EXHIBIT 3.7
McLEODUSA INCORPORATED
CERTIFICATE OF DESIGNATION OF THE POWERS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF SERIES C CONVERTIBLE
PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
McLeodUSA Incorporated (the "Corporation"), a corporation organized
and existing under the General Corporation Law of the State of Delaware, does
hereby certify that, pursuant to authority conferred upon the board of directors
of the Corporation (the "Board of Directors") by the Corporation's Amended and
Restated Certificate of Incorporation, as amended (the "Restated Certificate of
Incorporation") and pursuant to the provisions of Section 151 of the General
Corporation Law of the State of Delaware, said Board of Directors is authorized
to issue Preferred Stock of the Corporation in one or more series and the Board
of Directors has approved and adopted the following resolution on September 13,
1999 (the "Resolution"):
RESOLVED that, the Board of Directors hereby creates, authorizes
and provides for the issuance of a series of preferred stock of the
Corporation, par value $.01 per share (such preferred stock designated as
the "Series C Convertible Preferred Stock"), consisting of 125,000 shares
and having the powers, designation, preferences, relative, participating,
optional and other special rights and the qualifications, limitations and
restrictions thereof that are set forth in the Restated Certificate of
Incorporation and in this Resolution as follows:
1. Number and Designation. 125,000 shares of the Preferred Stock of
----------------------
the Corporation shall constitute a series designated as "Series C Convertible
Preferred Stock" (the "Series C Preferred Stock").
2. Definitions. Unless the context otherwise requires, when used
-----------
herein the following terms shall have the meaning indicated.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in New York
City, New York generally are authorized or required by law or other governmental
actions to close.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of such person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights (other than any evidence of indebtedness), warrants or options
exchangeable for or convertible into such capital stock.
"Class A Common Stock" means the Corporation's Class A common stock,
par value $.01 per share, now or hereafter authorized to be issued, and any and
all securities of any kind whatsoever of the Corporation which may be exchanged
for or converted into Class A Common Stock, any and all securities of any kind
whatsoever of the Corporation which may be issued on or after the date hereof in
respect of, in exchange for, or upon conversion of shares of Class A Common
Stock pursuant to a merger, consolidation, stock split, stock dividend,
recapitalization of the Corporation or otherwise.
"Common Stock" means the Corporation's Class A Common Stock and any
other common stock of the Corporation.
"Current Market Price" means the average of the daily Market Prices of
the Common Stock for ten consecutive trading days immediately preceding the date
for which such value is to be computed.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute, and the rules and regulations promulgated thereunder.
"Issue Date" means the original date of issuance of shares of Series C
Preferred Stock.
"Liquidation Preference" with respect to a share of Series C Preferred
Stock means, as at any date, $2,500.00 plus an amount equal to any accrued and
unpaid dividends with respect to such share through such date.
"Market Price" means, with respect to the Common Stock, on any given
day, (i) the price of the last trade, as reported on the Nasdaq National Market,
not identified as having been reported late to such system, or (ii) if the
Common Stock is so traded, but not so quoted, the average of the last bid and
ask prices, as those prices are reported on the Nasdaq National Market, or (iii)
if the Common Stock is not listed or authorized for trading on the Nasdaq
National Market or any comparable system, the average of the closing bid and
asked prices as furnished by two members of the National Association of
Securities Dealers, Inc. selected from time to time by the Corporation for that
purpose. If the Common Stock is not listed and traded in a manner that the
quotations referred to above are available for the period required hereunder,
the Market Price per share of Common Stock shall be deemed to be the fair value
per share of such security as determined in good faith by the Board of Directors
of the Corporation.
"Net Realizable FMV" means, with respect to a share of Common Stock,
if calculable, the amount of gross proceeds net of underwriters' discounts,
commissions or other selling expenses received by or to be received by the
holder in connection with the sale of such share of Common Stock on a when
issued basis or immediately after the conversion or, in all other cases, an
amount equal to 97% of the Current Market Price of the Common Stock.
"Series B Designation" means the Certificate of Designation for the
Series B Preferred Stock.
"Series B Preferred Stock" means the Series B Cumulative Convertible
Preferred Stock, par value $.01 per share, of the Corporation.
2
"Voting Stock" means, with respect to any person, the Capital Stock of
any class or kind ordinarily having the power to vote for the election of
directors or other members of the governing body of such person.
3. Rank. (a) The Series B Preferred Stock and Series C Preferred
----
Stock each will, with respect to dividend rights and rights on liquidation,
winding-up and dissolution, rank (i) senior to all classes of Common Stock and
to each other class of Capital Stock of the Corporation or series of Preferred
Stock of the Corporation established hereafter by the Board of Directors of the
Corporation the terms of which do not expressly provide that such class or
series ranks senior to, or on a parity with, the Series B Preferred Stock and
Series C Preferred Stock as to dividend rights and rights on liquidation,
winding-up and dissolution of the Corporation (collectively referred to,
together with all classes of Common Stock of the Corporation, as "Junior
Securities"); (ii) on a parity with the Corporation's 6.75% Series A Cumulative
Convertible Preferred Stock, par value $.01 per share, and with each class of
Capital Stock of the Corporation or series of Preferred Stock of the Corporation
established hereafter by the Board of Directors of the Corporation, the terms of
which expressly provide that such class or series will rank on a parity with the
Series B Preferred Stock and Series C Preferred Stock as to dividend rights and
rights on liquidation, winding-up and dissolution (collectively referred to as
"Parity Securities"); and (iii) junior to each class of Capital Stock of the
Corporation or series of Preferred Stock of the Corporation established
hereafter by the Board of Directors of the Corporation, the terms of which
expressly provide that such class or series will rank senior to the Series B
Preferred Stock and Series C Preferred Stock as to dividend rights and rights on
liquidation, winding-up and dissolution of the Corporation (collectively
referred to as "Senior Securities"); provided that the relative powers, rights
and preferences of the Series B Preferred Stock and Series C Preferred Stock
vis-a-vis the other shall be as set forth herein and in the Series B
Designation.
(b) The respective definitions of Junior Securities, Parity
Securities and Senior Securities shall also include any warrants, rights,
options or other securities exercisable or exchangeable for or convertible into
any of the Junior Securities, Parity Securities and Senior Securities, as the
case may be.
(c) The Series C Preferred Stock shall be subject to the creation of
Junior Securities and Parity Securities.
4. Dividends. If at any time from the Issue Date through the date
---------
ending five years thereafter, the Corporation pays a dividend in cash or
property other than in shares of Capital Stock on the Common Stock then at the
same time the Corporation shall declare and pay a dividend on each share of
Series C Preferred Stock an amount equal to the Series C Per Share Participation
Amount. The "Series C Per Share Participation Amount" means, as at any date,
62.5% of the amount of dividends that would be paid with respect to the Series B
Preferred Stock and Series C Preferred Stock taken together if converted into
Common Stock on the date established as the record date with respect to such
dividend on the Common Stock divided by the number of shares of Series C
Preferred Stock then outstanding.
5. Liquidation Preference. (a) In the event of any liquidation,
----------------------
dissolution or winding-up of the Corporation, whether voluntary or involuntary,
before any payment or
3
distribution of the assets of the Corporation (whether capital or surplus) shall
be made to or set apart for the holders of Junior Securities, the holders of the
shares of Series B Preferred Stock and Series C Preferred Stock taken together
shall be entitled to receive an amount in cash equal to the greater of (x) the
aggregate Liquidation Preferences (as set forth herein and in the Series B
Designation) of the shares of Series B Preferred Stock and Series C Preferred
Stock as of the date of liquidation, or (y) the aggregate amount that would have
been received with respect to the shares of Series B Preferred Stock and Series
C Preferred Stock if such stock had been converted to Common Stock immediately
prior to such liquidation, dissolution or winding-up. If, upon any liquidation,
dissolution or winding-up of the Corporation, the assets of the Corporation, or
proceeds thereof, shall be insufficient to pay in full the aforesaid amounts
under clause (x) of the preceding sentence and liquidating payments on all
Parity Securities, then such assets, or proceeds thereof, shall (i) be
distributed among the shares of Series B Preferred Stock and the Series C
Preferred Stock taken together and all such other Parity Securities ratably in
accordance with the respective amounts that would be payable on such shares of
Preferred Stock and any such other Parity Securities if all amounts payable
thereon were paid in full and (ii) the amount distributable under clause (i) to
the Series B Preferred Stock and Series C Preferred Stock taken together, shall
first be distributed to the Series B Preferred Stock until it has received an
amount equal to the aggregate Preference Amounts (as defined in the Series B
Designation) of all Series B Preferred Stock outstanding as of the date of
liquidation and thereafter 37.5% to the Series B Preferred Stock and 62.5% to
the Series C Preferred Stock. If, upon any liquidation, dissolution or winding-
up of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable to the Series B Preferred Stock and Series C Preferred Stock taken
together shall be sufficient to pay in full the aforesaid amounts under clause
(x) of the first sentence of this subsection 5(a) then such amount shall first
be distributed to the Series B Preferred Stock until it has received an amount
equal to the aggregate Preference Amounts (as defined in the Series B
Designation) of all Series B Preferred Stock outstanding as of the date of
liquidation and thereafter 37.5% to the Series B Preferred Stock and 62.5% to
the Series C Preferred Stock. Any amounts distributed with respect to the Series
C Preferred Stock pursuant to this paragraph 5(a) shall be allocated pro rata
among the shares of Series C Preferred Stock. For the purposes of this paragraph
5, neither the sale, conveyance, exchange or transfer (for cash, shares of
stock, securities or other consideration) of all or substantially all of the
property or assets of the Corporation nor the consolidation or merger of the
Corporation with or into one or more other entities shall be deemed to be a
liquidation, dissolution or winding-up of the Corporation.
(b) Subject to the rights of the holders of any Parity Securities,
after payment shall have been made in full to the holders of the Series B
Preferred Stock and the Series C Preferred Stock taken together, as provided in
this paragraph 5, any other series or class or classes of Junior Securities
shall, subject to the respective terms and provisions (if any) applying thereto,
be entitled to receive any and all assets remaining to be paid or distributed,
and the holders of the Series C Preferred Stock, Series B Preferred Stock and
any Parity Securities shall not be entitled to share therein.
6. Redemption. (a) The Series C Preferred Stock shall not be
----------
redeemable by the Corporation prior to the seventh anniversary of the Issue
Date. On and after the seventh anniversary of the Issue Date, to the extent the
Corporation shall have funds legally available for such payment, and subject to
the rights of the holders pursuant to Section 8 hereof, the Corporation may
redeem at its option shares of Series C Preferred Stock, at any time in whole or
4
from time to time in part, at a redemption price per share equal to the
Liquidation Preference as of the date fixed for redemption, without interest;
provided that the Corporation shall only be entitled to redeem shares of the
Series C Preferred Stock if shares of the Series B Preferred Stock are also
redeemed on a proportional basis based on the percentage of each series of
shares outstanding at such time.
(b) Pursuant to the Series B Designation, to the extent the
Corporation shall have funds legally available therefor, during the 180-day
period commencing on the tenth anniversary of the Issue Date, the holders of the
Series B Preferred Stock shall have the right to cause the Corporation to redeem
at any time in whole or from time to time in part outstanding shares of Series B
Preferred Stock, if any, at a redemption price per share in cash equal to the
Liquidation Preference (as set forth in the Series B Designation), without
interest; provided that upon any such election the Corporation shall be required
to redeem a proportional amount of the Series C Preferred Stock.
(c) Shares of Series C Preferred Stock which have been issued and
reacquired by the Corporation in any manner, including shares purchased or
redeemed, shall (upon compliance with any applicable provisions of the laws of
the State of Delaware) be retired and have the status of authorized and unissued
shares of the class of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of the Preferred Stock; provided
that no such issued and reacquired shares of Series C Preferred Stock shall be
reissued or sold as Series C Preferred Stock.
(d) If the Corporation is unable or shall fail to discharge its
obligation to redeem outstanding shares of Series B Preferred Stock and Series C
Preferred Stock pursuant to paragraph 6(b) (the "Mandatory Redemption
Obligation"), the Mandatory Redemption Obligation shall be discharged as soon as
the Corporation is able to discharge such Mandatory Redemption Obligation. If
and so long as any Mandatory Redemption Obligation with respect to the Series B
Preferred Stock and Series C Preferred Stock shall not be fully discharged, the
Corporation shall not (i) directly or indirectly, redeem, purchase, or otherwise
acquire any Parity Security or discharge any mandatory or optional redemption,
sinking fund or other similar obligation in respect of any Parity Securities or
(ii) declare or make any Junior Securities Distribution (as defined in the
Series B Designation), or, directly or indirectly, discharge any mandatory or
optional redemption, sinking fund or other similar obligation in respect of any
Junior Securities.
7. Procedure for Redemption. (a) In the event that fewer than all
------------------------
the outstanding shares of Series C Preferred Stock are to be redeemed, in the
case of Section 6(a), the number of shares to be redeemed shall be determined by
the Board of Directors and the shares to be redeemed shall be selected pro rata
(with any fractional shares being rounded to the nearest whole shares).
Notwithstanding anything in Section 6 to the contrary, the Corporation shall
only redeem shares of Series C Preferred Stock pursuant to Section 6(a) or 6(b)
on a proportional basis based on the percentage of each series of shares
outstanding at such time.
(b) In the event the Corporation shall redeem shares of Series C
Preferred Stock pursuant to Section 6(a), notice of such redemption shall be
given by first class mail, postage prepaid, mailed not less than 30 days nor
more than 60 days prior to the redemption date,
5
to each holder of record of the shares to be redeemed at such holder's address
as the same appears on the stock register of the Corporation; provided that
neither the failure to give such notice nor any defect therein shall affect the
validity of the giving of notice for the redemption of any share of Series C
Preferred Stock to be redeemed except as to the holder to whom the Corporation
has failed to give said notice or except as to the holder whose notice was
defective. Each such notice shall state: (i) the redemption date; (ii) the
number of shares of Series C Preferred Stock to be redeemed and, if fewer than
all the shares held by such holder are to be redeemed, the number of shares to
be redeemed from such holder; (iii) the redemption price; (iv) the place or
places where certificates for such shares are to be surrendered for payment of
the redemption price; and (v) that dividends on the shares to be redeemed will
cease to accrue on such redemption date.
(c) Notice having been mailed as aforesaid, if applicable, from and
after the redemption date, dividends on the shares of Series C Preferred Stock
so called for redemption shall cease to accrue, and all rights of the holders
thereof as stockholders of the Corporation (except the right to receive from the
Corporation the redemption price and except the right to convert shares so
called for redemption prior to the close of business on the date immediately
preceding the date fixed for such redemption) shall cease. Upon surrender in
accordance with said notice, if applicable, of the certificates for any shares
so redeemed (properly endorsed or assigned for transfer, if the Board of
Directors shall so require and the notice shall so state), such shares shall be
redeemed by the Corporation at the redemption price aforesaid. In case fewer
than all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof.
8. Conversion. (a) (i) Pursuant to the provisions of the Series B
----------
Designation, the holders of shares of Series B Preferred Stock have the right,
at any time in whole and from time to time in part, at such holders' option, to
convert any or all outstanding shares (and fractional shares) of Series B
Preferred Stock held by such holders into fully paid and non-assessable shares
of Class A Common Stock. Upon the exercise by any holder of Series B Preferred
Stock of its conversion option, a proportional amount, based on the percentage
of each series of shares outstanding, of the Series C Preferred Stock shall
automatically convert into fully paid and non-assessable shares of Class A
Common Stock, subject to the provisions of this Section 8. At any time and from
time to time the outstanding shares of Series B Preferred Stock and Series C
Preferred Stock taken together shall be convertible into a number of shares of
Class A Common Stock (the "Aggregate Conversion Shares") equal to the aggregate
Liquidation Preferences of the shares of the Series B Preferred Stock and the
Series C Preferred Stock as set forth herein and in the Series B Designation as
of the date of conversion divided by $36.50, subject to adjustment from time to
time pursuant to paragraph 8(g) hereof (the "Conversion Price"). The Series C
Preferred Stock shall be convertible into a number of shares of Class A Common
Stock (the "Aggregate Series C Conversion Shares") equal to .625 times the
excess, if any, of (A) the Aggregate Conversion Shares over (B) the aggregate
Preference Amounts (as defined in the Series B Designation) with respect to all
outstanding shares of Series B Preferred Stock divided by the Net Realizable FMV
of a share of Class A Common Stock at the time of conversion. Each share of
Series C Preferred Stock being converted shall convert into a number of shares
of Class A Common Stock equal to the Aggregate Series C Conversion Shares
divided by the number of shares of Series C Preferred Stock then outstanding.
Notwithstanding any call for redemption pursuant to Section 6(a), the holders'
right to convert shares so called for
6
redemption shall terminate at the close of business on the date immediately
preceding the date fixed for such redemption unless the Corporation shall
default in making payment of the amount payable upon such redemption.
(ii) In the case of any partial conversion of Series B Preferred
Stock by the holders thereof, selection of the Series C Preferred Stock for
automatic conversion will be made by the Corporation in compliance with the
requirements of the principal national securities exchange, if any, on which the
Series C Preferred Stock is listed, or if the Series C Preferred Stock is not
listed on a national securities exchange, on a pro rata basis, by lot or such
other method as the Corporation, in its sole discretion, shall deem fair and
appropriate; provided, however, that the Corporation may redeem all the shares
-------- -------
held by holders of fewer than 5 shares of Series C Preferred Stock (or all of
the shares held by the holders who would hold less than 5 shares of Series C
Preferred Stock as a result of such redemption) as may be determined by the
Corporation. The Corporation shall provide prompt written notice (including the
number of shares so converted) of the automatic conversion of shares of Series C
Preferred Stock pursuant to this paragraph 8 to the holders of record of the
shares so converted.
(b) (i) Promptly upon receipt of notice of automatic conversion of
shares of Series C Preferred Stock pursuant to paragraph 8(a) (including the
number of shares to be so converted), the holder of the shares of Series C
Preferred Stock so converted shall surrender the certificate representing such
shares at the principal executive offices of the Corporation. Unless the shares
issuable on conversion are to be issued in the same name as the name in which
such shares of Series C Preferred Stock are registered, each certificate so
surrendered shall be accompanied by instruments of transfer, in form
satisfactory to the Corporation, duly executed by the holder or the holder's
duly authorized attorney, and an amount sufficient to pay any transfer or
similar tax.
(ii) As promptly as practicable after the surrender by the
holder of the certificates for shares of Series C Preferred Stock as aforesaid,
the Corporation shall issue and shall deliver to such holder, or on the holder's
written order to the holder's transferee, (x) a certificate or certificates for
the whole number of shares of Class A Common Stock issuable upon the conversion
of such shares in accordance with the provisions of this paragraph 8, (y) any
cash adjustment required pursuant to Section 8(f), and (z) in the event of a
conversion in part, a certificate or certificates for the whole number of shares
of Series C Preferred Stock not being so converted.
(iii) Each conversion of shares of Series C Preferred Stock
pursuant to paragraph 8(a) shall be deemed to have been effected immediately
prior to the close of business on the date on which the certificates for shares
of Series B Preferred Stock shall have been surrendered and the notice of
election to convert received by the Corporation in accordance with the
procedures set forth in Section 8 of the Series B Designation, and the person in
whose name or names any certificate or certificates for shares of Class A Common
Stock shall be issuable upon such conversion shall be deemed to have become the
holder of record of the shares of Class A Common Stock represented thereby at
such time on such date and such conversion shall be into a number of whole
shares of Class A Common Stock in respect of the shares of Series C Preferred
Stock being converted as determined in accordance with this Section 8 at such
time on such date. All shares of Class A Common Stock delivered upon conversion
of the Series C
7
Preferred Stock will upon delivery be duly and validly issued and fully paid and
non-assessable, free of all liens and charges and not subject to any preemptive
rights. Upon automatic conversion of shares of Series C Preferred Stock, the
shares so converted shall no longer be deemed to be outstanding and all rights
of a holder with respect to such converted shares shall immediately terminate
except the right to receive the Class A Common Stock and other amounts payable
pursuant to this paragraph 8 and a certificate or certificates representing the
shares of Series C Preferred Stock not converted.
(c) (i) Upon delivery to the Corporation by a holder of shares of
Series B Preferred Stock of a notice of election to convert, the right of the
Corporation to redeem the applicable shares of Series C Preferred Stock shall
terminate, regardless of whether a notice of redemption has been mailed as
aforesaid.
(ii) If a holder of Series B Preferred Stock delivers to the
Corporation a certificate therefor and a notice of election to convert, the
Series C Preferred Stock to be converted shall cease to accrue dividends
pursuant to paragraph 4.
(iii) Except as provided above and in paragraph 8(g), the
Corporation shall make no payment or adjustment for accrued and unpaid dividends
on shares of Series C Preferred Stock, whether or not in arrears, on conversion
of such shares or for dividends theretofore paid on the shares of Class A Common
Stock.
(d) (i) The Corporation covenants that it will at all times reserve
and keep available, free from preemptive rights, such number of its authorized
but unissued shares of Class A Common Stock as shall be required for the purpose
of effecting conversions of the Series C Preferred Stock.
(ii) Prior to the delivery of any securities which the
Corporation shall be obligated to deliver upon conversion of the Series C
Preferred Stock, the Corporation shall comply with all applicable federal and
state laws and regulations which require action to be taken by the Corporation.
(e) The Corporation will pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares of
Class A Common Stock on conversion of the Series C Preferred Stock pursuant
hereto; provided that the Corporation shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issue or delivery of
shares of Class A Common Stock in a name other than that of the holder of the
Series C Preferred Stock to be converted and no such issue or delivery shall be
made unless and until the person requesting such issue or delivery has paid to
the Corporation the amount of any such tax or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(f) In connection with the conversion of any shares of Series C
Preferred Stock, no fractions of shares of Class A Common Stock shall be
required to be issued to the holder of such shares of Series C Preferred Stock,
but in lieu thereof the Corporation shall pay a cash adjustment in respect of
such fractional interest in an amount equal to such fractional interest
multiplied by the Market Price per share of Class A Common Stock on the business
day
8
next preceding the business day on which such shares of Series C Preferred Stock
are deemed to have been converted.
(g) (i) In case the Corporation shall at any time after the Issue
Date (A) declare a dividend or make a distribution on Common Stock payable in
Common Stock, (B) subdivide or split the outstanding Common Stock, (C) combine
or reclassify the outstanding Common Stock into a smaller number of shares, (D)
issue any shares of its Capital Stock in a reclassification of Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Corporation is the continuing corporation), or (E)
consolidate with, or merge with or into, any other person, the Conversion Price
in effect at the time of the record date for such dividend or distribution or on
the effective date of such subdivision, split, combination, consolidation,
merger or reclassification shall be adjusted so that the conversion of the
Series C Preferred Stock after such time shall entitle the holder to receive the
aggregate number of shares of Common Stock or other securities of the
Corporation (or other securities into which such shares of Common Stock have
been converted, exchanged, combined, consolidated, merged or reclassified
pursuant to clause 8(g)(i)(C), 8(g)(i)(D) or 8(g)(i)(E) above) which, if the
Series C Preferred Stock had been converted immediately prior to such time, such
holder would have owned upon such conversion and been entitled to receive by
virtue of such dividend, distribution, subdivision, split, combination,
consolidation, merger or reclassification. Such adjustment shall be made
successively whenever an event listed above shall occur.
(ii) In case the Corporation shall issue or sell any Common Stock
(or rights, options, warrants or other securities convertible into or
exercisable or exchangeable for shares of Common Stock) without consideration or
for a consideration per share (or having a conversion, exercise or exchange
price per share) less than the Conversion Price on the date of such issuance
(or, in the case of convertible or exchangeable or exercisable securities, less
than the Conversion Price as of the date of issuance of the rights, options,
warrants or other securities in respect of which shares of Common Stock were
issued), then, and in each such case, the Conversion Price shall be reduced to
an amount determined by multiplying (A) the Conversion Price in effect on the
day immediately prior to such date by (B) a fraction, the numerator of which
shall be the sum of (1) the number of shares of Common Stock outstanding
immediately prior to such sale or issuance multiplied by the then applicable
Conversion Price (such then applicable Conversion Price being the "Adjustment
----------
Price") and (2) the aggregate consideration receivable by the Corporation for
- -----
the total number of shares of Common Stock so issued (or into or for which the
rights, options, warrants or other securities are convertible, exercisable or
exchangeable), and the denominator of which shall be the sum of (x) the total
number of shares of Common Stock outstanding immediately prior to such sale or
issue and (y) the number of additional shares of Common Stock issued (or into or
for which the rights, options, warrants or other securities may be converted,
exercised or exchanged), multiplied by the Adjustment Price. In case any portion
of the consideration to be received by the Corporation shall be in a form other
than cash, the fair market value of such noncash consideration shall be utilized
in the foregoing computation. Such fair market value shall be determined in good
faith by the Board of Directors.
(iii)In case the Corporation shall fix a record date for the
issuance on a pro rata basis of rights, options or warrants to the holders of
its Common Stock or other securities entitling such holders to subscribe for or
purchase shares of Common Stock (or securities convertible into or exercisable
or exchangeable for shares of Common Stock) at a price
9
per share of Common Stock (or having a conversion, exercise or exchange price
per share of Common Stock, in the case of a security convertible into, or
exerciseable or exchangeable for, shares of Common Stock) less than the
Conversion Price on such record date, the maximum number of shares of Common
Stock issuable upon exercise of such rights, options or warrants (or conversion
of such convertible securities) shall be deemed to have been issued and
outstanding as of such record date and the Conversion Price shall be adjusted
pursuant to paragraph 8(g)(ii) hereof, as though such maximum number of shares
of Common Stock had been so issued for an aggregate consideration payable by the
holders of such rights, options, warrants or other securities prior to their
receipt of such shares of Common Stock. In case any portion of such
consideration shall be in a form other than cash, the fair market value of such
noncash consideration shall be determined as set forth in paragraph 8(g)(ii)
hereof. Such adjustment shall be made successively whenever such record date is
fixed; and in the event that such rights, options or warrants are not so issued
or expire in whole or in part unexercised, or in the event of a change in the
number of shares of Common Stock to which the holders of such rights, options or
warrants are entitled (other than pursuant to adjustment provisions therein
comparable to those contained in this paragraph 8(g)), the Conversion Price
shall again be adjusted as follows: (A) in the event that all of such rights,
options or warrants expire unexercised, the Conversion Price shall be the
Conversion Price that would then be in effect if such record date had not been
fixed; (B) in the event that less than all of such rights, options or warrants
expire unexercised, the Conversion Price shall be adjusted pursuant to paragraph
8(g)(ii) to reflect the maximum number of shares of Common Stock issuable upon
exercise of such rights, options or warrants that remain outstanding (without
taking into effect shares of Common Stock issuable upon exercise of rights,
options or warrants that have lapsed or expired); and (C) in the event of a
change in the number of shares of Common Stock to which the holders of such
rights, options or warrants are entitled, the Conversion Price shall be adjusted
to reflect the Conversion Price which would then be in effect if such holder had
initially been entitled to such changed number of shares of Common Stock.
Notwithstanding anything herein to the contrary, no further adjustment to the
Conversion Price shall be made upon the issuance or sale of Common Stock upon
the exercise of any rights, options or warrants to subscribe for or purchase
Common Stock, if any adjustment in the Conversion Price was made or required to
be made upon the record date for the issuance or sale of such rights, options or
warrants under this clause 8(g)(iii).
(iv) In case the Corporation shall fix a record date for the
making of a distribution to all holders of any class of Common Stock (including
any such distribution made in connection with a consolidation or merger in which
the Corporation is the continuing corporation) of evidences of indebtedness,
assets or other property, the Conversion Price to be in effect after such record
date shall be determined by multiplying the Conversion Price in effect
immediately prior to such record date by a fraction, (A) the numerator of which
shall be the Conversion Price immediately prior to such distribution less the
fair market value (determined as set forth in paragraph 8(g)(ii) hereof) of the
portion of the assets, other property or evidence of indebtedness so to be
distributed which is applicable to one share of Common Stock, and (B) the
denominator of which shall be the Conversion Price immediately prior to such
distribution. Such adjustments shall be made successively whenever such a record
date is fixed; and in the event that such distribution is not so made, the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such record date had not been fixed. An adjustment to the
Conversion Price also shall be made in respect of dividends and distributions
paid exclusively in cash to all holders of any class of Common Stock (excluding
any dividend or
10
distribution in connection with the liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary, and any cash that is
distributed upon a merger, consolidation or other transaction for which an
adjustment pursuant to paragraph 8(g)(i) is made) where the sum of (1) all such
cash dividends and distributions made within the preceding 12 months in respect
of which no adjustment has been made and (2) any cash and the fair market value
(determined as set forth in paragraph 8(g)(ii) hereof)of other consideration
paid in respect of any repurchases of Common Stock by the Corporation or any of
its subsidiaries within the preceding 12 months in respect of which no
adjustment has been made, exceeds 2% of the Corporation's market capitalization
(being the product of the then Current Market Price of the Common Stock times
the aggregate number of shares of Common Stock then outstanding on the record
date for such distribution). The Conversion Price to be in effect after such
adjustment shall be determined by subtracting from the Conversion Price in
effect prior to such adjustment an amount equal to the quotient of (A) the sum
of clause (1) and clause (2) above and (B) the number of shares of Common Stock
outstanding on the date such adjustment is to be determined.
(v) No adjustment to the Conversion Price pursuant to (a)
paragraphs 8(g)(ii), 8(g)(iii) or 8(g)(iv) above shall be required unless such
adjustment would require an increase or decrease of at least $.50 in the
Conversion Price or (b) paragraph 8(g)(ii) above shall be required with respect
to rights, options, warrants or other securities outstanding on the Issue Date
or issued pursuant to the Company's employee benefit plans in effect on the
Issue Date or reserved for issuance thereunder as of the Issue Date; provided,
however, that any adjustments which by reason of this paragraph 8(g)(v)(a) are
not required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this paragraph 8(g) shall be made
by the Corporation and shall be made to the nearest four decimal points.
(vi) In the event that, at any time as a result of the provisions
of this paragraph 8(g), a holder of Series C Preferred Stock upon subsequent
conversion shall become entitled to receive any shares of Capital Stock of the
Corporation other than Common Stock, the number of such other shares so
receivable upon conversion of Series C Preferred Stock shall thereafter be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions contained herein.
(vii)If, as a result of the operation of paragraphs 8(g)(ii),
8(g)(iii) or 8(g)(iv) above and corresponding provisions in the Series B
Designation, the cumulative number of shares of Class A Common Stock issued or
issuable upon conversion of the Series B Preferred Stock and Series C Preferred
Stock, after giving effect to (x) the adjustments described in such paragraphs
and corresponding provisions in the Series B Designation and (y) all prior
conversions of Series B Preferred Stock and Series C Preferred Stock, would
equal or exceed a number (the "Threshold Number") equal to 20% of the
outstanding shares of Class A Common Stock as of the Issue Date and if the
Company receives a written opinion of its outside counsel that the issuance of
such shares in excess of the Threshold Number would violate the rules of the
Nasdaq National Market or any other exchange on which the Class A Common Stock
is then quoted or traded, then until and unless the Corporation obtains the
approval of its common stockholders for the issuance of any such shares of Class
A Common Stock in excess of the Threshold Number, the holders shall only be
entitled to exercise their conversion rights with respect to a maximum number of
Series B and Series C Preferred Stock that would not result in
11
an amount of shares of Class A Common Stock being issued in excess of the
Threshold Number, but in any case, the Conversion Price shall be adjusted as
provided in such paragraphs. If, as a result of the operation of the preceding
sentence, the conversion rights of the holders of Series C Preferred Stock are
limited by operation thereof because appropriate stockholder approval has not
been obtained, the Corporation agrees for the benefit of the holders of Series B
Preferred Stock and Series C Preferred Stock to use its reasonable best efforts
to seek, as promptly as reasonably practicable, the requisite approval of its
common stockholders (and shall seek such approval as often as necessary to
obtain such approval), and will recommend to its stockholders that they vote in
favor of a resolution providing for such approval, for the amount of shares of
Class A Common Stock that would be issued or issuable upon conversion in full of
all outstanding Series B and Series C Preferred Stock. Notwithstanding anything
to the contrary set forth above, the holders of Series B Preferred Stock and
Series C Preferred Stock shall be entitled to exercise such holders' conversion
rights in full (after giving effect to any and all anti-dilution adjustments
resulting from operation of paragraphs 8(g)(ii), 8(g)(iii) or 8(g)(iv)) in
connection with any merger, consolidation or other transaction in which such
Series B Preferred Stock, Series C Preferred Stock or Class A Common Stock is
being converted into or exchanged for cash, securities or other property in
connection with such merger, consolidation or other transaction. In the event
that the Corporation elects to redeem the shares of Series B Preferred Stock and
Series C Preferred Stock at a time when the holders' right to convert such
shares into Class A Common Stock is limited as provided in this paragraph (g),
and such holders seek to exercise such conversion rights prior to the date fixed
for redemption in accordance with this Section 8 (the "Redemption Date"), then
if the total number of shares of Class A Common Stock issued or issuable upon
conversion of such shares, after giving effect to any adjustments provided under
the first sentence of this section (the "Cumulative Number"), would exceed the
Threshold Number, the holders shall be entitled to convert such number of shares
of Series B Preferred Stock and Series C Preferred Stock into a number of shares
of Class A Common Stock up to the Threshold Number, and with respect to the
balance of such shares, the Corporation shall cancel such shares and shall pay
the holders in lieu thereof an amount in cash equal to (a)(i) the Cumulative
Number minus (ii) the Threshold Number multiplied by (b) the Market Price per
share of Class A Common Stock on the business day next preceding the business
day which is deemed the Redemption Date.
(h) All adjustments pursuant to this paragraph 8 shall be notified to
the holders of the Series C Preferred Stock and such notice shall be accompanied
by a schedule of computations of the adjustments.
9. Voting Rights. (a) The holders of record of shares of Series C
-------------
Preferred Stock shall not be entitled to any voting rights except as hereinafter
provided in this Section 9 or as otherwise provided by law.
(b) (i) So long as any shares of Series C Preferred Stock are issued
and outstanding, the holders of the Series C Preferred Stock shall be entitled
to designate one Board Observer. "Board Observer" means a person who shall not
be a member of the Board of Directors and who shall have the rights as agreed to
with the Corporation.
(ii) If and whenever the Corporation shall have failed to
discharge its Mandatory Redemption Obligation or the Corporation shall have
failed to comply with Section
12
9(d) hereof, the total number of directors then constituting the whole Board of
Directors automatically shall be increased by one and the holders of outstanding
shares of Series C Preferred Stock, voting separately as a single series, shall
be entitled to elect one additional director to serve on the Board of Directors
at any annual meeting of stockholders or special meeting held in place thereof,
or at a special meeting of the holders of the Series C Preferred Stock called as
hereinafter provided. Whenever the Corporation shall have fulfilled its
Mandatory Redemption Obligation, then the right of the holders of the
outstanding shares of the Series C Preferred Stock to elect such additional
director shall cease (but subject always to the same provisions for the vesting
of such voting rights in the case of any future failure to fulfill any Mandatory
Redemption Obligation), and the term of office of any person elected as director
by the holders of outstanding shares of Series C Preferred Stock pursuant to
this subparagraph (b)(ii) shall forthwith terminate and the total number of
directors then constituting the whole Board of Directors automatically shall be
reduced by one. At any time after voting power to elect one additional director
shall have become vested and be continuing in the holders of outstanding shares
of Series C Preferred Stock pursuant to this subparagraph (b)(ii), or if a
vacancy shall exist in the office of a director elected by the holders of
outstanding shares of Series C Preferred Stock pursuant to this subparagraph
(b)(ii), a proper officer of the Corporation may, and upon the written request
of the holders of record of at least twenty-five percent (25%) of the shares of
Series C Preferred Stock then outstanding addressed to the Secretary of the
Corporation shall, call a special meeting of the holders of Series C Preferred
Stock, for the purpose of electing the one additional director which such
holders are entitled to elect pursuant to this subparagraph (b)(ii). If such
meeting shall not be called by a proper officer of the Corporation within twenty
(20) days after personal service of said written request upon the Secretary of
the Corporation, or within twenty (20) days after mailing the same within the
United States by certified mail, addressed to the Secretary of the Corporation
at its principal executive offices, then the holders of record of at least
twenty-five percent (25%) of the outstanding shares of Series C Preferred Stock
may designate in writing one of their number to call such meeting at the expense
of the Corporation, and such meeting may be called by the person so designated
upon the notice required for the annual meeting of stockholders of the
Corporation and shall be held at the place for holding the annual meetings of
stockholders. Any holder of Series C Preferred Stock so designated shall have,
and the Corporation shall provide, access to the lists of stockholders to be
called pursuant to the provisions hereof.
(c) Without the written consent of holders of a majority of the
outstanding shares of Series C Preferred Stock or the affirmative vote of
holders of a majority of the outstanding shares of Series C Preferred Stock at a
meeting of the holders of Series C Preferred Stock called for such purpose, the
Corporation will not amend, alter or repeal any provision of the Restated
Certificate of Incorporation or this Certificate of Designation so as to
adversely affect the preferences, rights or powers of the Series C Preferred
Stock or to authorize the issuance of, or to issue any, additional shares of
Series C Preferred Stock; provided that any such amendment that changes any
dividend or other amount payable on or the liquidation preference of the Series
C Preferred Stock shall require the written consent of holders of two-thirds of
the outstanding shares of Series C Preferred Stock or the affirmative vote of
holders of two-thirds of the outstanding shares of Series C Preferred Stock at a
meeting of the holders of Series C Preferred Stock called for such purpose.
13
(d) Without the written consent of holders of a majority of the
outstanding shares of Series C Preferred Stock or the affirmative vote of
holders of a majority of the outstanding shares of Series C Preferred Stock at a
meeting of such holders called for such purpose, the Corporation will not
create, authorize or issue any Senior Securities.
(e) The Corporation may, without the consent of any holder of Series
C Preferred Stock, consolidate with or merge with or into, or convey, transfer
or lease all or substantially all its assets as an entirety to, any Person,
provided that: (1) the successor, transferee or lessee (if not the Corporation)
is organized and existing under the laws of the United States of America or any
State thereof or the District of Columbia and the Series C Preferred Stock shall
be converted into or exchanged for and shall become shares of, or interests in,
such successor, transferee or lessee, having in respect of such successor,
transferee, or lessee substantially the same powers, preferences and relative,
participating, optional or other special rights and the qualifications,
limitations or restrictions thereof, that the Series C Preferred Stock has
immediately prior to such transaction; and (2) the Corporation delivers to the
transfer agent an officers' certificate and an opinion of counsel stating that
such consolidation, merger, conveyance, transfer or lease complies with this
Certificate of Designation. In the event of any consolidation or merger or
conveyance, transfer or lease of all or substantially all of the assets of the
Corporation that is permitted pursuant to this paragraph (e), the successor
resulting from such consolidation or into which the Corporation is merged or the
transferee or lessee to which such conveyance, transfer or lease is made, will
succeed to, and be substituted for, and may exercise every right and power of,
the Corporation with respect to the Series C Preferred Stock (or shares or
interests into, or for which, the Series C Preferred Stock is converted or
exchanged), and thereafter, except in the case of a lease, the predecessor (if
still in existence) shall be released from its obligations and covenants with
respect to the Series C Preferred Stock.
(f) In exercising the voting rights set forth in this paragraph 9,
each share of Series C Preferred Stock shall have one vote per share. Except as
otherwise required by applicable law or as set forth herein, the shares of
Series C Preferred Stock shall not have any relative, participating, optional or
other special voting rights and powers and the consent of the holders thereof
shall not be required for the taking of any corporate action.
10. Reports. So long as any of the Series C Preferred Stock is
-------
outstanding, in the event the Corporation is not required to file quarterly and
annual financial reports with the Securities and Exchange Commission pursuant to
Section 13 or Section 15(d) of the Exchange Act, the Corporation will furnish
the holders of the Series C Preferred Stock with reports containing the same
information as would be required in such reports.
11. General Provisions. (a) The term "person" as used herein means
------------------
any corporation, limited liability company, partnership, trust, organization,
association, other entity or individual.
(b) The term "outstanding", when used with reference to shares of
stock, shall mean issued shares, excluding shares held by the Corporation or a
subsidiary of the Corporation.
14
(c) The headings of the sections, paragraphs, subparagraphs, clauses
and subclauses of this Certificate of Designation are for convenience of
reference only and shall not define, limit or affect any of the provisions
hereof.
* * *
15
IN WITNESS WHEREOF, said McLeodUSA Incorporated has caused this
Certificate of Designations to be signed by Stephen C. Gray, its President and
Chief Operating Officer this 13th day of September, 1999.
McLEODUSA INCORPORATED
By: /s/ Stephen C. Gray
-----------------------------------------------
Name: Stephen C. Gray
Title: President and Chief Operating Officer
16