iowa Communications Network and costs associated with operating the Company's network. Cost of service also includes the costs of printing and distributing the telephone directories published by Telecom*USA Publishing. SG&A consists of selling and marketing, customer service and corporate administrative expenses. Depreciation and amortization include depreciation of the Company's telecommunications network and equipment; amortization of goodwill related to the Company's acquisitions of MWR, Ruffalo, Cody and Telecom*USA Publishing; amortization expense related to the excess of estimated fair market value in aggregate of certain options over the aggregate exercise price of such options granted to certain officers, other employees and directors; and amortization of one-time installation costs associated with transferring customers' local line service from the Regional Bell Operating Companies to the Company's telemanagement service. As the Company expands into new markets, both cost of service and SG&A will increase. The Company expects to incur SG&A expenses prior to achieving significant revenues in new markets. Significant levels of marketing activity may be necessary in new markets in order for the Company to build a customer base large enough to generate sufficient revenue to offset such marketing expenses. In addition, SG&A may increase as a percentage of total revenue in the short term after the Company enters a new market, because many of the fixed costs of providing service in new markets are incurred before significant revenue can be expected from those markets. In January and February 1996, the Company granted to certain directors, officers and other employees, options to purchase an aggregate of 965,166 and 688,502 shares of Class A Common Stock, respectively, at an exercise price of $2.67 per share. The estimated fair market value of these options, in the aggregate, at the date of grant was later determined to exceed the aggregate exercise price by approximately $9.2 million. This amount will be amortized on a monthly basis over the four-year vesting period of the options. The Company has experienced operating losses since its inception as a result of efforts to build its customer base, develop and construct its network infrastructure, build its internal staffing, develop its systems and expand into new markets. The Company expects to continue to focus on increasing its customer base and geographic coverage. Expansion of the Company's operations and facilities, network and services will require significant capital expenditures. Accordingly, the Company expects that its cost of service, SG&A and capital expenditures will continue to increase significantly, all of which may have a negative impact on operating results. The Company expects to incur significant operating losses and to generate negative cash flows from operating and construction activities during the next several years while it develops its business and installs and expands its fiber optic network. In addition, the Company may be forced to change its pricing policies to respond to a changing competitive environment, and there can be no assurance that the Company will be able to maintain its operating margin. See "Risk Factors -- Wireline Competition" and "Risk Factors -- Regulation." There can be no assurance that growth in the Company's revenue or customer base will continue or that the Company will be able to achieve or sustain profitability or positive cash flows. The Company has generated net operating losses since its inception and, accordingly, has incurred no income tax expense. The Company has reduced the net deferred tax assets generated by these losses by a valuation allowance which offsets the net deferred tax asset due to the uncertainty of realizing the benefit of the tax loss carryforwards. The Company will reduce the 29 33 valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will be realized. SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995 Telecommunications revenue increased from $11.4 million for the six-month period ended June 30, 1995 to $26.4 million for the six months ended June 30, 1996, representing an increase of $15.0 million or 131%. Revenue from the sale of local and long distance telecommunications services accounted for $9.3 million of this increase. Revenue from special access and private line services accounted for $5 million of this increase, of which $2.8 million was a one-time construction and sale of a fiber-optic network. Total local and long-distance customers increased 63% from 7,030 at June 30, 1995 to 11,474 at June 30, 1996. Local lines under the Company's management increased 77% from 26,960 at June 30, 1995 to 47,699 at June 30, 1996. Average lines per customer increased from 3.84 at June 30, 1995 to 4.34 at June 30, 1996. Average monthly revenue per line decreased from $69.68 for the month ended June 30, 1995 to $66.54 for the month ended June 30, 1996, due to fewer revenue-generating business days during June 1996. Revenue from telecommunications network maintenance services was $3 million for the six-month period ended June 30, 1996, and $2.3 million for the six months ended June 30, 1995. This increase was primarily attributable to increased revenues from the Company's Iowa Communications Network Maintenance Contract. The Company acquired MWR, a competitive access provider that offers most of the Company's special access and private line services, in April 1995 in an acquisition accounted for as a purchase. MWR represented $393,000 and $1.7 million, respectively, of the Company's revenue for the six-month periods ending June 30, 1995 and 1996. Cost of service increased from $7.6 million for the six-month period ended June 30, 1995 to $18.7 million for the six-month period ended June 30, 1996, an increase of $11.1 million or 145%. This increase in cost of service resulted primarily from costs for providing local and long distance services. Cost of service as a percentage of telecommunications revenue increased from 67% for the six-month period ended June 30, 1995 to 71% for the six-month period ended June 30, 1996. Although the cost of providing local and long-distance services decreased as a percentage of the local and long-distance telecommunications revenue by less than 1%, the overall 4% increase in cost of service as a percentage of telecommunication revenue was principally due to the low margin realized on the one-time construction and sale of a fiber optic network. SG&A increased from $8.3 million for the six-month period ended June 30, 1995 to $14 million for the six-month period ended June 30, 1996, an increase of $5.7 million or 69%. This increase was due to increased compensation resulting from selling and customer support activities of $2.4 million, additional administrative personnel expenses of $1.2 million and associated costs of $2.1 million required to handle the growth experienced primarily in local and long distance revenues. Depreciation and amortization expenses increased from $763,000 for the six-month period ended June 30, 1995 to $2.6 million for the six-month period ended June 30, 1996, an increase of $1.8 million or 237%. This increase consisted of $882,000 of amortization expense related to the excess of estimated aggregate fair market value of certain options over the aggregate exercise price of such options granted to certain officers, other employees, and directors; depreciation of $359,000 related to the additional fiber optic network purchased and built during 1995 and the first six months of 1996; $367,000 of depreciation related to capital costs associated with the growth of the Company; $145,000 resulting from the amortization of one-time installation costs primarily associated with transferring customers' local line service from the Regional Bell Operating Companies to the Company's telemanagement service; and amortization of goodwill of $56,000 related to the Company's acquisition of MWR in April 1995. Interest expense increased from $487,000 for the six months ended June 30, 1995 to $521,000 for the six months ended June 30, 1996. The increase is primarily a result of an increase in the amortization expense from $257,000 for the six months ended June 30, 1995 to $341,000 for the six 30 34 months ended June 30, 1996 related to the excess of estimated aggregate fair market value of certain options over the aggregate exercise price of such options granted to a significant stockholder of the Company in connection with the guarantee and/or support by such stockholder of certain portions of the Credit Facility, offset by lower interest expense on reduced borrowings as a result of the Company's payment of all amounts outstanding under the Credit Facility in June 1996 with a portion of the net proceeds from the Company's initial public offering of Class A Common Stock; and the capitalization of interest costs in the amounts of $6,000 and $204,000 for the six-month periods ended June 30, 1995 and 1996, respectively. Interest income increased from $27,000 for the six-month period ended June 30, 1995 to $505,000 for the same period in 1996. This increase resulted from additional highly liquid interest-bearing investments made in June 1996 with a portion of the proceeds of the Company's initial public offering of Class A Common Stock. Net loss increased from $5.7 million for the six-month period ended June 30, 1995 to $8.9 million for the six-month period ended June 30, 1996, an increase of $3.2 million. This increase resulted primarily from the expansion of the local and long distance businesses and amortization expense related to stock options granted to certain officers, other employees and directors. The development of the Company's business and the construction and expansion of its network require significant expenditures, a substantial portion of which is incurred before the realization of revenues. Operating loss before depreciation and amortization ("EBITDA") decreased from a negative $4.5 million for the six months ended June 30, 1995 to a negative $6.3 million for the six months ended June 30, 1996, a decrease of $1.8 million. The change reflected the increase in the net loss incurred in 1996 due primarily to the expansion of the Company's local, long distance and other telecommunications services and the factors described above. YEAR ENDED 1995 COMPARED WITH YEAR ENDED 1994 Telecommunications revenue increased from $8 million in 1994 to $29 million in 1995, representing an increase of $21 million or 262%. Revenue from the increase in the sale of local and long distance telecommunications services accounted for $16.9 million of this increase. Total local and long distance customers served increased 69% from 5,137 at December 31, 1994 to 8,700 at December 31, 1995. Local lines under the Company's management increased 109% from 17,112 at December 31, 1994 to 35,795 at December 31, 1995. Average lines per customer increased from 3.33 at December 31, 1994 to 4.31 at December 31, 1995. Average monthly revenue per line increased from $58.30 for the month ended December 31, 1994 to $62.68 for the month ended December 31, 1995. Revenue from telecommunications network maintenance services was $4.9 million in 1995. The Company acquired MWR, a competitive access provider that offers most of the Company's special access and private line services, in April 1995 in an acquisition accounted for as a purchase. MWR represented $1.6 million of the Company's revenue in 1995. Cost of service increased from $6.2 million in 1994 to $19.7 million in 1995, an increase of $13.5 million or 217%. This increase in cost of service resulted primarily from costs for providing local and long distance services. Cost of service as a percentage of telecommunications revenue decreased from 78% in 1994 to 68% in 1995, principally as a result of certain economies of scale. SG&A increased from $12.4 million in 1994 to $18.1 million in 1995, an increase of $5.7 million or 46%. This increase was due to increased compensation resulting from selling and customer support activities of $2.8 million, additional administrative personnel of $1.6 million and associated costs of $1.3 million required to handle the growth experienced primarily in local and long distance revenues. Depreciation and amortization expenses increased from $772,000 in 1994 to $1.8 million in 1995, an increase of $1 million or 138%. This increase consisted of depreciation of $362,000 related 31 35 to the additional fiber optic network purchased and built during 1995; $304,000 of depreciation related to capital costs associated with the growth of the Company; $266,000 resulting from the amortization of one-time installation costs primarily associated with transferring customers' local line service from the Regional Bell Operating Companies to the Company's telemanagement service; and amortization of goodwill of $117,000 related to the Company's acquisition of MWR in 1995. Net interest expense increased from $73,000 in 1994 to $771,000 in 1995. This net increase resulted from an increase in interest expense of $692,000 due to the need for additional secured debt in 1995 to fund the Company's growth and operating losses and a decrease in interest income of $6,000 resulting from reduced investment of funds due to the use of funds needed to satisfy working capital needs. The Company's net loss decreased from $11.4 million in 1994 to $11.3 million in 1995, a decrease of $87,000. This decrease resulted from the ability of the Company to generate additional service income while reducing customer acquisition and support costs as a percentage of service income. EBITDA improved from a negative $10.6 million in 1994 to a negative $8.7 million in 1995, an improvement of $1.9 million. The improvement reflected the decrease in the net loss and the increase in depreciation and amortization in 1995 resulting from the capital expenditures necessary to support the Company's revenue growth. YEAR ENDED 1994 COMPARED WITH YEAR ENDED 1993 Telecommunications revenue increased from $1.6 million in 1993 to $8 million in 1994, representing an increase of $6.4 million or 417%. This increase reflected an increase in revenue from the Iowa Communications Network Maintenance Contract of $1.9 million as well as the Company's commencement of local and long distance service. The increased revenue from the Iowa Communications Network Maintenance Contract resulted from the ability to charge full maintenance costs in 1994 versus reduced charges in 1993 because of a warranty period on the network. Cost of service increased from $1.5 million in 1993 to $6.2 million in 1994, an increase of $4.7 million or 307%. This increase in cost of service resulted primarily from costs for providing local and long distance services. SG&A increased from $2.4 million in 1993 to $12.4 million in 1994, an increase of $10 million or 418%. This increase was due to increased compensation resulting from selling and customer support activities of $5.5 million, additional administrative personnel of $1.8 million and associated costs of $2.7 million resulting from the start-up of local and long distance services. Depreciation and amortization expenses increased from $235,000 in 1993 to $772,000 in 1994, an increase of $537,000 or 228%. This increase was primarily due to depreciation on the increased capital expenditures required to enter the local and long distance businesses and the amortization of one time installation costs associated with transferring customers' local line service from the Regional Bell Operating Companies to the Company's telemanagement service. Interest income in 1993 was $163,000 compared to net interest expense of $73,000 in 1994. The decrease resulted from an increase in interest expense of $218,000 due to the need for additional secured debt in 1994 to fund the Company's growth and operating losses and a decrease in interest income of $18,000 resulting from reduced investment of funds due to the use of funds needed to satisfy the Company's working capital needs. The Company's net loss increased from $2.4 million in 1993 to $11.4 million in 1994, an increase of $9 million. This increase was primarily due to the Company's entry into the local and long distance businesses. 32 36 EBITDA decreased from a negative $2.4 million in 1993 to a negative $10.6 million in 1994, a decrease of $8.2 million. The decrease reflected the increased losses incurred in 1994 related to the Company's entry into the local and long distance businesses. YEAR ENDED 1993 COMPARED WITH YEAR ENDED 1992 Because the Company's revenue-producing operations began in November 1992, the Company does not believe a comparison of financial results between 1992 and 1993 would be meaningful. LIQUIDITY AND CAPITAL RESOURCES Since the inception of the Company in June 1991, the Company's total assets have grown to $289.3 million at June 30, 1996. At June 30, 1996, $35.2 million of the total assets consisted of property and equipment, net of depreciation. The growth of the Company has been funded through private sales of equity securities yielding proceeds of $41 million, drawings under the Credit Facility, and net proceeds of approximately $258.6 million from the Company's initial public offering of Class A Common Stock. At June 30, 1996, the Company's current assets of $249.5 million exceeded its current liabilities of $19.6 million, providing working capital of $229.9 million, which represents an improvement of $230 million compared to December 31, 1995 primarily attributable to the Company's completion of its initial public offering of Class A Common Stock. At December 31, 1995, the Company's current liabilities of $9.7 million exceeded current assets of $9.6 million, resulting in a working capital deficit of $92,000. This working capital deficit resulted from the growth experienced by the Company, the increase in working capital components and the substantial investment in property and equipment. The net cash used in operating activities totaled $3.8 million for the six months ended June 30, 1996 and $9.5 million for the year ended December 31, 1995. During the six months ended June 30, 1996, cash for operating activities was used primarily to fund the Company's net loss of $8.9 million for such period. The Company also required cash to fund the growth in trade receivables of $6.3 million and other assets of $937,000 as a result of the growth in local and long distance telecommunications services and special access and private line services. These uses of cash were partially offset by an increase in accounts payable and accrued expenses of $7 million due to the costs associated with the increase in telecommunications revenue, an increase in deferred revenue of $3.5 million resulting primarily from amounts received in advance from completed segments under long-term leases of fiber optic telecommunication networks and an increase in depreciation and amortization expense. During the year ended December 31, 1995, cash for operating activities was used primarily to fund the Company's net loss of $11.3 million for such period. The Company also required cash to fund the growth in trade receivables of $3.6 million and deferred line installation costs of $800,000 as a result of the growth in local and long distance telecommunications services and entry into special access and private line services. The use of cash during the year ended December 31, 1995 was partially offset by an increase in accounts payable and accrued expenses of $4.1 million due to the costs associated with the increase in telecommunications revenue and an increase in depreciation and amortization expense. The Company's investing activities used cash of $18.3 million during the six months ended June 30, 1996 and $5.5 million during the year ended December 31, 1995 primarily as a result of its continued development and expansion of its fiber optic telecommunications network. During 1994, the Company started building its telemanagement business by offering local and long distance services to business customers through the purchase of Centrex services from two Regional Bell Operating Companies and interexchange carrier services for termination of long distance calls. The equipment required for the growth of the telemanagement business and the Company's development and construction of its fiber optic telecommunications network resulted in purchases of equipment and fiber optic cable totaling $18 million and $5.3 million during the six months ended June 30, 1996 and the year ended December 31, 1995, respectively. 33 37 Cash received from net financing activities was $254.1 million during the six months ended June 30, 1996, primarily as a result of the Company's initial public offering of Class A Common Stock. The Company paid off and canceled the Credit Facility with a portion of the net proceeds from the initial public offering of Class A Common Stock during the same period. Cash received from financing activities during 1995 was $15 million and was primarily obtained through the issuance of Common Stock for an aggregate purchase price of $14 million in a private placement transaction. In addition, in April 1995 the Company issued Class B Common Stock valued at $8.3 million to acquire MWR. On July 15, 1996, the Company acquired Ruffalo, Cody in a cash and stock transaction valued at up to a maximum of approximately $19.9 million, based on the average closing sales price of the Class A Common Stock on the Nasdaq National Market at the time of the transaction. On July 15, 1996, the Company paid approximately $4.8 million in cash and issued 361,420 shares of Class A Common Stock to the shareholders of Ruffalo, Cody, and granted options to purchase 158,009 shares of Class A Common Stock to certain of the holders of options to purchase shares of Ruffalo, Cody common stock. An additional $50,782 in cash and 113,387 shares of Class A Common Stock were placed into escrow and will be delivered to the shareholders of Ruffalo, Cody over a period of 18 months, contingent upon the fulfillment of certain conditions relating to Ruffalo, Cody's ongoing revenues. The Company will record the Ruffalo, Cody acquisition as a purchase for accounting purposes. On September 20, 1996, the Company acquired Telecom*USA Publishing for approximately $74.1 million in cash and an additional amount currently estimated to be approximately $1.6 million to be paid to certain employees of Telecom*USA Publishing as part of an incentive plan. At the time of the acquisition, Telecom*USA Publishing had outstanding debt of approximately $6.6 million. The Company will record the Telecom*USA Publishing acquisition as a purchase for accounting purposes. The Company used a portion of the net proceeds from the Company's initial public offering of Class A Common Stock to fund the Telecom*USA Publishing acquisition and for the cash portion of the Ruffalo, Cody acquisition. Telecom*USA Publishing has a revolving line of credit and term loan (the "Telecom Credit Facility") with Norwest Bank Iowa, National Association (the "Telecom Credit Facility Bank"), with an aggregate credit limit of approximately $9.8 million. As of August 31, 1996, Telecom*USA Publishing had borrowings of approximately $4.8 million outstanding under the Telecom Credit Facility. Borrowings of less than $6 million under the Telecom Credit Facility bear interest at the Telecom Credit Facility Bank prime rate as in effect from time to time. Borrowings in excess of $6 million under the Telecom Credit Facility bear interest at the Telecom Credit Facility Bank prime rate as in effect from time to time plus .75%. Borrowings under the Telecom Credit Facility are secured by substantially all of Telecom*USA Publishing's assets. The Company currently intends to retain the Telecom Credit Facility. At June 30, 1996, the Company had actual contractual capital commitments of approximately $5.5 million for costs associated with the construction of fiber optic networks. The Company is currently bidding for certain PCS licenses being auctioned by the FCC and expects to explore alternatives to permit it to provide other wireless services which may require substantial additional capital. As of September 30, 1996, the Company had submitted bids totaling approximately $21.8 million for "D" and "E" block frequency licenses covering areas of Iowa, Illinois, Nebraska and Minnesota in the FCC's auctions of PCS licenses. If the Company is successful in obtaining PCS licenses, it will be required to make significant expenditures to develop, construct and operate a PCS system. As of September 30, 1996, the Company estimates that its aggregate capital requirements for the remainder of 1996, 1997 and 1998 will be approximately $ . 34 38 The Company's estimated capital requirements include the estimated cost of (i) developing and constructing its fiber optic network, (ii) market expansion activities, (iii) constructing its network operations center and corporate headquarters, and (iv) obtaining PCS licenses and related capital expenditures, including those licenses described above for which the Company currently has bids outstanding. These capital requirements are expected to be funded, in large part, out of the net proceeds from the Offering and the net proceeds remaining from the Company's initial public offering of Class A Common Stock (estimated to be $122 million as of September 30, 1996), and lease payments to the Company for portions of the Company's networks. The Company may require additional capital in the future for business activities related to those specified above and also for acquisitions, joint ventures and strategic alliances, as well as to fund operating deficits and net losses. These activities could require significant additional capital not included in the foregoing estimated aggregate capital requirements of $ million. The Company expects to meet its additional capital needs with the proceeds from credit facilities and other borrowings, and additional debt and equity issuances. The Company currently plans to obtain one or more additional bank lines of credit, although no such lines of credit have yet been negotiated. There can be no assurance that the Company will be successful in producing sufficient cash flows or raising sufficient debt or equity capital to enable it to meet its strategic objectives or that such funds, if available at all, will be available on a timely basis or on terms that are acceptable to the Company. See "Risk Factors -- Significant Capital Requirements." EFFECTS OF NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of, which will require the Company to review for the impairment of long-lived assets and certain identifiable intangibles to be held and used by the Company whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. Adoption of SFAS No. 121 is required in fiscal 1996. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, which establishes a fair value based method for financial accounting and reporting stock-based employee compensation plans. However, the new standard allows compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, but requires expanded disclosures. SFAS No. 123 is effective in fiscal year 1996. The Company has elected to continue to apply the intrinsic value-based method of accounting for stock options. While the Company does not know precisely the impact of adopting SFAS No. 121 and SFAS No. 123, the Company does not expect that the adoption of SFAS No. 121 or SFAS No. 123 will have a material effect on the Company's consolidated financial statements. INFLATION The Company does not believe that inflation has had a significant impact on the Company's consolidated operations. 35 39 BUSINESS OVERVIEW The Company is a provider of integrated telecommunications services to small and medium-sized businesses and, since June 1996, residential customers, primarily in Iowa and Illinois. The Company derives its telecommunications revenue from (i) the sale of "bundled" local, long distance and other telecommunications services to end users, (ii) telecommunications network maintenance services, (iii) competitive access services, including special access and private line services, and (iv) ancillary services, including direct marketing and telemarketing services and the sale of advertising space in telephone directories. As of June 30, 1996, the Company served over 11,550 telecommunications customers in 54 cities and towns. The Company offers "one-stop" integrated telecommunications services, including local, long distance, voice mail, paging and Internet access services, tailored to the customer's specific needs. For business customers, this approach simplifies telecommunications procurement and management and makes available customized services, such as "least-cost" long distance pricing and enhanced calling features, that might not otherwise be directly available to such customers on a cost-effective basis. For residential customers, this approach provides integrated local, long distance and other telecommunications services, flat-rate long distance pricing and enhanced calling features as part of the Company's basic PrimeLine(R) residential services. The Company also operates a competitive access provider that offers a variety of special access and private line services to 75 large businesses, institutional customers and interexchange carriers. In addition, the Company provides network maintenance services for the State of Iowa's fiber optic network. The Company was formed on June 6, 1991 as McLeod Telecommunications, Inc. It began operations in November of 1992, providing fiber optic maintenance services for the Iowa Communications Network. On August 1, 1993, the Company was reincorporated in the State of Delaware. McLeod Telemanagement received regulatory approvals in Iowa and Illinois to offer local and long distance services in December 1993 and began providing such services in January 1994. In April 1995, July 1996 and September 1996, respectively, the Company acquired MWR, a competitive access provider in Des Moines, Iowa, Ruffalo, Cody, a telemarketing company, and Telecom*USA Publishing, a publisher of telephone directories. The Company is organized as a holding company and operates through six wholly owned subsidiaries. Since September 1996, the Company's business has been organized into four operational groups: (i) Business Services, which develops, markets and sells the Company's telecommunications services to business customers; (ii) Consumer Services, which markets and sells the Company's PrimeLine(R) service to residential customers and engages in various direct marketing and telemarketing activities; (iii) Network Services, which designs, constructs, and operates the Company's fiber optic network and engages in the Company's network maintenance activities; and (iv) Media Services, which publishes and distributes telephone directories. The Company is currently offering telecommunications services to business and residential customers located primarily in Iowa and Illinois. The Company also offers long distance service in Omaha, Nebraska. The Company intends to begin sales of telecommunications services in a number of markets in Minnesota and Wisconsin during the fourth quarter of 1996. The Company plans to enter markets in South Dakota and North Dakota in 1997. Over the next several years, depending on competitive and other factors, the Company also intends to offer telecommunications services in Colorado, Wyoming, Montana, Utah and Idaho. Implementation of the Company's current and future expansion plans will depend on a variety of factors, including: (i) the availability of financing and regulatory approvals; (ii) the number of potential customers in a target market; (iii) the existence of strategic alliances or relationships; (iv) technological, regulatory or other developments in the Company's business; (v) changes in the competitive climate in which the Company operates; and (vi) the emergence of future opportunities. 36 40 The Company believes it is the first telecommunications provider in most of its current markets to offer "bundled" local, long distance and other telecommunications services. As a result, the Company believes that it is well-positioned to take advantage of fundamental changes occurring in the telecommunications industry resulting from the Telecommunications Act and to challenge incumbent local carriers. The Company provides local service using existing telephone lines obtained from incumbent local exchange carriers, which allows customers to switch to local service provided by the Company without changing existing telephone numbers. The Company provides long distance services by purchasing bulk capacity from a long distance carrier. Using the Company's sophisticated proprietary software, known as Raterizer(R), each business customer receives the lowest long distance rate available each month from among the pricing plans of AT&T, MCI and Sprint that currently are most popular with the Company's business customers, and, in certain cases, rates specifically identified by a business customer and agreed to by the Company. The Company also provides paging and Internet access services. Since the Company completed its initial public offering of Class A Common Stock in June 1996, it has actively pursued its strategy of increasing market penetration and expanding into new markets in the following ways: (i) in June 1996, the Company began offering to residential customers in Cedar Rapids, Iowa and Iowa City, Iowa an integrated package of telecommunications services, marketed under the name PrimeLine(R), that includes local and long distance service, voice mail, paging, Internet access and travel card services; PrimeLine(R) services are expected to be available in other residential markets in the near future; (ii) the Company has positioned itself to enter the Minnesota and Wisconsin markets in late 1996 in addition to the Iowa and Illinois markets currently served; (iii) in July 1996, the Company acquired Ruffalo, Cody, which specializes in direct marketing and telemarketing services, to enhance the Company's marketing of its telecommunications services; (iv) in September 1996, the Company acquired Telecom*USA Publishing, which publishes "white page" and "yellow page" telephone directories in fifteen states in the midwestern and Rocky Mountain regions of the United States to increase the Company's penetration of its current markets and to accelerate its entry into new markets; (v) the Company has constructed approximately 1,000 new route miles of fiber optic network at a cost of approximately $22.9 million; and (vi) the Company is bidding for certain PCS licenses as part of its strategy to increase the range of services provided to customers in its target markets. RECENT TRANSACTIONS On September 20, 1996, the Company acquired Telecom*USA Publishing by means of a merger of a newly formed wholly owned subsidiary of the Company with and into Telecom*USA Publishing. As consideration for the acquisition, the Company paid approximately $74.1 million in cash and an additional amount currently estimated to be approximately $1.6 million to be paid to certain employees of Telecom*USA Publishing as part of an incentive plan. At the time of the acquisition, Telecom*USA Publishing had outstanding debt of approximately $6.6 million. Telecom*USA Publishing publishes and distributes "white page" and "yellow page" telephone directories in fifteen states in the midwestern and Rocky Mountain regions of the United States, including most of the Company's target markets. Telecom*USA Publishing derives its revenues primarily from the sale of advertising space in its telephone directories. On July 15, 1996, the Company acquired Ruffalo, Cody by means of a merger of Ruffalo, Cody with and into a newly formed wholly owned subsidiary of the Company. As consideration for the acquisition, the Company paid approximately $4.8 million in cash and issued an aggregate of 361,420 shares of Class A Common Stock to the shareholders of Ruffalo, Cody, and granted options to purchase an aggregate of 158,009 shares of Class A Common Stock to the holders of options to purchase shares of Ruffalo, Cody common stock. An additional $50,782 in cash and 113,387 shares of Class A Common Stock were placed into escrow and will be delivered to certain of the shareholders of Ruffalo, Cody over a period of 18 months, contingent upon the fulfillment of certain conditions relating to Ruffalo, Cody's ongoing revenues. 37 41 Ruffalo, Cody specializes in direct marketing and telemarketing services, including telecommunications sales, as well as a variety of fund-raising services for colleges, universities and other non-profit organizations throughout the United States. On April 28, 1995, the Company purchased all of the outstanding stock of MWR from Midwest Capital Group, Inc. ("Midwest Capital Group"), a non-regulated subsidiary of MidAmerican. As consideration for the acquisition, the Company issued 3,676,058 shares of the Company's Class B Common Stock valued at $8.3 million to Midwest Capital Group. As part of the transaction, Midwest Capital Group received the right to appoint one director to the Board and one "observer Board member." Subsequently, Midwest Capital Group agreed to reduce its Board representation to one director. See "Management -- Stockholders' Agreements." It was also granted an option to purchase an additional 3,529,414 shares of Class B Common Stock at a purchase price of $2.27 per share, which option Midwest Capital Group exercised in June 1995. MWR is a competitive access provider which owns and operates a fiber optic network in Des Moines, Iowa and which offers special access and private line services to 75 large businesses, institutional customers and interexchange carriers. Effective September 4, 1996, the Company, through McLeod Telemanagement, agreed to purchase the customer base of Total Communication Systems, Inc. ("TCSI") for an aggregate cash purchase price of approximately $550,000. TCSI is an Iowa corporation that offers local and long distance service in Iowa by partitioning of U S WEST's central office switches. TCSI currently manages approximately 1,300 local and 250 long distance lines in Iowa. Completion of the transaction is subject to the approval of the Iowa Utilities Board and certain other conditions. BUSINESS STRATEGY The Company's objective is to become a leading provider of integrated telecommunications services in Iowa, Illinois, Nebraska, Minnesota, Wisconsin, South Dakota, North Dakota, Colorado, Wyoming, Montana, Utah and Idaho. The Company intends to increase its penetration of its current markets and expand into new markets by: (i) aggressively capturing market share and generating revenues using leased network capacity and (ii) concurrently constructing additional network infrastructure to more cost-effectively serve its customers. The Company estimates that as of September 30, 1996 it had a market share of approximately 20.1% of business local telephone lines in its Iowa markets (based on 1994 market data) and a market share of approximately 12.3% of business local telephone lines in its Illinois markets (based on 1994 Iowa market data, assuming that the Company's Illinois markets are substantially similar to the Company's Iowa markets). There can be no assurance that the Company will attain similar market share in other markets. The principal elements of the Company's business strategy include: - PROVIDE INTEGRATED TELECOMMUNICATIONS SERVICES. The Company believes that there is substantial demand among business and residential customers in its target markets for an integrated package of telecommunications services that meets all of the customer's telecommunications needs. The Company believes that, by bundling a variety of telecommunications services, it will position itself to become an industry leader in offering "one-stop" integrated telecommunications services, to penetrate rapidly its target markets and to build customer loyalty. - BUILD MARKET SHARE THROUGH BRANDING AND CUSTOMER SERVICE. The Company believes that the key to revenue growth in its target markets is capturing and retaining customers through an emphasis on marketing, sales and customer service. The Company's customer-focused software and network architecture allow immediate access to the Company's customer data by Company personnel, enabling a quick and effective response to customer requests and needs at any time. This software permits the Company to present its customers with one fully integrated monthly billing statement for local, long distance, 800, international, voice mail, 38 42 paging, Internet access and travel card service. The Company believes that its customer-focused software platform is an important element in the marketing of its telecommunications services and gives it a competitive advantage in the marketplace. The Company has been successful in obtaining long-term commitments from its business customers and responding rapidly and creatively to customer needs. - FOCUS ON SMALL AND MID-SIZED MARKETS. The Company principally targets small and mid-sized markets (cities and towns with a population between 8,000 and 350,000) in its service areas. The Company estimates that its current and planned target markets have a combined population of approximately 9.5 million. The Company strives to be the first to market integrated telecommunications services in its principal markets and expects that intense competition in bundled telecommunications services will be slower to develop in these markets than in larger markets. - EXPAND ITS FIBER OPTIC NETWORK. The Company is constructing a state-of-the-art digital fiber optic telecommunications network designed to serve markets in Iowa. In the future, the Company expects to expand its fiber optic network to include additional markets. The Company's decision to expand its fiber optic network will be based on various economic factors, including: (i) the number of its customers in a market; (ii) the anticipated operating cost savings associated with such construction; and (iii) any strategic relationships with owners of existing infrastructure (e.g., utilities and cable operators). The Company currently owns approximately 1,700 route miles of fiber network and expects to construct approximately 6,000 route miles of fiber network during the next five years. Through its strategic relationships with its electric utility stockholders and its contracts to build and lease the final links of the Iowa Communications Network to the State of Iowa, the Company believes that it will be able to achieve capital efficiencies in constructing its fiber optic network in a rapid and cost-effective manner. The Iowa Communications Network is a fiber optic network that links certain of the state's schools, libraries and other public buildings. The Company also believes that its fiber optic network in combination with its proprietary software will create an attractive customer-focused platform for the provision of local, long distance, wireless and enhanced services. - TRANSITION INTO LOCAL SWITCHED SERVICES BUSINESS. When regulatory authorities complete certain proceedings, and assuming the economics are favorable to the Company, the Company intends to begin offering local facilities-based switched services by using its existing high-capacity digital AT&T switch and installing additional switches. These regulatory proceedings are currently ongoing before the FCC and many state public utilities commissions, including that of Iowa, for the purpose of establishing most of the economic and technical terms of interconnection. The Company believes that these proceedings should be substantially completed and that the Company could begin offering local facilities-based switched services over the next three years. In March 1995 and April 1996, respectively, the Company received state regulatory approval in Iowa and Illinois to offer local switched services in Cedar Rapids, Iowa and in Illinois cities other than Chicago. The Company intends to seek regulatory approval to provide such services in other cities and towns in Iowa and other states targeted by the Company when the economic terms of interconnection with the incumbent local exchange carrier make the provision of local switched services cost-effective. - EXPLORE POTENTIAL ACQUISITIONS AND STRATEGIC ALLIANCES. The Company believes that its strategic alliances with two utilities in its current markets provide it with rights-of-way and other resources on favorable terms. The Company believes that its recent acquisitions of Ruffalo, Cody and Telecom*USA Publishing will increase the Company's penetration of its current markets and accelerate its entry into new markets. As part of its expansion strategy, the Company contemplates additional acquisitions, joint ventures and strategic alliances with businesses that are related or complementary to its current operations. The Company 39 43 believes that the addition of such related or complementary businesses will help it to expand its operations into its target markets. As a result, the Company plans to consider acquisitions, joint ventures and strategic alliances in areas such as wireless services, directory publishing, network construction and infrastructure and Internet access. In undertaking these transactions, the Company may use proceeds from the Offering, credit facilities and other borrowings, and additional debt and equity issuances. - LEVERAGE PROVEN MANAGEMENT TEAM. The Company has recruited a team of veteran competitive telecommunications managers, led by entrepreneur Clark McLeod, who have together in the past successfully implemented a similar customer-focused telecommunications strategy in the same industry and regions. Eight of the 11 executive officers of the Company served as officers of Teleconnect or its successor, Telecom*USA. Teleconnect began providing long distance services in Iowa in 1982 and rapidly expanded into dozens of cities and towns in the Midwest. Telecom*USA was the fourth-largest U.S. long distance provider when MCI purchased it in 1990 for $1.25 billion. MARKET POTENTIAL The telecommunications industry is currently undergoing substantial changes due to statutory, regulatory and technological developments. The Company believes that it is well-positioned to take advantage of these fundamental changes. The market for local exchange services consists of a number of distinct service components. These service components are defined by specific regulatory tariff classifications including: (i) local network services, which generally include basic dial tone, local area charges, enhanced calling features and private line services (dedicated point-to-point intraLATA service); (ii) network access services, which consist of access provided by local exchange carriers to long distance network carriers; (iii) long distance network services, which include intraLATA long distance calls; and (iv) other varied services, including the publication of "white page" and "yellow page" telephone directories. Industry sources have estimated that the 1994 aggregate revenues of all local exchange carriers approximated $97 billion. Until recently, there was virtually no competition in the local exchange markets. Until 1984, AT&T largely monopolized local and long distance telephone services in the United States. Technological developments gradually enabled others to compete with AT&T in the long distance market. In 1984, largely as the result of a court decree, AT&T was required to divest its local telephone systems (the "Divestiture"), which created the present structure of the telecommunications industry. The Divestiture and subsequent related proceedings divided the country into 201 Local Access and Transport Areas ("LATAs"). As part of the Divestiture, AT&T's former local telephone systems were organized into seven independent Regional Bell Operating Companies. The Regional Bell Operating Companies were given the right to provide local telephone service, local access service and intraLATA long distance service, but were prohibited from providing interLATA service. AT&T retained its long distance services operations. The separation of the Regional Bell Operating Companies from AT&T's long distance business created two distinct telecommunications market segments: local exchange and long distance. The Divestiture decreed direct, open competition in the long distance segment, but continued the regulated monopoly environment in local exchange services. In 1984, a separate court decree (the "GTE Decree") required the local exchange operations of the General Telephone Operating Companies to be structurally separated from the competitive operations of GTE Corp., their parent company. As a result, the GTE Decree also prohibited the General Telephone Operating Companies from providing interLATA services. On February 8, 1996, the Telecommunications Act was enacted. The Telecommunications Act removed the restrictions in the Divestiture and the GTE Decree concerning the provision of interLATA service by the Regional Bell Operating Companies and the General Telephone Operating 40 44 Companies. These decree restrictions have been replaced, with respect to the Regional Bell Operating Companies, by provisions of the Telecommunications Act setting forth the conditions under which the Regional Bell Operating Companies may enter formerly prohibited markets. The Telecommunications Act requires all local exchange carriers to "unbundle" their local network offerings and allow other providers of telecommunications services to interconnect with their facilities and equipment. Most significantly, the incumbent local exchange carriers will be required to complete local calls originated by the Company's customers and switched by the Company and to deliver inbound local calls to the Company for termination to its customers, assuring customers of unimpaired local calling ability. The Company should also be able to obtain access to incumbent carrier "loop" facilities (the transmission lines connecting customers' premises to the public telephone network) on an unbundled basis at reasonable and non-discriminatory rates. In addition, local exchange carriers are obligated to provide local number portability and dialing parity upon request and make their local services available for resale by competitors. Local exchange carriers also are required to allow competitors nondiscriminatory access to local exchange carrier pole attachments, conduit space and other rights-of-way. Moreover, states are forbidden from disallowing local competition, although they are allowed to regulate such competition. The Company believes that each of these requirements is likely, when fully implemented, to increase competition among providers of local telecommunications services and simplify the process of switching from local exchange carrier services to those offered by competitive access provider/competitive local exchange carriers. However, the Telecommunications Act also offers important benefits to the incumbent local exchange carriers. The incumbent local exchange carriers have been granted substantial new pricing flexibility. Regional Bell Operating Companies and General Telephone Operating Companies have regained the ability to provide long distance services under specified conditions and have new rights to provide certain cable TV services. The Telecommunications Act, however, also provides for certain safeguards to attempt to protect against anticompetitive abuses by the Regional Bell Operating Companies. Among other protections, the ability of the Regional Bell Operating Companies to market jointly interLATA and local services is limited under certain circumstances. Prior to the enactment of the Telecommunications Act, several factors served to promote competition in the local exchange market, including: (i) rapidly growing customer demand for an alternative to the local exchange carrier monopoly, spurred partly by the development of competitive activities in the long distance market; (ii) advances in the technology for transmission of data and video, which require greater capacity and reliability levels than many local exchange carrier networks (which principally are copper-based) can accommodate; (iii) the development of fiber optics and digital electronic technology, which reduced network construction costs while increasing transmission speeds, capacity and reliability as compared to the local exchange carriers' copper- based network; (iv) the significant access charges interexchange carriers are required to pay to local exchange carriers to access the local exchange carriers' networks; and (v) a willingness on the part of legislators to enact and regulators to enforce legislation and regulations permitting and promoting competition in the local exchange market. Competitors in the local exchange market, designated as competitive access providers by the FCC, were first established in the mid-1980s. Initially, competitive access providers were allowed to compete for only the non-switched special access/private line service of the local exchange market. In New York City, Chicago and Washington, D.C., newly formed companies provided dedicated non-switched services by installing fiber optic facilities capable of connecting points of presence of interexchange carriers within a metropolitan area, connecting two or more customer locations with private line service and, in some cases, connecting business and government users with interexchange carriers. Competitive access providers used the substantial capacity and economies of scale inherent in fiber optic cable to offer customers service that was generally less expensive and of higher quality than could be obtained from the local exchange carriers due, in part, to copper-based facilities used in many local exchange carrier networks. In addition, competitive access 41 45 providers offered shorter installation and repair intervals and improved reliability in comparison to the local exchange carriers. Most of the early competitive access providers were entrepreneurial enterprises that operated limited networks in the central business districts of major cities in the United States where the highest concentration of voice and data traffic, including interexchange carrier to interexchange carrier traffic, were located. The provision of competitive access services, however, need not be confined to large metropolitan areas. The Company believes that, through proper design and installation of its network in its targeted markets, it can effectively provide integrated local and long distance services not only to interexchange carriers and large users, but also to residential and small to medium-sized business customers. As a result of regulatory changes and competitive trends, competitive local telecommunications companies and access providers appear to be positioned for dramatic growth. Effective in early 1994, FCC decisions announced in September 1992 and August 1993, as modified by subsequent FCC and court decisions (the "Interconnection Decisions"), opened additional segments of the market by permitting competitive access providers expanded authority to interconnect with and use facilities owned by local exchange companies for interstate traffic. The Interconnection Decisions, together with other statutory and regulatory initiatives in the telecommunications industry (including the Telecommunications Act), recently introduced to foster competition in the local exchange markets, have stimulated demand for competitive local services. As of June 30, 1996, a number of states, including Iowa, Illinois, Minnesota, Wisconsin and North Dakota, have taken regulatory and legislative action to open local telecommunications markets to various degrees of competition. State regulatory agencies in other states within the Company's target market area, including South Dakota, Nebraska, Colorado, Montana and Wyoming, are conducting administrative proceedings to investigate opening local telecommunications markets to competition. The Telecommunications Act preempts any remaining state prohibitions of local competition and also forbids unreasonable restrictions on resale of local services. The Company expects that continuing pro-competitive regulatory changes, together with increasing customer demand, will create more opportunities for competitive service providers to introduce additional services, expand their networks and address a larger customer base. CURRENT PRODUCTS AND SERVICES The Company has historically derived revenue from: (i) the sale of local and long distance telecommunications services, (ii) special access and private line services and (iii) telecommunications network maintenance services. For the six months ended June 30, 1996, these services represented 68%, 11% and 21%, respectively, of the Company's total revenues. Following the acquisition by the Company of Ruffalo, Cody and Telecom*USA Publishing in July 1996 and September 1996, respectively, the Company also derives revenue from ancillary services, including direct marketing and telemarketing services and the sale of advertising space in telephone directories. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." INTEGRATED TELECOMMUNICATIONS SERVICES. Since beginning sales activities in January 1994, the Company has increased its revenue approximately 367% from the sale of bundled local and long distance products from $4.6 million for the year ended December 31, 1994 to $21.5 million for the year ended December 31, 1995. In order to provide integrated telecommunications services to its business and residential customers, the Company, pursuant to agreements with U S WEST for its Iowa customers and Ameritech for its Illinois customers, partitions part of the central office switches serving the communities in which the Company provides such services ("Centrex" services). The Company's customers' telephone lines and numbers are assigned to the Company's portion of the switch. U S WEST or Ameritech, as the case may be, bills the Company for all the lines that the Company has assigned to the Company's customers and provides the Company with call detail 42 46 reports, which enable the Company to verify its customers' bills for both local and long distance service. See "Risk Factors -- Failure of U S WEST to Furnish Call Detail Records." The Company believes that these services are superior to a standard business or residential telephone line, since the Company can offer features, such as three-way calling, consultation hold and call transfer, at no extra charge to the end user. Certain other custom calling features are also available at additional cost to the end user. Because the Company has also purchased the "Centrex Management System" and the "Centrex Mate Service" from U S WEST and Ameritech, respectively, Company personnel have on-line access to U S WEST and Ameritech facilities and may make changes to the customers' services electronically and quickly. In March 1996, the Company entered into a settlement agreement with U S WEST in connection with a complaint brought against U S WEST by the Company before the Iowa Utilities Board. The settlement agreement permits the Company to obtain access to the partitioned portion of U S WEST central office switches in Iowa until March 18, 2001 and contains rates that may not be increased by U S WEST unless the rates are renegotiated by the parties based on U S WEST's rates for access to unbundled elements of its network. See "-- Legal Proceedings." In Illinois, the Company's seven-year agreements with Ameritech extend through 2001 or 2002 and provide for stabilized rates that may not be unilaterally increased by Ameritech. The Company provides long distance service by purchasing capacity, in bulk, from WorldCom Network Services, Inc., d/b/a Wiltel ("WilTel") and a wholly owned subsidiary of WorldCom, and routing its customers' long distance traffic over this capacity. The Company is subject to certain minimum monthly purchase and minutes-of-usage requirements under its agreement with WilTel. If the Company fails to meet the minimum purchase requirement in any month, it is obligated to pay WilTel the difference between its actual purchases and the minimum commitment. If the Company fails to meet the minimum minutes-of-usage requirement in any month, it is obligated to pay WilTel an amount equal to the difference between its actual usage and the minimum usage requirement multiplied by a flat rate per minute. The Company has consistently met the minimum purchase requirements and generally has met the minimum usage requirements under its agreement with WilTel. The Company did, however, fail to meet the minimum usage requirements from December 1994 through February 1995, which obligated the Company to pay WilTel an aggregate of approximately $67,000. The Company believes that it will be able to continue to meet such requirements in the future. Because of the many potential suppliers of wholesale long distance services in the marketplace, the Company currently expects that it will be able to continue to obtain favorable wholesale long distance pricing. The Company has also developed and installed state-of-the-art, "customer-focused" software for providing integrated telecommunications services. This software permits the Company to present its customers with one fully integrated monthly billing statement for local, long distance, 800, international, voice mail, paging, Internet access and travel card services. The Company believes that its customer-focused software platform is an important element in the marketing of its telecommunications services and gives it a competitive advantage in the marketplace. Business Services. End-user business customers in each of the 54 cities and towns currently served by the Company can obtain local, long distance and ancillary (such as three-way calling and call transfer) services directly from the Company. By using Centrex service instead of a private branch exchange ("PBX") to direct their telecommunications traffic, business customers can also avoid the large investment in equipment required and the fixed costs associated with maintaining a PBX network infrastructure. The Company's telemanagement services allow small to mid-sized business customers, which may lack the resources to support their own PBX, to benefit from a sophisticated telecommunications system managed by industry experts. The Company generally offers its business customers local service at prices that are substantially similar to the published retail local exchange carrier rates for basic business service provided by the incumbent local exchange carrier. Long distance rates for business customers generally are 43 47 calculated by totaling each business customer's monthly calls and comparing the total charges that would be applicable to that customer's calls under each of the pricing plans of the major long distance carriers that currently are most popular with the Company's business customers. The Company then bills the customer the lowest long distance charges identified in this comparison. Specifically, the Company's billing software enables the Company to calculate the monthly charges that each customer would be billed based on the customer's actual calls under each of several long distance plans offered by AT&T, MCI and Sprint and, in certain instances, other rates specifically identified by a customer and agreed to by the Company. The customer is then billed an amount equal to such "lowest cost" monthly charges calculated using this software, minus any discount to which the customer may be entitled as a result of having made a long-term commitment to use the Company's services. Currently, the Company compares its business customers' monthly calls to the following plans offered by other long distance carriers: Outbound Products. AT&T Commercial Long Distance; AT&T CustomNet; AT&T ProWATS/Plan Q; AT&T Megacom; AT&T Uniplan; MCI Commercial Dial 1; MCI Prism Plus; MCI Preferred; MCI Vision (Switched Access); MCI Vision (Dedicated Access); MCI Prism I; Sprint Business Sense; Sprint Business Sense ($200 minimum usage required); Sprint Clarity "Most for Business"; Sprint Clarity (Dedicated Access); and Sprint UltraWATS. 800 Service Products. AT&T Readyline; AT&T Starterline (Plan K); AT&T Megacom 800; AT&T Uniplan 800; MCI Business Line 800; MCI Preferred 800; MCI Vision 800; MCI 800; Sprint FONline 800; Sprint Business Sense ($0 commitment); Sprint Business Sense ($200 minimum usage required); Sprint Clarity 800; and Sprint Ultra 800. The Company also offers other long distance rates to certain business customers, based on the customers' particular needs. The Company has developed the software, known as Raterizer(R), that performs its long distance rating analysis. Like other Company software, it is designed around the customer rather than around a given product. The Company believes that its method of computing long distance service rates is an important factor in attracting and retaining business customers. The Company's average business telemanagement service contract has an approximately 49-month term. Residential Services. In June 1996, the Company introduced its PrimeLine(R) service to residential and certain small business customers in the Cedar Rapids, Iowa and Iowa City, Iowa markets. PrimeLine(R) service includes local, long distance telephone service, paging, voice mail, Internet access and travel card services, as well as enhanced features such as three-way calling, call transfer and consultation hold. PrimeLine(R) customers may choose from five integrated telecommunications service packages generally ranging in price from $19.95 to $32.95 per month. Per minute long distance rates for PrimeLine(R) customers range from $.12 to $.15, depending on monthly calling volumes. These rates are applied 24 hours a day, seven days a week for all calls within the continental United States. The Company's standard PrimeLine(R) service contract has a 12-month term. The Company intends to begin offering PrimeLine(R) service in all of its Iowa markets and in Illinois, Minnesota and Wisconsin in the near future. SPECIAL ACCESS AND PRIVATE LINE SERVICES. The Company currently provides, on a private carrier basis, a wide range of special access and private line services to its interexchange carrier and end-user (including two cable television company) customers. These services include POP-to-POP special access, end user/interexchange carrier special access and private line services. POP- to-POP special access services provide telecommunications lines that link the points of presence ("POPs") of one interexchange carrier, or the POPs of different interexchange carriers, in a market, allowing these POPs to exchange telecommunications traffic for transport to final destinations. End user/interexchange carrier special access services provide telecommunications lines that connect an end user (such as a large business) to the local POP of its selected interexchange carrier. Private line services provide telecommunications lines that connect various locations of a customer's operation to transmit internal voice, video and/or data traffic. 44 48 To provide these services, the Company offers various types of highly reliable fiber optic lines that operate at different speeds and handle varying amounts of traffic to provide tailor-made solutions to meet its customers' needs. These lines include: DS-0. A dedicated line that meets the requirements of everyday business communications, with transmission capacity of up to 64 kilobits of bandwidth per second (one voice-grade equivalent circuit). This service offers a basic low-capacity dedicated digital channel for connecting telephones, fax machines, personal computers and other telecommunications equipment. DS-1. A high-speed channel typically linking high volume customer locations to interexchange carriers or other customer locations. Used for voice transmissions as well as the interconnection of local area networks, DS-1 service accommodates transmission speeds of up to 1.544 megabits per second, the equivalent of 24 voice-grade equivalent circuits. The Company offers this high-capacity service for customers who need a larger communications pipeline. DS-3. A very high-capacity digital channel with transmission capacity of 45 megabits per second, which is equivalent to 28 DS-1 circuits or 672 voice-grade circuits. This is a digital service used by interexchange carriers for central office connections and by some large commercial users to link multiple sites. The Company's networks are designed to support this wide range of communications services, provide increased network reliability and reduce costs for its customers. The Company's network consists of fiber optic cables, which typically contain between 24 and 144 fiber strands, each of which is capable of providing many telecommunications circuits. A single pair of fibers on the Company's network can currently transmit 32,256 simultaneous voice conversations, whereas a typical pair of copper wires can currently carry a maximum of 24 digitized simultaneous voice conversations. The Company expects that continuing developments in compression technology and multiplexing equipment will increase the capacity of each fiber, thereby providing more capacity at relatively low incremental cost. NETWORK MAINTENANCE SERVICES. In 1990, the State of Iowa authorized construction of Parts I and II of the Iowa Communications Network. Parts I and II, which were completed in 1993 and are owned by the State of Iowa, provide fiber optic connections to over 100 classrooms or other meeting facilities in Iowa, and are used primarily for interactive distance learning, telemedicine and the State's own long distance telephone traffic. The Company maintains Parts I and II of the 2,900 miles of the Iowa Communications Network pursuant to the Iowa Communications Network Maintenance Contract. The Company's maintenance activities under the Iowa Communications Network Maintenance Contract are available on a 24-hour-per-day, 365-days-per-year basis, and consist of alarm monitoring, repair services (include splicing, digital circuit card replacement, cable relocation and circuit installation testing) and cable location services. The Iowa Communications Network Maintenance Contract expires in 2004. For its services under the Iowa Communications Network Maintenance Contract, the Company receives approximately $3.2 million per year, plus an additional amount based on an hourly rate for certain overtime, equipment and repair supervision activities. The Company's network maintenance activities are provided by a 57-member team headquartered on-site at the Iowa Communications Network network operations center, which is located at the STARC National Guard Armory in Des Moines, Iowa. The Company believes that the expertise in fiber optic maintenance developed through the maintenance of the Iowa Communications Network will provide significant advantages in maintenance of the Company's own network facilities. Because commercial telecommunications use of the Part I and II segments is forbidden, however, neither the Company nor any other telecommunications carrier may use the Part I and II capacity to provide telecommunications services to customers. 45 49 ANCILLARY SERVICES. Through Telecom*USA Publishing, which the Company acquired in September 1996, the Company publishes and distributes an aggregate of over 7 million copies of 80 annual "white page" and "yellow page" telephone directories to local telephone subscribers in fifteen states in the midwestern and Rocky Mountain regions of the United States, including most of the Company's target markets. Telecom*USA Publishing derives its revenues primarily from the sale of advertising space in its telephone directories. In addition, through Ruffalo, Cody, which the Company acquired in July 1996, the Company provides direct marketing and telemarketing services, including telecommunications sales, as well as a variety of fund-raising services for colleges, universities and other non-profit organizations throughout the United States. Ruffalo, Cody derived over 40% of its revenues in 1995 from an agreement with a major long distance carrier to provide telemarketing services. Both Ruffalo, Cody and the major long distance carrier can terminate this agreement after giving notice to the other party. The major long distance carrier has informed the Company that it intends to terminate this agreement effective December 31, 1996. Upon termination of this agreement, the Company intends to redirect resources towards selling the Company's local and long distance telecommunications services. The Company believes that its telephone directories and its direct marketing and telemarketing services will provide valuable marketing opportunities and expertise for its telecommunications services, particularly with respect to potential residential customers. The Company intends to utilize Telecom*USA Publishing's sales force of 259 direct sales personnel and telemarketers to sell both advertising space in the Company's telephone directories and, where available, the Company's telecommunications services. Furthermore, by September 30, 1996, ten of the Company's 140 full-time telemarketing sales personnel at its Ruffalo, Cody subsidiary were engaged in sales of the Company's PrimeLine(R) residential services. See "-- Sales and Marketing." EXPANSION OF CERTAIN FACILITIES-BASED SERVICES The Company currently is constructing network that will enable it, upon receipt of all necessary regulatory approvals, to serve its end-user customers on a local switched basis as well as to serve other wireline and wireless carriers on a wholesale basis. The Company has leased and is currently testing a state-of-the-art high-capacity digital AT&T switch and plans to acquire additional switches in the future. Although the Company is not currently engaged in negotiations to acquire additional switches, such products are readily available from several suppliers, and the Company does not believe it will experience any difficulties or delays when it determines to acquire additional switches. It is anticipated that these switches will provide the switching platform for the local exchange switched telephone and long distance services to be offered by the Company. Given the size and regional concentration of the Company's markets, available technology and current cost structures, the Company plans ultimately to deploy a hubbed switching strategy, whereby one or more central switches would serve multiple markets via remote switching modules. In March 1995, the Iowa Utilities Board approved the Company's application for authorization to provide competitive switched local telephone service to business and residential customers in Cedar Rapids, Iowa. In April 1996, the Company received similar approval from the Illinois Commerce Commission to offer such service in Illinois cities other than in Chicago (which was not included in the Company's application). The Company intends to seek authorizations from the appropriate public utility commissions to provide similar services in other markets served by the Company. Although the Company has made no final determinations as to its target markets for facilities-based switched services, the Company intends initially to provide facilities-based switched services in Cedar Rapids, Des Moines, Waterloo, Cedar Falls, Dubuque, Sioux City, Council Bluffs, and Iowa City, Iowa and the Quad Cities of Iowa/Illinois (Davenport, Bettendorf, Rock Island and Moline), among other places. The Company plans to expand its facilities-based services to other cities as its network develops and its market penetration increases. 46 50 For a detailed description of the expansion of the Company's fiber optic network, see "-- Network Facilities." WIRELESS SERVICES The Company believes that the market for wireless telecommunications services is likely to expand significantly as equipment costs and service rates continue to decline, equipment becomes more convenient and functional and wireless services become more diverse. The Company also believes that wireline and wireless markets are converging, and that providers of wireless services increasingly will offer, in addition to products that supplement a customer's landline communications (similar to cellular telephone services in use today), wireline replacement products that may result in wireless services becoming the customer's primary mode of communication. The Company anticipates that in the future there could potentially be eight wireless competitors in its current and/ or target markets: two existing cellular providers and, in view of the ongoing PCS auctions for spectrum in these markets, as many as six additional PCS providers. The Company does not currently offer PCS or cellular services. The Company is, however, currently bidding for "D" and "E" block frequency licenses covering areas of Iowa, Illinois, Nebraska and Minnesota in the FCC's auctions of PCS licenses. As of September 30, 1996, the Company had submitted bids totaling approximately $21.8 million for such licenses. If the Company is successful in obtaining PCS licenses, it will be required to make significant expenditures to develop, construct and operate a PCS system. There can be no assurance that the Company will be successful in acquiring any PCS licenses. Nevertheless, as the wireline and wireless markets converge, the Company believes that it can identify opportunities to generate revenues from the wireless industry on both a wholesale and a retail basis. On a wholesale basis, these opportunities may include (i) leasing tower sites to wireless providers, (ii) switching wireless traffic through the Company's switching platform and (iii) transporting wireless traffic using the Company's fiber optic network to interconnect wireless providers' cell sites or to connect such sites to either the Company's switches or to switches of other providers of wireline services. In May 1996, the Company entered into an agreement with a paging company to provide access to several of the towers controlled by the Company. On a retail basis, the Company believes that it will be able to enter into "bundling/branding" arrangements with both cellular and PCS companies on favorable economic terms. However, except for its participation in the FCC auction of PCS licenses, the Company has no current or pending negotiations, arrangements or agreements to acquire the ability to provide wireless services. See "Risk Factors -- Wireless Competition." NETWORK FACILITIES As the incumbent local exchange carriers are compelled, by regulatory changes and competitive forces, to "unbundle" their network components and to permit resale of their products, the Company expects to be able to provide its customers with a full range of telecommunications services using a combination of its own network, the networks of the incumbent local exchange carriers and the networks of other competitive carriers. In April 1995, as part of its overall business strategy, the Company acquired MWR from MidAmerican. MWR is a competitive access provider which currently owns and operates a fiber optic network and offers special access and private line services to 75 large businesses, institutional customers and interexchange carriers, primarily in Des Moines, Iowa. As a result of this strategic acquisition, the Company believes that it is the only competitive access provider in the Des Moines market. The Company believes the already-installed MWR network is an important aspect of its efforts to become the first state wide integrated telecommunications provider. In 1995, the Iowa General Assembly passed legislation to extend the Iowa Communications Network to 543 more "endpoints" (which are usually located in schools or public libraries) throughout the state (the "Part III segments"). The majority of these fiber optic links, unlike Parts I 47 51 and II of the Iowa Communications Network, are not to be owned by the State of Iowa, but are to be leased from a private entity, such as the Company. As a result of public bidding, the Company has the right to build and then lease capacity to the State of Iowa on 265 of such segments. Under its lease agreements with the State, the Company is currently constructing a "fiber-rich" broadband network, on which the State of Iowa has agreed to lease one DS-3 circuit for a period of seven years for a total aggregate lease cost of approximately $30.5 million. Upon completion of installation of each segment, the leases provide that the State of Iowa will make a one-time up-front lease payment to the Company for the capacity, with nominal monthly lease payments thereafter. At the end of a seven-year period, the leases may be extended, upon terms to be mutually agreed upon. During the term of the leases, the State may order additional DS-3 circuits at a mutually agreed upon price. The Company has reached agreements with its electric utility stockholders (MidAmerican and IES) that allow the Company to make use of those utilities' underground conduits, distribution poles, transmission towers and building entrances in exchange for rights by such stockholders to use certain capacity on the Company's network. These agreements give the Company access to rights-of-way in Iowa and in certain portions of Illinois for installation of the Company's networks. The Company's access to these rights-of-way are expected to have a significant positive impact on the Company's capital costs for network construction and the speed with which the Company can construct its network. The Company believes that its strategic relationships with its electric utility stockholders give it a significant competitive advantage. Concurrently with construction of the Part III segments, the Company is also installing low-cost network facilities that are expected to form a series of fiber optic "self-healing rings" intended to enable the Company to provide facilities-based local and long distance service to most significant cities and towns in Iowa. Thus, the Company believes it is well positioned to become the first facilities-based state-wide integrated provider of competitive telecommunications services in the Midwest. The Company expects to build a total of 6,000 route miles of fiber optic cable in the next five years. Approximately two-thirds of this fiber capacity will be in the State of Iowa, with the balance built throughout the Company's other target markets. The Company will decide whether to begin construction of fiber in a market based on various economic factors, including: (i) the number of its customers in a market, (ii) the anticipated operating cost savings associated with such construction and (iii) any strategic relationships with owners of existing infrastructure (e.g., utilities and cable operators). SALES AND MARKETING Until June 1996, the Company directed its local and long distance telecommunications sales efforts primarily toward small and medium-sized businesses. In June 1996, the Company began marketing its PrimeLine(R) services to residential customers. Marketing of the Company's telecommunications services is handled by a sales and marketing group composed of direct sales personnel and telemarketers. The Company's sales force is trained to emphasize the Company's customer-focused sales and customer service efforts, including its 24-hours-per-day, 365-days-per-year customer service center, which a customer may call with any question or problem regarding the Company's services. The Company's employees answer customer service calls directly rather than requiring customers to use an automated queried message system. The Company believes that its emphasis on a "single point of contact" for meeting the customer's telecommunications needs, as well as its ability to provide one bill for both local and long distance service, is very appealing to its prospective customers. Marketing of the Company's telecommunications services to business customers is conducted by 160 direct sales personnel, located both at the Company's headquarters in Cedar Rapids, Iowa and in 35 branch sales offices in Iowa and Illinois. The sales personnel make direct calls to 48 52 prospective and existing business customers, conduct analyses of business customers' call usage histories, and demonstrate that the Company's software systems will rate the customers' calls by comparison to the lowest cost plan of the most popular business calling plans offered by AT&T, MCI and Sprint. Marketing of the Company's telecommunications services to residential customers is currently conducted by ten telemarketers from the Company's Ruffalo, Cody subsidiary. The Company plans to increase this number in the future. The telemarketers emphasize the PrimeLine(R) integrated package of telecommunications services and its flat-rated per minute pricing structure for long distance service. The Company also plans to use Ruffalo, Cody's information database to identify attractive sales opportunities and to pursue those opportunities through a variety of methods, including calls from Ruffalo, Cody's telemarketing personnel. Furthermore, the Company believes that its acquisition of Telecom*USA Publishing in September 1996 will further the Company's sales and marketing efforts of its residential services in several ways. First, it gives the Company an immediate presence in states where it is initiating service (Minnesota and Wisconsin) and also in states where it does not yet provide service but expects to do so in the future (such as Colorado, Wyoming, Montana, Utah and Idaho). Second, the Company believes that the acquisition will increase the Company's penetration of current markets and accelerate its entry into new markets. The telephone directories published and distributed by Telecom*USA Publishing will serve as "direct mail" advertising for the Company's telecommunications products. The directories will contain detailed product descriptions and step-by-step instructions on the use of the Company's telecommunications products. The Company believes that telephone directories are commonly used sources of information that potentially provide the Company with a long-term marketing presence in millions of households and businesses that receive a Telecom*USA Publishing directory. By using the directories to market its products, the Company can reach more customers than would be possible if the acquisition had not occurred. Third, the Company believes that combining the directories' distinctive black-and-gold motif with the McLeod name will create in all of the Company's markets the brand awareness that the McLeod name now enjoys in Iowa. In the fourth quarter of 1996 and in 1997, the Company expects to expand its local and long distance sales and marketing efforts primarily by opening new branch sales offices in approximately 25 cities and towns in Minnesota and approximately 13 cities and towns in Wisconsin, by continuing its expansion in Iowa and Illinois and by increasing its sales of long distance service in Omaha, Nebraska. The Company also expects to begin sales and marketing efforts in 1997 in South Dakota and North Dakota, assuming the Company is successful in its challenges to the U S WEST Centrex Action in those states, and in Colorado, Wyoming, Montana, Utah and Idaho. See "Risk Factors -- Dependence on Regional Bell Operating Companies; U S WEST Centrex Action" and "-- Legal Proceedings." In addition, the Company expects to expand its long distance sales and marketing efforts in 1997 to the remaining states in the continental United States upon receipt of required certifications from various state regulatory authorities. The Company estimates that as of September 30, 1996, after 33 months of operations, it had a market share of approximately 20.1% of business local telephone lines in its Iowa markets (based on 1994 market data) and a market share of approximately 12.3% of business local telephone lines in its Illinois markets (based on 1994 Iowa market data, assuming that the Company's Illinois markets are substantially similar to the Company's Iowa markets). There can be no assurance that the Company will attain similar market share in other markets. Because residential sales efforts have begun so recently, the Company has not achieved any significant share of the residential telecommunications services market. As of June 30, 1996, the Company was providing, on a retail basis, approximately 47,700 lines in its Iowa and Illinois markets, primarily to small and medium-sized business customers. Since beginning sales activities in January 1994, the Company has increased its revenues 367% from the sale of bundled local and long distance products from $4.6 million for the year ended December 31, 1994 to $21.5 million for the year ended December 31, 1995. 49 53 Sales and marketing of the Company's competitive access services are handled by a 6-member sales staff located in Des Moines and Cedar Rapids. These sales people work closely with the Company's network engineers to design and market special access and private line services. COMPETITION The telecommunications industry is highly competitive. The Company faces intense competition from local exchange carriers, including the Regional Bell Operating Companies (primarily U S WEST and Ameritech) and the General Telephone Operating Companies, which currently dominate their local telecommunications markets. The Company also competes with long distance carriers in the provision of long distance services. The long distance market is dominated by three major competitors, AT&T, MCI and Sprint. Hundreds of other companies also compete in the long distance marketplace. Other competitors of the Company may include cable television companies, competitive access providers, microwave and satellite carriers, wireless telecommunications providers, teleports and private networks owned by large end-users. In addition, the Company competes with the Regional Bell Operating Companies and other local exchange carriers, numerous direct marketers and telemarketers, equipment vendors and installers and telecommunications management companies with respect to certain portions of its business. Many of the Company's existing and potential competitors have financial and other resources far greater than those of the Company. See "Risk Factors -- Wireline Competition." The Company believes that the Telecommunications Act and other state legislative initiatives and developments in Illinois, Iowa and other states within the Company's target markets, as well as a recent series of transactions and proposed transactions between telephone companies, long distance carriers and cable companies, increase the likelihood that barriers to local exchange competition will be substantially reduced or removed. These initiatives include requirements that the Regional Bell Operating Companies permit entities such as the Company to interconnect to the existing telephone network, to purchase, at cost-based rates, access to unbundled network elements, to enjoy dialing parity, to access rights-of-way and to resell services offered by the incumbent local exchange carriers. However, incumbent local exchange carriers also have new competitive opportunities. The Telecommunications Act removes previous restrictions concerning the provision of long distance service by the Regional Bell Operating Companies and also provides them with increased pricing flexibility. Under the Telecommunications Act, the Regional Bell Operating Companies will, upon the satisfaction of certain conditions, be able to offer long distance services that would enable them to duplicate the "one-stop" integrated telecommunications approach used by the Company. The Company believes that it has certain advantages over these companies in providing its telecommunications services, including management's prior experience in the competitive telecommunications industry and the Company's emphasis on marketing (primarily using a direct sales force for sales to business customers and telemarketing for sales to residential customers) and on responsive customer service. However, there can be no assurance that the anticipated increased competition will not have a material adverse effect on the Company. The Telecommunications Act provides that rates charged by incumbent local exchange carriers for interconnection to the incumbent carrier's network are to be nondiscriminatory and based upon the cost of providing such interconnection, and may include a "reasonable profit," which terms are subject to interpretation by regulatory authorities. If the incumbent local exchange carriers, particularly the Regional Bell Operating Companies, charge alternative providers such as the Company unreasonably high fees for interconnection to the local exchange carriers' networks, significantly lower their rates for access and private line services or offer significant volume and term discount pricing options to their customers, the Company could be at a significant competitive disadvantage. See "Risk Factors -- Regulation" and "-- Regulation." The Company believes that there are currently no other competitive access providers operating or building networks in any of the Company's current markets. Based on management's experience, the initial market entrant with an operational fiber optic competitive access provider network 50 54 generally enjoys a competitive advantage over other competitive access providers that later attempt to enter the market, because it has the first opportunity to contact customers who are willing to switch from the local exchange carrier serving the market. Competition for local and access telecommunications services is based principally on price, quality, network reliability, customer service and service features. The Company believes that its management expertise allows it to compete effectively with the incumbent local exchange carriers. The Company generally offers its customers local exchange services at prices that are substantially similar to the established retail local exchange carrier rates for basic business service, while generally providing enhanced calling features and a higher level of customer service. Long distance rates ensure that each customer receives the lowest rate charged under the most popular pricing plans of the major long distance carriers. The Company's fiber optic networks will provide both diverse access routing and redundant electronics, design features not widely deployed by the local exchange carriers' networks. REGULATION OVERVIEW. The Company's services are subject to federal, state and local regulation. The FCC exercises jurisdiction over all facilities of, and services offered by, telecommunications common carriers to the extent those facilities are used to provide, originate or terminate interstate or international communications. State regulatory commissions retain some jurisdiction over the same facilities and services to the extent they are used to originate or terminate intrastate common carrier communications. Local governments may require the Company to obtain licenses, permits or franchises regulating use of public rights-of-way necessary to install and operate its networks. The Company, through its wholly owned subsidiary McLeod Telemanagement, holds various federal and state regulatory authorizations and often joins other industry members in seeking regulatory reform at the federal and state levels to open additional telecommunications markets to competition. The Company, through its wholly owned subsidiary MWR, provides certain competitive access services as a private carrier on a non-regulated basis. In general, a private carrier is one that provides service to customers on an individually negotiated contractual basis, as opposed to a common carrier that provides service to the public on the basis of generally available rates, terms, and conditions. The Company believes that MWR's private carrier status is consistent with applicable federal and state laws, as well as regulatory decisions interpreting and implementing those laws as of the date of this Prospectus. Should such laws and/or regulatory interpretations change in the future to reclassify MWR's regulatory status, whether as a result of passage of the Telecommunications Act or other regulatory developments, the Company believes that compliance with such reclassification would not have a material adverse effect on the Company. The Company, through its wholly owned subsidiary Ruffalo, Cody, is subject to certain federal and state regulatory requirements due to its fund-raising activities, including in certain states, bonding requirements. FEDERAL REGULATION. The Telecommunications Act became effective February 8, 1996. The Telecommunications Act preempts state and local laws to the extent that they prevent competitive entry into the provision of any telecommunications service. Subject to this limitation, however, the state and local governments retain most of their existing regulatory authority. The Telecommunications Act imposes a variety of new duties on incumbent local exchange carriers in order to promote competition in local exchange and access services. Some smaller telephone companies may seek suspension or modification of these duties, and some companies serving rural areas are exempt 51 55 from these duties. Some duties are also imposed on non-incumbent local exchange carriers, such as the Company. The duties created by the Telecommunications Act include the following: Reciprocal Compensation Requires all local exchange carriers to complete calls originated by competing carriers under reciprocal arrangements at prices based on a reasonable approximation of incremental cost or through mutual exchange of traffic without explicit payment. Resale Requires all local exchange carriers to permit resale of their telecommunications services without unreasonable restrictions or conditions. In addition, incumbent local exchange carriers are required to offer wholesale versions of all retail services to other telecommunications carriers for resale at discounted rates, based on the costs avoided by the incumbent local carrier in the wholesale offering. Interconnection Requires incumbent local exchange carriers to permit their competitors to interconnect with their facilities at any technically feasible point within their networks, on nondiscriminatory terms, at prices based on cost (which may include a reasonable profit). At the option of the carrier seeking interconnection, physical collocation of the requesting carrier's equipment in the incumbent local exchange carrier's premises must be offered, except where the incumbent local exchange carrier can demonstrate space limitations or other technical impediments to collocation. Unbundled Access Requires incumbent local exchange carriers to provide nondiscriminatory access to unbundled network elements (including network facilities, equipment, features, functions, and capabilities) at any technically feasible point within their networks, on nondiscriminatory terms, at prices based on cost (which may include a reasonable profit). Number Portability Requires all local exchange carriers to permit users of telecommunications services to retain existing telephone numbers without impairment of quality, reliability or convenience when switching from one telecommunications carrier to another. Dialing Parity Requires all local exchange carriers to provide "1+" equal access to competing providers of telephone exchange service and toll service, and to provide nondiscriminatory access to telephone numbers, operator services, directory assistance, and directory listing, with no unreasonable dialing delays. Access to Rights-of-Way Requires all local exchange carriers to permit competing carriers access to poles, ducts, conduits and rights-of-way at regulated prices. Incumbent local exchange carriers are required to negotiate in good faith with carriers requesting any or all of the above arrangements. If the negotiating carriers cannot reach agreement within a prescribed time, either carrier may request binding arbitration of the disputed issues by the state regulatory commission. The Telecommunications Act also eliminates previous prohibitions on the provision of interLATA long distance services by the Regional Bell Operating Companies and the General Telephone Operating Companies. The Regional Bell Operating Companies are now permitted to provide interLATA long distance service outside those states in which they provide local exchange 52 56 service ("out-of-region long distance service") upon receipt of any necessary state and/or federal regulatory approvals that are otherwise applicable to the provision of intrastate and/or interstate long distance service. Under the Telecommunications Act, the Regional Bell Operating Companies will be allowed to provide long distance service within the regions in which they also provide local exchange service ("in-region service") upon specific approval of the FCC and satisfaction of other conditions, including a checklist of interconnection requirements. The General Telephone Operating Companies are permitted to enter the long distance market without regard to limitations by region, although regulatory approvals otherwise applicable to the provision of long distance service will need to be obtained. The General Telephone Operating Companies are also subject to the provisions of the Telecommunications Act that impose interconnection and other requirements on local exchange carriers. The Telecommunications Act imposes certain restrictions on the Regional Bell Operating Companies in connection with the Regional Bell Operating Companies' entry into long distance services. Among other things, the Regional Bell Operating Companies must pursue such activities only through separate subsidiaries with separate books and records, financing, management and employees, and all affiliate transactions must be conducted on an arm's length and nondiscriminatory basis. The Regional Bell Operating Companies are also prohibited from jointly marketing local and long distance services, equipment and certain information services unless competitors are permitted to offer similar packages of local and long distance services in their market. Further, the Regional Bell Operating Company must obtain in-region long distance authority before jointly marketing local and long distance services in a particular state. Additionally, AT&T and other major carriers serving more than 5% of the nation's presubscribed long distance access lines are also restricted, under certain conditions, from packaging their long distance services and local services provided over Regional Bell Operating Company facilities. These restrictions do not, however, apply to the Company because it does not serve more than 5% of the nation's presubscribed access lines. Prior to passage of the Telecommunications Act, the FCC had already established different levels of regulations for dominant and non-dominant carriers. For domestic common carrier telecommunications regulation, large local exchange carriers and the Regional Bell Operating Companies are currently considered dominant carriers for the provision of interstate access services, while other interstate service providers, such as the Company, are considered non-dominant carriers. The FCC has recently proposed that the Regional Bell Operating Companies offering out-of-region interstate long distance services be regulated as non-dominant carriers, as long as such services are offered by an affiliate of the Regional Bell Operating Company that complies with certain structural separation requirements. The FCC regulates many of the rates, charges and services of dominant carriers to a greater degree than non-dominant carriers. As a non-dominant carrier, the Company may install and operate facilities for the transmission of domestic interstate communications without prior FCC authorization, although FCC authorization is required for the provision of international telecommunications by non-dominant carriers. Services of non-dominant carriers are subject to relatively limited regulation by the FCC. Non-dominant carriers currently are required to file tariffs listing the rates, terms and conditions of interstate and international services provided by the carrier. Periodic reports concerning the carrier's interstate circuits and deployment of network facilities also are required to be filed. The FCC generally does not exercise direct oversight over cost justification and the level of charges for services of non-dominant carriers, although it has the power to do so. The Company must offer its interstate services on a nondiscriminatory basis, at just and reasonable rates, and remains subject to FCC complaint procedures. Pursuant to these FCC requirements, the Company's subsidiary, McLeod Telemanagement, has filed and maintains with the FCC a tariff for its interstate and international services. All of the interstate and international retail "basic" services (as defined by the FCC) provided by the Company (through such subsidiary) and the rates charged for those services are described therein. McLeod Telemanagement also has obtained FCC authority to provide international services. 53 57 On March 21, 1996, the FCC initiated a rulemaking proceeding in which it proposed to eliminate the requirement that non-dominant interstate carriers such as the Company maintain tariffs on file with the FCC for domestic interstate services. The FCC's proposed rules are pursuant to authority granted to the FCC in the Telecommunications Act to "forebear" from regulating any telecommunications service provider if the FCC determines that the public interest will be served. The FCC also requested public comment on whether any other regulations currently imposed on non-dominant carriers also should be eliminated pursuant to the FCC's "forebearance" authority. It is not known when the FCC will take final action on this proposal. The FCC also imposes prior approval requirements on transfers of control and assignments of operating authorizations. The FCC has the authority to generally condition, modify, cancel, terminate or revoke operating authority for failure to comply with federal laws and/or the rules, regulations and policies of the FCC. Fines or other penalties also may be imposed for such violations. There can be no assurance that the FCC or third parties will not raise issues with regard to the Company's compliance with applicable laws and regulations. The Company does not currently hold any radio licenses issued by the FCC, although FCC radio licenses may be acquired in the future in connection with the provision of wireless services. In general, applications for FCC radio licenses may be denied, and in extreme cases radio licenses may be revoked after grant, if the FCC finds that an entity lacks the requisite "character" qualification to be a licensee. In making that determination, the FCC considers whether an applicant or licensee has been the subject of adverse findings in a judicial or administrative proceeding involving, among other things, the possession or sale of unlawful drugs, fraud, antitrust violations or unfair competition. Under the Telecommunications Act, 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 radio licensee; or more than 25% of the parent of a common carrier radio licensee if the FCC determines that the public interest would be served by prohibiting such ownership. If the Company acquires or is granted FCC radio licenses in the future, the Company will be required to comply with these foreign ownership restrictions. In addition, the FCC has imposed reporting requirements with respect to foreign affiliations between U.S. international and foreign telecommunications carriers, as well as reports of certain investments by other foreign entities. Depending on the particular foreign affiliate and its "home" market, the FCC may limit the size of the foreign affiliate's investment in the U.S. carrier or subject the U.S. carrier to dominant carrier regulation on one or more international routes. The Company's subsidiary, McLeod Telemanagement, holds FCC authority to provide international services, and therefore is subject to the FCC's rules on foreign affiliations. Failure to comply with statutory requirements on foreign ownership of radio licenses, or with the FCC's foreign affiliation reporting requirements, may result in the FCC issuing an order to the entity requiring divestiture of alien ownership to bring the entity into compliance with the Telecommunications Act and the FCC's rules. In addition, fines, a denial of renewal or revocation of radio licenses are possible. The Restated Certificate permits the Board to redeem any of the Company's capital stock from stockholders to the extent necessary to prevent the loss or secure the reinstatement of any license, operating authority or franchise from any governmental authority. The Company has no knowledge of any present alien ownership or affiliation with foreign telecommunications carriers in violation of the Telecommunications Act or the FCC's rules. See "Description of Capital Stock-- Certain Charter and Statutory Provisions." The FCC, through the Interconnection Decisions, has ordered the Regional Bell Operating Companies and all but one of the other local exchange carriers having in excess of $100 million in gross annual revenue for regulated services to provide expanded interconnection to local exchange carrier central offices to any competitive access provider, interexchange carrier or end user seeking such interconnection for the provision of interstate access services. As a result, the Company is able to reach most business customers in its metropolitan service areas and can expand its 54 58 potential customer base. The FCC has imposed mandatory virtual collocation obligations on the local exchange carriers. Virtual collocation is a service in which the local exchange carrier leases or purchases equipment designated by the interconnector and exerts complete physical control over this equipment, including central office installation, maintenance and repair. Certain local exchange carriers have pending requests for judicial review of the FCC's mandatory virtual collocation requirement. In addition, some local exchange carriers have voluntarily filed tariffs making "physical collocation" available, enabling the interconnector to place its equipment in the local exchange carriers central office space. As noted above, the Telecommunications Act now requires most incumbent local exchange companies to offer physical collocation. Subsequent to the enactment of the Telecommunications Act, the FCC has begun a series of expedited rulemaking proceedings to implement the requirements of the Telecommunications Act concerning interconnection with local exchange carrier facilities and other essential terms of the relationships between competing local carriers. On August 8, 1996, the FCC adopted rules to implement the interconnection, resale and number portability provisions of the Telecommunications Act. Certain provisions of these rules have been appealed to various U.S. Courts of Appeals which were consolidated into proceedings currently pending before the U.S. Eighth Circuit Court of Appeals. In addition, applications for a stay of the proposed rules were rejected by the FCC. However, the U.S. Eighth Circuit Court of Appeals has granted a temporary stay in the matter. When ordering interconnection, the FCC granted local exchange carriers additional flexibility in pricing their interstate special and switched access services on a central office specific basis. Under this pricing scheme, local exchange carriers may establish pricing zones based on access traffic density and charge different prices for central offices in each zone. The Company anticipates that the FCC will grant local exchange carriers increasing pricing flexibility as the number of interconnections and competitors increases. In a concurrent proceeding, the FCC enacted interim pricing rules that restructure local exchange carrier switched transport rates in order to facilitate competition for switched access. The Company, through its wholly owned subsidiary Ruffalo, Cody, is also subject to rules governing telemarketing that have been promulgated by both the FCC and the Federal Trade Commission (the "FTC"). The FCC and FTC telemarketing rules prohibit telemarketers, such as Ruffalo, Cody, from engaging in certain deceptive telemarketing practices and require that telemarketers make certain disclosures. For example, these telemarketing rules: prohibit the use of autodialers that employ prerecorded voice messages without the prior express consent of the dialed party; proscribe the facsimile transmission of unsolicited advertisements; require telemarketers to disclose clear and conspicuous information concerning quality, cost and refunds to a customer before a customer makes a purchase; require telemarketers to compile lists of individuals who desire not to be contacted; limit telemarketers to calling residences between the hours of 8:00 a.m. and 9:00 p.m.; require telemarketers to explicitly identify the seller and state that the purpose of the call is to sell goods; and prohibit product misrepresentations. STATE REGULATION. McLeod Telemanagement, the Company's subsidiary that provides intrastate common carrier services, is also subject to various state laws and regulations. Most public utilities commissions subject providers such as the Company to some form of certification requirement, which requires providers to obtain authority from the state public utilities commission prior to the initiation of service. In most states, including Iowa and Illinois, the Company also is required to file tariffs setting forth the terms, conditions and prices for services that are classified as intrastate. The Company also is required to update or amend its tariffs when it adjusts its rates or adds new products, and is subject to various reporting and record-keeping requirements. Many states also require prior approval for transfers of control of certified carriers, corporate reorganizations, acquisitions of telecommunications operations, assignment of carrier assets, carrier stock offerings and incurrence by carriers of significant debt obligations. Certificates of authority can generally be conditioned, modified, canceled, terminated or revoked by state regulatory authorities for failure to comply with state law and/or the rules, regulations and policies of state 55 59 regulatory authorities. Fines or other penalties also may be imposed for such violations. There can be no assurance that state utilities commissions or third parties will not raise issues with regard to the Company's compliance with applicable laws or regulations. The Company, through McLeod Telemanagement, currently holds certificates to offer local services through partitioning U S WEST switches in Iowa and Ameritech switches in Illinois, has long distance authority in Iowa and Illinois and has tariffs on file in these states, as necessary, governing the provision of local and intrastate long distance services. In March 1995 and April 1996, respectively, the Company received state regulatory approval in Iowa and in Illinois to offer local switched services in Cedar Rapids, Iowa and in Illinois cities other than Chicago. The Company intends to seek regulatory approval to provide such services in other cities and towns in Iowa and other states targeted by the Company in the Midwest when the economic terms of interconnection with the incumbent local exchange carrier make the provision of local switched services cost-effective. See "-- Expansion of Certain Facilities-based Services." In addition, the Company holds a certificate to provide local exchange and long distance services through resale in Minnesota, Wisconsin and North Dakota. The Company also is authorized to offer long distance service in Nebraska, Missouri, Colorado, Michigan, Montana and Utah. On October 3, 1996, the South Dakota Public Utilities Commission voted to approve the Company's application for local and long distance operating authority, which will become effective upon the issuance of a written order. Applications for authority to provide long distance service are pending in several states, including Arizona, California, Georgia, Indiana, Kansas, Ohio, Oregon, Pennsylvania, Texas, Washington and Wyoming. The Company has applied for authority to provide long distance service in such states, including states outside of its target markets, because it believes this capability will enhance the Company's ability to attract business customers that have offices outside of the Company's target markets. The Company may also apply for authority to provide services in other states in the future. While the Company expects and intends to obtain necessary operating authority in each jurisdiction where it intends to operate, there can be no assurance that each jurisdiction will grant the Company's request for authority. Although the Telecommunications Act preempts the ability of states to forbid local service competition, it is so recently enacted that public utilities commissions in certain states, such as Nebraska, South Dakota, Montana, Colorado, Wyoming and Missouri, where the legality of such competition was previously uncertain, have not yet taken regulatory or statutory actions to comply with the Telecommunications Act. Furthermore, the Telecommunications Act preserves the ability of states to impose reasonable terms and conditions of service and other regulatory requirements. In the last several years, Iowa, Illinois, Minnesota, Wisconsin and North Dakota have enacted broad changes in those states' telecommunications laws that authorize the entry of competitive local exchange carriers and provide for new regulations to promote competition in local and other intrastate telecommunications services. The Company believes that these state statutes provide some protection to the Company against any discriminatory conduct by the Regional Bell Operating Companies. The Iowa Utilities Board, for example, has determined in three separate instances that the conduct of U S WEST discriminated against the Company in violation of Iowa law. U S WEST has appealed one of these decisions by the Iowa Utilities Board, which appeal is currently pending before the Iowa District Court for Polk County. The Company believes that, as the degree of intrastate competition increases, the states will offer the local exchange carriers increasing pricing flexibility. This flexibility may present the local exchange carriers with an opportunity to subsidize services that compete with the Company's services with revenues generated from non-competitive services, thereby allowing incumbent local exchange carriers to offer competitive services at prices below the cost of providing the service. The Company cannot predict the extent to which this may occur or its impact on the Company's business. The Company, through Ruffalo, Cody, engages in various direct marketing, telemarketing and fund-raising activities. Most states have laws that govern either direct marketing, telemarketing or 56 60 fund-raising activities. In states that regulate such activities, several types of restriction have been imposed, either singly or in combination, including: (i) pre-commencement and post-completion registration requirements; (ii) posting of professional bonds; (iii) filing of operational contracts; (iv) imposing statutory waiting periods; (v) requiring employee registration; and (vi) prohibiting control over funds collected from such activities. LOCAL GOVERNMENT AUTHORIZATIONS. The Company is required to obtain street use and construction permits and licenses and/or franchises to install and expand its fiber optic networks using municipal rights-of-way. In some municipalities where the Company has installed or anticipates constructing networks, it will be required to pay license or franchise fees based on a percentage of gross revenues or on a per linear foot basis. There can be no assurance that, following the expiration of existing franchises, fees will remain at their current levels. In many markets, the local exchange carriers do not pay such franchise fees or pay fees that are substantially less than those required to be paid by the Company. To the extent that competitors do not pay the same level of fees as the Company, the Company could be at a competitive disadvantage. Termination of the existing franchise or license agreements prior to their expiration dates or a failure to renew the franchise or license agreements and a requirement that the Company remove its facilities or abandon its network in place could have a material adverse effect on the Company. EMPLOYEES As of September 30, 1996, the Company employed a total of 1,554 full-time employees and 261 part-time employees. The Company believes that its future success will depend on its continued ability to attract and retain highly skilled and qualified employees. The Company believes that its relations with its employees are good. PROPERTY The Company leases offices and space in a number of locations, primarily for sales offices and network equipment installations. The Company's headquarters is housed in 55,000 square feet of office space in Cedar Rapids, Iowa, under a lease expiring in March 2001. In August 1996, the Company purchased approximately 194 acres of farm land in southern Cedar Rapids, Iowa, and announced plans to construct a one-story, 160,000 square foot building to serve as the Company's headquarters. Adjacent to the new headquarters, the Company plans to construct a 38,000 square foot disaster-resistant network operations center that will house the Company's telephone switching and computer equipment. The total cost of the construction of the Company's corporate headquarters and network operations center is estimated to be approximately $25 million. See "Use of Proceeds." In connection with the new headquarters construction, the State of Iowa has awarded a $1 million grant to fund certain road construction costs. The new headquarters is scheduled for occupancy by mid-1997. In addition, the Company owns 88 acres of undeveloped farm and forest land in southern Cedar Rapids, Iowa. LEGAL PROCEEDINGS The Company is not aware of any material litigation against the Company. The Company is involved in numerous regulatory proceedings before various public utilities commissions, particularly the Iowa Utilities Board, as well as before the FCC. The Company and Clark E. McLeod are also plaintiffs in a civil action, instituted in the Iowa District Court for Linn County on September 19, 1994, seeking actual and punitive damages, and alleging that the defendants, Iowa Network Services, Inc. ("INS") and William P. Bagley, the general manager of INS, engaged in libel and other tortious acts against Clark E. McLeod, the Company and its wholly owned subsidiaries, through the publication and wide circulation of a "Letter to the Editor" sent to a number of newspapers and others in August 1994 regarding, among other things, the Company's business dealings with the State of Iowa. The lawsuit has been set for trial in February 1997. On October 9, 1996, the parties began non-binding 57 61 mediation in an attempt to resolve this dispute. See "Management -- Compensation Committee Interlocks and Insider Participation." The Company is dependent on the Regional Bell Operating Companies for provision of its local and certain of its long distance services. U S WEST and Ameritech are currently the Company's sole suppliers of access to local central office switches. The Company uses such access to partition the local switch and provide local service to its customers. The Company purchases access in the form of a product generally known as "Centrex." Without such access, the Company could not currently provide bundled local and long distance services, although it could provide stand-alone long distance service. Since the Company believes its ability to offer bundled local and long distance services is critical to its current sales efforts, any successful effort by U S WEST or Ameritech to deny or substantially limit the Company's access to partitioned switches would have a material adverse effect on the Company. On February 5, 1996, U S WEST filed tariffs and other notices announcing its intention to limit future Centrex access to its switches by Centrex customers (including the Company) throughout U S WEST's fourteen-state service region, effective February 5, 1996. Although U S WEST stated that it would "grandfather" existing Centrex agreements with the Company and permit the Company to continue to use U S WEST's central office switches through April 29, 2005, it also indicated that it would not permit the Company to expand to new cities and would severely limit the number of new lines it would permit the Company to partition onto U S WEST's portion of the switches in cities currently served by the Company. Because of U S WEST's commitment to "grandfather" service to the Company, the Company does not believe its current customers are at risk that service will be interrupted. The Company has challenged, or is challenging, the U S WEST Centrex Action before the public utilities commissions in each of the states served by U S WEST where the Company is doing business or currently plans to do business. The Company based such challenges on various state and federal laws, regulations and regulatory policies, including Sections 251(b)(1) and 251(c)(4)(B) of the Telecommunications Act, which the Company believes impose upon the Regional Bell Operating Companies the duty not to prohibit, and not to impose unreasonable or discriminatory conditions or limitations on, the resale of their telecommunications services, and Section 251(c)(4)(A) of the Telecommunications Act, which the Company believes obligates the Regional Bell Operating Companies to offer for resale at wholesale rates any telephone communications services that are provided at retail to subscribers who are not telecommunications carriers. Additional statutes cited in the Company's challenges include provisions of the laws of Iowa, Minnesota and Colorado, which the Company believes prohibit restrictions on the resale of local exchange services, functions or capabilities; prohibit local exchange carriers from refusing access by other carriers to essential facilities on the same terms and conditions as the local exchange carrier provides to itself; and prohibit the provision of carrier services pursuant to rates, terms and conditions that are unreasonably discriminatory. In Iowa, the Company filed a complaint with the Iowa Utilities Board against U S WEST's actions and was granted interim relief on an ex parte basis that allowed the Company to continue to expand to new cities and expand the number of new lines partitioned onto U S WEST's switches. Subsequent to the grant of interim relief, the Company on March 18, 1996 agreed to a settlement agreement with U S WEST that permits the Company to continue to expand, without restrictions, the number of new lines it serves in Iowa through March 18, 2001. In addition, the settlement agreement provides that the Company may expand to seven new markets (central offices) in Iowa per year through March 18, 2001. As a result of the settlement agreement, the Company withdrew its complaint before the Iowa Utilities Board. Because MCI, AT&T and others also challenged U S WEST's action, the Iowa Utilities Board continued to review the U S WEST Centrex Action and on June 14, 1996 issued an order rejecting U S WEST's filing. The order of the Iowa Utilities Board was appealed by U S WEST to the Iowa District Court for Polk County on July 12, 1996. The appeal remains pending. 58 62 In Nebraska and North Dakota, complaints filed by the Company with respect to the U S WEST Centrex Action are awaiting decision by the public utilities commissions in those states. In Minnesota, U S West's initial filing was rejected on procedural grounds by the Public Utilities Commission. Nevertheless, on April 30, 1996, U S WEST refiled its proposed limitations on Centrex service in Minnesota, proposing to "grandfather" the service to existing customers as of July 9, 1996. The Company opposed this filing in a letter to the Minnesota Public Utilities Commission on May 20, 1996. On May 21, 1996, the Minnesota Public Utilities Commission voted to suspend the new U S WEST filing and schedule a contested-case proceeding to consider it. The Minnesota Public Utilities Commission is expected to render a ruling in the proceedings by December 20, 1996. In South Dakota, U S WEST has appealed the unfavorable decision of the Public Utilities Commission in state court and has been granted a stay of the decision pending appeal. The Company anticipates that U S WEST will appeal other unfavorable decisions by public utilities commissions in other states with respect to the U S WEST Centrex Action. Other telecommunication firms also have challenged the U S WEST Centrex Action in each of the other states where U S WEST engages in local telephone service and public utilities commissions in several of those states have also rejected the U S WEST Centrex action. In Oregon, U S WEST's filing was rejected by the Public Utilities Commission on March 7, 1996. In South Dakota, the Public Utilities Commission rejected the U S WEST Centrex Action on August 22, 1996. In Colorado, on September 3, 1996, an Administrative Law Judge issued a recommendation that the U S WEST Centrex Action be rejected. In Wyoming, U S WEST's filing was rejected by the Public Service Commission on September 6, 1996. On its own motion, the Arizona Corporation Commission ordered U S WEST to continue the availability of Centrex services until a comparable replacement system becomes available. In New Mexico, the Public Service Commission has not allowed the U S WEST's filing to become effective. In Utah, on September 25, 1996, the Public Service Commission rejected the U S WEST Centrex Action and ordered U S WEST to continue the availability of Centrex service for resale. In Montana, the Public Service Commission is expected to render a decision with respect to the U S WEST Centrex Action in October 1996. There can be no assurance that the Company will succeed in its legal challenges to the U S WEST Centrex Action, or that this action by U S WEST, or similar actions by other Regional Bell Operating Companies, will not have a material adverse effect on the Company. See "-- Competition" and "Risk Factors -- Dependence on Regional Bell Operating Companies; U S WEST Centrex Action." As a result of its use of the Centrex product, the Company depends upon U S WEST to process service orders placed by the Company to transfer new customers to the Company's local service. U S WEST has imposed a limit of processing one new local service order of the Company per hour for each U S WEST central office. Furthermore, according to the Company's records, U S WEST commits an error on one of every three lines ordered by the Company, thereby further delaying the transition of new customers to the Company's local service. The Company has repeatedly requested that U S WEST increase its local service order processing rate and improve the accuracy of such processing. U S WEST has refused to change its service order processing practices. On July 12, 1996, the Company filed a complaint with the Iowa Utilities Board against U S WEST in connection with such actions. At a hearing held to consider the complaint, U S WEST acknowledged that it had not dedicated resources to improve its processing of the Company's service orders to switch new customers to the Company's local service because of its desire to limit Centrex service. On October 2, 1996, the Iowa Utilities Board determined that U S WEST's limitation on the processing of service orders constituted an unlawful discriminatory practice under Iowa law. There can be no assurance, however, that the decision of the Iowa Utilities Board will adequately resolve the service order problems or that such problems will not impair the Company's ability to expand or to attract new customers, which could have a material adverse effect on the Company. See "Risk Factors -- Refusal of U S WEST to Improve its Processing of Service Orders," "Risk Factors -- Dependence on Regional Bell Operating Companies; U S WEST Centrex Action" and "Risk Factors -- Refusal of U S WEST to Improve its Processing of Service Orders." 59 63 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are listed below. The Board currently consists of seven directors, divided into three classes of directors serving staggered three-year terms. The Company intends to expand the Board to nine directors pursuant to an Investors' Agreement with certain principal stockholders. See "-- Stockholders' Agreements." Directors and executive officers of the Company are elected to serve until they resign or are removed, or are otherwise disqualified to serve, or until their successors are elected and qualified. Directors of the Company are elected at the annual meeting of stockholders. Executive officers of the Company generally are appointed at the Board's first meeting after each annual meeting of stockholders. The ages of the persons set forth below are as of September 30, 1996.
NAME AGE POSITION(S) WITH COMPANY TERM AS DIRECTOR EXPIRES - ------------------------------ --- ------------------------------- ------------------------ Clark E. McLeod............... 49 Chairman, Chief Executive 1997 Officer and Director Stephen C. Gray............... 38 President, Chief Operating 1999 Officer and Director James L. Cram................. 52 Chief Accounting Officer and 1998 Director Blake O. Fisher, Jr........... 52 Chief Financial Officer, Executive Vice President, Corporate Administration and Treasurer Kirk E. Kaalberg.............. 37 Executive Vice President, Network Services Stephen K. Brandenburg........ 44 Chief Information Officer David M. Boatner.............. 47 Executive Vice President, Business Services Albert P. Ruffalo............. 49 Executive Vice President, Consumer Services Arthur L. Christoffersen...... 49 Executive Vice President, Media Services Casey D. Mahon................ 44 Senior Vice President, General Counsel and Secretary Joseph H. Ceryanec............ 35 Vice President, Finance and Controller Russell E. Christiansen(1).... 61 Director 1998 Thomas M. Collins(1)(2)....... 68 Director 1998 Paul D. Rhines(2)............. 53 Director 1999 Lee Liu(2).................... 63 Director 1997
- --------------- (1) Member of the Audit Committee (2) Member of the Compensation Committee Clark E. McLeod. Mr. McLeod founded the Company and has served as Chairman, Chief Executive Officer and a director of the Company since its inception in June 1991. His previous business venture, Teleconnect, an Iowa-based long distance telecommunications company, was founded in January 1980. Mr. McLeod served as Chairman and Chief Executive Officer of Teleconnect from January 1980 to December 1988, and from December 1988 to August 1990, he served as President of Telecom*USA, the successor to Teleconnect following its merger with SouthernNet, Inc. in December 1988. By 1990, Telecom*USA had become America's fourth largest 60 64 long distance telecommunications company with nearly 6,000 employees. MCI purchased Telecom*USA in August 1990 for $1.25 billion. Stephen C. Gray. Mr. Gray has been Chief Operating Officer of the Company since September 1992, President since October 1994 and a director since April 1993. Prior to joining the Company, Mr. Gray served from August 1990 to September 1992 as Vice President of Business Services at MCI, where he was responsible for MCI's local access strategy and for marketing and sales support of the Business Markets division. From February 1988 to August 1990, he served as Senior Vice President of National Accounts and Carrier Services for Telecom*USA, where his responsibilities included sales, marketing, key contract negotiations and strategic acquisitions and combinations. Prior to joining Telecom*USA, from September 1986 to February 1988, Mr. Gray held a variety of management positions with Williams Telecommunications Company, a long distance telephone company. From August 1983 to September 1986, Mr. Gray held a variety of management positions with Clay Desta Communications, Inc., a long distance company. James L. Cram. Mr. Cram has served as Chief Accounting Officer of the Company since February 1996 and as a director since April 1993. From June 1991 to February 1996, he served as Chief Financial Officer and Treasurer of the Company. From August 1990 to May 1991, Mr. Cram acted as a private financial consultant. From December 1987 to August 1990, he served as Executive Vice President of Finance of Long Distance Operations, Central Division of Telecom*USA. From 1982 to December 1987, he served as Vice President, Chief Financial Officer and Treasurer of Teleconnect. Prior to joining Teleconnect, Mr. Cram served from 1973 to 1982 in various management positions with HawkBilt Company, a farm equipment manufacturer, including Controller, Treasurer and General Manager. Mr. Cram has announced his retirement to be effective in January 1997. Blake O. Fisher, Jr. Mr. Fisher has served as Executive Vice President, Corporate Administration of the Company since September 1996 and as Chief Financial Officer and Treasurer since February 1996. Mr. Fisher served on the Board from April 1993 to February 1996. He served as Executive Vice President and Chief Financial Officer of IES, a diversified electric utility holding company, from January 1991 to February 1996, during which period he was one of IES' nominees to the Board. Mr. Fisher also served as President of IES Utilities Inc. from February 1995 to February 1996. Prior to joining IES, Mr. Fisher held a variety of management positions with Consumers Power Company, an electric utility, including Vice President of Finance and Treasurer. Kirk E. Kaalberg. Mr. Kaalberg has served since September 1996 as the Company's Executive Vice President, Network Services where he is responsible for the maintenance of the Iowa Communications Network and the design and development of the Company's network and switching platforms. From March 1994 to September 1996, Mr. Kaalberg served as Senior Vice President, Network Design and Development and from January 1992 to February 1994, he served as Vice President of the Company. From August 1990 to January 1992, Mr. Kaalberg served as a senior manager of MCI, where he managed a 175-person conference calling, financial and operations group. From August 1987 to August 1990, Mr. Kaalberg was an employee of Teleconnect and its successor, Telecom*USA, where he was responsible for business planning and management information systems project prioritization. From 1983 to 1987, he held a variety of product management positions with Banks of Iowa, Computer Services, Inc., a computer services company, and Source Data Systems, a software company. Stephen K. Brandenburg. Mr. Brandenburg has served since September 1996 as Chief Information Officer of the Company, where he is responsible for the design and deployment of the Company's internal computing systems and operations. From June 1995 to September 1996, he served as Senior Vice President, Intelligent Technologies and Systems of the Company. Prior to joining the Company, Mr. Brandenburg served from August 1990 to June 1995 as Vice President, Revenue Management Systems at MCI, where he was responsible for MCI's 1,400 person business markets traffic/call processing, order/entry, billing and calling card operations. From 1987 to August 1990, he served as Senior Vice President of Information Systems at Teleconnect and its 61 65 successor, Telecom*USA. Prior to joining Teleconnect, Mr. Brandenburg held a variety of information systems positions with academic medical centers, including the Mayo Medical Clinic and the University of Wisconsin. David M. Boatner. Mr. Boatner has served since September 1996 as Executive Vice President, Business Services of the Company. From February 1996 to September 1996, he served as the Company's Senior Vice President, Sales and Marketing. Prior to joining the Company, Mr. Boatner served from January 1995 to February 1996 as Regional Vice President of Sales of WorldCom, a long distance telecommunications company, where he was responsible for sales in the central, western and southwest regions of the United States. From May 1989 to January 1995, Mr. Boatner served as Vice President for Commercial Sales of WilTel, Inc., a long distance telecommunications company which was acquired by WorldCom in January 1995. Prior to joining WilTel, Inc., Mr. Boatner held a variety of positions at AT&T and its Bell operating subsidiaries. Albert P. Ruffalo. Mr. Ruffalo has served as the Company's Executive Vice President, Consumer Services since September 1996. Since August 1991 Mr. Ruffalo has served as President and Chief Executive Officer of Ruffalo, Cody, which was acquired by the Company on July 15, 1996. From September 1990 to July 1991, Mr. Ruffalo served as President of MCI Direct, Inc., an indirect wholly owned subsidiary of MCI. From 1983 to August 1990, Mr. Ruffalo held various executive positions at Teleconnect and Telecom*USA Data Base Marketing Company, an indirect wholly owned subsidiary of Telecom*USA, Teleconnect's successor. From 1980 to 1983, Mr. Ruffalo was Marketing Manager of National Oats Corporation, a grain distribution firm. Arthur L. Christoffersen. Mr. Christoffersen has served as the Company's Executive Vice President, Media Services since September 20, 1996, the date the Company acquired Telecom*USA Publishing. Mr. Christoffersen has served as Chairman, President and Chief Executive Officer of Telecom*USA Publishing since November 1990, the date Mr. Christoffersen and other investors acquired Telecom*USA Publishing from MCI. From December 1987 to August 1990, Mr. Christoffersen served as Executive Vice President and Chief Financial Officer of Teleconnect and its successor, Telecom*USA. From 1975 to 1987, Mr. Christoffersen held a variety of management positions, including Executive Vice President, of Life Investors, Inc., a diversified financial services company. Casey D. Mahon. Ms. Mahon is responsible for the legal and regulatory affairs of the Company, which she joined in June 1993 as General Counsel. Ms. Mahon has served as Senior Vice President of the Company since February 1996 and as the Company's Secretary since July 1993. Prior to joining the Company, she was engaged in the private practice of law, with emphasis on telecommunications, regulatory and corporate law. From August 1990 to December 1990, she served as Vice President of Corporate Affairs at MCI, where she assisted in transitional matters relating to MCI's purchase of Telecom*USA. From March 1986 to August 1990, Ms. Mahon served as Senior Vice President, General Counsel and Secretary of Teleconnect and its successor, Telecom*USA. From 1977 to 1986, Ms. Mahon served in various legal, financial and faculty positions at the University of Iowa. Joseph H. Ceryanec. Mr. Ceryanec has served since September 1996 as Vice President, Finance and Controller of the Company. Prior to joining the Company, Mr. Ceryanec was employed by Met-Coil Systems Corporation, a manufacturer of machine tools and factory automation equipment, where he served as Chief Financial Officer and Vice President -- Finance from May 1994 to September 1996 and as Vice President -- Finance from December 1993 to May 1994. From 1986 to December 1993, Mr. Ceryanec served as a supervisor, manager and senior manager for Ernst & Young, a public accounting firm. Russell E. Christiansen. Mr. Christiansen has been a director of the Company since June 1995, during which time he has been MidAmerican's nominee to the Board. Since June 1995, he has also been Chairman and Chairman of the Office of the Chief Executive Officer of MidAmerican. Mr. Christiansen has been a director of MidAmerican and its predecessors since 1983. He served as Chairman and Chief Executive Officer of Midwest Resources Inc., the predecessor to MidAmerican, 62 66 from October 1992 to June 1995, President from 1990 to 1995 and Vice Chairman and Chief Operating Officer from November 1990 to 1992. Thomas M. Collins. Mr. Collins has been a director of the Company since April 1993. Mr. Collins is Chairman of Shuttleworth & Ingersoll, P.C., a law firm in Cedar Rapids, Iowa, where he has practiced law since 1952. Mr. Collins was a director of Teleconnect and its successor, Telecom*USA, from December 1988 to August 1990. He is also a director of APAC TeleServices, Inc., a telemarketing company. Paul D. Rhines. Mr. Rhines has been a director of the Company since April 1993, during which time he has been the nominee of Allsop Venture Partners III, L.P. ("Allsop") to the Board. He is a founder and a general partner of R.W. Allsop and Associates, L.P., R.W. Allsop and Associates II Limited Partnership and Allsop, three venture capital limited partnerships established in Cedar Rapids, Iowa, in 1981, 1983 and 1987, respectively. He has served since 1987 as a general partner of Mark Venture Partners, L.P., a venture capital limited partnership. He has also served since 1980 as Executive Vice President and a director of RWA, Inc., a venture capital management firm. Mr. Rhines was a director of Teleconnect and its successor, Telecom*USA from 1982 to 1990. He is also a director of American Safety Razor Company, a consumer product manufacturing company. Lee Liu. Mr. Liu has been a director of the Company since April 1993, during which time he has been one of IES' nominees to the Board. Mr. Liu has served since July 1993 as Chairman of IES. He has also served as President and Chief Executive Officer of IES since July 1991. From May 1986 to July 1991, Mr. Liu was Chairman, Chief Executive Officer and President of the predecessor to IES. Mr. Liu has worked for IES since 1957. Mr. Liu is also a director of Hon Industries, an office furniture manufacturing company, Eastman Chemical Company, a chemical company and the Principal Financial Group, a financial services company. INVESTOR AGREEMENT The Company has entered into an agreement (the "Investor Agreement") with IES, MidAmerican and Clark E. and Mary E. McLeod (collectively, the "Investor Stockholders") and certain other stockholders. The Investor Agreement provides that each Investor Stockholder, for so long as such Investor Stockholder owns at least 10% of the outstanding capital stock of the Company, shall vote such Investor Stockholder's stock and take all action within its power to (i) establish the size of the Board at nine directors; (ii) cause to be elected to the Board one director designated by IES (for so long as IES owns at least 10% of the outstanding capital stock of the Company); (iii) cause to be elected to the Board one director designated by MidAmerican (for so long as MidAmerican owns at least 10% of the outstanding capital stock of the Company); (iv) cause to be elected to the Board three directors who are executive officers of the Company designated by Clark E. McLeod (for so long as Clark E. and Mary E. McLeod collectively own at least 10% of the outstanding capital stock of the Company); and (v) cause to be elected to the Board four independent directors nominated by the Board. The Investor Agreement also provides that, for a period ending in March 1999 and subject to certain exceptions, each of IES and MidAmerican will refrain from acquiring, or agreeing or seeking to acquire, beneficial ownership of any securities issued by the Company. In addition, the Investor Agreement provides that, for a two-year period commencing on the effective date of this Prospectus, no Investor Stockholder will sell or otherwise dispose of any equity securities of the Company without the consent of the Board. COMMITTEES OF THE BOARD OF DIRECTORS The Board currently has two committees, the Audit Committee and the Compensation Committee, each of which was appointed in March 1996. Prior to March 1996, there were no Board committees. The Audit Committee, among other things, recommends the firm to be appointed as independent accountants to audit the Company's financial statements, discusses the scope and results of the audit with the independent accountants, reviews with management and the independent accountants the Company's interim and year-end operating results, considers the adequacy of the internal accounting controls and audit procedures of the Company and reviews the non-audit 63 67 services to be performed by the independent accountants. The current members of the Audit Committee are Messrs. Collins and Christiansen. The Compensation Committee reviews and recommends the compensation arrangements for management of the Company and administers the Company's stock option plans and stock purchase plan. The current members of the Compensation Committee are Messrs. Collins, Rhines and Liu. DIRECTOR COMPENSATION Directors of the Company who are also employees of the Company receive no directors' fees. Non-employee directors receive directors fees of $1,000 for each Board and committee meeting attended in person and $500 for each Board and committee meeting attended by telephone. In addition, directors are reimbursed for their reasonable out-of-pocket travel expenditures incurred. Directors of the Company are also eligible to receive grants of stock options under the Company's Director Stock Option Plan. See "-- Stock Option Plans -- Directors Stock Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The current members of the Compensation Committee are Messrs. Collins, Rhines and Liu. Prior to March 1996, there was no Compensation Committee and the entire Board participated in deliberations regarding executive officer compensation. During the fiscal year ended December 31, 1995, Messrs. McLeod, Gray and Cram were executive officers of the Company. During such period, no member of the Board served as a director or a member of the compensation committee of any other company of which any executive officer served as a member of the Board. Prior to September 20, 1996, the Company purchased advertising space in telephone directories published by Telecom*USA Publishing, a corporation whose directors included, among others, Clark E. McLeod, Paul D. Rhines and James L. Cram. Messrs. McLeod and Rhines and Ms. Casey D. Mahon were stockholders of Telecom*USA Publishing. Telecom*USA Publishing also purchased telecommunications service from the Company. The Company paid Telecom*USA Publishing $1,397, $11,000 and $54,500 in 1993, 1994 and 1995, respectively, for advertising fees and charged Telecom*USA Publishing $103,112 for telecommunications services in 1995. Messrs. McLeod, Rhines and Cram are directors of the Company, and Messrs. McLeod and Cram and Ms. Mahon are executive officers of the Company. On September 20, 1996, the Company acquired Telecom*USA Publishing for approximately $74.1 million in cash and an additional amount currently estimated to be approximately $1.6 million to be paid to certain employees of Telecom*USA Publishing as part of an incentive plan. At the time of the acquisition, Telecom*USA had outstanding debt of approximately $6.6 million. Clark E. McLeod, a director and executive officer of the Company, Mary E. McLeod, a stockholder of the Company, the McLeod Charitable Foundation, Inc., a non-profit foundation controlled by Mr. and Mrs. McLeod, Aaron, Holly, Frank and Jane McLeod, relatives of Mr. and Mrs. McLeod, Paul D. Rhines, a director of the Company, James L. Cram, a director and executive officer of the Company, Casey D. Mahon, an executive officer of the Company, and IES, a stockholder of the Company, were shareholders of Telecom*USA Publishing. The Company paid $18,571,982, $1,195,313, $105,187, $1,459,563, $46,125, $250,219 and $1,000,875 to Mr. and Mrs. McLeod, the McLeod Charitable Foundation, Inc., Aaron, Holly, Frank and Jane McLeod, Mr. Rhines, Mr. Cram, Ms. Mahon and IES, respectively, in exchange for the shares of Telecom*USA Publishing common stock held by them. Messrs. McLeod, Rhines and Cram served as directors of Telecom*USA Publishing. A Special Committee of the Board, consisting of disinterested directors, approved the acquisition of Telecom*USA Publishing as fair to, and in the best interests of, the stockholders of the Company. In August 1996, Ryan Properties, Inc. ("Ryan Properties") assigned to the Company all of its right, title and interest in and to a purchase agreement between Ryan Properties and Iowa Land and Building Company ("Iowa Land"), and the Company assumed Ryan Properties' obligation to pay Iowa Land $691,650 for approximately 75 of the approximately 194 acres of farm land in southern Cedar Rapids, Iowa upon which the Company is constructing its new corporate headquarters and network operations center. See "Business -- Property." Following the assignment, the Company 64 68 paid Iowa Land $691,650 for the title to such land. Iowa Land is an indirect wholly owned subsidiary of IES, a significant stockholder of the Company. On July 15, 1996, the Company acquired Ruffalo, Cody in a cash and stock transaction valued at up to a maximum of $19.9 million, based on the average price of the Class A Common Stock on the Nasdaq National Market at the time of the transaction. Clark E. McLeod, a director and executive officer of the Company, and Mary E. McLeod owned 110,454 shares of Ruffalo, Cody common stock, which were exchanged for 77,218 shares of Class A Common Stock, of which 11,584 shares were placed in escrow to be released to Mr. and Mrs. McLeod, if at all, over a period of 18 months, contingent upon the fulfillment of certain conditions relating to Ruffalo, Cody's ongoing revenues. Allsop, a stockholder of the Company the general partner of which is Paul D. Rhines, a director of the Company, owned 278,182 shares of Ruffalo, Cody common stock, which were exchanged for 194,476 shares of Class A Common Stock, of which 29,171 shares were placed in escrow to be released to Allsop, if at all, after six months, contingent upon the fulfillment of certain conditions relating to Ruffalo, Cody's ongoing revenues. Mr. Rhines served as a director of Ruffalo, Cody. A Special Committee of the Board, consisting of disinterested directors, approved the acquisition of Ruffalo, Cody as fair to, and in the best interests of, the stockholders of the Company. In June 1996, in connection with the initial public offering of the Company's Class A Common Stock, Clark E. McLeod, Mary E. McLeod, MidAmerican and IES purchased 125,000, 125,000, 1,000,000 and 500,000 shares of Class A Common Stock, respectively, directly from the Company at the initial public offering price of $20.00 per share for $2,500,000, $2,500,000, $20,000,000 and $10,000,000, respectively. The Company was advised that such shares were purchased for investment purposes. Mr. McLeod is a director and executive officer of the Company and Mrs. McLeod, MidAmerican and IES are significant stockholders of the Company. During 1993, 1994 and 1995 the Company paid $91,191, $79,114 and $147,313, respectively, to Shuttleworth & Ingersoll, P.C., a law firm in Cedar Rapids, Iowa, for legal services rendered. The Company plans to retain the firm in 1996. Thomas M. Collins, a director of the Company, is Chairman and a stockholder of Shuttleworth & Ingersoll, P.C. The Company paid $17,750, $50,932 and $38,000 during 1993, 1994 and 1995, respectively, for use of an aircraft owned by ABCM Corporation ("ABCM"). McLeod Transportation, Inc., an Iowa corporation whose stockholders include, among others, the Company, Clark E. McLeod and McLeod Educational Group, Inc. (a corporation controlled by Mr. McLeod) ("McLeod Educational Group"), owned 19% of ABCM until March 1995. McLeod Transportation, Inc. was later liquidated. Mr. McLeod is a director and executive officer of the Company. The Company rents facilities and equipment, purchases maintenance and installation services and pays commission on local and long distance sales to customers of Digital Communications, Inc. ("Digital"), a corporation that is controlled by Mary E. and Clark E. McLeod. Mr. McLeod and Mr. James L. Cram serve on the Board of Directors of Digital. The Company paid Digital $36,393, $83,591 and $94,871 in 1993, 1994 and 1995, respectively. Messrs. McLeod and Cram are directors and executive officers of the Company. The Company provided accounting, payroll and administrative services to McLeod Educational Group, a corporation that owns and operates an elementary school in Cedar Rapids, Iowa. McLeod Educational Group paid the Company $6,297, $51,664 and $38,411 for these services in 1993, 1994 and 1995, respectively. Since June 1996, the Company has rented office space from McLeod Educational Group. The Company paid McLeod Educational Group an aggregate of approximately $36,055 from June 1996 through September 1996 for this space. Clark E. McLeod and Mary E. McLeod own over 99% of the stock of McLeod Educational Group. James L. Cram owns less than 1% of the stock of McLeod Educational Group. Messrs. McLeod and Cram are directors and executive officers of the Company. The Company and Clark E. McLeod have entered into an agreement under which they have agreed to share equally in the costs and damage awards, if any, of a lawsuit brought by the 65 69 Company and Mr. McLeod in Linn County, Iowa. The Company has not to date incurred any material costs or received any damage awards in connection with this lawsuit. See "Business -- Legal Proceedings." The Company and McLeod Network Services, Inc. (a wholly owned subsidiary of the Company) have entered into two agreements with IES pursuant to which IES has agreed to grant the Company access to certain of IES' towers, rights-of-way, conduits and poles in exchange for capacity on the Company's network. IES purchased 5,625,000 shares of Class B Common Stock in April 1993 at an aggregate price of $4.5 million. In February 1994, IES purchased 2,045,457 shares of Class B Common Stock for an aggregate price of $3 million. IES also purchased 750,000 shares of Class B Common Stock for an aggregate price of $1.7 million on June 15, 1995. IES also has entered into the IES Guarantee. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Lee Liu, a director of the Company, is Chairman, Chief Executive Officer and President of IES. Blake O. Fisher, Jr., an executive officer of the Company, was the Executive Vice President and Chief Financial Officer of IES until February 1996. IES is also a significant stockholder of the Company. See "Principal and Selling Stockholders." In February 1996, the Company entered into two agreements with MidAmerican, which incorporate prior agreements entered into between the parties or their subsidiaries, pursuant to which MidAmerican has agreed to grant the Company access to certain of MidAmerican's towers, rights-of-way, conduits and poles in exchange for capacity on the Company's network. In April 1995, McLeod, Inc. acquired MWR from MidAmerican in return for 3,676,058 shares of Class B Common Stock issued to Midwest Capital Group Inc. MidAmerican purchased 3,529,414 shares of Class B Common Stock of the Company in June 1995 at an aggregate price of $8 million. Russell E. Christiansen, a director of the Company, is Chairman and Chairman of the Office of the Chief Executive Officer of MidAmerican. MidAmerican is also a significant stockholder of the Company. See "Principal and Selling Stockholders." In 1995, the Company paid 2060 Partnership, L.P. $377,640 for the rental of the Company's headquarters office and parking spaces in Cedar Rapids, Iowa. 2001 Development Corporation ("2001"), an Iowa corporation, is the general partner and 80% owner of 2060 Partnership, L.P. IES and the Company own 54.55% and 3.03%, respectively, of the outstanding stock of 2001. The Company purchased its stock in 2001 for $250,000 in July 1995. The directors and officers of 2001 included Lee Liu and Thomas M. Collins, directors of the Company, and Clark E. McLeod, a director and executive officer of the Company. In April 1993, the Company sold 2,500,002 shares of Class A Common Stock to Allsop for an aggregate price of $2 million. In February 1994, the Company sold 1,022,727 shares of Class A Common Stock to Allsop for an aggregate price of $1.5 million. In June 1995, the Company sold 171,188 shares of Class A Common Stock to Allsop for an aggregate price of $388,025. Mr. Paul D. Rhines, an affiliate of Allsop, is a director of the Company. In July 1991, January 1993, April 1993, February 1994 and June 1995, the Company sold 18,750, 2,462,334, 1,250,003, 511,365 and 64,163 shares, respectively, of Class A Common Stock to Clark E. McLeod for $5,000, $656,622, $1,000,002, $750,002 and $145,435, respectively. Mr. McLeod is a director and executive officer of the Company. In January 1993, April 1993, February 1994 and June 1995, the Company sold 2,481,080, 1,249,999, 511,362 and 64,159 shares, respectively, of Class A Common Stock to Mary E. McLeod for $661,621, $999,999, $749,997 and $145,427, respectively. Mary E. McLeod is Mr. McLeod's wife. In January 1993, the Company sold 34,459 shares of Class A Common Stock to Holly A. McLeod, Mr. and Mrs. McLeod's daughter, for $9,189. In January 1993 and in April 1993, the Company sold 153,548 and 18,750 shares, respectively, of Class A Common Stock to James L. Cram for $40,946 and $15,000, respectively. In December 1995, the Company sold 11,250 shares of Class A Common Stock to James L. Cram, upon exercise 66 70 of stock options, for $3,000. Mr. Cram is a director and executive officer of the Company. In January 1993 and in April 1993, the Company sold 153,548 and 18,750 shares, respectively, of Class A Common Stock to Virginia A. Cram for $40,946 and $15,000, respectively. Virginia A. Cram is Mr. Cram's wife. In January 1993, Mr. Cram's children purchased an aggregate of 37,500 shares of Class A Common Stock for $10,000. In January 1993, April 1993 and in February 1994, the Company sold 86,149, 18,750 and 15,000 shares, respectively, of Class A Common Stock to Stephen C. Gray and Sally W. Gray as tenants in common, for $22,973, $15,000 and $22,000, respectively. In April 1993, the Company sold 3,750 shares of Class A Common Stock to the Stephen Samuel Gray Irrevocable Trust for $3,000. In January 1995, the Company sold 22,500 shares of Class A Common Stock to Mernat & Co. f/b/o Stephen C. Gray for $39,000. In June 1995, the Company sold 26,352 shares of Class A Common Stock to Stephen C. Gray for $59,730, and 3,750 shares of Class A Common Stock to Mernat & Co. f/b/o Stephen C. Gray IRA for $8,500. In June 1995, the Company also sold 88,238 shares of Class A Common Stock to a profit sharing trust, the beneficiary of which is Fred L. Wham, III, for $200,005. Mr. Gray serves as a director and executive officer of the Company. Sally W. Gray, Stephen Samuel Gray and Mr. Wham are Mr. Gray's wife, son and father-in-law, respectively. In January 1993, the Company sold 17,232 shares of Class A Common Stock to Kirk E. Kaalberg for $4,595. In February 1996, the Company sold 23,438 shares of Class A Common Stock to Blake O. Fisher, upon exercise of stock options, for $23,125. In February 1994, the Company sold 34,092 and 34,092 shares, respectively, of Class A Common Stock to Casey D. Mahon and to Dain Bosworth & Company as custodian for Ms. Mahon's IRA for $50,001 and $50,001, respectively. Messrs. Kaalberg and Fisher and Ms. Mahon are executive officers of the Company. In April 1993, the Company sold 45,000 shares of Class A Common Stock for $36,000 to each of two trusts (an aggregate of 90,000 shares for $72,000), beneficiaries of which are Thomas M. Collins and Joanne H. Collins, respectively. In February 1994, the Company sold 102,274 shares of Class A Common Stock to a trust, the beneficiary of which is Thomas M. Collins, for $150,002. Mr. Collins is a director of the Company and Joanne Collins is Mr. Collins' wife. Except for the stock issued in connection with the Company's April 1995 acquisition of MWR and the July 1996 acquisition of Ruffalo, Cody, all of the stock issuances described above were for cash consideration. In March 1996, the Board adopted a policy requiring that any material transactions between the Company and persons or entities affiliated with officers, directors or principal stockholders of the Company be on terms no less favorable to the Company than reasonably could have been obtained in arms' length transactions with independent third parties or be approved by a majority of disinterested directors. 67 71 EXECUTIVE COMPENSATION The following table sets forth certain information concerning the cash and non-cash compensation during fiscal year 1995 earned by or awarded to the Chief Executive Officer and to the four other most highly compensated executive officers of the Company whose combined salary and bonus exceeded $100,000 during the fiscal year ended December 31, 1995 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SECURITIES -------------------- UNDERLYING ALL OTHER SALARY BONUS OPTIONS COMPENSATION(1) -------- ------- ------------ --------------- Clark E. McLeod...................... $142,803 $74,902 75,000 1,500 Chairman and Chief Executive Officer Stephen C. Gray...................... 142,807 74,902 131,250 1,500 President and Chief Operating Officer Kirk E. Kaalberg..................... 101,528 56,177 75,000 1,463 Executive Vice President, Network Services James L. Cram........................ 102,884 56,177 84,375 1,500 Chief Accounting Officer Stephen K. Brandenburg............... 106,692 33,842 187,500 -- Chief Information Officer
- --------------- (1) All other compensation represents matching contributions made by the Company to the McLeod, Inc. 401(k) plan on behalf of the Named Executive Officers. OPTION GRANTS The following table sets forth information with respect to grants of stock options to each of the Named Executive Officers during the year ended December 31, 1995. OPTION GRANTS DURING 1995
INDIVIDUAL GRANTS(1) POTENTIAL REALIZED -------------------------------------------------------------------------- VALUE AT PERCENT OF ASSUMED ANNUAL NUMBER OF TOTAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION UNDERLYING GRANTED TO FOR OPTION TERM(2) OPTIONS EMPLOYEES IN EXERCISE ------------------- NAME GRANTED FISCAL YEAR PRICE GRANT DATE EXPIRATION DATE 5% 10% - ------------------------------- ---------- ------------ -------- ---------------- ---------------- -------- -------- Clark E. McLeod................ 18,750(4) 1.0% $ 1.91 January 26, 1995 January 26, 2000 $ 9,877 $ 21,826 56,250(5) 3.1% 2.49 July 27, 1995 July 27, 2000 38,748 85,624 Stephen C. Gray................ 75,000(4) 4.1% 1.73 January 26, 1995 January 26, 2002 52,931 123,344 56,250(5) 3.1% 2.27 July 27, 1995 July 27, 2005 80,184 203,202 Kirk E. Kaalberg............... 18,750(4) 1.0% 1.73 January 26, 1995 January 26, 2002 13,239 30,844 56,250(5) 3.1% 2.27 July 27, 1995 July 27, 2005 80,184 203,202 James L. Cram.................. 28,125(4) 1.5% 1.73 January 26, 1995 January 26, 2002 19,854 46,260 56,250(3) 3.1% 2.27 July 27, 1995 July 27, 2002 51,916 120,975 Stephen K. Brandenburg......... 131,250(4) 7.2% 2.27 June 29, 1995 June 29, 2002 121,123 282,257 56,250(5) 3.1% 2.27 July 27, 1995 July 27, 2005 80,184 203,202
- --------------- (1) All options are exercisable for shares of Class A Common Stock. Options granted pursuant to the 1992 and 1993 Incentive Stock Option Plans will become exercisable as follows: (i) 25% of the options will become exercisable on the first anniversary of the date of grant, (ii) an additional 25% will become exercisable on the second anniversary of the date of grant, (iii) an additional 25% will 68 72 become exercisable on the third anniversary of the date of grant, and (iv) the remaining 25% will become exercisable on the fourth anniversary of the date of grant. Options granted pursuant to the 1995 Incentive Stock Option Plan will become exercisable at a rate of 25% per year, on a cumulative basis, beginning five years from the date of grant, except for options issued to Clark E. McLeod, the Company's Chairman and Chief Executive Officer. Options issued to Mr. McLeod under the 1995 Incentive Stock Option Plan vest at a rate of 20% per year, on a cumulative basis. (2) Based on exercise price. (3) Granted pursuant to the 1992 Incentive Stock Option Plan. (4) Granted pursuant to the 1993 Incentive Stock Option Plan. (5) Granted pursuant to the 1995 Incentive Stock Option Plan. OPTION EXERCISES AND FISCAL YEAR-END VALUES The following table sets forth the information with respect to the Named Executive Officers concerning the exercise of options during fiscal year 1995 and unexercised options held as of December 31, 1995. OPTION EXERCISES DURING 1995
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------ ----------- ----------- ----------- ------------- ----------- ------------- Clark E. McLeod............... 0 $ 0 219,224 208,074 $ 467,492 $ 287,029 Stephen C. Gray............... 0 0 390,000 333,750 878,000 520,500 Kirk E. Kaalberg.............. 0 0 145,313 192,187 302,501 252,499 James L. Cram................. 11,250 27,000 207,974 228,699 451,138 347,128 Stephen K. Brandenburg........ 0 0 0 187,500 0 75,000
- --------------- (1) Represents the difference between the exercise price and a fair market value of $2.67 as determined by the Board. MANAGEMENT AGREEMENTS Employment, Confidentiality and Non-Competition Agreements. The Company has entered into employment, confidentiality and non-competition agreements with 55 members of senior management, including the Named Executive Officers, pursuant to which the senior managers have agreed that during the term of employment and for a two-year period following a termination for cause, resignation or voluntary termination of employment (other than on account of the Company's discontinuance of activities), the executive employee will not compete with the Company. The two-year period is reduced to a one-year period for senior management employees who are not executive employees. The agreements also provide that employees subject to the agreements may not disclose any Company confidential information while employed by the Company or thereafter. The agreements have an indefinite term but may be terminated on 30 days' written notice by either party, provided, however, that the confidentiality and non-competition obligations will survive any such termination. As partial consideration for the execution of the employment, confidentiality and non-competition agreements, the Company has granted to the employees signing such agreements options to purchase an aggregate of 942,500 shares of Class A Common Stock at exercise prices ranging from $20.00 to $33.875 per share. Such options were granted pursuant to the Company's 1996 Employee Stock Option Plan, with vesting generally to occur with respect to one-third of the shares subject to such options in the last month of the fourth year following the date of grant, and with an additional one-third of the shares subject to such options vesting in each of the two subsequent seven-month periods. As an owner of more than 10% of the outstanding Common Stock of the Company, Clark E. McLeod is ineligible, pursuant to Sections 422(b)(6) and 424(d) of the Internal Revenue Code of 1986, as amended (the "Code"), to receive options intended to qualify as incentive stock options under the Code if such options vest after the expiration of five years from the date of grant. Accordingly, options granted to Clark E. McLeod pursuant to an 69 73 employment, confidentiality and non-competition agreement vest (i) with respect to options to purchase 13,636 shares of Class A Common Stock, one-third on each of the 42-month, 49-month and 56-month anniversaries of the date of grant (which options are intended to qualify as incentive stock options under the Code) and (ii) as to the remaining options (which are not intended to qualify as incentive stock options under the Code), one-third on each of the 54-month, 61-month and 68-month anniversaries of the date of grant. See "Management -- Stock Option Plans -- 1996 Employee Stock Option Plan." Change-of-Control Agreements. The Company has entered into change-of-control agreements with certain executive employees, including the Named Executive Officers, which provide for certain payments and benefits in connection with certain terminations of employment after a change of control of the Company. The change of control agreements terminate on December 31, 2006 unless a change of control has occurred during the six months preceding December 31, 2006 in which case the agreements terminate on December 31, 2007. If an executive who is a party to a change of control agreement terminates employment within six months after a "change of control" or, if within 24 months after a "change of control," the executive's employment is terminated by the Company (other than for "disability," "cause," death or "retirement") or by the executive following a "material reduction" in responsibilities or compensation (as such terms are defined in the agreements), (i) the executive will be entitled to a lump sum payment equal to 24 times the executive's "average monthly compensation" (as defined) during the 12 months immediately preceding the change of control or the date of termination, whichever is higher, (ii) all of the executive's outstanding options to purchase stock of the Company will become immediately exercisable in full and (iii) if the executive elects to continue coverage under the Company's group health plan pursuant to Section 4980B of the Code, the Company will continue to pay the employer portion of the premiums for such coverage for the longer of 24 months or the period of coverage provided pursuant to Section 4980B. An executive who is entitled to payment(s) pursuant to a change of control agreement is subject to a non-compete provision generally restricting the executive from competing with the Company for a two-year period after the termination of employment. STOCK OPTION PLANS 1992 Incentive Stock Option Plan. Under the Company's 1992 Incentive Stock Option Plan (the "1992 Plan"), the Company was authorized to grant options to purchase up to 1,275,000 shares of Class A Common Stock to selected management and other key employees of the Company. These options are intended to qualify as incentive stock options under Section 422 of the Code. The Board selects optionees and determines the number of shares covered by each option and the terms of the option agreement to be executed by the Company and each optionee. As of September 30, 1996, options to purchase 1,271,021 shares of Class A Common Stock had been granted under the 1992 Plan and options to purchase 17,615 shares of Class A Common Stock had been exercised. The option agreements under the 1992 Plan typically include provisions by which (i) options granted under the 1992 Plan may be exercised with respect to 25 percent of the shares subject to such option one year after the option is granted and with respect to an additional 25 percent of the shares subject to such option in each of the three subsequent years and (ii) options expire seven years after the date of grant. The 1992 Plan provides that optionees may not dispose of shares of Class A Common Stock acquired pursuant to the exercise of an option unless they have first complied with certain transfer restrictions. The exercise price of the options granted under the 1992 Plan is equal to the fair market value of the Class A Common Stock as determined by the Board as of the date of grant. Shares of Class A Common Stock issued under the 1992 Plan have been registered under the Securities Act on Form S-8. The Board terminated the 1992 Plan in March 1996 in connection with the adoption of the Company's 1996 Employee Stock Option Plan (as amended, the "1996 Plan"). 1993 Incentive Stock Option Plan. Under the Company's 1993 Incentive Stock Option Plan (the "1993 Plan"), the Company was authorized to grant options to purchase up to 4,513,767 shares of Class A Common Stock to selected management and key employees of the Company. These 70 74 options are intended to qualify as incentive stock options under Section 422 of the Code. The Board selects the optionees and determines the number of shares of Class A Common Stock covered by each option and the terms of the option agreement to be executed by the Company and each optionee. As of September 30, 1996, options to purchase 4,224,787 shares of Class A Common Stock had been granted under the 1993 Plan and options to purchase 151,748 shares of Class A Common Stock had been exercised. The option agreements under the 1993 Plan typically include provisions by which (i) options granted under the 1993 Plan may be exercised with respect to 25 percent of the shares subject to such option one year after the option is granted and with respect to an additional 25 percent of the shares subject to such option in each of the three subsequent years and (ii) options expire seven years after the date of grant. The 1993 Plan provides that optionees may not sell shares of Class A Common Stock acquired pursuant to the exercise of an option unless they have first offered such shares of Class A Common Stock to the Company and all of the other stockholders. The exercise price of options granted under the 1993 Plan is equal to the fair market value of a share of Class A Common Stock as determined by the Board on the date of grant. Shares of Class A Common Stock issued under the 1993 Plan have been registered under the Securities Act on Form S-8. The Board terminated the 1993 Plan in March 1996 in connection with the adoption of the 1996 Plan. 1995 Incentive Stock Option Plan. Under the Company's 1995 Incentive Stock Option Plan (the "1995 Plan"), the Company was authorized to grant options to purchase up to 337,500 shares of Class A Common Stock to selected management and key employees of the Company. These options are intended to qualify as incentive stock options under Section 422 of the Code. The Board selects the optionees and determines the number of shares of Class A Common Stock covered by each option and the terms of the option agreement to be executed by the Company and each optionee. As of September 30, 1996, options to purchase 337,500 shares of Class A Common Stock had been granted under the 1995 Plan and no options had been exercised. The option agreements under the 1995 Plan typically include provisions by which (i) options granted under the 1995 Plan may be exercised with respect to 25 percent of the shares subject to such option five years after the option is granted and with respect to an additional 25 percent of the shares subject to such option in each of the three subsequent years and (ii) options expire ten years after the date of grant. Options issued to Clark E. McLeod, Chairman and Chief Executive Officer of the Company, under the 1995 Plan vest at a rate of 20% per year on a cumulative basis and expire five years after the date of grant. The 1995 Plan provides that optionees may not sell shares of Class A Common Stock acquired pursuant to the exercise of an option unless they have first offered such shares of Class A Common Stock to the Company and all of the other stockholders. The exercise price of options granted under the 1995 Plan is equal to the fair market value of a share of Class A Common Stock as determined by the Board on the date of grant. Shares of Class A Common Stock issued under the 1995 Plan have been registered under the Securities Act on Form S-8. The Board terminated the 1995 Plan in March 1996 in connection with the adoption of the 1996 Plan. 1996 Employee Stock Option Plan. Under the 1996 Plan, which supersedes the 1992 Plan, the 1993 Plan and the 1995 Plan, the Company may grant options to purchase up to 4,525,000 shares of Class A Common Stock to employees of the Company or any of its subsidiaries, or other individuals whose participation in the 1996 Plan is determined to be in the best interests of the Company by the Compensation Committee. In the event there is any increase or decrease in the number of shares of Class A Common Stock without receipt of consideration by the Company (for instance, by a recapitalization or stock split) after the effective date of the 1996 Plan, an appropriate and proportionate adjustment will be made in the number and kinds of shares subject to the 1996 Plan, and in the number, kinds, and per-share exercise price of shares subject to the unexercised portion of options granted prior to any such change. The 1996 Plan provides for the grant of options that are intended to qualify as "incentive stock options" under Section 422 of the Code to employees of the Company as well as the grant of non-qualifying options to officers, directors or key employees of the Company, or other individuals whose participation in the 1996 Plan is determined to be in the best interests of the Company by the Compensation Committee. The Compensation Committee administers the 1996 Plan, selects the optionees and determines the number of shares of Class A Common Stock covered by each option and the terms of the option agreement to be executed by the 71 75 Company and each optionee. As of September 30, 1996, options to purchase 1,687,489 shares of Class A Common Stock had been granted under the 1996 Plan, including options to purchase an aggregate of 942,500 shares of Class A Common Stock, at exercise prices ranging from $20.00 to $33.875 per share, granted to certain senior management employees of the Company as partial consideration for the execution of employment, confidentiality and non-competition agreements, and 700 options had been exercised. See "Management -- Management Agreements." In addition, on July 15, 1996, in connection with the Company's acquisition of Ruffalo, Cody, the Company granted options to purchase an aggregate of 158,009 shares of Class A Common Stock under the 1996 Plan to the holders of options to purchase shares of Ruffalo, Cody common stock at exercise prices ranging from $1.43 to $9.30, depending on the exercise price of the options to purchase Ruffalo, Cody common stock in exchange for which such options were granted. Although 4,525,000 shares of Class A Common Stock are reserved for issuance upon exercise of options granted pursuant to the 1996 Plan, the Board intends to limit at all times the aggregate number of shares subject to outstanding stock options under all stock option plans of the Company to no more than 15% of the then-issued and outstanding shares of the authorized Class A Common Stock and the then-granted and outstanding options. The option exercise price for incentive stock options granted under the 1996 Plan may not be less than 100% of the fair market value of the Class A Common Stock on the date of grant of the option (or 110% in the case of an incentive stock option granted to an optionee beneficially owning more than 10% of the outstanding Class A Common Stock). The option exercise price for non-incentive stock options granted under the 1996 Plan may not be less than 50% of the fair market value of the Class A Common Stock on the date of grant of the option. The maximum option term is ten years (or five years in the case of an incentive stock option granted to an optionee beneficially owning more than 10% of the outstanding Class A Common Stock). Options may be exercised at any time after grant, except as otherwise determined by the Compensation Committee and provided in the particular option agreement. Options covering no more than 2,000,000 shares of Class A Common Stock may be granted to any officer or other employee during the term of the 1996 Plan. There is also a $100,000 limit on the value of stock (determined at the time of grant) covered by incentive stock options that first become exercisable by an optionee in any calendar year. Options are non-transferable. Shares of Class A Common Stock issued or issuable under the 1996 Plan have been registered under the Securities Act on Form S-8. The Board at any time may terminate or suspend the 1996 Plan. Unless previously terminated, the 1996 Plan will terminate automatically on March 28, 2006. No termination, suspension or amendment of the 1996 Plan may, without the consent of the optionee to whom an option has been granted, adversely affect the rights of the holder of the option. Directors Stock Option Plan. The Company's Directors Stock Option Plan (the "Directors Plan") was adopted by the Board and approved by the stockholders in 1993. On March 28, 1996, the Directors Plan was amended and restated to be a "formula" plan providing for an automatic grant of stock options to eligible non-employee directors. Under the Directors Plan, as amended, the number of shares reserved for purchase pursuant to options was increased to an aggregate of 550,000 shares of Class A Common Stock (subject to adjustment for certain events, such as recapitalizations or stock splits, effected without consideration) for grants to directors of the Company who are not officers or employees of the Company (each an "Eligible Director"). Options for 332,813 shares of Class A Common Stock had been granted under the Directors Plan and options to purchase 23,438 shares of Class A Common Stock had been exercised as of September 30, 1996. The option agreements under the Directors Plan prior to its amendment and restatement in 1996 typically included provisions by which (i) options granted under the Directors Plan may be exercised with respect to 25 percent of the shares subject to such option one year after the option is granted and with respect to an additional 25 percent of the shares subject to such option in each of the three subsequent years, (ii) all options expire seven years after the date of grant, (iii) optionees may not dispose of shares of Class A Common Stock acquired pursuant to the exercise of an option unless the Company has filed an effective Registration Statement under the Securities Act covering the stock or the director has furnished an opinion of counsel satisfactory to the Company or a Securities and Exchange Commission "no action" letter stating that no such registration is required and (iv) in the event of an attempt to transfer shares of Class A Common 72 76 Stock issued pursuant to the exercise of an option, except a transfer to a Company employee or director approved by the Board, the Company has the right to repurchase the Class A Common Stock for a price which is the greater of the book value of the Class A Common Stock or the then fair market value of the Common Stock, as determined by the Board. Under the Directors Plan, as amended, each Eligible Director who commences service as a director after the 1996 amendment and restatement of the Directors Plan is granted an initial option to purchase 10,000 shares of Class A Common Stock. Each such Eligible Director is also granted an additional option to purchase 5,000 shares of Class A Common Stock immediately after each of the next two annual meetings of the Company's stockholders if the Eligible Director continues to be an Eligible Director. Options granted under the Directors Plan, as amended, may be exercised with respect to 25 percent of the shares subject to such option one year after the option is granted and with respect to an additional 25 percent of the shares subject to such option in each of the three subsequent years; provided, however, that all unvested options become fully exercisable upon a change in control of the Company (as defined in the Directors Plan). Shares of Class A Common Stock issued or issuable under the Directors Plan, as amended, have been registered under the Securities Act on Form S-8. All options expire ten years after the date of grant. The Directors Plan will terminate automatically on March 28, 2006, unless terminated at an earlier date by the Board. THE EMPLOYEE STOCK PURCHASE PLAN Under the Company's Employee Stock Purchase Plan (the "Employee Purchase Plan"), 1,000,000 shares of Class A Common Stock are available for purchase by eligible employees of the Company. The Employee Purchase Plan permits eligible employees to elect to have a portion of their pay deducted to purchase shares of Class A Common Stock of the Company. In the event there is any increase or decrease in the number of shares of Class A Common Stock without receipt of consideration by the Company (for instance, by a recapitalization or stock split), there may be a proportionate adjustment to the number and kinds of shares that may be purchased under the Employee Purchase Plan. Generally, payroll deductions will be accumulated during the period to be specified by the Compensation Committee (the "Payroll Deduction Period"). The Company has not yet implemented the Employee Purchase Plan. All employees of the Company are eligible to participate in the Employee Purchase Plan, except the following: (a) an employee who has been employed by the Company for less than six months as of the beginning of a Payroll Deduction Period; (b) an employee whose customary employment is for less than five months in any calendar year; (c) an employee whose customary employment is 20 hours or less per week; and (d) an employee who, after exercising his or her rights to purchase stock under the Employee Purchase Plan, would own stock (including stock that may be acquired under any outstanding options) representing five percent or more of the total combined voting power of all classes of stock of the Company. An employee must be employed on the last day of the Payroll Deduction Period in order to acquire stock under the Employee Purchase Plan unless the employee has retired, died or become disabled, or was involuntarily terminated other than for cause. Rights to purchase shares of Class A Common Stock will be deemed granted to participating employees as of the first trading day of each Payroll Deduction Period. The purchase price for each share will be established by the Compensation Committee, but will not be less than 85% of the fair market value of the Class A Common Stock on the first or last trading day of such Payroll Deduction Period, whichever is lower. No employee may purchase Class A Common Stock in any calendar year under the Employee Purchase Plan and all other "employee stock purchase plans" of the Company having an aggregate fair market value in excess of $25,000, determined as of the first trading date of the Payroll Deduction Period. No participating employee may assign his or her rights to purchase shares of Class A Common Stock under the Employee Purchase Plan, whether voluntarily, by operation of law or otherwise. Shares of Class A Common Stock issuable under the Employee Purchase Plan have been registered under the Securities Act on Form S-8. 73 77 The Board in its sole discretion may terminate the Employee Purchase Plan at any time, provided, however, that such termination shall not impair any rights of participants that have vested at the time of termination. In any event, the Employee Purchase Plan shall, without further action of the Board, terminate at the earlier of (i) March 28, 2006 and (ii) such time as all shares of Class A Common Stock that may be made available for purchase under the Employee Purchase Plan have been issued. INCENTIVE COMPENSATION PLAN On September 20, 1996, in connection with the Company's acquisition of Telecom*USA Publishing, the Company adopted the McLeod, Inc. Incentive Plan (the "Incentive Plan"). The 155 employees of Telecom*USA Publishing who held non-vested options (the "Telecom Non-Vested Options") to purchase shares of Telecom*USA Publishing common stock under its incentive stock option plan on September 20, 1996 (the "Telecom Participants") were eligible to participate in the Incentive Plan. Under the Incentive Plan, Telecom Participants received a unit of participation (a "Unit") for each Telecom Non-Vested Option. On September 20, 1996, an aggregate of 210,825 Units were granted to the Telecom Participants under the Incentive Plan and each Unit had a value of $12.75 less the option exercise price of the corresponding Telecom Non-Vested Option. Units accrue earnings at an annual rate no less than 6% and can, in certain circumstances, accrue earnings up to 31% annually depending on Telecom*USA Publishing's operating income. Units vest on January 1 of the year following the year in which the corresponding Telecom Non-Vested Option would have vested. Distributions with respect to each vested Unit and the earnings accrued thereon are made as soon as practicable following the January 1 vesting date. The Incentive Plan is administered by the Board, which may terminate or amend the Incentive Plan at any time. No additional Units will be granted under the Incentive Plan. CERTAIN TRANSACTIONS On July 18, 1995 and March 29, 1996, respectively, the Company loaned $75,000 to each of Kirk E. Kaalberg and Stephen K. Brandenburg in exchange for unsecured notes executed by Mr. Kaalberg and Mr. Brandenburg, respectively. Interest accrues on both loan amounts at the applicable rate as determined in accordance with Internal Revenue Service regulations. Pursuant to the terms of the notes executed by Mr. Kaalberg and Mr. Brandenburg, respectively, annual interest-only payments will be made through 1997 and 1998, respectively. They will then make annual payments of $25,000 plus accrued interest in each of the respective three years thereafter. Messrs. Kaalberg and Brandenburg are executive officers of the Company. For a description of certain other transactions, see "Business -- Legal Proceedings" and "Management -- Compensation Committee Interlocks and Insider Participation." 74 78 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's outstanding capital stock as of September 30, 1996 by (i) each stockholder who is known by the Company to beneficially own 5% or more of any class of the Company's capital stock, (ii) each director of the Company, (iii) each Named Executive Officer, (iv) each Selling Stockholder and (v) all directors and executive officers of the Company as a group.
BENEFICIAL OWNERSHIP PRIOR TO BENEFICIAL OWNERSHIP OFFERING(1)(2) AFTER OFFERING(1) -------------------- NUMBER OF -------------------- NUMBER OF SHARES NUMBER OF NAME OF BENEFICIAL OWNER SHARES PERCENT OFFERED SHARES PERCENT - ------------------------------------------- ---------- ------- --------- ---------- ------- IES Investments Inc.(3).................... 10,221,145 25.2% -- 10,221,145 22.1% Clark E. McLeod(4)......................... 9,285,942 29.8 -- 9,285,942 25.3 MWR Investments Inc.(5).................... 8,205,472 21.6 -- 8,205,472 18.8 Mary E. McLeod(6).......................... 4,451,459 14.4 -- 4,451,459 12.2 Allsop Venture Partners III, L.P.(7)....... 3,888,393 12.6 -- 3,888,393 10.7 Putnam Investments, Inc.(8)................ 3,281,270 10.6 -- 3,281,270 9.0 Russell E. Christiansen(9)................. 9,375 * -- 9,375 * Thomas M. Collins(10)...................... 227,431 * -- 227,431 * Paul D. Rhines(11)......................... 3,923,550 12.7 -- 3,923,550 10.8 Lee Liu(12)................................ 35,157 * -- 35,157 * James L. Cram(13).......................... 609,240 2.0 120,000 489,240 1.3 Stephen C. Gray(14)........................ 747,190 2.4 150,000 597,190 1.6 Kirk E. Kaalberg(15)....................... 246,921 * 65,000 181,921 * Stephen K. Brandenburg(16)................. 46,876 * 40,000 6,876 * Casey D. Mahon(17)......................... 225,217 * 60,000 165,217 * Albert P. Ruffalo(18)...................... 105,976 * 20,000 85,976 * Michael J. Brown(19)....................... 106,989 * 50,000 56,989 * Laura L. Dement(20)........................ 56,240 * 12,000 44,240 * Joseph P. Cunningham(21)................... 56,052 * 12,000 44,052 * Directors and executive officers as a group (15 persons)(22)......................... 15,496,313 47.5% 455,000 15,041,313 39.3%
- --------------- * Less than one percent. (1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), a person is deemed to be a "beneficial owner" of a security if he or she has or shares the power to vote or direct the voting of such security or the power to dispose or direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership within 60 days. More than one person may be deemed to be a beneficial owner of the same securities. (2) This table is based upon information supplied by directors, executive officers, selling stockholders and principal stockholders. Unless otherwise indicted in the footnotes to this table, each of the stockholders named in this table has sole voting and investment power with respect to the shares shown as beneficially owned. (3) Includes 500,000 shares of Class A Common Stock and 8,420,457 shares of Class B Common Stock. IES Investments Inc. is a wholly owned indirect subsidiary of IES. The address of IES is 200 1st St., SE, Cedar Rapids, IA 52401. Includes 1,300,688 shares of Class B Common Stock that IES has the right to purchase pursuant to options. IES has entered into a definitive agreement of merger with WPL Holdings, Inc., the parent of Wisconsin Power Light Company, and with Interstate Power Company, which merger is subject to certain regulatory and other approvals. (4) Includes 4,508,418 shares of Common Stock held of record by members of Clark E. McLeod's family, including Mary E. McLeod, Mr. McLeod's wife. Mr. McLeod's address is c/o McLeod, Inc., Suite 500, Town Centre, 221 3rd Ave., SE, Cedar Rapids, IA 52401. Includes 326,050 shares of Class A Common Stock that Mr. McLeod has the right to purchase within 60 days from September 30, 1996 pursuant to options. (Footnotes continued on following page) 75 79 (5) Includes 1,000,000 shares of Class A Common Stock and 7,205,472 shares of Class B Common Stock. MWR Investments Inc. is a wholly owned indirect subsidiary of MidAmerican. The address of MWR Investments, Inc. is c/o MidAmerican Energy Company, 500 E. Court Ave., Des Moines, IA 50309. (6) Mrs. McLeod's address is c/o McLeod, Inc., Suite 500, Town Centre, 221 3rd Ave., SE, Cedar Rapids, IA 52401. (7) The address of Allsop is 2750 1st Ave., NE, Cedar Rapids, IA 52402. (8) Includes 3,214,270 and 67,000 shares of Class A Common Stock held as of August 6, 1996 by Putnam Investment Management, Inc. and The Putnam Advisory Group, Inc., respectively, as disclosed on a Schedule 13G filed by Putnam Investments, Inc. with the Securities and Exchange Commission (the "Commission"). The address of Putnam Management, Inc. and The Putnam Advisory Group, Inc. is c/o Putnam Investments, Inc., One Post Office Square, Boston, MA 02109. (9) Includes 9,375 shares of Class A Common Stock that Mr. Christiansen has the right to purchase within 60 days from September 30, 1996 pursuant to options. (10) Includes 35,157 shares of Class A Common Stock that Mr. Collins has the right to purchase within 60 days from September 30, 1996 pursuant to options. (11) Mr. Rhines' address is c/o Allsop Venture Partners III, L.P., 2750 1st Ave., NE, Cedar Rapids, IA 52402. Includes 3,888,393 shares of Class A Common Stock held of record by Allsop. Includes 35,157 shares of Class A Common Stock that Mr. Rhines has the right to purchase within 60 days from September 30, 1996 pursuant to options. (12) Includes 35,157 shares of Class A Common Stock that Mr. Liu has the right to purchase within 60 days from September 30, 1996 pursuant to options. (13) Includes 140,423 shares of Class A Common Stock held of record by members of James L. Cram's family. Includes 317,144 shares of Class A Common Stock that Mr. Cram has the right to purchase within 60 days from September 30, 1996 pursuant to options. (14) Includes 119,899 shares of Class A Common Stock held as tenants in common with Sally W. Gray, Mr. Gray's wife. Also includes 3,750 shares of Class A Common Stock held of record by the Stephen Samuel Gray Irrevocable Trust, and 3,750 shares of Class A Common Stock held of record by the Elizabeth Mary Fletcher Gray Education Trust, of which Mr. Gray is the trustee. Includes 26,250 shares of Class A Common Stock held of record by Mernat & Co. for the benefit of Mr. Gray. Includes 570,939 shares of Class A Common Stock that Mr. Gray has the right to purchase within 60 days from September 30, 1996 pursuant to options. (15) Includes 229,689 shares of Class A Common Stock that Mr. Kaalberg has the right to purchase within 60 days from September 30, 1996 pursuant to options. (16) Includes 46,876 shares of Class A Common Stock that Mr. Brandenburg has the right to purchase within 60 days from September 30, 1996 pursuant to options. (17) Includes 157,033 shares of Class A Common Stock that Ms. Mahon has the right to purchase within 60 days from September 30, 1996 pursuant to options. (18) Includes 73,600 shares of Class A Common Stock and options to purchase 32,376 shares of Class A Common Stock issued in connection with the Company's acquisition of Ruffalo, Cody on July 15, 1996. (19) Includes 93,751 shares of Class A Common Stock that Mr. Brown has the right to purchase within 60 days from September 30, 1996 pursuant to options. Mr. Brown is a Senior Vice President of McLeod Telemanagement. (20) Includes 37,386 shares of Class A Common Stock and options to purchase 18,854 shares of Class A Common Stock issued in connection with the Company's acquisition of Ruffalo, Cody on July 15, 1996. Ms. Dement is a Vice President of Ruffalo, Cody. (21) Includes 40,301 shares of Class A Common Stock and options to purchase 15,751 shares of Class A Common Stock issued in connection with the Company's acquisition of Ruffalo, Cody on July 15, 1996. Mr. Cunningham is the Vice President and Chief Financial Officer of Ruffalo, Cody. (22) Includes 1,794,953 shares of Class A Common Stock that such persons have the right to purchase within 60 days from September 30, 1996 pursuant to options. 76 80 DESCRIPTION OF CAPITAL STOCK The following summary description of the capital stock of the Company does not purport to be complete and is subject to the provisions of the Company's Restated Certificate and Amended and Restated Bylaws (the "Bylaws"), which are included as exhibits to the Registration Statement of which this Prospectus forms a part and by the provisions of applicable law. AUTHORIZED AND OUTSTANDING CAPITAL STOCK Pursuant to the Restated Certificate, the Company has authority to issue 100,150,000 shares of capital stock, consisting of 75,000,000 shares of Class A Common Stock, par value $.01 per share, 22,000,000 shares of Class B Common Stock, par value $.01 per share, 2,000,000 shares of Preferred Stock, par value $.01 per share and 1,150,000 shares of Class A Preferred Stock, par value $5.50 per share (the "Class A Preferred Stock"). As of October 7, 1996, the Class A Common Stock was held by 366 holders of record and the Class B Common Stock was held by two holders of record. As of June 30, 1996, 30,210,519 shares of Class A Common Stock, 15,625,929 shares of Class B Common Stock, no shares of Preferred Stock, par value $.01 per share and no shares of Class A Preferred Stock were issued and outstanding. The rights of the holders of Common Stock discussed below are subject to the rights of the holders of Class A Preferred Stock and to such rights as the Board may hereafter confer on the holders of Preferred Stock; accordingly, rights conferred on holders of Preferred Stock that may be issued in the future under the Restated Certificate may adversely affect the rights of holders of Common Stock. CLASS A COMMON STOCK Voting Rights. Each holder of the Class A Common Stock shall be entitled to attend all special and annual meetings of the stockholders of the Company and, together with the holders of shares of Class B Common Stock and the holders of all other classes of stock entitled to attend and vote at such meetings, to vote upon any matter or thing (including, without limitation, the election of one or more directors) properly considered and acted upon by the stockholders. Holders of the Class A Common Stock are entitled to one vote per share. Liquidation Rights. In the event of any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of the Class A Common Stock, the holders of the Class B Common Stock and holders of any class or series of stock entitled to participate therewith, shall become entitled to participate in the distribution of any assets of the Company remaining after the Company shall have paid, or provided for payment of, all debts and liabilities of the Company and after the Company shall have paid, or set aside for payment, to the holders of any class of stock having preference over the 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 the Class A Common Stock, the Class B Common Stock and on any class or series of stock entitled to participate therewith when and as declared by the Board. CLASS B COMMON STOCK Voting Rights. Each holder of the Class B Common Stock shall be entitled to attend all special and annual meetings of stockholders of the Company and, together with the holders of shares of Class A Common Stock and the holders of all other classes of stock entitled to attend and vote at such meetings, to vote upon any matter or thing (including, without limitation, the election of one or more directors) properly considered and acted upon by the stockholders. Holders of the Class B Common Stock are entitled to .40 vote per share. 77 81 Liquidation Rights. In the event of any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of the Class B Common Stock, the holders of the Class A Common Stock, and the holders of any class or series of stock entitled to participate therewith, shall become entitled to participate in the distribution of any assets of the Company remaining after the Company shall have paid, or provided for payment of, all debts and liabilities of the Company and after the Company shall have paid, or set aside for payment, to the holders of any class of stock having preference over the 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 the Class B Common Stock, the Class A Common Stock and any class or series of stock entitled to participate therewith when and as declared by the Board. Conversion Into Class A Common Stock. The shares of Class B Common Stock may be converted at any time at the option of the holder into fully paid and nonassessable shares of Class A Common Stock at the rate of one share of Class A Common Stock for each share of Class B Common Stock (as adjusted for any stock split). CLASS A PREFERRED STOCK The Class A Preferred Stock was authorized in connection with the guarantee and support by a principal stockholder of the Company of certain portions of the Credit Facility, which was repaid in full and terminated subsequent to the Company's initial public offering of Class A Common Stock. No shares of Class A Preferred Stock have been issued. The Company currently anticipates eliminating from the Restated Certificate the Class A Preferred Stock at its next annual meeting of stockholders. Voting Rights. Except as otherwise required by law, the holders of shares of Class A Preferred Stock are not entitled to vote on matters that are voted on by stockholders generally, except that the holders of shares of Class A Preferred Stock shall be entitled to vote as a class, with each such holder entitled to cast one vote for each share of Class A Preferred Stock registered in the name of such holder, to elect two directors to the Board. Liquidation Rights. In the event of any dissolution, liquidation or winding up the Company, whether voluntary or involuntary, the holders of shares of Class A Preferred Stock are entitled to receive out of assets of the Company legally available for distribution to stockholders before any payment or distribution is made on the Common Stock cash in the amount of $5.50 per share plus any accumulated but unpaid dividends thereon (the "Class A Preferred Liquidation Distribution"). If the assets distributable upon such dissolution, liquidation or winding up are insufficient to pay cash in an amount equal to the Class A Preferred Liquidation Distribution to the holders of the shares of Class A Preferred Stock, then such assets or the proceeds thereof are distributed among the holders of the Class A Preferred Stock ratably in proportion to the respective amounts of the Class A Preferred Liquidation Distribution to which they would otherwise be entitled. Dividends. The Class A Preferred Stock ranks, as to dividends, senior and prior to the Common Stock and to all other classes or series of stock issued by the Company. Mandatory Redemption. The shares of Class A Preferred Stock will be redeemed by the Company, at $5.50 per share plus accumulated but unpaid dividends thereon, to the extent of the Company's cash available for such redemption pursuant to a formula, provided that if any dividends on the Class A Preferred Stock are in arrears, no such redemption will occur unless (i) the holders of two-thirds of the outstanding shares of Class A Preferred Stock consent thereto, or (ii) all outstanding shares of the Class A Preferred Stock are redeemed. OTHER AUTHORIZED PREFERRED STOCK The Restated Certificate authorizes the Board, 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 78 82 $.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 hereof, the Board has not provided for the issuance of any series of such Preferred Stock and there are no agreements or understandings for the issuance of any such Preferred Stock. Because of its broad discretion with respect to the creation and issuance of Preferred Stock without stockholder approval, the Board could adversely affect the voting power of the holders of Common Stock and, by issuing shares of Preferred Stock with certain voting, conversion and/or redemption rights, could discourage any attempt to obtain control of the Company. CERTAIN CHARTER AND STATUTORY PROVISIONS The Restated Certificate provides for the division of the Board into three classes of directors, serving staggered three-year terms. The Restated Certificate 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 the entire Board are necessary for the alteration, amendment or repeal of certain sections of the Restated Certificate relating to the election and classification of the Board, limitation of director liability, indemnification and the vote requirements for such amendments to the Restated Certificate. These provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of the Company. The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation 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 (i) prior to such date, the board approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder, (ii) 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 (iii) on or after the date the stockholder became an interested stockholder, the business combination is approved by the board of directors and authorized by the affirmative vote (and not by written consent) of at least two-thirds of the outstanding voting stock 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 who (other than the corporation and any direct or indirect majority-owned subsidiary of the corporation), together with affiliates and associates, owns (or, as an affiliate or associate, within three years prior, did own) 15% or more of the corporation's outstanding voting stock. Section 203 expressly exempts from the requirements described above any business combination by a corporation with an interested stockholder who became an interested stockholder at a time when the section did not apply to the corporation. As permitted by the Delaware General Corporation Law, the Company's original certificate of incorporation provided that it would not be governed by Section 203. Clark E. McLeod, Mary E. McLeod, IES and MidAmerican became interested stockholders within the meaning of Section 203 while that certificate of incorporation was in effect. Accordingly, future transactions between the Company and any of such stockholders will not be subject to the requirements of Section 203. The Restated Certificate empowers the Board to redeem any of the Company's outstanding capital stock, at a price determined by the Board, which price shall be at least equal to the lesser of (i) fair market value (as determined in accordance with the Restated Certificate) or (ii) 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" 79 83 is any holder of shares of stock of the Company whose holding of such stock may result in the loss of, or the failure to secure the reinstatement of, any license or franchise from any governmental agency held by the Company or any of its subsidiaries to conduct any portion of the business of the Company or any of its subsidiaries. Under the Telecommunications Act, non-U.S. citizens or their representatives, foreign governments or their representatives, or corporations organized under the laws of a foreign country may not own, in the aggregate, more than 20% of a common carrier licensee or more than 25% of the parent of a common carrier licensee if the FCC determines that the public interest would be served by prohibiting such ownership. Additionally, the FCC's rules may under certain conditions limit the size of investments by foreign telecommunications carriers in U.S. international carriers. See "Business -- Regulation." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Class A Common Stock is Norwest Bank Minnesota, N.A. SHARES ELIGIBLE FOR FUTURE SALE The Class A Common Stock has been traded on the Nasdaq National Market since June 10, 1996. Future sales of a substantial amount of Class A Common Stock in the public market, or the perception that such sales may occur, could adversely affect the market price of the Class A Common Stock prevailing from time to time in the public market and could impair the Company's ability to raise additional capital through the sale of its equity securities. Upon completion of the Offering, the Company will have approximately 52,065,319 shares of Common Stock outstanding, including 5,471,000 shares of Class A Common Stock offered hereby and 32,455,005 "restricted" shares of Common Stock. Of these restricted shares, 22,070,187 shares of Common Stock generally are currently eligible for sale under Rule 144 as currently in effect, and 10,384,818 shares of Common Stock generally will be eligible for sale under Rule 144 as currently in effect beginning in January 1997 through July 1998. The shares of Class A Common Stock offered hereby will be freely tradable without restriction or further registration under the Securities Act by persons other than "affiliates" of the Company within the meaning of Rule 144 promulgated under the Securities Act. The holders of restricted shares generally will be entitled to sell these shares in the public securities market without registration under the Securities Act to the extent permitted by Rule 144 (or Rule 145, as applicable) promulgated under the Securities Act or any exemption under the Securities Act. In general, under Rule 144 as currently in effect, if two years have elapsed since the later of the date of acquisition of restricted shares from the Company or any "affiliate" of the Company, as that term is defined under the Securities Act, the holder is entitled to sell within any three-month period a number of shares of Class A Common Stock that does not exceed the greater of 1% of the then-outstanding shares of Class A Common Stock or the average weekly trading volume of shares of Class A Common Stock on all exchanges and reported through the automated quotation system of a registered securities association during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain restrictions on the manner of sales, notice requirements and the availability of current public information about the Company. If three years have elapsed since the date of acquisition of restricted shares from the Company or from any "affiliate" of the Company, and the holder thereof is deemed not to have been an affiliate of the Company at any time during the 90 days preceding a sale, such person would be entitled to sell such Class A Common Stock in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. 80 84 The Company, its directors and officers, the Selling Stockholders and certain other stockholders have entered into "lock-up" agreements with the Underwriters, providing that, subject to certain exceptions, they will not, for a period from 120 days after the date of this Prospectus, without the prior written consent of Salomon Brothers Inc, offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce an offering of, any shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock. In connection with the Company's initial public offering of Class A Common Stock, Clark E. McLeod, Mary E. McLeod, IES and MidAmerican have each agreed with the Representatives that, subject to certain exceptions, they will not offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce an offering of, shares of Common Stock or any securities convertible into, or exchangeable for, any shares of Common Stock for a period of one year from June 10, 1996, without the prior written consent of the Representatives. See "Underwriting." In addition, certain directors, executive officers and stockholders have agreed that, for a period of two years commencing on the effective date of this Prospectus, they will not sell or otherwise dispose of any equity securities of the Company without the consent of the Board. See "Management -- Stockholders' Agreements." At September 30, 1996, the Company has reserved 11,738,945 shares of Class A Common Stock for issuance under the Company's employee stock purchase plan and upon exercise of options outstanding or to be granted pursuant to the Company's stock option plans. No shares have been issued under the Company's employee stock purchase plan and options to purchase 7,660,109 shares of Class A Common Stock are currently outstanding and unexercised under the Company's stock option plans. The Company has registered the shares of Class A Common Stock reserved for issuance under the Company's stock option plans and stock purchase plan. See "Management -- Stock Option Plans" and "Management -- The Employee Stock Purchase Plan." In addition, options to purchase 1,300,688 shares of Class B Common Stock, which were granted to IES in connection with its guarantee and support of certain portions of the Credit Facility, were outstanding and unexercised as of September 30, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 81 85 UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement among the Company, the Selling Stockholders and the Underwriters (the "Underwriting Agreement"), the Company and the Selling Stockholders have agreed to sell to each of the Underwriters named below (the "Underwriters"), for whom Salomon Brothers Inc, Bear, Stearns & Co. Inc. and Morgan Stanley & Co. Incorporated are acting as representatives (the "Representatives"), and each of the Underwriters has severally agreed to purchase from the Company and the Selling Stockholders the aggregate number of shares of Class A Common Stock set forth opposite its name below:
NUMBER OF UNDERWRITERS SHARES ------------------------------------------------------------------------ ---------- Salomon Brothers Inc ................................................... Bear, Stearns & Co. Inc. ............................................... Morgan Stanley & Co. Incorporated....................................... ---------- Total......................................................... ==========
In the Underwriting Agreement, the Underwriters have severally agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Class A Common Stock offered hereby (other than those subject to the over-allotment option described below) if any such shares are purchased. In the event of a default by any Underwriter, the Underwriting Agreement provides that, in certain circumstances, the purchase commitments of the non-defaulting Underwriters may be increased or the Underwriting Agreement may be terminated. The Company has been advised by the Representatives that the several Underwriters propose initially to offer the shares of Class A Common Stock to the public at the public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the public offering, the public offering price and such concessions may be changed. The Company has granted the Underwriters an option, exercisable within 30 days of the date of this Prospectus, to purchase up to 900,000 additional shares of Class A Common Stock to cover over-allotments, if any, at the price to the public set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, in whole or in part, each Underwriter will have a firm commitment, subject to certain conditions, to purchase the same proportion of the option shares as the number of shares of Class A Common Stock to be purchased by such Underwriter in the above table bears to the total number of shares of Class A Common Stock offered by the Underwriters hereby. 82 86 The Underwriting Agreement provides that the Company and the Selling Stockholders will indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments the Underwriters may be required to make in respect thereof. The Company, its directors and officers, the Selling Stockholders and certain other stockholders have each agreed with the Underwriters that they will not offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce an offering of, any shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock for a period of 120 days from the date of this Prospectus, without the prior written consent of Salomon Brothers Inc, and Clark E. McLeod, Mary E. McLeod, IES and MidAmerican have each agreed with the underwriters, in connection with the Company's initial public offering of the Class A Common Stock, that they will not offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce an offering of, shares of Common Stock or any securities convertible into, or exchangeable for, any shares of Common Stock for a period of one year from June 10, 1996, without the prior written consent of the Representatives, except (a) in the case of the Company, (i) grants of options and issuances and sales of Common Stock issued pursuant to any employee or director stock option plan, stock ownership plan or stock purchase plan in effect on the date the Underwriting Agreement is executed or (ii) issuances of Common Stock upon the conversion of securities or the exercise of warrants outstanding on the date the Underwriting Agreement is executed; and (b) in the case of directors, officers and stockholders of the Company, shares of Common Stock disposed of as bona fide gifts or pledges where the recipients of such gifts or the pledgees, as the case may be, agree in writing with the Underwriters to be bound by the terms of such agreement. In addition, the Investor Agreement provides that, for a two-year period commencing on June 10, 1996, none of Clark E. McLeod, Mary E. McLeod, IES or MidAmerican will sell or otherwise dispose of any equity securities of the Company without the consent of the Board. See "Management -- Stockholders' Agreements." In connection with the offering, certain Underwriters may engage in passive market making transactions in the Class A Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act, during the two business day period before commencement of offers or sales of the Class A Common Stock offered hereby. Passive market making transactions must comply with certain volume and price limitations and be identified as such. In general, a passive market maker may display its bid at a price not in excess of the highest independent bid for the security, and if all independent bids are lowered below the passive market maker's bid, then such bid must be lowered when certain purchase limits are exceeded. VALIDITY OF SECURITIES The validity of the Class A Common Stock and certain other legal matters in connection with the Class A Common Stock offered hereby are being passed upon for the Company by Hogan & Hartson L.L.P., Washington, D.C., special counsel for the Company. The validity of the Class A Common Stock is being passed upon for the Underwriters by Mayer, Brown & Platt, Chicago, Illinois. EXPERTS The consolidated balance sheets of the Company as of December 31, 1994 and 1995, and the consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995 and financial statement schedule included herein and elsewhere in the Registration Statement have been audited by McGladrey & Pullen, LLP, as indicated in their reports with respect thereto, and are included herein in reliance and upon the authority of said firm as experts in giving said reports. The statements of income, stockholders' equity and cash flows for MWR Telecom, Inc., for the years ended December 31, 1993 and December 31, 1994 and for the period from January 1, 1995 to April 28, 1995, included herein and elsewhere in the Registration Statement have been audited by 83 87 McGladrey & Pullen, LLP, as indicated in their reports with respect thereto, and are included herein in reliance and upon the authority of said firm as experts in giving said reports. The consolidated balance sheets of Ruffalo, Cody & Associates, Inc. as of December 31, 1994 and 1995, and the consolidated statements of income, statements of stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995 and financial statement schedule, included herein and elsewhere in this Registration Statement have been audited by McGladrey & Pullen, LLP, as indicated in their reports with respect thereto, and are included herein in reliance and upon authority of said firm as experts in giving said reports. The consolidated balance sheets of Telecom*USA Publishing Group, Inc. as of August 31, 1995 and 1996, and the consolidated statements of income, statements of stockholders' equity and cash flows for each of the years in the three-year period ended August 31, 1996 and financial statement schedule, included herein and elsewhere in this Registration Statement have been audited by McGladrey & Pullen, LLP, as indicated in their reports with respect thereto, and are included herein in reliance and upon authority of said firm as experts in giving said reports. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act, and, in accordance therewith, is required to file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at Citicorp Center, 500 West Madison Street, Suite 1400 Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of the reports, proxy statements and other information can be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549, upon payment of prescribed rates or in certain cases by accessing the Commission's World Wide Web site at http://www.sec.gov. The Class A Common Stock of the Company is quoted on the Nasdaq National Market under the symbol "MCLD", and such reports, proxy statements and other information concerning the Company also can be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed a Registration Statement under the Securities Act with respect to the shares of Class A Common Stock offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus does not contain all the information set forth in the Registration Statement. For further information about the Company and the Class A Common Stock, reference is made to the Registration Statement and to the financial statements, exhibits and schedules filed therewith. The statements contained in this Prospectus about the contents of any contract or other document referred to are not necessarily complete, and in each instance, reference is made to a copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of each such document may be obtained from the Commission at its principal office in Washington, D.C. upon payment or the charges prescribed by the Commission or, in the case of certain such documents, by accessing the Commission's World Wide Web site at http://www.sec.gov. 84 88 GLOSSARY Access -- Telecommunications services that permit long distance carriers to use local exchange facilities to originate and/or terminate long distance service. Access to Rights-of-Way -- Access to poles, ducts, conduits and other rights-of-way. CAP (competitive access provider) -- A company that provides its customers with an alternative to the local exchange company for local transport of private line and special access telecommunications services. Central offices -- The switching centers or central switching facilities of the local exchange companies. Collocation -- The ability of a CAP such as the Company to connect its network to the LECs central offices. Physical collocation occurs when a CAP places its network connection equipment inside the local exchange company's central offices. Virtual collocation is an alternative to physical collocation pursuant to which the local exchange company permits a CAP to connect its network to the local exchange company's central offices on comparable terms, even through the CAP's network connection equipment is not physically located inside the central offices. Dedicated -- Telecommunications lines reserved for use by particular customers. Dialing Parity -- The ability of a competing local or toll service provider to provide telecommunications services in such a manner that customers have the ability to route automatically, without the use of any access code, their telecommunications to the service provider of the customer's designation. Digital -- A method of storing, processing and transmitting information through the use of distinct electronic or optical pulses that represent the binary digits 0 and 1. Digital transmission and switching technologies employ a sequence of these pulses to represent information as opposed to the continuously variable analog signal. The precise digital numbers minimize distortion (such as graininess or snow in the case of video transmission, or static or other background distortion in the case of audio transmission). FCC -- Federal Communications Commission. Interconnection -- Interconnection of facilities between or among local exchange carriers, including potential physical collocation of one carrier's equipment in the other carrier's premises to facilitate such interconnection. Interconnection Decisions -- Rulings by the FCC announced in September 1992 and August 1993, which require the Regional Bell Operating Companies and most other large local exchange carriers to provide interconnection in local exchange company central offices to any CAP, long distance carrier or end user seeking such interconnection for the provision of interstate special access and switched access transport services. InterLATA -- Telecommunications services originating in a LATA and terminating outside of that LATA. IntraLATA -- Telecommunications services originating and terminating in the same LATA. LATA (local access and transport area) -- A geographic area composed of contiguous local exchanges, usually but not always within a single state. The State of Iowa contains all or part of five LATAs; the State of Illinois contains all or part of 17 LATAs. There are approximately 200 LATAs in the United States. Local exchange -- A geographic area determined by the appropriate state regulatory authority in which calls generally are transmitted without toll charges to the calling or called party. LEC (local exchange carrier) -- A company providing local telephone services. G-1 89 Long distance carriers (interexchange carriers) -- Long distance carriers provide services between local exchanges on an interstate or intrastate basis. A long distance carrier may offer services over its own or another carrier's facilities. Number portability -- The ability of an end user to change local exchange carriers while retaining the same telephone number. POPs (points of presence) -- Locations where a long distance carrier has installed transmission equipment in a service area that serves as, or relays calls to, a network switching center of that long distance carrier. PUC (public utilities commission) -- A state regulatory body, established in most states, which regulates utilities, including telephone companies providing intrastate services. Private line -- A dedicated telecommunications connection between end user locations. Public switched network -- That portion of a local exchange company's network available to all users generally on a shared basis (i.e., not dedicated to a particular user). Traffic along the public switched network is generally switched at the local exchange company's central offices. Reciprocal compensation -- The same compensation of a new competitive local exchange carrier for termination of a local call by the local exchange carrier on its network, as the new competitor pays the local exchange carrier for termination of local calls on the local exchange carrier network. Resale -- Resale by a provider of telecommunications services (such as a local exchange carrier) of such services to other providers or carriers on a wholesale or a retail basis. Route mile -- The number of miles of the telecommunications path in which fiber optic cables are installed. Self-healing ring -- A self-healing ring is a network design in which the network backbone consists of a continuous ring connecting a central hub facility with one or more network nodes (such as customer premises). Traffic is routed between the hub and each of the nodes simultaneously in both a clockwise and a counterclockwise direction. In the event of a cable cut or component failure along one of these paths, traffic will continue to flow along the alternate path so no traffic is lost. In the event of a catastrophic node failure, other nodes will be unaffected because traffic will continue to flow along whichever path (primary or alternate) does not pass through the affected node. The switch from the primary to the alternate path will be imperceptible to most users. Special access services -- The lease of private, dedicated telecommunications lines or "circuits" along the network of a local exchange company or a CAP, which lines or circuits run to or from the long distance carrier POPs. Examples of special access services are telecommunications lines running between POPs of a single long distance carrier, from one long distance carrier POP to the POP of another long distance carrier or from an end user to a long distance carrier POP. Switch -- A device that opens or closes circuits or selects the paths or circuits to be used for transmission of information. Switching is a process of interconnecting circuits to form a transmission path between users. Switched access transport services -- Transportation of switched traffic along dedicated lines between the local exchange company central offices and long distance carrier POPs. Switched traffic -- Telecommunications traffic along the public switched network. This traffic is generally switched at the local exchange company's central offices. Unbundled Access -- Access to unbundled elements of a telecommunications services provider's network, including network facilities, equipment, features, functions and capabilities, at any technically feasible point within such network. G-2 90 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- MCLEOD, INC. AND SUBSIDIARIES Independent Auditor's Report....................................................... F-2 Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (Unaudited)..................................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996 (Unaudited)............ F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996 (Unaudited).......... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996 (Unaudited)............ F-6 Notes to Consolidated Financial Statements......................................... F-7 MWR TELECOM, INC. Independent Auditor's Report....................................................... F-20 Statements of Income for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 to April 28, 1995........................... F-21 Statements of Stockholder's Equity for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 to April 28, 1995....................... F-22 Statements of Cash Flows for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 to April 28, 1995....................... F-23 Notes to Financial Statements...................................................... F-24 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY Independent Auditor's Report....................................................... F-27 Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (Unaudited)..................................................................... F-28 Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996 (Unaudited)................ F-29 Consolidated Statements of Redeemable Common Stock and Warrants and Common Stockholders' Equity (Deficit) for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996 (Unaudited)......................... F-30 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996 (Unaudited)............ F-32 Notes to Consolidated Financial Statements......................................... F-33 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES Independent Auditor's Report....................................................... F-40 Consolidated Balance Sheets as of August 31, 1995 and 1996......................... F-41 Consolidated Statements of Income for the years ended August 31, 1994, 1995 and 1996................................................................... F-42 Consolidated Statements of Stockholders' Equity for the years ended August 31, 1994, 1995 and 1996............................................................. F-43 Consolidated Statements of Cash Flows for the years ended August 31, 1994, 1995 and 1996................................................................... F-44 Notes to Consolidated Financial Statements......................................... F-46
F-1 91 INDEPENDENT AUDITOR'S REPORT To the Board of Directors McLeod, Inc. Cedar Rapids, Iowa We have audited the accompanying consolidated balance sheets of McLeod, Inc. and subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of McLeod, Inc. and subsidiaries as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. McGLADREY & PULLEN, LLP Cedar Rapids, Iowa March 28, 1996, except for Note 11, as to which the date is May 29, 1996 F-2 92 MCLEOD, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------- JUNE 30, 1994 1995 1996 ----------- ----------- ------------ (UNAUDITED) ASSETS (NOTE 3) Current Assets Cash and cash equivalents................................................ $ -- $ -- $232,019,068 Trade receivables, less allowance for doubtful accounts and discounts 1994 $84,000; 1995 $219,000; 1996 $289,000 (Note 2).......... 2,723,249 6,689,069 12,975,005 Inventory................................................................ 1,930,208 2,638,829 3,075,351 Prepaid expenses and other............................................... 208,776 295,689 1,458,181 ----------- ----------- ------------ TOTAL CURRENT ASSETS............................................... 4,862,233 9,623,587 249,527,605 ----------- ----------- ------------ Property and Equipment Land..................................................................... 310,917 310,917 309,539 Telecommunication networks............................................... 922,769 7,696,101 14,870,155 Equipment................................................................ 4,328,732 6,100,470 10,538,142 Networks in progress (Note 2)............................................ -- 3,115,361 12,841,810 ----------- ----------- ------------ 5,562,418 17,222,849 38,559,646 Less accumulated depreciation............................................ 846,203 2,144,615 3,337,089 ----------- ----------- ------------ 4,716,215 15,078,234 35,222,557 ----------- ----------- ------------ Intangibles and Other Assets Deferred line installation costs, less accumulated amortization 1994 $126,000; 1995 $518,000; 1996 $737,000............................ 1,010,704 1,424,685 1,705,252 Goodwill, less accumulated amortization 1995 $117,000; 1996 $205,000..... -- 2,525,091 2,436,333 Other.................................................................... 97,544 334,855 407,746 ----------- ----------- ------------ 1,108,248 4,284,631 4,549,331 ----------- ----------- ------------ $10,686,696 $28,986,452 $289,299,493 =========== =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable......................................................... $ 1,689,216 $ 5,832,543 $ 14,848,252 Checks issued not yet presented for payment.............................. 34,115 918,932 -- Accrued payroll and payroll related expenses............................. 1,216,144 1,954,621 2,503,400 Other accrued liabilities................................................ 239,669 874,916 1,653,497 Deferred revenue, current portion........................................ 24,107 134,325 602,664 ----------- ----------- ------------ TOTAL CURRENT LIABILITIES.......................................... 3,203,251 9,715,337 19,607,813 ----------- ----------- ------------ Long-Term Debt (Note 3).................................................... 3,500,000 3,600,000 -- ----------- ----------- ------------ Deferred Revenue, less current portion..................................... 692,263 713,173 3,762,281 ----------- ----------- ------------ Commitments (Notes 2, 3 and 4) Stockholders' Equity (Notes 3, 6, 7 and 11) Capital stock: Preferred, Class A, $5.50 par value; authorized 1,150,000 shares; none issued............................................................... -- -- -- Preferred, $.01 par value; authorized 2,000,000 shares; none issued; terms determined upon issuance....................................... -- -- -- Common, Class A, $.01 par value; authorized 75,000,000 shares; issued 1994 14,478,481 shares; 1995 16,387,081 shares; 1996 30,210,519 shares............................................................... 144,785 163,871 302,105 Common, Class B, convertible, $.01 par value; authorized 22,000,000 shares; issued 1994 7,670,457 shares; 1995 and 1996 15,625,929 shares............................................................... 76,705 156,259 156,259 Additional paid-in capital............................................... 17,253,105 40,117,164 299,833,502 Accumulated deficit...................................................... (14,150,413) (25,479,352) (34,362,467) Cost of common stock reacquired for the treasury, 1994 22,500 shares; 1995 and 1996 none..................................................... (33,000) -- -- ----------- ----------- ------------ 3,291,182 14,957,942 265,929,399 ----------- ----------- ------------ $10,686,696 $28,986,452 $289,299,493 =========== =========== ============
See Notes to Consolidated Financial Statements. F-3 93 MCLEOD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ------------ ------------- ------------- ----------- ----------- (UNAUDITED) Telecommunications revenue (Note 2)................................ $ 1,550,098 $ 8,014,093 $ 28,997,880 $11,418,728 $26,405,823 ------------ ------------- ------------- ----------- ----------- Operating expenses: Cost of service................... 1,527,658 6,211,783 19,667,138 7,628,002 18,723,990 Selling, general and administrative.................. 2,389,890 12,373,411 18,053,431 8,289,459 13,976,310 Depreciation and amortization..... 235,013 771,879 1,835,127 763,238 2,572,849 ------------ ------------- ------------- ----------- ----------- TOTAL OPERATING EXPENSES... 4,152,561 19,357,073 39,555,696 16,680,699 35,273,149 ------------ ------------- ------------- ----------- ----------- OPERATING LOSS............. (2,602,463) (11,342,980) (10,557,816) (5,261,971) (8,867,326) Financial income (expense): Interest income................... 162,846 145,193 138,691 27,510 504,890 Interest (expense)................ -- (218,175) (909,814) (487,396) (520,679) ------------ ------------- ------------- ----------- ----------- LOSS BEFORE INCOME TAXES... (2,439,617) (11,415,962) (11,328,939) (5,721,857) (8,883,115) Income taxes (Note 5)............... -- -- -- -- -- ------------ ------------- ------------- ----------- ----------- NET LOSS................... $ (2,439,617) $ (11,415,962) $ (11,328,939) $(5,721,857) $(8,883,115) ============ ============= ============= =========== =========== Loss per common and common equivalent share (Note 11)........ $ (0.08) $ (0.31) $ (0.31) $ (0.15) $ (0.23) ============ ============= ============= =========== =========== Weighted average common and common equivalent shares outstanding (Note 11)......................... 29,655,063 36,369,916 37,054,744 37,054,553 38,511,720 ============ ============= ============= =========== ===========
See Notes to Consolidated Financial Statements. F-4 94 MCLEOD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 3, 6, 7 AND 11) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
CAPITAL STOCK --------------------------------- COMMON ADDITIONAL -------------------- PAID-IN ACCUMULATED TREASURY PREFERRED CLASS A CLASS B CAPITAL DEFICIT STOCK TOTAL --------- -------- -------- ------------ ------------ -------- ------------ Balance, December 31, 1992....... $ $ 188 $ -- $ 4,812 $ (294,834) $ -- $ (289,834) Net loss........................ -- -- -- -- (2,439,617) -- (2,439,617) Issuance of 11,975,010 shares of Class A common stock.................. -- 119,750 -- 6,045,575 -- -- 6,165,325 Issuance of 5,625,000 shares of Class B common stock.................. -- 56,250 4,443,750 -- -- 4,500,000 -------- -------- -------- ------------ ------------ -------- ------------ Balance, December 31, 1993....... -- 119,938 56,250 10,494,137 (2,734,451) -- 7,935,874 Net loss........................ -- -- -- -- (11,415,962) -- (11,415,962) Issuance of 2,484,720 shares of Class A common stock.................. -- 24,847 -- 3,604,420 -- -- 3,629,267 Issuance of 2,045,457 shares of Class B common stock.................. -- -- 20,455 2,979,548 -- -- 3,000,003 Purchase of 22,500 shares of common stock for the treasury...................... -- -- -- -- -- (33,000) (33,000) Amortization of fair value of stock options issued to non-employees (Note 3)........ -- -- -- 175,000 -- -- 175,000 --------- --------- -------- ------------ ------------ -------- ------------ Balance, December 31, 1994....... -- 144,785 76,705 17,253,105 (14,150,413) (33,000) 3,291,182 Net loss........................ -- -- -- -- (11,328,939) -- (11,328,939) Issuance of 1,908,600 shares of Class A common stock.................. -- 19,086 -- 4,278,164 -- -- 4,297,250 Issuance of 4,279,414 shares of Class B common stock.................. -- -- 42,794 9,652,258 -- -- 9,695,052 Issuance of 3,676,058 shares of Class B common stock in connection with the acquisition of MWR Telecom Inc. (Note 9)......... -- -- 36,760 8,295,637 -- -- 8,332,397 Reissuance of 22,500 shares of treasury stock................ -- -- -- 6,000 -- 33,000 39,000 Amortization of fair value of stock options issued to non-employees (Note 3)........ -- -- -- 632,000 -- -- 632,000 --------- --------- -------- ------------ ------------ -------- ------------ Balance, December 31, 1995....... -- 163,871 156,259 40,117,164 (25,479,352) -- 14,957,942 Net loss (Unaudited)............ -- -- -- -- (8,883,115) -- (8,883,115) Issuance of 13,823,438 shares of Class A common stock (Unaudited)...... -- 138,234 -- 258,493,171 -- -- 258,631,405 Amortization of fair value of stock options issued to non-employees (unaudited) (Note 3)...................... -- -- -- 341,167 -- -- 341,167 Amortization of compensation expense related to stock options (unaudited) (Note 6)............................ -- -- -- 882,000 -- -- 882,000 --------- --------- -------- ------------ ------------ -------- ------------ Balance, June 30, 1996 (Unaudited)..................... $ -- $302,105 $156,259 $299,833,502 $(34,362,467) $ -- $265,929,399 ========= ======== ======== ============ ============ ======== ============
See Notes to Consolidated Financial Statements. F-5 95 MCLEOD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------------------- ------------------------------ 1993 1994 1995 1995 1996 ------------ ------------- ------------- ------------- ------------- (UNAUDITED) Cash Flows from Operating Activities Net loss..................................... $ (2,439,617) $ (11,415,962) $ (11,328,939) $ (5,721,857) $ (8,883,115) Adjustments to reconcile net loss to net cash (used in) operating activities: Depreciation............................... 230,321 632,472 1,299,381 560,187 1,197,499 Amortization............................... 4,692 314,407 1,167,746 460,051 1,716,515 Changes in assets and liabilities, net of effects of purchase of MWR Telecom Inc. (Note 9): (Increase) in trade receivables.......... (200,813) (2,272,436) (3,574,894) (906,170) (6,285,935) (Increase) in inventory.................. (1,739,861) (184,845) (269,128) (92,023) (436,522) (Increase) in deferred line installation costs.................................. -- (1,136,504) (806,146) (445,875) (500,009) Increase in accounts payable and accrued expenses............................... 827,230 2,000,753 4,095,478 1,343,620 7,003,339 Increase (decrease) in deferred revenue................................ -- 716,370 8,749 (14,263) 3,517,448 Other, net............................... (134,104) (16,302) (70,026) (194,917) (1,167,521) ----------- ------------ ------------ ------------ ------------ NET CASH (USED IN) OPERATING ACTIVITIES........................... (3,452,152) (11,362,047) (9,477,779) (5,011,247) (3,838,301) ----------- ------------ ------------ ------------ ------------ Cash Flows from Investing Activities Purchase of property and equipment........... (1,940,893) (3,363,223) (5,272,248) (564,069) (17,997,066) Other........................................ 152,019 (78,773) (266,092) (267,749) (258,038) ----------- ------------ ------------ ------------ ------------ NET CASH (USED IN) INVESTING ACTIVITIES........................... (1,788,874) (3,441,996) (5,538,340) (831,818) (18,255,104) ----------- ------------ ------------ ------------ ------------ Cash Flows from Financing Activities Increase (decrease) in checks issued not yet presented for payment...................... -- 34,115 884,817 (34,115) (918,932) Proceeds from line of credit agreement....... -- 8,400,000 42,200,000 36,100,000 47,900,000 Payments on line of credit agreement......... -- (4,900,000) (42,100,000) (37,800,000) (51,500,000) Net proceeds from issuance of common stock... 9,857,908 6,629,270 13,992,302 14,000,000 258,631,405 Reissuance (purchase) of treasury stock...... -- (33,000) 39,000 39,000 -- ----------- ------------ ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES........................... 9,857,908 10,130,385 15,016,119 12,304,885 254,112,473 ----------- ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... 4,616,882 (4,673,658) -- 6,461,820 232,019,068 Cash and cash equivalents: Beginning.................................... 56,776 4,673,658 -- -- -- ----------- ------------ ------------ ------------ ------------ Ending....................................... $ 4,673,658 $ -- $ -- $ 6,461,820 $ 232,019,068 =========== ============ ============ ============ ============ Supplemental Disclosure of Cash Flow Information Cash payment for interest, net of interest capitalized 1993 and 1994 none; 1995 $61,914; 1996 $204,056.............................. $ -- $ 35,345 $ 260,922 $ 227,782 $ 408,291 =========== ============ ============ ============ ============ Supplemental Schedule of Noncash Investing and Financing Activities Conversion of stockholder advances into 3,027,814 shares of Class A common stock...................................... $ 807,417 =========== Accounts payable incurred for property and equipment.................................. $ 111,582 $ 141,022 $ 1,233,779 $ 66,548 $ 4,573,509 =========== ============ ============ ============ ============ Acquisition of MWR Telecom Inc. (Note 9): Working capital acquired, net.............. $ 392,508 $ 392,508 Fair value of other assets acquired, principally fiber optic telecommunication networks................................. 5,298,082 5,298,082 Goodwill................................... 2,641,807 2,641,807 ------------ ------------ Stock issued............................... $ 8,332,397 $ 8,332,397 ============ ============
See Notes to Consolidated Financial Statements. F-6 96 MCLEOD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business: The Company is a diversified telecommunications company that provides a broad range of products and services to business and residential customers and government agencies in Iowa and Illinois. The Company's services primarily include local and long distance telephone services, communication services between interexchange carriers and customers and maintenance and installation services on fiber optic telecommunication networks. The Company's business is highly competitive and is subject to various federal, state and local regulations. Accounting estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the Company's significant accounting policies is as follows: Principles of consolidation: The accompanying financial statements include those of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany items and transactions have been eliminated in consolidation. Cash and cash equivalents: For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Included in cash and cash equivalents is approximately $219,400,000 consisting of a 30 day U.S. Treasury Bill. This security is classified as held to maturity and the fair market value approximates amortized cost. Inventory: Inventory is carried principally at the lower of average cost or market and consists primarily of new and reusable parts to maintain and build fiber optic networks. Inventories of approximately $1.6 million used to support a maintenance agreement are amortized on a straight-line basis over the 10-year life of the agreement (see Note 2). Property and equipment: Property and equipment is stated at cost. Construction costs, including interest, are capitalized during the installation of fiber optic telecommunication networks. Depreciation is computed by the straight-line method over the following estimated useful lives:
YEARS ----- Telecommunication networks........................... 15 Equipment............................................ 2-7
The Company's telecommunications networks are subject to technological risks and rapid market changes due to new products and services and changing customer demand. These changes may result in changes in the estimated economic lives of these assets. Deferred line installation costs: Deferred line installation costs include costs incurred in the establishment of local access lines for customers and are being amortized on the straight-line method over the life of the average customer contract as cost of telecommunications services. The contracts' terms do not exceed 60 months. Goodwill: Goodwill resulting from an acquisition is being amortized over 15 years using the straight-line method and is periodically reviewed for impairment based upon an assessment of future operations to ensure that it is appropriately valued. F-7 97 MCLEOD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Income tax matters: The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Net deferred tax assets are reduced by a valuation allowance when appropriate. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred revenue: Amounts received in advance under long-term leases of fiber optic telecommunication networks are recognized as revenue on a straight-line basis over the life of the leases. Revenue recognition: Revenues for local and long-distance services are recognized when subscribers use telecommunication services. The revenue from long-term leases of fiber optic telecommunication networks is recognized over the term of the lease. Base annual revenue for telecommunication contract maintenance is recognized on a straight line basis over the term of the contract. Additional services provided under these contracts are recognized as the services are performed. Cost of service: Includes local and long-distance services purchased primarily from two Regional Bell Operating Companies and one interexchange carrier and the cost of operating the Company's fiber optic telecommunication networks. The agreement with the interexchange carrier requires minimum monthly purchase and minutes-of-usage commitments. Stock options issued to employees: Compensation expense for stock issued through stock option plans is accounted for using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued for Employees." Under this method, compensation is measured as the difference between the estimated market value of the stock at the date of award less the amount required to be paid for the stock. The difference, if any, is charged to expense over the periods of service. The estimated market value used for the stock options granted was determined on a periodic basis by the Company's Board of Directors prior to the Company's initial public offering on June 10, 1996 (see Note 11). Subsequent to the Company's initial public offering, the market value used for stock options granted is based upon the closing price of the Class A common stock on the day before the grant date. Stock options issued to non-employees: The Company uses the Black-Scholes model to determine the fair value of the stock options issued to non-employees at the date of grant. This amount is amortized to expense over the vesting period of the options. Loss per common and common equivalent share: Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, stock issued and stock options granted with exercise prices below the assumed initial public offering price during the twelve-month period preceding the effective date of the Registration Statement have been included in the calculation as if they were outstanding for all years presented. Recently issued accounting standards: In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which will require the Company to review for the impairment of long-lived assets and certain identifiable intangibles to be held and used by the Company whenever F-8 98 MCLEOD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of SFAS No. 121 is required in fiscal 1996. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, which establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans. However, the new standard allows compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, but requires expanded disclosures. SFAS No. 123 is effective in fiscal year 1996. The Company has elected to continue to apply the intrinsic value based method of accounting for stock options. While the Company does not know precisely the impact that will result from adopting SFAS No. 121 and SFAS No. 123, the Company does not expect the adoption of SFAS No. 121 or SFAS No. 123 to have a material effect on the Company's consolidated financial statements. Fair value of financial instruments: The carrying amount of long-term debt approximates fair value because these obligations bear interest at current rates. Interim Financial Information (unaudited): The financial statements and notes related thereto as of June 30, 1996, and for the six month periods ended June 30, 1995 and 1996, are unaudited, but in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations. The operating results for the interim periods are not indicative of the operating results to be expected for a full year or for other interim periods. Not all disclosures required by generally accepted accounting principles necessary for a complete presentation have been included. NOTE 2. MAJOR CUSTOMER AND COMMITMENTS During 1992, the Company obtained an assignment of a contract covering the maintenance and operations responsibilities for the State of Iowa Fiber Optic Communications Network through October 2004. The annual fee for performing this maintenance is adjusted annually by the change in the Consumer Price Index and for additions to the network. The revenue from this and related contracts amounted to approximately $1,550,000, $3,407,000 and $4,937,000 for 1993, 1994 and 1995, respectively. In addition, the Company had additional revenues from this customer during 1995 of approximately $403,000. Trade receivables include approximately $1,147,000 and $2,143,000 from this customer at December 31, 1994 and 1995, respectively. During 1995, the Company was awarded contracts from the State of Iowa to build 265 fiber optic telecommunication network segments throughout the State of Iowa. Upon completion of each segment, the Company will receive approximately $115,000 for a seven year lease for certain capacity on that segment. The Company will recognize this revenue of approximately $30,475,000 on a straight-line basis over the term of the lease based on the relationship of individual segment costs to total projected costs. As of December 31, 1995, no revenue had been recognized under these contracts. The Company estimates that minimum future construction costs required to fulfill its obligations under the 1995 contract with the State of Iowa would be approximately $34,000,000. The Company, however, expects that its actual construction costs will be higher with respect to such network segments, because the Company is adding more fiber and route miles than is contractually required F-9 99 MCLEOD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) NOTE 2. MAJOR CUSTOMER AND COMMITMENTS -- (CONTINUED) with respect to such construction, in order to optimize the design of its network. In addition, the Company estimates that it will incur additional construction costs of approximately $2,000,000 to complete two other fiber optic telecommunication networks in process. The Company presently anticipates that the costs to complete these projects will be incurred as follows: 1996.......................................... $ 20,400,000 1997.......................................... 11,800,000 1998.......................................... 3,400,000 1999.......................................... 400,000 ------------ $ 36,000,000* ============
- --------------- * At December 31, 1995, the Company had actual remaining contractual commitments of approximately $8,700,000 for costs associated with the construction of fiber optic telecommunications networks. Subsequent to December 31, 1995, the Company entered into $4,000,000 of similar construction contracts. The Company plans to finance the completion of these contracts with the above mentioned revenues and external financing. NOTE 3. PLEDGED ASSETS, RELATED DEBT AND SUBSEQUENT EVENTS At December 31, 1995, the Company had a line of credit agreement with The First National Bank of Chicago under which it may borrow up to a total of $20,000,000. The agreement expires on May 16, 1998 with a one year extension upon mutual agreement. The Company is required to maintain a $2,000,000 term life insurance policy on the chief executive officer and a $1,000,000 term life insurance policy on the chief operating officer. Proceeds from the policies are pledged as collateral under this agreement. Additionally, the agreement contains various restrictive covenants, including, among others, ones which prohibit the payment of any dividends, limit additional indebtedness, limit the annual repurchase of stock by the Company and require the Company to maintain a financial ratio. At December 31, 1995, the Company was in compliance with all covenants. The agreement is structured as follows:
DECEMBER 31, 1995 BORROWINGS AT DECEMBER 31, MAXIMUM --------------------------------------- BORROWING LIMIT 1994 1995 ----------------- ----------------- ----------------- Facility A..................... $ 6,000,000 $3,500,000 $3,600,000 Facility B..................... 6,000,000 -- -- Facility C..................... 8,000,000 -- -- ----------- ---------- ---------- Total................ $20,000,000 $3,500,000 $3,600,000 =========== ========== ==========
Facility A: The interest rate is effective on the date of the borrowings and may be designated by the Company as either (1) the higher of the prime rate or Federal Funds effective rate plus 0.5% or (2) London Interbank Offered Rate plus 0.375%. The Company also pays a facilities fee of 0.1875% per annum on the average daily commitment. F-10 100 MCLEOD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) NOTE 3. PLEDGED ASSETS, RELATED DEBT AND SUBSEQUENT EVENTS -- (CONTINUED) Borrowings under Facility A are unsecured and are guaranteed by a stockholder which requires a 1% annual fee on the maximum borrowing limit. At the inception of the agreement, the stockholder was granted 1,875,000 Class B common stock options at $1.47 per share, the estimated market price at that date. The options vest quarterly at the rate of 93,750 shares. Vesting would be reduced if the maximum borrowing limit amount is reduced. The options are exercisable for five years from the date the last options are vested. As of December 31, 1995, 562,500 stock options are vested. In the event of a default under Facility A, the Company must issue to the guarantor shares of $5.50 par value preferred stock equal to the payment made by the guarantor divided by $5.50. Facility B: The interest rate is effective on the date of the borrowings at the higher of the prime rate plus 0.25% or Federal Funds effective rate plus 0.75%. The effective rate at March 31, 1996 is 8.50%. The Company also pays an annual facilities fee of 0.25% on the average daily commitment. Borrowings under Facility B are limited based on the Company's borrowing base which includes trade receivables and inventories. The borrowings under Facility B are collateralized by trade receivables and inventory. As of December 31, 1995, the maximum borrowing limit was available to the Company. In March 1996, the Bank and the Company agreed to increase the maximum borrowing limit under Facility B from $6,000,000 to $10,000,000. Facility C: The Company can borrow under this facility if the aggregate borrowings are in excess of the Facility A maximum borrowing amount plus the borrowing base of Facility B. The interest rate is the higher of the prime rate plus 0.75% or Federal Funds effective rate plus 1.25% on the date of the borrowing. The borrowings under Facility C are collateralized by trade receivables and inventory. Upon the use of Facility C, the Company pays an annual facilities fee of 0.5% on the average daily commitment. In addition, Facility C is then guaranteed by a stockholder which requires an annual fee equal to 0.5% of the difference between the actual borrowing on Facility C and the total borrowing base attributable to Facility C, which includes trade receivables and inventories. Facility C was activated in 1995, upon which the Company granted to the stockholder 1,912,500 Class B common stock options at $2.27 per share, the estimated market price at that date. The options vest quarterly at the rate of 112,500 shares. Vesting would be reduced if the maximum borrowing limit amount is reduced. The options are exercisable for five years from the date the last options are vested. As of December 31, 1995, 225,000 stock options are vested. In the event of a default under Facility C, the Company must issue to the guarantor shares of $5.50 par value preferred stock equal to the payment made by the guarantor divided by $5.50. Stock Options: The Company has used the Black-Scholes model to value the options issued under Facility A and C. The total value of the options under Facility A and C was approximately $1,400,000 and $2,000,000, respectively, at the date of issuance. F-11 101 MCLEOD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) NOTE 3. PLEDGED ASSETS, RELATED DEBT AND SUBSEQUENT EVENTS -- (CONTINUED) Interest expense for the years ended December 31, 1994 and 1995 is composed of the following:
1994 1995 ----------------------------------------------------- ----------------------------------------------------- FACILITY A FACILITY B FACILITY C TOTAL FACILITY A FACILITY B FACILITY C TOTAL ---------- ---------- ---------- -------- ---------- ---------- ---------- -------- Amounts to bank......... $ 26,706 $-- $-- $ 26,706 $ 253,701 $ 29,750 $ -- $283,451 Facility fee.......... 7,058 9,411 16,469 11,250 15,000 30,027 56,277 Capitalized interest..... -- -- -- -- (61,914) -- -- (61,914) Amortization of fair value of stock options issued to non-employees... 175,000 -- -- 175,000 280,000 -- 352,000 632,000 --------- -------- -------- -------- --------- --------- --------- -------- $ 208,764 $9,411 $-- $218,175 $ 483,037 $ 44,750 $ 382,027 $909,814 ========= ======== ======== ======== ========= ======== ========= ======== Effective average interest rate......... 46.8% ** ** 15.9% 13.7% ** ========= ======== ======== ======== ======== ========
- --------------- ** No amounts borrowed during the year. In March 1996, a Second Credit Facility for $8,000,000 was established. The borrowings under the Second Credit Facility are unsecured and bear interest at a rate equal to 1% over the higher of the prime rate or the Federal Funds effective rate plus 0.5%. The Company also must pay a facilities fee of 1% on the average daily commitment. At such time as the Company issues equity or debt for cash, the amount of the Second Credit Facility commitment is reduced by an amount equal to 100% of the net cash proceeds from such issuance and any amounts due at that time must be reduced down to the new commitment amount. A portion of the proceeds from the Company's initial public offering on June 10, 1996 (see Note 11) was used to pay off all existing indebtedness on the Company's credit facilities, which were subsequently cancelled. In addition, the guarantees on Facility A and C were cancelled, which terminated the vesting of the Class B common stock options granted in conjunction with the guarantees. At June 30, 1996, a total of 1,300,688 Class B common stock options are vested. NOTE 4. LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE The Company leases its facilities under noncancellable agreements, which expire at various times through March 2001. These agreements require various monthly rentals plus the payment of applicable property taxes, maintenance and insurance. The Company also leases vehicles and equipment under agreements which expire at various times through December 2001 and require various monthly rentals. The total minimum rental commitment at December 31, 1995 under the leases mentioned above is as follows: 1996............................................ $1,549,000 1997............................................ 1,047,000 1998............................................ 534,000 1999............................................ 454,000 2000............................................ 411,000 Thereafter...................................... 305,000 ---------- $4,300,000 ==========
F-12 102 MCLEOD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) NOTE 4. LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE -- (CONTINUED) The total rental expense included in the consolidated statements of operations for 1993, 1994 and 1995 is approximately $125,000, $622,000 and $1,558,000, respectively, which also includes short-term rentals for office facilities. NOTE 5. INCOME TAX MATTERS Net deferred taxes consist of the following components as of December 31, 1994 and 1995:
1994 1995 ---------- ----------- Deferred tax assets: Net operating loss carryforwards...................... $5,306,000 $ 9,681,000 Accruals and reserves not currently deductible........ 607,000 529,000 Deferred revenues..................................... 290,000 301,000 Other................................................. 8,000 17,000 ---------- ----------- 6,211,000 10,528,000 Less valuation allowance.............................. 5,411,000 8,418,000 ---------- ----------- 800,000 2,110,000 ---------- ----------- Deferred tax liabilities: Deferred line installation cost....................... 404,000 570,000 Property and equipment................................ 396,000 1,540,000 ---------- ----------- 800,000 2,110,000 ---------- ----------- $ -- $ -- ========== ===========
During 1995, the Company increased the valuation allowance to $8,418,000 on the deferred tax assets. A valuation allowance has been recognized to offset the related net deferred tax assets due to the uncertainty of realizing the benefit of the loss carryforwards. The Company has available net operating loss carryforwards totaling approximately $24 million, which expire in various amounts in the years 2008 to 2010. The income tax provision differs from the amount of income tax determined by applying the U.S. Federal income tax rate to pretax income for 1993, 1994 and 1995 due to the following:
1993 1994 1995 --------- ----------- ----------- Computed "expected" tax (benefit)......... $(854,000) $(3,934,000) $(3,744,000) Increase (decrease) in income taxes resulting from: Change in valuation allowance........... 789,000 4,622,000 3,007,000 Deferred tax rate differential on temporary differences................ 104,000 (656,000) 739,000 Other................................... (39,000) (32,000) (2,000) --------- ----------- ----------- $ -- $ -- $ -- ========= =========== ===========
NOTE 6. STOCK OPTION PLAN AND SUBSEQUENT EVENTS The Company has reserved 5,471,630 and 12,071,899 shares of Class A common stock for issuance to key employees and directors under certain employee and director stock option plans at F-13 103 MCLEOD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) NOTE 6. STOCK OPTION PLAN AND SUBSEQUENT EVENTS (CONTINUED) December 31, 1995 and June 30, 1996, respectively, which have been approved by the Board of Directors. Options are granted at prices equal to the fair market value on the dates of grant as determined by the Company's Board of Directors. Subsequent to the Company's initial public offering on June 10, 1996 (see Note 11), the market value of the options is based on the closing price of the Class A common stock on the day before the grant date. Under the 1992, 1993 and Director stock option plans, all options granted become exercisable at a rate of 25% per year, on a cumulative basis. Under the 1995 stock option plan, all options, except for options issued to the Company's chairman and chief executive officer, become exercisable at a rate of 25% per year, on a cumulative basis, beginning five years from the date of grant. The options issued to the Company's chairman and chief executive officer vest at a rate of 20% per year, on a cumulative basis. Other pertinent information related to the plans is as follows:
SHARES OPTION PRICE --------- -------------- Outstanding at January 1, 1993........................... 1,004,394 $0.27 - $ 0.29 Granted................................................ 1,564,414 0.80 - 1.07 --------- Outstanding at December 31, 1993......................... 2,568,808 0.27 - 1.07 Granted................................................ 786,113 1.47 - 1.73 Forfeited.............................................. (232,691) 0.80 - 1.73 --------- Outstanding at December 31, 1994......................... 3,122,230 0.27 - 1.73 Granted................................................ 2,006,273 1.73 - 2.67 Exercised.............................................. (11,532) 0.27 - 1.07 Forfeited.............................................. (247,923) 1.07 - 2.27 --------- Outstanding at December 31, 1995......................... 4,869,048 0.27 - 2.67 Granted................................................ 2,423,143 2.67 - 23.75 Exercised.............................................. (23,438) 0.80 - 1.73 Forfeited.............................................. (193,004) 1.07 - 2.67 --------- Under option, June 30, 1996.............................. 7,075,749 $0.27 - $23.75 =========
DECEMBER 31, -------------------------------- JUNE 30, 1993 1994 1995 1996 -------- --------- --------- --------- NUMBER OF SHARES Available for grant, end of year.......... 393,692 590,270 591,988 4,996,150 ======= ========= ========= ========= Options exercisable, end of year.......... 251,100 1,035,143 1,580,989 1,876,461 ======= ========= ========= =========
The Company issued 965,166 and 688,502 of stock options in January and February 1996. The estimated fair market value of these options at the date of grant was later determined to exceed the exercise price by $4,170,000 and $5,020,000, respectively. As a result, the Company will be required to amortize approximately $9,190,000 over the vesting period of these options. The amortization for the six months ended June 30, 1996 was approximately $882,000. On April 30, 1996, the stockholders approved the Amended and Restated Directors Stock Option Plan, the 1996 Employee Stock Option Plan and the Employee Stock Purchase Plan (see Note 11). F-14 104 MCLEOD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) NOTE 6. STOCK OPTION PLAN AND SUBSEQUENT EVENTS (CONTINUED) In addition, the Company has reserved 3,787,500 shares of Class B common stock at December 31, 1995 for issuance to a stockholder which has guaranteed a debt agreement. As discussed in Note 3, the vesting of these options was terminated upon cancellation of the credit facilities and the related guarantees, and at June 30, 1996, 1,300,688 shares of Class B common stock are reserved for issuance upon exercise of these vested options. NOTE 7. INVESTMENT AGREEMENT AND PREFERRED STOCK INFORMATION The Company has an investment agreement under which the Company issued 7,344,964 shares of Class A common stock and 15,625,929 shares of Class B common stock as of December 31, 1995. All Class B common stock has rights identical to Class A common stock other than their voting rights, which are equal to .40 vote per share. Each share of Class B common stock is convertible into one share of Class A common stock at the option of the holder. The agreement also restricts the payment of any dividends and redemption of stock without the prior consent of five-sevenths of the Company's Board of Directors. On April 1, 1996, the stockholders agreed to terminate the investment agreement and enter into a new Investor Agreement, which became effective on June 10, 1996, the effective date of the Registration Statement filed in connection with the Company's initial public offering (see Note 11). The Company has authorized but not issued 1,150,000 shares of $5.50 par value redeemable Class A preferred stock. If issued, holders of the Class A preferred stock would be entitled to nominate, vote and elect two additional members to the Company's Board of Directors and to receive cash dividends on the par value of the stock at the New York prime plus two percent. Such dividends are cumulative. NOTE 8. RETIREMENT PLAN The Company has a 401(k) profit-sharing plan available to employees who have completed one year of service and have worked 1,000 hours during the year. The Company's contribution is discretionary. The Company contributed approximately none, $12,000 and $44,000 for the years ended December 31, 1993, 1994 and 1995, respectively. NOTE 9. ACQUISITION On April 28, 1995, the Company issued 3,676,058 shares or approximately $8.3 million of the Company's Class B common stock in exchange for all of the outstanding common stock of MWR Telecom Inc. (MWR). In addition, the Company granted an option to the seller to purchase 3,529,414 shares of Class B common stock for $2.27 per share. This option was exercised on June 15, 1995. MWR provides fiber optics telecommunication services between interexchange carriers and their customers primarily in the Des Moines, Iowa area. The goodwill acquired of approximately $2.6 million is being amortized over 15 years by the straight-line method. The acquisition has been accounted for as a purchase and results of operations since the date of acquisition are included in the 1995 consolidated financial statements. F-15 105 MCLEOD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) NOTE 9. ACQUISITION (CONTINUED) The unaudited consolidated results of operations on a pro forma basis as though MWR had been acquired as of the beginning of 1994 is as follows:
1994 1995 ------------ ------------ Service income......................................... $ 10,060,000 $ 29,871,000 Net loss............................................... (11,070,000) (10,561,000) Loss per common and common equivalent share............ (.31) (.29)
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the MWR acquisition been consummated as of the above dates, nor are they necessarily indicative of future operating results. NOTE 10. RELATED PARTY TRANSACTIONS During 1995, the Company entered into agreements with two stockholders that gives certain rights-of-way to the Company for the construction of its telecommunications network in exchange for capacity on the network. These agreements were renegotiated in 1996 to clarify various terms of the agreements. The Company provided and purchased services from various companies, the principals of which are stockholders or directors of McLeod, Inc. or are affiliates. These provided and purchased services are as follows:
1993 1994 1995 -------- -------- -------- Telecommunications revenue.............................. $ -- $ -- $103,000 ======== ======== ======== Operating expenses: Rent.................................................. $ 36,000 $ 19,000 $383,000 Legal services........................................ 91,000 79,000 147,000 Transportation services............................... 18,000 51,000 38,000 Advertising fees...................................... 1,000 11,000 55,000 Maintenance and installation services................. -- 51,000 36,000 Commission expense.................................... -- 11,000 31,000 Miscellaneous expense................................. -- 3,000 23,000 Reimbursement of general and administrative expenses........................................... (6,000) (52,000) (38,000) -------- -------- -------- $140,000 $173,000 $675,000 ======== ======== ========
In addition, at March 31, 1996, the Company has two $75,000 notes receivable from officers. The notes bear interest at the applicable federal interest rate for mid-term loans and require interest only payments for two years and then annual $25,000 payments plus interest until paid in full. NOTE 11. EVENTS SUBSEQUENT TO DECEMBER 31, 1995 Public offering: On June 10, 1996, the Company undertook an initial public offering of Class A common stock for $276 million at $20 per share. The above amount includes an over-allotment option to sell additional shares which was exercised at the time of the initial public offering. The Company plans to use the offering proceeds to finance (i) certain development, construction and F-16 106 MCLEOD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) NOTE 11. EVENTS SUBSEQUENT TO DECEMBER 31, 1995 -- (CONTINUED) operating costs of the Company's fiber optic network, (ii) to fund market expansion activities of the telemanagement business, (iii) to repay borrowings and (iv) for additional working capital and general corporate purposes. Recapitalization: In March 1996, the Company's Board of Directors authorized a restatement of its Articles of Incorporation increasing the authorized Class A common stock from 15,000,000 shares of $.01 par value stock to 75,000,000 shares of $.01 par value stock and increasing the authorized Class B common stock from 15,000,000 shares of $.01 par value stock to 22,000,000 shares of $.01 par value stock. The restated Articles of Incorporation also authorizes the Board of Directors to issue up to 2,000,000 shares of $.01 par value preferred stock. The terms of the preferred stock are determined at the time of issuance. The Board of Directors also declared a 3.75 to 1 stock split for both the Class A and Class B common stock which was effected in the form of a stock dividend. All references to share and per share amounts give retroactive effect to this stock split and recapitalization. Investor agreement: On April 1, 1996, the stockholders entered into an Investor Agreement, which became effective on June 10, 1996, the effective date of the Registration Statement filed in connection with the Company's initial public offering. This agreement provides for the election of directors designated by certain principal stockholders and prevents certain principal stockholders from disposing of any equity securities of the Company for a period of two years unless consented to by the Board of Directors. In addition, certain principal stockholders agreed that for a period of three years they will not acquire any securities or options issued by the Company, except as allowed by previous agreements or by the Board of Directors. Employee benefit plans: On April 30, 1996, the Company's stockholders approved the Amended and Restated Directors Stock Option Plan, the 1996 Employee Stock Option Plan and the Employee Stock Purchase Plan. A summary of these plans follows: Amended and Restated Directors Stock Option Plan -- The Directors Stock Option Plan ("Directors Plan") was amended and restated to be a "formula" plan under which each eligible non-employee director who subsequently commences service as a director will be granted an initial option to purchase 10,000 shares of Class A common stock. An additional option to purchase 5,000 shares of Class A common stock will be granted in each of the next two years to each eligible director who remains for the two year period. Options granted under the Directors Plan, as amended, may be exercised with respect to 25 percent of the shares subject to such option one year after the option is granted and with respect to an additional 25 percent of the shares subject to such option over the next three years. The Directors Plan, as amended, will terminate in 2006, unless terminated earlier by the Board of Directors. 1996 Employee Stock Option Plan (1996 Plan) -- The 1996 Plan supersedes the 1992 Incentive Stock Option Plan, the 1993 Incentive Stock Option Plan and the 1995 Incentive Stock Option Plan. No future grants of options will be made under such Plans. The Company has reserved 4,525,000 shares for issuance under the 1996 Plan. All officers and key employees of the Company are eligible to receive grants under the 1996 Plan, provided the individual does not have more than 2,000,000 shares subject to exercise. The option price generally may not be less than 100% of the fair market value of the Class A common stock on the grant date (or 110% if the grantee beneficially owns more than 10% of the outstanding Class A common stock). The options granted terminate 10 years after the grant date (or five years after the grant F-17 107 MCLEOD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) NOTE 11. EVENTS SUBSEQUENT TO DECEMBER 31, 1995 -- (CONTINUED) date if the grantee beneficially owns more than 10% of the outstanding Class A common stock). The options vest over periods determined by the Compensation Committee, however, no more than $100,000 worth of stock covered by the options may become exercisable in any calendar year. The 1996 Plan will terminate in March 2006. Employee Stock Purchase Plan -- Under the stock purchase plan, employees may purchase up to an aggregate of 1,000,000 shares of Class A common stock through payroll deductions. Employees of the Company who have been employed more than six months and who are regularly scheduled to work more than 20 hours per week are eligible to participate in the plan, provided that they own less than five percent of the total combined voting power of all classes of stock of the Company. The purchase price for each share will be determined by the Compensation Committee but may not be less than 85% of the closing price of the shares of Class A common stock on the first or last trading day of the payroll deduction period, whichever is lower. No employee may purchase in any calendar year Class A common stock having an aggregate fair market value in excess of $25,000. Upon termination of employment, an employee other than a participating employee who is subject to Section 16(b) under the Securities Exchange Act of 1934, as amended, will be refunded all monies in his or her account and the employee's option to purchase shares will terminate. The plan will terminate in March 2006, unless terminated earlier by the Board of Directors. Employment, Confidentiality and Non-Competition Agreements: On May 29, 1996, the Company entered into employment, confidentiality and non-competition agreements with 37 members of senior management. The agreements with the ten senior management executive employees and 27 other senior management employees provide that during their term of employment and for a two-year and one-year period, respectively, following termination, the employees will not compete with the Company. In addition, the ten executives and 27 senior managers have each been granted options to purchase 23,000 and 11,500 shares of Class A common stock, respectively, at an exercise price generally equal to the initial public offering price per share, effective upon an initial public offering prior to December 31, 1996. The agreements provide that employees may not disclose any confidential information during or after employment. Change-of-Control Agreements: On May 29, 1996, the Company also entered into change-of-control agreements with the ten senior management executive employees discussed above, which provide for certain payments in connection with termination of employment after a change of control (as defined within the agreements) of the Company. The change-of-control agreements terminate on December 31, 2006 unless a change of control occurs during the six-month period prior to December 31, 2006, in which case the agreements terminate on December 31, 2007. The agreements provide that if an executive terminates his or her employment within six months after a change of control or if the executive's employment is terminated within 24 months after a change of control in accordance with the terms and conditions set forth in the agreements, the executive will be entitled to certain benefits. The benefits include cash compensation, immediate vesting of outstanding stock options and coverage under the Company's group health plan. NOTE 12. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1995 Ruffalo, Cody & Associates, Inc. -- On July 15, 1996, the Company consummated an acquisition of Ruffalo, Cody & Associates, Inc. ("Ruffalo, Cody"), from the shareholders of Ruffalo, Cody by means of a forward triangular merger pursuant to an Agreement and Plan of Reorganization, dated F-18 108 MCLEOD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) NOTE 12. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1995 -- (CONTINUED) as of July 12, 1996 (the "Agreement"), by and among the Company, Ruffalo, Cody and certain shareholders of Ruffalo, Cody. Pursuant to the Agreement, (i) McLeod Merging Co., a newly incorporated Iowa corporation and a wholly-owned subsidiary of the Company, was merged with and into Ruffalo, Cody, with McLeod Merging Co. (which has been renamed "Ruffalo, Cody & Associates, Inc.") being the surviving corporation, (ii) the outstanding shares of Ruffalo, Cody common stock were converted into the right to receive cash and/or shares of the Company's Class A Common Stock (the "Class A Common Stock"), and (iii) the outstanding options to purchase shares of Ruffalo, Cody common stock were converted into options to purchase shares of the Class A Common Stock (the "Substitute Options"). Under the Agreement, each issued and outstanding share of Ruffalo, Cody common stock was converted into the right to receive a maximum of approximately 0.7 of a share of the Class A Common Stock. The Company agreed to purchase Ruffalo, Cody for a maximum aggregate purchase price of approximately $19.9 million (based on the average market price of the Class A Common Stock during the five business days before and after the acquisition date). The purchase price consisted of approximately $4.9 million in cash, 474,807 shares of Class A Common Stock issuable in exchange for Ruffalo, Cody common stock, and 158,009 shares of Class A Common Stock issuable upon the exercise of the Substitute Options. On July 15, 1996, the Company paid an aggregate of approximately $4.8 million in cash and issued 361,420 shares of Class A Common Stock to the shareholders of Ruffalo, Cody, and granted to the Ruffalo, Cody option holders Substitute Options to purchase 158,009 shares of Class A Common Stock. An additional $50,782 in cash and 113,387 shares of Class A Common Stock were placed into escrow and will be delivered (if at all) to certain of the shareholders of Ruffalo, Cody over a period of 18 months, contingent upon certain conditions relating to Ruffalo, Cody's ongoing revenues. Telecom*USA Publishing Group, Inc. -- On September 20, 1996, the Company acquired Telecom*USA Publishing Group, Inc. ("Telecom") pursuant to an Agreement and Plan of Reorganization. Pursuant to this agreement, (i) Telecom was merged with and into McLeod Reverse Merging Co., a newly incorporated Iowa corporation and a wholly owned subsidiary of the Company, with Telecom as the surviving corporation, (ii) each outstanding share of common stock, no par value, of Telecom was converted into the right to receive $12.75 in cash, and (iii) all outstanding non-vested options to purchase shares of Telecom common stock were replaced with a deferred compensation program. This acquisition resulted in a total purchase price of approximately $75.7 million. The purchase consisted of approximately $74.1 million in cash and $1.6 million resulting from the Company entering into a deferred compensation program with all holders of non-vested options to purchase shares of Telecom. Total Communications Systems, Inc. -- Effective September 4, 1996, the Company agreed to purchase the customer base of Total Communications Systems, Inc. for a cash purchase price of approximately $550,000. F-19 109 INDEPENDENT AUDITOR'S REPORT To the Board of Directors MWR Telecom Inc. Cedar Rapids, Iowa We have audited the statements of income, stockholder's equity, and cash flows of MWR Telecom Inc. for the years ended December 31, 1993 and 1994 and the period from January 1, 1995 to April 28, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of MWR Telecom Inc. for the years ended December 31, 1993 and 1994 and the period from January 1, 1995 to April 28, 1995 in conformity with generally accepted accounting principles. McGLADREY & PULLEN, LLP Cedar Rapids, Iowa March 15, 1996 F-20 110 MWR TELECOM INC. STATEMENTS OF INCOME (NOTE 7)
PERIOD FROM YEARS ENDED DECEMBER 31, JANUARY 1, -------------------------- 1995 TO 1993 1994 APRIL 28, 1995 ----------- ----------- -------------- Telecommunications revenue (Note 2)................... $ 1,823,056 $ 2,045,597 $872,809 ----------- ----------- -------- Operating expenses: Cost of service..................................... 673,925 806,855 375,480 Selling, general and administrative, including management fees to parent company 1993 $18,000; 1994 $31,500; 1995 $12,000....................... 295,831 298,000 98,328 Depreciation........................................ 428,263 569,151 220,125 ----------- ----------- -------- TOTAL OPERATING EXPENSES.................... 1,398,019 1,674,006 693,933 ----------- ----------- -------- OPERATING INCOME............................ 425,037 371,591 178,876 Financial income (expense): Interest income, parent company and its affiliates....................................... 51,087 25,305 1,093 Interest (expense), parent company and its affiliates....................................... (137,068) (252,904) (55,820) ----------- ----------- -------- INCOME BEFORE INCOME TAXES.................. 339,056 143,992 124,149 Income taxes (Note 4)................................. 138,028 59,732 51,239 ----------- ----------- -------- NET INCOME.................................. $ 201,028 $ 84,260 $ 72,910 =========== =========== ========
See Notes to Financial Statements. F-21 111 MWR TELECOM INC. STATEMENTS OF STOCKHOLDER'S EQUITY (NOTE 7) YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD FROM JANUARY 1, 1995 TO APRIL 28, 1995
ADDITIONAL RETAINED COMMON PAID-IN EARNINGS STOCK CAPITAL (DEFICIT) TOTAL ------ ---------- ---------- ---------- Balance, December 31, 1992............... $1,000 $1,247,031 $ (16,154) $1,231,877 Net income............................. -- -- 201,028 201,028 Conversion of related party note payable to equity................... -- 1,200,000 -- 1,200,000 ------ ---------- ---------- ---------- Balance, December 31, 1993............... 1,000 2,447,031 184,874 2,632,905 Net income............................. -- -- 84,260 84,260 Distribution to parent company (Note 1)............................ -- -- (412,693) (412,693) ------ ---------- ---------- ---------- Balance, December 31, 1994............... 1,000 2,447,031 (143,559) 2,304,472 Net income............................. -- -- 72,910 72,910 Conversion of related party note payable to equity................... -- 2,500,000 -- 2,500,000 Distribution to parent company (Note 1)............................ -- -- (302,435) (302,435) ------ ---------- ---------- ---------- Balance, April 28, 1995.................. $1,000 $4,947,031 $ (373,084) $4,574,947 ====== ========== ========== ==========
See Notes to Financial Statements. F-22 112 MWR TELECOM INC. STATEMENTS OF CASH FLOWS (NOTE 7)
PERIOD FROM YEARS ENDED DECEMBER 31, JANUARY 1, ---------------------------- 1995 TO 1993 1994 APRIL 28, 1995 ------------ ------------ -------------- Cash Flows from Operating Activities Net income................................................ $ 201,028 $ 84,260 $ 72,910 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............................................ 428,263 569,151 220,125 Deferred income taxes................................... 105,513 261,290 13,795 Changes in assets and liabilities: (Increase) in trade receivables....................... (142,965) (65,761) (24,693) (Increase) decrease in related party receivables...... 921,089 28,364 2,957 Increase (decrease) in accounts payable and accrued expenses........................................... (96,357) (120,813) 76,509 Increase (decrease) in related party payables......... (80,266) (4,825) 30,028 Increase (decrease) in deferred revenue............... 25,945 (8,142) 83,030 Other, net............................................ 20,461 (107,607) 115,601 ----------- ----------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES.......... 1,382,711 635,917 590,262 ----------- ----------- ---------- Cash Flows from Investing Activities Purchase of property and equipment........................ (1,148,197) (1,032,468) (366,539) Proceeds from payments on notes receivable from parent company and its affiliates.............................. 30,000 1,097,000 -- Advances on notes receivable from parent company and its affiliates.............................................. (2,088,000) (712,000) (99,000) Proceeds on notes receivable.............................. -- 1,383,609 -- ----------- ----------- ---------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES....................................... (3,206,197) 736,141 (465,539) ----------- ----------- ---------- Cash Flows from Financing Activities Increase (decrease) in checks issued not yet presented for payment................................................. (228,411) 33,942 (39,723) Proceeds from notes payable to parent company............. 4,684,000 581,000 44,000 Payments on notes payable to parent company............... (2,632,103) (1,987,000) (129,000) ----------- ----------- ---------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES....................................... 1,823,486 (1,372,058) (124,723) ----------- ----------- ---------- NET INCREASE (DECREASE) IN CASH.................... -- -- -- Cash: Beginning................................................. -- -- -- ----------- ----------- ---------- Ending.................................................... $ -- $ -- $ -- =========== =========== ========== Supplemental Disclosure of Cash Flow Information Cash payment for interest, net of interest capitalized 1993 $10,777; 1994 $10,276; 1995 $6,827................. $ 137,068 $ 252,904 $ 55,820 =========== =========== ========== Cash payments for income taxes, net of refunds............ $ 94,023 $ (144,622) $ 8,000 =========== =========== ========== Supplemental Schedule of Noncash Investing and Financing Activities Conversion of related party notes payable to equity......................................... $ 1,200,000 $2,500,000 =========== ========== Distribution to parent company of certain net assets (Note 1)...................................................... $ 412,693 $ 302,435 =========== ==========
See Notes to Financial Statements. F-23 113 MWR TELECOM INC. NOTES TO FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business: MWR Telecom Inc. (the "Company") primarily provides fiber optics telecommunication services between interexchange carriers and their customers primarily in the Des Moines, Iowa area. The Company was a wholly-owned subsidiary of Midwest Capital Group, Inc. until April 28, 1995 when all of the Company's common stock was purchased by McLeod, Inc. (see Note 7). Accounting estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the Company's significant accounting policies is as follows: Basis of presentation: Prior to the sale of the operating assets of its wholly-owned subsidiary in March 1994, the financial statements for MWR Telecom Inc. (MWR) included the results of operations and cash flows of its subsidiary. Subsequent to the sale, the subsidiary was liquidated and certain remaining net assets were transferred to MWR's parent company. Since MWR's subsidiary was not acquired by McLeod, Inc. (see Note 7), these financial statements only include the results of operations and cash flows of MWR. Inventory: Inventory is carried principally at average cost and consists primarily of new and reusable parts to maintain and build fiber optic networks. Property and equipment: Property and equipment is stated at cost. Construction costs, including interest, are capitalized during the installation of fiber optic telecommunication networks. Depreciation is computed by the straight-line method over the following estimated useful lives:
YEARS ----- Telecommunication networks........................... 7-15 Equipment............................................ 3-7
Deferred revenue: Amounts received in advance under long-term leases of fiber optic telecommunication networks are recognized as revenue on a straight-line basis over the life of the leases. Revenue recognition: Revenue from long-term leases of fiber optic telecommunication networks is recognized over the term of the lease. Additional services provided under these lease agreements are recognized as the services are performed. Revenue from construction of fiber optic telecommunication networks for others is recognized as the services are performed. These construction contracts are short-term in nature and there were no material contracts in process at the end of any periods presented. Cost of service: Includes the cost of operating the Company's fiber optic telecommunication networks and the cost of construction of networks for others. Income tax matters: The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Net deferred tax assets are reduced by a valuation allowance when appropriate. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. F-24 114 MWR TELECOM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) For the periods presented, the Company was a member of a group that filed consolidated federal and state tax returns. Accordingly, income taxes payable to (refundable from) the tax authorities was recognized on the financial statements of the parent company who is the taxpayer for income tax purposes. The members of the consolidated group allocate payments to any member of the group for the income tax reduction resulting from the member's inclusion in the consolidated return, or the member makes payments to the parent company for its allocated share of the consolidated income tax liability. This allocation approximates the amounts that would be reported if the Company was separately filing its tax returns. Recently issued accounting standards: In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which will require the Company to review for the impairment of long-lived assets and certain identifiable intangibles to be held and used by the Company whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of SFAS No. 121 is required in fiscal 1996. While the Company does not know precisely the impact that will result from adopting SFAS No. 121, the Company does not expect the adoption of SFAS No. 121 to have a material effect on the Company's financial statements. NOTE 2. MAJOR CUSTOMERS Telecommunications revenue includes the following approximate amounts from major customers.
PERIOD FROM YEARS ENDED DECEMBER 31, JANUARY 1, --------------------------- 1995 TO 1993 1994 APRIL 28, 1995 --------- --------- -------------- Customer A.......................... $ 173,000 $ 268,000 $109,000 Customer B.......................... 354,000 449,000 170,000 -------- -------- -------- $ 527,000 $ 717,000 $279,000 ======== ======== ========
NOTE 3. LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE The Company leased its office and warehouse facilities from an affiliate through December 1995 when it entered into an agreement to lease its office and warehouse facilities from McLeod, Inc. on a month-to-month basis. The total rental expense included in the statements of income for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 to April 28, 1995 is approximately $79,000, $82,000 and $31,000, respectively. F-25 115 MWR TELECOM INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. INCOME TAX MATTERS The provision for income taxes consists of the following:
YEARS ENDED DECEMBER PERIOD FROM 31, JANUARY 1, ---------------------- 1995 TO 1993 1994 APRIL 28, 1995 -------- --------- -------------- Current................................ $ 32,515 $(201,558) $ 37,444 Deferred............................... 105,513 261,290 13,795 -------- --------- ------- $138,028 $ 59,732 $ 51,239 ======== ========= =======
The income tax provision differs from the amount of income tax determined by applying the U.S. Federal income tax rate to pretax income due to the following:
PERIOD FROM YEARS ENDED DECEMBER 31, JANUARY 1, ------------------------ 1995 TO 1993 1994 APRIL 28, 1995 -------- ------- -------------- Computed "expected" tax............... $118,670 $50,397 $ 43,452 Increase (decrease) in income taxes resulting from: State tax, net of federal benefit... 22,276 9,460 8,157 Other............................... (2,918) (125) (370) -------- ------- ------- $138,028 $59,732 $ 51,239 ======== ======= =======
NOTE 5. RETIREMENT PLANS The Company's employees who had completed certain service and hour requirements participated in certain retirement plans sponsored by the parent company. The Company's expense related to these benefit plans was approximately none, $76,000 and $21,000 for the years ended December 31, 1993 and 1994 and the period from January 1, 1995 to April 28, 1995, respectively. NOTE 6. RELATED PARTY TRANSACTION AND RIGHTS-OF-WAY Prior to the sale discussed in Note 7, the Company and an affiliate entered into a Joint Ownership Agreement which provides for the ownership and maintenance of each entity's fiber optic networks in the Des Moines, Iowa area. Some of the fiber optics network are constructed within rights-of-way owned by affiliated companies. This agreement remains in force after the above mentioned sale. The Company also had agreements with an affiliate to use certain of their rights-of-way at no charge. These agreements continued in force after the sale to McLeod, Inc. NOTE 7. SALE OF COMPANY On April 28, 1995, all of the outstanding common stock of MWR Telecom Inc. was sold to McLeod, Inc. of Cedar Rapids, Iowa. F-26 116 [MCGLADREY & PULLEN, LLP LETTERHEAD] INDEPENDENT AUDITOR'S REPORT To the Board of Directors Ruffalo, Cody & Associates, Inc. Cedar Rapids, Iowa We have audited the accompanying consolidated balance sheets of Ruffalo, Cody & Associates, Inc. and subsidiary as of December 31, 1994 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ruffalo, Cody & Associates, Inc. and subsidiary as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ MCGLADREY & PULLEN, LLP Cedar Rapids, Iowa February 9, 1996, except for Note 8, as to which the date is July 15, 1996 F-27 117 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------ JUNE 30, 1994 1995 1996 ------------ ------------ ------------ (UNAUDITED) ASSETS (NOTE 2) Current Assets Cash and cash equivalents................................................. $ -- $ -- $ 46,647 Receivables: Trade, less allowance for doubtful accounts 1994 $88,072; 1995 and 1996 $50,000 (Note 7)...................................................... 2,036,844 2,062,801 2,601,859 Income tax refund....................................................... 22,163 23,900 -- Other................................................................... 18,021 39,515 41,218 Deferred income taxes, net (Note 3)......................................... 115,000 70,000 70,000 Prepaid expenses............................................................ 64,829 44,395 29,588 ----------- ----------- ----------- TOTAL CURRENT ASSETS................................................ 2,256,857 2,240,611 2,789,312 ----------- ----------- ----------- Equipment and Leasehold Improvements Technical equipment....................................................... 1,510,401 1,773,178 1,966,626 Office equipment.......................................................... 127,578 250,494 278,772 Leasehold improvements.................................................... 16,552 108,724 122,976 In-house phones........................................................... 59,858 67,931 78,424 ----------- ----------- ----------- 1,714,389 2,200,327 2,446,798 Less accumulated depreciation............................................. 635,134 1,043,527 1,295,577 ----------- ----------- ----------- 1,079,255 1,156,800 1,151,221 ----------- ----------- ----------- Intangibles, primarily software, less accumulated amortization 1994 $18,807; 1995 $51,046; 1996 $68,277................................................ 464,789 481,928 569,094 ----------- ----------- ----------- Other Assets, deferred income taxes, net (Note 3)........................... 13,000 6,000 6,000 ----------- ----------- ----------- $ 3,813,901 $ 3,885,339 $ 4,515,627 =========== =========== =========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Notes payable (Note 2).................................................... $ 550,000 $ 100,000 $ 200,000 Current maturities of long-term debt...................................... 123,505 -- -- Checks issued not yet presented for payment............................... 207,773 16,376 -- Accounts payable.......................................................... 269,337 181,313 372,013 Accrued payroll and payroll related expenses.............................. 263,018 291,269 383,206 Accrued bonuses........................................................... 215,147 227,886 268,269 Accrued commissions....................................................... 104,585 128,573 190,245 Other accrued liabilities................................................. 317,065 243,349 209,507 Income taxes payable...................................................... -- -- 36,953 Customer deposits......................................................... 91,303 722,846 490,716 ----------- ----------- ----------- TOTAL CURRENT LIABILITIES........................................... 2,141,733 1,911,612 2,150,909 ----------- ----------- ----------- Long-Term Debt.............................................................. 222,340 -- -- ----------- ----------- ----------- Commitments (Notes 5 and 6) Redeemable Common Stock and Warrants (Notes 4 and 8) Common stock, no par or stated value; issued 1994, 1995 and 1996 318,182 shares.................................................................. 1,590,910 2,068,183 2,227,274 Common stock held by the 401(k) profit-sharing plan....................... -- 69,453 139,853 Warrants, issued 1994, 1995 and 1996 90,909............................... 363,636 500,000 545,454 ----------- ----------- ----------- 1,954,546 2,637,636 2,912,581 ----------- ----------- ----------- Common Stockholders' Equity (Deficit) (Notes 2, 4, 6 and 8) Common stock, no par or stated value; authorized 5,000,000 shares; issued 1994 500,000 shares; 1995 515,685 shares; 1996 524,979 shares........... 500,000 558,925 618,894 Retained earnings (deficit)............................................... (1,004,718) (1,153,381) (1,026,904) ----------- ----------- ----------- (504,718) (594,456) (408,010) Less maximum cash obligation related to 401(k) profit-sharing plan shares (Note 4)................................................................ -- 69,453 139,853 ----------- ----------- ----------- (504,718) (663,909) (547,863) ----------- ----------- ----------- $ 3,813,901 $ 3,885,339 $ 4,515,627 =========== =========== ===========
See Notes to Consolidated Financial Statements. F-28 118 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------------------ -------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ------------ ----------- ----------- (UNAUDITED) Telemarketing and other revenue (Note 7)... $ 8,370,904 $ 9,756,894 $ 13,286,146 $ 6,101,884 $ 8,278,479 ---------- ---------- ----------- ---------- ---------- Operating expenses: Cost of service.......................... 3,811,520 4,752,031 6,618,481 2,998,585 4,225,252 Selling, general and administrative...... 3,380,973 4,022,104 5,376,135 2,401,419 3,252,973 Depreciation and amortization............ 173,251 313,499 475,296 228,037 269,281 ---------- ---------- ----------- ---------- ---------- TOTAL OPERATING EXPENSES.......... 7,365,744 9,087,634 12,469,912 5,628,041 7,747,506 ---------- ---------- ----------- ---------- ---------- OPERATING INCOME.................. 1,005,160 669,260 816,234 473,843 530,973 Financial income (expense): Interest income.......................... 4,854 1,034 41,780 135 10,258 Interest (expense)....................... (3,132) (45,280) (119,305) (65,626) (16,209) ---------- ---------- ----------- ---------- ---------- INCOME BEFORE INCOME TAXES........ 1,006,882 625,014 738,709 408,352 525,022 Income taxes (Note 3)...................... 340,532 223,380 273,735 143,000 194,000 ---------- ---------- ----------- ---------- ---------- NET INCOME........................ $ 666,350 $ 401,634 $ 464,974 $ 265,352 $ 331,022 ========== ========== =========== ========== ========== Net income (loss) attributable to common stockholders............................. $ 666,350 $ (416,548) $ (148,663) $ (41,467) $ 126,477 ========== ========== =========== ========== ========== Income (loss) per common and common equivalent share......................... $ 1.10 $ (0.83) $ (0.29) $ (0.08) $ 0.19 ========== ========== =========== ========== ========== Weighted average common and common equivalent shares outstanding............ 606,000 500,000 508,546 506,317 675,745 ========== ========== =========== ========== ==========
See Notes to Consolidated Financial Statements. F-29 119 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK AND WARRANTS AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 6) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (CONTINUED ON PAGE F-31)
REDEEMABLE COMMON STOCK AND WARRANTS ------------------------------------------------------- 401(k) PROFIT- COMMON SHARING PLAN STOCK SHARES WARRANTS TOTAL ----------- -------------- -------- ---------- Balance, December 31, 1992........................ $ 1,050,000 $-- $300,000 $1,350,000 Issuance of 9,091 shares of common stock upon the exercise of warrants...................... 27,273 -- (18,182) 9,091 Purchase of 40,909 shares of redeemable common stock for retirement.......................... (122,727) -- -- (122,727) Warrants cancelled or expired................... -- -- (100,000) (100,000) Dividends ($.30 per share)...................... -- -- -- -- Net income...................................... -- -- -- -- ---------- -------- -------- ---------- Balance, December 31, 1993........................ 954,546 -- 181,818 1,136,364 Net income...................................... -- -- -- -- Increase in estimated redemption price.......... 636,364 -- 181,818 818,182 ---------- -------- -------- ---------- Balance, December 31, 1994........................ 1,590,910 -- 363,636 1,954,546 Common stock contributed to 401(k) profit- sharing plan, 10,685 shares (Note 4).......... -- -- -- -- Issuance of 5,000 shares of common stock upon the exercise of options (Note 4).............. -- -- -- -- Net income...................................... -- -- -- -- Increase in estimated redemption price.......... 477,273 -- 136,364 613,637 Change related to 401(k) profit-sharing plan shares........................................ -- 69,453 -- 69,453 ---------- -------- -------- ---------- Balance, December 31, 1995........................ 2,068,183 69,453 500,000 2,637,636 Common stock contributed to 401(k) profit- sharing plan, 10,140 shares (unaudited) (Note 4)............................................ -- -- -- -- Issuance of 375 shares of common stock upon the exercise of options (unaudited) (Note 4)...... -- -- -- -- Purchase of 1,221 shares of common stock for retirement (unaudited)........................ -- -- -- -- Net income (unaudited).......................... -- -- -- -- Increase in estimated redemption price (unaudited)................................... 159,091 -- 45,454 204,545 Change related to 401(k) profit-sharing plan shares (unaudited)............................ -- 70,400 -- 70,400 ---------- -------- -------- ---------- Balance, June 30, 1996 (unaudited)................ $ 2,227,274 $139,853 $545,454 $2,912,581 ========== ======== ======== ==========
See Notes to Consolidated Financial Statements. F-30 120 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK AND WARRANTS AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 6) YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (CONTINUED)
COMMON STOCKHOLDERS' EQUITY (DEFICIT) -------------------------------------------------- LESS MAXIMUM CASH OBLIGATION RELATED TO 401(k) RETAINED PROFIT- COMMON EARNINGS SHARING STOCK (DEFICIT) PLAN TOTAL -------- ----------- ---------- --------- Balance, December 31, 1992........................... $500,000 $(1,108,974) $ -- $(608,974) Issuance of 9,091 shares of common stock upon the exercise of warrants............................. -- (91) -- (91) Purchase of 40,909 shares of redeemable common stock for retirement............................. -- -- -- -- Warrants cancelled or expired...................... -- 100,000 -- 100,000 Dividends ($.30 per share)......................... -- (245,455) -- (245,455) Net income......................................... -- 666,350 -- 666,350 -------- ----------- --------- --------- Balance, December 31, 1993........................... 500,000 (588,170) -- (88,170) Net income......................................... -- 401,634 -- 401,634 Increase in estimated redemption price............. -- (818,182) -- (818,182) -------- ----------- --------- --------- Balance, December 31, 1994........................... 500,000 (1,004,718) -- (504,718) Common stock contributed to 401(k) profit-sharing plan, 10,685 shares (Note 4)..................... 53,425 -- -- 53,425 Issuance of 5,000 shares of common stock upon the exercise of options (Note 4)..................... 5,500 -- -- 5,500 Net income......................................... -- 464,974 -- 464,974 Increase in estimated redemption price............. -- (613,637) -- (613,637) Change related to 401(k) profit-sharing plan shares........................................... -- -- (69,453) (69,453) -------- ----------- --------- --------- Balance, December 31, 1995........................... 558,925 (1,153,381) (69,453) (663,909) Common stock contributed to 401(k) profit-sharing plan, 10,140 shares (unaudited) (Note 4)......... 65,909 -- -- 65,909 Issuance of 375 shares of common stock upon the exercise of options (unaudited) (Note 4)......... 375 -- -- 375 Purchase of 1,221 shares of common stock for retirement (unaudited)........................... (6,315) -- -- (6,315) Net income (unaudited)............................. -- 331,022 -- 331,022 Increase in estimated redemption price (unaudited)...................................... -- (204,545) -- (204,545) Change related to 401(k) profit-sharing plan shares (unaudited)...................................... -- -- (70,400) (70,400) -------- ----------- --------- --------- Balance, June 30, 1996 (unaudited)................... $618,894 $(1,026,904) $ (139,853) $(547,863) ======== =========== ========= =========
See Notes to Consolidated Financial Statements. F-31 121 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, -------------------------------------------- ---------------------------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Cash Flows from Operating Activities Net income...................................... $ 666,350 $ 401,634 $ 464,974 $ 265,352 $ 331,022 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.................................. 173,251 213,725 304,255 142,516 182,649 Amortization.................................. -- 99,774 171,041 85,521 86,632 Provision for doubtful accounts............... -- 38,072 -- -- -- (Gain) loss on sale of equipment.............. -- 10,761 (3,942) (3,942) -- Deferred income taxes......................... (6,000) -- 52,000 -- -- Changes in assets and liabilities: Other receivables........................... (541,671) (869,041) (47,451) 626,797 (540,761) (Increase) decrease in income taxes receivable................................ (18,042) (4,121) (1,737) 22,163 23,900 (Increase) decrease in prepaid expenses..... (15,008) (42,726) 20,434 (158,999) 14,807 Increase (decrease) in accounts payable and accrued expenses.......................... 253,107 411,916 (43,337) (392,739) 416,759 Increase (decrease) in income tax payable... (28,452) -- -- 38,445 36,953 Increase (decrease) in customer deposits.... (42,141) 16,086 631,543 7,650 (232,130) ----------- ----------- ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES.............................. 441,394 276,080 1,547,780 632,764 319,831 ----------- ----------- ----------- ----------- ----------- Cash Flows from Investing Activities Proceeds from sale of equipment................. -- 5,000 52,000 52,000 -- Purchase of equipment and leasehold improvements.................................. (146,220) (784,985) (568,660) (302,641) (246,471) Purchase of intangibles......................... -- (483,596) (49,378) -- (104,397) ----------- ----------- ----------- ----------- ----------- NET CASH (USED IN) INVESTING ACTIVITIES... (146,220) (1,263,581) (566,038) (250,641) (350,868) ----------- ----------- ----------- ----------- ----------- Cash Flows from Financing Activities Proceeds from notes payable..................... 1,065,000 3,510,000 6,120,000 3,080,000 3,135,000 Principal payments on notes payable............. (1,080,000) (2,960,000) (6,570,000) (3,480,000) (3,035,000) Proceeds from long-term borrowings.............. -- 600,000 -- 204,104 -- Principal payments on long-term borrowings...... (40,525) (254,155) (345,845) (58,890) -- Proceeds from issuance of common stock upon the exercise of options........................... -- -- 5,500 -- 375 Proceeds from issuance of redeemable common stock......................................... 9,000 -- -- -- -- Purchase of redeemable common stock for retirement.................................... (122,727) -- -- -- -- Purchase of common stock for retirement......... -- -- -- -- (6,315) Cash dividends paid............................. -- (245,455) -- -- -- Increase (decrease) in checks issued not yet presented for payment......................... -- 207,773 (191,397) (127,337) (16,376) ----------- ----------- ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.............................. (169,252) 858,163 (981,742) (382,123) 77,684 ----------- ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. 125,922 (129,338) -- -- 46,647 Cash and cash equivalents: Beginning....................................... 3,416 129,338 -- -- -- ----------- ----------- ----------- ----------- ----------- Ending.......................................... $ 129,338 $ -- $ -- $ -- $ 46,647 =========== =========== =========== =========== =========== Supplemental Disclosures of Cash Flow Information Cash payments for: Interest...................................... $ 3,262 $ 39,183 $ 125,530 $ 61,862 $ 14,237 Income taxes.................................. 400,702 235,517 223,472 82,392 133,146 Supplemental Schedule of Noncash Investing and Financing Activities Common stock contributed to 401(k) profit-sharing plan (Note 4).................. $ 53,425 $ 53,425 $ 65,909 =========== =========== =========== Increase in estimated redemption price of redeemable common stock and warrants.......... $ 818,182 $ 613,637 =========== ===========
See Notes to Consolidated Financial Statements. F-32 122 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED.) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business: The Company provides telemarketing services and systems to businesses and nonprofit entities throughout the United States. Accounting estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the Company's significant accounting policies follows: Principles of consolidation: The accompanying consolidated financial statements include Ruffalo, Cody & Associates, Inc. and its subsidiary, Campus-Call, Inc., which is wholly-owned. All material intercompany transactions and balances have been eliminated. The results of operations of the subsidiary have been reported since the inception date of June 2, 1994. Cash and cash equivalents: For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Equipment and leasehold improvements and depreciation: Equipment and leasehold improvements are carried at cost. Depreciation is computed by the straight-line method over the following estimated useful lives:
YEARS ----- Technical equipment.................................. 3-5 Office equipment..................................... 5 Leasehold improvements............................... 5-10 In-house phones...................................... 5
Software costs: Costs incurred to develop software products are charged to expense as research and development costs until technological feasibility for the product is established. Thereafter, software production costs are capitalized and, once the product is available for sale, are amortized by the greater of (a) the ratio that current gross revenues for the product bear to the total current and anticipated future gross revenues for that product and (b) the straight-line method over the remaining estimated economic life of the product including the period being reported on. If management's estimate of the future gross revenues or the remaining economic life of the product are reduced significantly, the carrying amount of software costs would be affected. Revenue recognition: Fees from telemarketing contracts are recognized as revenue in the period the services are performed. Revenue on software license fees and sales that require installation is recognized upon installation. Revenue on hardware sales is recognized upon delivery and installation. Training and consulting fees are recognized as the services are performed. Upon installation of a system, the Company records as deferred revenue the charge for software maintenance. Revenue is then recognized on the straight-line basis over the term of the contract. F-33 123 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED.) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Income taxes: Deferred taxes are provided on a liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Stock options issued to employees and directors: Compensation expense for stock issued through stock option plans is accounted for using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued for Employees." Under this method, compensation is measured as the difference between the estimated market value of the stock at the date of award less the amount required to be paid for the stock. The difference, if any, is charged to expense over the periods of service. The estimated market value used for the stock options granted is determined on a periodic basis by the Company's Board of Directors. Common stock held by 401(k) profit-sharing plan: The Company's maximum cash obligation related to these shares is classified outside stockholders' equity because the shares are not readily traded and could be put to the Company for cash. Earnings (loss) per common and common equivalent share: Earnings (loss) per common and common equivalent share are determined by dividing net income, less the increase in the estimated redemption price of redeemable common stock and warrants, by the weighted average number of common and common equivalent shares outstanding during each of the periods presented. Dilutive common stock equivalents related to the stock options discussed in Note 4 were determined using the treasury stock method. The estimated fair market value of the Company's common stock used to calculate the common stock equivalents under the treasury stock method for the periods presented has been estimated by management or determined by an independent appraisal. Earnings (loss) per common and common equivalent share assuming full dilution are the same as earnings (loss) per common and common equivalent share. Recently issued accounting standards: In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which will require the Company to review for the impairment of long-lived assets and certain identifiable intangibles to be held and used by the Company whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of SFAS No. 121 is required in fiscal 1996. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans. However, the new standard allows compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but requires expanded disclosures. SFAS No. 123 is effective in fiscal year 1996. The Company has elected to continue to apply the intrinsic value based method of accounting for stock options. F-34 124 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED.) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) While the Company does not know precisely the impact that will result from adopting SFAS No. 121 and SFAS No. 123, the Company does not expect the adoption of SFAS No. 121 or SFAS No. 123 to have a material effect on the Company's consolidated financial statements. Fair value of financial instruments: The carrying amount of current notes payable approximates fair value because these obligations bear interest at current rates. Interim financial information (unaudited): The financial statements and notes related thereto as of June 30, 1996, and for the six-month periods ended June 30, 1995 and 1996, are unaudited, but in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations. The operating results for the interim periods are not indicative of the operating results to be expected for a full year or for other interim periods. Not all disclosures required by generally accepted accounting principles necessary for a complete presentation have been included. NOTE 2. PLEDGED ASSETS, CURRENT NOTES PAYABLE AND LONG-TERM DEBT At June 30, 1996, the Company had a line of credit agreement with a bank under which they may borrow up to 80% of eligible trade receivables up to a maximum of $2,500,000. The Company has $200,000 outstanding under this agreement at June 30, 1996. Borrowings under this agreement are collateralized by substantially all of the Company's assets and bear interest at the bank's prime rate (the current effective rate is 8.25%). The agreement contains a covenant requiring the Company to maintain a certain amount of tangible net worth. The covenant was waived as of June 30, 1996. Additional available borrowings under the agreement totaled approximately $2,300,000 at June 30, 1996. The agreement expires May 2, 1997. NOTE 3. INCOME TAX MATTERS Net deferred tax assets consist of the following components as of December 31, 1994 and 1995:
1994 1995 --------- -------- Deferred tax assets: Receivable allowances............................. $ 35,000 $ 20,000 Equipment and leasehold improvements.............. 5,000 17,000 Intangibles....................................... 21,000 9,000 Accrued expenses.................................. 32,000 50,000 Deferred rent..................................... 35,000 -- --------- -------- 128,000 96,000 Deferred tax liabilities: Capitalized software costs........................ -- 20,000 --------- -------- $ 128,000 $ 76,000 ========= ========
F-35 125 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED.) NOTE 3. INCOME TAX MATTERS -- (CONTINUED) The deferred income tax amounts mentioned above have been classified on the accompanying balance sheets as of December 31, 1994 and 1995 as follows:
1994 1995 --------- -------- Current assets......................................... $ 115,000 $ 70,000 Noncurrent assets...................................... 13,000 6,000 --------- -------- $ 128,000 $ 76,000 ========= ========
Income tax expense is composed of the following:
YEAR ENDED DECEMBER 31, ----------------------------------- 1993 1994 1995 --------- --------- --------- Current tax expense........................ $ 346,532 $ 223,380 $ 221,735 Deferred tax expense....................... (6,000) -- 52,000 --------- --------- --------- $ 340,532 $ 223,380 $ 273,735 ========= ========= =========
The income tax provision differs from the amount of income tax determined by applying the U.S. Federal income tax rate to pretax income for 1993, 1994 and 1995 due to the following:
YEAR ENDED DECEMBER 31, ----------------------------------- 1993 1994 1995 --------- --------- --------- Computed "expected" tax.................... $ 342,340 $ 212,505 $ 251,161 Increase (decrease) in income taxes resulting from: Nondeductible expenses................ 1,674 6,072 9,774 State income taxes, net of federal income tax benefit.................. 1,393 1,864 4,691 Other................................. (4,875) 2,939 8,109 --------- --------- --------- $ 340,532 $ 223,380 $ 273,735 ========= ========= =========
NOTE 4. EMPLOYEE BENEFIT PLANS The Company has a 401(k) profit sharing plan for eligible employees. Contributions to the plan are at the discretion of the Company's Board of Directors. The amount of contribution included in operating expenses for the years ended December 31, 1993, 1994 and 1995 is $30,802, $52,473 and $59,494, respectively. The contributions for 1994 and 1995 have been made with company stock. In the event a terminated plan participant desires to sell his or her shares of the Company stock, or if certain employees elect to diversify their account balances, the Company may be required to purchase the shares from the participant at their fair market value. To the extent that shares of common stock held by the 401(k) profit-sharing plan are not readily traded, a sponsor must reflect the maximum cash obligation related to those securities outside of stockholders' equity. As of June 30, 1996, 19,979 shares held by the 401(k) profit-sharing plan, at a fair value of $7.00 per share, have been reclassified from stockholders' equity to liabilities. F-36 126 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED.) NOTE 4. EMPLOYEE BENEFIT PLANS -- (CONTINUED) The Company pays bonuses to its officers at the discretion of the Board of Directors. The amount of these bonuses charged to operating expenses for the years ended December 31, 1993, 1994 and 1995 is $288,665, $179,165 and $186,466, respectively. The Company has established employee and director stock option plans for the benefit of eligible employees and directors under which options for the issuance of up to 295,000 shares of common stock may be granted. Under the employee and director plans, all options vest over a period of up to ten years as determined by the Board of Directors at the time of grant. Other pertinent information related to the plan is as follows:
SHARES OPTION PRICE -------- ------------ Outstanding at January 1, 1993.............................. 154,000 $ 1.00-$1.10 Granted................................................ 67,000 3.00- 3.30 Forfeited.............................................. (15,000) 1.00- 3.00 -------- Outstanding at December 31, 1993............................ 206,000 1.00- 3.30 Granted................................................ 32,500 6.00 -------- Outstanding at December 31, 1994............................ 238,500 1.00- 6.00 Exercised.............................................. (5,000) 1.10 -------- Outstanding at December 31, 1995............................ 233,500 1.00- 6.00 Granted................................................ 26,500 6.50 Exercised.............................................. (375) 1.00 Forfeited.............................................. (1,875) 1.00- 6.00 -------- Under option, June 30, 1996................................. 257,750 $ 1.00-$6.50 ========
DECEMBER 31, JUNE --------------------------- 30, 1993 1994 1995 1996 ------ ------ ------- ------- NUMBER OF SHARES -------------------------------------- Available for grant, end of year............... 69,000 56,500 56,500 31,875 ====== ====== ======= ======= Options exercisable, end of year............... -- 72,500 135,500 170,000 ====== ====== ======= =======
NOTE 5. LEASE COMMITMENTS AND TOTAL RENT EXPENSE The Company leases its main office space under an agreement which expires on April 30, 2005. This lease requires monthly rent payments totaling $29,851 and increasing to $32,429 in later years plus the payment of property taxes and maintenance. The Company also leases other office space and office equipment under various leases which require various minimum rental payments through July 1997. F-37 127 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED.) NOTE 5. LEASE COMMITMENTS AND TOTAL RENT EXPENSE -- (CONTINUED) The total minimum lease commitment at December 31, 1995 under the operating leases mentioned above is $3,620,229 which is due as follows: During the year ending December 31: 1996...................................................... $ 438,644 1997...................................................... 399,992 1998...................................................... 358,215 1999...................................................... 358,215 2000...................................................... 378,839 Later years............................................... 1,686,324 ---------- $3,620,229 ==========
The total rent expense for the years ended December 31, 1993, 1994 and 1995 is approximately $241,500, $293,200 and $353,800, respectively. NOTE 6. REDEEMABLE COMMON STOCK AND WARRANTS In connection with an Investment Agreement covering the issuance of 350,000 shares of the Company's common stock, warrants were issued which entitle the holders to purchase one share of common stock in exchange for $1 and one warrant. At December 31, 1995 and June 30, 1996, a total of 90,909 warrants are outstanding. All of the outstanding warrants expire on October 2, 2001. At anytime after October 2, 1997, the shareholders covered by the Investment Agreement may, at their option, put the common stock and warrants to the Company and require the Company to immediately pay in cash, in the case of the common stock, the fair market value of the common stock as determined by an independent appraiser and, in the case of the warrants, the fair market value of the common stock less the exercise price of the warrants. The Company is increasing the carrying amount of the redeemable common stock and warrants so that the carrying amount will equal the estimated redemption amount. The estimated redemption amount at each year end was determined by an independent appraiser. For interim periods, the amount was estimated by management. NOTE 7. MAJOR CUSTOMER Telemarketing revenue for the years ended December 31, 1993, 1994 and 1995 includes approximately $2,750,000, $3,465,000 and $5,600,000, respectively, from a major customer. Trade receivables from this customer totaled $382,928, $579,943 and $522,544 at December 31, 1993, 1994 and 1995, respectively. In October 1995, the Company was informed by the major customer that it intends to terminate its contract with the Company effective December 31, 1996. NOTE 8. EVENTS SUBSEQUENT TO DECEMBER 31, 1995 On July 15, 1996, McLeod, Inc. consummated the acquisition (the "Acquisition") of the Company, from the shareholders of the Company by means of a forward triangular merger pursuant to an Agreement and Plan of Reorganization, dated as of July 12, 1996 (the "Agreement"), by and F-38 128 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED.) NOTE 8. EVENTS SUBSEQUENT TO DECEMBER 31, 1995 -- (CONTINUED) among McLeod, Inc., the Company and certain shareholders of the Company. Pursuant to the Agreement, (i) McLeod Merging Co., a newly incorporated Iowa corporation and a wholly-owned subsidiary of McLeod, Inc., was merged with and into the Company, with McLeod Merging Co. (which has been renamed "Ruffalo, Cody & Associates, Inc.") being the surviving corporation, (ii) the outstanding shares of the Company's common stock were converted into the right to receive cash and/or shares of McLeod, Inc.'s Class A Common Stock (the "Class A Common Stock"), and (iii) the outstanding options to purchase shares of the Company's common stock were converted into options to purchase shares of the Class A Common Stock (the "Substitute Options"). Under the Agreement, each issued and outstanding share of the Company's common stock was converted into the right to receive a maximum of approximately 0.7 of a share of the Class A Common Stock. McLeod, Inc. agreed to purchase the Company for a maximum aggregate purchase price of approximately $19.9 million (based on the average market price of the Class A Common Stock during the five business days before and after the Acquisition). The purchase price consisted of approximately $4.9 million in cash, 474,807 shares of Class A Common Stock issuable in exchange for the Company's common stock, and 158,009 shares of Class A Common Stock issuable upon the exercise of the Substitute Options. On July 15, 1996, McLeod, Inc. paid an aggregate of approximately $4.8 million in cash and issued 361,420 shares of Class A Common Stock to the shareholders of the Company, and granted to the Company's option holders Substitute Options to purchase 158,009 shares of Class A Common Stock. An additional $50,782 in cash and 113,387 shares of McLeod, Inc.'s Class A Common Stock were placed into escrow and will be delivered (if at all) to certain of the shareholders of the Company over a period of 18 months, contingent upon certain conditions relating to the Company's ongoing revenues. F-39 129 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Telecom*USA Publishing Group, Inc. Cedar Rapids, Iowa We have audited the accompanying consolidated balance sheets of Telecom*USA Publishing Group, Inc. and subsidiaries as of August 31, 1995 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Telecom*USA Publishing Group, Inc. and subsidiaries as of August 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1996 in conformity with generally accepted accounting principles. Cedar Rapids, Iowa September 27, 1996 F-40 130 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AUGUST 31, --------------------------- 1995 1996 ----------- ----------- ASSETS (NOTE 4) Current Assets Accounts receivable: Billed........................................................................... $ 3,744,468 $ 5,543,874 Unbilled......................................................................... 6,493,122 8,555,438 ----------- ----------- 10,237,590 14,099,312 Less allowance for doubtful accounts and adjustments............................. 2,334,156 3,102,923 ----------- ----------- 7,903,434 10,996,389 Income taxes receivable............................................................ -- 54,710 Other receivables.................................................................. 553,447 828,345 Deferred expenses.................................................................. 7,896,840 9,078,470 Prepaid expenses................................................................... 723,031 380,903 Deferred income taxes, net (Note 6)................................................ 1,410,000 1,536,000 ----------- ----------- TOTAL CURRENT ASSETS......................................................... 18,486,752 22,874,817 ----------- ----------- Equipment and Furniture (Note 13).................................................... 5,502,530 7,129,908 Less accumulated depreciation...................................................... 2,316,912 3,433,755 ----------- ----------- 3,185,618 3,696,153 ----------- ----------- Investments and Other Assets Investment in Colorado Directory Company, L.L.C. (Note 3).......................... 1,000,000 -- Purchase option (Note 2)........................................................... 500,000 500,000 Deferred income taxes, net (Note 6)................................................ 920,000 704,000 Other investment................................................................... -- 100,000 ----------- ----------- 2,420,000 1,304,000 ----------- ----------- Intangibles Customer lists, at cost, less accumulated amortization 1995 $1,155,646; 1996 $1,489,634 (Note 12)....................................... 5,349,506 6,176,196 Noncompete agreements, at cost, less accumulated amortization 1995 $1,094,317; 1996 $1,947,662.................................................................. 6,900,246 6,955,720 Organization and loan costs, at cost, less accumulated depreciation 1995 $72,592; 1996 $109,087.................................................................... 230,597 185,947 ----------- ----------- 12,480,349 13,317,863 ----------- ----------- $36,572,719 $41,192,833 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Note payable, bank (Note 4)........................................................ $ 1,532,000 $ 2,773,800 Current maturities of long-term debt (Note 4)...................................... 875,050 1,224,286 Payables for intangibles acquired, due within one year............................. 1,439,846 572,528 Accounts payable................................................................... 1,573,680 2,160,855 Checks issued not yet presented for payment........................................ 21,981 219,942 Accrued payroll and payroll related expenses....................................... 1,597,745 1,920,379 Other accrued expenses............................................................. 759,925 914,053 Income taxes payable............................................................... 172,524 Customer deposits.................................................................. 6,761,668 7,534,485 ----------- ----------- TOTAL CURRENT LIABILITIES.................................................... 14,734,419 17,320,328 ----------- ----------- Long-Term Debt, less current maturities (Note 4)..................................... 15,511,295 16,228,889 ----------- ----------- Commitments and Contingencies (Notes 5, 7, 9, 10 and 13) Minority Interests Redeemable preferred stock, redeemed on September 2, 1995.......................... 200,000 -- Consolidated subsidiary............................................................ 484,043 352,816 ----------- ----------- 684,043 352,816 ----------- ----------- Redeemable common stock held by 401(k) profit-sharing plan (Note 9).................. 125,595 220,070 ----------- ----------- Stockholders' Equity (Notes 4 and 14) Capital stock, common, no par or stated value; authorized 10,000,000 shares; issued 1995 2,533,124 shares; 1996 2,719,481 shares (Notes 9, 10 and 11)................ 3,968,357 4,194,075 Retained earnings.................................................................. 1,787,855 3,209,975 ----------- ----------- 5,756,212 7,404,050 Less cost of treasury stock, 37,750 shares......................................... 113,250 113,250 Less maximum cash obligation related to 401(k) profit-sharing plan (Note 9)........ 125,595 220,070 ----------- ----------- 5,517,367 7,070,730 ----------- ----------- $36,572,719 $41,192,833 =========== ===========
See Notes to Consolidated Financial Statements. F-41 131 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
1994 1995 1996 ----------- ----------- ----------- Revenue......................................... $31,438,605 $38,620,274 $52,117,929 ----------- ----------- ----------- Operating expenses: Production and distribution................... 12,568,411 15,022,983 22,340,587 Market sales.................................. 9,244,961 10,940,711 13,798,321 Sales and marketing administrative............ 1,761,103 2,279,484 2,294,370 General and administrative.................... 4,322,338 5,020,000 7,249,349 Depreciation and amortization................. 1,167,458 1,891,198 2,348,490 Restructuring loss (Note 11).................. 524,670 -- -- ----------- ----------- ----------- TOTAL OPERATING EXPENSES.............. 29,588,941 35,154,376 48,031,117 ----------- ----------- ----------- OPERATING INCOME...................... 1,849,664 3,465,898 4,086,812 ----------- ----------- ----------- Nonoperating (income) expense: Interest income............................... (1,707) (93,997) (251,000) Interest expense.............................. 843,961 1,497,699 1,767,309 Loan inducement fee payoff (Note 7)........... -- 1,330,000 -- Loss on disposal of investment (Note 3)....... -- -- 500,000 ----------- ----------- ----------- 842,254 2,733,702 2,016,309 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY.......................... 1,007,410 732,196 2,070,503 Federal and state income taxes (Note 6)......... 137,190 302,586 975,610 ----------- ----------- ----------- INCOME BEFORE MINORITY INTEREST IN NET (LOSS) IN CONSOLIDATED SUBSIDIARY... 870,220 429,610 1,094,893 Minority interest in net (loss) of consolidated subsidiary.................................... -- (15,959) (327,227) ----------- ----------- ----------- NET INCOME............................ $ 870,220 $ 445,569 $ 1,422,120 =========== =========== =========== Earnings per common and common equivalent shares outstanding: Primary....................................... $ 0.27 $ 0.14 $ 0.43 =========== =========== =========== Fully diluted................................. $ 0.26 $ 0.14 $ 0.36 =========== =========== =========== Weighted average common and common equivalent shares outstanding: Primary....................................... 3,198,776 3,271,497 3,332,659 =========== =========== =========== Fully diluted................................. 4,510,864 3,289,720 4,678,549 =========== =========== ===========
See Notes to Consolidated Financial Statements. F-42 132 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
LESS MAXIMUM CASH OBLIGATION RELATED TO LESS 401(k) COMMON RETAINED TREASURY PROFIT-SHARING STOCK EARNINGS STOCK PLAN SHARES TOTAL ---------- ---------- --------- --------------- ---------- Balance, August 31, 1993............... $3,868,400 $ 472,066 $(113,250) $ -- $4,227,216 Common stock contributed to 401(k) profit-sharing plan, 15,179 shares (Note 9)........................... 53,126 -- -- (53,126) -- Issuance of 925 shares of common stock upon the exercise of options (Note 10).......................... 925 -- -- -- 925 Purchase of 775 shares of common stock for retirement............... (2,713) -- -- -- (2,713) Net income........................... -- 870,220 -- -- 870,220 ---------- ---------- --------- --------- ---------- Balance, August 31, 1994............... 3,919,738 1,342,286 (113,250) (53,126) 5,095,648 Common stock contributed to 401(k) profit-sharing plan, 12,945 shares (Note 9)........................... 57,307 -- -- (57,307) -- Issuance of 14,175 shares of common stock upon the exercise of options (Note 10).......................... 19,775 -- -- -- 19,775 Purchase of 6,325 shares of common stock for retirement............... (28,463) -- -- -- (28,463) Change related to 401(k) profit- sharing plan shares................ -- -- -- (15,162) (15,162) Net income........................... -- 445,569 -- -- 445,569 ---------- ---------- --------- --------- ---------- Balance, August 31, 1995............... 3,968,357 1,787,855 (113,250) (125,595) 5,517,367 Common stock contributed to 401(k) profit-sharing plan, 10,363 shares (Note 9)........................... 57,470 -- -- (57,470) -- Issuance of 182,300 shares of common stock upon the exercise of options (Note 10).......................... 208,850 -- -- -- 208,850 Purchase of 6,306 shares of common stock for retirement............... (40,602) -- -- -- (40,602) Change related to 401(k) profit- sharing plan shares................ -- -- -- (37,005) (37,005) Net income........................... -- 1,422,120 -- -- 1,422,120 ---------- ---------- --------- --------- ---------- Balance, August 31, 1996............... $4,194,075 $3,209,975 $(113,250) $(220,070) $7,070,730 ========== ========== ========= ========= ==========
See Notes to Consolidated Financial Statements. F-43 133 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
1994 1995 1996 ------------ ------------ ------------ Cash Flows from Operating Activities Net income.......................................... $ 870,220 $ 445,569 $ 1,422,120 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation..................................... 551,531 802,428 1,116,508 Amortization..................................... 615,927 1,088,770 1,231,982 Deferred income taxes............................ (171,512) (813,000) 90,000 Provision for loan inducement fee payable (Note 7)....................................... -- 1,330,000 -- Restructuring loss (Note 11)..................... 524,670 -- -- Loss on disposal of investment (Note 3).......... -- -- 500,000 Minority interest in net (loss) of consolidated subsidiary..................................... -- (15,959) (327,227) Provision for doubtful accounts and adjustments.................................... 1,340,069 1,669,478 2,636,421 Change in assets and liabilities: (Increase) in accounts receivable.............. (2,235,749) (2,539,025) (5,729,376) (Increase) in income taxes receivable.......... -- -- (54,710) (Increase) in deferred expenses................ (1,454,860) (1,769,831) (1,181,630) Increase (decrease) in accounts payable and accrued expenses............................ 345,414 887,580 (163,439) Increase in customer deposits.................. 1,609,118 1,469,140 772,817 Increase (decrease) in income taxes payable.... 209,224 115,524 (172,524) Other.......................................... (67,702) (94,998) 67,230 ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES... 2,136,350 2,575,676 208,172 ------------ ------------ ------------ Cash Flows from Investing Activities Purchase of equipment and furniture................. (809,908) (1,483,881) (1,598,290) Purchase of customer lists.......................... (583,522) (3,121,804) (457,276) Purchase of noncompete agreements................... (684,828) (3,681,801) (204,692) Investment in Colorado Directory Company, L.L.C. (Note 3)......................................... -- (1,000,000) -- Proceeds received on disposal of investment......... -- -- 500,000 Purchase option (Note 2)............................ -- (500,000) -- Organization and loan costs......................... -- (158,332) -- Purchase of other investment........................ -- -- (100,000) ------------ ------------ ------------ NET CASH (USED IN) INVESTING ACTIVITIES..... (2,078,258) (9,945,818) (1,860,258) ------------ ------------ ------------
F-44 134 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
1994 1995 1996 ------------ ------------ ------------ ------------ ------------ ------------ Cash Flows from Financing Activities Increase (decrease) in checks issued not yet presented for payment............................ $ (3,493) $ (83,223) $ 197,961 Borrowings on revolving credit agreements........... 12,906,000 10,109,500 21,211,000 Payments on revolving credit agreements............. (12,853,000) (9,103,500) (17,733,200) Proceeds from long-term debt........................ -- 9,330,500 -- Principal payments on long-term debt................ (105,811) (3,374,447) (2,187,923) Proceeds from issuance of common stock upon the exercise of options.............................. 925 19,775 208,850 Purchase of common stock for retirement............. (2,713) (28,463) (40,602) Payment on redemption of preferred stock............ -- -- (200,000) Capital contribution received from minority owner in consolidated subsidiary.......................... -- 500,000 196,000 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................ (58,092) 7,370,142 1,652,086 ------------ ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS... -- -- -- Cash and cash equivalents: Beginning........................................... -- -- -- ------------ ------------ ------------ Ending.............................................. $ -- $ -- $ -- ============ ============ ============ Supplemental Disclosures of Cash Flow Information Cash payments for: Interest......................................... $ 793,609 $ 1,247,048 $ 1,767,309 Income taxes, net of refunds..................... 99,478 1,000,062 1,115,250 Supplemental Schedules of Noncash Investing and Financing Activities Customer list acquired by issuance payables......................................... $ 669,000 $ 464,923 $ 829,022 Noncompete agreement acquired by issuance payables......................................... 669,000 974,923 578,506 Common stock contributed to 401(k) profit-sharing plan (Note 9).................................... 53,126 57,307 57,470 Reclassification of intangibles to deferred income taxes (Note 6)................................... 1,188,488 Equipment acquired by contracts payable............. 552,612 28,753 Current note payable converted to long-term debt (Note 4)......................................... 2,236,000
See Notes to Consolidated Financial Statements. F-45 135 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business: Telecom*USA Publishing Group, Inc. and subsidiaries (the "Company") are publishers of telephone directories in a fifteen-state area primarily in the midwestern United States. Revenues are principally derived from advertising in such publications. Accounting estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the Company's significant accounting policies follows: Principles of consolidation: The consolidated financial statements include the accounts of Telecom*USA Publishing Group, Inc. and its wholly-owned subsidiaries, Telecom*USA Publishing Company and Telecom*USA Neighborhood Directories, Inc. (liquidated in January 1996) and its 51% owned subsidiary, OakTel Directory, L.C. (OakTel). All significant intercompany accounts and transactions have been eliminated in consolidation. OakTel was formed to publish a directory for the Lincoln, Nebraska area and its first publication was in November 1995. The Company provides directory services to OakTel at specified prices. Revenue and expense recognition: Revenue and expenses are recognized on the accrual basis. Revenues are recorded upon publication of directories. Deferred expenses consist of production and selling costs on unpublished directory advertising orders. They are expensed when the related directory is published and the related revenue of the directory is recognized. Customer deposits consist of cash received from customers at the time a sales contract is signed. They are recorded as revenue when the related directory is published. Advertising revenue and market sales expense includes contracts for trading advertising space with various other media companies. These revenues are recognized in the month of publication and the related prepaid expenses are recorded at estimated net realizable value. These revenues totaled approximately $548,000, $600,000, and $950,000 for the years ended August 31, 1994, 1995, and 1996, respectively. Accounts receivable: In accordance with industry practice, accounts receivable includes certain unbilled revenue from installment contracts. It is anticipated that a substantial portion of all such amounts at August 31, 1996 will be collected within one year. Equipment and furniture and depreciation: Equipment and furniture is carried at cost. Depreciation expense is computed by the straight-line method over primarily five or seven years. Investment in Colorado Directory Company, L.L.C. ("CDC"): The Company is accounting for its 12.5% investment in CDC by the cost method. Income tax matters: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be F-46 136 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Intangible assets: Intangible assets are being amortized by the straight-line method over the following periods:
YEARS ----- Customer lists (See Note 13)......................... 15 Noncompete agreements................................ 3-10 Organization and loan costs.......................... 1-6
Intangible assets are periodically reviewed for impairment based upon an assessment of future operations to ensure that they are appropriately valued. The Company entered into noncompete agreements and acquired customer lists for forty and eight directories during the years ended August 31, 1995 and 1996, respectively. Stock options: Compensation expense for stock issued through stock options plans is accounted for using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under this method, compensation is measured as the difference between the estimated market value of the stock at the date of award less the amount required to be paid for the stock. The difference, if any, is charged to expense over the periods of service. Common stock held by 401(k) profit-sharing plan: The Company's maximum cash obligation related to these shares is classified outside stockholders' equity because the shares are not readily traded and could be put to the Company for cash. Earnings per common and common equivalent share: Earnings per common and common equivalent share, assuming no dilution, are determined by dividing net income by the weighted average number of common and common equivalent shares outstanding during each of the periods presented. Dilutive common stock equivalents related to the stock options and warrants discussed in Note 10 were determined using the treasury stock method. The convertible debentures are not common stock equivalents. The estimated fair market value of the Company's common stock used to calculate the common stock equivalents under the treasury stock method for the periods presented has been estimated by management or determined by an independent appraisal. Earnings per common and common equivalent share, assuming full dilution, assumes conversion of the dilutive convertible debentures since the date of issuance. Recently issued accounting standards: In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," which will require the Company to review for the impairment of long-lived assets and certain identifiable intangibles to be held and used by the Company whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of SFAS No. 121 is required in fiscal 1997. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans. However, the new standard allows compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but requires F-47 137 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) expanded disclosures. SFAS No. 123 is effective in fiscal year 1997. The Company has elected to continue to apply the intrinsic value based method of accounting for stock options. While the Company does not know precisely the impact that will result from adopting SFAS No. 121 and SFAS No. 123, the Company does not expect the adoption of SFAS No. 121 or SFAS No. 123 to have a material effect on the Company's consolidated financial statements. Fair value of financial instruments: The carrying amount of long-term debt approximates fair value because these obligations bear interest at current rates. NOTE 2. OPTION TO PURCHASE DIRECTORIES The Company loaned $500,000 to another directory publisher in consideration of an option to purchase nine of its directories. The note is noninterest bearing, nonrecourse, and collateralized by the publishing rights to one of the directories. The option price of the directories is determined based on revenue of the directories at the time of exercise and other factors. The Company may exercise the option anytime between June 1, 1997 and June 1, 1999. If the Company does not exercise its option, the loan is forgiven. If the option is exercised, the amount of the loan is applied to the option price. NOTE 3. INVESTMENT IN COLORADO DIRECTORY COMPANY L.L.C. The Company's investment in Colorado Directory Company, L.L.C. (CDC), a Colorado limited liability company that publishes directories in Denver and Boulder, Colorado, consists of the following:
1995 1996 ---------- ---------- Convertible debenture which is noninterest bearing, due December 1, 2004, and collateralized by the publishing rights to the Boulder directory....................... $ 500,000 $ -- Members' equity, represents 12.5% ownership in CDC...... 500,000 -- ---------- ---------- $1,000,000 $ -- ========== ==========
In June 1996, the Company recognized a $500,000 loss on the disposition of the CDC investment as a result of selling all of its interest in CDC to an affiliate of another member of CDC for $500,000. NOTE 4. PLEDGED ASSETS, CURRENT NOTES PAYABLE AND LONG-TERM DEBT The Company has a $9,764,000 revolving line of credit with a bank, which expires January 31, 1997. As of August 31, 1995 and 1996, the Company had $1,532,000 and $2,773,800, respectively, outstanding on the line of credit. The borrowings bear interest at prime (current effective rate is 8.25% at August 31, 1996), and are collateralized by substantially all of the Company's assets. If borrowings are in excess of $6,000,000 the interest rate is prime plus 3/4%. To the extent that the line of credit is used to finance acquisitions that cost more than $1,000,000, the amount borrowed for the acquisition is converted to a term loan. The amount of the term loan reduces the line of credit on a dollar for dollar basis. The term loan will be repaid in quarterly installments of principal and monthly installments of interest over a five-year period and will bear interest at prime, unless over $6,000,000 is borrowed, then the rate shall be prime plus 3/4%. The other terms and conditions of the term loan are the same as the line of credit. As of August 31, 1996, there is a $2,012,400 term loan outstanding under this agreement. F-48 138 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. PLEDGED ASSETS, CURRENT NOTES PAYABLE AND LONG-TERM DEBT -- (CONTINUED) The loan agreement contains covenants concerning various financial ratios, additional acquisition and debt restrictions, and prohibition of any cash dividends. As of August 31, 1996, the Company was either in compliance with the restrictive covenants or had obtained waivers for noncompliance. Long-term debt consists of:
1995 1996 ----------- ----------- The Company has convertible unsecured debentures payable to various individuals and corporations. The convertible debentures are payable in quarterly payments of interest only until maturity at which time the debentures will be converted to common stock of the Company or paid in full, at the option of the holder. The debentures may be converted to common stock of the Company, at the option of the holder, upon the earlier of (i) the expiration of two years from the date of issuance (applies only to debentures issued April 1992), (ii) upon a public offering of common stock of the Company, or (iii) upon receipt of notice of redemption from the Company. The Company may only redeem the convertible debentures in connection with or as a precondition to a public offering of common stock of the Company. The terms of these debentures are due as follows: 9%, due April 1998, convertible at $4.00 per share of common stock, issued April 1992.* ............................... $ 5,214,000 $ 5,214,000 11%, due November 2000 through January 2001, convertible at $8.00 per share of common stock, issued November 1994 through January 1995.* ................................... 8,450,000 8,450,000 Note payable, bank, principal due in quarterly payments of $111,800 through January 31, 2001, interest is due monthly at prime (currently 8.25% at August 31, 1996), collateralized by substantially all of the Company's assets. .................. -- 2,012,400 Noncompete agreement, due in monthly payments of $5,250, including interest at 8 5/8%, through May 1996. ............. 41,980 -- Note payable, due $500,000 on January 1, 1996 and 1997, including interest at 6 5/8%. Collateralized by a second lien on publishing rights to purchased directories. .............. 905,377 465,377 Note payable, due in annual installments of $123,000 to $189,000, including interest at 8.25%, through 2006. Collateralized by publishing rights to purchased directories.................................................. -- 990,000 Contracts payable, to finance company, due in various monthly payments, including interest at 8.5% to 8 5/8%, through November 1998, collateralized by equipment with a depreciated cost of $348,053. ........................................... 444,988 321,398 Loan inducement fee payable (See Note 8)....................... 1,330,000 -- ----------- ----------- 16,386,345 17,453,175 Less current maturities........................................ 875,050 1,224,286 ----------- ----------- $15,511,295 $16,228,889 =========== ===========
- --------------- * All debentures were converted into Common Stock prior to the acquisition of the company by McLeod, Inc. on September 20, 1996. (See Note 14) F-49 139 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. PLEDGED ASSETS, CURRENT NOTES PAYABLE AND LONG-TERM DEBT -- (CONTINUED) Principal payments required on the long-term debt at August 31, 1996 are as follows: 1997.................................................. $ 1,224,286 1998.................................................. 5,874,780 1999.................................................. 573,309 2000.................................................. 550,200 2001.................................................. 8,773,600 Later years........................................... 457,000 ----------- $17,453,175 ===========
NOTE 5. LEASE COMMITMENTS AND TOTAL RENT EXPENSE The Company has an operating lease for its corporate headquarters, which expires August 31, 2005. In addition to minimum annual rentals, the lease requires the payment of operating costs of the building based on its pro rata share of the building. The Company also leases other office facilities and equipment under various operating leases. The total minimum rental commitment at August 31, 1996 under the operating leases is as follows: During the year ending August 31: 1997................................................ $ 1,412,000 1998................................................ 1,290,000 1999................................................ 1,130,000 2000................................................ 1,078,000 2001................................................ 891,000 Thereafter.......................................... 5,631,000 ---------- $11,432,000 ==========
The total rental expense for 1994, 1995, and 1996 was approximately $1,225,000, $1,312,000, and $1,528,000, respectively. F-50 140 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6. INCOME TAXES Net deferred tax assets consist of the following components as of August 31, 1995 and 1996:
1995 1996 ---------- ---------- Deferred tax assets: Accounts receivable..................................... $ 934,000 $1,219,000 Intangibles............................................. 679,000 664,000 Deferred expenses....................................... 101,000 -- Accrued expenses........................................ 444,000 513,000 Capital loss carryforward............................... -- 200,000 Loan inducement fee payable............................. 532,000 -- ---------- ---------- 2,690,000 2,596,000 Less valuation allowance................................ -- -- ---------- ---------- 2,690,000 2,596,000 ---------- ---------- Deferred tax liabilities: Equipment and furniture................................. 191,000 185,000 Accounts receivable..................................... 169,000 171,000 ---------- ---------- 360,000 356,000 ---------- ---------- $2,330,000 $2,240,000 ========== ==========
The components giving rise to the net deferred tax assets described above have been included in the accompanying balance sheets as of August 31, 1995 and 1996 as follows:
1995 1996 ---------- ---------- Current assets............................................ $1,410,000 $1,536,000 Noncurrent assets......................................... 920,000 704,000 ---------- ---------- $2,330,000 $2,240,000 ========== ==========
No valuation allowance is required on the deferred tax assets as of August 31, 1996 and 1995. The valuation allowance for deferred tax assets decreased $1,110,000 during 1994, due to the utilization of the acquired operating loss carryforwards and management's belief that deferred tax assets will ultimately be realized. The provision for income taxes charged to operations for 1994, 1995, and 1996 consists of the following:
1994 1995 1996 --------- ---------- -------- Current tax expense........................... $ 308,702 $1,115,586 $885,610 Deferred tax expense.......................... (171,512) (813,000) 90,000 --------- ---------- -------- $ 137,190 $ 302,586 $975,610 ========= ========== ========
F-51 141 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6. INCOME TAXES -- (CONTINUED) The income tax provision differs from the amount of income tax determined by applying the U.S. Federal income tax rate to pretax income for 1994, 1995, and 1996 due to the following:
1994 1995 1996 ------------------ ------------------ ----------------- % OF % OF % OF DOLLAR PRETAX DOLLAR PRETAX DOLLAR PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME --------- ------ --------- ------ -------- ------ Computed "expected" federal income tax expense........ $ 352,593 35% $ 256,269 35% $724,676 35% Increase (decrease) in income taxes resulting from: State income taxes, net of federal tax benefit.... 60,445 6 96,866 13 71,656 3 Meals and entertainment... 20,920 2 59,767 8 74,724 4 Minority interest in net loss of consolidated limited liability subsidiary............. -- -- 5,586 1 114,529 6 Additional deferred income taxes after reclassification of intangibles to deferred income taxes........... (396,907) (39) -- -- -- -- Other.................. 100,139 10 (115,902) (16) (9,975) (1) --------- --- --------- --- -------- -- $ 137,190 14% $ 302,586 41% $975,610 47% ========= === ========= === ======== ==
NOTE 7. LOAN INDUCEMENT FEE The Company had previously agreed to pay a fee of 1/2% of cash revenues to three individuals on a monthly basis as compensation for previous financing provided such individuals. Two of these individuals are stockholders of the Company and one of these individuals is on the Company's Board of Directors. The fee was to be paid through October 31, 2000. For 1994, 1995, and 1996, the loan inducement fee expense was approximately $153,000, $190,000, and none, respectively, which is included in interest expense. In August 1995, the Company's Board of Directors adopted a resolution to prepay the fee according to a formula contained in the original agreement. Therefore, the remaining liability of $1,330,000 was recorded at August 31, 1995. The payment of the remaining liability was made during the year ended August 31, 1996. NOTE 8. STOCKHOLDER AGREEMENTS The common stockholders of the Company have entered into a stockholder agreement that provides for the following: - The stockholders may not sell, transfer, or pledge their stock without first offering it to the Company, and secondly to the other stockholders, at fair market value. F-52 142 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8. STOCKHOLDER AGREEMENTS -- (CONTINUED) - Any gift of the stock must be approved by the Company and will be subject to the terms of the stockholder agreement. The gift may be made to a spouse, child of the stockholder or to a charitable organization or private foundation. - Upon the death of a stockholder, any transferee of the stock will be subject to the terms of the stockholder agreement. - Each stockholder has co-sale rights. - Each stockholder has piggyback rights upon a registration of the stock. - Written action of 51% of the stock may amend or cancel the agreement. NOTE 9. RETIREMENT AND BONUS PLAN The Company has a 401(k) Profit Sharing Plan for those employees who have completed one year of service and who are at least 18 years of age. The plan provides for contributions in such amounts as the Board of Directors may annually determine. The amount charged to expense during 1994, 1995, and 1996 was approximately $56,000, $80,000, and $117,500, respectively. The contributions for 1994 and 1995 have been made with the Company's common stock. The Company plans to make the 1996 contribution with cash. In the event a terminated plan participant desires to sell his or her shares of the Company's stock, or if certain employees elect to diversify their account balances, the Company may be required to purchase the shares from the participant at their fair market value. To the extent that shares of common stock held by the 401(k) profit-sharing plan are not readily traded, a sponsor must reflect the maximum cash obligation related to those securities outside of stockholders' equity. As of August 31, 1996, 38,273 shares held by the 401(k) profit-sharing plan, at a fair value of $5.75 per share, have been reclassified from stockholder's equity to liabilities. The Company has bonus plans for substantially all of its nonsales personnel based on obtaining certain profitability goals. These bonuses totaled approximately $362,000, $471,000, and $720,000 for 1994, 1995, and 1996, respectively. NOTE 10. STOCK OPTION PLAN AND STOCK PURCHASE WARRANTS The Company has adopted a qualified stock option plan with 800,000 shares of common stock reserved for the grant of options to key employees and directors. Option prices will be the fair market value of the common stock on the date options are granted. The options primarily vest over a F-53 143 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10. STOCK OPTION PLAN AND STOCK PURCHASE WARRANTS -- (CONTINUED) 54-month period and must be exercised within seven years from the date of grant. The following table summarizes the options to purchase shares of the Company's common stock:
SHARES OPTION PRICE -------- ------------ Outstanding, August 31, 1993.................... 490,800 $1.00-$3.00 Granted 18,900 1.00- 3.30 Exercised..................................... (925) 1.00 Cancelled..................................... (9,925) 1.00- 3.00 -------- Outstanding, August 31, 1994.................... 498,850 1.00- 3.50 Granted....................................... 265,600 4.50- 4.95 Exercised..................................... (14,175) 1.00- 3.00 Cancelled..................................... (20,775) 1.00- 4.50 -------- Outstanding, August 31, 1995.................... 729,500 1.00- 4.95 Granted....................................... 28,050 5.75 Exercised..................................... (182,300) 1.00- 4.50 Cancelled..................................... (21,400) 3.00- 5.75 -------- Outstanding, August 31, 1996.................... 553,850 1.00- 5.75 ========
1994 1995 1996 ------- ------- ------- Options exercisable, end of year.... 245,325 384,300 251,900 ======= ======= ======= Available for grant, end of year.... 625 55,400 48,750 ======= ======= =======
In connection with previous financing provided by three individuals (see Note 7), the Company issued three stock purchase warrants enabling the holders to purchase 488,650 shares of common stock at an exercise price of $.01 per share. The stock purchase warrants are exercisable through November 20, 2000. All vested options and stock purchase warrants were exercised prior to the acquisition of the Company by McLeod, Inc. on September 20, 1996. (See Note 14). NOTE 11. RESTRUCTURING LOSS In January 1994, the Company restructured Telecom*USA Neighborhood Directories, Inc. Previously it published eleven neighborhood directories in the Chicago, Illinois area. The Company has decided to keep certain market areas and produce two directories similar to the Company's other products. The expense included in 1994 includes previously deferred expenses on books which will no longer be published and a write-down of the purchased customer list and agreement not-to-compete. NOTE 12. CHANGE IN ACCOUNTING ESTIMATE During the year ended August 31, 1996, the Company evaluated the turnover of its customer lists and determined that a 15-year life was more appropriate than the 3-10 year life it was presently using. The effect of this change was to increase net income for 1996 by approximately $781,000, equal to $0.23 per average common share outstanding. F-54 144 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 13. COMMITMENT TO PURCHASE EQUIPMENT During the year ended August 31, 1996, the Company has capitalized approximately $200,000 related to a telephone sales force automation project. The Company estimates it will cost approximately $1,100,000 to complete the project. NOTE 14. REORGANIZATION OF COMPANY AND SUBSEQUENT EVENTS On September 20, 1996 the Company was acquired by McLeod, Inc. pursuant to an Agreement and Plan of Reorganization. Under the Agreement, the Company was merged into McLeod Reverse Merging Co., a wholly owned subsidiary of McLeod, Inc with the Company as the surviving corporation. Immediately after the merger each share of the Company was converted into the right to receive $12.75 in cash. This acquisition resulted in a total purchase price of approximately $75.7 million. This purchase price consisted of approximately $74.1 million in cash and $1.6 million resulting from McLeod, Inc. entering into a deferred compensation program with all holders of non-vested options to purchase shares of the Company's common stock. Prior to the acquisition all debentures discussed in Note 4 were converted into common stock and all vested stock options and stock purchase warrants discussed in Note 10 were exercised. F-55 145 NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS 6,000,000 SHARES BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION MCLEOD, INC. THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON CLASS A COMMON STOCK TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION. ($.01 PAR VALUE) ------------------------------ TABLE OF CONTENTS (MCLEOD LOGO) PAGE ---- Prospectus Summary................... 1 Risk Factors......................... 8 SALOMON BROTHERS INC Use of Proceeds...................... 20 Price Range of Class A Common Stock BEAR, STEARNS & CO. INC. and Dividend Policy................ 20 Capitalization....................... 21 MORGAN STANLEY & CO. Selected Consolidated Financial INCORPORATED Data............................... 22 Pro Forma Financial Data............. 24 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 28 Business............................. 36 Management........................... 60 Certain Transactions................. 74 Principal and Selling Stockholders... 75 Description of Capital Stock......... 77 Shares Eligible for Future Sale...... 80 Underwriting......................... 82 Validity of Securities............... 83 Experts.............................. 83 Available Information................ 84 Glossary............................. G-1 PROSPECTUS Index to Consolidated Financial Statements......................... F-1 DATED , 1996
146 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following are the estimated expenses payable by the Company in connection with the distribution of the securities hereunder. The selling stockholders are not paying any portion of such expenses. SEC registration fee.................................................... $ 67,955 NASD filing fee......................................................... 22,925 Nasdaq National Market listing fee...................................... 17,500 Accounting fees and expenses............................................ 175,000 Legal fees and expenses................................................. 500,000 Printing and engraving expenses......................................... 195,000 Blue Sky fees and expenses.............................................. 15,000 Transfer Agent fees and expenses........................................ 6,620 --------- Total......................................................... $ 1,000,000 =========
- --------------- * To be filed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Section 145 of the Delaware General Corporation Law ("DGCL"), a corporation may indemnify its directors, officers, employees and agents and its former directors, officers, employees and agents and those who serve, at the corporation's request, in such capacities with another enterprise, against expenses (including attorneys' fees), as well as judgments, fines and settlements in nonderivative lawsuits, actually and reasonably incurred in connection with the defense of any action, suit or proceeding in which they or any of them were or are made parties or are threatened to be made parties by reason of their serving or having served in such capacity. The DGCL provides, however, that such person must have acted in good faith and in a manner such person reasonably believed to be in (or not opposed to) the best interests of the corporation and, in the case of a criminal action, such person must have had no reasonable cause to believe his or her conduct was unlawful. In addition, the DGCL does not permit indemnification in an action or suit by or in the right of the corporation, where such person has been adjudged liable to the corporation, unless, and only to the extent that, a court determines that such person fairly and reasonably is entitled to indemnity for costs the court deems proper in light of liability adjudication. Indemnity is mandatory to the extent a claim, issue or matter has been successfully defended. The Restated Certificate contains provisions that provide that no director of the Company shall be liable for breach of fiduciary duty as a director except for (1) any breach of the directors' duty of loyalty to the Company or its stockholders; (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; (3) liability under Section 174 of the DGCL; or (4) any transaction from which the director derived an improper personal benefit. The Restated Certificate contains provisions that further provide for the indemnification of directors and officers to the fullest extent permitted by the DGCL. Under the Bylaws of the Company, the Company is required to advance expenses incurred by an officer or director in defending any such action if the director or officer undertakes to repay such amount if it is determined that the director or officer is not entitled to indemnification. In addition, the Company has entered into indemnity agreements with each of its directors pursuant to which the Company has agreed to indemnify the directors as permitted by the DGCL. The Company has obtained directors and officers liability insurance against certain liabilities, including liabilities under the Securities Act. II-1 147 The Underwriting Agreement provides for indemnification by the Underwriters of the directors, officers and controlling persons of the Company against certain liabilities, including liabilities under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES From the Company's inception on June 6, 1991 through September 30, 1996, the Company has issued and sold the following securities (as adjusted to give effect to the 3.75-for-one stock split of the Company's Class A Common Stock and Class B Common Stock, effective May 2, 1996 (the "Recapitalization")): (1) In July 1991, the Company issued 18,750 shares of Class A Common Stock to its founder, Clark E. McLeod. The price per share was $.27, for an aggregate consideration of $5,000. (2) In September 1992, the Company granted stock options to five of its employees to purchase an aggregate of 832,096 shares of Class A Common Stock pursuant to the 1992 Plan at an exercise price of $.27 per share and granted Clark E. McLeod stock options to purchase an aggregate of 172,298 shares of Class A Common Stock pursuant to the 1992 Plan at an exercise price of $.29 per share. (3) In January 1993, the Company issued an aggregate of 6,356,256 shares of Class A Common Stock to Clark E. McLeod (2,462,334), Mary E. McLeod (2,481,080), Holly A. McLeod (34,459), James L. Cram (153,548), Virginia A. Cram (153,548), William A. Cram (18,750), Kristin J. Cram (18,750), Stephen C. and Sally W. Gray (86,149), Scott L. and Julie A. Goldberg (68,918), Kirk E. Kaalberg (17,232), and Bruce A. and Susan M. Thayer (861,488). The price per share was $.27, for an aggregate consideration of $1,695,000. (4) Between March and November 1993, the Company granted stock options to 35 of its employees to purchase an aggregate of 1,193,438 shares of Class A Common Stock pursuant to the 1992 Plan (198,750) and the 1993 Plan (994,688), at an exercise price of $.80 per share and granted Clark E. McLeod stock options to purchase an aggregate of 180,000 shares of Class A Common Stock pursuant to the 1992 Plan (56,250) and the 1993 Plan (123,750), at an exercise price of $.88 per share. (5) In April 1993, the Company issued an aggregate of 5,618,754 shares of Class A Common Stock to Mary E. McLeod (1,249,999), Clark E. McLeod (1,250,003), Allsop (2,500,002), David C. Stanard (123,750), Judith A. Stanard (56,250), Douglas McGowan (153,750), Stephen C. and Sally W. Gray (18,750), James L. Cram (18,750), Virginia A. Cram (18,750), John D. and Karleen M. Hagan (18,750), Scott L. and Julie A. Goldberg (18,750), Robert C. and Deborah B. Taylor (18,750), Mernat & Co. f/b/o Henry Royer IRA (37,500), Gene L. Hassman (41,250), Stephen Samuel Gray Irrevocable Trust (3,750), Mernat & Co. f/b/o Joanne H. Collins Trust (45,000), and Mernat & Co. f/b/o Thomas M. Collins (45,000). The price per share was $.80, for an aggregate consideration of $4,495,002. (6) In April 1993, the Company issued 5,625,000 shares of Class B Common Stock to IES. The price per share was $.80, for an aggregate consideration of $4,500,000. (7) In May 1993, the Company granted to four of its directors, pursuant to the Director Plan, stock options to purchase an aggregate of 150,000 shares of Class A Common Stock at an exercise price of $.80 per share. (8) In December 1993, the Company issued an aggregate of 307,096 shares of Class A Common Stock to William A. Cram (14,063), Kristin J. Cram (14,063), James L. Cram (139,485) and Virginia A. Cram (139,485) in exchange for 307,096 shares of Class A Common Stock previously issued to James L. Cram (153,548) and Virginia A. Cram (153,548). II-2 148 (9) In December 1993, the Company granted to 44 of its employees, pursuant to the 1993 Plan, stock options to purchase an aggregate of 40,976 shares of Class A Common Stock at an exercise price of $1.07 per share. (10) Between January and June 1994, the Company granted to 47 of its employees, pursuant to the 1993 Plan, stock options to purchase an aggregate of 535,314 shares of Class A Common Stock at an exercise price of $1.47 per share. (11) In February 1994, the Company issued 2,045,457 shares of Class B Common Stock to IES. The price per share was $1.47, for an aggregate consideration of $3,000,003. (12) In February 1994, the Company issued an aggregate of 2,484,720 shares of Class A Common Stock to Allsop (1,022,727), Clark E. McLeod (511,365), Mary E. McLeod (511,362), Mernat & Co. f/b/o John D. Hagan IRA (76,875), Bruce A. and Susan M. Thayer (68,183), Judith A. Stanard (67,500), Mernat & Co. f/b/o Thomas M. Collins (102,274), Mernat & Co. f/b/o Henry Royer IRA (37,500), Casey D. Mahon (34,092), Dain Bosworth, Custodian for Casey D. Mahon IRA (34,092), Stephen C. and Sally W. Gray (15,000), and Robert C. and Deborah B. Taylor (3,750). The price per share was $1.47, for an aggregate consideration of $3,644,250. (13) In May 1994, the Company issued an aggregate of 14,478,480 shares of Class A Common Stock to all existing holders of Class A Common Stock and an aggregate of 7,670,457 shares of Class B Common Stock to all existing holders of Class B Common Stock in connection with the reincorporation of the Company from Iowa to Delaware in August 1993 and in exchange for all shares of Class A Common Stock and Class B Common Stock previously issued to such stockholders. (14) In May 1994, the Company granted to IES, in consideration of the guaranty executed by IES in connection with the Credit Facility, stock options to purchase an aggregate of 1,875,000 shares of Class B Common Stock at an exercise price of $1.47 per share. (15) Between August 1994 and January 1995, the Company granted to 235 of its employees, pursuant to the 1993 Plan, stock options to purchase an aggregate of 569,503 shares of Class A Common Stock at an exercise price of $1.73 per share and granted Clark E. McLeod stock options to purchase an aggregate of 18,750 shares of Class A Common Stock pursuant to the 1993 Plan at an exercise price of $1.91 per share. (16) In December 1994, the Company issued an aggregate of 2,482,602 shares of Class A Common Stock to Joni Thornton (3,750), Al and Delores Lyon (3,750), Aaron McLeod (3,750), Holly McLeod (3,750), Dave and Karen Lindberg (3,750), Ted McLeod (3,750), Clark E. McLeod (7,500) and Mary E. McLeod (2,452,602), in exchange for 2,482,602 shares of Class A Common Stock previously issued to Clark E. McLeod (18,750) and Mary E. McLeod (2,463,852). (17) In December 1994, the Company issued an aggregate of 278,972* shares of Class A Common Stock to William A. Cram (4,688), Kristin J. Cram (4,688), James L. Cram (134,798) and Virginia A. Cram (134,798) in exchange for 278,970* shares of Class A Common Stock previously issued to James L. Cram (139,485) and Virginia A. Cram (139,485). (18) In January 1995, the Company issued 22,500 shares of Class A Common Stock to Mernat & Co. f/b/o Stephen C. Gray. The price per share was $1.73, for an aggregate consideration of $39,000. - --------------- * Differences between the number of shares originally issued and the number of shares exchanged therefor in the described transaction are due to the rounding up of all fractional shares resulting from the Recapitalization. II-3 149 (19) In January 1995, the Company granted to four of its directors, pursuant to the Director Plan, stock options to purchase an aggregate of 75,000 shares of Class A Common Stock at an exercise price of $1.73 per share. (20) Between March and October 1995, the Company granted stock options to 452 of its employees to purchase an aggregate of 1,339,474 shares of Class A Common Stock pursuant to the 1992 Plan (105,000), the 1993 Plan (953,224) and the 1995 Plan (281,250), at an exercise price of $2.27 per share, and granted Clark E. McLeod stock options to purchase an aggregate of 56,250 shares of Class A Common Stock pursuant to the 1995 Plan at an exercise price of $2.49 per share. (21) In April 1995, the Company issued 3,676,058 shares of Class B Common Stock to Midwest Capital Group Inc. The price per share was $2.27, for an aggregate consideration of $8,332,397. (22) In April 1995, the Company granted to IES, in consideration of the guaranty executed by IES in connection with the Credit Facility, stock options to purchase an aggregate of 1,912,500 shares of Class B Common Stock at an exercise price of $2.27 per share. (23) In June 1995, the Company issued 3,529,414 shares of Class B Common Stock to MWR Investments Inc. The price per share was $2.27, for an aggregate consideration of $8,000,005. (24) In June 1995, the Company issued 750,000 shares of Class B Common Stock to IES. The price per share was $2.27, for an aggregate consideration of $1,700,000. (25) In June 1995, the Company issued 3,676,058 shares of Class B Common Stock to MWR Investments Inc., in exchange for 3,676,058 shares of Class B Common Stock previously issued to Midwest Capital Group Inc. (26) In June 1995, the Company issued an aggregate of 929,670* shares of Class A Common Stock to Bruce A. Thayer (464,835) and Susan M. Thayer (464,835) in exchange for 929,671* shares of Class A Common Stock previously issued to Bruce A. and Susan M. Thayer. (27) In June 1995, the Company issued an aggregate of 1,897,068 shares of Class A Common Stock to Allsop (171,188), Frank N. and Marilyn Y. Magid (44,119), Fred L. Wham, III, Trustee, Fred L. Wham, III Profit Sharing U/A dated 1/1/89 f/b/o Fred L. Wham, III (88,238), Scott G. Byers Partnership (44,119), Craig M. and Susan M. Byers (44,119), Richard C. Young (44,119), Ross D. Christensen (44,119), William C. Knapp as trustee of the William C. Knapp Revocable Trust (88,238), Nelson Investment Company (44,119), John W. Aalfs (44,119), John D. Hagan (44,119), William J. Stevens (11,625), Tami Young (22,062), Merrill Lynch f/b/o Michael J. Brown IRA (13,238), Ann Vermeer Stienstra (13,238), Keith R. Molof (2,250), Central Iowa Energy Cooperative (330,885), Trust for the Benefit of the Children of Frank Magid (44,119), Iowa Capital Corporation (154,414), Dain Bosworth f/b/o Thomas M. Brown IRA (32,363), Thomas M. Brown (8,813), Karen Jacobi (450), Philip Thrasher Kennedy (6,619), IPC Development Co. (45,000), Trusty (44,119), S.K.E. Investment Partnership (44,119), Thomas M. Hoyt (44,119), James S. Cownie (88,238), Mernat & Co. f/b/o Stephen C. Gray IRA (3,750), Stephen C. Gray (26,352), Gregg D. Miller (44,119), Theodore G. Schwartz (44,119), Clark E. McLeod (64,163), Mary E. McLeod (64,159), Ibak & Company f/b/o John W. Colloton (25,875), and John W. Colloton (18,244). The price per share was $2.27, for an aggregate consideration of $4,299,997. - --------------- * Differences between the number of shares originally issued and the number of shares exchanged therefor in the described transaction are due to the rounding up of all fractional shares resulting from the Recapitalization. II-4 150 (28) In July 1995, the Company issued an aggregate of 26,352 shares of Class A Common Stock to Stephen C. Gray (22,602) and Elizabeth Mary Fletcher Gray Education Trust (3,750) in exchange for 26,352 shares of Class A Common Stock previously issued to Stephen C. Gray. (29) In July 1995, the Company granted to six of its directors, pursuant to the Director Plan, stock options to purchase an aggregate of 112,500 shares of Class A Common Stock at an exercise price of $2.27 per share. (30) In October 1995, the Company issued 282 shares of Class A Common Stock to Kathleen Sanders. The price per share was $1.06, for an aggregate consideration of $300. (31) In October 1995, the Company issued an aggregate of 269,596 shares of Class A Common Stock to William A. Cram (3,750), Kristin J. Cram (3,750), James L. Cram (131,048) and Virginia A. Cram (131,048) in exchange for 269,596 shares of Class A Common Stock previously issued to James L. Cram (134,798) and Virginia A. Cram (134,798). (32) In December 1995, the Company issued an aggregate of 2,462,330 shares of Class A Common Stock to Joni Thornton (3,750), Dave and Karen Lindberg (3,750), Aaron McLeod (3,750), Holly McLeod (3,750), Clark E. McLeod (2,437,602) and Mary E. McLeod (9,728), in exchange for 2,462,330 shares of Class A Common Stock previously issued to Clark E. McLeod (2,445,102) and Mary E. McLeod (17,228). (33) In December 1995, the Company issued 11,250 shares of Class A Common Stock to James L. Cram. The price per share was $.27, for an aggregate consideration of $3,000. (34) Between December 1995 and February 1996, the Company granted stock options to 239 of its employees to purchase an aggregate of 1,514,263 shares of Class A Common Stock pursuant to the 1992 Plan (39,752) and the 1993 Plan (1,474,511), at an exercise price of $2.67 per share and granted Clark E. McLeod stock options to purchase an aggregate of 112,500 shares of Class A Common Stock pursuant to the 1993 Plan at an exercise price of $2.93 per share. (35) In January 1996, the Company granted to six of its directors, pursuant to the Director Plan, stock options to purchase an aggregate of 112,500 shares of Class A Common Stock at an exercise price of $2.67 per share. (36) In February 1996, the Company issued an aggregate of 262,096 shares of Class A Common Stock to William A. Cram (5,625), Kristin J. Cram (5,625), Thomas W. Burns (3,750), Rita M. Burns (3,750), James L. Cram (121,673) and Virginia A. Cram (121,673) in exchange for 262,096 shares of Class A Common Stock previously issued to James L. Cram (131,048) and Virginia A. Cram (131,048). (37) In February 1996, the Company issued 23,438 shares of Class A Common Stock to Blake O. Fisher, Jr. The price per share was $.99, for an aggregate consideration of $23,125. (38) In April 1996, as partial consideration for the execution of employment, confidentiality and non-competition agreements, the Company granted to the 37 employees signing such agreements options to purchase an aggregate of 540,500 shares of Class A Common Stock, effective upon consummation on or before December 31, 1996 of an initial public offering of the Class A Common Stock, at an exercise price equal to the initial public offering price per share. (39) In June 1996, the Company granted to 175 of its employees, pursuant to the 1996 Plan, stock options to purchase an aggregate of 223,175 shares of Class A Common Stock at an exercise price of $20.00 per share. (40) In June 1996, the Company granted to six of its employees, pursuant to the 1996 Plan, stock options to purchase an aggregate of 5,800 shares of Class A Common Stock at an exercise price of $23.75 per share. II-5 151 (41) In July 1996, the Company issued an aggregate of 474,807 shares of Class A Common Stock to Allsop (194,476), Albert P. Ruffalo (73,600), Joseph P. Cunningham (40,301), Laura L. Dement (37,386), Randy A. Snyder (18,763), Brian P. Donnelley (18,763), Clark E. McLeod (38,609), Mary E. McLeod (38,609), Eric Hender (7,150), and Julie Hender (7,150). The 474,807 shares were exchanged for all the shares of Ruffalo, Cody common stock held by such persons. (42) In July 1996, in connection with the acquisition of Ruffalo, Cody and pursuant to the 1996 Plan, the Company granted stock options to purchase an aggregate of 88,436 shares of Class A Common Stock at an exercise price of $1.43 to 19 Ruffalo, Cody employees, an aggregate of 29,537 shares of Class A Common Stock at an exercise price of $4.29 to 9 Ruffalo, Cody employees, an aggregate of 14,684 shares of Class A Common Stock at an exercise price of $8.58 to 14 Ruffalo, Cody employees, an aggregate of 11,370 shares of Class A Common Stock at an exercise price of $9.30 to 31 Ruffalo, Cody employees, an aggregate of 6,991 shares of Class A Common Stock at an exercise price of $8.58 to 1 Ruffalo, Cody independent contractor, and an aggregate of 6,991 shares of Class A Common Stock at an exercise price of $9.30 to 1 Ruffalo, Cody independent contractor. (43) In July 1996, as partial consideration for the execution of employment, confidentiality and non-competition agreements, the Company granted to 11 employees signing such agreements options to purchase an aggregate of 167,000 shares of Class A Common Stock at an exercise price of $25.25 per share. (44) In July 1996, the Company granted to one of its employees, pursuant to the 1996 Plan, stock options to purchase an aggregate of 10,000 shares of Class A Common Stock at an exercise price of $25.25 per share. (45) In July 1996, the Company granted to 81 of its employees, pursuant to the 1996 Plan, stock options to purchase an aggregate of 34,100 shares of Class A Common Stock at an exercise price of $27.75 per share. (46) In August 1996, the Company granted to 61 of its employees, pursuant to the 1996 Plan, stock options to purchase an aggregate of 109,855 shares of Class A Common Stock at an exercise price of $30.125 per share. (47) In September 1996, as partial consideration for the execution of employment, confidentiality and non-competition agreements, the Company granted to six employees signing such agreements options to purchase an aggregate of 225,000 shares of Class A Common Stock at an exercise price of $33.375 per share. (48) In September 1996, the Company granted to 548 of its employees, pursuant to the 1996 Plan, stock options to purchase an aggregate of 193,100 shares of Class A Common Stock at an exercise price of $33.375 per share. (49) In September 1996, as partial consideration for the execution of an employment, confidentiality and non-competition agreement, the Company granted to one employee signing such agreement options to purchase 10,000 shares of Class A Common Stock at an exercise price of $33.875 per share. (50) In September 1996, the Company granted to 29 of its employees, pursuant to the 1996 Plan, stock options to purchase an aggregate of 35,975 shares of Class A Common Stock at an exercise price of $33.875 per share. Each issuance of securities described above was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as a transaction by an issuer not involving any public offering. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in II-6 152 such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Company. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ --------------------------------------------------------------------------------- *1.1 -- Form of Underwriting Agreement among McLeod, Inc., Salomon Brothers Inc, Bear, Stearns & Co. Inc., Morgan Stanley & Co. Incorporated, and certain stockholders of the Company. 2.1 -- Agreement and Plan of Reorganization dated April 28, 1995 among Midwest Capital Group Inc., MWR Telecom, Inc. and McLeod Inc. (Filed as Exhibit 2.1 to Registration Statement on Form S-1, File No. 333-3112 ("Initial Form S-1"), and incorporated herein by reference). 2.2 -- Agreement and Plan of Reorganization dated July 15, 1996 among Ruffalo, Cody & Associates, Inc., certain shareholders of Ruffalo, Cody & Associates, Inc. and McLeod, Inc. (Filed as Exhibit 2 to Current Report on Form 8-K, File No. 0-20763, and incorporated herein by reference). 2.3 -- Agreement and Plan of Reorganization dated September 20, 1996 among Telecom*USA Publishing Group, Inc. and McLeod, Inc. (Filed as Exhibit 2 to Current Report on Form 8-K, File No. 0-20763, and incorporated herein by reference). 3.1 -- Amended and Restated Certificate of Incorporation of McLeod, Inc. (Filed as Exhibit 3.1 to Initial Form S-1, and incorporated herein by reference). 3.2 -- Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2 to Initial Form S-1, and incorporated herein by reference). 4.1 -- Form of Class A Common Stock Certificate of McLeod, Inc. (Filed as Exhibit 4.1 to Initial Form S-1, and incorporated herein by reference). 4.2 -- Investor Agreement dated as of April 1, 1996 among the Company, IES Investments Inc., Midwest Capital Group Inc., MWR Investments Inc., Clark and Mary McLeod, and certain other stockholders. (Filed as Exhibit 4.8 to Initial Form S-1, and incorporated herein by reference). *5.1 -- Opinion of Hogan & Hartson L.L.P. 10.1 -- Credit Agreement dated as of May 16, 1994 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.1 to Initial Form S-1, and incorporated herein by reference). 10.2 -- First Amendment to Credit Agreement dated as of June 17, 1994 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.2 to Initial Form S-1, and incorporated herein by reference). 10.3 -- Second Amendment to Credit Agreement dated as of December 1, 1994 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.3 to Initial Form S-1, and incorporated herein by reference). 10.4 -- Third Amendment to Credit Agreement dated as of May 31, 1995 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.4 to Initial Form S-1, and incorporated herein by reference).
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EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ --------------------------------------------------------------------------------- 10.5 -- Fourth Amendment to Credit Agreement dated as of July 28, 1995 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.5 to Initial Form S-1, and incorporated herein by reference). 10.6 -- Fifth Amendment to Credit Agreement dated as of October 18, 1995 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.6 to Initial Form S-1, and incorporated herein by reference). 10.7 -- Sixth Amendment to Credit Agreement dated as of March 29, 1996 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.7 to Initial Form S-1, and incorporated herein by reference). 10.8 -- Security Agreement dated as of May 16, 1994 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.8 to Initial Form S-1, and incorporated herein by reference). 10.9 -- First Amendment to Security Agreement dated as of December 1, 1994 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.9 to Initial Form S-1, and incorporated herein by reference). 10.10 -- Support Agreement dated as of December 1, 1994 among IES Diversified Inc., McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.10 to Initial Form S-1, and incorporated herein by reference). 10.11 -- Agreement Regarding Support Agreement dated December 1994 between McLeod, Inc. and IES Diversified Inc. (Filed as Exhibit 10.11 to Initial Form S-1, and incorporated herein by reference). 10.12 -- Agreement Regarding Guarantee dated May 16, 1994 between McLeod, Inc. and IES Diversified Inc. (Filed as Exhibit 10.12 to Initial Form S-1, and incorporated herein by reference). 10.13 -- Joinder to and Assumption of Credit Agreement dated as of April 28, 1995 between McLeod Merging Co. and The First National Bank of Chicago. (Filed as Exhibit 10.13 to Initial Form S-1, and incorporated herein by reference). 10.14 -- Joinder to and Assumption of Security Agreement dated as of April 28, 1995 between McLeod Merging Co. and The First National Bank of Chicago. (Filed as Exhibit 10.14 to Initial Form S-1, and incorporated herein by reference). 10.15 -- Letter from The First National Bank of Chicago to James L. Cram dated April 28, 1995 regarding extension of the termination date under the Credit Agreement. (Filed as Exhibit 10.15 to Initial Form S-1, and incorporated herein by reference). 10.16 -- Credit Agreement dated as of March 29, 1996 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. MWR Telecom, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.16 to Initial Form S-1, and incorporated herein by reference). 10.17 -- Agreement for Construction Related Services dated as of October 17, 1995 between City Signal Fiber Services, Inc. and McLeod Network Services, Inc. (Filed as Exhibit 10.17 to Initial Form S-1, and incorporated herein by reference).
II-8 154
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ --------------------------------------------------------------------------------- 10.18 -- Construction Services Agreement dated March 27, 1996 between City Signal Fiber Services, Inc. and McLeod Network Services, Inc. (Filed as Exhibit 10.18 to Initial Form S-1, and incorporated herein by reference). 10.19 -- Fiber Optic Use Agreement dated as of February 14, 1996 between McLeod Network Services, Inc. and Galaxy Telecom, L.P. (Filed as Exhibit 10.19 to Initial Form S-1, and incorporated herein by reference). 10.20 -- Agreement dated as of July 11, 1994 between McLeod Network Services, Inc. and KLK Construction. (Filed as Exhibit 10.20 to Initial Form S-1, and incorporated herein by reference). 10.21 -- Lease Agreement dated September 5, 1995 between State of Iowa and MWR Telecom, Inc. (Filed as Exhibit 10.21 to Initial Form S-1, and incorporated herein by reference). 10.22 -- Lease Agreement dated September 5, 1995 between State of Iowa and McLeod Network Services, Inc. (Filed as Exhibit 10.22 to Initial Form S-1, and incorporated herein by reference). 10.23 -- Contract dated September 5, 1995 between Iowa Telecommunications and Technology Commission and MWR Telecom, Inc. (Filed as Exhibit 10.23 to Initial Form S-1, and incorporated herein by reference). 10.24 -- Contract dated June 27, 1995 between Iowa National Guard and McLeod Network Services, Inc. (Filed as Exhibit 10.24 to Initial Form S-1, and incorporated herein by reference). 10.25 -- Addendum Number One to Contract dated September 5, 1995 between Iowa National Guard and McLeod Network Services, Inc. (Filed as Exhibit 10.25 to Initial Form S-1, and incorporated herein by reference). 10.26 -- U S WEST Centrex Plus Service Rate Stability Plan dated October 15, 1993 between McLeod Telemanagement, Inc. and U S WEST Communications, Inc. (Filed as Exhibit 10.26 to Initial Form S-1, and incorporated herein by reference). 10.27 -- U S WEST Centrex Plus Service Rate Stability Plan dated July 17, 1993 between McLeod Telemanagement, Inc. and U S WEST Communications, Inc. (Filed as Exhibit 10.27 to Initial Form S-1, and incorporated herein by reference). 10.28 -- Ameritech Centrex Service Confirmation of Service Orders dated various dates in 1994, 1995 and 1996 between McLeod Telemanagement, Inc. and Ameritech Information Industry Services. (Filed as Exhibit 10.28 to Initial Form S-1, and incorporated herein by reference). 10.29 -- Lease Agreement dated as of December 28, 1993 between 2060 Partnership and McLeod Telemanagement, Inc., as amended by Amendments First to Ninth dated as of July 3, 1994, March 25, 1994, June 22, 1994, August 12, 1994, September 12, 1994, September 20, 1994, November 16, 1994, September 20, 1995 and January 6, 1996, respectively. (Filed as Exhibit 10.29 to Initial Form S-1, and incorporated herein by reference). 10.30 -- Lease Agreement dated as of May 24, 1995 between 2060 Partnership and McLeod Telemanagement, Inc. (Filed as Exhibit 10.30 to Initial Form S-1, and incorporated herein by reference). 10.31 -- Lease Agreement dated October 31, 1995 between I.R.F.B. Joint Venture and McLeod Telemanagement, Inc. (Filed as Exhibit 10.31 to Initial Form S-1, and incorporated herein by reference).
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EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ --------------------------------------------------------------------------------- 10.32 -- First Amendment to Lease Agreement dated as of November 20, 1995 between I.R.F.B. Joint Venture and McLeod Telemanagement, Inc. (Filed as Exhibit 10.32 to Initial Form S-1, and incorporated herein by reference). 10.33 -- Uniform Purchase Agreement dated July 22, 1993 between McLeod, Inc. and Hill's Maple Crest Farms Partnership. (Filed as Exhibit 10.33 to Initial Form S-1, and incorporated herein by reference). 10.34 -- Master Right-of-Way Agreement dated July 27, 1994 between McLeod Network Services, Inc. and IES Industries Inc. (Filed as Exhibit 10.34 to Initial Form S-1, and incorporated herein by reference). 10.35 -- Master Right-of-Way and Tower Use Agreement dated February 13, 1996 between IES Industries Inc. and McLeod, Inc. (Filed as Exhibit 10.35 to Initial Form S-1, and incorporated herein by reference). 10.36 -- Master Pole, Duct and Tower Use Agreement dated February 20, 1996 between MidAmerican Energy Company and McLeod, Inc. (Iowa and South Dakota). (Filed as Exhibit 10.36 to Initial Form S-1, and incorporated herein by reference). 10.37 -- Master Pole, Duct and Tower Use Agreement dated February 20, 1996 between MidAmerican Energy Company and McLeod, Inc. (Illinois). (Filed as Exhibit 10.37 to Initial Form S-1, and incorporated herein by reference). 10.38 -- Settlement Agreement dated March 18, 1996 between U S WEST Communications, Inc. and McLeod Telemanagement, Inc. (Filed as Exhibit 10.38 to Initial Form S-1, and incorporated herein by reference). 10.39 -- Agreement dated August 4, 1995 between Vadacom, Inc. and McLeod Telemanagement, Inc. (Filed as Exhibit 10.39 to Initial Form S-1, and incorporated herein by reference). 10.40 -- McLeod Telecommunications, Inc. 1992 Incentive Stock Option Plan. (Filed as Exhibit 10.40 to Initial Form S-1, and incorporated herein by reference). 10.41 -- McLeod, Inc. 1993 Incentive Stock Option Plan. (Filed as Exhibit 10.41 to Initial Form S-1, and incorporated herein by reference). 10.42 -- McLeod, Inc. 1995 Incentive Stock Option Plan. (Filed as Exhibit 10.42 to Initial Form S-1, and incorporated herein by reference). 10.43 -- McLeod Telecommunications, Inc. Director Stock Option Plan. (Filed as Exhibit 10.43 to Initial Form S-1, and incorporated herein by reference). 10.44 -- Promissory Note dated July 18, 1995 between Kirk E. Kaalberg and McLeod, Inc. (Filed as Exhibit 10.44 to Initial Form S-1, and incorporated herein by reference). 10.45 -- Promissory Note dated March 29, 1996 between Stephen K. Brandenburg and McLeod, Inc. (Filed as Exhibit 10.45 to Initial Form S-1, and incorporated herein by reference). 10.46 -- Agreement dated April 28, 1995 among McLeod, Inc., McLeod Telecommunications, Inc., McLeod Telemanagement, Inc., McLeod Network Services, Inc. and Clark E. McLeod. (Filed as Exhibit 10.46 to Initial Form S-1, and incorporated herein by reference). +10.47 -- Telecommunications Services Agreement dated March 14, 1994 between WilTel, Inc. and McLeod Telemanagement, Inc., as amended. (Filed as Exhibit 10.47 to Initial Form S-1, and incorporated herein by reference). 10.48 -- Amendment to Contract Addendum A to Contract No. 2102 dated March 31, 1993 between the Iowa Department of General Services and McLeod Telecommunications, Inc. (Filed as Exhibit 10.48 to Initial Form S-1, and incorporated herein by reference).
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EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ --------------------------------------------------------------------------------- 10.49 -- Construction Services Agreement dated June 30, 1995 between MFS Network Technologies, Inc. and MWR Telecom, Inc. (Filed as Exhibit 10.49 to Initial Form S-1, and incorporated herein by reference). 10.50 -- First Amendment to Agreement Regarding Support Agreement dated May 14, 1996 among McLeod, Inc., IES Diversified Inc. and IES Investments Inc. (Filed as Exhibit 10.50 to Initial Form S-1, and incorporated herein by reference). 10.51 -- First Amendment to Agreement Regarding Guarantee dated May 14, 1996 among McLeod, Inc., IES Diversified Inc. and IES Investments Inc. (Filed as Exhibit 10.51 to Initial Form S-1, and incorporated herein by reference). 10.52 -- Amended and Restated Directors Stock Option Plan of McLeod, Inc. (Filed as Exhibit 10.52 to Initial Form S-1, and incorporated herein by reference). 10.53 -- Forms of Employment, Confidentiality and Non-Competition Agreement between McLeod, Inc. and certain employees of McLeod, Inc. (Filed as Exhibit 10.53 to Initial Form S-1, and incorporated herein by reference). 10.54 -- Form of Change-of-Control Agreement between McLeod, Inc. and certain employees of McLeod, Inc. (Filed as Exhibit 10.54 to Initial Form S-1, and incorporated herein by reference). 10.55 -- McLeod, Inc. 1996 Employee Stock Option Plan, as amended. 10.56 -- McLeod, Inc. Employee Stock Purchase Plan. (Filed as Exhibit 10.56 to Initial Form S-1, and incorporated herein by reference). 10.57 -- Form of Indemnity Agreement between McLeod, Inc. and certain officers and directors of McLeod, Inc. (Filed as Exhibit 10.57 to Initial Form S-1, and incorporated herein by reference). 10.58 -- License Agreement dated April 24, 1996 between PageMart, Inc. and MWR Telecom, Inc. (Filed as Exhibit 10.58 to Initial Form S-1, and incorporated herein by reference). 10.59 -- Assignment of Purchase Agreement dated August 15, 1996 by and between Ryan Properties, Inc. and McLeod, Inc. 10.60 -- Assignment of Purchase Agreement dated August 14, 1996 by and between Ryan Properties, Inc. and McLeod, Inc. 10.61 -- Asset Purchase Agreement dated September 4, 1996 by and between Total Communication Services, Inc. and McLeod Telemanagement, Inc. 10.62 -- First Amendment to Asset Purchase Agreement dated September 30, 1996 by and between Total Communication Services, Inc. and McLeod Telemanagement, Inc. 10.63 -- McLeod, Inc. Incentive Plan. 10.64 -- Amended and Restated Credit Agreement dated as of May 5, 1996 by and between Telecom*USA Publishing Group, Inc., Telecom*USA Publishing Company and Telecom*USA Neighborhood Directories, Inc. and Norwest Bank Iowa, National Association. 10.65 -- First Amendment to Amended and Restated Credit Agreement dated as of January 31, 1996 by and between Telecom*USA Publishing Group, Inc., Telecom*USA Publishing Company and Telecom*USA Neighborhood Directories, Inc. and Norwest Bank Iowa, National Association. 10.66 -- Lease Agreement dated as of September 26, 1994 between Ryan Properties, Inc. and Ruffalo, Cody & Associates, Inc. 10.67 -- First Lease Amendment dated as of April 12, 1995 between Ryan Properties, Inc. and Ruffalo, Cody & Associates, Inc.
II-11 157
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ --------------------------------------------------------------------------------- 10.68 -- Lease Agreement dated as of July 18, 1995 between 2060 Partnership, L.P. and Telecom*USA Publishing Company. 10.69 -- Lease Agreement dated April 26, 1995 by and between A.M. Henderson and Telecom*USA Publishing Company. 10.70 -- License Agreement dated as of April 19, 1994, between Ameritech Information Industry Services and Telecom*USA Publishing Company. 10.71 -- License Agreement dated September 13, 1993 between U S WEST Communications, Inc. and Telecom*USA Publishing Company. 11.1 -- Statement regarding Computation of Per Share Earnings. 21.1 -- Subsidiaries of McLeod, Inc. 23.1 -- Consents of McGladrey & Pullen, LLP. *23.2 -- Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1 to this Registration Statement on Form S-1). 27.1 -- Financial Data Schedule (Filed as Exhibit 27 to Quarterly Report on Form 10-Q, File No. 0-20763, and incorporated herein by reference). 99.1 -- Purchase Agreement dated as of August 15, 1996 between Iowa Land and Building Company and Ryan Properties, Inc. 99.2 -- Purchase Agreement dated as of June 28, 1996 between Donald E. Zvacek, Dennis E. Zvacek and Robert J. Zvacek and Ryan Properties, Inc.
- --------------- * To be filed by amendment. + Confidential treatment has been granted. The copy filed as an exhibit omits the information subject to the confidential treatment request. (b) FINANCIAL STATEMENT SCHEDULES. The following financial statement schedule is filed herewith: Schedule II -- Valuation and Qualifying Accounts Schedules not listed above have been omitted because they are inapplicable or the information required to be set forth therein is provided in the Financial Statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned registrant hereby further undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-12 158 The undersigned registrant hereby further undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-13 159 SIGNATURES Pursuant to the requirements of the Securities Act, the Company has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cedar Rapids, Iowa, on this 10th day of October, 1996. McLEOD, INC. By /s/ CLARK E. MCLEOD ----------------------------------- Clark E. McLeod Chairman and Chief Executive Officer ---------------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Clark E. McLeod, Stephen C. Gray and Blake O. Fisher, Jr., jointly and severally, each in his own capacity, his true and lawful attorneys-in-fact, with full power of substitution, for him and his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement or a Registration Statement filed pursuant to Rule 462 under the Securities Act, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents with full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on this 10th day of October, 1996.
SIGNATURE TITLE - --------------------------------------------- --------------------------------------------- /s/ CLARK E. MCLEOD Chairman, Chief Executive Officer and - --------------------------------------------- Director (Principal Executive Officer) Clark E. McLeod /s/ STEPHEN C. GRAY President, Chief Operating Officer and - --------------------------------------------- Director Stephen C. Gray /s/ BLAKE O. FISHER, JR. Chief Financial Officer, Executive Vice - --------------------------------------------- President, Corporate Administration and Blake O. Fisher, Jr. Treasurer (Principal Financial Officer) /s/ JAMES L. CRAM Chief Accounting Officer and Director - --------------------------------------------- (Principal Accounting Officer) James L. Cram /s/ RUSSELL E. CHRISTIANSEN Director - --------------------------------------------- Russell E. Christiansen /s/ THOMAS M. COLLINS Director - --------------------------------------------- Thomas M. Collins /s/ PAUL D. RHINES Director - --------------------------------------------- Paul D. Rhines /s/ LEE LIU Director - --------------------------------------------- Lee Liu
II-14 160 INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL STATEMENT SCHEDULES To the Board of Directors McLeod, Inc. Cedar Rapids, Iowa Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidated supplemental schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. McGLADREY & PULLEN, LLP Cedar Rapids, Iowa March 28, 1996 161 MCLEOD, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN B COLUMN C COLUMN D COLUMN E ADDITIONS --------------------- BALANCE CHARGED CHARGED BALANCE AT TO TO AT COLUMN A BEGINNING COST AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ------------------------------------ ---------- ---------- -------- --------- ---------- Year Ended December 31, 1993: Allowance for uncollectible accounts and discounts......... $ -- $ -- $ -- $ -- $ -- Valuation reserve on deferred tax assets..................... -- 789,000 -- -- 789,000 ---------- ---------- -------- --------- ---------- $ -- $ 789,000 $ -- $ -- $ 789,000 ========== ========== ==== === ========= ========== Year Ended December 31, 1994: Allowance for uncollectible accounts and discounts......... $ -- $ 84,000 $ -- $ -- $ 84,000 Valuation reserve on deferred tax assets..................... 789,000 4,622,000 -- -- 5,411,000 ---------- ---------- -------- --------- ---------- $ 789,000 $4,706,000 $ -- $ -- $5,495,000 ========== ========== ======== ========= ========== Year Ended December 31, 1995: Allowance for doubtful accounts and discounts.................. $ 84,000 $ 135,000 $ -- $ -- $ 219,000 Valuation reserve on deferred tax assets..................... 5,411,000 3,007,000 -- -- 8,418,000 ---------- ---------- -------- --------- ---------- $5,495,000 $3,142,000 $ -- $ -- $8,637,000 ========== ========== ======== ========= ==========
162 INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL STATEMENT SCHEDULES To the Board of Directors Ruffalo, Cody & Associates, Inc. Cedar Rapids, Iowa Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidated supplemental schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. McGLADREY & PULLEN, LLP Cedar Rapids, Iowa February 9, 1996 163 RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ADDITIONS ------------------- BALANCE CHARGED CHARGED BALANCE AT TO TO AT BEGINNING COST AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ---------------------------------------------- --------- -------- -------- --------- -------- Year Ended December 31, 1993: Allowance for doubtful accounts............. $50,000 $ -- $ -- $ -- $50,000 ======== ======= ======== ======= ======= Year Ended December 31, 1994: Allowance for doubtful accounts............. $50,000 $38,072 $ -- $ -- $88,072 ======== ======= ======== ======= ======= Year Ended December 31, 1995: Allowance for doubtful accounts............. $88,072 $ -- $ -- $38,072 $50,000 ======== ======= ======== ======= =======
164 INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL STATEMENT SCHEDULES To the Board of Directors Telecom*USA Publishing Group, Inc. Cedar Rapids, Iowa Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidated supplemental schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. McGLADREY & PULLEN, LLP Cedar Rapids, Iowa September 27, 1996 165 TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ADDITIONS --------------------- BALANCE CHARGED CHARGED BALANCE AT TO TO AT BEGINNING COST AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ---------------------------------- ---------- ---------- -------- ---------- ---------- Year Ended August 31, 1994: Allowance for doubtful accounts and adjustments..... $1,662,481 $1,340,069 $ -- $1,131,470 $1,871,080 ========== ========== ======== ========== ========== Year Ended August 31, 1995: Allowance for doubtful accounts and adjustments..... $1,871,080 $1,669,478 $ -- $1,206,402 $2,334,156 ========== ========== ======== ========== ========== Year Ended August 31, 1996: Allowance for doubtful accounts and adjustments.............. $2,334,156 $2,636,421 $ -- $1,867,654 $3,102,923 ========== ========== ======== ========== ==========
166 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ --------------------------------------------------------------------------------- *1.1 -- Form of Underwriting Agreement among McLeod, Inc., Salomon Brothers Inc, Bear, Stearns & Co. Inc., Morgan Stanley & Co. Incorporated, and certain stockholders of the Company. 2.1 -- Agreement and Plan of Reorganization dated April 28, 1995 among Midwest Capital Group Inc., MWR Telecom, Inc. and McLeod Inc. (Filed as Exhibit 2.1 to Registration Statement on Form S-1, File No. 333-3112 ("Initial Form S-1"), and incorporated herein by reference). 2.2 -- Agreement and Plan of Reorganization dated July 15, 1996 among Ruffalo, Cody & Associates, Inc., certain shareholders of Ruffalo, Cody & Associates, Inc. and McLeod, Inc. (Filed as Exhibit 2 to Current Report on Form 8-K, File No. 0-20763, and incorporated herein by reference). 2.3 -- Agreement and Plan of Reorganization dated September 20, 1996 among Telecom*USA Publishing Group, Inc. and McLeod, Inc. (Filed as Exhibit 2 to Current Report on Form 8-K, File No. 0-20763, and incorporated herein by reference). 3.1 -- Amended and Restated Certificate of Incorporation of McLeod, Inc. (Filed as Exhibit 3.1 to Initial Form S-1, and incorporated herein by reference). 3.2 -- Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2 to Initial Form S-1, and incorporated herein by reference). 4.1 -- Form of Class A Common Stock Certificate of McLeod, Inc. (Filed as Exhibit 4.1 to Initial Form S-1, and incorporated herein by reference). 4.2 -- Investor Agreement dated as of April 1, 1996 among the Company, IES Investments Inc., Midwest Capital Group Inc., MWR Investments Inc., Clark and Mary McLeod, and certain other stockholders. (Filed as Exhibit 4.8 to Initial Form S-1, and incorporated herein by reference). *5.1 -- Opinion of Hogan & Hartson L.L.P. 10.1 -- Credit Agreement dated as of May 16, 1994 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.1 to Initial Form S-1, and incorporated herein by reference). 10.2 -- First Amendment to Credit Agreement dated as of June 17, 1994 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.2 to Initial Form S-1, and incorporated herein by reference). 10.3 -- Second Amendment to Credit Agreement dated as of December 1, 1994 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.3 to Initial Form S-1, and incorporated herein by reference). 10.4 -- Third Amendment to Credit Agreement dated as of May 31, 1995 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.4 to Initial Form S-1, and incorporated herein by reference).
167
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ --------------------------------------------------------------------------------- 10.5 -- Fourth Amendment to Credit Agreement dated as of July 28, 1995 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.5 to Initial Form S-1, and incorporated herein by reference). 10.6 -- Fifth Amendment to Credit Agreement dated as of October 18, 1995 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.6 to Initial Form S-1, and incorporated herein by reference). 10.7 -- Sixth Amendment to Credit Agreement dated as of March 29, 1996 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telecommunications, Inc., MWR Telecom, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.7 to Initial Form S-1, and incorporated herein by reference). 10.8 -- Security Agreement dated as of May 16, 1994 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.8 to Initial Form S-1, and incorporated herein by reference). 10.9 -- First Amendment to Security Agreement dated as of December 1, 1994 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.9 to Initial Form S-1, and incorporated herein by reference). 10.10 -- Support Agreement dated as of December 1, 1994 among IES Diversified Inc., McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.10 to Initial Form S-1, and incorporated herein by reference). 10.11 -- Agreement Regarding Support Agreement dated December 1994 between McLeod, Inc. and IES Diversified Inc. (Filed as Exhibit 10.11 to Initial Form S-1, and incorporated herein by reference). 10.12 -- Agreement Regarding Guarantee dated May 16, 1994 between McLeod, Inc. and IES Diversified Inc. (Filed as Exhibit 10.12 to Initial Form S-1, and incorporated herein by reference). 10.13 -- Joinder to and Assumption of Credit Agreement dated as of April 28, 1995 between McLeod Merging Co. and The First National Bank of Chicago. (Filed as Exhibit 10.13 to Initial Form S-1, and incorporated herein by reference). 10.14 -- Joinder to and Assumption of Security Agreement dated as of April 28, 1995 between McLeod Merging Co. and The First National Bank of Chicago. (Filed as Exhibit 10.14 to Initial Form S-1, and incorporated herein by reference). 10.15 -- Letter from The First National Bank of Chicago to James L. Cram dated April 28, 1995 regarding extension of the termination date under the Credit Agreement. (Filed as Exhibit 10.15 to Initial Form S-1, and incorporated herein by reference). 10.16 -- Credit Agreement dated as of March 29, 1996 among McLeod, Inc., McLeod Network Services, Inc., McLeod Telemanagement, Inc., McLeod Telecommunications, Inc. MWR Telecom, Inc. and The First National Bank of Chicago. (Filed as Exhibit 10.16 to Initial Form S-1, and incorporated herein by reference). 10.17 -- Agreement for Construction Related Services dated as of October 17, 1995 between City Signal Fiber Services, Inc. and McLeod Network Services, Inc. (Filed as Exhibit 10.17 to Initial Form S-1, and incorporated herein by reference).
168
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ --------------------------------------------------------------------------------- 10.18 -- Construction Services Agreement dated March 27, 1996 between City Signal Fiber Services, Inc. and McLeod Network Services, Inc. (Filed as Exhibit 10.18 to Initial Form S-1, and incorporated herein by reference). 10.19 -- Fiber Optic Use Agreement dated as of February 14, 1996 between McLeod Network Services, Inc. and Galaxy Telecom, L.P. (Filed as Exhibit 10.19 to Initial Form S-1, and incorporated herein by reference). 10.20 -- Agreement dated as of July 11, 1994 between McLeod Network Services, Inc. and KLK Construction. (Filed as Exhibit 10.20 to Initial Form S-1, and incorporated herein by reference). 10.21 -- Lease Agreement dated September 5, 1995 between State of Iowa and MWR Telecom, Inc. (Filed as Exhibit 10.21 to Initial Form S-1, and incorporated herein by reference). 10.22 -- Lease Agreement dated September 5, 1995 between State of Iowa and McLeod Network Services, Inc. (Filed as Exhibit 10.22 to Initial Form S-1, and incorporated herein by reference). 10.23 -- Contract dated September 5, 1995 between Iowa Telecommunications and Technology Commission and MWR Telecom, Inc. (Filed as Exhibit 10.23 to Initial Form S-1, and incorporated herein by reference). 10.24 -- Contract dated June 27, 1995 between Iowa National Guard and McLeod Network Services, Inc. (Filed as Exhibit 10.24 to Initial Form S-1, and incorporated herein by reference). 10.25 -- Addendum Number One to Contract dated September 5, 1995 between Iowa National Guard and McLeod Network Services, Inc. (Filed as Exhibit 10.25 to Initial Form S-1, and incorporated herein by reference). 10.26 -- U S WEST Centrex Plus Service Rate Stability Plan dated October 15, 1993 between McLeod Telemanagement, Inc. and U S WEST Communications, Inc. (Filed as Exhibit 10.26 to Initial Form S-1, and incorporated herein by reference). 10.27 -- U S WEST Centrex Plus Service Rate Stability Plan dated July 17, 1993 between McLeod Telemanagement, Inc. and U S WEST Communications, Inc. (Filed as Exhibit 10.27 to Initial Form S-1, and incorporated herein by reference). 10.28 -- Ameritech Centrex Service Confirmation of Service Orders dated various dates in 1994, 1995 and 1996 between McLeod Telemanagement, Inc. and Ameritech Information Industry Services. (Filed as Exhibit 10.28 to Initial Form S-1, and incorporated herein by reference). 10.29 -- Lease Agreement dated as of December 28, 1993 between 2060 Partnership and McLeod Telemanagement, Inc., as amended by Amendments First to Ninth dated as of July 3, 1994, March 25, 1994, June 22, 1994, August 12, 1994, September 12, 1994, September 20, 1994, November 16, 1994, September 20, 1995 and January 6, 1996, respectively. (Filed as Exhibit 10.29 to Initial Form S-1, and incorporated herein by reference). 10.30 -- Lease Agreement dated as of May 24, 1995 between 2060 Partnership and McLeod Telemanagement, Inc. (Filed as Exhibit 10.30 to Initial Form S-1, and incorporated herein by reference). 10.31 -- Lease Agreement dated October 31, 1995 between I.R.F.B. Joint Venture and McLeod Telemanagement, Inc. (Filed as Exhibit 10.31 to Initial Form S-1, and incorporated herein by reference).
169
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ --------------------------------------------------------------------------------- 10.32 -- First Amendment to Lease Agreement dated as of November 20, 1995 between I.R.F.B. Joint Venture and McLeod Telemanagement, Inc. (Filed as Exhibit 10.32 to Initial Form S-1, and incorporated herein by reference). 10.33 -- Uniform Purchase Agreement dated July 22, 1993 between McLeod, Inc. and Hill's Maple Crest Farms Partnership. (Filed as Exhibit 10.33 to Initial Form S-1, and incorporated herein by reference). 10.34 -- Master Right-of-Way Agreement dated July 27, 1994 between McLeod Network Services, Inc. and IES Industries Inc. (Filed as Exhibit 10.34 to Initial Form S-1, and incorporated herein by reference). 10.35 -- Master Right-of-Way and Tower Use Agreement dated February 13, 1996 between IES Industries Inc. and McLeod, Inc. (Filed as Exhibit 10.35 to Initial Form S-1, and incorporated herein by reference). 10.36 -- Master Pole, Duct and Tower Use Agreement dated February 20, 1996 between MidAmerican Energy Company and McLeod, Inc. (Iowa and South Dakota). (Filed as Exhibit 10.36 to Initial Form S-1, and incorporated herein by reference). 10.37 -- Master Pole, Duct and Tower Use Agreement dated February 20, 1996 between MidAmerican Energy Company and McLeod, Inc. (Illinois). (Filed as Exhibit 10.37 to Initial Form S-1, and incorporated herein by reference). 10.38 -- Settlement Agreement dated March 18, 1996 between U S WEST Communications, Inc. and McLeod Telemanagement, Inc. (Filed as Exhibit 10.38 to Initial Form S-1, and incorporated herein by reference). 10.39 -- Agreement dated August 4, 1995 between Vadacom, Inc. and McLeod Telemanagement, Inc. (Filed as Exhibit 10.39 to Initial Form S-1, and incorporated herein by reference). 10.40 -- McLeod Telecommunications, Inc. 1992 Incentive Stock Option Plan. (Filed as Exhibit 10.40 to Initial Form S-1, and incorporated herein by reference). 10.41 -- McLeod, Inc. 1993 Incentive Stock Option Plan. (Filed as Exhibit 10.41 to Initial Form S-1, and incorporated herein by reference). 10.42 -- McLeod, Inc. 1995 Incentive Stock Option Plan. (Filed as Exhibit 10.42 to Initial Form S-1, and incorporated herein by reference). 10.43 -- McLeod Telecommunications, Inc. Director Stock Option Plan. (Filed as Exhibit 10.43 to Initial Form S-1, and incorporated herein by reference). 10.44 -- Promissory Note dated July 18, 1995 between Kirk E. Kaalberg and McLeod, Inc. (Filed as Exhibit 10.44 to Initial Form S-1, and incorporated herein by reference). 10.45 -- Promissory Note dated March 29, 1996 between Stephen K. Brandenburg and McLeod, Inc. (Filed as Exhibit 10.45 to Initial Form S-1, and incorporated herein by reference). 10.46 -- Agreement dated April 28, 1995 among McLeod, Inc., McLeod Telecommunications, Inc., McLeod Telemanagement, Inc., McLeod Network Services, Inc. and Clark E. McLeod. (Filed as Exhibit 10.46 to Initial Form S-1, and incorporated herein by reference). +10.47 -- Telecommunications Services Agreement dated March 14, 1994 between WilTel, Inc. and McLeod Telemanagement, Inc., as amended. (Filed as Exhibit 10.47 to Initial Form S-1, and incorporated herein by reference). 10.48 -- Amendment to Contract Addendum A to Contract No. 2102 dated March 31, 1993 between the Iowa Department of General Services and McLeod Telecommunications, Inc. (Filed as Exhibit 10.48 to Initial Form S-1, and incorporated herein by reference).
170
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ --------------------------------------------------------------------------------- 10.49 -- Construction Services Agreement dated June 30, 1995 between MFS Network Technologies, Inc. and MWR Telecom, Inc. (Filed as Exhibit 10.49 to Initial Form S-1, and incorporated herein by reference). 10.50 -- First Amendment to Agreement Regarding Support Agreement dated May 14, 1996 among McLeod, Inc., IES Diversified Inc. and IES Investments Inc. (Filed as Exhibit 10.50 to Initial Form S-1, and incorporated herein by reference). 10.51 -- First Amendment to Agreement Regarding Guarantee dated May 14, 1996 among McLeod, Inc., IES Diversified Inc. and IES Investments Inc. (Filed as Exhibit 10.51 to Initial Form S-1, and incorporated herein by reference). 10.52 -- Amended and Restated Directors Stock Option Plan of McLeod, Inc. (Filed as Exhibit 10.52 to Initial Form S-1, and incorporated herein by reference). 10.53 -- Forms of Employment, Confidentiality and Non-Competition Agreement between McLeod, Inc. and certain employees of McLeod, Inc. (Filed as Exhibit 10.53 to Initial Form S-1, and incorporated herein by reference). 10.54 -- Form of Change-of-Control Agreement between McLeod, Inc. and certain employees of McLeod, Inc. (Filed as Exhibit 10.54 to Initial Form S-1, and incorporated herein by reference). 10.55 -- McLeod, Inc. 1996 Employee Stock Option Plan, as amended. 10.56 -- McLeod, Inc. Employee Stock Purchase Plan. (Filed as Exhibit 10.56 to Initial Form S-1, and incorporated herein by reference). 10.57 -- Form of Indemnity Agreement between McLeod, Inc. and certain officers and directors of McLeod, Inc. (Filed as Exhibit 10.57 to Initial Form S-1, and incorporated herein by reference). 10.58 -- License Agreement dated April 24, 1996 between PageMart, Inc. and MWR Telecom, Inc. (Filed as Exhibit 10.58 to Initial Form S-1, and incorporated herein by reference). 10.59 -- Assignment of Purchase Agreement dated August 15, 1996 by and between Ryan Properties, Inc. and McLeod, Inc. 10.60 -- Assignment of Purchase Agreement dated August 14, 1996 by and between Ryan Properties, Inc. and McLeod, Inc. 10.61 -- Asset Purchase Agreement dated September 4, 1996 by and between Total Communication Services, Inc. and McLeod Telemanagement, Inc. 10.62 -- First Amendment to Asset Purchase Agreement dated September 30, 1996 by and between Total Communication Services, Inc. and McLeod Telemanagement, Inc. 10.63 -- McLeod, Inc. Incentive Plan. 10.64 -- Amended and Restated Credit Agreement dated as of May 5, 1996 by and between Telecom*USA Publishing Group, Inc., Telecom*USA Publishing Company and Telecom*USA Neighborhood Directories, Inc. and Norwest Bank Iowa, National Association. 10.65 -- First Amendment to Amended and Restated Credit Agreement dated as of January 31, 1996 by and between Telecom*USA Publishing Group, Inc., Telecom*USA Publishing Company and Telecom*USA Neighborhood Directories, Inc. and Norwest Bank Iowa, National Association. 10.66 -- Lease Agreement dated as of September 26, 1994 between Ryan Properties, Inc. and Ruffalo, Cody & Associates, Inc. 10.67 -- First Lease Amendment dated as of April 12, 1995 between Ryan Properties, Inc. and Ruffalo, Cody & Associates, Inc.
171
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ --------------------------------------------------------------------------------- 10.68 -- Lease Agreement dated as of July 18, 1995 between 2060 Partnership, L.P. and Telecom*USA Publishing Company. 10.69 -- Lease Agreement dated April 26, 1995 by and between A.M. Henderson and Telecom*USA Publishing Company. 10.70 -- License Agreement dated as of April 19, 1994, between Ameritech Information Industry Services and Telecom*USA Publishing Company. 10.71 -- License Agreement dated September 13, 1993 between U S WEST Communications, Inc. and Telecom*USA Publishing Company. 11.1 -- Statement regarding Computation of Per Share Earnings. 21.1 -- Subsidiaries of McLeod, Inc. 23.1 -- Consents of McGladrey & Pullen, LLP. *23.2 -- Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1 to this Registration Statement on Form S-1). 27.1 -- Financial Data Schedule (Filed as Exhibit 27 to Quarterly Report on Form 10-Q, File No. 0-20763, and incorporated herein by reference). 99.1 -- Purchase Agreement dated as of August 15, 1996 between Iowa Land and Building Company and Ryan Properties, Inc. 99.2 -- Purchase Agreement dated as of June 28, 1996 between Donald E. Zvacek, Dennis E. Zvacek and Robert J. Zvacek and Ryan Properties, Inc.
- --------------- * To be filed by amendment. + Confidential treatment has been granted. The copy filed as an exhibit omits the information subject to the confidential treatment request. EX-10.55 2 MCLEOD, INC. 1996 EMPLOYEE STOCK OPTION PLAN 1 EXHIBIT 10.55 MCLEOD, INC. 1996 EMPLOYEE STOCK OPTION PLAN 2 TABLE OF CONTENTS
PAGE ---- 1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.1. Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.2. No Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4. STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 6. EFFECTIVE DATE AND TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.1. Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.2. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 7. GRANT OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 8. LIMITATION ON INCENTIVE STOCK OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 9. OPTION AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 10. OPTION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 11. TERM AND EXERCISE OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 11.1. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 11.2. Exercise by Optionee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 11.3. Option Period and Limitations on Exercise . . . . . . . . . . . . . . . . . . . . . 6 11.4. Method of Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 12. TRANSFERABILITY OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 13. TERMINATION OF EMPLOYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 14. RIGHTS IN THE EVENT OF DEATH OR DISABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 7 14.1. Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 14.2. Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 15. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 16. SECURITIES LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
i 3 17. EXCHANGE ACT: RULE 16b-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 17.1. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 17.2. Compensation Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 17.3. Restriction on Transfer of Stock . . . . . . . . . . . . . . . . . . . . . . . . . 9 17.4. Requirement of Stockholders' Approval . . . . . . . . . . . . . . . . . . . . . . 10 18. AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 19. EFFECT OF CHANGES IN CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 19.1 Changes in Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 19.2. Reorganization With Corporation Surviving . . . . . . . . . . . . . . . . . . . . 11 19.3. Other Reorganizations; Sale of Assets or Stock . . . . . . . . . . . . . . . . . . 11 19.4. Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 19.5. No Limitations on Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 12 20. WITHHOLDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 21. DISCLAIMER OF RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 22. NONEXCLUSIVITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 23. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ii 4 MCLEOD, INC. 1996 EMPLOYEE STOCK OPTION PLAN McLEOD, INC., a Delaware corporation (the "Corporation"), sets forth herein the terms of the 1996 Employee Stock Option Plan (the "Plan") as follows: 1. PURPOSE The Plan is intended to advance the interests of the Corporation by providing eligible individuals (as designated pursuant to Section 5 hereof) an opportunity to acquire or increase a proprietary interest in the Corporation, which thereby will create a stronger incentive to expend maximum effort for the growth and success of the Corporation and its subsidiaries and will encourage such eligible individuals to continue to service the Corporation. Each stock option granted under the Plan is intended to be an Incentive Stock Option within the meaning of Section 422 of the Code, except (a) to the extent that any such Option would exceed the limitations set forth in Section 8 hereof and (b) for Options specifically designated at the time of grant as not being Incentive Stock Options. 2. DEFINITIONS For purposes of interpreting the Plan and related documents (including Option Agreements), the following definitions shall apply: 2.1 "Affiliate" means McLeod, Inc. and any company or other trade or business that is controlled by or under common control with the Corporation, (determined in accordance with the principles of Section 414(b) and 414(c) of the Code and the regulations thereunder) or is an affiliate of the Corporation within the meaning of Rule 405 of Regulation C under the 1933 Act. 2.2 "Board" means the Board of Directors of the Corporation. 2.3 "Code" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. 2.4 "Committee" means the Compensation Committee of the Board which must consist of no fewer than two members of the Board and shall be appointed by the Board. 2.5 "Corporation" means McLeod, Inc. 2.6 "Effective Date" means the date of adoption of the Plan by the Board. 2.7 "Employer" means McLeod, Inc. or other Affiliate which employs the designated recipient of an Option. 5 2.8 "Exchange Act" means the Securities Exchange Act of 1934, as now in effect or as hereafter amended. 2.9 "Fair Market Value" means the value of each share of Stock subject to the Plan determined as follows: if on the Grant Date or other determination date the shares of Stock are listed on an established national or regional stock exchange, are admitted to quotation on the National Association of Securities Dealers Automated Quotation System, or are publicly traded on an established securities market, the Fair Market Value of the shares of Stock shall be the closing price of the shares of Stock on such exchange or in such market (the highest such closing price if there is more than one such exchange or market) on the trading day immediately preceding the Grant Date or such other determination date (or if there is no such reported closing price, the Fair Market Value shall be the mean between the highest bid and lowest asked prices or between the high and low sale prices on such trading day) or, if no sale of the shares of Stock is reported for such trading day, on the next preceding day on which any sale shall have been reported. If the shares of Stock are not listed on such an exchange, quoted on such System or traded on such a market, Fair Market Value shall be determined by the Board in good faith. 2.10 "Grant Date" means the later of (i) the date as of which the Committee approves the grant and (ii) the date as of which the Optionee and the Corporation or Affiliate enter the relationship resulting in the Optionee being eligible for grants. 2.11 "Incentive Stock Option" means an "incentive stock option" within the meaning of section 422 of the Code. 2.12 "Option" means an option to purchase one or more shares of Stock pursuant to the Plan. 2.13 "Option Agreement" means the written agreement evidencing the grant of an Option hereunder. 2.14 "Optionee" means a person who holds an Option under the Plan. 2.15 "Option Period" means the period during which Options may be exercised as defined in Section 11. 2.16 "Option Price" means the purchase price for each share of Stock subject to an Option. 2.17 "Plan" means the McLeod, Inc. 1996 Employee Stock Option Plan. 2.18 "1933 Act" means the Securities Act of 1933, as now in effect or as hereafter amended. 2.19 "Stock" mean the shares of Class A common stock, par value $.01 per share, of the Corporation. 2 6 2.20 "Subsidiary" means any "subsidiary corporation" of the Corporation within the meaning of Section 425(f) of the Code. 3. ADMINISTRATION 3.1. COMMITTEE The Plan shall be administered by the Committee appointed by the Board, which shall have the full power and authority to take all actions and to make all determinations required or provided for under the Plan or any Option granted or Option Agreement entered into hereunder and all such other actions and determinations not inconsistent with the specific terms and provisions of the Plan deemed by the Committee to be necessary or appropriate to the administration of the Plan or any Option granted or Option Agreement entered into hereunder. The interpretation and construction by the Committee of any provision of the Plan or of any Option granted or Option Agreement entered into hereunder shall be final and conclusive. 3.2. NO LIABILITY No member of the Board or of the Committee shall be liable for any action or determination made, or any failure to take or make an action or determination, in good faith with respect to the Plan or any Option granted or Option Agreement entered into hereunder. 4. STOCK The stock that may be issued pursuant to Options granted under the Plan shall be Stock, which shares may be treasury shares or authorized but unissued shares. The number of shares of Stock that may be issued pursuant to Options granted under the Plan shall not exceed in the aggregate 4,525,000 shares of Stock, which number of shares is subject to adjustment as provided in Section 19 hereof. If any Option expires, terminates or is terminated for any reason prior to exercise in full, the shares of Stock that were subject to the unexercised portion of such Option shall be available for future Options granted under the Plan. It is the intention of the Board that the shares of Stock that are subject to unexercised Options granted under the Plan, and all other plans of the Corporation pursuant to which stock options can be granted, shall not exceed 15% of the then-issued and outstanding shares of Stock and the then-granted and outstanding options. 5. ELIGIBILITY Options may be granted under the Plan to (i) any officer or key employee of the Corporation or any Subsidiary (including any such officer or key employee who is also a director of the Corporation or any Subsidiary) or (ii) any other individual whose participation in the Plan is determined to be in the best interests of the Corporation by the Committee and who is not 3 7 subject to Section 16 of the Exchange Act. An individual may hold more than one Option, subject to such restrictions as are provided herein. 6. EFFECTIVE DATE AND TERM 6.1. EFFECTIVE DATE The Plan shall become effective as of the date of adoption by the Board, subject to stockholders' approval of the Plan within one year of such effective date by a majority of the votes cast at a duly held meeting of the stockholders of the Corporation at which a quorum representing a majority of all outstanding stock is present, either in person or by proxy, and voting on the matter, or by written consent in accordance with applicable state law and the Certificate of Incorporation and By-Laws of the Corporation and in a manner that satisfies the requirements of Rule 16b-3(b) of the Exchange Act; provided, however, that upon approval of the Plan by the stockholders of the Corporation, all Options granted under the Plan on or after the effective date shall be fully effective as if the stockholders of the Corporation had approved the Plan on the effective date. If the stockholders fail to approve the Plan within one year of such effective date, any Options granted hereunder shall be null, void and of no effect. 6.2. TERM The Plan shall terminate on the date 10 years after the effective date. 7. GRANT OF OPTIONS Subject to the terms and conditions of the Plan, the Committee may, at any time and from time to time prior to the date of termination of the Plan, grant to such eligible individuals as the Committee may determine Options to purchase such number of shares of Stock on such terms and conditions as the Committee may determine, including any terms or conditions which may be necessary to qualify such Options as Incentive Stock Options. Without limiting the foregoing, the Committee may at any time, with the consent of the Optionee, amend the terms of outstanding Options or issue new Options in exchange for the surrender and cancellation of outstanding Options. The date on which the Committee approves the grant of an Option (or such later date as is specified by the Committee) shall be considered the date on which such Option is granted. The maximum number of shares of Stock subject to Options that can be awarded under the Plan to any person is 2,000,000 shares. 8. LIMITATION ON INCENTIVE STOCK OPTIONS An Option (other than an Option described in Section 1 hereof) shall constitute an Incentive Stock Option only to the extent that the aggregate fair market value (determined at the time the Option is granted) of the Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under the Plan and all 4 8 other plans of the Optionee's employer corporation and its parent and subsidiary corporations within the meaning of Section 422(d) of the Code) does not exceed $100,000. This limitation shall be applied by taking Options into account in the order in which such Options were granted. 9. OPTION AGREEMENTS All Options granted pursuant to the Plan shall be evidenced by written agreements to be executed by the Corporation and the Optionee, in such form or forms as the Committee shall from time to time determine. Option Agreements covering Options granted from time to time or at the same time need not contain similar provisions; provided, however, that all such Option Agreements shall comply with all terms of the Plan. 10. OPTION PRICE The purchase price of each share of Stock subject to an Option shall be fixed by the Committee and stated in each Option Agreement. In the case of an Option that is intended to constitute an Incentive Stock Option, the Option Price shall be not less than the greater of par value or 100 percent of the Fair Market Value of a share of the Stock covered by the Option on the date the Option is granted (as determined in good faith by the Committee); provided, however, that in the event the Optionee would otherwise be ineligible to receive an Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of more than 10 percent), the Option Price of an Option which is intended to be an Incentive Stock Option shall be not less than the greater of par value or 110 percent of the Fair Market Value of a share of the Stock covered by the Option at the time such Option is granted. In the case of an Option not intended to constitute an Incentive Stock Option, the Option Price shall be not less than the greater of par value or 50 percent of the Fair Market Value of a share of the Stock covered by the Option on the date the Option is granted (as determined in good faith by the Committee). 11. TERM AND EXERCISE OF OPTIONS 11.1. TERM Each Option granted under the Plan shall terminate and all rights to purchase shares thereunder shall cease upon the expiration of 10 years from the date such Option is granted, or on such date prior thereto as may be fixed by the Committee and stated in the Option Agreement relating to such Option; provided, however, that in the event the Optionee would otherwise be ineligible to receive an Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of more than 10 percent), an Option granted to such Optionee which is intended to be an Incentive Stock Option shall in no event be exercisable after the expiration of five years from the date it is granted. 5 9 11.2. EXERCISE BY OPTIONEE Only the Optionee receiving an Option (or, in the event of the Optionee's legal incapacity or incompetency, the Optionee's guardian or legal representative, and in the case of the Optionee's death, the Optionee's estate) may exercise the Option. 11.3. OPTION PERIOD AND LIMITATIONS ON EXERCISE Each Option granted under the Plan shall be exercisable in whole or in part at any time and from time to time over a period commencing on or after the date of grant of the Option and ending upon the expiration or termination of the Option, as the Committee shall determine and set forth in the Option Agreement relating to such Option. Without limitation of the foregoing, the Committee, subject to the terms and conditions of the Plan, may in its sole discretion provide that an Option may not be exercised in whole or in part for any period or periods of time during which such Option is outstanding as the Committee shall determine and set forth in the Option Agreement relating to such Option. Any such limitation on the exercise of an Option contained in any Option Agreement may be rescinded, modified or waived by the Committee, in its sole discretion, at any time and from time to time after the date of grant of such Option. Notwithstanding any other provisions of the Plan, no Option shall be exercisable in whole or in part prior to the date the Plan is approved by the stockholders of the Corporation as provided in Section 6.1 hereof. 11.4. METHOD OF EXERCISE An Option that is exercisable hereunder may be exercised by delivery to the Corporation on any business day, at its principal office addressed to the attention of the Committee, of written notice of exercise, which notice shall specify the number of shares for which the Option is being exercised, and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised. Payment of the Option Price for the shares of Stock purchased pursuant to the exercise of an Option shall be made, as determined by the Committee and set forth in the Option Agreement pertaining to an Option, (a) in cash or by certified check payable to the order of the Corporation; (b) through the tender to the Corporation of shares of Stock, which shares shall be valued, for purposes of determining the extent to which the Option Price has been paid thereby, at their Fair Market Value on the date of exercise; or (c) by a combination of the methods described in Sections 11.4(a) and 11.4(b) hereof; provided, however, that the Committee may in its discretion impose and set forth in the Option Agreement pertaining to an Option such limitations or prohibitions on the use of shares of Stock to exercise Options as it deems appropriate. Payment in full of the Option Price need not accompany the written notice of exercise provided the notice directs that the Stock certificate or certificates for the shares for which the Option is exercised be delivered to a licensed broker acceptable to the Corporation as the agent for the individual exercising the Option and, at the time such Stock certificate or certificates are delivered, the broker tenders to the Corporation cash (or cash equivalents acceptable to the Corporation) equal to the Option Price plus the amount (if any) of federal and/or other taxes which the Corporation may, in its judgment, be required to withhold with respect to the exercise of the Option. An attempt to exercise any Option granted hereunder 6 10 other than as set forth above shall be invalid and of no force and effect. Promptly after the exercise of an Option and the payment in full of the Option Price of the shares of Stock covered thereby, the individual exercising the Option shall be entitled to the issuance of a Stock certificate or certificates evidencing such individual's ownership of such shares. A separate Stock certificate or certificates shall be issued for any shares purchased pursuant to the exercise of an Option which is an Incentive Stock Option, which certificate or certificates shall not include any shares which were purchased pursuant to the exercise of an Option which is not an Incentive Stock Option. An individual holding or exercising an Option shall have none of the rights of a stockholder until the shares of Stock covered thereby are fully paid and issued to such individual and, except as provided in Section 19 hereof, no adjustment shall be made for dividends or other rights for which the record date is prior to the date of such issuance. 12. TRANSFERABILITY OF OPTIONS No Option shall be assignable or transferable by the Optionee to whom it is granted, other than by will or the laws of descent and distribution. 13. TERMINATION OF EMPLOYMENT The Committee may provide, by inclusion of appropriate language in any Option Agreement, that an Optionee may (subject to the general limitations on exercise set forth in Section 11.3 hereof), in the event of termination of employment of the Optionee with the Corporation or a Subsidiary, exercise an Option, in whole or in part, at any time subsequent to such termination of employment and prior to termination of the Option pursuant to Section 11.1 hereof, either subject to or without regard to any installment limitation on exercise imposed pursuant to Section 11.3 hereof, as the Committee, in its sole and absolute discretion, shall determine and set forth in the Option Agreement. Whether a leave of absence or leave on military or government service shall constitute a termination of employment for purposes of the Plan shall be determined by the Committee, which determination shall be final and conclusive. For purposes of the Plan, a termination of employment with the Corporation or a Subsidiary shall not be deemed to occur if the Optionee is immediately thereafter employed with the Corporation or any other Subsidiary. 14. RIGHTS IN THE EVENT OF DEATH OR DISABILITY 14.1. DEATH If an Optionee dies while employed by the Corporation or a Subsidiary or within the period following the termination of employment during which the Option is exercisable under Section 13 or 14.2 hereof, the executors, administrators, legatees or distributees of such Optionee's estate shall have the right (subject to the general limitations on exercise set forth in Section 11.3 hereof), at any time within three months after the date of such Optionee's death and prior to termination of the Option pursuant to Section 11.1 hereof, to exercise any Option held by such Optionee at the date of such Optionee's death, to the extent such Option was exercisable 7 11 immediately prior to such Optionee's death; provided, however, that the Committee may provide by inclusion of appropriate language in any Option Agreement that, in the event of the death of an Optionee, the executors, administrators, legatees or distributees of such Optionee's estate may exercise an Option (subject to the general limitations on exercise set forth in Section 11.3 hereof), in whole or in part, at any time subsequent to such Optionee's death and prior to termination of the Option pursuant to Section 11.1 hereof, either subject to or without regard to any installment limitation on exercise imposed pursuant to Section 11.3 hereof, as the Committee, in its sole and absolute discretion, shall determine and set forth in the Option Agreement. 14.2. DISABILITY If an Optionee terminates employment with the Corporation or a Subsidiary by reason of the "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code) of such Optionee, then such Optionee shall have the right (subject to the general limitations on exercise set forth in Section 11.3 hereof), at any time within three months after such termination of employment and prior to termination of the Option pursuant to Section 11.1 hereof, to exercise, in whole or in part, any Option held by such Optionee at the date of such termination of employment, to the extent such Option was exercisable immediately prior to such termination of employment; provided, however, that the Committee may provide, by inclusion of appropriate language in any Option Agreement, that an Optionee may (subject to the general limitations on exercise set forth in Section 11.3 hereof), in the event of the termination of employment of the Optionee with the Corporation or a Subsidiary by reason of the "permanent and total disability" (within the meaning of Section 22(e)(3) of the Code) of such Optionee, exercise an Option, in whole or in part, at any time subsequent to such termination of employment and prior to termination of the Option pursuant to Section 11.1 hereof, either subject to or without regard to any installment limitation on exercise imposed pursuant to Section 11.3 hereof, as the Committee, in its sole and absolute discretion, shall determine and set forth in the Option Agreement. Whether a termination of employment is to be considered by reason of "permanent and total disability" for purposes of the Plan shall be determined by the Committee, which determination shall be final and conclusive. 15. USE OF PROCEEDS The proceeds received by the Corporation from the sale of Stock pursuant to Options granted under the Plan shall constitute general funds of the Corporation. 16. SECURITIES LAWS The Corporation shall not be required to sell or issue any shares of Stock under any Option if the sale or issuance of such shares would constitute a violation by the individual exercising the Option or by the Corporation of any provisions of any law or regulation of any governmental authority, including, without limitation, any federal or state securities laws or regulations. If at any time the Corporation shall determine, in its discretion, that the listing, 8 12 registration or qualification of any shares subject to the Option upon any securities exchange or under any state or federal law, or the consent of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Corporation, and any delay caused thereby shall in no way affect the date of termination of the Option. Specifically in connection with the Securities Act, upon exercise of any Option, unless a registration statement under the Securities Act is in effect with respect to the shares of Stock covered by such Option, the Corporation shall not be required to sell or issue such shares unless the Corporation has received evidence satisfactory to the Corporation that the Optionee may acquire such shares pursuant to an exemption from registration under the Securities Act. Any determination in this connection by the Corporation shall be final and conclusive. The Corporation may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act. The Corporation shall not be obligated to take any affirmative action in order to cause the exercise of an Option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable unless and until the shares of Stock covered by such Option are registered or are subject to an available exemption from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption. 17. EXCHANGE ACT: RULE 16b-3 17.1. GENERAL The Plan is intended to comply with Rule 16b-3 ("Rule 16b-3") (and any successor thereto) under the Exchange Act. Any provision inconsistent with Rule 16b-3 shall, to the extent permitted by law and determined to be advisable by the Committee (constituted in accordance with Section 17.2 hereof), be inoperative and void. 17.2. COMPENSATION COMMITTEE The Committee appointed in accordance with Section 3.1 hereof shall consist of not fewer than two members of the Board each of whom shall qualify (at the time of appointment to the Committee and during all periods of service on the Committee) in all respects as a "disinterested person" as defined in Rule 16b-3. 17.3. RESTRICTION ON TRANSFER OF STOCK No director, officer or other "insider" of the Corporation subject to Section 16 of the Exchange Act shall be permitted to sell Stock (which such "insider" had received upon exercise of an Option) during the six months immediately following the grant of such Option. 9 13 17.4. REQUIREMENT OF STOCKHOLDERS' APPROVAL No amendment by the Board shall, without approval by a majority of the votes cast at a duly held meeting of the stockholders of the Corporation at which a quorum representing a majority of all outstanding stock is present, either in person or by proxy, and voting on the amendment, or by written consent in accordance with applicable state law and the Certificate of Incorporation and By-Laws of the Corporation, materially increase the benefits accruing to Section 16 "insiders" under the Plan or take any other action that would require the approval of such stockholders pursuant to Rule 16b-3. 18. AMENDMENT AND TERMINATION The Board may, at any time and from time to time, amend, suspend or terminate the Plan as to any shares of Stock as to which Options have not been granted; provided, however, that no amendment by the Board shall, without approval by a majority of the votes cast at a duly held meeting of the stockholders of the Corporation at which a quorum representing a majority of all outstanding stock is present, either in person or by proxy, and voting on the amendment, or by written consent in accordance with applicable state law and the Certificate of Incorporation and By-Laws of the Corporation, materially change the requirements as to eligibility to receive Options or increase the maximum number of shares of Stock in the aggregate that may be sold pursuant to Options granted under the Plan (except as permitted under Section 19 hereof). The Corporation also may retain the right in an Option Agreement to cause a forfeiture of the shares or gain realized by an Optionee on account of the Optionee taking actions in "competition with the Corporation," as defined in the applicable Option Agreement. Furthermore, the Corporation may, in the Option Agreement, retain the right to annul the grant of an Option if the holder of such grant was an employee of the Corporation or a Subsidiary and is terminated "for cause," as defined in the applicable Option Agreement. Except as permitted under Section 19 hereof, no amendment, suspension or termination of the Plan shall, without the consent of the Optionee, alter or impair rights or obligations under any Option theretofore granted under the Plan. 19. EFFECT OF CHANGES IN CAPITALIZATION 19.1 CHANGES IN STOCK If the number of outstanding shares of Stock is increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Corporation by reason of any recapitalization, reclassification, stock split-up, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Corporation, occurring after the effective date of the Plan, a proportionate and appropriate adjustment shall be made by the Corporation in the number and kind of shares for which Options are outstanding, so that the proportionate interest of the Optionee immediately following such event shall, to the extent practicable, be the same as immediately prior to such event. Any such adjustment in outstanding Options shall not change the aggregate Option Price payable with respect to shares subject to the 10 14 unexercised portion of the Option outstanding but shall include a corresponding proportionate adjustment in the Option Price per share. 19.2. REORGANIZATION WITH CORPORATION SURVIVING Subject to Section 19.3 hereof, if the Corporation shall be the surviving entity in any reorganization, merger or consolidation of the Corporation with one or more other entities, any Option theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option would have been entitled immediately following such reorganization, merger or consolidation, with a corresponding proportionate adjustment of the Option Price per share so that the aggregate Option Price thereafter shall be the same as the aggregate Option Price of the shares remaining subject to the Option immediately prior to such reorganization, merger or consolidation. 19.3. OTHER REORGANIZATIONS; SALE OF ASSETS OR STOCK Upon the dissolution or liquidation of the Corporation, or upon a merger, consolidation or reorganization of the Corporation with one or more other entities in which the Corporation is not the surviving entity, or upon a sale of substantially all of the assets of the Corporation to another entity, or upon any transaction (including, without limitation, a merger or reorganization in which the Corporation is the surviving entity) approved by the Board that results in any person or entity (other than persons who are holders of stock of the Corporation at the time the Plan is approved by the Stockholders and other than an Affiliate) owning 80 percent or more of the combined voting power of all classes of stock of the Corporation, the Plan and all Options outstanding hereunder shall terminate, except to the extent provision is made in connection with such transaction for the continuation of the Plan and/or the assumption of the Options theretofore granted, or for the substitution for such Options of new options covering the stock of a successor entity, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kinds of shares and exercise prices, in which event the Plan and Options theretofore granted shall continue in the manner and under the terms so provided. In the event of any such termination of the Plan, each Optionee shall have the right (subject to the general limitations on exercise set forth in Section 11.3 hereof and except as otherwise specifically provided in the Option Agreement relating to such Option), immediately prior to the occurrence of such termination and during such period occurring prior to such termination as the Committee in its sole discretion shall designate, to exercise such Option in whole or in part, to the extent such Option was otherwise exercisable at the time such termination occurs, but subject to any additional provisions that the Committee may, in its sole discretion, include in any Option Agreement. The Committee shall send written notice of an event that will result in such a termination to all Optionees not later than the time at which the Corporation gives notice thereof to its stockholders. 19.4. ADJUSTMENTS Adjustments under this Section 19 relating to stock or securities of the Corporation shall be made by the Committee, whose determination in that respect shall be final 11 15 and conclusive. No fractional shares of Stock or units of other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share or unit. 19.5. NO LIMITATIONS ON CORPORATION The grant of an Option pursuant to the Plan shall not affect or limit in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 20. WITHHOLDING The Corporation or a Subsidiary may be obligated to withhold federal and local income taxes and Social Security taxes to the extent that an Optionee realizes ordinary income in connection with the exercise of an Option. The Corporation or a Subsidiary may withhold amounts needed to cover such taxes from payments otherwise due and owing to an Optionee, and upon demand the Optionee will promptly pay to the Corporation or a Subsidiary having such obligation any additional amounts as may be necessary to satisfy such withholding tax obligation. Such payment shall be made in cash or cash equivalents. 21. DISCLAIMER OF RIGHTS No provision in the Plan or in any Option granted or Option Agreement entered into pursuant to the Plan shall be construed to confer upon any individual the right to remain in the employ of the Corporation or any Subsidiary, or to interfere in any way with the right and authority of the Corporation or any Subsidiary either to increase or decrease the compensation of any individual at any time, or to terminate any employment or other relationship between any individual and the Corporation or any Subsidiary. The obligation of the Corporation to pay any benefits pursuant to the Plan shall be interpreted as a contractual obligation to pay only those amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall in no way be interpreted to require the Corporation to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any participant or beneficiary under the terms of the Plan. 22. NONEXCLUSIVITY Neither the adoption of the Plan nor the submission of the Plan to the stockholders of the Corporation for approval shall be construed as creating any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of stock options otherwise than under the Plan. 12 16 23. GOVERNING LAW. This Plan and all Options to be granted hereunder shall be governed by the laws of the State of Delaware (but not including the choice of law rules thereof). 13 17 The Plan was duly adopted and approved by the Board on March 28, 1996 and was duly approved by the stockholders of the Corporation on April 30, 1996. ------------------------ Casey D. Mahon, Esq. Secretary 14 EX-10.59 3 ASSIGNMENT OF PURCHASE AGREEMENT 1 EXHIBIT 10.59 ASSIGNMENT OF PURCHASE AGREEMENT This Assignment is made and entered into this 15th day of August, 1996 by and between Ryan Properties, Inc. ("Assignor") and McLeod, Inc. ("Assignee"). 1. By execution hereof, Assignor does hereby assign to Assignee all of its right, title and interest in and to that certain Purchase Agreement by and between Assignor and Iowa Land and Building Company dated August 15, 1996. 2. By execution hereof, Assignee hereby accepts the assignment from Assignor and agrees to assume any and all obligations of Assignee under the Purchase Agreement as assigned. 3. This Assignment shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Assignment on the date and in the year first above written. RYAN PROPERTIES, INC. BY: /s/ JEFF A. SMITH --------------------------------- JEFF A. SMITH, Vice President MCLEOD, INC. BY: /s/ JAMES CRAM --------------------------------- NAME Chief Accounting Officer --------------------------------- TITLE By execution hereof, Iowa Land and Building Company acknowledges the above Assignment. IOWA LAND AND BUILDING COMPANY BY: /s/ THOMAS L. ALLER --------------------------------- THOMAS L. ALLER, Vice President EX-10.60 4 ASSIGNMENT OF PURCHASE AGREEMENT 1 EXHIBIT 10.60 ASSIGNMENT OF PURCHASE AGREEMENT This Assignment is made and entered into this 14th day of August, 1996 by and between Ryan Properties, Inc. ("Assignor") and McLeod, Inc. ("Assignee"). 1. By execution hereof, Assignor does hereby assign to Assignee all of its right, title and interest in and to that certain Purchase Agreement by and between Assignor and Donald E. Zvacek, Dennis E. Zvacek and Robert J. Zvacek dated June 28, 1996. 2. By execution hereof, Assignee hereby accepts the assignment from Assignor and agrees to assume any and all obligations of Assignee under the Purchase Agreement as assigned. 3. This Assignment shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Assignment on the date and in the year first above written. RYAN PROPERTIES, INC. BY: /s/ JEFF A. SMITH ----------------------------------- JEFF A. SMITH, Vice President MCLEOD, INC. BY: /s/ JAMES CRAM ----------------------------------- NAME Chief Accounting Officer ----------------------------------- TITLE EX-10.61 5 ASSET PURCHASE AGREEMENT 1 EXHIBIT 10.61 ASSET PURCHASE AGREEMENT THIS AGREEMENT is made and entered into this 4th day of September, 1996, by and between TOTAL COMMUNICATION SERVICES, INC., a corporation organized and existing under the laws of the State of Iowa, ("Seller") and MCLEOD TELEMANAGEMENT, INC., an Iowa corporation with its principal place of business in Cedar Rapids, Iowa ("Buyer"), and joined in by the shareholders and management of Seller listed on Exhibit "B" to this Agreement for the limited purpose of agreeing not to compete, all as hereinafter set forth in this Agreement. RECITALS A. Seller desires to sell and Buyer desires to purchase certain of the assets of Seller on the terms herein stated and; B. Seller and Buyer have reached certain agreements and understandings relative thereto, including terms relating to price, method of payment, delivery and wish to reduce such agreements to writing. The parties agree as follows: 1. ASSETS SOLD AND PURCHASED. Buyer agrees to purchase from Seller and Seller agrees to sell, convey, transfer and deliver to Buyer, free and clear of all liens and encumbrances, the following assets of Seller, which are more fully described on Exhibit A attached (the "Assets"): (a) The Seller's customer base which shall include 1320 Centrex local and long distance lines, 123 long distance only lines, and 135 local lines only, excluding any customer with a Past Due Account (as defined in subparagraph 1(f) of this Agreement); (b) All Customer deposits and the documentation related to Centrex services, to include: customer lists including addresses, customer files including copies of Letters of Agency and PIC forms, LEC orders, LEC records, LEC correspondence, install date, billing records, internal order forms, customer contact lists, and if applicable an electronic file of all customer stored data ("Customer Data"); (c) Ninety-nine (99) installed Dialers; (d) One-hundred Fifty-four (154) toll-free 800/888 numbers (e) All calling cards; (f) All voice mail accounts, all ISDN lines, all T-Span lines and all 56K lines, if any are owned by Seller on the date of Closing; and 2 (g) Account receivables due in less than 60 days after the invoice date on the date of Closing ("Receivables"). Seller shall commence disconnect procedures with respect to any customer whose account is over 60 days past due ("Past Due Account(s)"), in accordance with Iowa Utilities Board rules. Buyer shall not be obligated to service such Past Due Accounts, and Buyer shall be under no obligation or duty to pursue collection of Past Due Accounts. However, if Buyer receives payment for any such Past Due Accounts, Buyer shall forward such payment to Seller. All Receivables are being sold free and clear of liens and encumbrances. All other assets of Seller not listed above or on Exhibit A are specifically excluded. BUYER IS NOT ASSUMING ANY LIABILITIES OF SELLER. 2. PURCHASE PRICE. The total Purchase Price for the Assets shall equal the sum of Five Hundred Thirty-Two Thousand Five Hundred Thirty Dollars ($532,530.00) (the "Purchase Price"), adjusted as follows: (a) Increase in Customer Base. The Purchase Price shall be increased if the Seller's customer base for any of the following Assets: (1) Centrex local and long distance lines; (2) long distance only lines, and (3) 800/888 numbers, has increased by five percent or more from the respective customer base as identified in paragraph 1 of this Agreement. If any such an increase has occurred, Seller shall pay Buyer for each additional active customer telephone number which exceeds the five percent (5%) threshold of the applicable customer base: (i) an additional $290 for each additional active customer telephone number which subscribes to local and long distance service, which is installed prior to Closing. (ii) an additional $130 for each additional active customer telephone number which subscribes to only long distance service which is installed prior to Closing. (iii) an additional $260 for each additional active 800/888 customer telephone number which is installed prior to Closing. (b) Decrease in Customer Base. The Purchase Price shall be reduced if the Seller's customer base for any of the following Assets: (1) Centrex local and long distance lines; (2) long distance only lines, and (3) 800/888 numbers, has decreased by five percent or more from the respective customer base as identified in paragraph 1 of this Agreement. If any such decrease has occurred, the Purchase Price shall be reduced for each additional active 2 3 customer telephone number which exceeds the five percent (5%) threshold of the applicable customer base: (i) a reduction of $290 for each active customer telephone number which subscribes to local and long distance service, which is no longer part of the Seller's customer base at Closing. (ii) a reduction of $130 for each active customer telephone number which subscribes to only long distance service, which is no longer part of the Seller's customer base at Closing. (iii) a reduction of $260 for each active 800/888 customer telephone number which is no longer part of the Seller's customer base at Closing. (c) Active Account. An active account is one that has been installed with U.S. West as a customer of Seller. (d) Price for Receivables. The Purchase Price shall be increased to reflect the value of the Seller's Receivables which are being purchased. Buyer shall pay Seller an additional $0.95 for each $1.00 of Receivables. The "Final Purchase Price" shall be equal to the Purchase Price, as adjusted in accordance with subparagraphs (a) (b) and (c) above. 3. PAYMENT OF PURCHASE PRICE. Buyer has deposited One Hundred Sixty-Six Thousand Dollars ($166,000) in escrow ("Escrow Funds") with Moyer & Bergman, P.L.C. pursuant to an Escrow Agreement dated August 26, 1996. At the Closing, the Final Purchase Price shall be paid in cash or in other immediately available funds, reduced by the amount of the Escrow Funds (excluding any interest on the Escrow Funds) and the Escrow Fund and interest earned shall be paid to Seller. Buyer does not accept or assume and will not accept or assume any liability or obligation of Seller of any kind or nature currently existing or incurred by Seller at any time in the future, including, but not limited to, Seller's bank debt, trade accounts payable, accrued salary and vacation, and any actual or contingent liabilities (known or unknown) associated with the conduct of Seller's business arising from acts occurring prior to or continuing after Closing, including but not limited to commission payments and billing disputes. 4. SELLER'S CREDITORS. Seller agrees to be responsible for and pay promptly all creditors of the Seller and to defend, indemnify, and hold Buyer harmless for the full amount of any claim made against Buyer by creditors of Seller. 3 4 5. CLOSING. (a) The transaction which is the subject of this Agreement shall be closed on September 30, 1996 ("Closing"), or sooner by mutual agreement of the parties, at the offices of Shuttleworth & Ingersoll, P.C., 500 Firstar Bank Building, Cedar Rapids, Iowa 52401. However, the parties acknowledge that the Closing may be delayed up to ninety (90) days after submittal of the parties joint application relating to the items required by subparagraphs 5(b)(iv) and 5(b)(v) of this Agreement if the IUB does not waive the 90 day notice requirement. (b) At the Closing Seller will deliver to Buyer the following: (i) A Bill of Sale and other instruments of transfer sufficient and effective to vest Buyer with good and marketable title to the Assets. (ii) An assignment of the letters of agency relating to the Assets. (iii) All Customer Data. (iv) An assignment and transfer of the Certificate of Public Convenience and Necessity from the Iowa Utilities Board (the "Certificate") to provide local land line and local telephone service in Iowa. (v) Approval from the Iowa Utilities Board of Seller's application to discontinue service to its Iowa customers located in those cities and towns listed on the attached Exhibit "D". (vi) A Certificate of Incumbency identifying the then current officers, directors and shareholders of Seller. (vii) A certified copy of all resolutions and actions of the Seller's board of directors and shareholders authorizing the transaction contemplated by this Agreement. (viii) Releases of all Security Agreements and UCC filings against the Assets. (ix) Written consent of US West to the assignment of the following agreements from Seller to Buyer: (1) "US West Intrastate Network Service Master Agreement Between Total Communication Service, Inc. and US West Communications, Inc." dated October 6, 1994; and 4 5 (2) "Settlement Agreement" between U S WEST Communications, Inc. and Total Commununication Services, Inc. dated April 30, 1996. Such consent shall state that U S West will honor the Iowa Utility Board's approval of Seller's request to discontinue service, and specifically acknowledge the transition of Seller's customers to Buyer's network and billing system. (x) All necessary governmental approvals, including any certificate of convenience and necessity. (xi) Documentation substantiating that Seller has made payment for accrued services related to customer telephone numbers being purchased by Buyer. (c) At Closing, the parties listed in Exhibit B shall deliver to Buyer a Covenant not to Compete Agreement in a form identical to that attached hereto as Exhibit C, restricting all such parties' activities relating to the resale of Centrex and local land line services for a period of three (3) years in all cities or towns in which any affiliate of the Buyer currently conducts business or proposes to conduct business within the State of Iowa as shown on Exhibit D, except such activities which relate to Seller's provision of T-1s and DS-3s as necessary to companies that are associated with the "Link" or "Link of Iowa" group that now, or in the future, may have offices located in the communities listed on Exhibit D, but only for the purpose of providing telemarketing services. (d) At the Closing, Buyer will deliver to Seller with delivery of the items referred to in subparagraphs (b) and (c) above, its certified check or cashier's check payable to Seller in the amount of the Final Purchase Price, reduced by the amount of Escrow Funds. 6. SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents and warrants as follows: (a) Existence; Good Standing; Corporate Authority; Compliance With Law. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Iowa and has the corporate power to own its property and carry on its business as it is now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the character of its properties owned by it therein or in which the transaction of its business makes such qualification necessary. Seller is not in default with respect to any order of any court, governmental authority or arbitration board or tribunal to which Seller is a party or is subject, and to its knowledge, Seller is not in violation of any laws, ordinances, governmental rules or regulations to which it is subject. 5 6 (b) Authority. Seller has full power, right and authority to enter into, and perform its obligations under, this Agreement. The execution, delivery and performance of this Agreement by Seller have been duly and properly authorized by proper corporate action in accordance with applicable law and with the Articles of Incorporation and By-laws of Seller and this Agreement constitutes a valid and binding obligation of Seller, enforceable against it in accordance with its terms. (c) Seller's Title. Seller holds good, valid and marketable title to all of the Assets free and clear of any liens, mortgages, charges and encumbrances of every kind, nature and description (except those liens and encumbrances that will be released prior to or at Closing), and has the full power, right and authority to sell the Assets in accordance with the terms of this Agreement. (d) Receivables. The Receivables are valid, genuine and existing, arose out of the performance of services, are collectible in the ordinary course of business and are subject to no defenses, set-offs or counterclaims. (e) Customer Service and Notification. Seller shall continue to provide adequate and reliable service to the customers listed on Exhibit A until regulatory approval for discontinuance of service is obtained from the Iowa Utilities Board. At Closing Seller and Buyer shall agree upon a letter to be sent to the customers identified on Exhibit A which will be signed by both Buyer and Seller. (f) Licenses, Permits and Assessments. Seller has obtained all licenses, permits, governmental approvals and other authorizations, and has taken all actions required by applicable laws or governmental regulations, necessary or appropriate in the conduct of its business. Seller has complied in all material respects with and has not violated any law or regulation applicable to the conduct of its business, and has filed all reports and paid all regulatory fees and assessments attributable to Seller's business operations involving the Assets which are due or accrue prior to the date of Closing. (g) Transaction Not a Breach. Neither the execution and delivery of this Agreement nor its performance will conflict with or result in a breach of the terms, conditions or provisions of the Articles of Incorporation or By-laws of Seller or any contract, agreement, mortgage, trust deed, note, bond indenture or other instrument or obligation of any nature to which Seller is a party or by which Seller is bound or by which Seller, the business, or the Assets may be affected. (h) Customer Lists and Other Data. All customer lists, receivable listings, and other data provided to Buyer are, in all material respects, true, correct and 6 7 accurate as of the date of Closing. The customer base listed on Exhibit A only reflects customers and lines located in Iowa and/or Illinois, and such customer accounts are current, active and have not been terminated nor does Seller have any knowledge of any intent of any such customer to modify or terminate the current contract. There are no duplicate numbers in the customer lists, 800/888 telephone numbers or the calling cards which comprise the Assets. (i) Liabilities. With respect to the Assets, Seller has not incurred any debts, liabilities or obligations of any nature whether accrued, absolute, contingent, direct, indirect, perfected or otherwise and whether due or to become due except liabilities incurred for services rendered or goods supplied in the ordinary course of business, liabilities on account of taxes and governmental charges and obligations or liabilities incurred by virtue of the execution of this Agreement. (j) Tax Returns. Seller has filed all federal, state, county, and local tax returns which it is required to have filed, and such returns are true and correct. Seller has paid or made adequate provision for the payment of all taxes, interest, penalties, assessments, or deficiencies which have, or may become due pursuant to said returns, or pursuant to any assessment received with respect thereto. (k) Litigation. To the knowledge of Seller, there is no suit, action, arbitration proceeding, or investigation pending or threatened against Seller, or to which Seller is otherwise a party, and which may affect the Assets, before any court, or before any governmental department (including OSHA), commission, board, agency, or instrumentality. (1) Trade Secrets. To the knowledge of the Seller, the Seller has the right to use, free and clear of any claims or rights of others, all trade secrets and client lists employed in carrying on the Seller's business in the manner presently conducted. To the knowledge of the Seller, Seller is not using or in any way making use, without appropriate permission, of any confidential information, confidential formula, computer programs, or trade secrets of any third party, including, without limitation, any former employer of any present or past employee of Seller or of any former or present employee of Seller. (m) Services. Seller shall pay for all services provided in connection with the Assets, whether actually billed or accrued and unbilled, prior to Closing. Seller shall provide Buyer documentation that payments have been made for accrued services related to the Assets. Buyer and Seller shall mutually agree to the process to be utilized to determine customer billing cut-off dates consistent with the date of Closing, taking into account that a portion 7 8 is billed in advance and a portion is billed in arrears, and to allocate revenues to Seller and Buyer in an efficient manner which is fairly consistent with the payment for services made by Seller pursuant to this Agreement. (n) ERISA. Seller currently sponsors or maintains no "employee pension benefit plans" as that term is defined in Section 3(2) of ERISA; and has not, at any time in the past, sponsored or maintained any such plan or terminated any such plan. (o) Seller's Local Service. For a period of six (6) months after Closing, Seller shall keep at least 33 of the Seller's local lines with Buyer's local service program, but only if Seller is still located in Buyer's service area. The foregoing representations and warranties of Seller shall survive the Closing for period of two (2) years. 7. BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer hereby represents and warrants as follows: (a) Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Iowa and has the corporate power to own its property and carry on its business as it is now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the character of its properties owned by it therein or in which the transaction of its business makes such qualification necessary. (b) Authority. Buyer has full power, right and authority to enter into, and perform its obligations under, this Agreement. The execution, delivery and performance of this Agreement by Buyer have been duly and properly authorized by proper corporate action in accordance with applicable law and with the Articles of Incorporation and By-laws of Buyer and this Agreement constitutes a valid and binding obligation of Buyer, enforceable against it in accordance with its terms. (c) No Breach. Neither the execution and delivery of this Agreement nor its performance will conflict with or result in a breach of the terms, conditions or provisions of any contract, agreement, mortgage or other instrument or obligation of any nature to which Buyer is a party or by which Buyer is bound. (d) Services. Buyer shall pay for all services related to the customer telephone numbers listed on Exhibit A which are incurred on the date of Closing or thereafter. 8 9 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. All obligations of Buyer under this Agreement with respect to the Closing are subject to the fulfillment of each of the following conditions: (a) Each and every representation and warranty of Seller contained in this Agreement shall be true in all material respects at the Closing. (b) Seller shall have performed and complied in all material respects with all covenants and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing, including, but not limited to, the approval of the transaction contemplated by this Agreement by Seller's Board of Directors in a manner consistent with the Iowa Business Corporation Act. (c) The execution of the Covenant not to Compete Agreement referred to in paragraph 5(c) above. (e) Iowa Utilities Board approval of the Transfer of the Certificate and Seller's discontinuance of service. (f) Release of any and all liens against the Assets. (g) Buyer shall have been furnished with a certificate executed by the President and Secretary of Seller dated as of the Closing restating and reconfirming as of the date of Closing all Seller's warranties and representations set forth in this Agreement and otherwise certifying the fulfillment of the conditions set forth in Paragraphs (a) and (b) hereof. (h) No suit or action by any party nor any investigation, inquiry or proceeding by any governmental authority nor any legal or administrative proceeding shall have been instituted or threatened on or before the Closing which: (i) questions the validity or legality of any transaction contemplated hereby or (ii) seeks to enjoin any transaction contemplated hereby or (iii) seeks material damages on account of the consummation of any transaction contemplated hereby. (i) Written consent of US West to the assignment of the following agreements from Seller to Buyer: 9 10 (1) "U S West intrastate Network Service Master Agreement Between Total Communication Service, Inc. and U S West Communications, Inc." dated October 6, 1994; and (2) "Settlement Agreement" between U S West Communications, Inc. and Total Communication Services, Inc. dated April 30, 1996. Such consent shall state that U S West will honor the Iowa Utility Board's approval of Seller's request to discontinue service, and specifically acknowledge the transition of Seller's customers to Buyer's network and billing system. (j) Approval of any necessary governmental authorities, including, but not limited to, the Iowa Utilities Board, the Federal Trade Commission and the United States Department of Justice. The cost and expense of obtaining such approval (except for the cost and expense of obtaining the transfer of the Certificate) shall be paid by Buyer. In the event that any of the conditions set forth in this Paragraph 8 have not been fulfilled as of the Closing, Buyer, may, at its option, by written notice to Seller render its obligations hereunder null and void, and thereupon this Agreement shall be of no further force or effect whatsoever. By proceeding with the Closing, Buyer shall be conclusively deemed to have accepted or waived fulfillment of all of said conditions, but shall not be deemed to have waived the requirement that Seller's representations and warranties shall survive the Closing. 9. ADDITIONAL REPRESENTATIONS OF SELLER. Seller further represents that it will not, between the date of this Agreement and the Closing, except with the prior written consent of Buyer, which consent will not be unreasonably withheld: (a) Change materially or adversely the general character of the Assets. (b) Create, incur or permit any mortgage, pledge, lien, charge or encumbrance of any kind on the Assets now owned or hereafter acquired. (c) Enter into, engage in, or become a party to, directly or indirectly, any transaction with respect to the Assets other than in the ordinary course of business. (d) Perform or omit to perform any act, which act or omission would cause any of Seller's warranties and representations in this Agreement to be untrue if made as of the Closing. (e) Seller further represents that between the date of this Agreement and the Closing that it will: 10 11 (f) Give to Buyer and its representatives full access to all of the properties, contracts, records, books, and accounts relating to the Assets and furnish to Buyer and its said representatives such information relative to the Assets as they shall at any time, or from time to time, reasonably request. (g) Use its best efforts to continue to operate the business with respect to the Assets in the ordinary course and maintain the goodwill of each of Seller's customers. (h) Maintain its books and records in the usual, regular and ordinary manner on a basis consistent with prior years. (i) Use its best efforts to cause fulfillment of all of the conditions to which the obligations of the parties hereto are subject, if, any. 10. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER. All of the obligations of Seller hereunder are subject to the fulfillment of each of the following conditions: (a) Each and every representation and warranty of Buyer contained in this Agreement shall be true in all respects at the Closing. (b) Buyer shall have performed or complied with all covenants and conditions required by this Agreement to be performed or complied with by it prior to or at Closing. (c) Seller shall have been furnished with a certificate executed by Buyer dated as of the Closing restating and reaffirming as of the date of Closing all Buyer's warranties and representations set forth in this Agreement and otherwise certifying the fulfillment of the conditions set forth in paragraphs (a) and (b) hereof. (d) No suit or action by any party nor any investigation, inquiry or proceeding by any governmental authority nor any legal or administrative proceeding shall have been instituted or threatened on or before the Closing which: (i) questions the validity or legality of any transaction contemplated hereby or (ii) seeks to enjoin any transaction contemplated hereby or (iii) seeks material damages on account of the consummation of any transaction contemplated hereby. 11 12 (e) Approval of any necessary governmental authorities, including, but not limited to, the Iowa Utilities Board, the Federal Trade Commission and the United States Department of Justice. The cost and expense of obtaining such approval (except for the cost and expense of obtaining the transfer of the Certificate) shall be paid by Buyer. In the event that any of the conditions set forth in this Paragraph 10 have not been fulfilled as of the Closing, Seller may at its option, by written notice to Buyer, render its obligations hereunder null and void. By proceeding with the Closing, Seller shall be conclusively deemed to have accepted or waived fulfillment of all of said conditions. 11. INDEMNIFICATION. (a) Seller agrees to defend, indemnify and hold Buyer forever harmless from and against any and all liabilities, demands, claims, actions, or causes of action, assessments, losses, costs, damages or expenses, including reasonable attorneys' fees, sustained or incurred by the Buyer resulting from or arising out of or by virtue of: (i) Any material inaccuracy in any representation or warranty made herein by Seller or non-compliance with or breach by Seller of any of the covenants, undertakings or obligations of this agreement to be performed by Seller; (ii) Any claims, liability or obligation of Seller of any kind or nature currently existing or incurred by Seller at any time in the future, including, but not limited to, Seller's bank debt, trade accounts payable, accrued salary and vacation, and any actual or contingent liabilities (known or unknown) associated with the conduct of Seller's business arising from acts occurring prior to or continuing after Closing, including but not limited to commission payments and billing disputes. (b) Buyer hereby agrees to defend, indemnify and hold Seller forever harmless from and against any and all liabilities, claims, demands, actions or causes of action, assessments, losses, costs, damages or expenses, including reasonable attorneys' fees sustained or incurred by Seller resulting from or arising out of or by virtue of (i) any material inaccuracy in any representation or warranty made herein by Buyer or non-compliance with or breach by Buyer of any of the covenants of this Agreement to be performed by Buyer; (ii) Buyer's ownership, operation, or use of the Assets following the Closing, excluding any claims, liability or obligation of Seller of any kind or nature currently existing or incurred by Seller at any time in the future, including, but not limited to, Seller's bank debt, trade accounts payable, accrued salary and vacation, and any actual or contingent liabilities (known or unknown) associated with the Assets and/or conduct of Seller's business arising from 12 13 acts occurring prior to or continuing after Closing, including but not limited to commission payments and billing disputes. (c) In the event that subsequent to the Closing any claim is asserted against a party hereto as to which such party is entitled to indemnification hereunder, such party (the "indemnified party") shall within ten (10) days after learning of such claim notify the party obligated to indemnify it (the "indemnifying party") thereof in writing. The indemnifying party shall have the right, upon written notice to the indemnified party within ten (10) days after receipt from the indemnified party of notice of such claim, to conduct at its expense the defense against such claim in its own name, or if necessary in the name of the indemnified party. In the event that the indemnifying party shall fail to give such notice, it shall be deemed to have elected not to conduct the defense of the subject claim, and in such event the indemnified party shall have the right to conduct such defense and to compromise and settle the claim without prior consent of the indemnifying party. In the event that the indemnifying party does elect to conduct the defense of the subject claim, the identified party will cooperate with and make available to the indemnifying party such assistance and materials as may be reasonably requested by it, all at the expense of the indemnifying party, and the indemnified party shall have the right at its expense to participate in the defense, provided that the indemnified party shall have the right to compromise and settle the claim only with the prior written consent of the indemnifying party. Any judgment entered or settlement agreed upon in the manner provided herein shall be binding upon the indemnifying party, and shall conclusively be deemed to be an obligation with respect to which the indemnified party is entitled to indemnification hereunder. 12. MISCELLANEOUS. (a) Any notices from Buyer to Seller hereunder shall be deemed sufficiently given upon delivery, refusal by addressee or notice to Buyer from the Post Office that such notice is undeliverable, if such notice has been mailed by United States registered or certified mail, postage prepaid, addressed to: Total Communication Services, Inc. P.O. Box 96 204 Main Street Van Horne, IA 52346-0096 Attn: Don Whipple Copy to: Michael G. Kulik, Esq. 666 Walnut Street, Suite 2500 Des Moines, IA 50309 or at such other, address or addresses as Seller may from time to time specify by notice in writing to Buyer, given in the manner provided in this paragraph. 13 14 (b) Any notice from Seller to Buyer hereunder shall be deemed sufficiently given upon delivery, refusal by addressee or notice to Seller from the Post Office that such notice is undeliverable if such notice has been mailed by United States registered or certified mail, postage prepaid, addressed to: McLeod Telemanagement, Inc. Town Centre, Suite 500 221 Third Avenue S.E. Cedar Rapids, IA 52401 ATTN: Casey Mahon, General Counsel or at such other address or addresses as Buyer may from time to time specify by notice in writing to Seller, given in the manner provided in this paragraph. (c) Severability. The unenforceability or invalidity of any provision of this Agreement shall not affect the enforceability or validity of any other provision. (d) Successors. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, heirs and personal representatives. (e) Confidentiality. In the event that the transaction which is the subject of this Agreement is not consummated, Buyer agrees that it will return to Seller and Seller agrees that it will return to Buyer all records and other documents of the other then in that party's possession and will not itself use, or disclose, directly or indirectly, to any person any Business Information with respect to the other party or the business learned by that party during the period between the date hereof and termination of this agreement. The term "Business Information" as used herein means all information of a business or technical nature relevant to Seller's business which is not generally known to or by those persons generally knowledgeable about the Seller's type of business. The Seller and Buyer further agree that all terms and conditions of the transaction contemplated by this Agreement, including, but not limited to, the Purchase Price and other consideration, shall remain confidential, except to the extent disclosure is required by law. The remaining terms, conditions, and obligations of a certain Confidentiality Agreement entered into by Seller and Buyer and dated on or about May 16, 1994, shall survive the Closing. (f) Entire Agreement. This agreement sets forth the entire understanding of the parties and may be modified only by instruments signed by both of the parties hereto. This Agreement supersedes and hereby cancels the letter of intent dated as of August 14, 1996, by and between the parties. (g) Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 14 15 (h) Expenses. Each party shall pay its own legal and accounting costs and expenses incurred in negotiating and preparing this agreement and in closing and carrying out the transactions contemplated by this Agreement. (i) Governing Law. This agreement shall be construed and governed in accordance with the laws of the State of Iowa. (j) Headings. The subject headings of paragraphs and subparagraphs of this agreement are included for purposes of convenience only and shall not affect the construction or interpretation of any of its provisions. (k) Further assurances. Each party hereto shall cooperate, shall take such further action and shall execute and deliver such further documents as may be reasonably requested by any other party in order to carry out the provisions and purposes of this Agreement, including but not limited to the endorsement of checks received after Closing in payment of the Accounts Receivable being purchased by Buyer. (l) Arbitration. Any disputes relating to the interpretation of this Agreement or the duties and obligations of either party hereunder shall be resolved by arbitration in accordance with the rules and procedures of the American Arbitration Association. (m) Release of Information. Neither party shall disclose any of the terms of the transaction contemplated by this Agreement, except as may be required by law, and the contents of any press releases concerning the transaction contemplated by this Agreement shall be determined by mutual agreement of the parties. (n) Media Inquiries. All media inquiries relating to this Agreement and the transactions contemplated shall all be referred to Buyer and all responses and comments shall be provided solely by Buyer, except that any reference to Seller or information regarding Seller will be submitted to and subject to the prior review by Seller. Seller may respond to media inquiries relative to the transaction contemplated by this Agreement by indicating that the Seller shall continue other lines of business and limit any further response to Seller's other lines of business. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. TOTAL COMMUNICATION SERVICES, MCLEOD TELEMANAGEMENT, INC. INC. ("SELLER") ("BUYER") By: /s/ DONALD G. WHIPPLE By: /s/ STEPHEN C. GRAY -------------------------- -------------------------- Its: Board Chairman Its: President ------------------------- ------------------------- 15 16 The shareholders and management of Seller listed on the attached Exhibit "B" execute this Agreement for the limited purpose of agreeing to execute a Non-Competition Agreement pursuant to the terms of this Agreement: /s/ DONALD WHIPPLE /s/ CHARLES ELDRED - --------------------------- ---------------------------- Donald Whipple Charles Eldred /s/ JOHN BRADY /s/ DUANE ANDREW - --------------------------- ---------------------------- John Brady Duane Andrew /s/ BRIAN RAMMELSBERG - --------------------------- ---------------------------- Brian Rammelsberg Michael Knight I.S.H., INC. BENTON MARKETING GROUP, L.C. By: By:/s/ DONALD G. WHIPPLE ------------------------ ------------------------- Its: Its: Chairman ----------------------- ------------------------ ATTACHED EXHIBITS Exhibit A List of Assets Exhibit B List of Parties Executing Non-Competition Agreement Exhibit C Non-Competition Agreement Exhibit D Non-Competition Area 16 17 The shareholders and management of Seller listed on the attached Exhibit "B" execute this Agreement for the limited purpose of agreeing to execute a Non-Competition Agreement pursuant to the terms of this Agreement - --------------------------- ---------------------------- Donald Whipple Charles Eldred - --------------------------- ---------------------------- John Brady Dwayne Andrew /s/ MICHAEL KNIGHT - --------------------------- ---------------------------- Brian Rammelsberg Michael Knight I.S.H., INC. BENTON MARKETING GROUP, L.C. By: [SIG] By: ------------------------ ------------------------- Its: President Its: ----------------------- ------------------------ ATTACHED EXHIBITS Exhibit A List of Assets Exhibit B List of Parties Executing Non-Competition Agreement Exhibit C Non-Competition Agreement Exhibit D Non-Competition Area 16 EX-10.62 6 FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT 1 EXHIBIT 10.62 FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT THIS AMENDMENT made and entered into this 30th day of September, 1996, by and between TOTAL COMMUNICATION SERVICES, INC., a corporation organized and existing under the laws of the State of Iowa, ("Seller") and MCLEOD TELEMANAGEMENT, INC., an Iowa corporation with its principal place of business in Cedar Rapids, Iowa ("Buyer"), is the First Amendment to that Asset Purchase Agreement dated September 5, 1996 executed by Seller and Buyer ("Agreement"), and is joined in by the shareholders and management of Seller listed on Exhibit "B" to the Agreement for the limited purpose of agreeing not to compete, all as set forth in the Agreement. 1. FIRST AMENDMENT. Buyer and Seller agree that the Closing Date provided in Paragraph 5 of the Agreement is hereby extended from no later than September 30, 1996 to no later than October 31, 1996. Buyer and Seller agree to read all other dates or terms contained in the Agreement and its Exhibits A, B, C and D and which affect the Closing Date to be modified to be consistent with a Closing Date not later than October 31, 1996. 2. RATIFICATION. Except as modified by this First Amendment, the Agreement is hereby ratified and confirmed and shall remain in full force and effect according to the terms of the Agreement. 3. SIGNATURES. Buyer and Seller agree that the execution of this Amendment may be made by facsimile signatures and facsimile signatures shall be as binding on the respective parties as original signatures. IN WITNESS WHEREOF, Buyer and Seller have executed this First Amendment to Agreement effective as of the date first above written. TOTAL COMMUNICATION SERVICES, MCLEOD TELEMANAGEMENT, INC. INC. ("SELLER") ("BUYER") By: /s/ DONALD WHIPPLE By: /s/ CASEY D. MAHON ----------------------------- --------------------------- Its: Chairman Its: Senior Vice President ----------------------------- -------------------------- & General Counsel THE SHAREHOLDERS AND MANAGEMENT OF SELLER LISTED ON EXHIBIT "B" ATTACHED TO THE AGREEMENT FOR THE LIMITED PURPOSE OF AGREEING TO EXECUTE A NON-COMPETITION AGREEMENT PURSUANT TO THE TERMS OF THE AGREEMENT: /s/ DONALD WHIPPLE /s/ CHARLES ELDRED - --------------------------------- ------------------------------ Donald Whipple Charles Eldred 2 /s/ DWAYNE ANDREW - -------------------------------- ------------------------------- John Brady Dwayne Andrew - -------------------------------- ------------------------------- Brian Rammelsberg Michael Knight I.S.H., INC. PENTON MARKETING GROUP, L.C. By: By: /s/ DONALD WHIPPLE ----------------------------- ---------------------------- Its: Its: Chairman ---------------------------- --------------------------- 3 - -------------------------------- ------------------------------- John Brady Dwayne Andrew /s/ BRIAN RAMMELSBERG - -------------------------------- ------------------------------- Brian Rammelsberg Michael Knight I.S.H., INC. PENTON MARKETING GROUP, L.C. By: By: /s/ DONALD WHIPPLE ----------------------------- ---------------------------- Its: Its: Chairman ---------------------------- --------------------------- 4 - -------------------------------- ------------------------------- John Brady Dwayne Andrew /s/ MICHAEL KNIGHT - -------------------------------- ------------------------------- Brian Rammelsberg Michael Knight I.S.H., INC. PENTON MARKETING GROUP, L.C. By: [SIG] By: /s/ DONALD WHIPPLE ----------------------------- ---------------------------- Its: President Its: Chairman ---------------------------- --------------------------- 5 /s/ JOHN BRADY - -------------------------------- ------------------------------- John Brady Dwayne Andrew - -------------------------------- ------------------------------- Brian Rammelsberg Michael Knight I.S.H., INC. PENTON MARKETING GROUP, L.C. By: By: /s/ DONALD WHIPPLE ----------------------------- ---------------------------- Its: Its: Chairman ---------------------------- --------------------------- EX-10.63 7 MCLEOD, INC. INCENTIVE PLAN 1 EXHIBIT 10.63 MCLEOD, INC. INCENTIVE PLAN ARTICLE I PLAN 1.1. PURPOSE. The purpose of the McLeod, Inc. Incentive Plan (the "Plan") is to provide a means whereby McLeod, Inc. (the "Company") can (i) provide Participants with additional incentives and (ii) reward actions which enhance the profitable growth of the Company and its subsidiaries. 1.2. PLAN. The Plan is a non-qualified incentive plan which does not defer the receipt of income to retirement or past the termination of employment. Therefore, the Plan is not and is not intended to be an Employee Benefit Plan as defined by ERISA Section 3. 1.3. EFFECTIVE DATE. The Plan is effective as of September 20, 1996. 1.4. APPENDICES. The Plan may be amplified or modified from time to time by appendices. Each such appendix shall form a part of the Plan and shall supersede Plan provisions in accordance with its terms. ARTICLE II DEFINITIONS 2.1. DEFINITIONS. For purposes of this Plan, the following words and phrases have the following meanings, unless the context clearly indicates otherwise: a. "Account" means the account maintained by the Administrator on behalf of a Participant under the terms of the Plan. 2 b. "Account Balance" means the value of a Participant's Account which on any given day shall equal the total value of all Units contributed to the Plan on behalf of a Participant which have not previously been distributed, and all earnings thereon. C. "Administrator" means the Company or such other person or persons as may be appointed from time to time to administer the Plan. d. "Beneficiary" means the person or persons the Employee has designated in writing to the Company as the Beneficiary in the event of the death of the Participant. If the Employee has not named a Beneficiary, then the Beneficiary shall be the Employee's Spouse, if living and if the Spouse is not living, then the Estate of the Employee. e. "Board" means the Board of Directors of the Company. f. "Effective Date" means September 20, 1996, the effective date of the merger between McLeod Reverse Merging Company and Telecom*USA Publishing Group, Inc. g. "Employee" means any employee of Telecom*USA Publishing Group, Inc. or Telecom*USA Publishing Company. h. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. i. "ISO" means the Telecom*USA Publishing Group, Inc. and Telecom*USA Publishing Company Incentive Stock Option Plan. j. "ISO Agreement" means the agreements entered into by and between Telecom*USA Publishing Group, Inc. and Telecom*USA Publishing Company and certain of its eligible employees and sales representatives who were granted Options pursuant to the terms of the ISO. k. "Operating Earnings" means operating income or loss as determined by generally accepted accounting principles used in the Telecom*USA Publishing Group, Inc. ("Telecom") financial statements as of August 31, 1996, adjusted for any amortization of good will or other intangibles created as a result of the merger of Telecom with McLeod Reverse Merging Co., any costs/disbursements of the Plan and any special items or projects as designated by the Chief Executive Officer of Telecom and the Company. 2 3 l. "Option" means a right to purchase one share of Telecom*USA Publishing Group, Inc. common stock which is granted pursuant to the ISO. m. "Participant" means any employee who participates in the Plan in accordance with the provisions of Article III. n. "Spouse" means the individual to whom the Employee is legally married at the time of the Employee's death. o. "Unit" means a unit of participation in the Plan. 2.2. CONSTRUCTION. A pronoun or adjective in the masculine gender includes the feminine gender, and the singular includes the plural, unless the context clearly indicates otherwise. ARTICLE III PARTICIPATION 3.1. ELIGIBLE EMPLOYEES. All Employees who held non-vested Options in the ISO on the Effective Date are eligible to participate in the Plan on the Effective Date. No other Employees will become eligible to participate in the Plan. 3.2. DURATION OF PARTICIPATION. A Participant shall remain a Participant until the earlier of: (i) the date he receives distribution of his entire Account Balance under the Plan, or (ii) the date his employment with the Company terminates; provided, however, that if a Participant terminates his employment after he vests in Units of his Account Balance as provided in Section 5.1, but prior to receipt of payment of such vested amounts, he shall remain a Participant in the Plan until such payments are made as specified in Article VI. ARTICLE IV CONTRIBUTIONS 4.1. UNITS. For each non-vested Option a Participant holds on the Effective Date, he will receive a Unit in the Plan. On the Effective Date of the Plan, the "Unit Value" of 3 4 each such Unit will equal $12.75 less the option exercise price of the corresponding non-vested Option as specified in the Participant's ISO Agreement. Therefore, each Participant's Account Balance on the Effective Date will equal the total number of Units received by such Participant pursuant to this section 4.1 multiplied by their applicable Unit Values. 4.2. EARNINGS. Each Participant's Account Balance in the Plan will accrue earnings at a rate of six percent (6%) annually; in addition, if Telecom*USA Publishing Group, Inc. has Operating Earnings for any calendar year, which exceed the Operating Earnings for the Base Year, earnings will accrue on each Participant's Account Balance at a rate of six percent (6%) plus an "Additional Percentage." For purposes of this Section, the Additional Percentage shall be equal to the lesser of (i) the percentage of increase in Operating Earnings for the current calendar year compared to the prior calendar year or (ii) the percentage of increase in Operating Earnings for the current calendar year compared to the "Base Calendar Year;" provided, however, if the prior calendar year was a year in which Operating Earnings were 0 or less, the Additional Percentage shall be calculated per subparagraph 4.2(ii) above. For purposes of this section the "Base Calendar Year" means the 1996 calendar year. Further, in no event, will the Additional Percentage exceed twenty-five percent (25%) for any year. 4.3. FUNDING. A Participant's or Beneficiary's interest in the Plan is an unsecured claim against the general assets of the Company and neither the Participant or Beneficiary has any right against the Account until it has been distributed pursuant to the terms of the Plan. All amounts credited to an Account shall remain a general, unpledged and unrestricted asset of the Company. ARTICLE V VESTING 5.1. VESTING. Each Unit shall vest on January 1 of the year following the year in which the corresponding Option would have vested pursuant to the applicable ISO Agreement. The vesting schedule for each Participant is set forth in Appendix A. 4 5 5.2. FORFEITURES. Any Participant whose employment with the Company terminates shall forfeit all of the Units in his Account Balance in which he is not vested as provided in Section 5.1. ARTICLE VI PAYMENT OF BENEFITS 6.1. TIMING AND METHOD OF DISTRIBUTION. Distribution of each vested Unit and the earnings thereon will be made as soon as administratively feasible after the applicable January 1 vesting date of such Unit. All distributions will be made to Participants or Beneficiaries in lump-sum cash payments subject to applicable withholding. 6.2. PAYMENT ON ACCOUNT OF DEATH. If a Participant dies prior to receiving payment of his vested Account Balance, distribution will be made to the Participant's Beneficiary in accordance with the provisions of Section 6.1. ARTICLE VII AMENDMENT AND TERMINATION The Company reserves the right to terminate or amend the Plan at any time by resolution of its Board. The Board will determine the effective date of the amendment or termination. ARTICLE VIII ADMINISTRATION The Plan shall be administered by the Company or the Administrator appointed by the Board for this purpose. The Administrator shall have the sole responsibility for and the sole control of the operation and administration of the Plan, and shall have the power and authority to take all action and make all decisions and interpretations which may be necessary or appropriate in order to administer the Plan. All expenses incurred in the administration of the Plan shall be paid by the Company. 5 6 ARTICLE IX MISCELLANEOUS 9.1. BENEFITS NOT ASSIGNABLE. Neither the Participant nor Beneficiary may assign, transfer or pledge the benefits under this Plan, except as otherwise provided in Section 6.2, in the event of the Participant's death. Any attempt to assign, transfer or pledge a Participant's benefits under this Plan is void. 9.2. GOVERNING LAW. This Plan shall be construed, administered, and enforced in accordance with the laws of the State of Iowa. 9.3. PLAN NOT A CONTRACT. The Plan shall not be deemed to be a contract between the Company and any Employee or to be consideration or an inducement for the employment of any Employee. No Participant shall acquire any right to be retained in the Company's employ by virtue of the Plan, nor, upon his dismissal or upon his voluntary termination of employment, shall he have any right or interest in the Plan other than as specifically provided herein. 9.4. SUCCESSORS. This Plan shall not be terminated by a transfer or sale of the assets of the Company or by the merger or consolidation of the Company into or with any other corporation or entity, but the Plan shall be continued after such sale, merger or consolidation and the transferee, purchaser or successor entity shall be required as part of the sale, merger or consolidation to agree to such continuation. IN WITNESS WHEREOF, the Company has caused this Plan to be executed in its name and behalf on this 20th day of September, 1996, by its duly authorized officer. MCLEOD, INC. By /s/ BLAKE O. FISHER, JR. ----------------------------------------- Blake O. Fisher, Jr. Chief Financial Officer and Treasurer 6 EX-10.64 8 AMENDED AND RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.64 AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDED AND RESTATED CREDIT AGREEMENT is dated as of the 5th day of May, 1995, and is by and between TELECOM*USA PUBLISHING GROUP, INC., an Iowa corporation ("TPG"), TELECOM*USA PUBLISHING COMPANY ("TPC") and TELECOM*USA NEIGHBORHOOD DIRECTORIES, INC. ("TND") (TPG, TPC and TND shall be together referred to as the "Borrower"), and NORWEST BANK IOWA, NATIONAL ASSOCIATION, a national banking association with offices located in Cedar Rapids, Iowa (the "Bank"). RECITALS: WHEREAS, the Borrower desires to maintain and increase a revolving credit line in the principal amount of TWELVE MILLION DOLLARS ($12,000,000.00) (the "Credit") for working capital purposes, acquisitions, and/or for the issuance of letters of credit; and, WHEREAS, the Bank is willing to make the Credit available to the Borrower subject to the provisions of this Credit Agreement; and NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein, the parties agree that the Credit Agreement dated as of January 31, 1994 is hereby amended and restated as follows: SECTION 1 Definitions In addition to those terms defined in the above recitals, as used herein: 1.1 "Accounts," "Contract Rights," "Equipment," "General Intangibles," and "Inventory" shall have the same respective meanings as are given to those terms in the Uniform Commercial Code of the State of Iowa. 1.2 "Agreement" shall mean this Credit Agreement and all amendments and supplements hereto which may from time to time become effective hereafter in accordance with the terms hereof. 1.3 "Banking Day" shall mean any day other than a Saturday, Sunday or legal holiday on which banks in Cedar Rapids, Iowa are authorized or required to be closed. 1.4 "Base Rate" shall mean the "base" or "prime" rate of interest as announced by Norwest Bank Iowa, National Association, at its principal office located in Des Moines, Iowa, as in effect from time to time. 1.5 "Borrowed Money" shall mean funds obtained by incurring contractual indebtedness and shall not include trade accounts payable or money borrowed from the Bank. 2 1.6 "Closing Date" shall mean the date of this Agreement. 1.7 "Current Maturities of Long Term Debt" shall mean that portion of all long term debt with the Bank, plus seller financing on acquisitions, including Phone Directories Company, Inc., Utah; Metropolitan Publishing Corp., Missouri; the Gruenemeir noncompete debt; or any other debt properly classified as long term debt under generally accepted accounting principles (excluding future seller debt on acquisitions) which are due and payable in the upcoming fiscal year. 1.8 "Current Note" shall mean the promissory note of the Borrower in the form of Exhibit A, evidencing borrowings under Section 2.1 hereof. 1.9 "Notes" shall mean the Current Note and all Term Notes. 1.10 "Events of Default" shall mean any and all events of default described in Section 8 hereof. 1.11 "Maturity Date" shall mean January 31, 1996. 1.12 "Permitted Liens" shall mean: A. Liens in favor of the Bank; B. Purchase money liens; C. Existing liens disclosed to the Bank in writing prior to the date of this Agreement; and, D. Liens for taxes not delinquent or which Borrower is contesting in good faith. 1.13 "Private Placement Debt" shall mean the existing convertible debt of the Borrower, plus any new debt issues that are subordinated to the Bank. 1.14 "Security Agreement" shall mean the existing Security Agreement dated November 20. 1990, pursuant to which, among other things, TPC has granted Bank a security interest in the collateral described in Section 4.1 hereof. 1.15 "Subsidiary" shall mean any corporation of which more than fifty percent (50%) of the outstanding voting securities shall, at the time of determination, be owned directly, or indirectly through one or more intermediates, by the Borrower. 1.16 "Term Note" shall mean a promissory note of the Borrower in the form of Exhibit B, evidencing a term loan under Section 2.3 hereof. -2- 3 1.17 "Unfinanced Capital Expenditures" shall mean all capital expenditures except those capital expenditures financed through purchase money financing. SECTION 2 Borrowings and Conditions of Lending 2.1 The Credit. The Bank may lend to the Borrower from time to time from the date of this Agreement until the Maturity Date sums not to exceed TWELVE MILLION AND NO/100 DOLLARS ($12,000,000.00) in the aggregate principal amount at any one time outstanding. Each borrowing under this Section 2.1 will be requested in writing or in person by an authorized officer of the Borrower, or telephonically by any person reasonably believed by the Bank to be an authorized officer of the Borrower. Advances under this Section 2.1 will be at the sole discretion of the Bank. Each borrowing under this Section 2.1 will be evidenced by a notation on the Bank's records, which shall be conclusive evidence of such borrowing, and by the Current Note. Within the limits of the Credit and subject to the terms and conditions hereof, the Borrower may borrow, prepay pursuant to Section 2.4 hereof and reborrow pursuant to this Section 2.1. A. Interest on the first $6,000,000.00 of unpaid principal outstanding under the Current Note, less amounts outstanding under the Term Notes, if any, shall be calculated at an annual rate equal to the Base Rate in effect from time to time. Interest on unpaid principal outstanding under the Current Note in excess of $6,000,000.00, less amounts outstanding under the Term Notes, if any, shall be calculated at an annual rate of three-quarters of one percent (0.75%) in excess of the Base Rate in effect from time to time. Interest shall be calculated on the basis of the actual number of days elapsed in a year of 360 days, and shall change as and when the Base Rate changes. B. Interest on the Current Note shall be payable monthly, commencing as set forth in the Current Note, and continuing on the same day of each succeeding month until the Current Note is paid in full. C. The principal of the Current Note shall be repayable in full on the Maturity Date. 2.2 Letters of Credit. Subject to the other provisions of this Agreement, upon delivery to the Bank of a written application for letter of credit, the Bank will issue Letters of Credit from time to time. The face amount of each Letter of Credit shall reduce, on a dollar-for-dollar basis, the amount available to the Borrower under the Current Note. In no event shall the Bank issue a Letter of Credit if, after giving effect to such issuance, the sum of the aggregate outstanding letters of credit plus the outstanding principal balance of the Current Note would exceed the amount available under Section 2.1. In no event shall the expiry date of any Letter of Credit be more than one year from the date of issuance nor extend beyond a date that is 30 days prior to the Maturity Date. A. The Borrower shall pay the following fees with respect to each Letter of Credit: (i) a Letter of Credit fee equal to 1.75% of the stated amount of the letter of credit, payable -3- 4 on or before the issuance of such letter of credit; and (ii) all other charges customarily charged by the Bank with respect to the letters of credit. B. If any change in any law or regulation or in the interpretation or implementation thereof by any court or administrative governmental authority charged with the administration thereof shall either (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against letters of credit issued by, or assets held by, or deposits in or for the account of the Bank, or (ii) impose on the Bank any other condition regarding this Agreement or any letter of credit, and the result of any event referred to in the preceding clause (i) or (ii) shall be to increase the cost to the Bank of issuing or maintaining any letter of credit hereunder (which increase in cost shall be determined by the Bank's reasonable allocation of the aggregate of such cost increases resulting from such events), then, upon demand by the Bank, the Borrower shall immediately pay to the Bank, from time to time as specified by the Bank, additional amounts which shall be sufficient to compensate the Bank for such increased cost, together with interest on each such amount from the date demanded until payment in full thereof at the rate provided in Section 2.1. 2.3 Term Loans. To the extent that advances under the Credit are used to finance acquisitions with a total cost of more than $1,000,000, the Bank and the Borrower agree that such advances shall be converted to Term Loans, such conversion to occur on the earlier of twelve months following the closing of the acquisition or the on date of the first publication of a directory related to such acquisition. A. At the time of the making of each Term Loan, the Borrower will execute and deliver a Term Note to the Bank, in the form of Exhibit B. B. The interest on each Term Note shall be calculated at an annual rate equal to the Base Rate in effect from time to time, unless the aggregate principal outstanding under the Term Notes exceeds $6,000,000.00, in which case the rate on all amount above $6,000,000.00 shall be equal to an annual rate of three-quarters of one percent (0.75%) in excess of the Base Rate in effect from time to time. Interest shall be calculated on the basis of the actual number of days elapsed in a year of 360 days. C. The principal and interest of each Term Note will be repaid in monthly installments of principal and interest, in an amount sufficient to fully amortize the principal outstanding over a term of five years. D. Each Term Note delivered under this Section 2.3 shall reduce the maximum amount available under the Credit by the original principal amount of such Term Note. 2.4 The Borrower may at any time prepay the Notes in whole or from time to time in part without premium or penalty. -4- 5 SECTION 3 Conditions Precedent 3.1 The Borrower shall deliver the following to the Bank on or before the Closing Date: A. The Current Note, duly executed by each Borrower; B. An opinion of counsel to the Borrower as to the perfection of the Bank's security interest and such other matters as the Bank may request. 3.2 The Borrower acknowledges that the following documents previously delivered to the Bank continue to be in full force and effect: A. The Security Agreement; B. The landlord's waiver previously delivered to the Bank; C. A certified copy of each of the Borrowers' Articles of Incorporation and By-laws; D. A certified copy of resolutions of each of the Borrowers' board of directors authorizing the execution, delivery and performance of this Agreement, the Note, the Security Agreement, and each other document to be delivered pursuant hereto; E. A certificate of each of the Borrowers' corporate secretary as to the incumbency and signatures of the officers of the Borrower signing this Agreement, the Notes, the Security Agreement, and each other document to be delivered pursuant hereto; and, F. Certificates of insurance, in form and substance acceptable to Bank, indicating that Borrower is in compliance with the covenant contained in Section 6.5 hereof. 3.3 The Bank shall not be obligated to lend hereunder on the occasion for any borrowing unless: A. The representations and warranties contained in Section 5 hereof are true and accurate on and as of such date; and, B. No Event of Default, and no event which might become an Event of Default after the lapse of time or the giving of notice and the lapse of time, has occurred and is continuing or will exist upon the disbursement of such loan. -5- 6 SECTION 4 Security 4.1 The Notes and the performance of the Borrower's additional obligations as set forth hereunder shall be secured by the Security Agreement granting to the Bank a first security interest in Inventory, Accounts, Equipment, and General Intangibles, now owned or hereafter acquired. 4.2 As additional security for the prompt satisfaction of all obligations of Borrower under the Note and Security Agreement, the Borrower hereby assigns, transfers and sets over to the Bank all of its right, title and interest in and to, and grants the Bank a lien on and a security interest in, all amounts that may be owing from time to time by the Bank to the Borrower in any capacity, including, but without limitation, any balance or share belonging to the Borrower, of any deposit or other account with the Bank, which lien and security interest shall be independent of any right of set-off which the Bank may have. 4.3 The foregoing liens shall be first and prior liens except for Permitted Liens. 4.4 At any time requested by the Bank, the Borrower shall execute and deliver or cause to be executed and delivered to the Bank such additional documents as the Bank may consider to be necessary or desirable to evidence or perfect the security interests referred to in Sections 4.1 through 4.2 hereof. SECTION 5 Representations and Warranties To induce the Bank to enter into this Agreement, the Borrower represents and warrants to the Bank as follows: 5.1 Each of the Borrowers is a corporation duly organized, existing and in good standing under the laws of the State of lowa. 5.2 Each of the Borrowers is duly qualified to do business and is in good standing in any additional jurisdictions where, on advice of legal counsel, registration was deemed necessary. 5.3 The execution, delivery and performance of this Agreement and the Note by each of the Borrowers are within its corporate powers, have been duly authorized, and are not in contravention of law, or the terms of each Borrower's Articles of Incorporation or By-Laws or of any undertaking to which either Borrower is a party or by which it is bound. 5.4 The property of the Borrower is not subject to any lien except Permitted Liens. 5.5 No litigation or governmental proceeding is pending or, to the knowledge of the officers of the Borrower, threatened against the Borrower which could have a material adverse effect on the Borrower's financial condition or business. -6- 7 5.6 a) The present value of all benefits vested under all "Employee Pension Benefit Plans" (as such term is defined in Section 3.2 of ERISA) from time to time maintained by Borrower did not as of the date of the signing of this Agreement, exceed the value of the assets of such "Employee Benefit Plans" allocable to such vested benefits. b) To the best of the Borrower's knowledge, no Pension Plan from time to time maintained by Borrower or trust created thereunder, or any trustee or administrator thereof has engaged in any "Prohibited Transaction" (as such term is defined in Section 406 or Section 2003(a) of ERISA) which would subject such Pension Plan or any other Pension Plan, any trust created thereunder, or any trustee or administrator thereof, or any party dealing with any Pension Plan or any such trust to a material tax or material penalty on Prohibited Transactions. c) No Pension Plan or trust created thereunder has been terminated, and there have been no "Reportable Events" (as such term is defined in Section 301 of ERISA) whether or not waived, since the effective date of ERISA. 5.7 To the best of the knowledge of Borrower, there has been no disposal, release or threatened release of any hazardous materials, as defined by any applicable state or federal hazardous substance law, on, from, or under any property of Borrower during the period of its ownership thereof, where such disposal, release or threatened release could have a materially adverse effect on the business, assets, operations or condition of Borrower, and the Borrower has no knowledge of any presence, disposal, release or threatened release of any hazardous materials on, from, or under any property of Borrower that may have occurred prior to Borrower's acquisition of title thereto, which could have a material adverse effect on the business, assets, operations or condition of Borrower. There are no pending or threatened actions, suits, investigations, or other proceedings, or any rulings, orders, or citations against the Borrower or its properties under any federal or state hazardous substance law. 5.8 All financial statements delivered to Bank by or on behalf of Borrower, including any schedules and notes pertaining thereto, have been prepared in accordance with generally accepted accounting principles consistently applied, and fully and fairly present the financial condition of the Borrower at the dates thereof and the results of operations for the periods covered thereby, and there have been no material adverse changes in the consolidated financial condition or business of the Borrower from February 28, 1995, to the date hereof. SECTION 6 Affirmative Covenants Each Borrower individually, and with respect to financial covenants, on a consolidated basis, covenants and agrees that so long as any indebtedness remains outstanding hereunder, unless the Bank shall otherwise consent in writing, it will: 6.1 Pay, when due, all taxes assessed against it or its property except to the extent and so long as contested in good faith. -7- 8 6.2 Maintain its corporate existence and comply with all laws and regulations applicable thereto. 6.3 Furnish to the Bank: A. Within 90 days after the end of each fiscal year of the Borrower (i) a detailed, unqualified report of audit of the Borrower for such fiscal year, on a consolidated basis, including the balance sheet of the Borrower as of the end of such fiscal year and the statements of profit and loss and surplus of the Borrower for the fiscal year then ended, prepared by independent certified public accountants satisfactory to the Bank, and (ii) a certificate of such accountants stating whether, in making their audit, they have become aware of any Event of Default, or of any event which might become an Event of Default after the lapse of time or the giving of notice and the lapse of time, which has occurred and is then continuing and, if any such event has occurred and is continuing, specifying the nature and period of existence thereof. B. Within 30 days after the end of each month, (i) the balance sheet of the Borrower, on a consolidated basis, as of the end of such month, and (ii) the statement of profit and loss and surplus of the Borrower, on a consolidated basis, from the beginning of such fiscal year to the end of such month. All of the foregoing shall be unaudited, but certified as correct (subject to year end adjustments) by an appropriate officer of the Borrower. C. Within 30 days after the end of each month, a summary listing of Borrower's Accounts Receivable certified as correct by an appropriate officer of the Borrower. 6.4 Maintain its inventory, equipment, real estate and other properties in good condition and repair (normal wear and tear excepted), and pay and discharge or cause to be paid and discharged when due, the cost of repairs to or maintenance of the same, and pay or cause to be paid all rental or mortgage payments due on such real estate. 6.5 Cause its properties of an insurable nature to be adequately insured by reputable and solvent insurance companies against Loss or damages customarily insured against by persons operating similar properties, and similarly situated, and carry such other insurance (including business interruption insurance) as usually carried by persons engaged in the same or similar businesses and similarly situated, with the Bank named as loss payee on all such policies of insurance. 6.6 Keep true, complete and accurate books, records and accounts in accordance with generally accepted accounting principles consistently applied. 6.7 Permit any of Bank's duly authorized employees or agents the right, at any reasonable time and from time to time, to visit and inspect the properties of Borrower and to examine and take abstracts from its books and records. -8- 9 6.8 Continue to conduct the same general type of business as is now being carried on in compliance with all applicable statutes, laws, rules and regulations. SECTION 7 Negative Covenants Each Borrower individually, and with respect to financial covenants, on a consolidated basis, covenants and agrees that so long as any indebtedness remains outstanding hereunder, unless the Bank shall otherwise consent in writing, it will not: 7.1 Permit any lien including, without limitation, any pledge, assignment, mortgage, title retaining contract or other type of security interest to exist on its property, real or personal, except Permitted Liens. 7.2 Declare or pay any dividends or make any distribution on any shares of common stock of either Borrower, and not exceeding $125,000.00 per year on preferred stock, except dividends of TPC payable to TPG, provided that such dividends shall not be paid by TPG to its shareholders. 7.3 Permit the redemption of any preferred stock of the Borrower, other than 200,000 shares of preferred stock owned by Teleconnect Company. 7.4 Enter into any transaction of merger or consolidation, or transfer, sell, assign, lease or otherwise dispose of (other than sales in the ordinary course of business) all or a substantial part (which shall be 10% or more) of its properties or assets, or any of its notes or accounts receivable, or any stock, or any assets or properties necessary or desirable for the proper conduct of its business, or change the nature of its business, or wind up, liquidate or dissolve, or agree to do any of the foregoing. 7.5 Create, incur, assume or suffer to exist, contingently or otherwise, indebtedness for Borrowed Money, except indebtedness disclosed to the Bank in writing as existing at the time of execution of this Agreement. 7.6 Become or remain a guarantor or surety, or pledge its credit or become liable in any manner (except by endorsement for deposit in the ordinary course of business) on undertakings of another. 7.7 Purchase any telephone directory or otherwise acquire all or substantially all of the assets of any person, firm, corporation or other entity. 7.8 Purchase or otherwise invest in or hold securities, non-operating real estate or other non-operating assets, except: (i) direct obligations of the United States of America; (ii) certificates of deposits in national or state banks with over $50,000,000.00 in assets. -9- 10 7.9 Make any loan or advance to any officer, shareholder, director or employee of the Borrower or any subsidiary, except for temporary advances in the ordinary course of business. 7.10 Permit its ratio of Debt less Private Placement Debt to Tangible Net Worth plus Private Placement Debt to exceed 2.5 to 1.0 for the fiscal year ending August 31, 1995 and each fiscal year end thereafter. "Debt" shall mean total liabilities. "Tangible Net Worth" shall mean Net Worth (defined below) minus the aggregate amount of the Borrower's items properly shown as the following types of assets on its balance sheet, determined in accordance with generally accepted accounting principles consistently applied: (i) goodwill, patents, copyrights, mailing lists, trade names, trademarks, servicing rights, organizational and franchise costs, bond underwriting costs, and other like assets properly classified as intangible; (ii) leasehold improvements; (iii) receivables, loans and other amounts due from any shareholder, director, officer, or employee of the Borrower, and receivables, loans and other amounts due from any other related or affiliated person, corporation, partnership, trust, or other entity of the Borrower; and (iv) the $500,000.00 option on Frontier Directory Company, Inc. "Net Worth" shall mean the aggregate amount of the Borrower's items properly shown as assets on its balance sheet minus the aggregate amount of the Borrower's items properly shown as liabilities on its balance sheet, determined in accordance with generally accepted accounting principles consistently applied. For the purpose of this calculation, the preferred stock owned by Teleconnect Company will be considered equity. 7.11 Permit its Cash Flow Coverage Ratio to be less than 1.25 to 1.0 for the fiscal year ending August 31, 1995 and each fiscal year end thereafter. "Cash Flow Coverage Ratio" shall mean the sum of (a) net income, (b) depreciation, (c) amortization, and (d) interest expense divided by the sum of (i) current maturities of long-term debt, (ii) interest expense, and (iii) Unfinanced Capital Expenditures. 7.12 Permit the aggregate amount of Borrower's expenditures for fixed assets or leased equipment to exceed $850,000.00 during the fiscal year ending August 31, 1995 and each fiscal year thereafter. 7.13 Permit the aggregate directors fees to exceed $25,000.00 in any year. 7.14 Make a material change in its accounting procedures, whether for tax purposes or otherwise, including, but not limited to making a Subchapter S election under the United States Internal Revenue Code. SECTION 8 Events of Default 8.1 Upon the occurrence of any of the following Events of Default: A. Default in any payment of interest or of principal on either of the Notes when due, and continuance thereof for 10 calendar days; -10- 11 B. Default in the observance or performance of any other agreement of the Borrower set forth herein or in the Security Agreement and continuance thereof for 10 days following written notice from the Bank except in the case of Sections 7.10 through 7.12 such period shall be 30 days; C. Default by the Borrower in the payment of any other indebtedness for Borrowed Money or in the observance or performance of any term, covenant or agreement of the Borrower in any agreement relating to any indebtedness of the Borrower, and the holder of such indebtedness has declared the same due prior to the date fixed for its payment under the terms thereof; D. Any representation or warranty made by the Borrower herein, or in any statement or certificate furnished by the Borrower hereunder, is untrue in any material respect; or, E. The occurrence of any litigation or governmental proceeding which is pending or threatened against the Borrower, which could have a material adverse effect on the Borrower's financial condition or business and in the reasonable judgment of the Bank, there is reasonable grounds for such litigation or proceeding, and which is not remedied within a reasonable period of time after notice thereof to the Borrower; then, or at any time thereafter, unless such Event of Default is remedied, the Bank or the holder of the Note may, by notice in writing to the Borrower, terminate the Credit and the Term Loan or declare the Notes to be due and payable, or both, whereupon the Credit and the Term Loan shall terminate forthwith or the Notes shall immediately become due and payable, or both, as the case may be. 8.2 Upon the occurrence of any of the following Events of Default: The Borrower becomes insolvent or bankrupt, or makes an appointment for the benefit of creditors or consents to the appointment of a custodian, trustee or receiver for itself or for the greater part of its properties; or a custodian, trustee or receiver is appointed for the Borrower, or for the greater part of its properties without its consent and is not discharged within 30 days; or bankruptcy, reorganization or liquidation proceedings are instituted by or against the Borrower and, if instituted against it, are consented to by it or remain undismissed for 30 days; then the Credit and the Term Loan shall automatically terminate and the Notes shall automatically become immediately due and payable, without notice. SECTION 9 Miscellaneous 9.1 The provisions of this Agreement shall be in addition to those of any guaranty, pledge or security agreement, note or other evidence of liability held by the Bank, all of which shall be -11- 12 construed as complementary to each other. Nothing herein contained shall prevent the Bank from enforcing any or all other notes, guaranties, pledges or security agreements in accordance with their respective terms. 9.2 From time to time, the Borrower will execute and deliver to the Bank such additional documents and will provide such additional information as the Bank may reasonably require to carry out the terms of this Agreement and be informed of the Borrower's status and affairs. 9.3 The Borrower will pay all expenses, including the reasonable fees and expenses of legal counsel for the Bank, incurred in connection with the preparation, administration, amendment, modification or enforcement of this Agreement and the Security Agreement, and the collection or attempted collection of the Notes. Notwithstanding the payment by the Borrower of the legal expenses of the Bank, the Bank's counsel is engaged solely to represent the Bank and does not and cannot represent the Borrower. 9.4 Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed delivered if delivered in person or if sent by certified mail, postage prepaid, return receipt requested, or telegraph, as follows, unless such address is changed by written notice hereunder: A. If to TPG: Telecom*USA Publishing Group, Inc. 201 Third Avenue SE Suite 500 P.O. Box 3162 Cedar Rapids, Iowa 52406-3162 Attention: Arthur L. Christoffersen James A. Haddad B. If to TPC: Telecom*USA Publishing Company 201 Third Avenue SE Suite 500 P.O. Box 3162 Cedar Rapids, Iowa 52406-3162 Attention: Arthur L. Christoffersen James A. Haddad -12- 13 C. If to TND: Telecom*USA Neighborhood Directories, Inc 201 Third Avenue SE Suite 500 P.O. Box 3162 Cedar Rapids, Iowa 52406-3162 Attention: Arthur L. Christoffersen James A. Haddad D. If to the Bank: Norwest Bank Iowa, National Association 101 Third Avenue Southwest Cedar Rapids, Iowa 52406 Attention: R. Troy Hansen 9.5 The substantive Laws of the State of Iowa shall govern the construction of this Agreement and the rights and remedies of the parties hereto. 9.6 This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and permitted assigns of the parties hereto. The Borrower has no right to assign any of its rights or obligations hereunder without the prior written consent of the Bank. This Agreement, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties, and may be amended only by a writing signed on behalf of each party. 9.7 If any provision of this Agreement shall be held invalid under any applicable Laws, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable. 9.8 IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT. 9.9 By execution below, the Borrower acknowledges receipt of a copy of this Agreement. -13- 14 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. TELECOM*USA PUBLISHING GROUP, INC. By: /s/ JAMES A. HADDAD ------------------------------- James A. Haddad Its: Treasurer TELECOM*USA PUBLISHING COMPANY By: /s/ JAMES A. HADDAD -------------------------- James A. Haddad Its: Vice President of Finance TELECOM*USA NEIGHBORHOOD DIRECTORIES, INC, By: /s/ JAMES A. HADDAD -------------------------- James A. Haddad Its: Vice President of Finance NORWEST BANK IOWA, NATIONAL ASSOCIATION By: /s/ R. TROY HANSEN ------------------------- R. Troy Hansen Its: Vice President -14- EX-10.65 9 FIRST AMENDMENT TO AMENDED RESTATED CREDIT AGMT. 1 EXHIBIT 10.65 FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FIRST AMENDMENT is made and entered into as of the 31st day of January, 1996 by and between TELECOM*USA PUBLISHING GROUP, INC., an Iowa corporation ("TPG") and TELECOM*USA PUBLISHING COMPANY ("TPC") (TPG and TPC shall be together referred to as the "Borrower"), and NORWEST BANK IOWA, NATIONAL ASSOCIATION, a national banking association (the "Bank"). RECITALS: A. Borrower and the Bank have entered into an Amended and Restated Credit Agreement dated as of May 5, 1995 (the "Credit Agreement"). B. The Bank and the Borrower now desire to convert a portion of the Credit to a Term Loan and to modify certain provisions of the Credit Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, Borrower and the Bank agree as follows: 1. Section 1.11 of the Credit Agreement is hereby amended to extend the Maturity Date from January 31, 1996 to January 31, 1997. 2. Section 2.1 of the Credit Agreement is hereby amended to reduce the maximum available amount of the Credit from $12,000,000.00 to $9,764,000.00. 3. The Borrower and the bank agree that $2,236,000.00 currently outstanding under the Credit shall be converted to a Term Loan effective the date of this Amendment, pursuant to Section 2.3 of the Credit Agreement. Such Term Loan will be evidenced by a Term Note in the form of Exhibit A to this Amendment and shall be subject to the following additional terms and conditions: A. The interest on the Term Note shall be calculated at an annual rate equal to the Base Rate in effect from time to time, calculated on the basis of the actual number of days elapsed in a year of 360 days. B. The principal of the Term Note will step down quarterly in the amount of $111,800 each quarter, commencing on April 30, 1996 and on the last day of each July, October, January, and April thereafter. Accrued interest shall be payable monthly on the 20th day of each month, commencing on February 20, 1996. On January 31, 2001, all remaining outstanding principal plus accrued interest shall be payable in full. C. The Term Note may be prepaid only if no amounts are then outstanding under the Current Note. Following any prepayment, amounts prepaid may be readvanced, 2 on a reducing, revolving basis, subject to the quarterly reductions in the maximum principal amount as set forth in B. above. If the Term Note has been prepaid to less than the maximum principal then available, no advances will be permitted on the Current Note until the Term Note has first been readvanced up to the maximum principal then available. 4. Section 7.11 of the Credit Agreement is hereby amended to read as follows: 7.11 Permit its Cash Flow Coverage Ratio to be less than 1.1 to 1.0 for the fiscal year ending August 31, 1996 and each fiscal year end thereafter. "Cash Flow Coverage Ratio" shall mean the sum of (a) net income, (b) depreciation, (c) amortization, and (d) interest expense divided by the sum of (i) current maturities of long-term debt, (ii) interest expense, and (iii) Unfinanced Capital Expenditures. 5. Section 7.12 of the Credit Agreement is hereby amended to read as follows: 7.12 Permit the aggregate amount of Borrower's expenditures for fixed assets or leased equipment to exceed $1,400,000 during the fiscal year ending August 31, 1996 and each fiscal year thereafter. 6. The Borrower hereby represents and warrants to the Bank as follows: A. The Credit Agreement as amended by this Amendment remains in full force and effect. B. The execution, delivery and performance of this Amendment and the Term Note are within its powers, have been duly authorized and are not in contravention of law or the terms of any Borrower's articles of incorporation or bylaws, or of any undertaking to which any Borrower is a party or by which it is bound. C. All representations and warranties contained in Section 5 of the Credit Agreement remain true and correct on the date of this Amendment. D. No Event of Default has occurred and is continuing, and no event has occurred and is continuing that, with the giving of notice or passage of time or both, would be an Event of Default. 7. Simultaneously with the execution of this First Amendment, the Borrower shall execute and deliver to the Bank a Term Note in the form of Exhibit A to this Amendment, and a replacement Current Note in the form of Exhibit B to this Amendment, which Current Note shall be in renewal and replacement of the existing Current Note. 8. Other than as set forth herein, all terms and conditions of the Credit Agreement shall remain in full force and effect. Nothing in this Amendment shall constitute a waiver or modification of any covenant or provision of the Credit Agreement or the related documents 3 unless expressly waived or modified herein. The Bank shall retain its right to enforce the terms and conditions of the Credit Agreement and the related documents. 9. Capitalized terms not defined herein shall have the meaning assigned to such term in the Credit Agreement. 10. The Bank and the Borrower acknowledge that Telecom*USA Neighborhood Directories, Inc. is no longer a party to the Credit Agreement. IN WITNESS WHEREOF, Borrower and Bank have executed this Amendment as of the day and year first written above. TELECOM*USA PUBLISHING GROUP, INC. By: /s/ JAMES A. HADDAD ------------------------ James A. Haddad Its: Treasurer TELECOM*USA PUBLISHING COMPANY By: /s/ JAMES A. HADDAD ------------------------ James A. Haddad Its: Vice President of Finance NORWEST BANK IOWA, NATIONAL ASSOCIATION By: /s/ R. TROY HANSEN ------------------------ R. Troy Hansen Its: Vice President 4 - -------------------------------------------------------------------------------- [NORWEST BANKS LOGO] Commercial Note EXHIBIT A Telecom*USA Publishing Group, Inc. - -------------------------------------------------------------------------------- NAME Telecom*USA Publishing Company DATE [INITIALS] January 31, 1996 - -------------------------------------------------------------------------------- Choose one of the following / / On the earlier of demand or ______________, 19 _______; or /X/ on January 31, 2001; or / / ___ days after date, the resulting choice being the "Due Date," which also means the date, if any, on which this note is accelerated. For value received, the undersigned (if more than one, jointly, and severally) promise(s) to pay to the order of Norwest Bank Iowa, National Association (the "Bank") at P O Box 1887 Cedar Rapids, IA 52406 **See Attached Exhibit or at any other place designated at any time by the holder of this Note, in lawful money of the United States of America, the principal sum of Two Million Two Hundred Thirty-Six Thousand ------------- and no/100 Dollars ($2,236,000.00**), or as much as has been disbursed and remains outstanding on this Note at the Due Date, as is shown by the Bank's records, together with interest (calculated on the basis of actual days elapsed in a year of 360 days) on the unpaid principal of this Note from the Date until this Note is fully paid, at the following rate: (Choose one of the following): / / an annual rate of ________ % (the "Note Rate"). / / an annual rate equal to __________ % in excess of the Base Rate, each change in the interest rate to become effective on the day the corresponding change in the Base Rate becomes effective (the "Note Rate"). /X/ an annual rate equal to 00.00% in excess of the Base Rate, with an initial rate to be tied to the Base Rate in effect on the date this Note is signed and the rate for each month thereafter to be tied to the Base Rate in effect on the ______ day of the immediately preceeding month (the "Note Rate"). / / an annual rate _________________________ (the "Note Rate"). "Base Rate" means the rate of interest established by Norwest Bank Iowa, N.A. from time to time as its "base" or "prime" rate or "_________________________" rate. If this / / is checked, the Note Rate shall never be less than ____% and shall never be greater than ____%. After the Due Date, the unpaid principal and interest on this Note shall bear interest until paid at the rate of _____% per annum in excess of the Note Rate in effect on the Due Date except that, if the Bank is located in Minnesota and the original principal amount of this Note is less than $100,000.00, or the Bank is located in North Dakota, this Note shall bear the same interest rate after its Due Date as was in effect on the Due Date. The interest rate on this Note shall never exceed the maximum rate permitted by law. / / Interest shall be payable on the Due Date. /X/ Interest shall be payable monthly, commencing February 20, 1996, and on the same day of each succeeding month, and on the Due Date. If this / / is checked, if any payment required by this Note is not paid within ___ days after the payment is due, Borrower will make an additional payment to the Bank of (Choose one) / / $____________________; or / /____________% of the amount of the late payment (the "Late Fee"). The undersigned may, at any time, prepay this Note, in whole or from time to time in part: (Choose one) /x/ without premium or penalty, upon written or telephonic notice to the Bank; or, / / provided that, upon prepayment, the Bank will be entitled to receive a prepayment penalty equal to ________% of the principal amount to be prepaid. / / In addition, the undersigned shall pay to the Bank a nonrefundable: (Mark the applicable fee type(s)) / / commitment fee, / / facility fee, / / documentation fee, / / application and loan processing fee of (Choose one) / / $ _________________; / / _________% of the principal amount of this Note, at the time this Note is signed. (Check if applicable) /X/ The undersigned may borrow, prepay and reborrow under this Note until the Due Date within the limits of this Note and subject to the terms and conditions in any other agreement between the undersigned and the Bank. / / Any advances made under this Note shall be at the sole discretion of the Bank and the Bank is not obligated to make any advance. This Note is Secured by: / / a Mortgage dated ___________, 19 ______. / / a Mortgage dated ___________, 19 ______ and other collateral. /X/ This Note is given in substitution and replacement for (and not in payment of) a previous Note of the undersigned, payable to the Bank, dated May 5, 1995. This Note / / evidences indebtedness in addition to the indebtedness evidenced by the previous Note, or /X/ evidences only a portion of the debt evidenced by the previous Note. IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT AND ANY RELATED DOCUMENTS SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THE WRITTEN CONTRACT(S) MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THE AGREEMENT(S) ONLY BY ANOTHER WRITTEN AGREEMENT. THIS NOTICE ALSO APPLIES TO ANY OTHER CREDIT AGREEMENTS (EXCEPT CONSUMER LOANS OR OTHER EXEMPT TRANSACTIONS) NOW IN EFFECT BETWEEN YOU AND THE LENDER. The undersigned acknowledges receipt of a copy of this document. THE REVERSE SIDE OF THIS NOTE CONTAINS IMPORTANT, ADDITIONAL PROVISIONS, ALL OF WHICH ARE MADE A PART HEREOF. The proceeds of this loan will be used for business or agricultural purposes only. - -------------------------------------------------------------------------------- NAME BY: Telecom*USA Publishing Group, Inc. - -------------------------------------------------------------------------------- ITS: James A Haddad, Treasurer Telecom*USA Publishing Company - -------------------------------------------------------------------------------- STREET ADDRESS BY P O Box 3162 - -------------------------------------------------------------------------------- ITS: James A Haddad, V P of Finance [INITIALS] - -------------------------------------------------------------------------------- CITY, STATE AND ZIP Cedar Rapids, IA 52406 - -------------------------------------------------------------------------------- 5 EXHIBIT A This exhibit is hereby made a part of the commercial note dated January 31, 1996 in the amount of $2,236,000.00 executed by Telecom *USA Publishing Group, Inc et al. The aggregate principal outstanding shall not exceed $2,236,000.00 during the period commencing January 31, 1996 thru April 30, 1996. Thereafter, the maximum available balance shall be reduced automatically, without further notice to the Borrower, on the last day of each quarter by $111,800.00 beginning on April 30, 1996. Principal payments are required on the date of each step-down (last day of quarter) to reduce the amount outstanding to the maximum available as shown on the schedule below. Amounts may be borrowed and/or reborrowed up to the maximum available balance. On January 31, 2001, all outstanding principal and unpaid accrued interest shall be immediately due and payable in full.
DATE MAXIMUM DATE MAXIMUM AVAILABLE AVAILABLE BALANCE BALANCE 4-30-96 $2,124,200.00 1-31-99 $894,400.00 7-31-96 $2,012,400.00 4-30-99 $782,600.00 10-31-96 $1,900,600.00 7-31-99 $670,800.00 1-31-97 $1,788,800.00 10-31-99 $559,000.00 4-30-97 $1,677,000.00 1-31-00 $447,200.00 7-31-97 $1,565,200.00 4-30-00 $335,400.00 10-31-97 $1,453,400.00 7-31-00 $223,600.00 1-31-98 $1,341,600.00 10-31-00 $111,800.00 4-30-98 $1,229,800.00 1-31-01 -00- 7-31-98 $1,118,000.00 10-31-98 $1,006,200.00
Telecom *USA Publishing Group, Inc. et al By /s/ JAMES A HADDAD -------------------------------------- James A Haddad Treasurer & VP of Finance 6 - -------------------------------------------------------------------------------- [NORWEST BANKS LOGO] Commercial Note EXHIBIT B Telecom*USA Publishing Group, Inc. - -------------------------------------------------------------------------------- NAME Telecom*USA Publishing Company DATE [INITIALS] January 31, 1996 - -------------------------------------------------------------------------------- Choose one of the following / / On the earlier of demand or ______________, 19 _______; or /X/ on January 31, 1997; or / / ___ days after date, the resulting choice being the "Due Date," which also means the date, if any, on which this note is accelerated. For value received, the undersigned (if more than one, jointly, and severally) promise(s) to pay to the order of Norwest Bank Iowa, National Association (the "Bank") at P O Box 1887 Cedar Rapids, IA 52406 or at any other place designated at any time by the holder of this Note, in lawful money of the United States of America, the principal sum of Nine Million Seven Hundred Sixty-Four Thousand ------------- and no/100 Dollars ($9,764,000.00), or as much as has been disbursed and remains outstanding on this Note at the Due Date, as is shown by the Bank's records, together with interest (calculated on the basis of actual days elapsed in a year of 360 days) on the unpaid principal of this Note from the Date until this Note is fully paid, at the following rate: (Choose one of the following): /X/ an annual rate of **% (the "Note Rate"). See Attached Addendum / / an annual rate equal to __________ % in excess of the Base Rate, each change in the interest rate to become effective on the day the corresponding change in the Base Rate becomes effective (the "Note Rate"). / / an annual rate equal to _____% in excess of the Base Rate, with an initial rate to be tied to the Base Rate in effect on the date this Note is signed and the rate for each month thereafter to be tied to the Base Rate in effect on the ______ day of the immediately preceeding month (the "Note Rate"). / / an annual rate _________________________ (the "Note Rate"). "Base Rate" means the rate of interest established by Norwest Bank Iowa, N.A. from time to time as its "base" or "prime" rate or "_________________________" rate. If this / / is checked, the Note Rate shall never be less than ____% and shall never be greater than ____%. After the Due Date, the unpaid principal and interest on this Note shall bear interest until paid at the rate of _____% per annum in excess of the Note Rate in effect on the Due Date except that, if the Bank is located in Minnesota and the original principal amount of this Note is less than $100,000.00, or the Bank is located in North Dakota, this Note shall bear the same interest rate after its Due Date as was in effect on the Due Date. The interest rate on this Note shall never exceed the maximum rate permitted by law. / / Interest shall be payable on the Due Date. /X/ Interest shall be payable monthly, commencing February 20, 1996, and on the same day of each succeeding month, and on the Due Date. If this / / is checked, if any payment required by this Note is not paid within ___ days after the payment is due, Borrower will make an additional payment to the Bank of (Choose one) / / $____________________; or / /____________% of the amount of the late payment (the "Late Fee"). The undersigned may, at any time, prepay this Note, in whole or from time to time in part: (Choose one) /x/ without premium or penalty, upon written or telephonic notice to the Bank; or, / / provided that, upon prepayment, the Bank will be entitled to receive a prepayment penalty equal to ________% of the principal amount to be prepaid. / / In addition, the undersigned shall pay to the Bank a nonrefundable: (Mark the applicable fee type(s)) / / commitment fee, / / facility fee, / / documentation fee, / / application and loan processing fee of (Choose one) / / $ _________________; / / _________% of the principal amount of this Note, at the time this Note is signed. (Check if applicable) / / The undersigned may borrow, prepay and reborrow under this Note until the Due Date within the limits of this Note and subject to the terms and conditions in any other agreement between the undersigned and the Bank. /X/ Any advances made under this Note shall be at the sole discretion of the Bank and the Bank is not obligated to make any advance. This Note is Secured by: / / a Mortgage dated ___________, 19 ______. / / a Mortgage dated ___________, 19 ______ and other collateral. /X/ This Note is given in substitution and replacement for (and not in payment of) a previous Note of the undersigned, payable to the Bank, dated May 5, 1995. This Note / / evidences indebtedness in addition to the indebtedness evidenced by the previous Note, or /X/ evidences only a portion of the debt evidenced by the previous Note. IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT AND ANY RELATED DOCUMENTS SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THE WRITTEN CONTRACT(S) MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THE AGREEMENT(S) ONLY BY ANOTHER WRITTEN AGREEMENT. THIS NOTICE ALSO APPLIES TO ANY OTHER CREDIT AGREEMENTS (EXCEPT CONSUMER LOANS OR OTHER EXEMPT TRANSACTIONS) NOW IN EFFECT BETWEEN YOU AND THE LENDER. The undersigned acknowledges receipt of a copy of this document. THE REVERSE SIDE OF THIS NOTE CONTAINS IMPORTANT, ADDITIONAL PROVISIONS, ALL OF WHICH ARE MADE A PART HEREOF. The proceeds of this loan will be used for business or agricultural purposes only. - -------------------------------------------------------------------------------- NAME BY: Telecom*USA Publishing Group, Inc. /s/ JAMES A HADDAD - -------------------------------------------------------------------------------- ITS: James A Haddad, Treasurer Telecom*USA Publishing Company - -------------------------------------------------------------------------------- STREET ADDRESS BY P O Box 3162 /s/ JAMES A HADDAD - -------------------------------------------------------------------------------- ITS: James A Haddad, V P of Finance - -------------------------------------------------------------------------------- CITY, STATE AND ZIP Cedar Rapids, IA 52406 - -------------------------------------------------------------------------------- 7 EXHIBIT B ADDENDUM TO COMMERCIAL NOTE DATED JANUARY 31, 1996 Interest on the first $6,000,000.00 of unpaid principal outstanding under the Current Note, less amounts outstanding under the Term Note, if any, shall be calculated at an annual rate equal to the Base Rate in effect from time to time. Interest on unpaid principal outstanding under the Current Note in excess of $6,000,000.00, less amounts outstanding under the Term Notes, if any, shall be calculated at an annual rate of three-quarters (0.75%) in excess of the Base Rate in effect from time to time. Telecom*USA Publishing Group, Inc. By /s/ JAMES A HADDAD ---------------------------------- James A Haddad, Treasurer Telecom*USA Publishing Company By /s/ JAMES A HADDAD ---------------------------------- James A Haddad, V P of Finance Date January 31, 1996 ---------------- EX-10.66 10 LEASE AGREEMENT 1 EXHIBIT 10.66 RYAN PROPERTIES, INC., A MINNESOTA CORPORATION Landlord and RUFFALO, CODY & ASSOCIATES, INC., AN IOWA CORPORATION Tenant ---------------------- LEASE AGREEMENT ---------------------- Dated as of September 26, 1994 ------------------ 2 TABLE OF CONTENTS SECTION PAGE 1. Leased Property; Fixed Term.............................................1 2. Basic Rent, etc.........................................................2 2.1. Basic Rent.........................................................2 2.2. Basic Rent; Manner of Payment......................................2 3. Additional Rent.........................................................2 4. Net Lease; No Counterclaim, Abatement, etc..............................2 5. Condition and Use of Property...........................................2 6. Maintenance and Repairs...............................................2-3 7. Alterations and Additions, etc..........................................3 8. Tenant's Equipment......................................................3 9. Utility Services........................................................3 10. No Claims Against Landlord, etc.........................................3 11. Indemnification by Tenant.............................................3-4 12. Inspection, etc.........................................................4 13. Payment of Taxes, etc.................................................4-5 14. Compliance with Legal and Insurance Requirements, Instruments...........5 15. Liens, Easements, etc...................................................5 16. Permitted Contests....................................................5-6 17. Insurance.............................................................6-7 17.1. Risks to be Insured...............................................6 17.2. Policy Provisions.................................................7 17.3. Delivery of Policies, Insurance Certificates......................7 i 3 18. Hazardous Materials...................................................7-8 19. Damage to or Destruction of Property....................................8 19.1. Tenant to Give Notice.............................................8 19.2. Restoration.......................................................8 19.3. Total Destruction.................................................8 19.4. Application of Insurance Proceeds...............................8-9 20. Taking of Property.................................................. 9-10 20.1. Tenant to Give Notice; Assignment of Awards, etc..................9 20.2. Partial Taking....................................................9 20.3. Total Taking...................................................9-10 20.4. Application of Awards, etc.......................................10 21. Certificate as to No Event of Default, etc.; Financial Statements...11-12 21.1. Certification of Tenant as to No Event of Default, etc...........11 21.2. Certificate of Landlord..........................................11 21.3. Financial Statements..........................................11-12 22. Right of Landlord to Perform Tenant's Covenants, etc...................12 23. Assignments, Subleases, Mortgages, etc.................................12 23.1. Assignments, Subleases, etc. by Tenant...........................12 23.2. Assignments, Mortgages, etc. by Landlord......................12-13 24. Events of Default; Termination......................................13-14 25. Repossession, etc......................................................14 26. Survival of Tenant's Obligations; Damages...........................14-15 26.1. Termination of Lease Not to Relieve Tenant of Obligations.....14-15 26.2. Current Damages..................................................15 26.3. Final Damages....................................................15 27. Tenant's Waiver of Statutory Rights....................................15 28. No Waiver by Landlord..................................................16 29. Remedies Cumulative....................................................16 30. Modification, Acceptance of Surrender..................................16 ii 4 31. End of Lease Term......................................................16 32. Notices, etc........................................................16-17 33. Short Form or Memorandum...............................................17 34. Quiet Enjoyment........................................................17 35. Miscellaneous..........................................................18 36. Definitions.........................................................18-21 Exhibit A: Description of Property;, Permitted Exceptions Exhibit B: Plans and Specifications Exhibit C: Basic Rent Schedule Exhibit D: Enviromental Survey iii 5 LEASE AGREEMENT THIS LEASE AGREEMENT (the "Lease"), dated as of September 26th, 1994, between Ryan Properties, Inc., a Minnesota Corporation, (hereinafter referred to as "Landlord"), and Ruffalo, Cody and Associates, Inc., an Iowa Corporation (hereinafter referred to as "Tenant"). WITNESSETH THAT: In consideration of the mutual agreements contained in this Lease, Landlord and Tenant agree with each other as follows: 1. Leased Property, Term. 1.1 Leased Property, Fixed Term. Upon and subject to the conditions and limitations set forth below, Landlord leases to Tenant, and Tenant leases, and rents from Landlord, the following property ("Property") described in Exhibit A attached hereto and made a part hereof, together with an existing 32,565 square foot building to be renovated by Landlord and all buildings, improvements and structures now or hereafter located on the Property (the "Improvements") subject, however, to such of the Permitted Exceptions set forth on Exhibit A hereto. The Improvements shall be constructed by Landlord in a good and workmanlike manner and in accordance with the plans and specifications for the same identified on Exhibit B attached hereto and shall comply with all Legal Requirements. Landlord and Tenant have each signed a set of such plans and specifications identified on Exhibit B. The improvments are anticipated to be completed by April 1st, 1995. Landlord further agrees to provide during the first five (5) years of the Fixed Term, parking spaces for the benefit of Tenant's employees, customers and visitors. Such parking spaces shall be located off the Property at a location reasonably acceptable to Tenant within four blocks of the Property The monthly rate shall be TWENTY and no/100 Dollars ($20.00) per parking space. Tenant's use of such parking spaces shall be subject to such rules and regulations as may from time to time be put into effect by the owner/operator of the parking facility. TO HAVE AND TO HOLD the Property for a fixed term (the "Fixed Term") commencing on the 1st day of April 1995, and expiring at midnight on the last day of the calendar month which is 120 full calendar months following the commencement of the Fixed Term, unless this Lease shall sooner terminate as provided herein. 1 6 The blank with respect to the commencement of the term shall be completed as follows: A date thirty (30) days after Landlord or Landlord's architect issues a Certificate of Substantial Completion of Landlord's work or the date on which Tenant actually opens for business, whichever is earlier. Landlord shall have the right to insert the commencement date as so determined or the said date may be set by amendment hereto if requested by either party. In the event a dispute occurs as to whether or not the Landlord's work in construction of the Improvements is substantially completed, the certificate of Landlord's architect that the Improvements are so completed shall be conclusive and binding upon the parties hereto. 1.2 Extended Term. Tenant shall have the option to extend the term of this Lease with respect to the entire Property for two (2) additional terms of five (5) years each, collectively, the "Extended Terms", and individually, an "Extended Term"; provided, however, that no Event of Default shall have occurred and be continuing at the time of any such exercise. The Extended Term shall be upon the same terms as provided in this Lease for the Fixed Term, except for the Basic Rent which shall be as set forth on Exhibit C for the Extended Term. The Tenant shall exercise to Landlord not less than 365 days prior to the expiration of the Fixed Term or the then current Extended Term, as the case may be. Should Tenant fail to exercise any option to extend the term of this Lease within the time provided in this Section 2, all of the Tenant's rights further to extend the term hereof shall expire. 2. Basic Rent. 2.1 Basic Rent. Net basic rental ("Basic Rent") shall be payable during the Fixed Term in the amounts and at the times specified on Exhibit C hereto. 2.2 Basic Rent Net; Manner of Payment. The Basic Rent and all other sums payable to Landlord hereunder shall be payable in such currency of the United States of America as at time of payment shall be legal tender for the payment of public and private debts and shall be paid to Landlord at Landlord's address set forth above or to such other person or address as Landlord from time to time may designate. The Basic Rent shall be net to Landlord so that this Lease shall yield to Landlord the full amount of the installments of Basic Rent throughout the term of this Lease without deduction or setoff. 3. Additional Rent. Tenant will also pay, from time to time as provided in this Lease or on demand of Landlord, as additional rent (the "Additional Rent") (a) all other amounts, liabilities and obligations that Tenant herein assumes or agrees to pay, and (b) interest at the rate of fifteen per cent (15%) per annum on such of the foregoing amounts, liabilities and obligations as are payable by Tenant that are not paid when due and that Landlord shall have paid on behalf of Tenant, from the date of payment thereof by Landlord until paid by Tenant and on all overdue installments of Basic Rent and other sums payable under this Lease, from the due date thereof until payment. 4. Net Lease; No Counterclaim, Abatement, etc. This Lease is a net lease, and the Basic Rent, Additional Rent and all other sums payable hereunder shall be paid without setoff or deduction. Except as otherwise expressly provided in this Lease, Tenant shall at all times remain bound by this 2 7 Lease and shall at all times remain obligated to pay the stated rentals required by this Lease. Except as specifically set forth herein to the contrary, Tenant shall in no event have any right to terminate this Lease. 5. Condition and Use of Property. Tenant upon acceptance of possession acknowledges that Tenant will be fully familiar with the physical condition of the Property and has received the same in good and clean order and condition, and that the Property complies in all respects with all requirements of this Lease. Tenant may use the Property for any office purpose and will not do or permit any act or thing that is contrary to any Legal Requirement or Insurance Requirement, or that may impair the value or utility of the Property or any part thereof, or that constitutes a public or private nuisance or waste of the Property or any part thereof. 6. Maintenance and Repairs. Tenant at its expense will keep the Property and the adjoining sidewalks, curbs, and all means of access to the Property in good and clean order and condition, subject to ordinary wear and tear, and will promptly, at its own expense, make all necessary or appropriate repairs, replacements and renewals thereof, whether interior or exterior, ordinary or extraordinary, foreseen or unforeseen, provided however, Landlord shall maintain footings, foundations, exterior walls, and roofing systems. All repairs, replacements and renewals shall be at least equal in quality, utility and class to the original condition of the Property. Tenant waives any right created by any law now or hereafter in force to make repairs to the Property at Landlord's expense. Landlord shall have no obligation to repair, rebuild or maintain the Property. 7. Alterations and Additions, etc. Tenant at its expense may make reasonable alterations of and additions to the Improvements or any part thereof, provided, however, that any such alteration or addition (a) shall not change the general character of the Improvements located on the Property, or reduce the fair market value of any such Improvements immediately before such alteration or addition (assuming the Property was then being maintained in accordance with the terms of this Lease), (b) shall be effected with due diligence, in a good and workmanlike manner and in compliance with all Legal Requirements, Insurance Requirements and the provisions of Section 14 hereof, and (c) shall be fully paid for by Tenant upon its construction or installation on the Property. All alterations of and additions to the Improvements, other than Tenant's Equipment, shall immediately become the property of Landlord and shall constitute a part of the Property. 8. Tenants Equipment. All Tenant's Equipment shall be the property of Tenant. Tenant will immediately repair at its expense all damage to the Property caused by any removal of Tenant's Equipment therefrom, whether effected by Tenant or Landlord. 9. Utility Services. Tenant will pay or cause to be paid all charges of any nature for utilities, communications and other services rendered at the Property. 10. No Claims Against Landlord, etc. Nothing contained in this Lease shall constitute any consent or request by Landlord or any Mortgagee, express or implied, for the performance of any labor or services or the furnishing of any materials or other property in respect of the Property or any part 3 8 thereof, nor as giving Tenant any right, power or authority to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Landlord or any Mortgagee in respect thereof. 11. Indemnification by Tenant. Tenant will (to the full extent permitted by applicable law) protect, indemnify and save harmless Landlord, any beneficiary of Landlord, any officer, director or shareholder of any of the foregoing and Mortgagee of the Property (each an "Indemnified Party") from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) imposed upon or incurred by or asserted against any Indemnified Party or against the Property or any interest of such Indemnified Party therein by reason of the occurrence or existence of any of the following, during the term of this Lease, unless caused solely by the willful misconduct or negligence of such Indemnified Party: (1) any accident, injury to or death of any person or persons or loss of or damage to property occurring on or about the Property or any part thereof or the adjoining sidewalks, curbs, streets or ways, (b) any use, non-use or condition of the Property or any part thereof, or of the adjoining sidewalks, curbs, streets or ways, including, without limitation, claims or penalties arising from violation of any Legal Requirement or Insurance Requirement, any claim as to which the applicable insurance is inadequate, and any claim in respect of any adverse environmental impact or effect which is due solely to the Tenant's conduct or operation after the commencement of the Lease and is not the result of any pre-exisiting condition which is later discovered, (c) any failure on the part of Tenant to perform or comply with any of the terms of this Lease, (d) any negligent or tortuous act on the part of Tenant or any of its agents, contractors, servants, employees, licensees or invitees, or (e) any negligent or tortious act on the part of any assignee or sublessee of Tenant, or of any agents, contractors, servants, employees, licensees or invitees of any assignee or sublessee of Tenant. Any Indemnified Party seeking indemnification hereunder shall give notice to Tenant of the existence of any claim giving rise to the need for such indemnification within thirty (30) Business Days after the date on which such Indemnified Party shall have obtained actual knowledge of such claim; provided, however, that no Indemnified Party shall have any such obligation with respect to any claim whose existence is actually or constructively known to Tenant. In case any action, suit or proceeding is brought against any Indemnified Party by reason of any occurrence referred to above, Tenant, upon the request of such Indemnified Party, will at Tenant's expense resist and defend such action, suit or proceeding or cause the same to be resisted and defended by counsel designated by Tenant and reasonably acceptable to such Indemnified Party. 12. Inspection, etc. Landlord and its authorized representatives may enter the Property at all reasonable times (provided that no such entry shall be made without reasonable advance notice or shall unreasonably interfere with the conduct of Tenant's business) for the purpose of (a) inspecting the same, (b) exhibiting the Property for the purpose of sale or mortgage or other financing, (c) at any time within six (6) months prior to the expiration of the term of this Lease, exhibiting the Property for the purpose of leasing same, and (d) at any time after Tenant shall have abandoned the Property, displaying thereon advertisements for sale or letting. Landlord shall not have any duty to make any such inspection and shall not incur any liability or obligation for not making any such inspection. No such entry shall constitute an eviction of Tenant. 4 9 13. Payment of Taxes, etc. Subject to the provisions of Section 16 hereof, Tenant will pay, promptly as and when the same shall become due and payable all taxes (including, without limitation, real estate taxes, personal or other property taxes and all sales, value added, use and similar taxes), assessments (including, without limitation, all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the term hereof) installments of which become due during the term hereof, or in any case a prorate share thereof, water, sewer or other rents, rates and charges, excises, review, license fees, permit fees, or any future inspection fees and other authorization fees which may be created or imposed and other charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character that may be assessed, levied, confirmed or imposed on or in respect of the Property or any rent therefrom (all of the foregoing being hereinafter collectively referred to as "Taxes"). Notwithstanding the foregoing or any other provision of this Lease, Tenant shall not be required to pay any income, profits or revenue tax upon the net income of Landlord, nor any franchise, excise, corporate, estate, inheritance, succession, capital levy or transfer tax of Landlord, nor any interest, additions to tax or penalties in respect thereof, unless such tax is imposed, levied or assessed in substitution for any Taxes that Tenant is required to pay pursuant to this Section 13. Tenant will furnish to Landlord, upon request, official receipts or other proof reasonably satisfactory to Landlord evidencing payment of any Taxes in accordance with the requirements of this Section 13. 14. Compliance with Legal and Insurance Requirements. Instruments. Subject to the provisions of Section 16 hereof, Tenant at its expense will promptly (a) comply with all Legal Requirements and Insurance Requirements, and (b) procure, maintain and comply with all permits, licenses and other authorizations required for any use of the Property. 15. Liens, Easements, etc. Tenant will not directly or indirectly create or permit to be created or to remain, and will discharge, any mortgage, lien, or encumbrance with respect to the Property or any part thereof or Tenant's interest therein, or the Basic Rent, Additional Rent or any other sum payable under this Lease. 16. Permitted Contests. Tenant at its expense may contest by appropriate legal proceedings conducted in good faith and with due diligence, the amount or validity or application, in whole or in part, of any Taxes or lien therefor or any Legal Requirement or Insurance Requirement or the application of any instrument of record affecting the Property or any part thereof or any claims of mechanics, materialmen, suppliers or vendors or lien therefor, and if permitted by law, may withhold payment of the same pending such contest; provided, however, that (a) such proceedings shall suspend the collection thereof from Landlord, the Property and any sums payable hereunder, (b) neither the Property nor any part thereof or interest therein (or any sums payable hereunder) would be in any danger of being sold, forfeited or lost, nor would the use or occupancy of the Property (or any part thereof) be adversely affected, (c) Landlord shall not be in any danger of any civil or criminal liability by reason thereof and neither the Property nor any part thereof or interest therein (or any sums payable hereunder) would be subject to the imposition of any lien as a result of such failure, and (d) Tenant shall have either (i) paid the disputed amount under protest, or (ii) furnished to Landlord such security as Landlord may deem reasonably necessary to insure the ultimate payment of the contested amount 5 10 and to prevent the forfeiture of any sums payable to Landlord or any Mortgagee hereunder. Tenant shall give prompt written notice to Landlord of the commencement of any contest referred to in the preceding sentence, providing a reasonably detailed description thereof, and Landlord shall, at Tenant's expense, cooperate with Tenant with respect to any such contest. Tenant agrees that each such contest shall be promptly prosecuted to final conclusion, and Tenant shall indemnify and save Landlord and any Mortgagee harmless from and against any and all losses, judgments, decrees and costs (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection therewith. Tenant agrees that it will, promptly after final determination of each such contest, fully pay and discharge the amounts which shall finally be levied, assessed, charged or imposed or determined to be payable, together with all penalties, fines, interest, costs and expenses incurred in connection therewith, and perform all acts the performance of which shall be finally ordered or decreed as a result thereof. 17. Insurance. 17.1. Risks to be Insured. Tenant, at its expense, will maintain with insurers authorized to issue insurance in the State of Iowa and having an A.M. Best rating of "A" or better or otherwise approved by Landlord and any Mortgagee (a) insurance with respect to the Improvements against loss or damage by fire, lightning and other risks from time to time included under "all-risk" policies and against loss or damage by sprinkler leakage, water damage, collapse, vandalism and malicious mischief, in amounts sufficient to prevent Landlord and Tenant from becoming co-insurers of any loss under the applicable policies, and in any event in amounts not less than 100% of the actual replacement costs of the Improvements (initially determined as of the date on which such insurance is originally issued, and subsequently re-determined on the basis on an annual review of the actual replacement cost of the Improvement), as determined at the request of Landlord (such insurance shall also include at least nine (9) months rental loss coverage), (b) comprehensive general liability insurance against claims arising out of or connected with the possession, use, leasing, operation or condition of the Property in such amounts as are usually carried by persons operating similar properties in the same general locality but in any event with a combined single limit of not less than $5,000,000 for any single injury to a person and $10,000,000 for all claims with respect to property damage and personal injury and death with respect to any one occurrence, (c) explosion insurance in respect of any steam and pressure boilers and similar apparatus located on the Property in amounts not less than those required by subdivision (b) above, (d) in the event that the Property shall at any time be used as anything other than for office purposes such other insurance against such risks and in such amounts as Landlord shall reasonably request. In addition, during any period of repair, alteration or addition to the Property, Tenant shall obtain and keep in effect Builder's Risk insurance in such amounts as Landlord shall reasonably request. Tenant may effect any insurance not required by this Lease, but any such insurance effected by Tenant on the Property shall be for the benefit of Landlord, Tenant and any Mortgagee, as their interests may appear, and shall be subject to all of the provisions of Section 17.2 hereof. The insurance required under this Section 17.1 may be subject to a deductible in an amount not exceeding $2,500.00 and may be effected under a blanket policy or policies covering the Property and other property and assets not constituting part of the Property; provided, however, that any such policy shall specify the portion of the total coverage of such policy or policies that is allocated to the Property and shall, in all other respects, comply with the requirements of this Section 17. 6 11 17.2 Policy Provisions. All insurance maintained by Tenant pursuant to Section 17.1 hereof shall (a) name Landlord (individually and as a fiduciary), Tenant and any Mortgagee as insured parties, (b) provide that all insurance proceeds for losses of less than $10,000 shall, except in the case of comprehensive general liability insurance be adjusted by and be payable to Tenant to be used by Tenant, to the extent necessary, for Restoration, (c) provide that all insurance proceeds for losses of $10,000 or more shall (except in the case of comprehensive general liability insurance and workers' compensation insurance) be adjusted by Landlord and Tenant jointly and shall be payable to any Mortgagee by means of a standard mortgage loss payable endorsement (or to Landlord, if there is not Mortgagee), to be held in trust pursuant to the terms of this Lease, (d) provide that if all or any part of such policy is canceled, terminated or expires, the insurer will forthwith give notice thereof to each named insured party and loss payee and that no cancellation, reduction in amount or material change in coverage thereof shall be effective until at least 30 days after delivery to each named insured party and loss payee of written notice thereof, and (e) be reasonably satisfactory in all other respects to Landlord and any Mortgagee. 17.3 Delivery of Policies; Insurance Certificates. Tenant will deliver to Landlord and any Mortgagee the originals of all insurance policies (or, in the case of blanket policies, certificates thereof) and any amendments or supplements thereto with respect to the Property that Tenant is required to maintain pursuant to this Section 17, together with evidence as to the payment of all premiums then due thereon, and not later than 30 days prior to the expiration of any policy, a certificate of the insurer evidencing the replacement or renewal thereof. 18. Hazardous Materials. Tenant shall not (either with or without negligence) cause or permit the escape, disposal or release of any biologically or chemically active or other hazardous substances, or materials. Tenant shall not allow the storage or use of such substances or materials in any manner not sanctioned by law or by the highest standards prevailing in the industry for the storage and use of such substances or materials, nor allow to be brought into the Property any such materials or substances except to use in the ordinary course of Tenant's business, and then only after written notice is given to Landlord of the identity of such substances or materials. Without limitation, hazardous substances and materials shall include those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., any applicable state or local laws and the regulations adopted under these acts. If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release of hazardous materials, then the reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand as additional charges if such requirement applies to the Property. In addition, Tenant shall execute affidavits, representations and the like from time to time at Landlord's request concerning Tenant's best knowledge and belief regarding the presence of hazardous substances or materials on the Property. In all events, Tenant shall indemnify Landlord in the manner elsewhere provided in this Lease from any release of hazardous materials on the Property occurring while Tenant is in possession, or elsewhere if caused by Tenant or persons acting under Tenant. The within covenants shall survive the expiration or 7 12 earlier termination of the Lease Term. Landlord has caused an environmental survey of the property to be preformed by Shive Hattery and Associates attached hereto as Exhibit D. 19. Damage to or Destruction of Property. 19.1. Tenant to Give Notice. In case of any damage to or destruction of the Improvements located on the Property (or any part of such Improvements), the Restoration of which is reasonably estimated to cost more than $10,000.00, Tenant will promptly give notice thereof to Landlord, generally describing the nature and extent of such damage or destruction and setting forth Tenant's best estimate of the cost of Restoration. 19.2. Restoration. In case of any damage to or destruction of the Improvements located on the Property (or any part of such Improvement), other than a Total Destruction, Tenant, whether or not the insurance proceeds, if any, on account of such damage or destruction shall be sufficient for the purpose, at its expense will promptly commence and complete (subject to Unavoidable Delays) Restoration of such Improvements. 19.3. Total Destruction. In case of (a) the destruction during the last two years of the Fixed Term of all of the Improvements located on the Property, or (b) the destruction during the last two years of the Fixed Term of such a substantial part of the Improvements located on the Property that, in the good faith judgment of the Board of Directors of Tenant, Restoration of such Improvements is not economically feasible (any such destruction being hereinafter referred to as a "Total Destruction"), Tenant may, by notice to Landlord given within 60 days after the date of such destruction, terminate this Lease. In the event of such termination of this Lease by the Tenant as a result of such Total Destruction, the obligation of the Tenant to pay Basic Rent and all other obligations of the Tenant hereunder shall be prorated as of the date of termination. The Tenant agrees that all insurance proceeds with respect to the Property and the Improvements shall be automatically assigned and paid over solely to the Landlord and the Tenant shall have no right, title or interest in the same. 19.4. Application of Insurance Proceeds. Tenant hereby irrevocably assigns to Landlord any compensation or insurance proceeds to which Tenant may become entitled by reason of Tenant's interest in the Property if the Property or any part thereof is damaged or destroyed by fire or other casualty. Any compensation or insurance payment of more than $10,000 shall be paid to and held in trust and applied in accordance with this Lease by Mortgagee or, if there is no Mortgagee or if Mortgagee does not require that it hold such compensation, by Landlord; provided, however, that any such compensation or insurance payment which is not in excess of $10,000 shall be paid directly to Tenant (if no Event of Default than exists hereunder) and shall be expended by Tenant in connection with the Restoration of the Property (with the balance of such proceeds, if any, being retained by Tenant upon the completion of such Restoration). 20. Taking of Property. 8 13 20.1. Tenant to Give Notice; Assignment of Awards, etc. In case of a Taking, or the commencement of any proceedings or negotiations that might result in a Taking, in respect of which the Restoration of the Property is reasonably estimated to cost more than $10,000, Tenant will promptly give notice thereof to Landlord, generally describing the nature and extent of such Taking or the nature of such proceedings or negotiations and the nature and extent of the Taking that might result therefrom. Tenant hereby irrevocably assigns, transfers and sets over to Landlord all rights of Tenant to any award or payment on account of any Taking of Tenant's Leasehold and irrevocably authorizes and empowers Landlord, with full power of substitution, in the name of Tenant or otherwise, to file and prosecute what would otherwise be Tenant's claim for any such award or payment and to collect, receipt for and retain the same. 20.2. Partial Taking. In the case of a Taking other than a Total Taking, (a) this Lease shall remain in effect as to the portion of the Property remaining immediately after such Taking, without any abatement or reduction of Basic Rent, Additional Rent or any other sum payable hereunder, and without any change or reduction in the amount of insurance required pursuant to Section 17 hereof, and (b) Tenant, whether or not the awards or payments, if any, on account of such Taking shall be sufficient for the purpose, at its expense will promptly commence and complete (subject to Unavoidable Delays) Restoration of the Property, except for any reduction in area of the Property caused by such Taking; provided, however, that in case of Taking for temporary use ("Temporary use" being defined for all purposes herein as any taking for less than nine consecutive months) Tenant shall not be required to effect any Restoration until such Taking is terminated. 20.3. Total Taking. In case of the Taking during the Fixed Term of the Property in its entirety (or all of the Improvements located thereon) or the Taking during the Fixed Term (other than for temporary use) of such a substantial part of the Property (or the Improvements located thereon) that, in the good faith judgment of the Board of Directors of Tenant, either (a) the portion of the Property (or the Improvements located thereon) remaining after such Taking is (and after Restoration would be) unsuitable for use by Tenant in the operation of its business, or (b) Restoration of the Property (or the Improvements located thereon) is not economically feasible, this Lease shall terminate as of the date of such Taking. In the event of the termination of this Lease as a result of any such Taking, the Tenant hereby releases all right, title, claim and interest in and to any award or payments received or payable as a result of any such Taking of the Improvements and/or the Property, except that the Tenant shall be entitled to any separate award for the loss of its trade fixtures or equipment or moving allowances, if any such separate award is made. 20.4. Application of Awards, etc. All awards and payments received by or payable to Landlord on account of a Taking (less the actual costs, fees and expenses incurred in connection with the collection thereof, for which the Person incurring the same shall be reimbursed from such award or payment, together with any interest or other income earned on such awards from the investment thereof and any other interest paid on such awards prior to disbursement hereunder) shall be paid to 9 14 and held in trust and applied in accordance with this Lease by Mortgagee, or, if there is no Mortgagee or if Mortgagee does not require that it hold such award, by Landlord, and shall be applied or dealt with as follows: (a) All such awards and payments actually received on account of a Taking (other than a Total Taking) shall be applied as follows: (i) Subject to subparagraph (ii) below, such awards and payments shall be applied to pay the cost of the Restoration of the Property, such application to be effected substantially in the same manner and subject to the same conditions as provided in paragraph (a) of Section 19.4 hereof with respect to insurance proceeds; provided, however, that in case the total amount of such awards and payments shall not exceed $5,000, such awards and payments shall be paid over to Tenant, if no Event of Default then exists hereunder, upon Tenant's request and without compliance with any of such conditions. (ii) In case of a Taking for a temporary use, such awards and payments shall be paid to Tenant and there shall be no abatement in Tenant's obligation to pay Basic Rent and Additional Rent hereunder during the period of such temporary use; provided, however, that if any portion of such awards and payments is made by reason of any damage to or destruction of the Property (or the Improvements thereon) during such Taking for temporary use, such portion shall be held and applied as provided in subparagraph (i) above after such Taking is terminated. (iii) The balance, if any, of such awards and payments not required to be held or applied in accordance with subparagraphs (i) and (ii) above, shall be paid to Landlord following completion of the Restoration. (b) All such awards and payments received by or payable to Landlord on account of a Total Taking with respect to the Property (or the Improvements thereon) during the Fixed Term or any Extended Term shall, as contemplated by Section 20.3 hereof, be paid over or assigned to Landlord. 21. Certificate as to No Event of Default, etc.; Financial Statements, etc. 21. 1. Certificate of Tenant as to No Event of Default, etc. Tenant will deliver to Landlord within 10 days following Landlord's request therefor (but in no event more often than three times in any twelve-month period), (a) a Certificate of Tenant stating (i) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the modifications), (ii) the date to which the Basic Rent has been paid and that all Additional Rent payable on or before the date of such Certificate has been paid, and (iii) that no Event of Default exists hereunder, or, if any such Event of Default exists, specifying the nature and period of existence thereof and what action Tenant is taking or has taken with respect thereto, and (b) such information with respect to Tenant and the Property or any part thereof as from time to time may reasonably be requested. 10 15 21.2. Certificate of Landlord. Within 10 days following Tenant's request therefor, but in no event more often than three times in any twelve-month period (which request shall (i) state that it is made pursuant to this Section 21.2 and that Tenant proposes, pursuant to Section 23.1 hereof, to assign its interest in this Lease or sublet a portion of the Property to a Person identified in such request, and (ii) be accompanied by a copy of this Lease and each modification hereof or amendment hereto, if any, to and including the date of such request, and a Certificate of Tenant stating that such copies are true, correct and complete copies of this Lease and of all such modifications and amendments), Landlord will deliver to Tenant a Certificate of Landlord stating (a) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the modifications), (b) the date to which Basic Rent has been paid hereunder and (c) whether or not an Event of Default has been declared by Landlord hereunder, it being agreed that (and any such Certificate shall state that) no rights or remedies of Landlord hereunder or otherwise resulting from any condition, event or circumstance that would entitle Landlord to declare an Event of Default (and with respect to which condition, event or circumstance no Event of Default has been declared on or before the date of such Certificate) shall be waived, impaired or diminished in any respect by reason of any such Certificate or any statement made therein. No failure of Landlord to deliver any such Certificate shall release, discharge or otherwise affect any of Tenant's or Landlord's rights or obligations hereunder. 21.3. Financial Statements. Tenant will deliver to Landlord as soon as reasonably possible, and in any event within 120 days after the close of each fiscal year of Tenant, a copy of (i) the consolidated balance sheet of Tenant as of the end of such fiscal year, (ii) consolidated statements of income and shareholders' equity for Tenant with respect to such fiscal year, and (iii) consolidated statements of changes in financial position for Tenant with respect to such fiscal year, setting forth in each case in comparative form the corresponding figures for the previous fiscal year, all in reasonable detail, prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except for any changes required by the Financial Accounting Standards Board and other changes consistent with generally accepted accounting principles) and accompanied by an unqualified opinion of independent public accountants of recognized national standing. 22. Right of Landlord to Perform Tenant's Covenants, etc. If Tenant shall fail to make any payment or perform any act required to be made or performed by it hereunder, Landlord, upon notice to Tenant (except in cases of emergency that threaten bodily injury or material property damage), but without waiving or releasing any obligation or default, may make such payment or perform such act for the account and at the expense of Tenant, and may enter upon the Property and the Improvements or any part thereof for such purpose and take all such action thereon as, in the opinion of Landlord, may be necessary or appropriate therefor. No such entry shall constitute an eviction of Tenant. All reasonable payments so made by Landlord and all reasonable costs and expenses (including, without limitation, attorneys' fees and expenses) incurred in connection therewith or in connection with the performance by Landlord of any such act shall constitute Additional Rent hereunder. 23. Assignments, Subleases, Mortgages, etc. 11 16 23.1. Assignments, Subleases, etc. by Tenant. If no Event of Default shall have occurred and be continuing Tenant may, after obtaining the written consent of Landlord, at any time, sublet the Property or any part thereof, and may assign its interest in this Lease; provided, however, that (a) Tenant shall deliver to Landlord a fully executed counterpart of each such sublease or assignment promptly after execution thereof, and (b) no assignment, whether by operation of law, consolidation, merger, a sale of stock or otherwise, shall be effective prior to the execution by the assignee and delivery to Landlord of an instrument, reasonably satisfactory in form and substance to Landlord, assuming all of the obligations of Tenant under this Lease. No assignment or sublease made as permitted by this Section 23.1 shall affect or reduce any obligations of Tenant or any rights of Landlord hereunder, and all obligations of the Tenant originally named hereunder shall continue in full force and effect as the obligations of a principal and not of a guarantor or surety, to the same extent as though no assignment or subletting had been made. 23.2. Assignments, Mortgages, etc. by Landlord. The interest of Landlord in this Lease and in and to the Property or any part thereof may, at any time and from time to time, be sold, conveyed, assigned or otherwise transferred, without the prior written consent of Tenant, and upon any sale or conveyance of the Property as an entirety or any assignment or other transfer (other than for the purpose of securing indebtedness) by any party lessor of its interest in this Lease and in and to the Property, such party lessor shall be completely relieved of and from any and all obligations not theretofore accrued under this Lease or otherwise with respect to the Property, and such party lessor shall have no further obligations whatsoever to any party lessee, except to the extent that any such obligation accrued prior to the date of such sale, conveyance, assignment or transfer, and Tenant shall thereupon look only to the then owner of Landlord's estate in the Property for the performance of any obligations of Landlord hereunder. Landlord may also from time to time mortgage or assign, by way of pledge or otherwise, any or all of the rights, in whole or in part, of Landlord under this Lease to any Person as security for the indebtedness or other obligations of Landlord. From and after any such mortgage or assignment and to the extent provided in the instrument effecting such mortgage or assignment, (a) such Mortgagee may enforce any and all of the terms of this Lease to the extent so assigned as though such Mortgage had been a party hereto, (b) no action or failure to act on the part of Landlord shall adversely affect or limit any rights of such Mortgagee, (c) no such assignment shall constitute an assumption of any such obligations on the part of such Mortgagee, and (d) a copy of all notices, demands, consents, approvals and other instruments given by Tenant hereunder shall also be delivered to such Mortgagee, if such Mortgagee shall have provided Tenant with written notice of its address for such purposes. 24. Events of Default; Termination. If any one or more of the following events ("Events of Default") shall occur (whatever the reason therefor, and whether voluntary or involuntary or by operation of law or pursuant to or in compliance with any judgment, decree or order of any court of any rule or regulation of any administrative or governmental body): (a) if Tenant shall fail to pay any installment of Basic Rent or Additional Rent, or other sum required to be paid by Tenant hereunder on the date the same becomes due and payable and such 12 17 failure continues for more than five (5) Business Days following written notice by Landlord to Tenant; or (b) if Tenant shall fail to perform or comply with any term of this Lease (other than those referred to in clause (a) above) or any term of any instrument related hereto pursuant to which Tenant undertakes obligations or makes agreements for the benefit of Landlord or any Mortgagee and, in any such case, such failure shall continue for more than 30 days after an Officer of Tenant received notice (from any source) or otherwise obtains knowledge of such non-performance or noncompliance; provided, however, that in the case of any such failure that is susceptible of being cured but that cannot with diligence be cured within such 30-day period, if Tenant shall promptly commence to cure the same and shall thereafter prosecute the curing thereof with diligence, the period within which such failure may be cured shall be extended for such further period as shall be necessary for the curing thereof with diligence, or (c) if any material representation or warranty made by Tenant herein, in any document or certificate furnished by Tenant or any Mortgagee in connection herewith or therewith or pursuant hereto or thereto, or any material representation or warranty made by Tenant in any assignment or reassignment by Landlord of this Lease shall be incorrect in any material respect as of the date when made; or (d) if the Property or the Improvements shall be left vacant and without maintenance and security; or (e) if Tenant shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (f) if an involuntary case or other proceeding shall be commenced against Tenant seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undischarged and unstayed for a period of 90 days, or if an order for relief shall be entered against Tenant under the federal bankruptcy laws as now or hereafter in effect; or (g) if a final judgment that, together with other outstanding final judgments against Tenant, exceeds an aggregate of $30,000 shall be rendered against Tenant, and if, within 120 days after the entry thereof, such judgment shall not have been discharged or execution thereof stayed pending 13 18 appeal or if within 120 days after the expiration of such stay, such judgment shall not have been discharged; then, and in any such event, Landlord may at any time thereafter, during the continuance of any such Event of Default, give a written termination notice to Tenant specifying a date (not less than five days from the date on which such notice is given) on which this Lease shall terminate, and, on such date, subject to the provisions of Section 26 hereof relating to the survival of Tenant's obligations hereunder, the term of this Lease shall terminate by limitation and all rights of Tenant under this Lease shall cease. All reasonable costs and expenses incurred by or on behalf of Landlord (including, without limitation, attorneys' fees and expenses) occasioned by any default by Tenant under this Lease shall constitute Additional Rent hereunder. 25. Repossession, etc. If an Event of Default shall have occurred and be continuing, Landlord, whether or not the term of this Lease shall, have been terminated pursuant to Section 24 hereof, may enter upon and repossess the Property or any part thereof by legal process, summary proceedings, ejectment or otherwise, and may remove Tenant and all other persons and any and all property therefrom. Landlord shall be under no liability for or by reason of any such entry, repossession or removal. 26. Survival of Tenant's Obligations; Damages. 26.1. Termination of Lease Not to Relieve Tenant of Obligations. No termination of the term of this Lease pursuant to Section 24 hereof, by expiration or by operation of law or otherwise, and no repossession of the Property or any part thereof pursuant to Section 25 hereof or otherwise, and no reletting of the Property, shall relieve Tenant of its liabilities and obligations hereunder, all of which shall survive such expiration, termination, repossession or reletting. 26.2. Current Damages. In the event of any such termination, repossession or reletting, Tenant will pay to Landlord the Basic Rent and all Additional Rent and other sums required to be paid by Tenant up to the time of such termination, repossession or relettng, and thereafter Tenant, until the end of what would have been the term of this Lease (including the Fixed Term) in the absence of such termination or repossession, and, whether or not the Property or any part thereof shall have been relet, shall be liable to Landlord for and shall pay to Landlord, as liquidated and agreed current damages for Tenant's default, (a) the Basic Rent and all Additional Rent and other sums that would be payable under this Lease by Tenant in the absence of such termination or repossession, plus, (b) all reasonable expenses directly incurred by Landlord in connection with such termination and repossession and any reletting effected for the account of Tenant pursuant to Section 25 hereof (including, without limitation, all, repossession costs, brokerage commissions, legal expenses, attorney's fees, employees expenses, alteration costs and expenses of preparing for such reletting), less (c) the proceeds, if any, of such reletting. Tenant will pay such current damages monthly on the days on which the Basic Rent would have been payable under this Lease in the absence of such termination, repossession or reletting, and Landlord shall be entitled to recover the same from Tenant on each such day. 14 19 26.3. Final Damages. At any time after any such termination or repossession, whether or not Landlord shall have collected any current damages as aforesaid, Landlord shall be entitled to recover from Tenant and Tenant will pay to Landlord on demand, as and for liquidated and agreed final damages beyond the date of such demand, (a) an amount equal to the excess of (i) all past due Basic Rent and Additional Rent plus the present value of all Basic Rent and Additional Rent that would be payable under this Lease from the date of such demand (or, if it be earlier, the date to which Tenant shall have satisfied in full its obligations under Section 26.2 hereof to pay current damages) for what would be the unexpired term of this Lease in the absence of such termination or repossession, over (ii) the present value of the fair market rental for the Property at the date of this Lease, which present value shall in each case be determined by the application of a discount factor of 10% per annum. Payment of final damages herein is limited to those damages not accounted for and paid for under 26.2. 27. Tenant's Waiver of Statutory Rights. In the event of any termination of the term of this Lease pursuant to Section 24 hereof or any repossession of the Property or any part thereof pursuant to Section 25 hereof, Tenant, so far as permitted by law, waives any right of redemption, re-entry or repossession. 28. No Waiver by Landlord. No failure by Landlord to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. No waiver of any breach shall affect or alter this Lease, which shall continue in full force and effect, or the rights of Landlord with respect to any other then existing or subsequent breach. No foreclosure, sale or other proceedings under any mortgage or other security arrangement with respect to the Property shall discharge or otherwise affect the obligations of Tenant hereunder. 29. Remedies Cumulative. Each right, power and remedy of Landlord provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or attempted exercise by Landlord of any one or more of the rights, powers or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by Landlord of any or all such other rights, powers or remedies. 30. Modification, Acceptance of Surrender. No modification, termination or surrender to Landlord of this Lease and no surrender of the Property or any part thereof or of any interest therein shall be valid or effective unless agreed to and accepted in writing by Landlord, and no act by any representative or agent of Landlord, and no act by Landlord, other than such a written agreement and acceptance by Landlord, shall constitute an agreement thereto or acceptance thereof. 31. End of Lease Term. Upon the expiration or earlier termination of this Lease, Tenant, at its expense, shall quit and surrender to Landlord the Property in good order and condition, ordinary 15 20 wear and tear excepted, and, if requested by Landlord, shall remove, at Tenant's expense, all of Tenant's Equipment therefrom and shall repair, at Tenant's expense, all damage caused by such removal. 32. Notices, etc. All notices, offers, acceptances, rejections, consents and other communications hereunder shall be in writing and shall be deemed to have been given when delivered or mailed by first class registered or certified mail, postage prepaid, or sent by a nationally recognized overnight courier service, addressed: If to Landlord: Ryan Properties, Inc. 700 International Centre 900 Second Avenue South Minneapolis, Minnesota 55402 or at such other address as Landlord shall have furnished to Tenant in writing; and If to Tenant: Joe Cunningham Ruffalo Cody & Associates, Inc. 221 Third Avenue SE Cedar Rapids, IA 52401 with a copy to: Bill Neppl White & Johnson, P.C. 1715 lst Avenue SE Cedar Rapids, IA 52402 or at such other address as Tenant shall have furnished to Landlord in writing. 33. Short Form or Memorandum. Landlord and Tenant shall execute and deliver a short form or memorandum of this Lease, satisfactory in form and substance to Landlord and Tenant, for recording in the proper office or offices in each of the states in which the Property is located. 16 21 34. Quiet Enjoyment. So long as Tenant shall pay the Basic Rent and Additional Rent and any other sums payable hereunder as the same become due and shall fully comply with all of the terms of this Lease and fully perform its obligations hereunder, Tenant (and any subtenant of Lease permitted pursuant to the terms of this Lease) shall peaceably and quietly have, hold and enjoy the Property for the term hereof, subject, however, to all the terms of this Lease. No failure by Landlord to comply with the foregoing covenants during the Fixed Term shall give Tenant any right to cancel or terminate this Lease or to abate, reduce or make a deduction from or offset against the Basic Rent or any Additional Rent or any other sum payable under this Lease, or to fail to perform any other obligation of Tenant hereunder. Notwithstanding anything contained in this Lease to the contrary, it is specifically understood and agreed that neither Landlord nor any beneficiary of Landlord, nor any officer, director or shareholder of any of the foregoing, or any Mortgagee, shall have any personal liability in respect of any of the terms, covenants, conditions or provisions of this Lease. Nothing contained in this Section 34 shall prohibit Landlord, or any Mortgagee, or their respective authorized representatives, from entering the Property at reasonable times to inspect the same. 35. Miscellaneous. All rights, powers and remedies provided herein may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and are intended to be limited to the extent necessary so that they wili not render this Lease invalid, illegal or unenforceable under the provisions of any applicable law. If any term of this Lease or any application thereof shall be invalid or unenforceable, the remainder of this Lease and any other application of such term shall not be affected thereby. This Lease may be changed, waived, discharged or terminated only by an instrument in writing, signed by each of the parties hereto. Subject to Section 23.2 hereof, this Lease shall be binding upon and inure to the benefit of and be enforceable by the respective successors and permitted assigns of the parties hereto. This Lease shall be construed and enforced in accordance with and governed by the laws of the State of Iowa. The headings in this Lease are for the purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Lease may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. It is understood by both parties that at the time of signing Landlord has not purchased the property. This lease does not take full effect until the title is transferred to the Landlord which is anticipated on October 7th, 1994. In any event, if such closing does not take place by November 1st, 1994, this lease shall become null and void with written notice from either party. 36. Definitions. As used in this Lease, the following terms shall have the following respective meanings, applicable both to the singular and plural forms of the terms so defined: Additional Rent: the meaning specified in Section 3 hereof. Basic Rent: the meaning specified in Section 2 hereof. Business Day: any day other than a day on which banking institutions in the State of Iowa are authorized by law to close. 17 22 Casualty Termination Date: the meaning specified in Section 19.3 hereof. Certificate: with respect to any corporation, a certificate of such corporation signed by the President or a Vice President and by the Treasurer, Comptroller, Assistant Treasurer or Assistant Comptroller of such corporation. Estoppel Certificate: the meaning specified in Section 21 hereof. Event of Default: the meaning specified in Section 24 hereof. Fixed Term: the meaning specified in Section 1 hereof. Improvements: the meaning specified in Section 1 hereof. Indemnified Party: the meaning specified in Section 11 hereof. Insurance Requirements: all terms of any insurance policy covering Tenant or covering or applicable to the Property or any part thereof, all requirements of the issuer of any such policy, and all orders, rules, regulations and other requirements of the national Board of First Underwriters (or any other body exercising similar functions) applicable to or affecting the Property or any part thereof or any use or condition of the Property or any part thereof. Legal Requirements: all laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all governments, departments, commissions, boards, courts, authorities (including, without limitations, environmental protection, planning and zoning authorities), agencies (and other governmental or quasigovernmental units, whether Federal, state, count, district, municipal, city or other), and any officials and officers thereof, which now or at any time hereafter may be applicable to Tenant with respect to the Property or to the Property or any part thereof (including any which may apply to the repair, use or maintenance of the Property or any part thereof), or any of the adjoining sidewalks, curbs, vaults and vault space, if any, streets or ways, or any use or condition of the Property or any part thereof. Mortgage: any mortgage or other similar instrument from time to time providing for the assignment as security of Landlord's interest in the Property or this Lease by the holder thereof. Mortgagee: the mortgagee under any Mortgage. Permitted Exceptions: the exceptions set forth on Exhibit A hereto. Person: a corporation, an association, a partnership, an organization, a trust, an individual, a government or political subdivision thereof or a governmental agency. Property: the meaning specified in Section 1 hereof. 18 23 Restoration: in case of damage to or destruction of the Property or of the Improvements located thereon, the restoration, replacement or rebuilding of the Property or the Improvements as nearly as possible to its value, condition and character immediately prior to such damage, destruction or Taking, with such alterations and additions as may be made at Tenant's election pursuant to and subject to the conditions of Section 7 hereof, together with any temporary repairs and property protection which may be required pending completion of such work. Taking: a temporary or permanent taking by a government or political subdivision thereof or by a governmental agency during the term hereof of all or part of the Property, or any interest therein or right accruing thereto, as the result of or in lieu of or in anticipation of the exercise of the right of condemnation or eminent domain, or a change of grade affecting the Property or any part thereof. Such a taking shall be deemed to have occurred on the date on which Tenant shall be legally required to relinquish possession of the Property. Taking Termination Date: the meaning specified in Section 20.3 hereof. Taxes: the meaning specified in Section 13 hereof. Tenant: Ruffalo, Cody and Associates, Inc., together with any entity or entities succeeding to all or substantially all of the assets of it, by merger or otherwise. Tenant's Equipment: the trade fixtures and other similar items of property. Total Destruction: the meaning specified in Section 19.3 hereof. Total Taking: the meaning specified in Section 20.3 hereof. Unavoidable Delays: delays due to acts of God, governmental restrictions, enemy actions, civil commotion, firs, unavoidable casualty, strikes, shortages of supplies or other causes beyond the control of Tenant, but lack of funds shall not be deemed a cause beyond the control of Tenant. 19 24 IN WITNESS WHEREOF, the parties hereto have caused this Lease to be duly executed as of the date first set forth above. Landlord: RYAN PROPERTIES, INC. By /s/ JEFF A. SMITH ---------------------------- Its Vice President ------------------------- Tenant: RUFFALO, CODY AND ASSOCIATES, INC. By /s/ ALBERT P. RUFFALO ------------------------- Its President/CEO ---------------------- And By /s/ JOSEPH P. CUNNINGHAM ---------------------------- Its Treasurer ------------------------- 20 25 STATE OF IOWA) )SS. COUNTY OF LINN) The foregoing was acknowledged before me this 26th day of Sept., 1994, by Albert P. Ruffalo, the President/CEO of RUFFALO CODY & ASSOCIATES, a Iowa corporation, on behalf of said corporation. /s/ ANNE FABER SEIDL ------------------------- STATE OF IOWA) )SS. COUNTY OF LINN) The foregoing was acknowledged before me this 26th day of Sept., 1994, by Joseph P. Cunningham, the Treasurer of RUFFALO CODY & ASSOCIATES, a Iowa corporation, on behalf of said corporation. /s/ ANNE FABER SEIDL ------------------------- [SEAL] ANNE FABER SEIDL MY COMMISSSION EXPIRES 11-2-95 21 26 EXHIBIT C BASIC RENT Tenant agrees to pay Landlord: I. for the period from the commencement of this Lease through the sixtieth (60th) full month of the term a monthly base rent of $29,851.25; II. for the period from the sixty-first (61st) month of this Lease through the one hundred-twentieth (120th) full month of the term a monthly base rent of $32,429.31; payable on the first day of each month in advance, without notice. 24 EX-10.67 11 FIRST LEASE AMENDMENT 1 EXHIBIT 10.67 FIRST LEASE AMENDMENT This First Amendment of Lease dated as of this 12th day of April, 1995 (First Amendment), between Ryan Properties, Inc., a Minnesota Corporation (Landlord) and Ruffalo Cody and Associates, Inc., an Iowa Corporation (Tenant). WITNESSETH, that: WHEREAS, Landlord and Tenant have entered into an Agreement dated September 26, 1994, (Lease), whereby Landlord has leased to Tenant certain Premises located at 421 Fourth Avenue SE, in the City of Cedar Rapids, County of Linn, State of Iowa, consisting of the Premises, as such Premises are defined in the Lease; and NOW, THEREFORE, Landlord and Tenant desire and intend hereby to further amend the Lease as specifically hereinafter set forth and provided: 1. Landlord and Tenant agree to revise the commencement date to be April 24, 1995. The Fixed Term shall be April 24, 1995 to April 30, 2005. 2. Landlord and Tenant agree to revising the following Basic Rent schedule as previously outlined in Exhibit C of the Lease: April 24, 1995 to April 30, 1995 $6,965.29 May 1, 1995 to April 30, 2000 $29,851.25/month May 1, 2000 to April 30, 2005 $32,429.31/month 3. Landlord and Tenant agree to revise the first sentence Item 1.1, third paragraph to read: Landlord further agrees to provide during the first five (5) years of the Fixed Term One Hundred Fifty (150) parking spaces for the benefit of Tenant's employees, customers and visitors. EXCEPT, as otherwise specifically set forth herein, the terms and conditions of the September 26, 1994 Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the First Amendment is hereby executed and delivered effective as of the date and year first above written. LANDLORD: TENANT: RYAN PROPERTIES, INC. RUFFALO, CODY AND ASSOCIATES, INC. BY: /s/ JEFF SMITH BY:/s/ ALBERT P. RUFFALO ------------------ ------------------------ Jeff Smith Albert P. Ruffalo Its: Vice President Its: President ------------------ ------------------------ Date: 4/12/95 Date: 4/11/95 ------------------ ------------------------ AND BY: JOSEPH P. CUNNINGHAM ------------------------ Joseph P. Cunningham Its: Treasurer ------------------------ Date: 4/11/95 ------------------------ EX-10.68 12 LEASE AGREEMENT 1 Exhibit 10.68 201 TOWN CENTRE LEASE AGREEMENT This LEASE AGREEMENT, made as of this 18th day of July 1995, between 2060 Partnership L.P., an Iowa Limited Partnership ("Landlord"), and Telecom * USA Publishing Company, an Iowa corporation ("Tenant"), WITNESSETH, THAT 1. PREMISES: Landlord, subject to the terms and conditions hereof, hereby leases to Tenant certain premises (the "Premises") shown on the floor Plan attached hereto as Exhibit A containing approximately 38,535 square feet of useable area (48,438 square feet rentable area) on the Lower, Third, Fourth, and Fifth floors, located in the building situated at 201 Third Avenue SE, Cedar Rapids, Iowa (the "Building"), to be used by Tenant for general office uses and purposes and for no other use or purpose. The Building, the land underlying and contiguous thereto and all improvements thereon are hereinafter referred to as the "Project". 2. TERM: Tenant takes the Premises from Landlord, upon the terms and conditions contained herein, for the term (the "Term") of Ten (10) years commencing on September 1, 1995 and ending on the 31st day of August, 2005, unless terminated sooner as herein provided. 3. MONTHLY BASE RENT: Tenant agrees to pay Landlord during the Term a Base Rent ("Base Rent") as follows:
Rate Dates Monthly Base Rent Per/RSF -------------------------------- ----------------- ------- September 1, 1995 to December 31, 1995 $30,071.93/month $7.45 January 1, 1996 to December 31, 1996 $31,242.51/month $7.74 January 1, 1997 to December 2001 $31,807.62/month $7.88 January 1, 2002 to December 31, 2002 $33,301.13/month $8.25 January 1, 2003 to December 31, 2004 $35,319.38/month $8.75 January 1, 2005 to August 31, 2005 $37,337.63/month $9.25
Base Rent is payable on the first day of each month in advance, without deduction or set-off of any kind, to Landlord and delivered to Landlord at Suite 700, 900 Second Avenue South, Minneapolis, Minnesota 55402, or at such other place as may from time to time be designated by Landlord. 1 2 4. OPERATING COSTS: Tenant shall, for the entire Term, pay to Landlord as additional rent without any set-off or deduction therefrom, Fifty and 27/100 percent (50.27%) of all costs which Landlord may incur in owning, maintaining, and operating the Project during the Term. Beginning with calendar year 1996 and each subsequent year, Landlord and Tenant agree that for the purpose of computing Tenant's share of Operating Costs, the Project Operating Costs shall be deemed to be the lesser of actual Operating Costs or an amount equal to 105% of the previous year's Operating Costs. Said costs are referred to herein as "Operating Costs" and are hereby defined to include, but shall not be limited to, all gross real estate taxes and annual installments of special assessments with respect to the Project, reasonable management fees, insurance premiums, utility costs, costs of wages, services, equipment and supplies, and all other costs of any nature whatsoever which, for Federal tax purposes may be expensed rather than capitalized, but exclusive only of leasing commissions, depreciation, costs of tenant improvements and payments of principal and interest on any mortgages covering the Project. Operating Costs shall also include the yearly amortization of capital costs incurred by Landlord for improvements, but not structural repairs or modifications to the Project required to comply with any change in the laws, rules or regulations of any governmental authority having jurisdiction, or for purposes of reducing Operating Costs, which costs shall be amortized over the useful life of such improvements or repairs as reasonably estimated by Landlord in accordance with generally accepted accounting principles. As soon as reasonably practicable prior to the commencement of each calendar year during the Term, Landlord shall furnish to Tenant an estimate of Tenant's share of Operating Costs for the ensuing calendar year and Tenant shall pay, as additional rent hereunder, together with each installment of monthly Base Rent, one-twelfth (1/12th) of its estimated annual share of such Operating Costs. As soon as reasonably practicable after the end of each calendar year during the Term, Landlord shall furnish to Tenant a certified statement of the actual Operating Costs for the previous calendar year, including Tenant's share of such amount, and within thirty (30) days thereafter Tenant shall pay to Landlord the difference between such actual and estimated Operating Costs paid by Tenant. Tenant's share of such Operating Costs for the years in which this Lease commences and terminates shall be prorated based upon the dates of commencement and termination of the Term. If Tenant overpaid such Operating Costs, Landlord shall, at Tenant's option, refund the overpayment or apply it to the next sums due under the Lease. Any such refund shall be payable within thirty (30) days after Landlord becomes aware of such overpayment. Tenant shall have the right at any time to inspect Landlord's books and records to verify the actual and estimated Operating Costs. The cost of any such inspection shall be borne by Tenant unless Tenant discovers an error in Landlord's books and records equal to five percent (5.0%) or more of the total amount paid by Tenant for Operating Expenses during the applicable year, in which case, the cost of such inspection (not to exceed $300) shall be borne by Landlord. Notwithstanding any other provision herein to the contrary, it is agreed that in the event the Project is not fully occupied during any partial year or any full calendar year, an adjustment shall be made in computing the operating expenses for such year so that the Operating Costs shall be 2 3 computed for such year as though the Project has been fully occupied during such year and for real estate tax purposes as if fully occupied and assessed as a completed project; provided however, in no event shall Tenant be required to pay more than 50.27% of all Operating Costs as outlined above. 5. ADDITIONAL TAXES: Tenant shall pay as additional rent to Landlord, together with each installment of Base Rent, the amount of any gross receipts tax, sales tax or similar tax or any tax imposed in lieu of real property taxes (but excluding therefrom any income tax) or arising out of ownership, payable, or which will be payable, by Landlord, by reason of the receipt of the Base Rent and adjustments thereto. 6. OBLIGATIONS OF LANDLORD: Landlord agrees that it shall: A. Furnish heat and air conditioning to provide a temperature condition required for comfortable occupancy of the Premises under Tenant's normal business operations. Wherever heat generating machines or equipment are used in the Premises which affect the temperature otherwise maintained by the air conditioning system, Landlord reserves the right to install supplementary air conditioning equipment in the Premises, and the cost, operation and maintenance thereof shall be paid by Tenant to Landlord on the monthly rent payment dates at such rates as are determined by Landlord, providing Tenant has the option to review such plans prior to installation. B. Provide passenger elevator service in common with others during working days. Elevator service shall be available at all other times subject to necessary maintenance and repair work. C. Provide janitor service in and about the Premises; Saturdays, Sundays, and holidays excepted. D. Make all normal repairs to the Premises, excluding repairs to any special treatments of walls, floors or ceilings made by or at the request of Tenant and excluding repairs to any fixtures or other improvements installed or made by or at the request of Tenant. E. Provide water for drinking, lavatory, and toilet purposes drawn through fixtures installed by Landlord. F. Provide venetian or similar type of blinds for exterior windows. Tenant, at its own expense, may install drapes and window coverings to the inside of said blinds (and if installed shall maintain them in attractive and safe condition); provided, however, in the sole discretion of Landlord, they are in harmony 3 4 with the exterior and interior appearance of the Project and create no safety or fire hazard. G. Make and install or provide for the installation of Tenant's leasehold improvements in accordance with the plans and specifications, terms and conditions set forth in Exhibit B and Exhibit D. It is understood that Landlord does not warrant that any of the services and utilities referred to above will be free from interruption from causes beyond the reasonable control of Landlord. Such interruption of service or utilities shall never be deemed an eviction or disturbance of Tenant's use and possession of the Premises or any part thereof or render Landlord liable to Tenant for damages by abatement of rent or otherwise or relieve Tenant from performance of Tenant's obligations under this Lease, unless such interruption of services is caused by the negligence or willful misconduct of Landlord. If the interruption of services continues for a period of 10 days in more than 25% of the Premises for reasons under Landlord's reasonable control, Tenant shall have the right to terminate this Lease upon written notice to Landlord. 7. COVENANTS OF TENANT: Tenant agrees that it shall: A. Observe such governmental ordinances, laws and regulations and rules and regulations as from time to time may be put in effect by Landlord for the general safety, comfort, and convenience of Landlord, occupants, and to tenants of the Project; provided however, Tenant shall not be required to make any structural repairs or modifications to the Premises that may be required by such governmental ordinances, laws, or regulations. B. Give Landlord access to the Premises at all reasonable times, without charge or diminution of rent, to enable Landlord to examine or exhibit the same and to make such inspections, repairs, additions and alterations as Landlord may deem advisable. C. Keep the Premises in good order and condition; Tenant shall be responsible for payment of all costs incurred by Landlord in replacing all broken glass with glass of the same quality, save only glass broken by fire and extended coverage risks or caused by others than Tenant, and commit no waste on the Premises. D. Pay for all replacement electric lamps and ballasts used in the Premises. E. Upon the termination of this Lease in any manner whatsoever, remove Tenant's goods and effects and those of any other person claiming under Tenant, and quit and deliver the Premises to Landlord peaceably and quietly in as good order and condition as the same are now in or hereafter may be put in by 4 5 Landlord or Tenant, reasonable use and wear thereof excepted. Goods and effects not removed by Tenant at the termination of this Lease, however terminated, shall be considered abandoned and Landlord may dispose of the same as it deems expedient at Tenant's expense. Tenant shall be responsible for any restoration of the Premises needed by virtue of the removal of Tenant's goods and effects whether removed by Tenant or Landlord. F. Not assign this Lease or sublet all or any part of the Premises (other than to its parent corporation or a wholly owned subsidiary of such parent corporation or Tenant) without first obtaining Landlord's written consent thereto, which consent will not be unreasonably withheld provided (i) the occupancy of any such assignee or sublessee is not inconsistent with the character of the Project, (ii) such assignee or sublessee shall assume in writing the performance of the covenants and obligations of Tenant hereunder, and (iii) a fully executed copy of any such assignment or sublease shall be immediately delivered to Landlord but any such assignment or subletting shall not be deemed to release Tenant from the payment and performance of any of its obligations under this lease; (iv) Tenant shall promptly disclose and pay to Landlord as additional rent hereunder any rent or other payments pursuant to any sublease which exceed the amounts payable hereunder and any other consideration paid, or to be paid, by reason of the assignment or sublease. Tenant specifically may sublet that portion of Fourth Floor totaling 3,878 useable square feet as designated on Exhibit A without Landlord's consent providing all conditions of this Lease are met. G. Not place additional signs on or about the Premises or Project without first obtaining Landlord's written consent thereto which will not unreasonably be withheld. H. Not overload, damage or deface the Premises or the Project or do any act which may make void or voidable any insurance on the Premises or the Project, or which may render an increased or extra premium payable for insurance. I. Not make any alterations or additions to the Premises without the prior written consent of Landlord and until payment and completion bonds therefore have been approved by Landlord; and all alterations, additions or improvements (including carpeting or other floor covering) which may be made by either of the parties hereto upon the Premises, except movable office furniture and equipment shall at Landlord's election be the property of Landlord, and shall remain upon and be surrendered with the Premises, as a part thereof, at the termination of this Lease. 5 6 J. Tenant shall pay the cost of all separately metered electricity supplied to or used in the Premises at rates prevailing for Tenant's class of use as established by the company providing the electrical service. Tenant's, obligation under this paragraph numbered 7 to do or not to do a specified act shall extend to and include Tenant's obligation to see to it that Tenant's employees, agents and invitees shall do or shall not do such acts, as the case may be. 8. CASUALTY LOSS: In case of damage to the Premises or the Project by fire or other casualty, Tenant shall give immediate written notice to Landlord, who shall within 30 days of such notice give notice to Tenant that: (1) Landlord elects to terminate this Lease as hereinafter provided, or (2) Landlord will cause the damage to be repaired with reasonable speed, at the expense of the Landlord, subject to delays which may arise by reason of adjustment of loss under insurance policies and for delays beyond the reasonable control of Landlord, but Landlord shall have no obligation to restore or replace any property owned by Tenant; and to the extent that the Premises are rendered untenantable, the rent shall proportionately abate, except in the event such damage resulted from the act, fault or neglect of Tenant, Tenant's employees, invitees or agents, in which event there shall be no abatement of rent. If the damage shall be so extensive that the Landlord shall decide not to repair or rebuild, this Lease shall, at the option of Landlord, be terminated as of the date of such damage by written notice from Landlord to Tenant, and the rent shall be adjusted to the date of such damage and Tenant shall thereupon promptly vacate the Premises. If more than 50% of the Premises is rendered untenantable for more than twenty (20) days, Tenant shall have the right to terminate this Lease upon ten (10) days written notice to Landlord. 9. CONDEMNATION: If the entire Premises are taken by eminent domain, this Lease shall automatically terminate as of the date of taking. If fifty percent (50%) or more of the Premises are taken by eminent domain, Landlord or Tenant shall have the right to terminate this Lease as of the date of taking by giving written notice thereof to the other on or before the date of taking. If neither Landlord or Tenant elect to terminate this Lease, Landlord shall, at its expense, restore the Premises, exclusive of any improvements or other changes made therein by Tenant, to as near the condition which existed immediately prior to the date of taking as reasonably possible, and to the extent that the Premises are rendered untenantable, the rent shall proportionately abate. All compensation awarded or paid upon such eminent domain shall belong to and be the property of Landlord, without any participation by Tenant; provided, however, nothing contained herein shall be construed to preclude Tenant from prosecuting any claim directly against the condemning authority for loss of business, depreciation to, damage to and/or cost of removal of and/or for value of stock and/or trade fixtures, furniture and other personal property belonging to Tenant as along as such claim does not diminish or otherwise adversely affect Landlord's award. 10. DELAY IN POSSESSION: If the Premises shall on the scheduled date of commencement of the Term not be ready for occupancy by the Tenant due to the possession or occupancy thereof by any person not lawfully entitled thereto, or because construction has not yet been 6 7 completed, or by reason of any building operations, repair or remodeling to be done by Landlord, Landlord shall use due diligence to complete such construction, building operations, repair or remodeling and to deliver possession of the Premises to Tenant. The Landlord, using such due diligence, shall not in any way be liable for failure to obtain possession of the Premises for Tenant or to timely complete such construction, building operations, repair or remodeling, but the Base Rent and other charges payable by Tenant hereunder shall abate until the Premises shall, on Landlord's part, be ready for the occupancy of Tenant, this Lease remaining in all other respects in full force and effect and the Term not thereby extended provided, however, if the Premises are not ready for occupancy due to Landlord's negligence within 45 days of the scheduled date of commencement of the Term, Tenant may terminate this Lease by written notice to Landlord. 11. LIABILITY: Tenant agrees that Landlord and its officers, agents and employees shall not be liable to Tenant for any damage to or loss of personal property in the Premises unless such damage or loss is the result of the negligence or willful misconduct of Landlord or its officers, agents and employees. 12. DEFAULT: If Tenant shall fail to: A. Pay, within five (5) days of its due date, any Monthly Base Rent or Operating Costs, or B. Pay any other sum payable hereunder within ten (10) days after written notice has been given to Tenant, or C. Keep, observe or perform any of the other terms, covenants or conditions herein to be kept, observed or performed by Tenant for more than thirty (30) days after written notice is given to Tenant specifying the nature of such default, or if such default so specified shall be of such a nature that the same cannot be reasonably cured or remedied within said thirty (30) day period, than, if Tenant shall not in good faith have commenced the curing or remedying of such default within such thirty (30) day period and is not thereafter continuously and diligently proceeding therewith to completion; then in any such event, Landlord, in addition to all other rights and remedies available to Landlord, by law or by other provisions hereof, may, with due process, re-enter immediately into the Premises and remove all persons and property therefrom, and at Landlord's option, annul and cancel this Lease as to all future rights of Tenant, and Tenant hereby expressly waives the service of any notice in writing of intention to re-enter as aforesaid. Tenant further agrees that in case of any such termination or re-entry Tenant will indemnify the Lessor against all loss of rents and other damage which Landlord may incur by reason of such termination, or re-entry, including but not being limited to, costs of restoring and repairing the Premises and putting the same in rentable condition, costs of renting the Premises to another tenant, loss or diminution of rents and other damages which Landlord may incur by reason of 7 8 such termination or re-entry, and all reasonable attorney's fees and expenses incurred in enforcing any of the terms of this Lease. Neither acceptance of rent by Landlord, with or without knowledge of breach, nor failure of Landlord to take action on account of any breach hereof or to enforce its rights hereunder shall be deemed a waiver of any breach, any absent written notice or consent, said breach shall be a continuing one. 13. NOTICES: All bills, statements, notices or communications which Landlord may desire or be required to give to Tenant shall be deemed sufficiently given or rendered if in writing and either delivered to Tenant personally or sent by registered or certified mail return receipt request addressed to Tenant at the Premises and the time of rendition thereof or the giving of such notice or communication shall be deemed to be the time when the same is delivered to Tenant or deposited in the mail as herein provided. Any notice by Tenant to Landlord shall be deemed sufficiently given or rendered if in writing and either delivered to Landlord personally or sent by registered or certified mail return receipt requested addressed to Landlord at the address where the last previous rental hereunder was payable, or in case of subsequent change upon notice given, to the latest address furnished, and the time of rendition thereof or the giving of such notice or communication shall be deemed to be the time when the same is delivered to Landlord or deposited in the mail as herein provided. 14. HOLDING OVER: Should Tenant continue to occupy the Premises after expiration or termination of the Term or any renewal or renewals thereof, with Landlord's consent, such tenancy shall be from month to month and in no event from year to year or for any longer term, and shall be on all the terms and conditions hereof applicable to a month to month tenancy except that Base Rent shall equal 150% of the Base Rent plus Tenant's share of Operating Costs payable at the time of such expiration or termination. Nothing herein, however, shall prevent Landlord from removing Tenant forthwith and seeking all remedies available to Landlord in law or equity. 15. SUBORDINATION: The rights of Tenant shall be and are subject and subordinate at all times to the lien of any mortgage now and hereafter in force against the Project and Tenant shall execute such further instruments subordinating this Lease to the lien or any such mortgage as shall be requested by Landlord. 16. ESTOPPEL CERTIFICATE: Tenant shall at any time and from time to time, within twenty (20) days after written request by Landlord, execute, acknowledge and deliver to Landlord and any other parties designated by Landlord, a certificate in writing certifying (a) that this Lease is in full force and effect and is unmodified (or, if modified, stating the nature of such modifications), (b) the date to which the rental and other charges payable hereunder have been paid in advance, if any, and (c) that there are, to Tenant's knowledge, no uncured defaults on the part of Landlord hereunder (or specifying such defaults if any are claimed). Any such certificate may be furnished to and relied upon by any prospective purchaser, lessee or encumbrancer of all or any portion of the Project. 8 9 17. INTEREST: Any amount due under this Lease which is not paid when due shall bear interest at the lesser of the highest legal rate or 18 percent per annum from the date due until paid; provided, however, the payment of such interest shall not excuse or cure the default upon which such interest accrued. 18. BINDING EFFECT: The word "Tenant", wherever used in this Lease, shall be construed to mean tenants in all cases where there is more than one tenant, and the necessary grammatical changes required to make the provisions hereof apply to corporations, partnerships or individuals, men or women, shall in all cases be assumed as though in each case fully expressed. Each provision hereof shall extend to and shall, as the case may require, bind and inure to the benefit of Landlord and Tenant and their respective heirs, legal representatives, successors and assigns, provided that this Lease shall not inure to the benefit of any assignee, heir, legal representative, transferee or successor of the Tenant except upon the express written consent or election of Landlord. 19. ENVIRONMENTAL PROVISIONS: A. Tenant shall not cause or permit any Hazardous Material to be brought upon, kept or used in or about the Premises by Tenant, its agents, employees, contractors or invitees. B. Tenant shall not discharge, leak, or admit, or permit to be discharged, leaked, or admitted any material into the atmosphere, ground, sewer system or any body of water, if that material (as is reasonably determined by Landlord or any governmental authority) does or may pollute or contaminate the same, or may adversely effect (a) the health, welfare or safety of persons, whether located on the Premises or elsewhere, or (b) the condition, use or enjoyment of the Premises or any other real or personal property. C. As used herein the term "Hazardous Material" means: i. Any "hazardous waste" as defined by the Resource Conservation and Recovery Act of 1976, as amended from time to time, and regulations promulgated thereunder; ii. Any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, and regulations promulgated thereunder, iii. Any oil, petroleum products, and their byproducts; and iv. Any substance that is or becomes regulated by any federal, state or local governmental authority. 9 10 D. Tenant shall defend, indemnify and hold harmless Landlord, its successors and assigns, and their agents from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs or expenses (including without limitation attorneys' and consultant's fees, court costs and litigation expenses) of whatever kind or nature, known or unknown, contingent or otherwise, arising out of Tenant's acts or omissions after Tenant takes possession of the Premises, and in any way related to: i. The presence, disposal, release or threatened release of any Hazardous Material that is on, from or affecting the soil, water, vegetation, buildings, personal property, persons, animals, or otherwise; ii. Any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to the Hazardous Material; iii. Any lawsuit brought or threatened, settlement reached or government order relating to the Hazardous Material; or iv. Any violations of any laws or regulations applicable thereto. The provisions of this paragraph shall be in addition to any other obligations or liabilities Tenant may have to Landlord. 20. COMMISSIONS: Tenant represents and warrants that Tenant has not been and is not liable for any brokers' or finders' fees or commissions in connection with Tenant's leasing of the Premises. 21. TRANSFER OF LANDLORD'S INTEREST: In the event of any transfer or transfers of Landlord's interest in the Premises or the Building, other than a transfer for security purposes only, the transferor shall be automatically relieved of any and all obligations and liabilities on the part of Landlord accruing from and after the date of such transfer. Except that Tenant shall be entitled to any rights of termination and/or rights of cancellation and/or rights of cancellation and/or rights of abatement of rent to which Tenant is entitled under the terms of this Lease. 22. INCORPORATION OF EXHIBITS: The following exhibits to this Lease are hereby incorporated by reference for all purposes as fully as if set forth at length herein: EXHIBIT A Floor Plan of Premises EXHIBIT B Leasehold Improvements Plan and Specifications 10 11 EXHIBIT C Intentionally Omitted EXHIBIT D Additional Terms and Conditions EXHIBIT D-1 Letter to Building Department 23. QUIET ENJOYMENT: Landlord covenants that its estate in the Premises is fee simple and that Tenant, on paying the Monthly Base Rent and Operating Costs herein reserved and performing all the agreements by Tenant to be performed, shall and may peaceably have, hold and enjoy the Premises for the Term of this Lease free from molestation, eviction or disturbance by Landlord or any other persons or legal entity whatsoever. 24. DEFAULT BY LANDLORD: If Landlord breaches any of the obligations required to be performed by Landlord under this Lease, and fails to cure such breach within ten (10) days after written notice thereof, Tenant may either cure such breach and deduct the cost thereof from any sum subsequently due hereunder, or elect to terminate this Lease upon written notice to Landlord. 25. ATTORNEY FEES: In the event either party hereto is successful in enforcing against the other any remedy, legal or equitable, for a breach of any of the provisions of this Lease, there shall be included in the judgment or decree, the reasonable expenses and attorney's fees of the successful party. 26. APPLICABLE LAW: This Lease shall be construed and performed in accordance with the laws of the State of Iowa. 27. ATTORNMENT: Tenant agrees that no action taken by the holder of a mortgage by reason of default hereunder shall terminate this Lease or invalidate or constitute a breach of any of the terms or conditions hereof and Tenant shall attorn to the purchaser at any foreclosure sale or the grantee in any conveyance in lieu of foreclosure as Landlord under this Lease, and Tenant will execute such instruments as may be necessary or appropriate to evidence such attornment, provided that the holder of the note and mortgage agrees that as long as Tenant is not in default under this Lease, Tenant's right to possession and use of the Premises shall be and remain undisturbed and unaffected by the holder of the note and mortgage or by any foreclosure proceedings thereunder. 28. WARRANTY: Landlord shall defend, indemnify and hold harmless Tenant, its successors and assigns, from any and all claims, demands, penalties, fines, liabilities, settlements, damages, costs or expenses (including without limitation attorneys and consultant's fees, court costs and litigation expenses) of whatever kind or nature, known or unknown, contingent or otherwise, which arise out of Landlord's acts or omissions which are not attributable to Tenant's acts or omissions and are not in any way related to the items described in 19.D.(i-iv) above. 11 12 IN WITNESS WHEREOF, the respective parties hereto have caused this Lease to be executed as of the day and year first above written. LANDLORD: TENANT: 2060 PARTNERSHIP, L.P. TELECOM*USA PUBLISHING COMPANY By: 2001 Development Corporation Its: General Partner By: /s/ THOMAS L. ALLER By: /s/ JAMES A. HADDAD -------------------------- -------------------------------- Thomas L. Aller James A. Haddad Its: Executive Vice President Its: Vice President - Finance Date: 7-18-95 Date: 7/18/95 ------------------------ ------------------------------ 12 13 EXHIBIT B LEASEHOLD IMPROVEMENT PLAN AND SPECIFICATIONS Landlord and Tenant agree to the Leasehold Improvement Plan and Specifications as shown in drawings by OPN Architects dated June 5, 1995. The Landlord will pay $17,100.00 towards the improvements on the Lower Level location. Any improvements in excess of the above amount shall be paid by Tenant. 13 14 EXHIBIT D ADDITIONAL TERMS AND CONDITIONS 1) LEASEHOLD IMPROVEMENTS (Lower Level): Landlord and Tenant agree all Leasehold Improvements to the Lower Level Premises location shall be constructed by Ryan Construction Company (Ryan) in accordance with the Leasehold Improvement Plan and Specifications agreed to by Landlord and Tenant as per drawings by OPN Architects dated June 5, 1995. Landlord will pay $17,100.00 towards improvements for the Lower Level. Any improvements in excess of this amount shall be paid by Tenant. Landlord will amortize the excess Leasehold Improvements in the amount of $52,670.00. The terms are 11% interest over 60 months. The monthly Leasehold Improvement payment will be $1,145.17. 2) RIGHT OF CANCELLATION. Tenant shall have the right to terminate this Lease as of September 1, 2002 if: (a) Tenant gives written notice to Landlord that it is exercising that right no later than March 1, 2002 and (b) Tenant is not in default under the Lease at the time such termination right is exercised and at the time such termination becomes effective, and (c) Tenant pays to Landlord in cash on or before the date of termination, One Hundred Ninety-Five Thousand and Zero dollars ($195,000.00) in addition to all other sums due and owing under the terms of the Lease as of the date of termination. If the foregoing conditions are met, on or before the date set forth in Tenant's notice, the Term shall expire with the same force and effect as if such date were the expiration date of the Term. The respective rights and obligations of Landlord and Tenant with respect to the Lease and the Premises shall be preserved and shall survive the termination of this Lease as to all matters arising or accruing prior to the date of termination. 14 15 Within 15 days after receipt from Landlord or Tenant, the other party shall execute and deliver those instruments reasonably requested to evidence the termination of this Lease. 3) RENEWAL OPTION: Landlord grants Tenant the option to extend the Term for 1 period of 60 months each subject to the following conditions: (a) At the time Tenant exercises the option, Tenant is not in default under the Lease. (b) Tenant gives Landlord at least 8 months prior written notice of Tenant's election to extend the Term no later than January 1, 2005. (c) The extended Term will be on the same terms, covenants and conditions provided during the initial Term except that there will be no further options to extend the Term, and the Monthly Base Rent will be as follows:
Base Rent Dates Per/RSF ------------------------------------ --------- September 1, 2005 to August 31, 2006 $ 9.25 September 1, 2006 to August 31, 2010 $10.75
(d) At the request of either, Landlord and Tenant will execute and deliver appropriate documents covering extension of the Term, the Monthly Base Rent and other terms of this Lease during the extended Term. (e) The rights of Tenant under this Section will not be severed from this Lease or separately sold, assigned or transferred, and will expire on the expiration or earlier termination of this Lease. 4) EXPANSION: (a) Tenant shall have the option to lease the area designated Right of First Refusal on Exhibit A (Fourth Floor) attached hereto effective January 1, 1997. Tenant shall notify Landlord in writing no later than June 30, 1996 of its intention to lease this area. The Monthly Base Rent during the Lease's initial Term shall be calculated as follows if the space is leased in "as-is" condition: 15 16
Base Rent Dates Per/RSF ------------------------------------ --------- Commencement date - December 31, 2001 $6.88 January 1, 2002 - December 31, 2002 $7.25 January 1, 2003 - December 31, 2004 $7.75 January 1, 2005 - August 31, 2005 $8.25
The Monthly Base Rental rate for the Option period shall be:
Rate Dates Per/RSF ------------------------------------ ------- September 1, 2005 to August 31, 2006 $8.25 September 1, 2006 to August 31, 2010 $9.75
All other terms, covenants and conditions provided in the Lease will apply to the expansion space. The failure of Tenant to exercise its option as to any space tendered pursuant to this paragraph shall terminate the obligation of Landlord to again offer that space to Tenant pursuant to the terms and conditions of this paragraph. (b) Effective January 1, 1997, Tenant shall have the option to lease the corridor area on Exhibit A (Fourth Floor) only if Tenant exercises its option as outlined in this Section 4, Item a. Tenant shall notify Landlord in writing no later than June 30, 1996 of its intention to lease this area. Landlord shall pay $22,965 towards Leasehold Improvements for this area. The Monthly Base Rent shall be calculated using the same rates as outlined in the Lease (Section 3; Monthly Base Rent) and in Exhibit D (Section 3, Item C; Renewal Option). All other terms convenience and conditions provided in the Lease will apply to the corridor space Any excess Leasehold Improvement costs shall be paid by the Tenant. Landlord will consider amortizing the excess cost at reasonable rates, but is not committed to doing so. 5) PARKING: Landlord shall cause to be made available to Tenant, and Tenant agrees to rent up to 48 parking spaces ("Spaces") in the parking facility located at 218 Fourth Avenue SE, Cedar Rapids, Iowa and up to 96 spaces in the City of Cedar Rapids Fourth Avenue Parkade. Tenant shall pay directly to the parking facility operator ("Operator") such amounts as are from time to time agreed upon by Tenant and Operator. Landlord does not warrant that these Spaces will be free from interruption from causes beyond reasonable control of Landlord. Such 16 17 interruption of Spaces shall never be deemed an eviction or disturbance of Tenant's use and possession of the Premises or any part thereof or render Landlord liable to Tenant for damages by abatement of rent or otherwise relieve Tenant from performance of Tenant's obligations under this Lease. 6) TERMINATION OF LEASE: This Lease is in lieu of and to take the place of the certain Lease Agreement for Third, Fourth, and Fifth floors dated February 12, 1993 and First Lease Amendment dated May 24, 1994, by and between 2060 Partnership, L.P. and Telecom*USA Publishing Company, which lease and amendment shall terminate as of the commencement date of this Lease. 7) RESTROOMS - FIFTH FLOOR: If Tenant exercises its option to lease the area outlined in this Exhibit, Item 4a, Landlord agrees to pay for reasonable relocation expansion and remodeling of the men's and women's restrooms on Fifth Floor of the Premises to comply with applicable City Code requirements and ordinances. Landlord agrees that reasonable relocation encompasses any place on South side. See attached Exhibit D1 to the City of Cedar Rapids Building Department. 17 EX-10.69 13 LEASE AGREEMENT 1 EXHIBIT 10.69 LEASE - BUSINESS PROPERTY THIS LEASE AGREEMENT, executed in duplicate, made and entered into this 26th day of April 1995, by and between A.M. Henderson - ---- ---- -- ---------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- _______________________________(hereinafter called the "Landlord") whose address for the purpose of this lease is P.O. Box 922, Cedar Rapids --------------------------------------- (Street and Number) (City) Iowa 52406 and Telecom*USA Publishing Company - -------------------------- ------------------------------------------------ (State) (Zip Code) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- _____________________________________(hererinafter called the "Tenant") whose address for the purpose of this lease is 201 3rd Avenue SE, Ste. 550, Cedar -------------------------------------- (Street and Number) (City) Rapids, IA 52401 , WITNESSETH THAT: - ------------------------- (State) (Zip Code) 1. PREMISES AND TERM. The Landlord, in consideration of the rents herein reserved and of the agreements and conditions herein contained, on the part of the Tenant to be kept and performed, leases unto the Tenant and Tenant hereby rents and leases from Landlord, according to the terms and provisions herein, the following described real estate, situated in Linn County, Iowa, to wit: 23,773 sq.ft. (see Exhibit B for breakdown) 931 Blairs Ferry Road NE, Cedar Rapids, Iowa Legal: IRR SUR NE 3-83-7 N OF RR W 438.25' MEAS ON N LN LOT 5 & IRR SUR NW N OF RR (LESS CITY) E 169' MEAS ON N LN LOT 2 with the improvements thereon and all rights, easements and appurtenances thereto belonging, which, more particularly, includes the space and premises as may be shown on "Exhibit A," if and as may be attached hereto, for a term of 5 years, commencing at midnight of the day previous to the first day of the lease term, which shall be on the first day of August 1995, and ending at midnight on the last day of the lease term, which shall be on the 31st day of July 2000, upon the condition that the Tenant pays rent therefor, and otherwise performs as in this lease provided. 2. RENTAL. Tenant agrees to pay to Landlord as rental for said term, as follows: $12,824.28 per month, in advance, the first rent payment becoming due upon Strike XXXXXXXXXXXXXXXXXXX one (b) the 1st day of August, 1995, and the same amount, per month, in advance, on the _______day of each month thereafter, during the term of this lease. In addition to the above monthly rental Tenant shall also pay: All sums shall be paid at the address of Landlord, as above designated, or at such other place in Iowa, or elsewhere, as the Landlord may, from time to time, previously designate in writing. Delinquent payments shall draw interest at 9.0% per annum from five (5) days after the due date, until paid. 3. POSSESSION. Tenant shall be entitled to possession on the first day of the term of this lease, and shall yield possession to the Landlord at the time and date of the close of this lease term, except as herein otherwise expressly provided. Should Landlord be unable to give possession on said date, Tenant's only damages shall be a rebating of the pro rata rental. 4. USE OF PREMISES. Tenant convenants and agrees during the term of this lease to use and to occupy the leased premises only for office/warehouse/training center. - ----------------------------------------------------------------------------- For restrictions on such use, see paragraphs 6(c), 6(d) and 11(b) below. 5. QUIET ENJOYMENT. Landlord covenants that its estate in said premises is fee simple absolute ----------------------------------------------------------------- and that the Tenant on paying the rent herein reserved and performing all the agreements by the Tenant to be performed as provided in this lease, shall and may peaceably have, hold and enjoy the demised premises for the term of this lease free from molestation, eviction or disturbance by the Landlord or any other persons or legal entity whatsoever. (But see paragraph 14, below.) Landlord, shall have the right to mortgage all of its right, title, interest in said premises at any time without notice, subject to this lease. 6. CARE AND MAINTENANCE OF PREMISES. (a) Tenant takes said premises in their present condition except for such repairs and alterations as may be expressly herein provided. 2 (b) LANDLORD'S DUTY OF CARE AND MAINTENANCE. Landlord will keep the roof, structural part of the floor, walls and other structural parts of the building in good repair. (c) TENANT'S DUTY OF CARE AND MAINTENANCE. Tenant shall, after taking possession of said premises and until the termination of this lease and the actual removal from the premises, at its own expense, care for and maintain said premises in a reasonably safe and serviceable condition, except for structural parts of the building. Tenant will furnish its own interior decorating. Tenant will not permit or allow said premises to be damaged or depreciated in value by any act or negligence of the Tenant, its agents or employees. Without limiting the generality of the foregoing. Landlord will make necessary repairs to the sewer, the plumbing, the water pipes and electrical wiring, except as follows: None and Tenant agrees to keep faucets closed so as to prevent waste of water and flooding of premises: to promptly take care of any leakage or stoppage in any of the water, gas or waste pipes. The Tenant agrees to maintain adequate heat to prevent freezing of pipes, if and only if the other terms of this lease fix responsibilility for heating upon the Tenant. Landlord will be responsible for the plate glass in the windows of the leased premises and for maintaining the parking area, driveways and sidewalks on and abutting the leased premises, if the leased premises include the ground floor, and if the other terms of this lease include premises so described. Tenant shall make no structural alterations or improvements without the written approval of the Landlord first had and obtained, of the plans and specifications therefor. (d) Tenant will make no unlawful use of said premises and agrees to comply with all valid regulations of the Board of Health, City Ordinances or applicable municipality, the laws of the State of Iowa and the Federal government, but this provision shall not be construed as creating any duty by Tenant to members of the general public. If Tenant, by the terms of this lease is leasing premises on the ground floor, it will not allow trash of any kind to accumulate on said premises in the halls, if any, or the alley or yard in front, side or rear thereof, and it will remove same from the premises at its own expense. Tenant also agrees to remove snow and ice and other obstacles from the sidewalk on or abutting the premises, if premises include the ground floor, and if this lease may be fairly-construed to impose such liability on the Tenant. 7. (a) UTILITIES AND SERVICES. Tenant, during the term of this lease, shall pay, before delinquency, all charges for use of telephone, electricity, power, air conditioning, garbage disposal, trash disposal and not limited by the foregoing all other utilities and services of whatever kind and nature which may be used in or upon the demised premises. (b) AIR CONDITIONING equipment shall be furnished at the expense of Landlord and maintenance thereof at the expense of Landlord - ------------------- ------------------- (Landlord or Tenant) (Landlord or Tenant) (c) JANITOR SERVICE shall be furnished at the expense of Tenant - -------------------- (Landlord or Tenant) (d) HEATING shall be furnished at the expense of Landlord ----------------------- (Landlord or Tenant) 8. (a) SURRENDER OF PREMISES AT END OF TERM - REMOVAL OF FIXTURES. Tenant agrees that upon the termination of this lease, it will surrender, yield up and deliver the leased premises in good and clean condition, except the effects of ordinary wear and tear and depreciation arising from lapse of time, or damage without fault or liabilitiy of Tenant. [See also 11(a) and 11(e) below] (b) Tenant may, at the expiration of the term of this lease, or renewal or renewals thereof or at a reasonable time thereafter, if Tenant is not in default hereunder, remove any fixtures or equipment which said Tenant has installed in the leased premises, providing said Tenant repairs any and all damages caused by removal. (c) HOLDING OVER. Continued possession, beyond the expiratory date of the term of this lease, by the Tenant, coupled with the receipt of the specified rental by the Landlord (and absent a written agreement by both parties for an extension of this lease, or for a new lease) shall constitute a month to month extension of this lease. 9. ASSIGNMENT AND SUBLETTING. Any assignment of this lease or subletting of the premises or any part thereof, without the Landlord's written permission shall, at the option of the Landlord, make the rental for the balance of the lease term due and payable at once. Such written permission shall not be unreasonably withheld. 10. (a) ALL REAL ESTATE TAXES, except as may be otherwise expressly provided in this paragraph 10, levied or assessed by lawful authority (but reasonably preserving Landlord's rights of appeal) against said real property shall be timely paid by the parties in the following proportions: by Landlord 100%; by Tenant 0%. (b) Increase in such taxes, except as in the next paragraph provided, above the amount paid for the base tax year of 1994/95 (base year if any and as may be defined in this paragraph) shall be paid by Landlord, 0%; by Tenant 100%. (c) Increase in such taxes caused by Improvements of Tenant shall be paid by Landlord 0%; by Tenant 100%. (d) PERSONAL PROPERTY TAXES. Tenant agrees to timely pay all taxes, assessments or other public charges levied or assessed by lawful authority (but reasonably preserving Tenant's rights of appeal) against its personal property on the premises, during the term of this lease. (e) SPECIAL ASSESSMENTS. Special assessments shall be timely paid by the parties in the following proportions: by the Landlord 0%; by the Tenant 100%. 11. INSURANCE. (a) Landlord and Tenant will each keep its respective property interests in the premises and its liability in regard thereto, and the personal property on the premises, reasonably insured against hazards and casualties; that is, fire and those items usually covered by extended coverage; and Tenant will procure and deliver to the Landlord a certification from the respective insurance companies to that effect. Such insurance shall be made payable to the parties hereto as their interests may appear. (b) Tenant will not do or omit the doing of any act which would vitiate any insurance, or increase the insurance rates in force upon the real estate improvements on the premises or upon any personal property of the Tenant upon which the Landlord by law or by the terms of this lease, has or shall have a lien. (c) Subrogation rights are not to be waived unless a special provision is attached to this lease. (d) Tenant further agrees to comply with recommendations of Iowa Insurance Service Bureau and to be liable for and to promptly pay, as if current rental, any increase in insurance rates on said premises and on the building of which said premises are a part, due to increased risks of hazards resulting from Tenant's use of the premises otherwise than as herein contemplated and agreed. (e) INSURANCE PROCEEDS. Landlord shall settle and adjust any claim against any insurance company under its said policies or insurance for the premises, and said insurance monies shall be paid to and held by the Landlord to be used in payment for cost of repairs or restoration [REMAINDER OF SENTENCE IS MISSING] 3 12. INDEMNITY AND LIABILITY INSURANCE. Except as to any negligence of the Landlord, or any other tenants, Tenant will protect, indemnify and save harmless the Landlord from and against any and all loss, costs, damage and expenses occasioned by, or arising out of, any accident or other occurrence causing or inflicting injury and/or damage to any person or property, happening or done, in, upon or about the leased premises, or due directly or indirectly to the tenancy, use or occupancy thereof, or any part thereof by the Tenant or any person claiming through or under the Tenant. The Tenant further covenants and agrees that it will at its own expense procure and maintain casualty and liability insurance in a responsible company or companies authorized to do business in the State of Iowa, in amounts not less than $100,000 ___________ for any one person injured, and $500,000 ___________________ for any one accident, and with the limits of $25,000 _____________ for property damage, protecting the Landlord against such claim, damages, costs or expenses on account of injury to any person or persons, or to any property belonging to any person or persons, by reason of such casualty, accident or other happening on or about the demised premises during the term thereof. Certificates or copies of said policies, naming the Landlord, and providing for 30 days' notice to the Landlord before cancellation shall be delivered to the Landlord within twenty (20) __________ days from the date of the beginning of the term of this lease. As to insurance of the Landlord for roof and structural faults, see paragraph 11(a) above. 13. FIRE AND CASUALTY, PARTIAL DESTRUCTION OR PREMISES. (a) In the event of a partial destruction or damage of the leased premises, which is a business interference, that is, which prevents the conducting of a normal business operation and which damage is reasonably repairable within sixty (60) days after its occurrence, this lease shall not terminate but the rent for the leased premises shall abate during the time of such business interference. In the event of partial destruction, Landlord shall repair such damages within 60 ___________________ days of its occurrence unless prevented from so doing by acts of God, the elements, the public enemy, strikes, riots, insurrection, government regulations, city ordinances, labor, material or transportation shortages, or other causes beyond Landlord's reasonable control. (b) ZONING. Should the zoning ordinance of the city or municipality in which this property is located make it impossible for Landlord, using diligent and timely effort to obtain necessary permits and to repair and/or rebuild so that Tenant is not able to conduct its business on these premises, then such partial destruction shall be treated as a total destruction as in the next paragraph provided. (c) TOTAL DESTRUCTION OF BUSINESS USE. In the event of a destruction or damage of the leased premises including the parking area (if a parking area is a part of the subject matter of this lease) so that Tenant is not able to conduct its business on the premises or the then current legal use for which the premises are being used and which damages cannot be repaired within sixty (60) _______________ days this lease may be terminated at the option of either the Landlord or Tenant. Such termination in such event shall be effected by written notice of one party to the other, within 30 days after such destruction. Tenant shall surrender possession within ten (10) ____________ days after such notice issues, and each party shall be released from all future obligations hereunder, Tenant paying rental pro rata only to the date of such destruction. In the event of such termination of this lease, Landlord at its option, may rebuild or not, according to its own wishes and needs. 14. CONDEMNATION. (a) DISPOSITION OF AWARDS. Should the whole or any part of the demised premises be condemned or taken by a competent authority for any public or quasi-public use or purpose, each party shall be entitled to retain, as its own property, any award payable to it. Or in the event that a single entire award is made on account of the condemnation, each party will then be entitled to take such proportion of said award as may be fair and reasonable. (b) DATE OF LEASE TERMINATION. If the whole of the demised premises shall be so condemned or taken, the Landlord shall not be liable to the Tenant except and as its rights are preserved as in paragraph 14(a) above. 15. TERMINATION OF LEASE AND DEFAULTS OF TENANT. (a) TERMINATION UPON EXPIRATION OR UPON NOTICE OF DEFAULTS. This lease shall terminate upon expiration of the demised term; or if this lease expressly and in writing provides for any option or options, and if any such option is exercised by the Tenant, then this lease will terminate at the expiration of the option term or terms. Upon default in payment of rental herein or upon any other default by Tenant in accordance with the terms and provisions of this lease, this lease may at the option of the Landlord be cancelled and forfeited, PROVIDED, HOWEVER, before any such cancellation and forfeiture except as provided in 15(b) below, Landlord shall give Tenant a written notice specifying the default, or defaults, and stating that this lease will be cancelled and forfeited thirty (30) days after the giving of such notice, unless such default, or defaults, are remedied within such grace period. (See paragraph 22, below.) As an additional optional procedure or as an alternative to the foregoing (and neither exclusive of the other) Landlord may proceed as in paragraph 21, below, provided. (b) BANKRUPTCY OR INSOLVENCY OF TENANT. In the event Tenant is adjudicated a bankrupt or in the event of a judicial sale or other transfer of Tenant's leasehold interest by reason by any bankruptcy or insolvency proceedings or by other operation of law, but not by death, and such bankruptcy, judicial sale or transfer has not been vacated or set aside within ten (10) days from the giving of notice thereof by Landlord to Tenant, then, and in any such events, Landlord may, at its option, immediately terminate this lease, re-enter said premises, upon giving of ten (10) days' written notice by Landlord to Tenant, all to the extent permitted by applicable law. (c) In (a) and (b) above, waiver as to any default shall not constitute a waiver of any subsequent default or defaults. (d) Acceptance of keys, advertising and re-renting by the Landlord upon the Tenant's default shall be construed only as an effort to mitigate damages by the Landlord, and not as an agreement to terminate this lease. 16. RIGHT OF EITHER PARTY TO MAKE GOOD ANY DEFAULT OF THE OTHER. If default shall be made by either party in the performance of, or compliance with, any of the terms, covenants or conditions of this lease, and such default shall have continued for thirty (30) days after written notice thereof from one party to the other, the person aggrieved, in addition to all other remedies now or hereafter provided by law, may, but need not, perform such term, covenant or condition, or make good such default and any amount advanced shall be repaid forthwith on demand, together with interest at the rate of 12% per annum, from date of advance. 17. SIGNS (a) Tenant shall have the right and privilege of attaching, affixing, painting or exhibiting signs on the leased premises, provided only (1) that any and all signs shall comply with the ordinances of the city or municipality in which the property is located and the laws of the State of Iowa; (2) such signs shall not change the structure of the building; (3) such signs if and when taken down shall not damage the building; and (4) such signs shall be subject to the written approval of the Landlord, which approval shall not be unreasonably withheld. (b) Landlord during the last ninety (90) days of this lease, or extension, shall have the right to maintain in the windows or on the building or on the premises either or both a "For Rent" or "For Sale" sign and Tenant will permit, at such time, prospective tenants or buyers to enter and examine the premises. 18. MECHANIC'S LIENS. Neither the Tenant nor anyone claiming by, through, or under the Tenant, shall have the right to file or place any mechanic's lien or other lien of any kind or character whatsoever, upon said premises or upon any building or improvement thereon, or upon the leasehold interest of the Tenant therein, and notice is hereby given that no contractor, sub-contractor, or anyone else who may furnish any material, service or labor for any building, improvements, alteration, repairs or any part thereof, shall at any time be or become entitled to any lien thereon, and for the further security of the Landlord, the Tenant covenants and agrees to give actual notice thereof in advance, to any and all contractors and sub-contractors who may furnish or agree to furnish any such material, service or labor. 4 21. RIGHTS CUMULATIVE. The various rights, powers, options, elections and remedies of either party, provided in this lease, shall be construed as cumulative and no one of them as exclusive of the others, or exclusive of any rights, remedies or priorities allowed either party by law, and shall in no way affect or impair the right of either party to pursue any other equitable or legal remedy to which either party may be entitled as long as any default remains in any way unremedied, unsatisfied or undischarged. 22. NOTICES AND DEMAND. Notices as provided for in this lease shall be given to the respective parties hereto at the respective addresses designated on page one of this lease unless either party notifies the other, in writing, of a different address. Without prejudice to any other method of notifying a party in writing or making a demand or other communication, such message shall be considered given under the terms of this lease when sent, addressed as above designated, postage prepaid, by registered or certified mail, return receipt requested, by the United States mail and so deposited in a United States mail box. 23. PROVISIONS TO BIND AND BENEFIT SUCCESSORS, ASSIGNS, ETC. Each and every covenant and agreement herein contained shall extend to and be binding upon the respective successors, heirs, administrators, executors and assigns of the parties hereto; except that if any part of this lease is held in joint tenancy, the successor in interest shall be the surviving joint tenant. 24. CHANGES TO BE IN WRITING. None of the covenants, provisions, terms or conditions of this lease to be kept or performed by Landlord or Tenant shall be in any manner modified, waived or abandoned, except by a written instrument duly signed by the parties and delivered to the Landlord and Tenant. This lease contains the whole agreement of the parties. 25. RELEASE OR DOWER. Spouse of Landlord, appears as a party signatory to this lease soley for the purpose of releasing dower, or distributive share, unless said spouse is also a co-owner of an interest in the lease premises. 26. CONSTRUCTION. Words and phrases herein, including acknowledgement hereof, shall be construed as in the singular or plural number, and as masculine, feminine or neuter gender according to the context. 27. See Addendum attached hereto and made a part hereof for all purposes. IN WITNESS WHEREOF, the parties hereto have duly executed this lease in duplicate the day and year first above written. /s/ A.M. HENDERSON - ----------------------------------- ----------------------------------------- LANDLORD'S SPOUSE A.M. Henderson LANDLORD (See paragraph 25) Telecom*USA Publishing Company By: /s/ JAMES A. HADDAD - ----------------------------------- ----------------------------------------- TENANT'S SPOUSE James A. Haddad, Vice President TENANT [See paragraph 19(b)]
[ATTACH APPROPRIATE ACKNOWLEDGEMENTS HERE] 5 ADDENDUM Addendum to Lease -- Business Property (the "Lease") between A.M. Henderson ("Landlord") and Telecom*USA Publishing Company, an Iowa corporation ("Tenant"). The provisions of this Addendum shall control over any conflicting provisions of the Lease. If the Lease is in full force and effect on June 30, 2000, Tenant shall have the right, at its option, to extend the term of the Lease for an additional five (5) years upon the same terms and conditions contained in the Lease, except the rental for such extended period shall be increased by 80% of the percentage increase in the Consumer Price Index All Consumers - U.S. Cities average, from the commencement date through June 30, 2000, with such increased monthly rental commencing on July 1, 2000. To exercise this option to extend, Tenant shall notify Landlord in writing no later than December 31, 1999. The parties acknowledge that Telecom is currently leasing other space for its Cedar Rapids sales office at 1350 Boyson Road, Building D, Hiawatha, Iowa. Scott Olson has agreed to attempt to sublet that lease space. The rent due under this Lease shall be reduced by $1,000.00 per month beginning September 1, 1995 until that space is leased. Landlord agrees to, prior to the commencement date of this Lease, repair the parking lot surface on the property, clean up the area around the railroad tracks, and paint the south wall of the building. In addition, Landlord shall fence the warehouse area in accordance with the drawing attached hereto as Exhibit "A and B". Telecom shall be allowed to place signage on the west wall of the building, over the loading dock area, and at the front of the property near Blairs Ferry Road. Such signage shall be subject to the prior approval of Landlord, which approval shall not be unreasonably withheld. Tenant shall have the right to use one-half of the east parking lot on the property until 4:00 p.m. each day. Tenant shall have the right to use at least seventy parking spaces in the west parking lot at all times. All notices to Tenant under the Lease shall be sent to the attention of James A. Haddad. Any increase in the amounts due from Tenant under this Lease, including, but not limited to, any increase in real estate taxes, shall be paid by Tenant on a pro rata basis based on the square footage under this Lease versus the square footage of the entire building. Total taxes for 1994/95 are $$28,404.00. 6 ADDENDUM -------- PAGE 2 Notwithstanding the provision of Section 6(d), Tenant shall not be obligated to make any alterations or changes required by the Americans With Disabilities Act or any other rules, regulations, ordinances, or laws, unless such alterations or changes are required due to the nature of Tenant's use of the premises. Landlord agrees to complete its work on the premises on or before September 1, 1995. If Landlord has not completed its work by such date, Tenant shall have the right, at its option, to terminate this Lease upon written notice to Landlord. Tenant shall have the non-exclusive use of two loading docks and one ramp. Landlord acknowledges that the warehouse space and the use of the loading docks is an important requirement of Tenant in entering into the Lease. Therefore, Tenant shall have the right, at its option, to terminate the Lease upon 60 days written notice to Landlord if Tenant's reasonable use of the loading docks is adversely affected or restricted. The parties acknowledge that the rent due hereunder is based on the calculations set out on Exhibit "C" attached hereto. As shown on such Exhibit, $125,000 of the renovation costs have been amortized over a five year period (the "5 year component"). Landlord agrees that if Tenant exercises its options to extend the term of the Lease, the 5 year component shall be removed from the calculation of the rent for the extended term of the Lease. Attached hereto as Exhibit "B" are the improvements to be completed to the premises. The allowance provided Tenant for such construction costs, including design costs and a contingency fund, totals $325,000. Any amounts incurred by Tenant above that amount shall be paid directly by Tenant. Rate is based on gas annual usage of $0.19/sq.ft. If gas usage increases, rate will be adjusted annually prorated by square footage. TELECOM*USA PUBLISHING COMPANY /s/ A.M. HENDERSON By: /s/ JAMES A. HADDAD - ----------------------------- ----------------------------- A.M. Henderson James A. Haddad, Vice President EX-10.70 14 LICENSE AGREEMENT 1 EXHIBIT 10.70 AMERITECH LISTING LICENSE AGREEMENT This Agreement entered into as of the 19th day of April, 1994, between AMERITECH INFORMATION INDUSTRY SERVICES, A division of Ameritech Services, Inc., whose principal place of business is 2000 W. Ameritech Center Drive, Hoffman Estates, Illinois 60196-1025, on behalf of and as agent for Ameritech Illinois, Ameritech Indiana, Ameritech Michigan, Ameritech Ohio and Ameritech Wisconsin (each said Company shall be referred to individually and collectively hereinafter as "Ameritech") and Telecom * USA Publishing Company whose principal place of business is 201 Third Ave. SE. STE. 500, Cedar Rapids, IA ("Licensee"). 52406-3162 WITNESSETH: WHEREAS, Ameritech to the extent permitted by law, is the owner of all right, title and interest in and to certain name, address and telephone number information of its residential and business telephone service subscribers ("Listing Information"); and WHEREAS, Licensee desires to obtain the Listing Information which appears in one or more Ameritech Directory or Directories, for us in compiling, producing, publishing, and/or delivering a directory in Licensee's name ("Licensee Directory"); and WHEREAS, Ameritech is willing to license the right to use Listing Information to Licensee strictly pursuant to the provisions of this Agreement and for no other purpose. NOW, THEREFORE, in consideration of the mutual covenants hereinafter contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: ARTICLE ONE-LISTING REQUESTS 1.0 Licensee may, from time-to-time, during the term of this Agreement obtain from Ameritech Listing Information subject to the conditions stated herein. Such Listing Information shall be current as of the date of extraction from Ameritech's listing system. 1.1 All requests for Ameritech Listing Information supplied to Licensee pursuant to this Agreement shall be provided upon the submission by Licensee of an appropriate "Request for Listing Information" form, the current sample of which appears as Appendix A, attached hereto and incorporated herein ("Request"). 2 1.2 Each Request shall specify the Listing Information requested according to either the Ameritech Exchange Areas, zip code area or community and shall include the format in which such Listing Information shall be furnished. For purposes of this Agreement, "Exchange Area" means the central office serving area represented by the first three digits of a telephone exchange within an area code. 1.3 Each Request shall be subject to appropriate license fees and other charges as set forth in Paragraph 3 herein. Any Request submitted by Licensee for a Base File only (as defined in Appendix B) shall be subject to a minimum charge of three hundred dollars ($300). 1.4 Each Request shall be provided to Ameritech no later than thirty (30) calendar days prior to the date by which Listing Information and related Additional Services are scheduled to be provided to the Licensee. It shall contain the name of the Licensee's Directory, the publication date, Additional Services, if any, the date mutually agreed upon for provision of same to Licensee ("Provision Date") and identification specifications for the requested Ameritech Listing Information. ARTICLE TWO-LICENSE 2.0 Subject to the provisions of this Agreement, Ameritech grants to Licensee during the term of this Agreement a non-exclusive, non-transferable License for one (1) time use of Listing Information provided pursuant to each Request, such use to be limited to the compilation, production, publication and distribution of the Licensee Directory identified in the particular Request. This License Agreement applies to and is effective only to those listings contained in Ameritech's records with respect to business and residence customers and excludes all non-published and non-listed subscribers. 2.1 Licensee agrees not to use or publish any lists or Listing Information which it has been advised by Ameritech or otherwise has reason to know is incorrect or incomplete. 2.2 Ameritech reserves the right to make changes in the form, content or scope of its Listing Information; makes no representation that it will continue to provide the Listing Information in its current form in the future; and reserves the right to modify its form, to change the manner in which it is provided. Ameritech shall notify Licensee in writing of any such change not less than thirty (30) days prior to implementation. 2.3 Any source material containing Listing Information furnished by Ameritech hereunder, whether or not used by Licensee for the purpose stated herein, shall remain the property of Ameritech and Licensee shall, upon request from Ameritech, but in no event later than thirty (30) days following the termination of this Agreement as stated in Paragraph 6.5 herein, return or destroy such source material. 2 3 2.4 If Listing Information provided hereunder includes any listings or other information that is the property of a telephone company other than Ameritech whether pursuant to release, by mistake or otherwise, Licensee must enter into a separate license agreement with such telephone company if Licensee desires to use or publish any such listing or other information in a Licensee Directory. Upon Ameritech's request, Licensee shall furnish a copy of such license agreement to Ameritech. 2.5 The License granted herein shall be non-assignable and Licensee shall have no right to sub-license or permit any other publisher or person to use the Listing Information of any information extracted therefrom except for the purpose of assisting in the compilation, production, publication or distribution of the Licensee Directory identified in the particular Request. Licensee shall take reasonable and prudent steps to prevent disclosure of the source material containing Listing Information at least equal to the steps taken by it to protect its own similar proprietary information, including adequate computer security measures to prevent unauthorized access to the Listing Information when contained in any data base. 2.6 Any "Updates", "Advanced Listing Orders" or "New Connect Listings" (as defined in Appendix B) requested by Licensee, whether provided daily, weekly, or monthly shall not be used to compile, publish or update a directory or compile or publish a separate list but may be used to generate leads for sales of yellow pages classified advertising in Licensee's Directory. In no event shall Licensee use, disclose or reproduce any Ameritech service order information or other information furnished hereunder or permit anyone but its duly authorized employees or agents to inspect or use the same, except for the purposes expressly provided herein. ARTICLE THREE - LICENSEE FEE 3.0 Fees as set forth in the Appendix B and any transportation expenses shall be assessed for the Listing Information and related Additional Services specified in 3.2 below. Amounts due hereunder shall be invoiced fifty percent (50%) upon receipt of a Request and fifty percent (50%) sixty (60) days after delivery of the Listing Information or upon publication of a Licensee Directory containing such Listing Information, whichever first occurs. All fees owed to Ameritech under this Agreement shall be paid by Licensee within thirty (30) days of invoice date. 3.1 Listing Information - Licensee agrees to pay to Ameritech all applicable license fees and per-listing charges and such state, municipal and federal taxes as may be applicable to such transaction (hereinafter "Fees") for each submitted Request as are shown on Appendix B. 3.2 Additional Services. (i) Photocomposition pages - Upon receipt of a Request ordering photocomposition pages, Ameritech shall provide Licensee with 3 4 photocomposed pages of the requested Listing Information for Licensee's Directory. In addition to the Fees described in Paragraph 3.1 herein, Licensee shall pay to Ameritech a processing charge as set forth in Appendix B for each photocomposed page provided to it. (ii) Customization services - Customization and other special programming for non-standard extracts e.g. sorted by street address, as noted in Appendix B, are also available to Licensee, upon receipt of a Request by Licensee. For each Request requiring special programming, Licensee shall pay to Ameritech a one time fee set forth in Appendix B in addition to the fees described in Paragraph 3.1. 3.3 The per listing charge as specified in Appendix B herein entitles Licensee to a one time publication of each listing so provided. In the event any Licensee Directory contains more than one reference to any Listing Information (for example, in both an alphabetical and a classified listing section), and only one per listing charge will be assessed. 3.4 Increase or Decrease in Fees or Charges, All Fees shall be fixed during the period of this Agreement. Charges for Additional Services specified in Paragraph 3.2 herein may be increased by Ameritech at any time upon thirty (30) days prior written notice to Licensee. Notwithstanding the foregoing, all Fees and other charges herein may be decreased by Ameritech at any time without notice. 3.5 Notwithstanding the provisions of paragraph 3.0 above, Ameritech reserves the right to require receipt of payment in full for any Listing Information or Additional Services prior to scheduled shipment to Licensee. The payment in full will include, but is not limited to, estimated charges made for items requested by Licensee and contained in the Request. The payment of estimated charges by Licensee to Ameritech shall be credited against the charges due and payable with the final invoice. Any or all remaining payment shall be due and payable upon thirty (30) days of receipt of an invoice. ARTICLE FOUR - IDENTIFICATION OF LICENSEE 4.0 Licensee shall, to the extent legally permissible, include a proper copyright notice in its name in each Licensee Directory published by it and Licensee shall use its best efforts to protect and maintain the validity of said copyright. Nothing contained in this Agreement shall restrict, impair or diminish the proprietary interest of Ameritech in any Ameritech Directory or the Listing Information furnished to the Licensee, and Ameritech shall continue to copyright directories published by it or on its behalf without regard to the prior publication and copyright of any Licensee Directory. Upon request by Ameritech, Licensee agrees to execute and deliver to Ameritech all assignments, documents and directories necessary to carry out the intent of this Paragraph; however, Licensee shall deliver to Ameritech one copy of each edition of the 4 5 Licensee's Directory for which Listing Information has been provided by Ameritech. This copy shall be furnished without charge within ten (10) working days following the publication of Licensee's Directory. Ameritech further reserves the right to examine at reasonable times Licensee's security practices. 4.1 Licensee shall not make any representation to the public, prospective advertisers or others, express or implied, written or oral, which would give the impression that Licensee and/or any Licensee Directory is the same as, a part of, or associated with Ameritech or any Ameritech Directory; nor shall Licensee canvass for or publish any type of telephone directory in the name of Ameritech, or use, except as authorized herein, Listing Information or any Ameritech or any affiliated Ameritech Company advertising contained in Ameritech Directories. 4.2 Licensee shall not publish any Licensee Directory in such form as may tend to cause or create confusion or be identified with any Ameritech Directory, and further, Licensee agrees that its employees, agents and representatives shall not use any advertisement, order form, billing invoice, stationery, promotional material or any other material or device which would tend to create or imply association with or sponsorship by Ameritech or any affiliated Ameritech Company. 4.3 Licensee shall not word the title of any Licensee Directory in any manner which would tend to indicate that it is an Ameritech Directory. Licensee shall use its own name or trade name (in full or in part) on the cover of each Licensee Directory and shall use a similar designation in all of its advertising, canvassing and billing for such Licensee Directory. 4.4 Licensee shall not reproduce or use in a classified portion (or in any other part) of any Licensee Directory stock graphic cuts or filler material or text which is proprietary to Ameritech or used by Ameritech or its affiliated companies in any Ameritech Directory, unless such matter was furnished to Licensee by the advertiser and owned by the advertiser. 4.5 Licensee agrees to print month and year of publication on the front cover of each of its Directories and to publish the following statement on the masthead page of each Directory: Listings of Ameritech, contained herein were transcribed by Telecom * USA Publishing Company pursuant to a license from Ameritech and may not be reproduced in whole or in part, or in any form whatsoever, without the written permission of Ameritech. 5 6 ARTICLE FIVE - INDEMNITY/LIMITATION OF LIABILITY 5.0 Licensee shall defend, indemnify, and hold harmless Ameritech and its officers, employees, affiliates, agents, assigns, representatives and licensees from and against all loss, liability, damage and expense (including all costs and reasonable attorneys' fees) arising out of any demand, claim, suit or judgment by a third party related to Ameritech supplying or its failure to supply any listing or Listing Information hereunder, or Licensees use or misuse of the same; or related to any error, inclusion or omission in any Licensee Directory, regardless whether any such demand, claim or suit by such third party is brought jointly against the Licensee and Ameritech or against Ameritech alone; provided, however, that in the event of any such demand, claim or suit, Ameritech may, at its option and at its expense, assume and undertake its own defense or assist in the defense of Licensee provided, however, that Ameritech shall not enter into any settlement of any such demand, claim or suit without prior written consent of Licensee. 5.1 Ameritech's responsibility for delivery of the Listing Information shall be discharged upon its delivery to Licensee's specified courier. If the Listing Information provided to Licensee by Ameritech is not that as stated in the Request, Ameritech shall, upon request, attempt to provide those listings identified in the particular Request without additional cost to Licensee. Such request must be made within thirty (30) calendar days of Licensee's receipt of the Listing Information and shall include the original Listing Information provided in error. 5.2 The lists and Listing Information are provided "AS IS"; Ameritech does not warrant or represent that any lists or Listing Information made available to Licensee pursuant to this Agreement are correct or complete; and, Licensee hereby releases Ameritech from any liability due to errors, inclusions or omissions in the lists or Listing Information provided hereunder; provided however Licensee shall be entitled to refund of the amount paid for any individual listing to the extent such listing is found to be inaccurate or incomplete. 5.3 THE REMEDY STATED IN PARAGRAPH 5.1 and 5.2 HEREOF SHALL BE LICENSEE'S SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO THE PROVISION OF LISTS AND LISTING INFORMATION HEREUNDER, AMERITECH MAKES AND LICENSEE RECEIVES NO WARRANTY, EXPRESS OR IMPLIED, AND THERE ARE EXPRESSLY EXCLUDED ALL WARRANTIES OR MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. AMERITECH SHALL HAVE NO LIABILITY WITH RESPECT TO ITS OBLIGATIONS UNDER THIS AGREEMENT FOR DIRECT, CONSEQUENTIAL EXEMPLARY OR INCIDENTAL DAMAGES EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 6 7 ARTICLE SIX - MISCELLANEOUS 6.0 Non-Exclusivity - Nothing in this Agreement or elsewhere shall give Licensee any exclusive right to the use of the Listing Information and Ameritech shall be free at any time to grant similar Licenses to others under the same or different terms and conditions as Ameritech in its sole discretion may determine. 6.1 Force Majeure - Performance by Ameritech shall be excused by reason of natural disaster; labor difficulty; civil disorder; acts of God; statute, ordinance or regulation hereinafter enacted, promulgated or entered by a court or government agency of competent jurisdiction; or by reason of any other cause beyond the reasonable control of Ameritech. 6.2 Survival of Obligations - The provisions of this Agreement that by their sense and context are intended to survive the termination of this Agreement shall so survive and continue in effect in accordance with their terms. 6.3 Governing Law - The validity, construction and enforceability of this Agreement shall be governed by the laws and regulations of the State of Illinois. 6.4 Severability - In the event any one or more of the provisions of this Agreement shall for any reason be held to be invalid, illegal or unenforceable, the remaining provisions of this Agreement shall be unimpaired, and the valid, illegal or unenforceable provisions shall be replaced by a mutually acceptable provision, which being valid, legal and enforceable, comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. 6.5 Term and Termination (i) This Agreement shall commence as of the date noted in the introductory paragraph of this Agreement, and shall continue for a period of 36 months (the "Term"); provided however, if Licensee violates any material provisions of this Agreement, Ameritech may immediately terminate this Agreement without notice thereof to Licensee, and seek injunctive relief and all damages and other remedies available to it by law or equity. Failure of Ameritech to enforce or insist upon compliance with any provisions of this Agreement shall not constitute a waiver thereof nor derogate from Ameritech the right to damages or any other relief. Subject to this Paragraph, termination of the Agreement shall not affect Licensee's right to use the material or information furnished prior to the effective date of the termination solely for the purpose permitted by this Agreement. (ii) In the event this Agreement is terminated by Licensee prior to the expiration of the Term, Licensee shall be responsible for paying the difference between the per listing charge associated with this Agreement Term and the higher per listing charge specified in Section I of Appendix B hereto for the actual period this Agreement remains in effect. 7 8 The foregoing liability shall be in addition to any other damages or remedies available to Ameritech in law or in equity. Termination of this Agreement by Ameritech shall not relieve Licensee of the obligation to pay all amounts owing to Ameritech as of the date of termination or any of its other obligations contained herein. 6.6 Notices - All notices and deliveries to Ameritech as contemplated by this Agreement shall be delivered to: AMERITECH INFORMATION INDUSTRY SERVICES ATTN.: LINDA J. PARKER - OPERATIONS SPECIALIST 23500 NORTHWESTERN HWY, RM. A-106 SOUTHFIELD, MICHIGAN 48075 All notices and deliveries of any kind to Licensee as contemplated by this Agreement shall be delivered to: TELECOM * USA PUBLISHING COMPANY 201 THIRD AVE. S.E., STE. 500 P.O. BOX 3162 CEDAR RAPIDS, IA 52406-3162 ATTN: JAMES HADDAD 6.7 Entire Agreement - The terms contained in this Agreement and the attachment(s) and specification(s) referred to herein, which are incorporated herein by this reference, constitute the entire agreement between the parties with respect to the subject matter hereof, superseding all prior understandings and communications, oral or written. This Agreement may not be modified except by a writing signed by both parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year written below. AMERITECH INFORMATION INDUSTRY SERVICES Telecom * USA Publishing Company A division of Ameritech Services, Inc. -------------------------------- LICENSEE By: /s/ PETER M. POTOSKI By: /s/ JAMES HADDAD Name: Peter M. Potoski Name: James Haddad Title: Regional Account Manager Title: Vice President Date: 8/26/94 Date: 10/18/94 8 9 APPENDIX B I. Listing Information may include any or all of the following information provided at the rates specified herein:
LISTING INFORMATION RATES BASE FILE ONE YEAR CONTRACT Includes a snap shot of a particular date specified $.23 per listing in a Request of the name, address and telephone number information ("Subscriber Information") of TWO YEAR CONTRACT all residential and business telephone service Year One: $.21 per listing subscribers which appear in one or more Ameritech Year Two: $.19 per listing directories. THREE YEAR CONTRACT Year One: $.19 per listing Year Two: $.16 per listing Year Three: $.13 per listing NEW CONNECTS Daily - $1.75 Includes Subscriber Information on N and T orders, new Weekly - $.75 installs and changes of address orders. Monthly (or 30 days old) provided at Walter Karl Corp. market price. UPDATES Daily - $1.75 Includes any changes in Weekly - $1.25 Subscriber Information through any Monthly - $.50 completed service order activity
9 10 ADVANCE LISTING ORDERS Daily - $1.75 Includes any changes in Subscriber Information Weekly - $1.25 as a result of any pending service order activity Monthly - $.50 II. Other Rates & Charges PHOTOCOMPOSED PAGES Up to sixty pages $4.70 each Over sixty pages $3.00 each SPECIAL PROGRAMMING Requests for non-standard extracts, e,g., $111.00 per hour of work time sorted by street address
10 EX-10.71 15 LICENSE AGREEMENT 1 EXHIBIT 10.71 LICENSE AGREEMENT FOR THE USE OF DIRECTORY PUBLISHER LISTS THIS LICENSE AGREEMENT ("Agreement") is made by and between U S WEST Communications, Inc., a Colorado corporation ("USWC") and Telecom*USA Publishing Company ("Client"). For the purpose of this Agreement the addresses of the parties shall be listed in Section 13, Notices. FOR AND IN CONSIDERATION of the mutual promises and covenants hereinafter set forth, the parties agree as follows: 1. GRANT AND SCOPE OF LICENSE A. Subject to the terms of this Agreement, USWC grants to Client a non-exclusive, non-transferable (except as specifically allowed in an Exhibit) restricted license, for Client's use of Directory Publisher List Information as is more fully defined under the appropriate Exhibit for List(s). B. Lists covered under this Agreement: Exhibit A- Expanded Use Subscriber List(s) and Updates Exhibit B- Subscriber List(s) Exhibit C- Daily Business Updates Exhibit D- One-Time Use of Delivery Lists 2. TERM A. This Agreement shall become effective September 13, 1993, 1993, and shall continue until terminated by either party by providing thirty (30) days prior written notice to the other party. Client agrees to reimburse USWC for any non-recoverable costs associated with an Order(s) (as determined by USWC's then current accounting method), incurred by USWC prior to the termination of that Order. In the event USWC terminates this Agreement while an order is pending, USWC agrees to reimburse client an amount equal to the amount client would have paid to USWC for that order out of which any liability arose. The termination of an Order(s) or this Agreement shall not affect the obligations of either party to the other which have accrued prior to the effective date of the termination. B. Client may obtain Directory Publisher List Information by using the Order Forms(s) attached to the Exhibit(s) to this Agreement. Client may submit additional or replacement Order Forms throughout the term of this Agreement in accordance with 1 2 the terms contained in the associated Exhibit(s) and Order Form(s). 3. EXCHANGE CARRIER OWNED LISTINGS In the event Client orders Exchange Carrier Owned Listings which consist of the Exchange Carrier's (EC) subscribers' names, telephone numbers and addresses that reside in USWC's database, Client must provide written proof of a License Agreement between Client and the EC owning the listings, as well as the authorization for USWC to extract Listings, thirty (30) days prior to the provision of Listings. USWC will provide Listings only for those exchanges detailed in the License Agreement between Client and the EC. Client agrees to notify USWC in the event the License Agreement between Client and the EC is terminated. Upon USWC's receipt of such notification, Exchange Carrier Information will no longer be provided. 4. CLIENT RESPONSIBILITIES: A. Listing information will not include non-published or non-listed subscriber listings. In the event such information is provided or a subscriber elects non-published or non-listed status after the Listings have been provided to Client, Client then agrees not to publish any such non-published or non-listed listings, to the extent Client has been advised by USWC or the subscriber that such listings are non-published or non-listed. Client further agrees to remove from its compilation and not to publish in any future directories any listings which Client has been advised have become non-published or non-listed in the records of USWC. Client will be responsible for such changes only when they have been given to Client in a time frame which would reasonably permit changes to the status. Client shall not use non-published and non-listed information in violation of any tariff, state PUC rule or state or federal law. B. Delivery Lists include name and address of each residence and/or business subscriber who is to receive a telephone directory. Client's use of Delivery Lists is restricted to delivery of telephone directories. C. Client agrees to abide by subscriber-requested restrictions on use, such as omit-from-marketing lists, omit-from-reverse directories or no telephone solicitation as noted under Client Responsibilities in the attached product exhibits. D. Client agrees to take all appropriate security measures to guard against any unauthorized use of Information provided hereunder. Upon written request, Client agrees to advise USWC 2 3 of the names of persons known by the Client to have access to information provided and will permit USWC to inspect Client's premises to observe the manner in which said information is stored, processed, and used. 5. CHARGES FOR LIST(S) Charges for Listing Information provided under this Agreement shall be pursuant to USWC's Price Schedule in effect at the time an Order is filled, attached hereto as Exhibit E. Client shall pay all federal, state or local sales, use, excise, gross receipts or other taxes or tax like fees imposed on or charged upon the sums payable hereunder. The Price Schedule in effect at the time this Agreement was made is attached to the Exhibit(s) to this Agreement. It is understood that USWC may, at any time and at its sole discretion modify prices or product descriptions, provided, however, no increase in Price Schedules will become effective until after USWC has provided Client with sixty (60) days prior written notice. USWC reserves the right to require an advance payment for Client's license to use Information hereunder. If an advance payment is required, USWC will notify Client upon receipt of Client's Order. 6. PAYMENT AND LATE CHARGES A. Amounts payable under this Agreement are due and payable as follows: (1) within thirty (30) days after the date of USWC's invoice; or (2) one-half upon receipt of USWC's invoice and the remaining balance upon publication of Client's product plus a late charge as described below. Any amount not paid within thirty (30) days of the date of the applicable invoice shall bear a late charge equal to the lesser of: 1) The highest interest rate (in decimal value) which is allowed by law compounded daily for the number of calendar days from the payment due date to and including the date that Client actually makes the payment to USWC, or 2) 0.000454 per day compounded daily for the number of calendar days from the payment due date to and including the date that Client actually makes the payment to USWC, which would result in an annual percentage rate of 18%. B. Client shall notify USWC in writing in the event of any dispute relating to the invoice. Client shall, notwithstanding the continuing existence of any dispute, pay the invoice amount in accordance with the terms defined in this Agreement. In any event, Client shall notify USWC of any dispute relating to the invoice no later than sixty (60) days after the publication of Client's product. If any adjustment 3 4 is due Client, USWC shall reflect such adjustment on an invoice including interest at same rate as 6.A above, which shall be calculated from the date of payment to the adjustment date. Both parties shall retain such detailed information as may reasonably be required for resolution of the disputed amount during the duration of the dispute. 7. INDEMNIFICATION Client agrees to indemnify and save harmless USWC against and with respect to any and all losses, damages, expenses (including but not limited to reasonable attorneys' fees) and all other liabilities arising, in whole or in part, out of the negligence or misconduct or breach of this Agreement by Client, its employees, agents, or contractors in the use of the information herein provided. 8. LIMITATION OF LIABILITY USWC DOES NOT WARRANT OR GUARANTEE THE CORRECTNESS OR THE COMPLETENESS OF THE LISTING INFORMATION, INCLUDING, BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT WILL USWC BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES. IT IS EXPRESSLY AGREED THAT ANY LIABILITY WILL BE LIMITED, ON A LISTING-BY-LISTING BASIS, TO THE AMOUNT PAID BY CLIENT TO USWC FOR THAT LISTING OUT OF WHICH ANY LIABILITY AROSE. 9. TRADEMARKS Neither party may use, for any purpose, the other party's name or logo, in any form or abbreviation, its trade name(s), trademarks, or service marks. Client may disclose that USWC is a source of its information by using the following statement in its directory: "Listings of U S WEST Communications' subscribers contained within this directory, were provided under license from U S WEST Communications and were subsequently compiled for publication by Telecom*USA. Questions or concerns about this directory should be referred to Telecom*USA." 10. FORCE MAJEURE Neither of the parties shall be held responsible for delays, failure in performance, loss or damage due to fire, explosion, power blackout, earthquake, volcanic action, flood, strike, war, civil disturbance, governmental requirements, or acts of God. For the purpose of this Agreement, "strike" shall be interpreted to mean a third party labor dispute affecting USWC's operations but, beyond USWC's control. List(s) shall be provided as soon as possible after the cessation of such cause, unless otherwise terminated as provided in this 4 5 paragraph. If such condition occurs and results in a delay in performance of a Party's obligations for more than sixty (60) calendar days, the other Party may by providing written notice, terminate this Agreement. 11. PROPERTY RIGHTS Client acquires no ownership interest in any information by virtue of the license granted in this Agreement. 12. DEFAULT A. If either party defaults in the performance of any obligation under this Agreement and such default is not cured within fifteen (15) days of written notice thereof, the non-defaulting party may terminate this Agreement upon written notice to the defaulting party. B. Client will be liable to USWC for damages arising out of Client's unauthorized use(s) of information, and shall bear all expenses of collection, including costs and attorneys' fees. 13. NOTICES Except as otherwise provided under this Agreement, all notices, demands or requests which may be given by any party to the other party shall be in writing and shall be deemed to have been duly given on the date delivered in person or after being deposited, postage prepaid, in the United States mail and addressed as follows: Telecom*USA Publishing Co. U S WEST Communications, Inc. P. O. Box 3162 1314 DOTM, 10th Floor Cedar Rapids, IA 52406-3162 Omaha, Nebraska 68102 Attn: Rich Twedt Attn: Barb Sandel 319-366-1100 402-422-7845 If personal delivery is selected as the method of giving notice under this section, a receipt of such delivery shall be obtained. Either party may change its representative by giving thirty (30) days written notice to the other party. 14. ASSIGNMENT Either party may assign its rights and obligations hereunder, or any portion thereof, to a parent corporation, a subsidiary of a parent corporation, or successor, upon prior written notification to the other party. 15. NON-WAIVER 5 6 A failure, on any occasion, by either party to enforce or insist upon compliance with any provision of this Agreement, shall not constitute a general waiver of its right to enforce that or any other provision of this Agreement on any other occasion. 16. LAWFULNESS This Agreement and the parties' actions under this Agreement shall comply with all applicable federal, state, and local laws, rules, regulations, court orders, and governmental agency orders including the Modification of Final Judgment ('MFJ'), as issued in United States v. Western Electric Co., et al., Civil Action No. 82-0192, U. S. District Court for the District of Columbia, and all subsequent orders issued in or related to that proceeding. This Agreement shall only be effective when mandatory regulatory filing requirements are met, if applicable. If a court or a governmental agency with proper jurisdiction determines that this Agreement, or a provision of this Agreement, is unlawful, or if USWC determines this Agreement or a provision of this Agreement, is inconsistent with, or contradictory to the "MFJ", this Agreement, or that provision of this Agreement shall terminate on written notice to the customer to that effect. If a provision of this Agreement is so terminated but the parties legally, commercially, and practicably can continue this Agreement without the terminated provision, the remainder of this Agreement shall continue in effect. 17. AMENDMENT This Agreement may be amended only by a written document signed by both parties. 18. JURISDICTION This Agreement and the obligations of the parties hereunder shall be construed and governed in accordance with the laws of the State of Colorado. 19. COMPLETE AGREEMENT This Agreement, together with all attachments, constitutes the entire understanding of the parties with respect to the use and provision of List(s) provided hereunder. Neither party will be bound by any other representations. 6 7 IN WITNESS WHEREOF, the parties have entered into this Agreement as of the last date written below. TELECOM*USA PUBLISHING COMPANY U S WEST COMMUNICATIONS, INC. /s/ ARTHUR L. CHRISTOFFERSEN /s/ JANET L. WATKINS - ---------------------------------- ---------------------------------- SIGNATURE SIGNATURE ARTHUR L. CHRISTOFFERSEN PRESIDENT AND CEO Janet L. Watkins, Director - ---------------------------------- ---------------------------------- NAME NAME 9/9/93 9/13/93 - ---------------------------------- ---------------------------------- DATE DATE 7 8 EXHIBIT A EXPANDED USE SUBSCRIBER LIST(S) AND UPDATES This Exhibit A describes EXPANDED USE SUBSCRIBER LIST(S) AND UPDATES LIST(S) which shall be provided to Client under the license granted by USWC. DESCRIPTION OF LIST(S): USWC shall provide List(s) which can be used by the Client for any lawful purpose in the Client's daily business operations and sublicense by the Client, subject to the terms and conditions set forth in this Exhibit and Agreement. Subscriber name, address, telephone number information will be provided for Client's unlimited use, except that Client will be required to honor those subscriber-requested restrictions as noted on marked accounts. RIGHT TO SUBLICENSE: A. Client shall have the right to sublicense any Information supplied under this Agreement to any person including, but not limited to, Client's subsidiaries, for any lawful purpose in the sublicensee's business operation. B. With respect to Subscriber-Requested Restrictions noted on marked accounts at the time of delivery of the Subscriber Listing Information to Client, the Client will include the obligations of the Agreement which have been identified in this Exhibit in its sublicenses. Client agrees to include the obligations in paragraphs 7 INDEMNIFICATION, 8 LIMITATION OF LIABILITY, 9 TRADEMARKS, 11 PROPERTY RIGHTS, and 19 JURISDICTION of this Agreement in its sublicenses, USWC as licensor (not specified by name) shall be made a third-party beneficiary with respect to such obligations in Client's sublicenses. DEFINITION: A. Expanded Use Subscriber Listing Information consists of USWC subscriber name, address, telephone number, and related elements. Information will not include USWC's subscribers with non-published or non-listed telephone service. B. Expanded Use Updates are changes to any of the elements that comprise the Expanded Use Subscriber Lists, including New Connects and Disconnects. Expanded Use Updates transactions will portray as disconnects any listings which have changed to non-published or non-listed service. A-1 9 C. Updates are provided in the form of transactions on a daily basis. A transaction refers to the time and type of a change in a subscriber's listing information. D. Subscriber-Requested Restrictions are limitations on use of the Information as noted on marked accounts. Listings for subscribers who have requested restrictions will include coding to designate usage, such as omit from all marketing lists and from reverse directories, omit from telemarketing lists. Another coding may indicate the requirement to print the phrase "No Solicitation Calls" in the directory and/or an indicator by the specific listing. CLIENT RESPONSIBILITIES: A. Client agrees to remove from its data base and not to use or sublicense any Information that has become non-published or non-listed as notified by subscriber or updates. B. Client agrees to honor subscriber requested restrictions on use. C. Upon written request, Client agrees to advise USWC of the names of persons known by the Client to have access to information provided hereunder and will permit USWC to inspect Client's premises to observe the manner in which said Information is stored, processed, and used. D. Client agrees either to print the No Solicitation indicator or the No Solicitation phrase in their directory, dependent upon the state's regulatory requirements. DELIVERY SCHEDULE: USWC will deliver Information within thirty (30) days of receipt of an Order Form. CHARGES: Priced per current Price Schedule IN WITNESS WHEREOF, the parties have entered into this Agreement as of the last date written below. TELECOM*USA PUBLISHING COMPANY U S WEST COMMUNICATIONS, INC. /s/ ARTHUR L. CHRISTOFFERSEN /s/ JANET L. WATKINS - ---------------------------------- ---------------------------------- SIGNATURE SIGNATURE ARTHUR L. CHRISTOFFERSEN PRESIDENT AND CEO Janet L. Watkins, Director - ---------------------------------- ---------------------------------- NAME NAME 9/9/93 9/13/93 - ---------------------------------- ---------------------------------- DATE DATE A-2 10 EXHIBIT B SUBSCRIBER LIST(S) This Exhibit B describes SUBSCRIBER LIST(S) which shall be provided to Client under the license granted by USWC. DESCRIPTION OF LIST: A. USWC will provide Client with listing information in white page directory format. Client shall be restricted to using the listing information only for the compilation, publication and distribution of Client's printed, voice or electronic directories named on the Order Form for the specific areas identified. Client may use listing information in one or more directories, printed, voice or electronic; provided however, that Client identifies such uses on the Order Form. B. Subscriber listing information consists of USWC's subscriber listed name, address, and telephone number for the geographic areas selected by client as contained in USWC's Customer Listing Databases. C. The computer and magnetic tape formats in which subscriber listing information will be furnished shall be agreed upon by USWC and Client, dependent, however, upon the format(s) available and in use by USWC. DEFINITION: A. Subscriber List(s) - Business and/or residence subscriber listings in white page directory format, include caption arrangements and may include composition, i.e., running heads, page numbers, mast heads; not for resale. B. Cutover List: When there is a central office conversion, an "old number/new number" list can be provided. This cutover list is only available in conjunction with a Subscriber List Order and is to be used for Clients internal use. Listings may only be used for the compilation, publication and distribution of a printed, voice or electronic directory, not for resale. C. No Solicitation Calls: Where subscribers have so requested, Information will include coding to indicate that a symbol and/or phrase designating "No Solicitation Calls" is to be printed in Client's directory. D. Government Listings-Name, address and telephone number of recognized government agencies, (city, county, state, federal). Listings are manually extracted from subscriber B-1 11 database and placed in separate government sections. Client identifies which government entities are to be included in Client's directory, this information is not for resale. The Client specifies the sequencing arrangement of those listings. E. Proofs: First and Final Copies - A printout of first and final versions for proofing and internal use, not for publication, shall be offered in a format the same as or different from published product. CLIENT RESPONSIBILITIES: A. To reduce the potential for outdated publications, Client shall publish the listing information, subject to this Agreement for any area(s) for which listing information is requested, within a reasonable time after such listing information has been provided to Client by USWC. B. Client shall resolve all customer complaints regarding listing errors or omissions in Client's Telephone Directories. C. Client agrees to honor those Subscriber-Requested Restrictions as noted on marked accounts, and agrees to print No Solicitation Call symbols and/or phrase on listings where applicable. D. Client shall, at it's expense, furnish USWC a copy of each version of the published directories, containing the listing information covered herein, within ten (10) days after publication. The mailing address is: U S WEST Communications, Inc. 1314 DOTM, 10th Floor Omaha, Nebraska 68102 Attention: Barb Sandel DELIVERY SCHEDULE: USWC will deliver Information within thirty (30) days of receipt of an Order Form. CHARGES: Priced per current Price Schedule. B-2 12 IN WITNESS WHEREOF, the parties have entered into this Agreement as of the last date written below. TELECOM*USA PUBLISHING COMPANY U S WEST COMMUNICATIONS, INC. /s/ ARTHUR L. CHRISTOFFERSEN /s/ JANET L. WATKINS - ---------------------------------- ---------------------------------- SIGNATURE SIGNATURE ARTHUR L. CHRISTOFFERSEN PRESIDENT AND CEO Janet L. Watkins, Director - ---------------------------------- ---------------------------------- NAME NAME 9/9/93 9/13/93 - ---------------------------------- ---------------------------------- DATE DATE B-3 13 EXHIBIT C DAILY BUSINESS UPDATES This Exhibit C describes DAILY BUSINESS UPDATES LIST which shall be provided to Client under the license granted by USWC. DESCRIPTION OF LIST: A. USWC will grant Client the use of USWC's Daily Business Updates ("Records"), which will consist of all listing-related changes occurring on a business subscriber's name, address or telephone number ("Listing'). The Listing changes that will cause issuing of the Record include: changes in name, address or telephone number, change from business class of service to residence, or the reverse, new connects, disconnects, and "To and From" (T & F) move activity. Listings changing to non-listed and non-published will appear as disconnects. B. Client shall be restricted to using the listing information only for the purpose of conducting activities generally associated with the publishing of telephone directories, updating business files, and soliciting advertisement(s). The listing information may not be resold or used for publication of other than yellow pages. Client shall not use the Records for publication of white pages. DEFINITION: Listings for subscribers who have requested restrictions will be designated by coding such as omit from all marketing lists and from reverse directories, omit from telemarketing lists and no solicitation calls. CLIENT RESPONSIBILITIES: Client will honor subscriber requested restrictions as noted on marked accounts. On listings with subscriber requested restrictions such as no marketing or solicitation, Client is allowed to contact subscriber to determine appropriate yellow pages heading under which subscriber's listing is to be placed. Such Records shall be used for yellow page clarification only, not for the purpose of solicitation of advertising. DELIVERY SCHEDULE: Records will be extracted for Client once each business day and will be shipped to Client at the frequency requested by Client on Order Form. C-1 14 CHARGES: Priced per current Price Schedule IN WITNESS WHEREOF, the parties have entered into this Agreement as of the last date written below. TELECOM*USA PUBLISHING COMPANY U S WEST COMMUNICATIONS, INC. /s/ ARTHUR L. CHRISTOFFERSEN /s/ JANET L. WATKINS - ---------------------------------- ---------------------------------- SIGNATURE SIGNATURE ARTHUR L. CHRISTOFFERSEN PRESIDENT AND CEO Janet L. Watkins, Director - ---------------------------------- ---------------------------------- NAME NAME 9/9/93 9/13/93 - ---------------------------------- ---------------------------------- DATE DATE C-2 15 EXHIBIT D ONE-TIME USE OF DELIVERY LISTS This Exhibit D describes ONE-TIME USE OF DELIVERY LIST(S) which shall be provided to Client under this license granted by USWC. DESCRIPTION OF LIST(S): USWC will grant Client the use of USWC's List(s), which include USWC's subscriber name, address, and telephone number information, as detailed on the Delivery List(s) Order Form(s). Lists will exclude non-published and non-listed telephone numbers, public and semi-public listings. CLIENT RESPONSIBILITIES: Client shall be restricted to using Delivery Lists solely for the purpose of delivering Client's named directory. AUTHORIZED USAGE: A. Client may use the List(s) in a computer merge-purge operation for the sole purpose of eliminating duplicate names, addresses, telephone numbers on delivery lists, and to compare the List(s) with other information for the sole purpose of selecting or suppressing certain parts of the List(s) for delivery. B. At Client's discretion, Client may include unbound promotional materials or packets of information with the directories to be delivered. C. Client agrees that USWC shall not be held responsible for any claim or action filed against Client or USWC as a result of any unbound advertising or packets of information Client includes with the directories. UNAUTHORIZED USAGE: Unauthorized uses of the list include, but are not limited to, the following: A. Use the list for any purpose other than delivery of a directory. B. To use the List(s) to establish a database. C. Using the List(s) in any merge-purge or matching process to tag or code other names, addresses, telephone numbers on other lists or files; D. Addition of telephone numbers from the List to another List; D-1 16 E. Appending information from the List(s) to Client's house list; F. Collecting, transferring or tagging information from the List(s) at a geographic level (such as zip code, state, house, apartment, suite numbers, etc.); G. Retention by Client or its service bureau of any full or match code version of names and addresses from the List(s) for purposes of pre-screening, qualifying or segmenting other List(s). DELIVERY SCHEDULE: Normal production time is seven (7) working days from the date an order is accepted by USWC until it is shipped. Where multiple orders are involved, USWC will notify Client when a requested delivery date cannot be met. CHARGES: Priced per current Price Schedule IN WITNESS WHEREOF, the parties have entered into this Agreement as of the last date written below. TELECOM*USA PUBLISHING COMPANY U S WEST COMMUNICATIONS, INC. /s/ ARTHUR L. CHRISTOFFERSEN /s/ JANET L. WATKINS - ---------------------------------- ---------------------------------- SIGNATURE SIGNATURE ARTHUR L. CHRISTOFFERSEN PRESIDENT AND CEO Janet L. Watkins, Director - ---------------------------------- ---------------------------------- NAME NAME 9/9/93 9/13/93 - ---------------------------------- ---------------------------------- DATE DATE D-2 EX-11.1 16 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 MCLEOD, INC. COMPUTATION OF LOSS PER COMMON AND COMMON EQUIVALENT SHARE
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, -------------------------------------------------- ---------------------------------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ Computation of weighted average number of common shares outstanding and common equivalent shares:(A) Common shares, Class A, outstanding at the beginning of the period . . . . . . . . . 18,750 11,993,760 14,455,981 14,455,981 16,387,081 Common shares, Class B, outstanding at the beginning of the period . . . . . . . . . -- 5,625,000 7,670,457 7,670,457 15,625,929 Weighted average number of shares issued during the period (C) . . . . . . . . . . 14,730,198 3,859,959 -- -- 1,456,667 Weighted average number of shares purchased for the treasury during the period . . -- (14,918) -- -- -- Weighted average number of shares reissued from the treasury during the period . . -- -- 22,191 22,000 -- Common equivalent shares attributable to stock options granted(B) . . . . . . . . . . 5,018,605 5,018,605 5,018,605 5,018,605 5,018,605 Common stock issued(c) . . . . . . . 9,887,510 9,887,510 9,887,510 9,887,510 23,438 ----------- ------------ ------------ ----------- ----------- Weighted average number of common and common equivalent shares . . . . . . . . . . . . 29,655,063 36,369,916 37,054,744 37,054,553 38,511,720 =========== ============ ============ =========== =========== Net loss . . . . . . . . . . . . . . $(2,439,617) $(11,425,963) $(11,328,939) $(5,721,857) $(8,883,115) =========== ============ ============ =========== =========== Loss per common and common equivalent share . . . . . . . $ (0.08) $ (0.31) $ (0.31) $ (0.15) $ (0.23) =========== ============ ============ =========== ===========
- --------------- (A) All shares have been adjusted to give effect to the 3.75 for 1 stock split effected in the form of a stock dividend effective March 28, 1996. (B) All stock options are anti-dilutive, however, pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83 (SAB 83), stock options granted with exercise prices below the assumed initial offering price during the twelve-month period preceding the date of the initial filing of the Registration Statement have been included in the calculation of common stock equivalent shares as if they were outstanding for all periods presented. (C) All stock issued during the year ended December 31, 1995 was within the twelve-month period discussed in (B) above. As a result, the shares issued at prices below the assumed initial public offering price during this period have been included in the calculation as if they were outstanding for all periods presented. For the six months ended June 30, 1996, the shares of Class A and B common stock issued during the year ended December 31, 1995 are shown as shares outstanding at the beginning of the period. EX-21.1 17 SUBSIDIARIES OF MCLEOD, INC. 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES OF McLEOD, INC.
STATE OF NAME INCORPORATION ---- ------------- McLeod Telemanagement, Inc. Iowa (doing business as McLeod Telemanagement Organization, McLeod Telemanagement Organization and TMO) MWR Telecom, Inc. Iowa McLeod Network Services, Inc. Iowa McLeod Telecommunications, Inc. Iowa Ruffalo, Cody & Associates, Inc. Iowa Campus-Call, Inc. Iowa Telecom*USA Publishing Group, Inc. Iowa Telecom*USA Publishing Company Iowa OakTel Directory, L.L.C. Iowa
EX-23.1 18 CONSENTS OF MCGLADREY & PULLEN, LLP. 1 [MCGLADREY & PULLEN, LLP LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors McLeod, Inc. Cedar Rapids, Iowa We hereby consent to the use in this Registration Statement of our report, dated March 28, 1996, except for Note 11, as to which the date is May 29, 1996, relating to the consolidated financial statements of McLeod, Inc. and subsidiaries, and to the reference to our Firm under the caption "Experts" and "Selected Consolidated Financial Data" in the Prospectus. /s/ MCGLADREY & PULLEN, LLP ----------------------------- MCGLADREY & PULLEN, LLP Cedar Rapids, Iowa October 10, 1996 2 [MCGLADREY & PULLEN, LLP LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors MWR Telecom Inc. Cedar Rapids, Iowa We hereby consent to the use in this Registration Statement of our report, dated March 15, 1996, relating to the financial statements of MWR Telecom Inc., and to the reference to our Firm under the caption "Experts" in the Prospectus. /s/ MCGLADREY & PULLEN, LLP ------------------------------- MCGLADREY & PULLEN, LLP Cedar Rapids, Iowa October 10, 1996 3 [MCGLADREY & PULLEN, LLP LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Ruffalo, Cody & Associates, Inc. Cedar Rapids, Iowa We hereby consent to the use in this Registration Statement of our report, dated February 9, 1996, except for Note 8, as to which the date is July 15, 1996, relating to the consolidated financial statements of Ruffalo, Cody & Associates, Inc. and subsidiary, and to the reference to our Firm under the caption "Experts" in the Prospectus. /s/ MCGLADREY & PULLEN, LLP -------------------------------- MCGLADREY & PULLEN, LLP Cedar Rapids, Iowa October 10, 1996 4 [MCGLADREY & PULLEN, LLP LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Telecom*USA Publishing Group, Inc. Cedar Rapids, Iowa We hereby consent to the use in this Registration Statement of our report, dated September 27, 1996, relating to the consolidated financial statements of Telecom*USA Publishing Group, Inc. and subsidiaries, and to the reference to our Firm under the caption "Experts" in the Prospectus. /s/ MCGLADREY & PULLEN, LLP ----------------------------- MCGLADREY & PULLEN, LLP Cedar Rapids, Iowa October 10, 1996 EX-99.1 19 PURCHASE AGREEMENT 1 EXHIBIT 99.1 PURCHASE AGREEMENT THIS PURCHASE AGREEMENT is made and entered into as of this 15th day of August, 1996 between IOWA LAND AND BUILDING COMPANY ("Seller"), and RYAN PROPERTIES, INC. ("Purchaser"). In consideration of the covenants and agreements contained herein, the parties agree as follows: 1. Land To Be Purchased. Subject to compliance with the terms and conditions of this Agreement, Seller shall sell to Purchaser and Purchaser shall purchase from Seller the real property legally described on Exhibit A attached hereto (the "Land"), together with all leases, if any, not earlier terminated, easements, tenements, hereditaments, and appurtenances belonging thereto. 2. Purchase Price. The purchase price for the Land ("Purchase Price") shall be the sum of Six Hundred Ninety-one Thousand Sixty Hundred Fifty Dollars and Twenty-five Cents ($691,650.25) payable by wire transfer, certified or cashier's check at the closing hereunder. 3. Title To Be Delivered. Seller agrees to convey marketable fee simple title in the Land to Purchaser subject only to the farm lease for the Land which is terminable on not more than six months notice, easements, restrictions, conditions and covenants of record. A. Seller, at its sole cost and expense, shall deliver to Purchaser an abstract of title to the Land continued through the date of Purchaser's exercise of its option to purchase the Land for examination by Purchaser. It shall show merchantable title in Seller in conformity with this Agreement, Iowa law and Title Standards of the Iowa Bar Association. The abstract shall become the property of Purchaser when the Purchase Price is paid in full. Seller shall pay the costs of any additional abstracting and title work due to any act or omission of Seller between the date of Purchaser's exercise and the closing. B. Purchaser shall have twenty (20) days after receipt of the abstract of title to render objections to title, including any easements or other encumbrances, in writing to Seller and Seller shall have thirty (30) days from the date it receives such objections to have the same removed or satisfied. If Seller shall fail to have such objections removed within that time, Purchaser may, at its sole discretion, either (a) terminate this Agreement without any further liability on its part, except for the forfeiture of the option payments 2 as and to the extent provided for in the Option Agreement between the parties, or (b) take title subject to such objections. Seller agrees to use its best reasonable efforts to promptly satisfy any such objections. 4. Inspection Rights. A. Throughout the term of this Agreement Purchaser, its counsel, accountants, agents and other representatives, shall have full and continuing access to the Land and all parts thereof, upon reasonable notice to Seller, subject to prior rights of any tenants of the Land. Purchaser and its agent and representatives shall also have the right to enter upon the Land at any time after the execution and delivery hereof for any purpose whatsoever, including inspecting, surveying, engineering, test boring, performance of environmental tests and such other work as Purchaser shall consider appropriate, provided that Purchaser shall defend, indemnify hold Seller harmless against any damage, claim, liability or cause of action (including, claims of third parties) arising from or caused by the acts or omissions of Purchaser, its agents, or representatives upon the Land specifically including, but not limited to, personal injury and property damage claims. In the event Purchaser contracts with a third party to perform inspection, surveying, engineering, test boring performance of environmental tests or other such work on the Land, Purchaser shall remain solely responsible for the satisfactory completion of such work. B. Environmental Investigation. Purchaser shall pay for all costs associated with the environmental investigation and shall provide Seller with copies of all analysis, test results, and draft and final reports prepared or generated. Seller shall be given the opportunity to take split samples. Except to the extent necessary for the performance of the tests, et al. to be conducted hereunder or as otherwise required by law or order of court, Purchaser agrees to keep confidential all analytical results, test results, and other reports, information and documents obtained or prepared during the environmental investigation either by Purchaser or its contractor(s)and to not release to any third party any reports, information or documents relating to same the without the prior written consent of Seller. Purchaser shall not unreasonably interfere with Seller's operations during the environmental investigation and shall provide Seller with forty-eighth (48) hours notice of such activities. Purchaser shall remain solely responsible for the activities of its contractors or subcontractors in the performance of the limited sampling, and shall incorporate the terms and conditions of this Purchase Agreement into any 2 3 contracting agreement. After termination of the sampling activities, Purchaser agrees to restore the Land to its condition prior to sampling, and shall leave it free of debris and holes in the ground and in such condition as is satisfactory to the Seller. 5. Eminent Domain/Insurance. If, prior to closing, the Land shall be materially damaged, through no fault of the Purchaser, or be the subject of an action in eminent domain or a proposed taking by a governmental authority, Purchaser, at its sole discretion, shall have the right to terminate this Agreement upon notice to Seller without further liability on its part, except for the forfeiture of the option payments as and to the extent provided for in the Option Agreement, by so notifying Seller in writing. Seller agrees to keep the Land continually insured during the term of this Agreement under its current policy of fire and extended coverage insurance. 6. Seller's Statements (a) Seller acknowledges receipt from Purchaser of a copy of the Phase I Environmental Site Assessment, McLeod Complex, dated July, 1996, by Howard R. Green Company (the "Phase I Report"). Except for the items raised in the Phase I Report, Seller states that to the best of its knowledge: A. Except any which might result from actions being taken by Purchaser, there are not any action in condemnation, eminent domain or public taking proceedings against the Land. B. Except any which might result from actions being taken by Purchaser, there is not any ordinance or hearing now before any local governmental body which authorizes any public improvements or special tax levies, the cost of which may be assessed against the Land. C. Seller has not received any notices, orders, suits, judgment or other proceedings relating to fire, building, zoning, air pollution or health violations that have not been corrected. Seller shall notify Purchaser of any past notices, orders, suits, judgments or other proceedings relating to fire, building, zoning, air pollution or health violations as they relate to the Land. D. Neither any consents from nor notice to any federal, state, or municipal or local government agency, body, board or official are required for Seller's performance of this Agreement. E. Seller has not received notice of any violations of any environmental laws, rules or regulations relating to the Land or its use nor has Seller received notice of any writs, injunctions, decrees, orders, judgments, 3 4 lawsuits, claims, proceedings, or investigations, whether pending or threatened, relating to the ownership, use, maintenance or operation of the Land. 7. Closing. The closing of the purchase and sale shall take place as promptly as possible after the conditions set out in Section 8 are satisfied and in no event later than ninety (90) days after exercise of the Option pursuant to the Option Agreement. Closing may be extended beyond ninety (90) days by mutual agreement of the parties. Possession of the Land shall be delivered on the date of Closing. 8. Conditions to Closing. The closing of this transaction and all the obligations of Purchaser under this Agreement are subject to fulfillment on or before the Closing Date of the following conditions: A. Purchaser, in its sole and absolute discretion, shall have completed and approved of any inspections done by Purchaser hereunder or under the Option Agreement dated June 11, 1996. B. Purchaser shall have obtained any and all necessary governmental approvals including without limitation approval of subdivision or platting which might be necessary in connection with the sale and transfer of the Land. Any material conditions imposed as a part of the platting or subdivision must be satisfactory to Purchaser, in its sole opinion and any condition imposed on any portion of Seller's remaining property contiguous with the Land must be satisfactory to Seller in its sole opinion. Seller shall cooperate with Purchaser in its attempts to obtain any such approvals and shall execute any documents necessary for this purpose provided that Seller shall bear no expense in connection therewith. C. Seller's statements set forth in Section 6 shall be true and correct on the Closing Date. 9. Seller's Obligations At Closing. At or prior to the Closing Date, Seller shall: A. Deliver to Purchaser Seller's duly recordable Warranty Deed to the Land (in a form satisfactory to Purchaser) conveying to Purchaser marketable fee simple title to the Land and all rights appurtenant thereto subject only to easements, restrictions, conditions and covenants of record. B. Deliver to Purchaser the Abstract of Title to the Land. 4 5 C. Deliver to Purchaser such other documents as may be required by this Agreement, all in a form satisfactory to Purchaser and Seller. 10. Delivery of Purchase Price; Purchaser's Obligations At Closing. At closing, and subject to the terms, conditions, and provisions hereof and the performance by Seller of its obligations as set forth herein, Purchaser shall deliver the Purchase Price to Seller pursuant to Section 2 hereof and shall deliver such other documents as may be required by this Agreement, all in a form satisfactory to Purchaser and Seller. 11. Closing Costs. The following costs and expenses shall be paid as follows in connection with the closing: A. Seller shall pay: (i) The transfer fee imposed on the conveyance. (ii) A pro-rata portion of all taxes as provided in Section 10. (iii) All special assessments whether levied, pending or assessed. (iv) Seller's attorneys fees. (v) The cost of recording the satisfaction of any existing mortgage and any other document necessary to make title marketable. B. Purchaser shall pay the following costs in connection with the closing: (i) The documentary fee necessary to record the Deed. (ii) Purchaser's attorneys fees. (iii) Broker and real estate commissions and fees, if any. 12. Real Estate Taxes and Special Assessments. Seller shall pay all levied and pending special assessments against the Land prior to the Closing Date. Seller shall pay all real estate taxes for all fiscal years which end prior to the Closing Date. Real estate taxes for the fiscal year in which the Closing Date occurs shall be prorated to the Closing Date on the basis of a 365 day calendar year. Purchaser shall pay all real estate taxes due in subsequent fiscal years. 13. Remedies. If Seller defaults in the performance of this Agreement, Purchaser may elect either to cancel this Agreement, or to commence an action for specific performance to enforce performance of the terms of this Agreement. In the event of cancellation or termination for breach, Purchaser shall be entitled to reimbursement of all option payments expended under the Option Agreement. 5 6 If Purchaser defaults in the performance of this Agreement, Seller may elect either to cancel this Agreement, and to recover the direct costs associated with such breach, including the forfeiture of all amounts paid under the Option Agreement, or to commence an action for specific performance to enforce performance of the terms of this Agreement. 14. Time for Acceptance. This Agreement, when duly executed by all of the parties hereto, shall be binding upon the parties hereto, their heirs, representatives, successors and assigns. By execution hereof, Seller acknowledges the timely exercise, as of the date hereof, by Purchaser of its option under the Option Agreement as to all the Land and waives the necessity of written notice thereunder. 15. Miscellaneous. The following general provisions govern this Agreement. A. No Waivers. The waiver by either party hereto of any condition or the breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any other condition or of any subsequent breach of the same or of any other term, covenant or condition herein contained. Either party, in its sole discretion may waive any right conferred upon such party by this Agreement; provided that such waiver shall only be made by giving the other party written notice specifically describing the right waived. B. Time of Essence. Time is of the essence of this Agreement. C. Governing Law. This Agreement is made and executed under and in all respects to be governed and construed by the laws of the State of Iowa D. Notices. All notices and demands given or required to be given by any party hereto to any other party shall be deemed to have been properly given if and when delivered in person or three (3) business days after having been deposited in any U.S. Postal Service and sent by registered or certified mail, Postage prepaid, addressed as follows:
If to Seller: If to Purchaser: ------------- ---------------- Iowa Land and Building Company Ryan Properties, Inc. c/o Thomas L. Aller c/o Jeff A. Smith 200 First Street SE 221 Third Avenue SE, Suite 250 Cedar Rapids, IA 52401 Cedar Rapids, IA 52401
6 7 E. Assignability. This Agreement and the rights set out herein may not be assigned by Purchaser to anyone other than McLeod, Inc., or its affiliate without the prior written consent of the Seller. If at the time of execution hereof, this Agreement has not already been assigned to McLeod, Inc. or one of its affiliates, Purchaser shall so assign this Agreement on or before the Closing Date and it shall be a condition of Seller's obligations hereunder that this Agreement be so assigned. Any assignment shall not release Purchaser from any liability under this Agreement. F. Invalidity. If for any reason any term or provision of this Agreement shall be declared void and unenforceable by any court of law or equity it shall only affect such particular term or provision of this Agreement and the balance of this Agreement shall remain in full force and effect. G. Complete Agreement. All understandings and agreements heretofore had between the parties are merged into this Agreement which alone fully and completely expressed their agreement. This Agreement may be changed only in writing signed by both of the parties hereto and shall apply to and bind the successors and assigns of each of the parties hereto and shall merge with the deed delivered to Purchaser at closing except as specifically provided herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year set forth above. SELLER: ------- IOWA LAND AND BUILDING COMPANY BY: /s/ THOMAS L. ALLER ------------------------------------- THOMAS L. ALLER, Vice President PURCHASER: ---------- RYAN PROPERTIES, INC. BY: /s/ JEFF A. SMITH ------------------------------------- JEFF A. SMITH, Vice President 7 EX-99.2 20 PURCHASE AGREEMENT 1 EXHIBIT 99.2 PURCHASE AGREEMENT THIS PURCHASE AGREEMENT is made and entered into as of this 28th day of June, 1996 between Donald E. Zvacek, Dennis E. Zvacek and Robert J. Zvacek ("Seller"), and Ryan Properties, Inc. ("Purchaser"). In consideration of the covenants and agreements contained herein and prior payments made by Purchaser to Seller, the parties agree as follows: 1. Land To Be Purchased. Subject to compliance with the terms and conditions of this Agreement, Seller shall sell to Purchaser and Purchaser shall purchase from Seller the real property legally described on Exhibit A attached hereto (the "Land"), together with all easements, tenements, hereditaments, and appurtenances belonging thereto. 2. Purchase Price. The purchase price for the Land ("Purchase Price") shall be the sum of $9,250.00 per acre payable by wire transfer, certified or cashier's check at the closing hereunder. 3. Title To Be Delivered. Seller agrees to convey marketable fee simple title in the Land to Purchaser subject only to easements, restrictions, conditions and covenants of record and to rights of farm tenants of the Land whose leases can be terminated on not more than six (6) months notice only ("Six Month Farm Leases"). A. Seller at its sole cost and expense shall deliver to Purchaser an abstract of title to the Land continued through the date of Purchaser's exercise of its option to purchase the Land for examination by Purchaser. It shall show merchantable title in Seller in conformity with this Agreement, Iowa law and Title Standards of the Iowa Bar Association. The abstract shall become the Land of Purchaser when the Purchase Price is paid in full. Seller shall pay the costs of any additional abstracting and title work due to any act or omission of Seller between the continuation date of the abstract and the closing. B. Purchaser shall have twenty (20) days after receipt of the abstract of title and survey to render objections to title, including any easements, et al. not satisfactory to Purchaser, in writing to Seller and Seller shall have thirty (30) days from the date it receives such objections to have the same removed or satisfied. If Seller shall fail to have such objections removed within that time, Purchaser may, at its sole discretion, either (a) terminate this Agreement without any liability on its part, or (b) take title subject to such 2 objections. Seller agrees to use its best reasonable efforts to promptly satisfy any such objections. 4. Rights of Inspection, Testing and Review. Purchaser, its counsel, accountants, agents and other representatives, shall have full and continuing access to the Land and all parts thereof, upon reasonable notice to Seller. Purchaser and its agent and representatives shall also have the right to enter upon the Land at any time after the execution and delivery hereof for any purpose whatsoever, including inspecting, surveying, engineering, test boring, performance of environmental tests and such other work as Purchaser shall consider appropriate, provided that Purchaser shall hold Seller harmless and fully indemnify Seller against any damage, claim, liability or cause of action arising from or caused by the actions of Purchaser, its agents, or representatives upon the Land, and shall have the further right to make such inquiries of governmental agencies and utility companies, etc., and to make such feasibility studies and analyses as it considers appropriate. 5. Control of Land. Until the closing and subject to Purchaser's indemnification under Section 4 above, Seller shall have the full responsibility and the entire liability for any and all damages or injury of any kind whatsoever to the Land, and any and all persons, whether employees or otherwise, and all property from and connected to the Land. If, prior to the closing, the Land is materially damaged or the Land shall be the subject of an action in eminent domain or a proposed taking by a governmental authority, whether temporary or permanent, Purchaser, at its sole discretion, shall have the right to terminate this Agreement upon notice to Seller without liability on its part by so notifying Seller and all sums heretofore paid by Purchaser (with interest) shall be refunded to Purchaser. If Purchaser does not exercise its right of termination, any and all proceeds arising out of such damage or destruction, if the same be insured, or out of any such eminent domain or taking, shall be assigned to or paid over to the Purchaser on the Closing Date. Seller agrees to keep the Land continually insured during the term of this Agreement under its current policy of fire and extended coverage insurance. 6. Representations Of Seller. In order to induce Purchaser to enter into this Agreement and purchase the Land, Seller hereby represents and warrants to Purchaser that to the best of Seller's knowledge: A. No action in condemnation, eminent domain or public taking proceedings are now pending or contemplated against the Land. B. No ordinance or hearing is now before any local governmental body which either contemplates or authorizes any public improvements or special tax levies, the cost of which may be assessed against the Land. 3 C. Seller has good and marketable fee simple title interest to the Land. D. There are no notices, orders, suits, judgment or other proceedings relating to fire, building, zoning, air pollution or health violations that have not been corrected. Seller shall notify Purchaser of any past notices, orders, suits, judgments or other proceedings relating to fire, building, zoning, air pollution or health violations as they relate to the Land. E. The Land will as of the date of closing be free and clear of all liens, security interests, all encumbrances, leases (except Six Month Farm Leases) or other restrictions, with the exception, if any, placed thereon as a result of the governmental approvals itemized in Section 7D herein. F. All labor or material which have been furnished to the Land have been fully paid for or will be fully paid for prior to the closing date so that no lien for labor or materials rendered can be asserted against the Land. G. The undersigned is a duly authorized representative of the Seller and as such is authorized to execute this Agreement and bind the Seller hereto. H. The Land does not contain any underground or above ground storage tanks. If any above ground or underground tanks have previously been located on the Land, Seller agrees to provide Purchaser with any and all information available in connection with the removal of any such tanks. I. The Land and its existing and all prior uses comply and have at all times complied with, and Seller is not in violation of, has not violated, in connection with its ownership, use, maintenance or operation of the Land and the conduct of the business related thereto, any applicable federal, state, county or municipal or local statutes, laws, regulations, rules, ordinances, codes, standards, orders, licenses and permits of any governmental authorities relating to environmental matters (being hereinafter collectively referred to as the "Environmental Laws") and all other applicable environmental standards or requirements. (i) Neither Seller, its agents, employees and independent contractors nor any tenant has operated the Land for the purpose of receiving, handling, using, storing, treatment, transporting and disposing of petroleum products or any Hazardous Substance or Material meaning asbestos, urea formaldehyde, polychlorinated biphenyls, nuclear fuel or materials, chemical waste, radioactive materials, explosives, known carcinogens, petroleum products or other dangerous or toxic or hazardous pollutant, contaminant, chemical 4 material or other substance defined in said Environmental Laws, or other toxic dangerous or hazardous chemicals, materials, substances, pollutants and wastes, or any chemical, material or substance exposure which is prohibited, limited or regulated by any federal, state, county, regional or local authority (all the foregoing being hereinafter collectively referred to as "Hazardous Materials"); (ii) there are no existing or pending remedial actions or other work, with respect to the Land in connection with the Environmental Laws, nor has Seller received any notice of any of the same; (iii) no Hazardous Materials have been or will be released into the environment, or have been or will be deposited, spilled, discharged, placed or disposed of at, on, or, to the actual knowledge of Seller, adjacent to the Land, nor has the Land been used at any time by any person as a landfill or a disposal site for Hazardous Materials or for garbage, waste or refuse of any kind; (iv) there are not electrical transformers or other equipment containing dielectric fluid containing polychlorinated biphenyls in excess of 50 parts per million located in, on or under the Land, nor is there any friable asbestos contained in, on or under the Land; (v) there are no locations off the Land where Hazardous Materials generated by or on the Land have been treated, stored, deposited or disposed of; (vi) there is no fact pertaining to the physical condition of either the Land or the area surrounding the Land and which materially adversely affects or will materially adversely affect the Land or the use or enjoyment or the value thereof or Seller's ability to perform the transactions contemplated by this Agreement; (vii) the sale of the Land by Seller to Purchaser does not require notice to or the prior approval, consent or permission of any federal, state or municipal or local governmental agency, body, board or official; and (viii) no notices of any violation of any of the matters referred to in the foregoing sections relating to the Land or its use have been received by Seller and there are no writs, injunctions, decrees, orders or judgments outstanding, no lawsuits, claims, proceedings or investigations pending or threatened, relating to the ownership, use, maintenance or operation of the Land, nor is there any basis for any such lawsuit, claim, proceedings or investigation being instituted or filed. The representations and warranties set forth in this Section 6 shall survive closing and shall not be affected by any investigation, verification or approval by any 5 party thereto or by anyone on behalf of any party hereto and shall not merge into Seller's deed being delivered at closing. Seller agrees to indemnify and hold Purchaser harmless from and against and to reimburse Purchaser with respect to any and all claims, demands, causes of action, loss, damage, liabilities, and costs (including attorney's fees and court costs) asserted against or incurred by Purchaser by reason of or arising out of the breach of any representation or warranty as set forth in this Section 6. 7. Conditions to Closing. The closing of the transaction contemplated by this Agreement and all the obligations of Purchaser under this Agreement are subject to fulfillment, on or before the Closing Date of the following conditions: A. The representations and warranties made by Seller in Section 6 shall be correct as of the Closing Date with the same force and effect as if such representations were made at such time. B. Title to the Land shall be in the condition warranted in Section 6. C. Purchaser, in its sole and absolute discretion, having completed and approved of any inspections done by Purchaser hereunder. D. Purchaser having obtained any and all necessary governmental approvals, including without limitation those necessary or desirable for: (a) subdivision or platting which might be necessary or desirable in connection with the sale and transfer of the Land. (Any conditions imposed as a part of the platting or subdivision must be satisfactory to Purchaser, in its sole opinion.); (b) change to the zoning classification of the Land to O/S. (Any conditions imposed as a part of the rezoning must be satisfactory to Purchaser, in its sole opinion.); (c) annexation of the Land into the City of Cedar Rapids; (d) CEBA Grant from the Iowa Department of Economic Development; (e) RISE Grant from the State of Iowa; and (f) formation of an Urban Renewal District and passage of a Tax Increment Financing Ordinance. Seller shall cooperate with Purchaser in attempting to obtain any such approvals and shall execute any documents necessary for this purpose, provided that Seller shall bear no expense in connection therewith. 6 8. Closing. The closing of the purchase and sale shall take place as promptly as possible after all the conditions to closing set forth in Section 7 have been satisfied. Possession of the Land shall be delivered on the date of Closing. 9. Seller's Obligations At Closing. At or prior to the Closing Date, Seller shall: A. Deliver to Purchaser Seller's duly recordable Warranty Deed to the Land (in a form satisfactory to Purchaser) conveying to Purchaser marketable fee simple title to the Land and all rights appurtenant thereto subject only to easements, restrictions, conditions and covenants of record. B. Deliver to Purchaser the Abstract of Title to the Land. C. Deliver to Purchaser such other documents as may be required by this Agreement, all in a form satisfactory to Purchaser. 10. Delivery of Purchase Price; Obligations At Closing. At closing, and subject to the terms, conditions, and provisions hereof and the performance by Seller of its obligations as set forth herein, Purchaser shall deliver the Purchase Price to Seller pursuant to Section 2 hereof. 11. Closing Costs. The following costs and expenses shall be paid as follows in connection with the closing: A. Seller shall pay: (i) The transfer fee imposed on the conveyance. (ii) A pro-rata portion of all taxes as provided in Section. (iii) All special assessments except as provided in the Option Agreement dated May 29,1996 between the parties hereto. (iv) Seller's attorneys fees. (v) The cost of recording the satisfaction of any existing mortgage and any other document necessary to make title marketable. B. Purchaser shall pay the following costs in connection with the closing: (i) The documentary fee necessary to record the Deed. (ii) Purchaser's attorneys fees. 12. Failure of Closing Conditions. Seller and Purchaser agree that should any of the conditions to Purchaser's obligations set forth in Section 7D above not be satisfied, the Option Agreement dated May 29, 1996 between Seller and Purchaser shall be reinstated and Purchaser shall be provided thirty (30) days in which to make up 7 any option payments due to Seller under the terms of the Option Agreement but not made due to the execution of this Agreement. 13. Real Estate Taxes and Special Assessments. Except as otherwise provided in the Option Agreement dated May 29,1996 between Seller and Purchaser, Seller shall pay all levied and pending special assessments against the Land prior to the Closing Date. Seller shall pay all real estate taxes for all fiscal years which end prior to the Closing Date. Real estate taxes for the fiscal year in which the Closing Date occurs shall be prorated to the Closing Date on the basis of a 365 day calendar year. Purchaser shall pay all real estate taxes due in subsequent fiscal years. 14. Remedies. If Seller defaults in the performance of this Agreement and Purchaser does not cancel this Agreement, Seller acknowledges the Land is unique and that money damages to Purchaser in the event of default by Seller are inadequate. Accordingly, Purchaser shall have the right, in addition to any other remedy available, to apply for and to receive from a court of competent jurisdiction equitable relief by way of restraining order, injunction or otherwise, prohibitory or mandatory, to prevent a breach of the terms of this Agreement, or by way of specific performance to enforce performance of the terms of this Agreement or rescission. This right to equitable relief shall not be construed to be in lieu of or to preclude the right to seek a remedy at law. 15. Time for Acceptance. This Agreement, when duly executed by all of the parties hereto, shall be binding upon the parties hereto, their heirs, representatives, successors and assigns. By execution hereof, Seller waives written notice of the exercise of Purchaser's option under the Option Agreement. 16. Miscellaneous. The following general provisions govern this Agreement. A. No Waivers. The waiver by either party hereto of any condition or the breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any other condition or of any subsequent breach of the same or of any other term, covenant or condition herein contained. Either party, in its sole discretion may waive any right conferred upon such party by this Agreement; provided that such waiver shall only be made by giving the other party written notice specifically describing the right waived. B. Time of Essence. Time is of the essence of this Agreement. C. Governing Law. This Agreement is made and executed under and in all respects to be governed and construed by the laws of the State of Iowa 8 D. Notices. All notices and demands given or required to be given by any party hereto to any other party shall be deemed to have been properly given if and when delivered in person or three (3) business days after having been deposited in any U.S. Postal Service and sent by registered or certified mail, Postage prepaid, addressed as follows: If to Seller If to Purchaser c/o Donald Zvacek Ryan Properties, Inc. 2403 31st Street, S.W. ATTN: Jeff A. Smith Cedar Rapids, IA 52404 221 Town Centre, Suite 250 Cedar Rapids, IA 52401 E. Assignability. This Agreement and the rights set out herein may be assigned by Purchaser provided, however, any assignment shall not release Purchaser from any liability under this Agreement. F. Invalidity. If for any reason any term or provision of this Agreement shall be declared void and unenforceable by any court of law or equity it shall only affect such particular term or provision of this Agreement and the balance of this Agreement shall remain in full force and effect and shall be G. Complete Agreement. All understandings and agreements heretofore had between the parties are merged into this Agreement which alone fully and completely expressed their agreement. This Agreement may be changed only in writing signed by both of the parties hereto and shall apply to and bind the successors and assigns of each of the parties hereto and shall merge with the deed delivered to Purchaser at closing except as specifically provided herein. H. Counterparts. This Agreement may be executed in one (1) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year set forth above. 9 SELLER: /s/ DONALD E. ZVACEK ----------------------------------- DONALD E. ZVACEK /s/ KAREN M. ZVACEK ----------------------------------- KAREN M. ZVACEK STATE OF IOWA ) ) ss: COUNTY OF LINN ) On this 28th day of June, 1996, before me, a Notary Public in and for the State of Iowa, personally appeared Donald E. Zvacek and Karen M. Zvacek, husband and wife, to me known to be the persons named in and who executed the foregoing instrument, and acknowledged that they executed the same as their voluntary act and deed. [NOTARIAL SEAL CARMEL R. BROWN /s/ CARMEL R. BROWN IOWA] MY COMMISSION EXPIRES ----------------------------------- 5/7/99 NOTARY PUBLIC - STATE OF IOWA /s/ DONALD E. ZVACEK Atty. in fact for Dennis E. Zvacek ----------------------------------- DENNIS E. ZVACEK /s/ DONALD E. ZVACEK Atty. in fact for Donalyn A. Zvacek ----------------------------------- DONALYN A. ZVACEK STATE OF IOWA ) ) ss: LINN COUNTY ) On this 28th day of June, 1996, before me, a Notary Public in and for the State of Iowa, personally appeared Donald E. Zvacek, to me known to be the person who executed the foregoing instrument on behalf of Dennis E. Zvacek and Donalyn A. Zvacek, and acknowledged that that person executed the same as the voluntary act and deed of said Dennis E. Zvacek and Donalyn A. Zvacek. [NOTARIAL SEAL CARMEL R. BROWN /s/ CARMEL R. BROWN IOWA] MY COMMISSION EXPIRES ----------------------------------- 5/7/99 NOTARY PUBLIC - STATE OF IOWA 10 /s/ ROBERT J. ZVACEK ----------------------------------- ROBERT J. ZVACEK /s/ MARILYN J. ZVACEK ----------------------------------- MARILYN J. ZVACEK STATE OF IOWA ) ) SS: COUNTY OF LINN ) On this 28th day of June 1996, before me, a Notary Public in and for the State of Iowa, personally appeared Robert J. Zvacek and Marilyn J. Zvacek, husband and wife, to me known to be the persons named in and who executed the foregoing instrument, and acknowledged that they executed the same as their voluntary act and deed. /s/ CARMEL R. BROWN ----------------------------------- NOTARY PUBLIC-STATE OF IOWA [NOTARIAL SEAL CARMEL R. BROWN IOWA] MY COMMISSION EXPIRES 5/7/99 11 BUYER: RYAN PROPERTIES, INC. BY: /s/ JEFF A. SMITH ----------------------------------- JEFF A. SMITH, Vice President STATE OF IOWA ) ) SS: COUNTY OF LINN ) On this 27th day of 1996, before me, a Notary Public in and for the State of Iowa, personally appeared Jeff A. Smith, to me personally known, who being by me duly sworn did say that he is Vice President of Ryan Properties, Inc., that no seal has been procured by the said corporation, and that said instrument was signed on behalf of the said corporation by authority of its Board of Directors, and the said Jeff A. Smith acknowledged the execution of said instrument to be the voluntary act and deed of said corporation, by it and by him voluntarily executed. [NOTARIAL SEAL [NAME] [SIG] IOWA] MY COMMISSION EXPIRES ----------------------------------- September 27, 1997 NOTARY PUBLIC-STATE OF IOWA -----END PRIVACY-ENHANCED MESSAGE-----