As filed with the Securities and Exchange Commission on October 20, 2000
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_______________
McLeodUSA Incorporated
(Exact name of registrant as specified in its charter)
Delaware 4813 42-1407240
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
_______________
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
(319) 790-7800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
_______________
Clark E. McLeod
Chairman and Chief Executive Officer
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
(319) 790-7800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_______________
Copies to:
Joseph G. Connolly, Jr., Esq. Robert I. Townsend, III, Esq. A. Michael Hainsfurther, Esq.
James G. McMillan, Esq. Cravath, Swaine & Moore Munsch Hardt Kopf & Harr, P.C.
Hogan & Hartson L.L.P. 825 Eighth Avenue 4000 Fountain Place
555 13th Street, N.W. New York, New York 10019 1445 Ross Avenue
Washington, D.C. 20004 (212) 474-1000 Dallas, Texas 75202
(202) 637-5600 (214) 855-7500
_______________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effectiveness of this Registration Statement and certain
other conditions under the merger agreement are met or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. [_]
___________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_] ___________
_______________
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Title of each class of Amount to be Proposed maximum Proposed maximum aggregate Amount of
securities to be registered registered(1) offering price per share offering price(2) registration fee
===================================================================================================================================
Class A Common Stock, $.01 par
value per share 17,664,282 Not Applicable Not Applicable $63,045
===================================================================================================================================
(1) Represents the maximum number of shares of Class A common stock, par value
$.01 per share, of McLeodUSA Incorporated that may be issued pursuant to the
transactions described herein, based on (a) 45,573,482 shares of common
stock, par value $.01 per share, of CapRock Communications Corp., which is
the maximum number of shares of CapRock common stock that may be outstanding
immediately prior to the completion of the transactions described herein,
assuming exercise of all outstanding options to purchase shares of CapRock
common stock (whether or not currently exercisable), and (b) the exchange
ratio of 0.3876 of a share of McLeodUSA Class A common stock for each share
of CapRock common stock.
(2) Pursuant to Rules 457(f)(1) and 457(c) under the Securities Act of 1933, the
registration fee has been calculated based on a price of $5.24 per share of
CapRock common stock (the average of the high and low price per share of
CapRock common stock as reported on the Nasdaq National Market on October
18, 2000).
_______________
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
The information in this proxy statement/prospectus is not complete and may be
changed. We may not issue these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This proxy
statement/prospectus is not an offer to sell these securities, and it is not
soliciting an offer to buy these securities in any state or jurisdiction where
the offer or sale is not permitted.
SUBJECT TO COMPLETION - DATED OCTOBER 20, 2000
[Insert CapRock Communications Corp. Logo]
CAPROCK COMMUNICATIONS CORP.
15601 Dallas Parkway, Suite 700
Dallas, Texas 75001
MERGER PROPOSED-YOUR VOTE IS VERY IMPORTANT
[________], 2000
Dear fellow stockholder,
You are cordially invited to attend our special meeting of stockholders on
[__________], 2000 at 9:00 a.m. local time, at our offices located at 15601
Dallas Parkway, Suite 700, Dallas, Texas 75001.
At the special meeting, we will ask you to approve the acquisition of our
company by McLeodUSA Incorporated. In the merger, you will receive 0.3876 of a
share of McLeodUSA Class A common stock for each share of CapRock common stock
you own. As you know, CapRock common stock is quoted on the Nasdaq National
Market under the symbol "CPRK." The closing price for CapRock common stock on
[_________], 2000 was $[____] per share. McLeodUSA Class A common stock is
quoted on the Nasdaq National Market under the symbol "MCLD." The closing price
for McLeodUSA Class A common stock on [__________], 2000, was $[____] per share.
You will receive cash for any fractional share of McLeodUSA Class A common stock
that you would otherwise receive in the merger.
Completion of the merger requires the approval of the merger agreement by
the holders of a majority of the outstanding shares of CapRock common stock.
Only stockholders who hold shares of CapRock common stock at the close of
business on [___________], 2000 will be entitled to vote at the special meeting.
CapRock stockholders holding approximately 52% of the aggregate voting power of
the CapRock common stock have agreed to vote all of their shares in favor of the
approval of the merger agreement. Consequently, the approval of the merger
agreement is assured.
After careful consideration, the CapRock board of directors has unanimously
recommended the approval of the merger agreement and determined that its terms
are fair to and in the best interests of CapRock and its stockholders. The
CapRock board of directors recommends that you vote "FOR" the approval of the
merger agreement.
This document provides you with detailed information about the meeting and
the proposed merger. You can also get information from publicly available
documents filed with the Securities and Exchange Commission. We encourage you to
read this entire document carefully, including the section entitled "Risk
Factors" beginning on page [__].
Sincerely,
Jere W. Thompson, Jr.
Chairman of the Board
and Chief Executive Officer
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus and proxy statement. Any representation
to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
This proxy statement / prospectus is dated [________________], 2000
and is first being mailed to stockholders on or about [______________], 2000.
REFERENCES TO ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates documents by reference
which are not presented in or delivered with this proxy statement/prospectus.
This information is available to you without charge upon your oral or written
request. With respect to McLeodUSA's documents, your requests should be directed
to McLeodUSA Incorporated, McLeodUSA Technology Park, 6400 C Street SW, Post
Office Box 3177, Cedar Rapids, Iowa 52406-3177, Attention: General Counsel
(telephone (319) 790-7775). With respect to CapRock's documents, your requests
should be directed to CapRock Communications Corp., 15601 Dallas Parkway, Suite
700, Dallas, Texas 75001, Attention: Chief Financial Officer (telephone (972)
982-9550). In order to ensure delivery of the documents in advance of the
special meeting, any request should be made at least five business days prior to
the date of the special meeting.
[Insert CapRock Communications Corp. Logo]
CAPROCK COMMUNICATIONS CORP.
15601 Dallas Parkway
Suite 700
Dallas, Texas 75001
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AT 9:00 A.M. ON [___________], 2000
We will hold a special meeting of stockholders of CapRock Communications
Corp., a Texas corporation, at 9:00 a.m., local time on [__________], 2000 at
our offices located at 15601 Dallas Parkway, Suite 700, Dallas, Texas 75001, for
the following purposes:
1. to consider and vote upon a proposal to approve the Agreement and Plan
of Merger, by and among McLeodUSA Incorporated, Cactus Acquisition
Corp., a wholly-owned subsidiary of McLeodUSA Incorporated, and CapRock
Communications Corp., dated as of October 2, 2000, as more fully
described in this proxy statement/prospectus and
2. to transact other business as may properly come before the special
meeting.
Only holders of record of CapRock common stock at the close of business on
[__________], 2000, which has been fixed as the record date for notice of the
special meeting, are entitled to notice of, and will be entitled to vote at, the
special meeting and any adjournments or postponements of the meeting.
Completion of the merger requires the approval of the merger agreement by
the holders of a majority of the outstanding shares of CapRock common stock.
Stockholders of CapRock holding approximately 52% of the aggregate voting power
of the CapRock common stock have agreed to vote all of their shares in favor of
the approval of the merger agreement. Consequently, the approval of the merger
agreement is assured. Holders of CapRock common stock have no dissenters' rights
of appraisal under Texas law in connection with the merger.
For more information about the merger, please read this proxy
statement/prospectus and the various documents attached as appendices, including
the merger agreement and the fairness opinion of Salomon Smith Barney Inc.
A complete list of stockholders entitled to vote at the meeting will be
available at the offices of CapRock during ordinary business hours for the 10-
day period before the special meeting for examination by any stockholder. This
list will also be available at the meeting.
Whether or not you expect to be present at the meeting, please submit your
proxy by completing, dating, signing and returning the enclosed proxy card,
which is solicited by the CapRock board of directors. The shares represented by
the proxy will be voted according to your specified response. The proxy is
revocable and will not affect your right to vote in person if you attend the
meeting. Properly executed proxies that do not contain voting instructions will
be voted for the approval of the merger agreement.
By Order of the Board of Directors
Jere W. Thompson, Jr.
Chairman of the Board
and Chief Executive Officer
Dallas, Texas
[________], 2000
TABLE OF CONTENTS
Page
----
SUMMARY
The Companies..................................................................................
The Special Meeting............................................................................
The Merger ....................................................................................
Recommendation of CapRock Board of Directors...................................................
Opinion of CapRock Financial Advisor...........................................................
Differences in the Rights of Stockholders .....................................................
Selected Consolidated Financial Data of McLeodUSA..............................................
Selected Consolidated Financial Data of CapRock................................................
Comparative Per Share Data.....................................................................
Comparative Market Data........................................................................
RISK FACTORS........................................................................................
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS................................................
THE SPECIAL MEETING.................................................................................
THE MERGER..........................................................................................
Background of the Merger.......................................................................
Recommendation of the CapRock Board of Directors and Reasons for the Merger....................
McLeodUSA's Reasons for the Merger.............................................................
Opinion of the CapRock Financial Advisor.......................................................
Independent Auditors...........................................................................
Interests of the CapRock Directors and Executive Officers in the Merger........................
Accounting Treatment...........................................................................
Listing of McLeodUSA Class A Common Stock......................................................
Delisting and Deregistration of CapRock Common Stock...........................................
Governmental and Regulatory Approvals..........................................................
Federal Income Tax Consequences................................................................
Restrictions on Resales by Affiliates..........................................................
No Appraisal Rights............................................................................
CapRock Debt Securities........................................................................
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS..............................................
Structure of the Merger........................................................................
Conversion of CapRock Common Stock; Treatment of Options.......................................
Exchange of Certificates.......................................................................
Continuation of Employee Benefits..............................................................
Effective Time.................................................................................
Representations and Warranties.................................................................
Business of CapRock and Its Subsidiaries Pending the Merger....................................
No Solicitation by CapRock.....................................................................
Directors' and Officers' Insurance and Indemnification.........................................
Conditions to Completion of the Merger.........................................................
Termination of the Merger Agreement............................................................
Expenses; Termination Fee......................................................................
Waiver and Amendment of the Merger Agreement...................................................
Voting Agreements..............................................................................
Grant of Option................................................................................
Credit Agreement...............................................................................
Other Agreements...............................................................................
INFORMATION ABOUT McLEODUSA AND CACTUS ACQUISITION CORP.............................................
SELECTED CONSOLIDATED FINANCIAL DATA OF McLEODUSA...................................................
PRO FORMA FINANCIAL DATA............................................................................
INFORMATION ABOUT CAPROCK...........................................................................
SELECTED FINANCIAL DATA OF CAPROCK..................................................................
McLEODUSA CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS........................................
LEGAL MATTERS.......................................................................................
EXPERTS.............................................................................................
OTHER MATTERS.......................................................................................
SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS..........................................................
WHERE YOU CAN FIND MORE INFORMATION.................................................................
APPENDICES
Appendix A-- Agreement and Plan of Merger among McLeodUSA, Cactus Acquisition Corp. and CapRock..... A-1
Appendix B-- Voting and Option Agreement between McLeodUSA and various stockholders of CapRock...... B-1
Appendix C-- Voting Agreement between McLeodUSA and a stockholder of CapRock........................ C-1
Appendix D-- Opinion of Salomon Smith Barney Inc., dated as of October 2, 2000...................... D-1
i
QUESTIONS & ANSWERS ABOUT THE MERGER
Q. What will I receive for my CapRock shares?
A. You will receive 0.3876 of a share of McLeodUSA Class A common stock for
each share of CapRock common stock that you own at the effective time of
the merger. You will receive cash for any fractional share that you would
otherwise receive in the merger. Based on the closing price per share of
McLeodUSA Class A common stock on the Nasdaq National Market on
[_________], 2000, the value of 0.3876 of a share of McLeodUSA Class A
common stock was $[___]. The market value of the shares of McLeodUSA Class
A common stock that you will receive in the merger will fluctuate both
before and after the merger. After the merger, CapRock stockholders will
own approximately 2% of the outstanding shares of McLeodUSA Class A common
stock on a fully diluted basis.
For example: A CapRock stockholder who owns 1,000 shares of CapRock common
stock will be entitled to receive after the merger 387 shares of McLeodUSA
Class A common stock, plus a check for the market value of six-tenths of a
share.
Q. What are the federal income tax consequences of the merger?
A. In general, it is expected that CapRock stockholders will not be required
to pay federal income tax as a result of exchanging CapRock shares for
McLeodUSA shares, except for taxes on any cash that is received in lieu of
fractional shares.
Q. When and where will the special meeting take place?
A. The special meeting will be held on [___], 2000 at 9:00 a.m., local time,
at the offices of CapRock located at 15601 Dallas Parkway, Suite 700,
Dallas, Texas 75001.
Q. What should I do now?
A. You should carefully read and consider the information contained in this
proxy statement/prospectus. You should then complete and sign your proxy
----------------------------
card and return it in the enclosed return envelope as soon as possible so
------------------
that your shares will be represented at the special meeting. You may also
vote in person at the special meeting. If you do not return your proxy card
or otherwise vote at the special meeting, it will have the same effect as
if you voted against the approval of the merger agreement.
Q. Can I change my mind and revoke my proxy?
A. Yes. You may take back your proxy up to and including the day of the
special meeting by following the directions on page [__]. Then you can
either grant a new proxy or attend the special meeting and vote in person.
Q. If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A. Your broker will vote your shares only if you instruct your broker on how
to vote. Your broker will send you directions on how you can instruct him
or her to vote. Your broker cannot vote your shares without instructions
from you.
Q. Should I send in my CapRock stock certificate now?
A. No, you should not send in your stock certificate with your proxy. Promptly
after the merger is completed, McLeodUSA will send written instructions to
former CapRock stockholders describing the process for exchanging their
CapRock stock certificates for McLeodUSA stock certificates.
Q. Are CapRock stockholders entitled to dissenters' rights?
A. No. Under Texas law, CapRock stockholders are not entitled to dissenters'
rights of appraisal.
Q. When do the companies expect the merger to be completed?
A. We are working to complete the merger as quickly as possible. We plan to
complete the merger promptly after the special meeting.
Q. Whom should I call if I have questions?
A. Stockholders who have questions about the merger may call the Chief
Financial Officer of CapRock, at (972) 982-9550.
* * *
ii
SUMMARY
This document is a prospectus of McLeodUSA and a proxy statement of
CapRock. This summary highlights selected information from this proxy
statement/prospectus. It does not contain all of the information that may be
important to you. You should carefully read this entire proxy
statement/prospectus and the other documents to which this document refers you.
In addition, you should carefully consider the factors set forth under the
caption "Risk Factors." See "Where You Can Find More Information."
The Companies
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
(319) 790-7800
McLeodUSA provides selected telecommunications services to customers nationwide.
McLeodUSA provides integrated communications services, including local services,
in many Midwest and Rocky Mountain states and long distance and advanced data
services in all 50 states. McLeodUSA is a facilities-based telecommunications
provider with 361 ATM switches, 37 voice switches, nearly 824,000 local lines
and more than 9,000 employees. McLeodUSA expanded its marketplace for advanced
data and Internet services to all 50 states through its March 30, 2000
acquisition of Splitrock Services, Inc. The network acquired in the Splitrock
transaction is capable of transmitting integrated next-generation data, video
and voice services, reaching 800 cities and 90% of the U.S. population. In the
next 12 months, McLeodUSA plans to distribute 30 million telephone directories
in 26 states, serving a population of 52 million. McLeodUSA is a Nasdaq-100
company traded under the symbol "MCLD."
McLeodUSA offers local, long distance, Internet access, data, voice mail and
paging services from a single company on a single bill. McLeodUSA believes it is
the first company in many of its markets to offer one-stop shopping for
communications services tailored to customers' specific needs.
McLeodUSA's core business is providing communications services in competition
with existing local telephone companies, including:
. local and long distance services
. dial and dedicated Internet access
. higher bandwidth Internet access services, such as digital subscriber line
(DSL) and cable modem
. value-added services such as virtual private networks and web hosting
. bandwidth leasing and colocation services
. facilities and services dedicated for a particular customer's use
. telephone and computer sales, leasing, networking, service and installation
. other communications services, including video, cellular, operator,
payphone, mobile radio, wireless communications and paging services
McLeodUSA also derives revenue from the following services related to its core
business:
. sale of advertising in print and electronic telephone directories
. traditional local telephone company services in east central Illinois and
southeast South Dakota
. telemarketing services
In most of its markets, McLeodUSA competes with the existing local phone company
by leasing its lines and switches. McLeodUSA provides long distance services by
using its own facilities and by leasing capacity from others. McLeodUSA is
actively developing fiber optic communications networks in many of its target
local markets to carry additional communications traffic on its own network.
McLeodUSA is actively developing enhancements to its national network and
associated next-generation services.
CapRock Communications Corp.
15601 Dallas Parkway, Suite 700
Dallas, Texas 75001
(972) 982-9550
CapRock is a facilities-based integrated communications service provider
primarily to small and medium-sized business and communications carrier
customers in the Southwestern United States. CapRock offers business customers
an integrated bundle of communications products and services including local
exchange, domestic and international long distance, enhanced voice, data,
Internet, DSL and dedicated private line services. Additionally, CapRock offers
its communications-intensive
1
business and carrier customers dark fiber, high bandwidth dedicated fiber
infrastructure, terminating access for domestic and international long distance
and ATM, frame relay and IP data transport services.
CapRock's communications services are provided through resale and over its
fiber, voice and data networks. As of June 30, 2000, the CapRock network covered
approximately 4,500 route miles (including 22 metro fiber loops in key markets).
Additionally, as of June 30, 2000, CapRock provided switch-based competitive
local exchange services in 13 markets. As of June 30, 2000, CapRock had 12 voice
and 17 data switches installed and operational on its network.
The Special Meeting
(page __)
The special meeting of CapRock stockholders will be held on [___________], 2000
at 9:00 a.m., local time, at the offices of CapRock located at 15601 Dallas
Parkway, Suite 700, Dallas, Texas 75001. At the special meeting, you will be
asked to vote to approve the merger agreement.
You can vote, or submit a proxy to vote, at the special meeting if you were a
record holder of CapRock common stock at the close of business on [__________],
2000. You can vote your shares by attending the meeting and voting in person or
by marking the enclosed proxy card with your vote, signing it and mailing it in
the enclosed return envelope. You can revoke your proxy at any time before it is
exercised.
Vote Required (page __)
The approval of at least a majority of all of the outstanding shares of CapRock
common stock is required to approve the merger agreement. There were
[38,729,536] shares of CapRock common stock outstanding as of [_______], 2000.
Each holder of CapRock common stock is entitled to one vote per share with
respect to all matters on which a vote is to be taken at the special meeting.
The directors and executive officers of CapRock and their affiliates hold
12,772,739 shares of CapRock common stock, or approximately 33% of the
outstanding shares entitled to vote at the special meeting. Moreover, in
connection with the merger agreement, McLeodUSA and several CapRock stockholders
beneficially owning in the aggregate 19,979,230 shares of CapRock common stock,
representing approximately 52% of the outstanding shares of CapRock common stock
as of the record date, entered into agreements under which these CapRock
stockholders have agreed to vote in favor of the approval of the merger
agreement. These agreements are attached as Appendices B and C to this proxy
statement/prospectus. These stockholders together own enough shares to cause the
merger agreement to be approved at the special meeting.
The Merger (page __)
Under the merger agreement, Cactus Acquisition Corp. will be merged with and
into CapRock, with CapRock surviving as a wholly-owned subsidiary of McLeodUSA.
McLeodUSA and CapRock plan to complete the merger promptly after the special
meeting.
The merger agreement is included as Appendix A to this proxy
statement/prospectus. It is the legal document that governs the merger.
What You Will Receive in the Merger (page__)
If the merger is completed as proposed, each outstanding share of CapRock common
stock that you own will be converted into the right to receive 0.3876 of a share
of McLeodUSA Class A common stock. You will also receive a cash payment for any
fraction of a share of McLeodUSA Class A common stock that you would otherwise
be entitled to receive.
Exchange of CapRock Stock Certificates (page__)
After the merger occurs, Wells Fargo Bank Minnesota, N.A., the exchange agent
designated by McLeodUSA, will send a letter of transmittal to you that will
provide instructions on the procedure for exchanging your CapRock stock
certificates for McLeodUSA stock certificates.
Please do not send any stock certificates at this time.
No Appraisal Rights (page__)
Under Texas law, CapRock stockholders are not entitled to dissenters' rights of
appraisal in connection with the merger.
What is Needed to Complete the Merger (page__)
McLeodUSA and CapRock will complete the merger only if they satisfy or, if the
law permits, waive, several conditions, including the following:
. holders of a majority of the outstanding shares of CapRock common stock
must approve the merger agreement (holders of such a majority have agreed
to approve the merger agreement)
2
. the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 must have expired or been terminated
. CapRock must have obtained the written consent of a majority of the
aggregate principal amount of each of the two series of its outstanding
notes to amendments to the indentures which will eliminate most of the
restrictive covenants contained in the indentures and which will provide
that the merger will not violate the indentures or constitute a change of
control under the indentures
. Munsch Hardt Kopf & Harr, P.C., counsel to CapRock, must deliver an opinion
to CapRock stating that the merger will qualify for United States federal
income tax purposes as a tax free reorganization within the meaning of the
Internal Revenue Code
. other customary contractual conditions set forth in the merger agreement
Federal Income Tax Consequences (page__)
The merger is expected to be tax free to CapRock stockholders for United States
federal income tax purposes, except with respect to cash received for fractional
shares of McLeodUSA Class A common stock.
Determining the actual tax consequences of the merger to a CapRock stockholder
can be complicated. Such consequences will depend on the stockholder's specific
situation and on variables not within the control of CapRock or McLeodUSA.
CapRock stockholders should consult with their own tax advisors for a full
understanding of the tax consequences to them of the merger.
Accounting Treatment (page__)
McLeodUSA and CapRock will account for the merger using the purchase method of
accounting.
Interests of the CapRock Directors and Executive Officers in the Merger (page__)
Some of the CapRock directors and executive officers have interests in the
merger that are different from, or in addition to, their interests as CapRock
stockholders. These interests exist because of indemnification agreements,
employment agreements and other agreements that the directors and executive
officers have with CapRock and rights that they have under benefit and
compensation plans. Various CapRock directors or executive officers may enter
into employment, advisory and other agreements or arrangements with McLeodUSA.
The merger agreement requires McLeodUSA to indemnify directors and executive
officers of CapRock for events occurring before the merger, including events
that are related to the merger.
Governmental and Regulatory Approvals (page__)
United States antitrust laws prohibit McLeodUSA and CapRock from completing the
merger until after they have furnished certain information and materials to the
Antitrust Division of the Department of Justice and the Federal Trade Commission
and a required waiting period has expired or been terminated. McLeodUSA and
CapRock each filed the required notification and report forms with the Antitrust
Division of the Department of Justice and the FTC on October 12, 2000 and
October 13, 2000, respectively. McLeodUSA and CapRock have filed applications to
complete the merger with the Federal Communications Commission and the state
public utility commissions (PUCs) in Louisiana, Oklahoma, Texas, Florida and
California. In other states, where CapRock has only minimal customers, CapRock
and McLeodUSA intend to transfer those customers from CapRock to McLeodUSA.
CapRock will soon file for approval to relinquish its intrastate interexchange
(IXC) certificates in those certain jurisdictions in which (a) McLeodUSA already
holds the authority required to provide the IXC services and (b) regulatory
approval of the merger would be required if CapRock's certificates were not
relinquished.
While neither CapRock nor McLeodUSA knows of any reason why the requested
approvals will not be obtained in a timely manner, CapRock and McLeodUSA cannot
be certain when or if they will receive them.
Termination of the Merger Agreement; Termination Fee (page__)
The merger agreement contains provisions addressing the circumstances under
which McLeodUSA or CapRock may terminate the merger agreement. In addition, the
merger agreement provides that in several circumstances, CapRock may be required
to pay McLeodUSA a termination fee of $7.85 million.
Grant of Option (page__)
CapRock stockholders owning 15,023,729 shares of CapRock common stock,
representing approximately 39% of the outstanding shares of CapRock common stock
as of the record date, have granted McLeodUSA an option to purchase their shares
of CapRock common stock. The option is exercisable under several circumstances,
including those under
3
which CapRock is required to pay to McLeodUSA the termination fee of $7.85
million.
Exchange Offers (page __)
McLeodUSA has prepared and filed a registration statement on Form S-4 to effect
exchange offers to acquire all of the outstanding CapRock 12% senior notes due
2008 and CapRock 11 1/2% senior notes due 2009 in exchange for notes of
McLeodUSA having the same interest rate, payment, maturity and redemption terms
as the applicable CapRock notes. These exchange offers are expected to be
completed concurrently with the completion of the merger.
Recommendation of the CapRock Board of
Directors (page __)
The CapRock board of directors recommends that you vote "FOR" the approval of
the merger agreement.
Opinion of CapRock Financial Advisor
(page __)
Salomon Smith Barney, financial advisor to CapRock, delivered an opinion to the
CapRock board of directors that, as of October 2, 2000, the exchange ratio of
0.3876 of a share of McLeodUSA Class A common stock was fair to the holders of
CapRock common stock from a financial point of view. We have attached this
opinion as Appendix D to this proxy statement/prospectus.
Differences in the Rights of Stockholders
(page __)
When the merger is completed, CapRock stockholders will become stockholders of
McLeodUSA. CapRock stockholders' rights will be governed by Delaware law and by
the McLeodUSA certificate of incorporation and bylaws, rather than by Texas law
and the CapRock articles of incorporation and bylaws.
4
Selected Consolidated Financial Data of McLeodUSA
The information in the following unaudited table is based on historical
financial information included in the prior SEC filings of McLeodUSA, including
the McLeodUSA Annual Report on Form 10-K for the fiscal year ended December 31,
1999 and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
The following summary financial information should be read in connection with
this historical financial information including the notes which accompany such
financial information. This historical financial information is considered a
part of this document. See "Where You Can Find More Information." The audited
historical financial statements of McLeodUSA as of December 31, 1999, 1998 and
1997, and for each of the three years in the period ended December 31, 1999 were
audited by Arthur Andersen LLP, independent public accountants.
The information in the following table reflects financial information for
the following companies McLeodUSA has acquired:
Acquired Company Date Acquired
---------------- -------------
MWR Telecom, Inc................................... April 28, 1995
Ruffalo, Cody & Associates, Inc.................... July 15, 1996
Telecom*USA Publishing Group, Inc................. September 20, 1996
Consolidated Communications, Inc................... September 24, 1997
Ovation Communications, Inc........................ March 31, 1999
Splitrock Services, Inc............................ March 30, 2000
The operations statement data and other financial data in the table include
the operations of these companies beginning on the dates they were acquired. The
balance sheet data in the table include the financial position of these
companies at the end of the periods presented. These acquisitions affect the
comparability of the financial data for the periods presented.
The pro forma information presented in the operations statement data and
other financial data in the table includes the operations of Ovation, Splitrock
and CapRock as if they had been acquired at the beginning of the periods
presented and the as adjusted information in the balance sheet data in the table
includes the Ovation, Splitrock and CapRock financial position as of the date
presented. The 1999 pro forma amounts include adjustments to the CapRock 1999
historical financial statements to give effect to the issuance by CapRock in May
1999 of $210 million of its 11 1/2% senior notes as if the note issuance had
occurred at the beginning of such period.
The information in the table also reflects the following debt and equity
securities that McLeodUSA has outstanding:
Description of Securities Principal Amount Date Issued
------------------------- ---------------- -----------
10 1/2% senior discount notes due March 1, 2007..................... $500 million March 4, 1997
9 1/4% senior notes due July 15, 2007.............................. $225 million July 21, 1997
8 3/8% senior notes due March 15, 2008.............................. $300 million March 10, 1998
9 1/2% senior notes due November 1, 2008............................ $300 million October 30, 1998
8 1/8% senior notes due February 15, 2009........................... $500 million February 22, 1999
Series A preferred stock............................................ $287 million August 23, 1999
Series B preferred stock............................................ $687 million September 15, 1999
Series C preferred stock............................................ $313 million September 15, 1999
Senior Secured Credit Facilities.................................... $575 million May 30, 2000
The operations statement data and other financial data in the table include
the effects of the issuances beginning on the dates the securities were issued.
The balance sheet data in the table include the effects of these issuances at
the end of the periods presented. The pro forma information presented in the
operations statement data and other financial data in the table includes the
effects of the issuance of the 8 1/8% senior notes, the Series A, B and C
preferred stock and the Senior Secured Credit Facilities as if they had occurred
at the beginning of 1999.
On June 30, 1999, McLeodUSA announced that its board of directors had
declared a two-for-one stock split to be effected in the form of a stock
dividend. The record date for the stock split was July 12, 1999.
5
Stockholders of record at the market close on that date received one additional
share of McLeodUSA Class A common stock for each share held. Distribution of the
additional shares took place on July 26, 1999. On February 29, 2000, McLeodUSA
announced that its board of directors had declared a three-for-one stock split
to be effected in the form of a stock dividend. The record date for the stock
split was April 4, 2000. Stockholders of record at the market close on that date
received two additional shares of McLeodUSA Class A common stock for each share
held. Distribution of the additional shares took place on April 24, 2000. All
information in the selected consolidated financial data has been adjusted to
reflect the two-for-one stock split and the three-for-one stock split.
(table begins on the next page)
6
Selected Consolidated Financial Data of McLeodUSA
(In thousands, except per share data)
Year Ended December 31,
----------------------------------------------------
Pro Forma
---------
1995 1996 1997 1998 1999 1999
----------- ----------- ----------- --------------------------- --------
(unaudited)
Operations Statement Data:
Revenue................................. $ 28,998 $ 81,323 $ 267,886 $ 604,146 $ 908,792 $1,210,667
---------- ---------- ---------- ----------- ---------- ----------
Operating expenses:
Cost of service....................... 19,667 52,624 151,190 323,208 457,085 699,401
Selling, general and administrative... 18,054 46,044 148,158 260,931 392,687 481,488
Depreciation and amortization......... 1,835 8,485 33,275 89,107 190,695 346,131
Other................................. -- 2,380 4,632 5,575 -- --
---------- ---------- ---------- ----------- ---------- ----------
Total operating expenses ............. 39,556 109,533 337,255 678,821 1,040,467 1,527,020
Operating loss.......................... (10,558) (28,210) (69,369) (74,675) (131,675) (316,353)
Interest income (expense), net.......... (771) 5,369 (11,967) (52,234) (94,244) (191,068)
Other income............................ -- 495 1,426 1,997 5,637 7,163
Income taxes............................ -- -- -- -- -- --
---------- ---------- ---------- ----------- ---------- ----------
Net loss................................ (11,329) (22,346) (79,910) (124,912) (220,282) (500,528)
Preferred stock dividends............... -- -- -- -- (17,727) (54,375)
---------- ---------- ---------- ----------- ---------- ----------
Loss applicable to common stock......... $ (11,329) $ (22,346) $ (79,910) $ (124,912) $ (238,009) $ (554,633)
========== ========== ========== =========== ========== ==========
Loss per common share................... $ (.07) $ (.09) $ (.24) $ (.33) $ (.54) $ (.99)
========== ========== ========== =========== ========== ==========
Weighted average common shares
outstanding........................... 168,024 243,036 329,844 376,842 443,130 559,751
========== ========== ========== =========== ========== ==========
Six Months Ended June 30,
--------------------------
Pro Forma
---------
1999 2000 2000
----------- ------------- ----
(unaudited) (unaudited) (unaudited)
Operations Statement Data:
Revenue $ 403,771 $ 620,082 $ 769,055
---------- --------- ----------
Operating expenses:
Cost of service......................................................... 205,507 344,426 466,226
Selling, general and administrative..................................... 178,339 256,563 309,973
Depreciation and amortization........................................... 78,708 163,193 213,415
Other................................................................... -- -- 872
---------- --------- ----------
Total operating expenses................................................ 462,554 764,182 990,486
Operating loss............................................................ (58,783) (144,100) (221,431)
Interest income (expense), net............................................ (50,666) (42,077) (70,486)
Other income.............................................................. 562 1,971 1,996
Income taxes.............................................................. -- -- --
---------- --------- ----------
Net loss.................................................................. (108,887) (184,206) (289,921)
Preferred stock dividends................................................. -- (27,204) (27,204)
---------- --------- ----------
Loss applicable to common stock........................................... $ (108,887) $(211,410) $ (317,125)
=========== ========= ==========
Loss per common share..................................................... $ (.26) $ (.40) $ (.54)
========== ========= ==========
Weighted average common shares outstanding................................ 423,210 529,109 590,221
========== ========= ==========
7
Selected Consolidated Financial Data of McLeodUSA
(In thousands, except per share data)
December 31, June 30, 2000
------------------------------------------------------ -------------
1995 1996 1997 1998 1999 Actual Pro Forma
-------- ---------- ---------- ---------- ---------- ----------- ----------
(unaudited) (unaudited)
Balance Sheet Data:
Current assets................... $ 8,507 $224,401 $ 517,869 $ 793,192 $1,569,473 $1,647,070 $1,879,002
Working capital (deficit)........ $(1,208) $185,968 $ 378,617 $ 613,236 $1,272,794 $ 859,997 $ 913,955
Property and equipment, net...... $16,119 $ 92,123 $ 373,804 $ 629,746 $1,270,032 $1,897,962 $2,321,001
Total assets..................... $28,986 $452,994 $1,345,652 $1,925,197 $4,203,147 $7,069,543 $7,791,496
Long-term debt................... $ 3,600 $ 2,573 $ 613,384 $1,245,170 $1,763,725 $2,370,370 $2,718,588
Redeemable convertible preferred
stock.......................... $ -- $ -- $ -- $ -- $1,000,000 $1,000,000 $1,000,000
Stockholders' equity............. $14,958 $403,429 $ 559,379 $ 462,806 $1,108,542 $2,878,436 $3,074,207
Year Ended December 31,
---------------------------------------------------------
Pro Forma
-----------
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- ----
(unaudited)
Other Financial Data:
Capital expenditures
Property, plant and equipment............... $ 6,364 $ 79,845 $179,255 $289,923 $580,003 $ 820,756
Business acquisitions....................... $ 8,333 $ 93,937 $421,882 $ 49,737 $736,626 $3,376,180
EBITDA(1)...................................... $(8,723) $(17,345) $(31,462) $ 20,007 $ 59,020 $ 29,778
Six Months Ended June 30,
-------------------------
Pro Forma
----------
1999 2000 2000
---------- ---------- ----
(unaudited) (unaudited) (unaudited)
Other Financial Data:
Capital expenditures
Property, plant and equipment........................................ $220,390 $ 559,834 $ 804,163
Business acquisitions................................................ $525,161 $2,052,925 $2,415,523
EBITDA(1)............................................................... $ 19,925 $ 19,093 $ (7,144)
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. McLeodUSA has included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
8
Selected Consolidated Financial Data of CapRock
(In thousands, except per share data)
The following table sets forth financial data as of and for the years
ended December 31, 1995, 1996, 1997, 1998 and 1999 and as of and for the six
months ended June 30, 1999 and 2000. The business combination among CapRock's
predecessor companies was completed on August 26, 1998 and was accounted for as
a pooling of interests. Accordingly, these Consolidated Financial Statements
include CapRock's three predecessor companies (CapRock Telecommunications Corp.,
CapRock Fiber Network, LTD. and IWL Communications, Incorporated) as though
these entities were always a part of CapRock.
In May 1998, IWL Communications changed its fiscal year end to coincide
with the fiscal years of CapRock, CapRock Telecommunications and CapRock Fiber.
The Consolidated Statement of Operations for the year ended December 31, 1996
combines the operating activity of IWL Communications for the year ended June
30, 1996 with the operating activity of CapRock Telecommunications and CapRock
Fiber for the year ended December 31, 1996. The net income of IWL Communications
in the amount of approximately $260,000 for the six month period ended December
31, 1996 was excluded from the Consolidated Statement of Operations for the year
ended December 31, 1996 as a result of the non-conforming year ends for such
period. This amount was included as an adjustment to retained earnings in the
Consolidated Statement of Stockholders' Equity and Comprehensive Income in 1997.
IWL Communications' cash flow for this period was added to the 1997 beginning
balance in the Consolidated Statement of Cash Flows.
As of and for the Year Ended December 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
Statement of Operations Data:
Revenues............................................ $29,407 $50,970 $75,349 $121,774 $192,623
Costs of Services................................... 21,185 39,357 52,471 83,221 115,676
------- ------- ------- -------- --------
Gross profit.................................. 8,222 11,613 22,878 38,553 76,947
Operating expenses:
Selling, general and administrative............. 7,326 8,983 14,074 23,528 56,535
Merger related expenses......................... - - - 2,313 -
Depreciation and amortization................... 1,186 1,536 3,346 4,887 9,698
------- ------- ------- -------- --------
Total operating expenses..................... 8,512 10,519 17,420 30,728 66,233
------- ------- ------- -------- --------
Operating income (loss)............................. (290) 1,094 5,458 7,825 10,714
Interest expense, net............................... (484) (585) (1,603) (6,441) (17,861)
Other income (expense).............................. 151 42 220 106 1,526
------- ------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item.............................. (623) 551 4,075 1,490 (5,621)
Income tax expense (benefit)........................ 48 227 1,513 1,267 (2,080)
------- ------- ------- -------- --------
Income (loss) before extraordinary item............. (671) 324 2,562 223 (3,541)
Extraordinary item - extinguishment of debt......... 645 - - - -
------- ------- ------- -------- --------
Net income (loss)............................. $ (26) $ 324 $ 2,562 $ 223 $ (3,541)
======= ======= ======= ======== ========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item............................ $ (623) $ 551 $ 4,075 $ 1,490 $ (5,621)
Pro forma income taxes, as if CapRock
Fiber were a C corporation.................... (211) 143 1,475 1,267 (2,080)
------- ------- ------- -------- --------
Income (loss) before extraordinary item......... (412) 408 2,600 223 (3,541)
Extraordinary item, net of taxes................ 397 - - - -
------- ------- ------- -------- --------
Pro forma net income (loss)................... $ (15) $ 408 $ 2,600 $ 223 $ (3,541)
======= ======= ======= ======== ========
Historical and pro forma income (loss) per common share:
Income (loss) before extraordinary item......... $ (0.02) $ 0.01 $ 0.09 $ 0.01 $ (0.11)
Extraordinary item, net of tax.................. $ 0.02 - - - -
------- ------- -------- -------- --------
Basic and diluted............................... $ - $ 0.01 $ 0.09 $ 0.01 $ (0.11)
======= ======= ======== ======== ========
Weighted average shares outstanding:
Basic........................................... 25,926 27,146 27,984 28,899 31,727
Diluted......................................... 25,936 27,156 28,481 30,028 31,727
9
Selected Consolidated Financial Data of CapRock
(In thousands, except per share data)
Six Months Ended
June 30,
-----------
1999 2000
-------- ------
Statement of Operations Data:
Revenues........................................................... $ 74,596 $ 113,936
Costs of Services.................................................. 44,919 79,220
-------- ---------
Gross profit................................................. 29,677 34,716
Operating expenses:
Selling, general and administrative............................ 25,012 43,398
Merger related expenses........................................ - -
Depreciation and amortization.................................. 3,337 9,077
-------- ---------
Total operating expenses.................................... 28,349 52,475
-------- ---------
Operating income (loss)............................................ 1,328 (17,759)
Interest expense, net.............................................. (7,134) (7,021)
Other income (expense)............................................. (135) 25
-------- ---------
Income (loss) before income taxes and
extraordinary item............................................. (5,941) (24,755)
Income tax expense (benefit)....................................... (2,335) (9,118)
-------- ---------
Income (loss) before extraordinary item............................ (3,606) (15,637)
Extraordinary item - extinguishment of debt........................ - -
-------- ---------
Net income (loss)............................................ $ 3,606 $ (15,637)
======== =========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item........................................... $ (5,941) $ (24,755)
Pro forma income taxes, as if CapRock
Fiber were a C corporation................................... (2,335) (9,118)
-------- ---------
Income (loss) before extraordinary item........................ (3,606) (15,637)
Extraordinary item, net of taxes............................... - -
-------- ---------
Pro forma net income (loss).................................. $ (3,606) $ (15,637)
======== =========
Historical and pro forma income (loss) per
common share:
Income (loss) before extraordinary item........................ $ (0.12) $ (0.47)
Extraordinary item, net of tax................................. - -
-------- ---------
Basic and diluted.............................................. $ (0.12) $ (0.47)
======== =========
Weighted average shares outstanding:
Basic.......................................................... 30,321 33,406
Diluted........................................................ 30,321 33,406
10
Selected Consolidated Financial Data of CapRock
(In thousands, except per share data)
As of and for the Year Ended December 31,
-----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ------
Balance Sheet Data:
Working capital (deficit).............................. $ (797) $ (2,153) $ (305) $ 102,489 $ 216,145
Property, plant and equipment, net..................... 6,705 15,901 27,341 59,607 228,601
Total assets........................................... 13,198 28,522 49,389 191,966 548,835
Long-term debt and capital lease obligations........... 2,443 13,254 21,062 145,187 347,502
Stockholders' equity................................... 3,552 3,886 14,086 16,062 96,030
Operating Data:
EBITDA(1).............................................. $ 896 $ 2,630 $ 8,804 $ 15,025 $ 20,412
Cash flows provided by (used in) operations............ 827 781 4,112 7,125 (13,302)
Cash flows used in investing activities................ (1,919) (9,350) (12,987) (134,350) (264,623)
Cash flows provided by financing activities............ 903 8,605 12,114 123,990 283,338
Capital expenditures................................... (2,282) (10,212) (13,631) (36,855) (201,289)
Six Months Ended June 30,
-------------------------
1999 2000
---------- -----------
Balance Sheet Data:
Working capital (deficit).............................. $337,555 $ 104,312
Property, plant and equipment, net..................... 97,360 423,039
Total assets........................................... 479,533 676,174
Long-term debt and capital lease obligations........... 347,012 348,218
Stockholders' equity................................... 94,939 177,738
Operating Data:
EBITDA(1).............................................. $ (4,665) $ (8,682)
Cash flows provided by (used in) operations............ (14,897) 50,799
Cash flows used in investing activities................ (258,169) (159,910)
Cash flows provided by financing activities............ 283,872 107,113
Capital expenditures................................... (45,717) (216,263)
(1) EBITDA consists of operating income or loss before interest, income taxes,
depreciation and amortization and other nonrecurring operating expenses.
EBITDA is a measure commonly used in the communications industry. EBITDA is
not a measure of financial performance under generally accepted accounting
principles and should not be considered as an alternative to net income as
a measure of performance nor as an alternative to cash flow as a measure of
liquidity.
11
Comparative Per Share Data
The following table summarizes per share information for McLeodUSA and
CapRock on a historical, pro forma combined and equivalent pro forma basis. The
earnings per share were calculated using income (loss) from continuing
operations. The pro forma earnings per share amounts do not include any
adjustments to reflect potential expense reductions or revenue enhancements that
may result from the merger or the effect of repurchases of McLeodUSA Class A
common stock or CapRock common stock after the stated periods. The pro forma
data do not necessarily indicate the results of future operations or the actual
results that would have occurred had the merger occurred at the beginning of the
periods presented. The pro forma financial data have been included in accordance
with the rules of the SEC and are provided for comparative purposes only.
Options are not included in the computation of diluted earnings per share for
each company because the effect is anti-dilutive.
The McLeodUSA pro forma earnings per share data include the adjusted
operations of CapRock for the year ended December 31, 1999 and the six months
ended June 30, 2000 and adjustments attributable to the acquisitions of Ovation
and Splitrock by McLeodUSA, the issuance by McLeodUSA of its 8 1/8% senior
notes, the issuance by McLeodUSA of its Series A, B and C preferred stock and
the completion by McLeodUSA of its Senior Secured Credit Facilities, as if such
transactions had occurred on January 1, 1999. The McLeodUSA "book value per
share at period end" data give effect to the acquisitions of Ovation and
Splitrock and the merger of CapRock as if they had occurred at the end of the
applicable periods.
The CapRock "equivalent" pro forma amounts are calculated by
multiplying the unaudited McLeodUSA pro forma per share amounts by 0.3876. This
exchange ratio represents the number of shares of McLeodUSA Class A common stock
that CapRock stockholders would have received in exchange for each share of
CapRock common stock if the merger had been completed on October 2, 2000.
As of or for the As of or for the
year ended six months ended
December 31, 1999 June 30, 2000
-------------------- ------------------
(unaudited) (unaudited)
McLeodUSA Class A Common Stock
Loss attributable to shares of common stock
Basic earnings per share
Historical............................................. $ (0.54) $ (0.40)
Pro forma for the merger............................... (0.99) (0.54)
Diluted earnings per share
Historical............................................. (0.54) (0.40)
Pro forma for the merger............................... (0.99) (0.54)
Book value per share at period end
Historical............................................. 1.74 4.48
Pro forma for the merger............................... 4.85 4.69
CapRock Common Stock
Loss attributable to shares of common stock
Basic earnings per share
Historical............................................. $ (0.11) $ (0.47)
Equivalent pro forma................................... (0.38) (0.21)
Diluted earnings per share
Historical............................................. (0.11) (0.47)
Equivalent pro forma................................... (0.38) (0.21)
Book value per share at period end
Historical............................................. 2.89 4.60
Equivalent pro forma................................... 1.88 1.82
12
Comparative Market Data
McLeodUSA. McLeodUSA Class A common stock is, and the shares of
McLeodUSA Class A common stock to be issued to CapRock stockholders are expected
to be, quoted on the Nasdaq National Market and traded under the symbol "MCLD."
The following table sets forth for the periods indicated the high and low sales
price per share of McLeodUSA Class A common stock as reported by the Nasdaq
National Market. Prices per share of McLeodUSA Class A common stock take into
account the two-for-one stock split in the form of a stock dividend effective
July 26, 1999 and the three-for-one stock split in the form of a stock dividend
effective April 24, 2000.
CapRock. CapRock common stock is quoted on the Nasdaq National Market
and traded under the symbol "CPRK." CapRock common stock has been quoted on the
Nasdaq National Market since August 27, 1998. Before August 27, 1998, no
established public trading market for CapRock common stock existed. The
following table sets forth for the periods indicated the high and low sales
price per share of CapRock common stock as reported by the Nasdaq National
Market.
McLeodUSA CapRock
----------------- ----------------
High Low High Low
------ ----- ------ -----
1997
First Quarter................................. $ 4.792 $ 2.896 $ -- $ --
Second Quarter................................ 5.708 2.729 -- --
Third Quarter................................. 6.667 4.771 -- --
Fourth Quarter................................ 6.958 5.333 -- --
1998
First Quarter................................. $ 7.729 $ 5.083 $ -- $ --
Second Quarter................................ 8.052 6.333 -- --
Third Quarter................................. 6.688 3.563 10.000 6.375
Fourth Quarter................................ 6.417 2.542 8.750 4.750
1999
First Quarter................................. $ 7.375 $ 5.063 $ 20.125 $ 7.250
Second Quarter................................ 10.313 7.063 41.625 18.250
Third Quarter................................. 14.250 7.542 40.250 22.375
Fourth Quarter................................ 21.125 12.208 34.375 17.250
2000
First Quarter................................. $ 35.938 $ 16.500 $ 58.500 $ 29.750
Second Quarter................................ 29.500 13.688 49.000 18.250
Third Quarter................................. 25.125 10.500 20.125 3.469
Fourth Quarter (through Oct. [__], 2000)...... [____] [_____] [_____] [____]
On October 2, 2000, the last full trading day before the public
announcement of the proposed merger, the closing price of McLeodUSA Class A
common stock was $13.0635 per share and the closing price of CapRock common
stock was $5.063 per share. On [_________], 2000, the last trading day for which
information was available prior to the date of this proxy statement/prospectus,
the closing price reported for McLeodUSA Class A common stock was $[___] per
share and the closing price reported for CapRock common stock was $[___] per
share.
As of October [__], 2000, there were approximately [_____] holders of
record of McLeodUSA Class A common stock and there were approximately [_____]
holders of record of CapRock common stock.
Dividends. McLeodUSA has never declared or paid a cash dividend with
respect to McLeodUSA Class A common stock, and CapRock has never declared or
paid a cash dividend with respect to its common stock. McLeodUSA does not
anticipate paying cash dividends on McLeodUSA Class A common stock in the
foreseeable future. The terms of some debt instruments of both McLeodUSA and
CapRock limit each company's ability to pay cash dividends.
13
RISK FACTORS
You should carefully consider the following risk factors relating to
the merger and to ownership of McLeodUSA Class A common stock. You should also
consider the other information in this proxy statement/prospectus, including the
SEC Reports on Forms 10-K, 10-Q and 8-K and in the other documents considered a
part of this proxy statement/prospectus. See "Where You Can Find More
Information."
The Value of the McLeodUSA Class A Common Stock CapRock Stockholders Will
Receive in the Merger Will Depend on Its Market Price at the Time of the Merger.
If the market price of McLeodUSA Class A common stock drops, the value of
the McLeodUSA Class A common stock a CapRock stockholder will receive as a
result of the merger will also drop, since the formula for converting CapRock
common stock into McLeodUSA Class A common stock uses a fixed exchange ratio of
0.3876 of a share of McLeodUSA Class A common stock for each share of CapRock
common stock. See "Terms of the Merger Agreement and Related Transactions--
Conversion of CapRock Common Stock; Treatment of Options."
CapRock Directors and Executive Officers May Have Conflicts of Interest that
Influence Their Decision to Approve the Merger.
You should be aware of potential conflicts of interest of, and the benefits
available to, CapRock directors and executive officers when considering the
recommendation of the CapRock board of directors of the merger agreement. As
discussed below under "The Merger -- Interests of the CapRock Directors and
Executive Officers in the Merger," the CapRock directors and executive officers
have interests in the merger that are in addition to, or different from, their
interests as CapRock stockholders. These interests include:
. Options. Under the terms of CapRock's stock option plans, upon the
completion of the merger, outstanding, non-vested options to purchase
CapRock common stock held by CapRock directors and employees, including
executive officers, will vest and become immediately exercisable. McLeodUSA
will assume these options or issue substitute stock options to purchase
McLeodUSA Class A common stock in replacement of all unexercised CapRock
stock options outstanding at the effective time of the merger as described
under "Terms of the Merger Agreement and Related Transactions--Conversion
of CapRock Common Stock; Treatment of Options."
. Current Employment Agreements. CapRock has entered into employment
agreements with Jere W. Thompson, Jr., Leo J. Cyr, James E. Skinner and
Timothy W. Rogers, each of whom is an executive officer of CapRock. Under
these agreements, if the executive's employment with CapRock is terminated
by CapRock without cause, as defined in the agreements, the executive is
entitled to receive severance compensation and benefits as described under
"The Merger--Interests of the CapRock Directors and Executive Officers in
the Merger--Current Employment Agreements."
. Restricted Stock Agreements. CapRock has entered into restricted stock
agreements with each of Messrs. Cyr and Skinner and Kenneth L. Monblatt,
who is also an executive officer of CapRock. Under these agreements, upon
the completion of the merger, restricted stock held by these officers is
deemed to have become fully vested immediately prior to the merger. In
addition, if the employment of Mr. Cyr or Mr. Skinner with CapRock is
terminated by CapRock without cause, as defined in the agreements, the
executive's restricted stock is deemed to have become fully vested
immediately prior to such termination. See "The Merger--Interests of the
CapRock Directors and Executive Officers in the Merger--Restricted Stock
Agreements."
. Loan Agreement. CapRock has entered into a loan agreement with Mr. Cyr in
connection with his employment agreement. Under this agreement, upon the
completion of the merger, CapRock will fully forgive the principal amount
and any unpaid accrued interest on this loan as described under
"The Merger--Interests of the CapRock Directors and Executive Officers in
the Merger--Loan Agreement."
. Grant of Option. Several CapRock directors, executive officers and other
stockholders have entered into an agreement granting to McLeodUSA an option
to purchase the shares of CapRock common stock owned by such stockholders
under specified circumstances and terms as described under "The Merger--
Interests of the CapRock Directors and Executive Officers in the Merger--
Grant of Option" and "Terms of
14
the Merger Agreement and Related Transactions--Grant of Option."
. Directors' and Officers' Insurance; Indemnification of CapRock Directors
and Officers. Under the merger agreement, current and former CapRock
directors and officers have significant rights to directors' and officers'
insurance coverage and to indemnification with respect to acts and
omissions in their capacities as CapRock directors and officers. See "The
Merger--Interests of the CapRock Directors and Executive Officers in the
Merger--Directors' and Officers' Insurance and Indemnification" and "Terms
of the Merger Agreement and Related Transactions--Directors' and Officers'
Insurance and Indemnification."
The Termination Fee, the Voting and Option Agreement and the Voting Agreement
May Discourage Other Companies from Trying to Acquire CapRock.
In the merger agreement, CapRock agreed to pay a termination fee to
McLeodUSA in specified circumstances, including where a third party acquires or
seeks to acquire CapRock. Several CapRock stockholders beneficially owning an
aggregate of approximately 39% of the CapRock common stock outstanding on the
record date have entered into an agreement granting McLeodUSA an option to
purchase their shares of CapRock common stock. These options are exercisable
under similar circumstances as the payment of the termination fee. In addition,
CapRock stockholders beneficially owning an aggregate of approximately 52% of
the CapRock common stock outstanding on the record date have entered into
agreements with McLeodUSA whereby they have agreed to vote their shares in favor
of the approval of the merger agreement and against any competing transaction.
These agreements could discourage other companies from trying to acquire CapRock
even though those other companies might be willing to offer greater value to
CapRock stockholders than McLeodUSA has offered in the merger agreement. In
addition, payment of the termination fee could have an adverse effect on
CapRock's financial condition.
McLeodUSA May Not Be Able to Successfully Integrate Acquired Companies,
including CapRock, into Its Operations, Which Could Slow Its Growth.
The integration of acquired companies, including the proposed acquisition
of CapRock, into the operations of McLeodUSA involves a number of risks,
including:
. difficulty integrating operations and personnel
. diversion of management attention
. potential disruption of ongoing business
. inability to retain key personnel
. inability to successfully incorporate acquired assets and rights into
the service offerings of McLeodUSA
. inability to maintain uniform standards, controls, procedures and
policies
. impairment of relationships with employees, customers or vendors
Failure to overcome these risks or any other problems encountered in
connection with the merger or other similar transactions could slow the growth
of McLeodUSA or lower the quality of its services, which could reduce customer
demand and have a negative impact upon the price of the McLeodUSA Class A common
stock that CapRock stockholders receive in the merger.
Continued Rapid Growth of the McLeodUSA Network, Services and Subscribers Could
Be Slowed if McLeodUSA Cannot Manage this Growth.
McLeodUSA has rapidly expanded and developed its network, services and
subscribers. This has placed and will continue to place, in part as a result of
the merger, significant demands on its management, operational and financial
systems and procedures and controls. McLeodUSA may not be able to manage its
anticipated growth effectively, which would harm its business, results of
operations and financial condition. Further expansion and development will
depend on a number of factors, including:
. cooperation of existing local telephone companies
. regulatory, legislative and other governmental developments
. changes in the competitive climate in which McLeodUSA operates
. development of customer billing, order processing and network
management systems
. availability of financing
. technological developments
. availability of rights-of-way, franchises, building access and antenna
sites
. existence of strategic alliances or relationships
. emergence of future opportunities
15
McLeodUSA will need to continue to improve its operational and financial
systems and its procedures and controls as it grows. McLeodUSA must also
develop, train and manage its employees.
McLeodUSA Expects to Incur Significant Losses Over the Next Several Years.
If McLeodUSA does not become profitable in the future, it could have
difficulty obtaining funds to continue its operations. McLeodUSA has incurred
net losses every year since it began operations. Since January 1, 1995,
McLeodUSA net losses applicable to common stock have been as follows:
Period Amount
------ ------
1995....................... $ 11.3 million
1996....................... $ 22.3 million
1997....................... $ 79.9 million
1998....................... $124.9 million
1999....................... $238.0 million
First 6 months of 2000..... $211.4 million
McLeodUSA expects to incur significant operating losses during the next
several years while it develops its business and expands its fiber optic
communications network.
Failure to Raise Necessary Capital Could Restrict the Ability of McLeodUSA to
Develop Its Network and Services and Engage in Strategic Acquisitions.
McLeodUSA needs significant capital to continue to expand its operations,
facilities, network and services including, following the merger, the expansion
and operation of CapRock. McLeodUSA cannot assure you that its capital resources
will permit it to fund its planned network deployment and operations or achieve
operating profitability. Failure to generate or raise sufficient funds may
require McLeodUSA to delay or abandon some of its expansion plans or
expenditures, which could harm its business and competitive position.
As of June 30, 2000, based on the combined McLeodUSA and CapRock business
plan, capital requirements and growth projections as of that date, McLeodUSA
estimated that it would require approximately $1.5 billion through 2002 to fund
its planned capital expenditures and operating expenses. McLeodUSA expects to
meet these funding needs through the existing cash balances of McLeodUSA and
CapRock, the existing McLeodUSA lines of credit and income from future
operations. The estimated aggregate capital requirements of McLeodUSA include
the projected costs of:
. expanding its fiber optic communications network, including national
and intra-city fiber optic networks
. adding voice and ATM switches
. expanding operations in existing and new markets
. developing wireless services in limited markets
. funding general corporate expenses
. completing recent acquisitions, including the merger
. constructing, acquiring, developing or improving telecommunications assets
The McLeodUSA estimate of its future capital requirements is a "forward-
looking statement" within the meaning of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The actual amount and timing
of the future capital requirements of McLeodUSA may differ substantially from
its estimate due to factors such as:
. strategic acquisition costs and effects of acquisitions on its business
plan, capital requirements and growth projections
. unforeseen delays
. cost overruns
. engineering design changes
. changes in demand for its services
. regulatory, technological or competitive developments
. new opportunities
McLeodUSA also expects to evaluate potential acquisitions, joint ventures
and strategic alliances on an ongoing basis. McLeodUSA may require additional
financing if it pursues any of these opportunities.
The projected funding plan of McLeodUSA assumes that (a) the indentures
governing the CapRock 12% senior notes due 2008 and 11 1/2% senior notes due
2009 are amended to provide that the acquisition of CapRock does not constitute
a change of control and (b) such notes will either remain outstanding as amended
to remove various covenants or be exchanged for a like principal amount of notes
of McLeodUSA pursuant to the terms of the exchange offers. See "Terms of the
Merger Agreement and Related Transactions--CapRock Debt Securities."
16
McLeodUSA may meet any additional capital needs by issuing additional debt
or equity securities or borrowing funds from one or more lenders. McLeodUSA
cannot assure you that it will have timely access to additional financing
sources on acceptable terms. If it does not, McLeodUSA may not be able to expand
its markets, operations, facilities, network and services as it intends. See
"Information About McLeodUSA and Cactus Acquisition Corp."
The High Level of Debt of McLeodUSA Could Limit Its Flexibility in Responding to
Business Developments and Put It at a Competitive Disadvantage.
McLeodUSA has substantial debt, which could adversely affect it in a number
of ways, including:
. limiting its ability to obtain necessary financing in the future
. limiting its flexibility to plan for, or react to, changes in its business
. requiring it to use a substantial portion of its cash flow from operations
to pay debt rather than for other purposes, such as working capital or
capital expenditures
. making it more highly leveraged than some of its competitors, which may
place it at a competitive disadvantage
. making it more vulnerable to a downturn in its business
As of June 30, 2000, McLeodUSA had $2.4 billion of long-term debt,
including $1.7 billion of debt under its senior notes and $575 million under its
credit facilities. It also had $1.0 billion of redeemable convertible preferred
stock and $2.9 billion of stockholders' equity. In addition, upon completion of
the merger and the exchange offers, McLeodUSA expects to have $360 million of
long-term debt resulting from the exchange of McLeodUSA notes for outstanding
CapRock notes. As a result, McLeodUSA expects its fixed charges to exceed its
earnings for the foreseeable future.
Covenants in Debt Instruments Restrict the Capacity of McLeodUSA to Borrow and
Invest, Which Could Impair Its Ability to Expand or Finance Its Operations.
The indentures governing the terms of the long-term debt of McLeodUSA
impose operating and financial restrictions. In addition, under the terms of its
credit facilities, McLeodUSA has granted a security interest in substantially
all the assets of McLeodUSA and its subsidiaries. These restrictions and
encumbrances limit the discretion of McLeodUSA in some business matters, which
could make it more difficult for McLeodUSA to expand, finance its operations or
engage in other business activities that may be in its interest. These
restrictions limit or prohibit the ability of McLeodUSA to:
. incur additional debt
. pay dividends or make other distributions
. make investments or other restricted payments
. enter into sale and leaseback transactions
. pledge, mortgage or permit liens upon assets
. enter into transactions with affiliates
. sell assets
. consolidate, merge or sell all or substantially all of its assets
If McLeodUSA fails to comply with these restrictions, all of its long-term debt
could become immediately due and payable.
The Ability of McLeodUSA to Pay Cash Dividends Is Restricted.
McLeodUSA has never paid any cash dividends on shares of its Class A common
stock and it does not anticipate doing so for the foreseeable future. The
indentures and credit facilities governing the debt of McLeodUSA restrict
McLeodUSA from paying cash dividends. You should therefore not expect that cash
dividends will be paid on the shares of McLeodUSA Class A common stock you will
receive in the merger. In addition, you should be aware that the shares of
Series A preferred stock and Series B preferred stock of McLeodUSA carry rights
to receive a cumulative dividend before any cash dividend may be paid on the
McLeodUSA Class A common stock.
The Dependence of McLeodUSA on the MegaBells to Provide Most of Its
Communications Services Could Make it More Difficult for McLeodUSA to Offer Its
Services at a Profit.
The original seven regional Bell operating companies that resulted from the
divestiture by AT&T in 1984 of its local telephone systems are now concentrated
into four large incumbent "MegaBells." McLeodUSA depends on these MegaBells to
provide most of its core local and some of its long distance services. Today,
without using the communications facilities of these companies, McLeodUSA could
not provide bundled local and long distance services to most of its customers.
Because of this dependence, the McLeodUSA communications services are highly
17
susceptible to changes in the conditions for access to these facilities and to
inadequate service quality provided by the MegaBells, and therefore McLeodUSA
may have difficulty offering its services on a profitable and competitive basis.
Qwest Communications International, Inc. (successor to U S WEST
Communications, Inc.) and SBC Communications Inc. (including its wholly-owned
subsidiary Ameritech Corporation) are the primary suppliers to McLeodUSA of
local lines to its customers and communications services that allow it to
transfer and connect calls. Upon completion of the merger, BellSouth will also
become a supplier to McLeodUSA. The communications facilities of the MegaBells
allow McLeodUSA to provide local service, long distance service and private
lines dedicated to its customers' use. If the MegaBells or other companies deny
or limit access by McLeodUSA to their communications network elements or
wholesale services, McLeodUSA may not be able to offer its communications
services at profitable rates.
The McLeodUSA plan to provide local service using its own communications
network equipment also depends on the MegaBells. In order to interconnect its
network equipment and other communications facilities to network elements
controlled by the MegaBells, McLeodUSA must first negotiate and enter into
interconnection agreements with them. Interconnection obligations imposed on the
MegaBells by the Telecommunications Act of 1996 have been and continue to be
subject to a variety of legal proceedings, the outcome of which could affect the
ability of McLeodUSA to obtain interconnection agreements on acceptable terms.
McLeodUSA cannot assure CapRock stockholders that it will succeed in obtaining
interconnection agreements on terms that would permit it to offer local services
using its own communications network facilities at profitable and competitive
rates.
Actions by the MegaBells May Make it More Difficult for McLeodUSA to Offer Its
Communications Services.
The MegaBells have pursued several measures that may make it more difficult
for McLeodUSA to offer its communications services. For example, in February
1996, U S WEST, which has since been acquired by Qwest, filed tariffs and other
notices with the public utility commissions in its fourteen-state service region
to limit future Centrex access to its switches. Centrex access allows McLeodUSA
to aggregate lines, have control over several characteristics of those lines and
provide a set of standard features on those lines. McLeodUSA uses Qwest's
Centrex services to provide most of its local communications services in Qwest's
service territories.
In January 1997, U S WEST proposed interconnection surcharges in several of
the states in its service region, which would increase the costs incurred by
McLeodUSA in providing communications services in those states.
In addition, during the past year Qwest filed proposals with the Iowa
Utilities Board to reduce the retail prices charged by Qwest for various
business services which, if approved, would have the effect of reducing the
margins of McLeodUSA on competitive local business services in Iowa.
McLeodUSA has challenged or is challenging these actions before the FCC or
applicable state public utility commissions. McLeodUSA cannot assure you it will
succeed in its challenges to these or other actions by Qwest that would prevent
or deter McLeodUSA from using Qwest's Centrex service or communications network
elements. If Qwest successfully withdraws or limits access by McLeodUSA to
Centrex services in any jurisdiction, McLeodUSA may not be able to offer
communications services in that jurisdiction, which could harm its business.
McLeodUSA anticipates that Qwest will also pursue legislation in states
within the McLeodUSA target market area to reduce state regulatory oversight
over its rates and operations. If adopted, these initiatives could make it more
difficult for McLeodUSA to challenge Qwest's actions in the future.
SBC/Ameritech has also introduced measures that may make it more difficult
for McLeodUSA to offer certain types of communications services. For example, in
1998 and 1999, Ameritech assessed extra special construction charges to install
service for customers when McLeodUSA leased a line from them. Ameritech did not
assess comparable charges to retail customers that ordered service directly from
SBC/Ameritech, which puts McLeodUSA at a disadvantage. McLeodUSA has challenged
or is challenging these actions by SBC/Ameritech before the applicable state
public utility commissions. Though McLeodUSA has succeeded in three such
challenges, it cannot assure CapRock stockholders that it will succeed in its
challenges to these or other actions by SBC/Ameritech that would prevent or
deter McLeodUSA from competing with them. If SBC/Ameritech can successfully
charge McLeodUSA extraordinary costs to install service when its does not assess
the same charges to retail customers, McLeodUSA may not be able to offer
18
communications services in that location, which would harm McLeodUSA's business.
Competition in the Communications Services Industry Could Cause McLeodUSA to
Lose Customers and Revenue and Could Make it More Difficult for McLeodUSA to
Enter New Markets.
McLeodUSA faces intense competition in all of its markets. This competition
could result in loss of customers and lower revenue for McLeodUSA. It could also
make it more difficult for McLeodUSA to enter new markets. Existing local
telephone companies, including Qwest, SBC/Ameritech, BellSouth and Verizon,
currently dominate their local telecommunications markets. Three major
competitors, AT&T, WorldCom and Sprint, dominate the long distance market.
Hundreds of other companies also compete in the long distance marketplace. AT&T,
WorldCom and Sprint also offer local telecommunications services in many
locations.
The McLeodUSA local and long distance services also compete with the
services of other communications services companies competing with the existing
local telephone companies in some markets.
Other competitors may include cable television companies, providers of
communications network facilities dedicated to particular customers, microwave
and satellite carriers, wireless telecommunications providers, private networks
owned by large end-users, and telecommunications management companies.
These and other firms may enter the markets where McLeodUSA focuses its
sales efforts, which may create downward pressure on the prices for its services
and negatively affect its returns. Many of the existing and potential
competitors of McLeodUSA have financial and other resources far greater than
those of McLeodUSA. In addition, the trend toward mergers and strategic
alliances in the communications industry may strengthen some of the competitors
of McLeodUSA and could put McLeodUSA at a significant competitive disadvantage.
If the MegaBells Are Allowed to Offer Bundled Local and Long Distance Services
in McLeodUSA Markets It Could Cause McLeodUSA to Lose Customers and Revenues and
Could Make It More Difficult for McLeodUSA to Enter New Markets.
Presently the MegaBells are prohibited from offering interLATA long
distance services to customers in their regions until they have shown compliance
with the Telecommunications Act of 1996. The MegaBells are attempting to show
compliance and are seeking authority to offer in-region interLATA long distance
service. Southwestern Bell has obtained such authority in Texas.
If the MegaBells, which have resources far greater than those of McLeodUSA,
are authorized to bundle interLATA long distance service and local service in
McLeodUSA markets before the MegaBells' local markets are effectively open to
competition, such an offering by the MegaBells could cause McLeodUSA to lose
customers and revenues and make it more difficult for it to compete in those
markets.
McLeodUSA May Not Succeed in Developing or Making a Profit from Wireless
Services.
The McLeodUSA effort to offer wireless services involves a high degree of
risk and will impose significant demands on the management and financial
resources of McLeodUSA. Developing wireless services may require McLeodUSA to,
among other things, spend substantial time and money to acquire, build and test
a wireless infrastructure and enter into roaming arrangements with wireless
operators in other markets. The McLeodUSA business plan does not currently
include substantial funds for the development of wireless services. In order to
offer wireless services on a widespread basis, McLeodUSA would need to obtain
additional funding by issuing additional debt or equity securities or by
borrowing funds from one or more lenders. McLeodUSA may not succeed in
developing wireless services. Even if McLeodUSA spends substantial amounts to
develop wireless services, McLeodUSA may not make a profit from wireless
operations.
The ability of McLeodUSA to successfully offer wireless services will also
depend on a number of factors beyond its control, including:
. changes in communications service rates charged by other companies
. changes in the supply and demand for wireless services due to competition
with other wireline and wireless operators in the same geographic area
. changes in the federal, state or local regulatory requirements affecting
the operation of wireless systems
. changes in wireless technologies that could render obsolete the technology
and equipment McLeodUSA chooses for its wireless services
19
Competition in the Wireless Telecommunications Industry Could Make it More
Difficult for McLeodUSA Successfully to Offer Wireless Services.
The wireless telecommunications industry is experiencing increasing
competition and significant technological change. This will make it more
difficult for McLeodUSA to gain a share of the wireless communications market.
McLeodUSA expects up to eight wireless competitors in each of its potential
target wireless markets. McLeodUSA could face additional competition from mobile
satellite services.
Many of the potential wireless competitors of McLeodUSA have financial and
other resources far greater than those of McLeodUSA and have more experience
testing new or improved products and services. In addition, several wireless
competitors operate or plan to operate wireless telecommunications systems that
encompass most of the United States, which could give them a significant
competitive advantage, particularly if McLeodUSA offers only regional wireless
services.
The Success of the Communications Services of McLeodUSA Will Depend on the
Ability of McLeodUSA to Keep Pace with Rapid Technological Changes in Its
Industry.
Communications technology is changing rapidly. These changes influence the
demand for the services of McLeodUSA. McLeodUSA needs to be able to anticipate
these changes and to develop new and enhanced products and services quickly
enough for the changing market. This will determine whether McLeodUSA can
continue to increase its revenue and number of subscribers and remain
competitive.
The Loss of Key Personnel Could Weaken the Technical and Operational Expertise
of McLeodUSA, Delay Its Introduction of New Services or Entry into New Markets
and Lower the Quality of Its Services.
McLeodUSA may not be able to attract, develop, motivate and retain
experienced and innovative personnel. There is intense competition for qualified
personnel in the McLeodUSA lines of business. The loss of the services of key
personnel, or the inability to attract additional qualified personnel, could
cause McLeodUSA to make less successful strategic decisions, which could hinder
the introduction of new services or the entry into new markets. McLeodUSA could
also be less prepared for technological or marketing problems, which could
reduce its ability to serve its customers and lower the quality of its services.
As a result, the financial condition of McLeodUSA could be adversely affected.
The future success of McLeodUSA depends on the continued employment of its
senior management team, particularly Clark E. McLeod, the Chairman and Chief
Executive Officer of McLeodUSA, Stephen C. Gray, the President and Chief
Operating Officer of McLeodUSA and the President and Chief Executive Officer of
the Local Services operations of McLeodUSA, and Roy A. Wilkens, the Chief
Technology Officer of McLeodUSA and the President and Chief Executive Officer of
the Network and Data Services operations of McLeodUSA.
Failure to Obtain and Maintain Necessary Permits and Rights-of-Way Could Delay
Installation of McLeodUSA Networks and Interfere with Its Operations.
To obtain access to rights-of-way needed to install its fiber optic cable,
McLeodUSA must reach agreements with state highway authorities, local
governments, transit authorities, local telephone companies and other utilities,
railroads, long distance carriers and other parties. The failure to obtain or
maintain any rights-of-way could delay planned McLeodUSA network expansion,
interfere with its operations and harm its business. For example, if McLeodUSA
loses access to a right-of-way, it may need to spend significant sums to remove
and relocate its facilities.
Government Regulation May Increase the Cost to McLeodUSA of Providing Services,
Slow Its Expansion into New Markets and Subject Its Services to Additional
Competitive Pressures.
McLeodUSA facilities and services are subject to federal, state and local
regulations. The time and expense of complying with these regulations could slow
down the expansion by McLeodUSA into new markets, increase its costs of
providing services and subject it to additional competitive pressures. One of
the primary purposes of the Telecommunications Act of 1996 was to open the local
telephone services market to competition. While this has presented McLeodUSA
with opportunities to enter local telephone markets, it also provides important
benefits to the existing local telephone companies, such as the ability, under
specified conditions, to provide out-of-region long distance service to
customers in their respective regions. In addition, McLeodUSA needs to obtain
and maintain licenses, permits and other regulatory approvals in connection with
some of its services. Any of the following could harm the business of McLeodUSA:
. failure to maintain proper federal and state tariffs
20
. failure to maintain proper state certifications
. failure to comply with federal, state or local laws and regulations
. failure to obtain and maintain required licenses and permits
. burdensome license or permit requirements to operate in public
rights-of-way
. burdensome or adverse regulatory requirements
. delays in obtaining or maintaining required authorizations
Management and Principal Stockholders of McLeodUSA Have Significant Ownership of
McLeodUSA and May Have Different Interests Than Those of Other Stockholders.
As of the record date, Alliant Energy Corporation, M/C Investors L.L.C.,
Media/Communications Partners III Limited Partnership, Richard Lumpkin and
various trusts for the benefit of his family, Clark and Mary McLeod, and the
directors and executive officers of McLeodUSA beneficially owned approximately
[26]% of the outstanding McLeodUSA Class A common stock. These stockholders may
have substantial influence over management policy and many corporate actions
requiring a stockholder vote, including election of the board of directors.
Conflicts of interest may arise between the interests of these stockholders and
other stockholders of McLeodUSA. For example, the fact that these stockholders
hold so much McLeodUSA Class A common stock could make it more difficult for a
third party to acquire McLeodUSA. You should expect these stockholders to
resolve any conflicts in their favor.
Preferred Stockholders May Have Competing Interests.
Holders of McLeodUSA preferred stock have the ability to convert their
shares into approximately 112 million shares of McLeodUSA Class A common stock.
Potential conflicts of interest may arise between holders of McLeodUSA Class A
common stock and holders of McLeodUSA preferred stock with respect to, among
other things, the payment of dividends, conversion rights, asset dispositions or
liquidation matters, and operation and financial decisions of the McLeodUSA
board of directors. In addition, the holders of McLeodUSA preferred stock have
class voting rights on specified actions requiring McLeodUSA stockholder
approval.
Secondary Sales of McLeodUSA Class A Common Stock in the Public Market Could
Adversely Affect Its Stock Price.
The market price of McLeodUSA Class A common stock may fluctuate or decline
significantly in the future as a consequence of sales by either existing holders
of McLeodUSA Class A common stock or existing holders of McLeodUSA preferred
stock who convert their shares into shares of McLeodUSA Class A common stock.
As of [September 30], 2000, there were outstanding:
. [585,128,506] shares of McLeodUSA Class A common stock
. [1,149,580] shares of McLeodUSA Series A preferred stock convertible into
[29,658,923] shares of McLeodUSA Class A common stock
. 400,000 shares of McLeodUSA Series B and Series C preferred stock
convertible into 82,191,777 shares of McLeodUSA Class A common stock, all
of which shares of Series B and Series C Preferred Stock are held by three
partnerships affiliated with Forstmann Little & Co.
. options to purchase [132,589,350] shares of McLeodUSA Class A common stock
. [153,946,555] shares of McLeodUSA Class A common stock beneficially owned
by Alliant Energy, M/C Investors, Media/Communications Partners III,
Richard Lumpkin and various trusts for the benefit of his family, Clark and
Mary McLeod, and the directors and executive officers of McLeodUSA, all of
which shares were eligible for sale in the public market either in
accordance with Rule 144 under the Securities Act or otherwise
. options held by Alliant Energy to purchase 7,804,128 shares of McLeodUSA
Class B common stock convertible into 7,804,128 shares of McLeodUSA Class A
common stock
After the merger, approximately 15.1 million additional shares of McLeodUSA
Class A common stock issued to the former stockholders of CapRock will be
outstanding, as well as options to purchase approximately 2.7 million shares of
McLeodUSA Class A common stock. These options generally will be fully
exercisable upon completion of the merger.
21
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus and the information incorporated by
reference in it include "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. McLeodUSA and CapRock intend the forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements in these sections.
All statements regarding our expected financial position and operating results,
our business strategy, our financing plans, our future capital requirements,
forecasted demographic and economic trends relating to our industry, our ability
to complete acquisitions, including the merger of CapRock with a subsidiary of
McLeodUSA, to realize anticipated cost savings and other benefits from
acquisitions and to recover acquisition-related costs, and similar matters are
forward-looking statements. These statements are subject to known and unknown
risks, uncertainties and other factors that could cause events or our actual
results to differ materially from the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. In some cases, you can identify these statements by our use of
forward-looking words such as "may," "will," "should," "anticipate," "estimate,"
"expect," "plan," "believe," "predict," "potential" or "intend." You should be
aware that these statements only reflect our predictions. Actual events or
results may differ substantially. Important factors that could cause events or
our actual results to be materially different from our expectations include
those discussed in this proxy statement/prospectus under the caption "Risk
Factors" and those discussed in documents incorporated by reference in this
proxy statement/prospectus. We undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
22
THE SPECIAL MEETING
This proxy statement/prospectus is first being mailed or delivered by
CapRock to its stockholders on or about [_________], 2000 in connection with the
solicitation of proxies by the CapRock board of directors for use at the special
meeting and at any adjournments or postponements of the special meeting. This
document is also a prospectus for the McLeodUSA Class A common stock to be
issued in the merger. You should read this document carefully before voting your
shares.
Date, Time and Place; Matters to be Considered
The special meeting will be held on [_______], 2000 at 9:00 a.m.,
local time at the offices of CapRock located at 15601 Dallas Parkway, Suite 700,
Dallas, Texas 75001. At the special meeting, CapRock stockholders will be asked
to consider and vote on a proposal to approve the Agreement and Plan of Merger,
by and among McLeodUSA Incorporated, Cactus Acquisition Corp., a wholly-owned
subsidiary of McLeodUSA Incorporated, and CapRock Communications Corp., dated as
of October 2, 2000.
The approval of this proposal is required in order for CapRock to
complete the merger.
Proxies
The accompanying form of proxy is for the use of CapRock stockholders
to allow them to vote at the special meeting if they cannot or do not wish to
attend and vote in person. A CapRock stockholder may revoke a previously granted
proxy at any time before it is exercised, by submitting to the Corporate
Secretary of CapRock written notice of revocation or a properly executed proxy
with a later date, or by attending the special meeting and voting in person.
Written notices of revocation and other communications with respect to
the revocation of proxies should be addressed to CapRock Communications Corp.,
15601 Dallas Parkway, Suite 700, Dallas, Texas 75001, Attention: Corporate
Secretary. All shares represented by valid proxies received and not revoked
before they are exercised will be voted in the manner specified in such proxies.
If no specification is made, such shares will be voted in favor of the proposal
to approve the merger agreement.
The CapRock board of directors is not currently aware of any other
matters which will come before the special meeting. If any other matter is
presented at the special meeting for action, the persons named in the
accompanying proxy card will vote the proxy in their own discretion.
Solicitation of Proxies
McLeodUSA and CapRock have agreed to share equally all expenses
incurred in connection with the filing, printing and mailing of this proxy
statement/prospectus. Other than these expenses, CapRock will bear the entire
cost of soliciting proxies from CapRock stockholders. In addition to soliciting
proxies by mail, CapRock will request banks, brokers and other record holders to
send proxies and proxy material to the beneficial owners of CapRock common stock
and to secure their voting instructions. CapRock will reimburse such record
holders for their reasonable expenses in so doing. CapRock intends to use
several of its officers and regular employees, who will not be specially
compensated, to solicit proxies from stockholders, either personally or by
telephone, telegram, facsimile or electronic or United States mail.
Record Date and Voting Rights
The CapRock board of directors has selected the close of business on
[_____________], 2000 as the record date for the special meeting. Under Texas
law and the bylaws of CapRock, only holders of record of shares of CapRock
common stock on the record date will be entitled to notice of and to vote at the
special meeting. [____________] shares of CapRock common stock are entitled to
vote at the special meeting. On the record date, there were approximately [__]
record holders of CapRock common stock.
23
Each share of CapRock common stock entitles its holder to one vote.
The affirmative vote of at least a majority of the outstanding shares of CapRock
common stock is required to approve the merger agreement. The approval of the
merger agreement is required in order for CapRock to complete the merger.
While there is no definitive statutory or case law authority in Texas
as to the proper treatment of abstentions, CapRock believes that abstentions
should be counted for purposes of determining the presence or absence of a
quorum for the transaction of business. In the absence of controlling precedent
to the contrary, CapRock intends to treat abstentions in this manner. Brokers
who hold shares of CapRock common stock in nominee or street name for customers
who are the beneficial owners of such shares are prohibited from giving a proxy
to vote shares held for these customers with respect to the matters to be voted
upon at the special meeting without specific instructions from these customers.
Broker non-votes will not be counted for purposes of determining the presence or
absence of a quorum for the transaction of business. Because the affirmative
vote of at least a majority of the outstanding shares of CapRock common stock is
required to approve the merger agreement, abstentions and broker non-votes will
have the same effect as a vote against the proposal to approve the merger
agreement.
Several directors, executive officers and stockholders of CapRock
entered into agreements by which they have agreed to vote their shares in favor
of the approval of the merger agreement. The 19,979,230 shares of CapRock common
stock subject to these agreements represent approximately 52% of the outstanding
shares entitled to vote at the special meeting.
In accordance with the terms of the agreements referenced above,
CapRock is assured of receiving the requisite votes in favor of the approval of
the merger agreement.
Recommendation of the CapRock Board of Directors
The CapRock board of directors has determined that the merger
agreement and the merger are fair and in the best interests of CapRock and its
stockholders. The CapRock board of directors recommends that the CapRock
stockholders vote "FOR" the approval of the merger agreement. See "The Merger--
Recommendation of the CapRock Board of Directors and Reasons for the Merger."
24
THE MERGER
Background of the Merger
Both McLeodUSA and CapRock regularly evaluate different strategies to
improve their competitive positions and enhance their respective stockholder
values, including opportunities for acquisitions of other companies or their
assets, possible partnerships or alliances and other significant transactions.
CapRock became more focused on this process and accelerated its
efforts after CapRock's announcement on July 6, 2000 that its revenues, gross
margins, EBITDA and earnings per share for the quarter ended June 30, 2000 would
be significantly below analysts' expectations.
The board of directors of CapRock held a telephonic meeting on July
28, 2000 during which management made a presentation with respect to the
financial position of CapRock and the availability of capital. The board
authorized management to seek sources of financing including completion, if
possible, of a secured credit facility from The Chase Manhattan Bank. From July
28, 2000 through September 22, 2000, the CapRock board of directors met seven
times to discuss the operations and cash position of CapRock, its progress with
respect to obtaining financing, private investors and strategic alternatives.
In early August 2000, in addition to its own efforts, CapRock asked
Chase Securities, Inc. to renew the efforts Chase Securities had undertaken
earlier in the year to seek private financial investors. In addition, on August
16, 2000, CapRock engaged Salomon Smith Barney to solicit interest in strategic
alternatives, as well as to solicit interest for private equity financings.
Salomon Smith Barney contacted a number of potential strategic and financial
investors. This process ultimately narrowed to three proposals (including the
proposal from McLeodUSA as described below), which were carefully considered and
explored by CapRock's board of directors.
In early September 2000, representatives from Salomon Smith Barney
worked with representatives from McLeodUSA to arrange an introductory meeting
between McLeodUSA and CapRock. On September 12, 2000, McLeodUSA and CapRock
executed a confidentiality agreement.
On September 13, 2000, Blake O. Fisher, Jr., Group Vice President of
Corporate Development for McLeodUSA, along with three other members of the
McLeodUSA management team, traveled to the CapRock corporate headquarters in
Dallas, Texas, for an introductory meeting. Jere W. Thompson, Jr., Chairman of
the Board of Directors and Chief Executive Officer of CapRock, along with
certain of CapRock's key officers, provided an overview of CapRock to McLeodUSA.
During this meeting, Messrs. Fisher and Thompson discussed whether a business
combination between McLeodUSA and CapRock might be mutually beneficial and
agreed to continue their discussions. In a subsequent telephone conversation,
Messrs. Fisher and Thompson scheduled a follow-up meeting to be held in Cedar
Rapids, Iowa, on September 21, 2000.
On September 21, 2000, Mr. Thompson, Leo J. Cyr, President and Chief
Operating Officer of CapRock, and Mark Langdale, a member of the board of
directors of CapRock, met with key members of the McLeodUSA management team in
Cedar Rapids. During this meeting, Stephen C. Gray, President and Chief
Operating Officer of McLeodUSA and President and Chief Executive Officer of
Local Services operations, expressed to Mr. Thompson an interest in continuing
discussions regarding a strategic business combination of McLeodUSA and CapRock.
On the morning of September 22, 2000, the CapRock board of directors
held a meeting during which James E. Skinner, the Chief Financial Officer of
CapRock, discussed the cash position of CapRock. Mr. Thompson updated the board
of directors on the status of discussions with respect to each of the three
proposals for strategic alternatives and the status of obtaining a credit
facility.
Later in the day, on September 22, 2000, Mr. Fisher expressed to Mr.
Thompson the interest of McLeodUSA in acquiring CapRock in order to expand
McLeodUSA's markets. Mr. Fisher did not propose any specific terms of the
transaction, although he and Mr. Thompson discussed general price and structure
terms of a potential business combination, including the form of consideration
to be received by the CapRock stockholders.
25
Messrs. Fisher and Thompson each indicated the respective price levels at which
their companies might be interested in proceeding with a transaction. On the
evening of September 22, 2000, Mr. Fisher sent Mr. Thompson a list of critical
parameters for the continued interest in CapRock by McLeodUSA. Over the weekend
of September 23-24, 2000, Messrs. Fisher and Thompson continued their
discussions, and Mr. Fisher indicated a willingness on the part of McLeodUSA to
execute a definitive agreement with respect to the transaction within seven
days.
The CapRock board of directors met on September 25, 2000 to discuss
the interest of McLeodUSA and the parameters of that interest, as well as other
alternative financial and strategic opportunities for CapRock. Salomon Smith
Barney led a discussion with respect to each of the strategic alternatives being
considered by CapRock. Mr. Thompson received direction from the CapRock board of
directors to continue discussions and due diligence with McLeodUSA and to seek
additional information and enhanced terms from each of the proponents of the
strategic alternatives being considered. During the week of September 25, 2000,
each of the proponents of the strategic alternatives was contacted and McLeodUSA
and one other proponent each agreed to enhance their proposals. Representatives
of McLeodUSA also agreed to come to Dallas to commence their due diligence
review, as well as the preparation of documentation with respect to a possible
transaction.
During the evening of September 27, 2000, McLeodUSA's legal counsel
sent CapRock's legal counsel drafts of a merger agreement together with related
agreements.
On September 28, 2000, Mr. Fisher and Randall Rings, Group Vice
President and Chief Legal Officer for McLeodUSA, along with a select group from
McLeodUSA, began meetings with CapRock to discuss issues to be resolved in order
to complete the definitive documents for the transaction and to conduct an
extensive review of the operations, business, accounting, financial position and
legal matters of one another. This process continued until execution of the
definitive merger agreement and related agreements on October 2, 2000.
During the afternoon of September 28, 2000, Messrs. Thompson and
Langdale, together with CapRock's internal legal advisors, met with Mr. Fisher
and Tracy A. Millard, Vice President of Mergers and Acquisitions for McLeodUSA,
together with McLeodUSA's internal legal advisors, to negotiate the principal
terms of the proposed transaction, including, among other things, (1) the
proposed voting and option agreement and voting agreement, (2) the proposed
representations and warranties to be made under, and the conditions to the
closing of, the merger agreement, including the condition that CapRock
noteholders consent to amendments to CapRock's outstanding notes, (3) operating
covenants between the signing of the definitive merger agreement and the closing
of the transaction, (4) the negotiation of acceptable arrangements to provide
financing for CapRock through May 2001 even if the merger agreement was
terminated and (5) employee stock options. McLeodUSA conditioned its proceeding
with the transaction with CapRock on (1) receiving voting agreements from
CapRock stockholders owning more than 50% of the shares of CapRock common stock
requiring them to vote for the transaction and against competing transactions,
(2) receiving option agreements from each of Messrs. Thompson and Langdale and
Jere W. Thompson, Sr., or related individuals or affiliated entities, granting
McLeodUSA the right under certain circumstances to purchase their shares of
CapRock common stock, representing approximately 39% of the outstanding common
stock of CapRock, (3) receiving consents from CapRock noteholders to amendments
to CapRock's outstanding notes and (4) there being no termination provisions in
the merger agreement for superior proposals. CapRock conditioned its proceeding
with the transaction with McLeodUSA on (1) entering into arrangements
satisfactory to CapRock to provide funding for CapRock through May 2001 and (2)
satisfactory operating covenants between signing and closing.
Throughout the period from the evening of September 28, 2000 to the
signing of the definitive merger agreement on October 2, 2000, Messrs. Thompson
and Fisher, and the respective financial and legal advisors for CapRock and
McLeodUSA, held numerous conversations, reviewed drafts of the merger agreement
and related agreements, and negotiated various terms of the transaction and
provisions of the agreements. This process involved representatives of Salomon
Smith Barney and Munsch Hardt Kopf & Harr, P.C. on behalf of CapRock, and
representatives of Goldman Sachs & Co. and Cravath, Swaine & Moore on behalf of
McLeodUSA.
During the afternoon of October 1, 2000, the board of directors of
McLeodUSA held a special meeting to hear a report from its senior management on
the status and proposed terms of the transaction.
26
Also during the afternoon of October 1, 2000, the CapRock board of
directors held a special meeting. Mr. Thompson briefed the board on the status
of the negotiations with McLeodUSA and one of the other proponents of a
strategic transaction. Together with CapRock's financial advisors and legal
counsel, the board reviewed and considered the strategic rationale for the
proposed business combination with McLeodUSA, other alternatives available to
CapRock, and their fiduciary duties and responsibilities to the CapRock
stockholders with respect to proposed business combinations. At this meeting,
the CapRock board of directors determined to hold another meeting later in the
evening of October 1, 2000 for an update on any developments during the day. The
board also requested that the proponent of a proposal for a strategic
transaction other than McLeodUSA, which had previously agreed to enhance its
proposal, be contacted to arrange a meeting on Monday, October 2, 2000.
On the evening of October 1, 2000, the CapRock board of directors held
a special meeting. Mr. Thompson updated the board on the status of the
negotiations with McLeodUSA and one of the other proponents of a strategic
transaction.
On October 2, 2000, McLeodUSA presented to CapRock a revised draft of
a proposed merger agreement, together with related agreements. CapRock
identified to McLeodUSA a list of issues to be resolved in order to proceed with
the transaction, including the form of financing proposed by McLeodUSA, the
terms of the proposed option and voting agreement and the proposed voting
agreement, and specific provisions in the draft merger agreement relating to
representations and warranties.
On the afternoon of October 2, 2000, Mr. Thompson met with Mr. Fisher
to determine whether each party would be able to meet the other's conditions for
proceeding with the proposed transaction. During this meeting, Messrs. Thompson
and Fisher were able to agree on, among other things, the exchange ratio, the
principal terms of the option and voting agreement and the voting agreement, as
such agreements affected CapRock, and the operating covenants between signing
and closing. Throughout the day on October 2, 2000, senior management of both
companies, together with their respective financial and legal advisors,
continued to negotiate the principal terms of a credit agreement between CapRock
and The Chase Manhattan Bank and discussed entering into an indefeasible right
of use (IRU) agreement for McLeodUSA to purchase fiber from CapRock.
Throughout the day and evening of October 2, 2000, representatives of
the two companies and their respective advisors negotiated the final terms of
the merger agreement and related agreements and completed their due diligence
analyses.
The CapRock board of directors held a special meeting in the afternoon
of October 2, 2000. Mr. Skinner provided a report which listed the cash on hand
and projected the sources and uses of cash for the next several months. Mr.
Skinner discussed the report with the directors and responded to inquiries from
the directors. Mr. Langdale reported on the results of his meeting that day with
the proponent of the other strategic alternative. Following Mr. Langdale's
report, the CapRock board of directors, together with CapRock's financial
advisors and legal counsel, reviewed the final terms of each of the proposed
transactions. Munsch Hardt Kopf & Harr, P.C. made a presentation to the board
regarding the fiduciary duties and responsibilities of the directors, the
material terms and conditions of the final merger agreement, the voting and
option agreement, the voting agreement, CapRock noteholder issues and updated
the board on how the key remaining legal issues had been resolved. Michael
Donohoe, in-house counsel for CapRock, made a presentation on the terms of the
credit agreement. Salomon Smith Barney presented the final results of its
financial and valuation analyses of CapRock and McLeodUSA and the proposed
transaction, as well as analyses of other strategic alternatives potentially
available to CapRock. Salomon Smith Barney delivered its oral opinion, later
confirmed in writing, that as of October 2, 2000, the exchange ratio was fair,
from a financial point of view, to the CapRock stockholders. After further
discussion and due consideration, the CapRock board of directors approved the
merger agreement, the voting and option agreement, the voting agreement and the
credit agreement and the other matters contemplated by these agreements,
recommended that the merger agreement be approved by the CapRock stockholders
and directed that the merger agreement be submitted to the CapRock stockholders
for approval.
Also during the afternoon of October 2, 2000, the McLeodUSA board of
directors held a special meeting. At the meeting, the McLeodUSA board of
directors received a presentation from senior management on the material
27
terms and conditions of the merger agreement, the voting and option agreement,
the voting agreement and the credit agreement and the other matters contemplated
by these agreements. The McLeodUSA board of directors also heard an update from
management, financial advisors and legal advisors on how certain of the
remaining open issues had been resolved. The McLeodUSA board of directors
discussed the information presented by senior management and by its financial
advisors. After discussion and due consideration, the McLeodUSA board of
directors approved the merger agreement and related agreements and the credit
agreement and related agreements.
McLeodUSA and CapRock issued a joint press release to announce the
execution of the definitive merger agreement and the related agreements before
the Nasdaq National Market opened on the morning of October 3, 2000.
Recommendation of the CapRock Board of Directors and Reasons for the Merger
The CapRock board of directors has determined that the terms of the merger
agreement and the merger are fair to and in the best interests of CapRock and
its stockholders. The CapRock board of directors has approved the merger
agreement, recommended that the merger agreement be approved by the CapRock
stockholders and directed that the merger agreement be submitted to the CapRock
stockholders for approval. The CapRock board of directors recommends that
CapRock stockholders vote "FOR" the approval of the merger agreement.
In reaching its determination to approve the transaction and to
recommend that the CapRock stockholders vote to approve the merger agreement,
the CapRock board identified several potential benefits for CapRock and its
stockholders, including:
. CapRock stockholders will have the opportunity to participate in the
potential for growth of the combined company after the merger
. McLeodUSA is more diversified and has a significantly larger market
capitalization than CapRock; as a result, CapRock stockholders who
exchange their CapRock common stock for McLeodUSA Class A common stock
in the merger may obtain a more liquid investment
. the combined management teams will allow CapRock's recently enhanced
management team to work with McLeodUSA's recognized management to
accelerate the growth and progress of the combined business
. as a result of the strategic fit between the CapRock and McLeodUSA
operations, the merger provides the opportunity to create a super-
regional telecommunications company that will combine CapRock's
Southwestern presence with McLeodUSA's Midwestern and Rocky Mountain
presence and will have the ability to bundle basic local and long
distance telephone services with advanced broadband voice, video and
data communications services
. the combined company will have the opportunity to realize significant
synergies by leveraging the combined company's network to reduce local
access charges, wholesale carriage costs and operating costs and take
advantage of potentially significant growth in data traffic
. the integrated products and services offerings of the combined company
will create and enhance cross-selling opportunities to the existing
customer bases of each of CapRock and McLeodUSA, resulting in new
opportunities to generate revenue
. as part of McLeodUSA, CapRock will benefit from substantially greater
financial and sales and marketing resources and will be better able to
compete in the highly competitive market for telecommunications
services
. the financial resources and access to capital of McLeodUSA, together
with the interim financing which CapRock received in connection with
the announcement of the merger, will allow CapRock to continue its
operations and business plan
28
. the merger is expected to be tax free to CapRock's U.S. stockholders
(except to the extent they receive cash for any fractional shares)
The CapRock board consulted with CapRock senior management, as well as its
financial advisors, independent accountants and legal counsel, in reaching its
decision to approve the merger agreement. Among the factors the CapRock board
considered in its deliberations were the following:
. the benefits described above
. the familiarity of the CapRock board with CapRock's cash position,
difficulties in accessing capital, business, properties and prospects
of CapRock, including the opportunities and acquisition alternatives
available to CapRock if the proposed merger did not occur
. the exchange ratio negotiated with McLeodUSA and the recent and
historical market prices of CapRock common stock, as well as how this
exchange ratio compared to the other opportunities available to CapRock
and the value achievable upon a liquidation of CapRock
. the opinion of Salomon Smith Barney that, as of October 2, 2000, the
exchange ratio was fair, from a financial point of view, to the CapRock
stockholders (a copy of Salomon Smith Barney's opinion is attached as
Appendix D to this proxy statement/prospectus)
. information and presentations by CapRock management and legal and
financial advisors concerning the business, technology, products,
operations, financial condition, organizational structure and industry
position of CapRock and McLeodUSA, on both an historical and
prospective basis
. current financial market conditions and historical market prices,
volatility and trading information about CapRock common stock and
McLeodUSA Class A common stock
. the potential benefits of the merger to CapRock's customers, suppliers
and employees
. the terms and conditions of the merger agreement
. the terms and conditions of the voting agreement of various
stockholders of CapRock, who own approximately 52% of the
outstanding CapRock common stock, which requires them to vote such
shares in favor of the merger agreement
. the terms and conditions of the option agreement of various
stockholders of CapRock, granting McLeodUSA an option to purchase
up to approximately 39% of the outstanding CapRock common stock
under specified circumstances
. the completion by McLeodUSA of its due diligence and willingness to
execute a definitive agreement and commitment to completion of the
transaction on an expedited basis
Prior to reaching a decision to recommend that the merger agreement be
approved by the stockholders of CapRock, the CapRock board of directors, with
the assistance of Salomon Smith Barney and legal counsel, considered a number of
strategic alternatives, including (1) a sale of a significant minority preferred
equity investment in CapRock to a strategic investor, (2) a combination with a
private entity through the contribution of that entity's assets to CapRock in
return for a significant majority equity interest in CapRock, (3) obtaining a
secured credit facility, (4) sales of significant assets, including large
amounts of its fiber network and (5) the likelihood of obtaining additional
alternatives after evaluating the results of the marketing process conducted by
Salomon Smith Barney and Chase Securities.
During the third quarter of 2000, Salomon Smith Barney contacted numerous
potential investors to solicit interest in strategic alternatives, as well as to
solicit interest for private equity financings with CapRock. In addition, Chase
Securities renewed its efforts, which it had begun earlier in the year, to seek
potential private investors. In addition, CapRock both sought and received
contacts from additional parties with regard to credit facilities, large
indefeasible right of use sales, private equity transactions and strategic
alternatives. This process narrowed to three proposals for a strategic
transaction and a separate proposal for secured credit financing.
29
The proposed merger provided the most certainty for completion of a
transaction in the shortest period of time, which the CapRock board of directors
believed was significant in light of the immediate and long-term capital needs
of CapRock. In addition to other issues associated with the other alternatives
being considered, the time to execution of a definitive agreement with any party
other than McLeodUSA was expected to take several weeks. During those weeks,
CapRock would be exposed to potentially negative and unacceptable liquidity and
market risks. Those risks could be negatively affected by reactions to the
expiration of the Chase Manhattan credit facility commitment, differing
perceptions of operational results for the third quarter, payment demands from
creditors, employee recruiting and retention issues, marketing challenges with
customers and competitors due to unfavorable publicity, and the difficulties
being faced by other competitive local exchange companies in the capital
markets.
The CapRock board of directors also identified and considered a variety
of potentially negative factors in its deliberations concerning the merger
agreement, including the following:
. the risk that the per share value of the consideration to be received
in the merger could decline significantly from the value immediately
prior to the announcement of the merger, because the exchange ratio
will not be adjusted for changes in the market price of CapRock common
stock or McLeodUSA Class A common stock
. the possibility that the merger might not be consummated due to a
party's failure to satisfy conditions to closing, including the
condition that CapRock noteholders consent to amendments to CapRock's
outstanding notes
. the potential adverse effects of the failure to consummate the merger
on CapRock's operating results, the ability of CapRock to implement
its business plan and the overall competitive position and prospects
of CapRock
. the inability for a third-party acquisition proposal to become
effective because of the stock option and voting agreements described
above and the termination provisions of the merger agreement
. the inability of CapRock to terminate the merger agreement for a
superior proposal
. the risk that the potential benefits of the merger may not be realized
. other applicable risks described in this proxy statement/prospectus
under "Risk Factors"
After due consideration, the CapRock board of directors concluded that the
potential benefits of the merger to CapRock and its stockholders outweighed the
risks associated with the merger.
This discussion is not exhaustive of all the factors considered by the
CapRock board of directors. In view of the wide variety of factors considered in
connection with the board's evaluation of the merger and the complexity of these
matters, the CapRock board of directors did not quantify or otherwise assign
relative weights to the factors described above. Rather, the CapRock board made
its determination based on the totality of the information it considered. The
members of the board were aware that, as described below under "-- Interests of
the CapRock Directors and Executive Officers in the Merger," directors and
executive officers of CapRock have interests in the merger in addition to, or
different from, their interests as stockholders in CapRock, and the board
considered this in deciding to recommend the transaction.
CapRock cannot assure you that any of the expected results, synergies,
opportunities or other benefits described in this section will be achieved as a
result of the merger.
McLeodUSA's Reasons for the Merger
Over the past several months, as the communications industry has continued
to experience consolidation and expansion, McLeodUSA has examined its own
opportunities to expand. In this regard, the McLeodUSA board of directors has
identified the acquisition of CapRock as an attractive opportunity that both
offers McLeodUSA an
30
incremental step into markets where McLeodUSA has considered expanding its
operations and is consistent with the prior strategic actions of McLeodUSA.
McLeodUSA believes the merger will create a stronger company and will
provide significant value for its stockholders, employees and customers. The
main reasons for this view, among others, are the following:
. The acquisition of CapRock brings a strong set of new assets to
McLeodUSA. McLeodUSA will increase by 19% its current target market
from 21 to 25 states. This addition brings a 34% increase in
addressable points of presence (POPs). It will also take McLeodUSA to
18 new cities, an increase of 16% to a total of 133 citises.
. McLeodUSA network will be expanded by adding approximately 5,000 route
miles of fiber optic cable, increasing the McLeodUSA total by 19% to
approximately 31,000 route miles (including miles scheduled to be
delivered by Level 3 during the first half of 2001). McLeodUSA
believes the addition of this fiber is a logical, incremental step in
the development of a network designed to provide a very broad range of
products and services and to enable McLeodUSA to serve customers of
all sizes. McLeodUSA expects to strengthen the interconnection of its
network to the networks of existing carriers by adding CapRock
colocations to those of McLeodUSA, bringing McLeodUSA's projected
total to 600 by the end of 2000. Through the acquisition of CapRock,
McLeodUSA will also gain an additional 12 voice switches and 17 ATM
switches.
. McLeodUSA believes it will be able to leverage its proven management
expertise in the areas of sales process, product development and
customer service.
. McLeodUSA believes the addition of new sales people and strong
operational management within CapRock will provide the firm base
necessary to launch an incremental expansion by McLeodUSA into new
areas.
. Because New Mexico and Arizona are target market states for both
McLeodUSA and CapRock, McLeodUSA expects to recognize capital
expenditure synergies in those states.
. McLeodUSA believes it will be able to negotiate better arrangements
with CapRock's vendors.
. McLeodUSA expects savings from a "time to market" advantage. McLeodUSA
believes that the merger will enable it to enter the CapRock markets
more quickly than it would have been able to enter them otherwise.
McLeodUSA cannot assure you that any of the potential savings, synergies or
opportunities considered by McLeodUSA will be achieved through completion of the
merger. See "Risk Factors" and "Cautionary Note Regarding Forward-Looking
Statements."
Opinion of the CapRock Financial Advisor
Salomon Smith Barney has acted as the financial advisor to CapRock in
connection with the merger. At the meeting of the CapRock board of directors
held on October 2, 2000, Salomon Smith Barney delivered its oral opinion,
subsequently confirmed in writing, to the CapRock board that, as of that date,
the exchange ratio was fair, from a financial point of view, to the holders of
CapRock common stock (other than McLeodUSA and its affiliates). No limitations
were imposed by the CapRock board upon Salomon Smith Barney with respect to the
investigation made or the procedures followed by Salomon Smith Barney in
rendering its opinion. The opinion of Salomon Smith Barney was for the use and
benefit of the CapRock board in connection with its consideration of the merger.
The full text of the written opinion of Salomon Smith Barney, which
sets forth the assumptions made, procedures followed, matters considered and
limitations on the review undertaken by Salomon Smith Barney, is attached as
Appendix D to this proxy statement/prospectus. You are urged to read the Salomon
Smith Barney opinion in its entirety. The Salomon Smith Barney opinion is
directed only to the fairness, from a financial point of view, of the exchange
ratio to the holders of CapRock common stock and does not constitute a
recommendation as
31
to how you should vote at the special meeting. The summary of the opinion as
discussed in this document is qualified in its entirety by reference to the full
text of the opinion, which is incorporated herein by reference.
In connection with the rendering of its opinion, Salomon Smith Barney
reviewed and analyzed, among other things, the following:
. drafts of the merger agreement
. publicly available business and financial information concerning
CapRock
. financial forecasts and other information and data concerning the
business and operations of CapRock furnished to it by CapRock for
purposes of its analysis
. publicly available information concerning the trading of, and the
trading market for, CapRock common stock
. publicly available business and financial information concerning
McLeodUSA
. financial forecasts and other information and data concerning the
business and operations of McLeodUSA, furnished to Salomon Smith
Barney by McLeodUSA for purposes of its analysis
. publicly available information concerning the trading of, and the
trading market for, McLeodUSA Class A common stock
. publicly available financial information with respect to certain other
companies that Salomon Smith Barney believed to be relevant in
evaluating CapRock or McLeodUSA and the trading markets for certain of
such other companies' securities
. publicly available information concerning the nature and terms of
certain other transactions that Salomon Smith Barney considered
relevant to its inquiry
. pro forma financial impact of the merger on McLeodUSA
Salomon Smith Barney conducted such other analyses and examinations and
considered such other information and financial, economic and market criteria
that it deemed appropriate. Salomon Smith Barney also met with officers,
directors and other representatives and advisors of CapRock and officers and
other representatives and advisors of McLeodUSA concerning the business,
operations and prospects of CapRock and McLeodUSA, respectively.
In connection with its engagement, Salomon Smith Barney was requested
to approach, and Salomon Smith Barney held discussions with, third parties to
solicit indications of interest in the possible acquisition of all or a part of
CapRock or in providing financing to CapRock. These discussions resulted in
three indications of interest in a merger with, or investment in, CapRock.
Salomon Smith Barney noted that, with the exception of the McLeodUSA proposal,
the other preliminary proposals contained significant contingencies, and there
was no assurance as to the likelihood of executing definitive agreements with
respect to those preliminary proposals on a timely basis.
In rendering its opinion, Salomon Smith Barney assumed and relied upon
the accuracy and completeness of all financial and other information provided to
it, discussed with it or publicly available and did not attempt independently to
verify any of such information. Further, with respect to financial forecasts and
other information and data provided to or otherwise reviewed by or discussed
with Salomon Smith Barney, Salomon Smith Barney was advised by the respective
managements of CapRock and McLeodUSA that such forecasts and other information
and data were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the respective managements of CapRock and
McLeodUSA as to the future financial performance of CapRock and McLeodUSA,
respectively, and the strategic implications and operational benefits
anticipated to result from the merger. Salomon Smith Barney has not made or been
provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of CapRock or McLeodUSA or of the solvency
of either entity, nor did it make any physical inspection of the properties or
assets of CapRock or McLeodUSA. Salomon Smith Barney assumed that the merger
would be consummated in accordance with the terms of the merger agreement and
the other
32
agreements entered into in connection therewith, and would be treated as a tax
free reorganization for federal income tax purposes. Salomon Smith Barney
further assumed that in the course of obtaining the necessary regulatory or
third party approvals for the merger, no limitations, restrictions or conditions
would be imposed that would have an adverse effect on CapRock or McLeodUSA or
the contemplated benefits to CapRock of the merger.
In conducting its analysis and arriving at its opinion as expressed herein,
Salomon Smith Barney has considered financial terms of the merger in relation
to, among other things:
. current and historical market prices and trading volumes of CapRock
common stock and McLeodUSA Class A common stock
. the historical and projected earnings and other operating data of
CapRock and McLeodUSA
. the capitalization and financial condition of CapRock and McLeodUSA
. CapRock's current cash requirements for working capital, including for
short-term obligations to suppliers, and its other near-term liquidity
needs
The opinion of Salomon Smith Barney relates to the relative values of
CapRock and McLeodUSA and does not express any opinion as to what the value of
McLeodUSA Class A common stock actually will be when issued pursuant to the
merger or the price at which McLeodUSA Class A common stock will trade
subsequent to the merger. The Salomon Smith Barney opinion does not address the
relative merits of the merger as compared to any alternative business strategies
that might exist for CapRock or the effect of any other transaction in which
CapRock might engage.
In connection with its opinion, Salomon Smith Barney performed various
financial analyses, which it discussed with the CapRock board of directors on
October 2, 2000. The material portions of the analyses performed by Salomon
Smith Barney in connection with the rendering of its opinion are summarized
below.
Liquidation Value. Salomon Smith Barney performed a liquidation valuation
analysis to derive a range of implied value per share as a result of
liquidation. In this analysis, Salomon Smith Barney relied on a gross property,
plant and equipment ("PP&E") multiple ranging from 0.76x to 0.84x and a net PP&E
multiple ranging from 0.90x to 1.00x, which were derived from the recent sale in
a bankruptcy proceeding of substantially all the assets of GST
Telecommunications, a facilities-based integrated communications provider in the
western United States.
Based on this analysis, Salomon Smith Barney derived a total firm value
range of $425 million to $475 million and an implied value per share range of
$1.68 to $2.96 for CapRock, representing a discount ranging from 70.4% to 40.7%
from the implied value to CapRock stockholders based on the closing price of
CapRock common stock as of October 2, 2000. For purposes of its analysis,
Salomon Smith Barney assumed that CapRock had total debt of $360 million and did
not have a cash balance.
Discounted Cash Flow Analysis. Salomon Smith Barney performed a discounted
cash flow analysis to derive a range of equity values per share for CapRock. In
this analysis, Salomon Smith Barney assumed a weighted average cost of capital
for CapRock ranging from 15.5% to 17.5%. Terminal values for CapRock were based
on a range of 8.0x to 10.0x projected earnings before interest, taxes,
depreciation and amortization.
In deriving a range of firm values for CapRock, Salomon Smith Barney
performed the discounted cash flow analysis using both management projections
provided by CapRock and projections adjusted to reflect Wall Street equity
research benchmarks for comparable companies. Salomon Smith Barney then applied
a discount to the range of equity values per share it derived for CapRock. This
discount was derived from the discount to discounted cash flow valuations
maintained by a select group of peer "smart build" CLEC companies as of October
2, 2000, which included Choice One, Mpower, Net2000, Network Plus, Pac-West
Telecom and US LEC. In this analysis, Salomon Smith Barney assumed a discount
ranging from 68.6% to 88.0%. Based upon this analysis, Salomon Smith Barney
derived the following ranges of firm values and adjusted equity values per share
for CapRock, in each case as of September 30, 2000:
33
Wall Street Benchmark
---------------------
Management Projections Adjusted Projections
---------------------- --------------------
Adjusted Equity Value $6.05 - $19.17 $3.80 - $12.45
(per share)
Salomon Smith Barney noted that the achievement of these values was
dependent on numerous factors, particularly the achievement of projected
operating results and availability of capital required to finance CapRock's
business plan. Salomon Smith Barney observed that, under current market and
operating conditions, CapRock did not appear to have the required access to
capital and may not be able to operate as planned.
Public Market Sum-of-the-Parts Valuation. Salomon Smith Barney performed a
sum-of-the-parts valuation analysis. For purposes of its analysis, Salomon Smith
Barney assumed that CapRock had total debt of $360 million, cash of $40 million
and option/warrant proceeds of approximately $21 million. Based on this
analysis, Salomon Smith Barney derived a total sum-of-the-parts value range for
CapRock of $575 million to $975 million and an implied value per share range of
$6.49 to $15.90, representing a premium to the closing price of CapRock common
stock as of October 2, 2000 ranging from 28.4% to 216%.
Salomon Smith Barney noted that these implied values represent a
theoretical "snapshot" of the values to prospective buyers or investors as of
the date of the analysis and that the values implied by this analysis were
likely superceded by the process by which prospective buyers and investors had
already been contacted (as discussed more fully in "--Recommendation of the
CapRock Board of Directors and Reasons for the Merger").
Public Market Valuation of McLeodUSA. Using publicly available information,
Salomon Smith Barney also performed a public market valuation analysis for
McLeodUSA Class A common stock which, when multiplied by the exchange ratio,
resulted in a range of implied values per share to CapRock stockholders of $5.81
to $6.73.
Historical Stock Price Performance. Salomon Smith Barney reviewed the
historical stock performance of CapRock common stock as compared with the stock
performance of a selected group of peer group CLECs, including Adelphia Business
Solutions, e.spire, Electric Lightwave, ICG Communications, Intermedia
Communications, McLeodUSA, XO Communications, Time Warner Telecom and Allegiance
Telecom; and peer group fiber providers, including Broadwing, FLAG Telecom,
Global Crossing, Level 3 Communications, Metromedia Fiber Network, TyCom,
360networks and Williams Communications. Salomon Smith Barney noted that
CapRock's stock price began underperforming the peer group companies in June
2000 and has severely underperformed since then as a result of a series of
events that have created financial uncertainty regarding CapRock's prospects,
including the announcements of the loss of a major contract valued at more than
$30 million, the anticipated failure to achieve projected second quarter
earnings and the resignation of its chief financial officer.
The preparation of a fairness opinion is a complex process and is not
susceptible to a partial analysis or summary description. The summary set forth
above is not and does not purport to be a complete description of the analyses
underlying Salomon Smith Barney's opinion or its presentation to the CapRock
board of directors. Salomon Smith Barney believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses and the factors considered by it, without considering
all such analyses and factors, could create an incomplete view of the processes
underlying the analyses discussed in its opinion. In addition, no company used
in the discounted cash flow analysis or the historical stock price performance
analysis summarized above is identical to CapRock or McLeodUSA or any of their
business segments. Salomon Smith Barney also may have deemed various assumptions
more or less probable than other assumptions, so that the ranges of valuations
resulting for any particular analysis described above should not be taken to be
Salomon Smith Barney's view of the actual value of CapRock. Additionally, an
analysis of the data described above necessarily involves complex considerations
and judgments concerning differences in financial and operating characteristics
of CapRock, McLeodUSA or any of their business segments and other facts that
could affect the public trading value or the acquisition value of the companies
to which they are being compared.
34
In performing its analyses, Salomon Smith Barney made numerous assumptions
with respect to industry performance, general business, financial, market and
economic conditions and other matters, many of which are beyond the control of
CapRock or McLeodUSA. The analyses which Salomon Smith Barney performed are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. Such
analyses were prepared solely as part of Salomon Smith Barney's analysis of the
fairness, from a financial point of view, of the exchange ratio to holders of
CapRock common stock (other than McLeodUSA and its affiliates). The analyses do
not purport to be appraisals or to reflect the prices at which a company or any
of its businesses might actually be sold or the prices at which any securities
may trade at the present time or at any time in the future. In addition, the
opinion of Salomon Smith Barney and Salomon Smith Barney's presentation to the
CapRock board of directors were among the many factors taken into consideration
by the CapRock board in making its determination to approve the merger.
Salomon Smith Barney is an internationally recognized investment banking
firm that provides financial services in connection with a wide range of
business transactions. As part of its business, Salomon Smith Barney regularly
engages in the valuation of companies and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and other purposes. In the ordinary course of its business, Salomon Smith Barney
or its affiliates may actively trade or hold the securities of CapRock and
McLeodUSA for its own account or the account of its customers and, accordingly,
may at any time hold a long or short position in such securities. In addition,
Salomon Smith Barney has rendered certain investment banking services to CapRock
and McLeodUSA, respectively, unrelated to the proposed merger, for which Salomon
Smith Barney received compensation. Salomon Smith Barney and its affiliates
(including Citigroup Inc. and its affiliates) may maintain other business
relationships with CapRock, McLeodUSA and their respective affiliates. The
CapRock board of directors retained Salomon Smith Barney based on Salomon Smith
Barney's expertise in the valuation of companies as well as its substantial
experience in transactions such as the merger.
Miscellaneous. Pursuant to the terms of an engagement letter dated
September 11, 2000, CapRock agreed to pay Salomon Smith Barney for its financial
advisory and investment banking services a fee of $1.1 million, and, if the
merger is completed, a transaction fee payable upon completion of the merger in
a maximum aggregate amount, together with amounts previously paid or payable for
financial advisory and investment banking services, equal to the greater of $4
million or 0.7% of the transaction value.
CapRock also agreed to reimburse Salomon Smith Barney for all reasonable
expenses incurred in performing its services, including legal fees and expenses,
and to indemnify Salomon Smith Barney and certain related parties against
certain liabilities in connection with Salomon Smith Barney's engagement,
including liabilities under the securities laws.
Independent Auditors
The partial presentation of prospective financial information included or
referred to in this document on pages [__] through [__] has been prepared by,
and is the responsibility of, the management of CapRock and its financial
advisor. Arthur Andersen LLP and KPMG LLP have neither examined nor compiled
that prospective financial information, and accordingly, Arthur Andersen LLP and
KPMG LLP do not express an opinion or any other form of assurance with respect
thereto and accept no responsibility for that information. The Arthur Andersen
LLP and KPMG LLP reports on the consolidated financial statements of McLeodUSA
and CapRock, respectively, incorporated by reference in this proxy
statement/prospectus, relate to the historical financial information of
McLeodUSA and CapRock, respectively. They do not extend to the prospective
financial information and should not be read to do so.
Interests of the CapRock Directors and Executive Officers in the Merger
Some directors and executive officers of CapRock have interests in the
merger that are in addition to, or different from, their interests as
stockholders of CapRock. The CapRock board of directors knew about these
interests, and considered them, when it approved the merger agreement. These
interests are summarized below.
35
Options. Under the terms of the CapRock 1998 Director Stock Option Plan and
the CapRock 1998 Equity Incentive Plan, upon the completion of the merger, a
total of 1,494,054 outstanding, non-vested options to purchase CapRock common
stock held by CapRock directors and executive officers, as listed in the table
below, will vest and become immediately exercisable. McLeodUSA will either
assume each unexercised CapRock stock option outstanding at the effective time
of the merger or issue substitute stock options to purchase McLeodUSA Class A
common stock in replacement of all unexercised CapRock stock options outstanding
at the effective time of the merger as described under "Terms of the Merger
Agreement and Related Transactions - Conversion of CapRock Common Stock;
Treatment of Options."
The following table shows the number of unvested options held by the
CapRock directors and executive officers whose vesting will accelerate as a
result of the merger, assuming the merger is completed as of December 31, 2000.
Number of Unvested CapRock
Name of Director or Options that
------------------- Accelerate as a Result
Executive Officer of the Merger (1)
----------------- --------------------------
Jere W. Thompson, Jr. 97,500
Leo J. Cyr 583,334
James E. Skinner 250,000
Timothy W. Rogers 56,250
Mark Langdale 4,668
Christopher J. Amenson 4,668
John R. Harris 2,334
T. George Hess 200,250
Claude A. Robertson 130,000
Kenneth L. Monblatt 165,050
(1) This represents the number of CapRock options estimated to be unvested as of
December 31, 2000. The aggregate estimated value of unvested options shown
in this table is approximately $[_______] based upon the [___________], 2000
closing price for McLeodUSA Class A common stock of $[____] multiplied by
the exchange ratio of 0.3876, less the exercise price of these options.
Current Employment Agreements. CapRock has employment agreements with Jere
W. Thompson, Jr., Leo J. Cyr, James E. Skinner and Timothy W. Rogers, each of
whom is an executive officer of CapRock. Under these agreements, if the
executive's employment with CapRock is terminated by CapRock without cause, as
defined in the agreements, the executive's stock options vest and the executive
is entitled to receive severance compensation and benefits consisting of the
following:
. Jere W. Thompson, Jr. - If Mr. Thompson's employment is terminated
without cause, he will receive payments equal to the base salary that
would have been payable over the period commencing on the date of
termination and ending on April 30, 2001, which will in no event be
less than six months. Mr. Thompson's current base salary is $265,000
per year.
. Leo J. Cyr - If Mr. Cyr's employment is terminated without cause, he
will receive payments equal to the base salary that would have been
payable over the period commencing on the date of termination and
ending 12 months thereafter. CapRock will also continue to provide
group health coverage for Mr. Cyr and his dependents during such 12-
month period. Mr. Cyr's current base salary is $250,000 per year. Mr.
Cyr may be entitled to a loan or a cash payment from CapRock with
respect to any excise tax he is subject to as a result of the merger.
. James E. Skinner - If Mr. Skinner's employment is terminated without
cause, he will receive payments equal to the base salary that would
have been payable over the period commencing on the date of
termination and ending 12 months thereafter. CapRock will also
continue to provide group health
36
coverage for Mr. Skinner and his dependents during such 12-month
period. Mr. Skinner's current base salary is $235,000 per year.
. Timothy W. Rogers - If Mr. Rogers' employment is terminated without
cause, he will receive payments equal to the base salary that would
have been payable over the period commencing on the date of
termination and ending on April 30, 2001, which will in no event be
less than six months. Mr. Rogers' current base salary is $210,000 per
year.
CapRock has also agreed to provide Kenneth L. Monblatt, who is also an
executive officer of CapRock, severance pay in an amount equal to 12 months'
base salary if there is a change of control and his position is eliminated, the
scope of his position and responsibilities are decreased or he is required to
move more than 50 miles. Mr. Monblatt's current base salary is $220,000.
Restricted Stock Agreements. CapRock has entered into restricted stock
agreements with Messrs. Cyr, Skinner and Monblatt pursuant to which such
executive officers received 100,000, 50,000 and 15,000 shares of restricted
stock, respectively. Under these agreements, all shares of restricted stock will
become fully vested immediately prior to the completion of the merger. In
addition, if the employment of Mr. Cyr or Mr. Skinner is terminated without
cause, then the vesting schedule is accelerated so that such person's restricted
stock becomes fully vested immediately prior to the termination of his
employment.
Loan Agreement. In connection with Mr. Cyr's employment agreement, CapRock
loaned to Mr. Cyr the principal amount of $900,000, payable over three years.
Under Mr. Cyr's employment agreement, upon the completion of the merger, the
outstanding principal amount of the loan and any accrued but unpaid interest
thereon is forgiven. On October 18, 2000, the one year anniversary of Mr. Cyr's
employment agreement, the first required payment of principal in the amount of
$300,000 and all of the accrued but unpaid interest through that date was
forgiven.
Grant of Option. In connection with the merger agreement, McLeodUSA and
Jere W. Thompson, Sr., The Williamsburg Corporation, Margaret D. Thompson, Jere
W. Thompson, Jr., Greenway Holdings, Ltd., CapRock Systems, Inc., Mark Langdale,
The Mark Langdale 1999 Trust, The Patricia Langdale 1999 Trust, CapRock
Investors and Timothy W. Rogers entered into a voting and option agreement under
which these CapRock stockholders, representing approximately 39% of CapRock's
issued and outstanding shares of common stock, granted to McLeodUSA an option to
purchase their CapRock shares. The option is exercisable for cash or stock, at
McLeodUSA's option, under specified circumstances, including those under which
CapRock is required to pay McLeodUSA the $7.85 million termination fee under the
merger agreement. In addition, if McLeodUSA exercises the option and within 12
months of such exercise CapRock completes any other takeover proposal, McLeodUSA
will pay an amount of additional consideration equal to 50% of the difference
between the aggregate price paid by McLeodUSA upon exercise of the option and
the aggregate amount received by McLeodUSA in the takeover proposal. For a
description of the terms of the voting and option agreement, see "Terms of the
Merger Agreement and Related Transactions -- Grant of Option."
Voting Agreements. Directors, executive officers and other stockholders of
CapRock have entered into voting agreements with respect to the voting of their
shares of CapRock common stock in connection with the merger. By entering into
these voting agreements, the holders of approximately 52% of the outstanding
shares of CapRock common stock have agreed to vote in favor of the approval of
the merger agreement. For a description of the terms of such voting agreements,
see "Terms of the Merger Agreement and Related Transactions --Voting
Agreements."
Directors' and Officers' Insurance and Indemnification. The merger
agreement provides that for six years after the effective time of the merger,
McLeodUSA will, and will cause CapRock to, maintain directors' and officers'
liability insurance to cover current and former directors and officers of
CapRock with respect to claims against them arising from facts or events which
occurred before the merger. Subject to specified limitations, this insurance
will have at least the same maximum coverage and amounts as, and terms and
conditions no less advantageous than, the coverage currently provided by
CapRock.
37
The merger agreement requires the surviving corporation in the merger
to continue to indemnify each current and former director, officer and agent of
CapRock and its subsidiaries following the merger against all expenses or
liabilities incurred in connection with any claim or investigation arising out
of actions or omissions occurring before the merger to the fullest extent
permitted under its articles of incorporation and bylaws. The surviving
corporation will also assume any indemnification or other similar agreement of
CapRock in effect at the time the merger becomes effective. CapRock has entered
into indemnification agreements with each of its directors, Mr. Skinner and
Kevin W. McAleer, a former executive officer of CapRock. Such agreements require
CapRock to indemnify such persons and advance expenses to the fullest extent
permitted by law. See "Terms of the Merger Agreement and Related Transactions -
Directors' and Officers' Insurance and Indemnification."
Accounting Treatment
The merger is expected to be accounted for using the purchase method of
accounting. McLeodUSA will be deemed the acquiror for financial reporting
purposes. Under the purchase method of accounting, the purchase price in the
merger is allocated among the CapRock assets acquired and the CapRock
liabilities assumed to the extent of their fair market value with any excess
purchase price being allocated to goodwill.
Listing of McLeodUSA Class A Common Stock
McLeodUSA has agreed to use its commercially reasonable efforts to
cause the shares of McLeodUSA Class A common stock issuable in the merger to be
approved for quotation on the Nasdaq National Market, subject to official notice
of issuance.
Delisting and Deregistration of CapRock Common Stock
If the merger is completed, CapRock common stock will no longer be
quoted on the Nasdaq National Market and will be deregistered under the
Securities Exchange Act.
Governmental and Regulatory Approvals
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
rules promulgated thereunder by the Federal Trade Commission, the merger may not
be completed until notifications have been given and certain information has
been furnished to the Antitrust Division of the Department of Justice and the
FTC and specified waiting period requirements have been satisfied. McLeodUSA and
CapRock each filed premerger notification and report forms with the Antitrust
Division and the FTC on October 12 and October 13, 2000, respectively.
At any time before or after the effective time of the merger, the
Antitrust Division, the FTC or a private person or entity could seek under
antitrust laws, among other things, to enjoin the merger or to cause McLeodUSA
to divest itself, in whole or in part, of the surviving corporation of the
merger or of certain businesses conducted by the surviving corporation. There
can be no assurance that a challenge to the merger will not be made or that, if
such a challenge is made, McLeodUSA will prevail. The obligation of McLeodUSA
and CapRock to complete the merger is subject to the condition that the
applicable waiting period under the HSR Act shall have expired without action by
the Antitrust Division or the FTC to prevent completion of the merger.
Under the laws of Louisiana, Oklahoma and Texas, where CapRock is
certified as a competitive local exchange carrier (CLEC), McLeodUSA and CapRock
are required to make certain filings and/or obtain regulatory approval of the
merger from the Louisiana Public Service Commission, the Oklahoma Corporation
Commission and the Texas Public Utility Commission. McLeodUSA and CapRock have
filed the necessary documents with these commissions. CapRock is also certified
as a CLEC in Arizona, Kansas and Missouri. McLeodUSA, however, is already
certified as a CLEC in these states and therefore intends to relinquish
CapRock's CLEC certificate following the merger and operate pursuant to
McLeodUSA's own certificate. The remaining states where CapRock is certified as
a CLEC, Arkansas and Tennessee, do not require prior regulatory approval or
other action in order for McLeodUSA and CapRock to complete the merger.
McLeodUSA and CapRock intend to contact the limited
38
number of CapRock customers in each of these states to inform them that CapRock
will cease providing service and request the customer's authorization to
transfer their account to McLeodUSA or another service provider.
CapRock is also certified to provide intrastate interexchange (IXC)
services in numerous states, although CapRock has only a minimal number of long
distance customers. McLeodUSA, however, is already certified to provide IXC
services in every state in which CapRock is authorized to provide such service.
McLeodUSA and CapRock have filed for regulatory approval of the merger in
California and Florida. CapRock will soon file for approval to relinquish its
IXC certificates in those certain jurisdictions in which (a) McLeodUSA already
holds the authority required to provide the IXC services and (b) regulatory
approval of the merger would be required if CapRock's certificates were not
relinquished. McLeodUSA and CapRock intend to contact the limited number of
CapRock customers in these states to inform them that CapRock will cease
providing service and request authorization to transfer the customer's account
to McLeodUSA or another service provider.
In addition, McLeodUSA and CapRock must obtain the approval of the
Federal Communications Commission for transfer of certain licenses and
certificates granted by the FCC to CapRock. All necessary FCC filings have
already been made.
See "Terms of the Merger Agreement and Related Transactions--Conditions
to Completion of the Merger" and "--Termination of the Merger Agreement."
Federal Income Tax Consequences
The following discussion is a summary of the material United States
federal income tax consequences of the merger to a CapRock stockholder holding
shares of CapRock common stock as a capital asset at the effective time of the
merger.
This discussion does not address all aspects of federal taxation that
may be relevant to particular CapRock stockholders in light of their personal
circumstances or to CapRock stockholders subject to special treatment under the
Internal Revenue Code, including, without limitation, banks, tax-exempt
organizations, insurance companies, dealers in securities or foreign currencies,
CapRock stockholders who received their CapRock stock through the exercise of
employee stock options or otherwise as compensation, CapRock stockholders who
are not U.S. persons and CapRock stockholders who hold CapRock stock as part of
a hedge, straddle or conversion transaction. We have not described tax
consequences that arise from rules that apply generally to all taxpayers from
the ownership of McLeodUSA Class A common stock. We have also not described tax
consequences that we assume to be generally known by investors. In addition, the
discussion does not address any state, local or foreign tax consequences of the
merger. Finally, the tax consequences to holders of CapRock stock options or
CapRock restricted stock are not discussed.
The discussion is based on the Internal Revenue Code, the United States
Department of Treasury regulations and administrative rulings and court
decisions as of the date of this proxy statement/prospectus, all of which are
subject to change, possibly with retroactive effects, and which are subject to
differing interpretations. No ruling has been or will be sought from the
Internal Revenue Service concerning the tax consequences of the merger. CapRock
stockholders are urged to consult their tax advisors regarding the tax
consequences of the merger to them, including the effects of United States
federal, state, local, foreign and other tax laws.
The obligation of CapRock to complete the merger is subject to the
condition, which may be waived, that CapRock receive a legal opinion from Munsch
Hardt Kopf & Harr, P.C. to the effect that the merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. The opinion will be based on customary assumptions and factual
representations and will assume that the merger will be completed according to
the terms of the merger agreement.
The following discussion of United States federal income tax
consequences of the merger assumes that, if completed, the merger will qualify
as a reorganization within the meaning of Section 368(a) of the Internal Revenue
39
Code, subject to the assumptions, limitations, qualifications and other
considerations described below under "--Considerations with Respect to the
Opinion."
Accordingly, if the merger is completed:
. CapRock and McLeodUSA will not recognize gain or loss as a result
of the merger
. no gain or loss will be recognized by a CapRock stockholder as a
result of the exchange of all of such CapRock stockholder's shares
of CapRock common stock solely for shares of McLeodUSA Class A
common stock, except that gain or loss may be recognized with
respect to cash received in lieu of a fractional share of McLeodUSA
Class A common stock
. a CapRock stockholder who receives cash in lieu of a fractional
share of McLeodUSA Class A common stock will recognize gain or loss
with respect to the cash received, measured by the difference
between (a) the amount of cash received and (b) the CapRock
stockholder's tax basis in the fractional share. This gain or loss
will be capital gain or loss and will be long-term capital gain or
loss if the shares of CapRock common stock have been held for more
than one year at the time the merger is completed
. a CapRock stockholder's aggregate tax basis in the shares of
McLeodUSA Class A common stock received by such CapRock stockholder
in the merger will initially be equal to (a) the CapRock
stockholder's aggregate tax basis in the shares of CapRock common
stock owned by such CapRock stockholder immediately prior to the
merger, reduced by (b) the amount of basis allocable to any
fractional share, as described above
. a CapRock stockholder's holding period for the shares of McLeodUSA
Class A common stock received by such CapRock stockholder in the
merger, including any fractional share for which the stockholder
received cash, will include the holding period of the shares of
CapRock common stock owned by such CapRock stockholder immediately
prior to the merger
. CapRock stockholders must retain records and file a statement
setting forth facts about the merger with their United States
federal income tax returns
Backup Withholding. Certain non-corporate CapRock stockholders may be
subject to backup withholding at a 31% rate on cash payments received instead of
fractional shares of McLeodUSA Class A common stock. Backup withholding will not
apply, however, to a CapRock stockholder who:
. furnishes a correct taxpayer identification number and certifies
that he, she or it is not subject to backup withholding on the
substitute Form W-9 or successor form included in the letter of
transmittal to be delivered to CapRock stockholders following the
date of completion of the merger
. provides a certification of foreign status on form W-8 or successor
form
. is otherwise exempt from backup withholding
Considerations with Respect to the Opinion. The tax opinion of Munsch
Hardt Kopf & Harr, P.C. and the foregoing summary of the material United States
federal income tax consequences of the merger are and will be subject to
assumptions, limitations and qualifications and are based on current law and,
among other things, representations of CapRock and McLeodUSA, including
representations made by the respective managements of CapRock and McLeodUSA. The
opinion of counsel is not binding on the Internal Revenue Service and does not
preclude the Internal Revenue Service from adopting a contrary position. In
addition, if any of the representations or assumptions are inconsistent with the
actual facts, the United States federal income tax consequences of the merger
could be adversely affected.
The foregoing discussion is not intended to be a complete analysis or
description of all potential United States federal income tax consequences or
any other consequences of the merger. The tax consequences of the merger to you
may be different from those summarized above, based on your individual
40
situation. Accordingly, CapRock stockholders are strongly urged to consult with
their tax advisors with respect to the particular United States federal, state,
local or foreign income tax or other tax consequences of the merger to them.
Restrictions on Resales by Affiliates
The McLeodUSA Class A common stock to be issued to CapRock stockholders
in the merger will be freely transferable under the Securities Act, except for
shares issued to any person who may be deemed to be an "affiliate" of CapRock
within the meaning of Rule 145 under the Securities Act or who will become an
"affiliate" of McLeodUSA within the meaning of Rule 144 under the Securities Act
after the merger. Shares of McLeodUSA Class A common stock received by persons
who are deemed to be CapRock affiliates or who become McLeodUSA affiliates may
be resold by these persons only in transactions permitted by the limited resale
provisions of Rule 145 or as otherwise permitted under the Securities Act.
Persons who may be deemed to be affiliates of CapRock generally include
individuals or entities that, directly or indirectly through one or more
intermediaries, control, are controlled by or are under common control with
CapRock and may include officers, directors and principal CapRock stockholders.
All CapRock stockholders who may be deemed to be CapRock affiliates will be so
advised prior to the effective time of the merger.
CapRock has agreed to use its commercially reasonable efforts to obtain
an affiliate agreement from each affiliate of CapRock prior to the completion of
the merger by which each CapRock affiliate will agree not to sell any of the
McLeodUSA Class A common stock received in the merger in violation of the
Securities Act. This proxy statement/prospectus does not cover resales of shares
of McLeodUSA Class A common stock received by any person upon completion of the
merger, and no person is authorized to make any use of this proxy
statement/prospectus in connection with any such resale.
No Appraisal Rights
CapRock is a Texas corporation. Under Texas law, CapRock stockholders
are not entitled to appraisal rights in connection with the merger because, on
the record date, shares of CapRock common stock were designated and quoted on
the Nasdaq National Market and will be converted into shares of McLeodUSA Class
A common stock, which immediately after the effective time of the merger will be
designated and quoted on the Nasdaq National Market.
CapRock Debt Securities
CapRock has two series of publicly traded debt securities outstanding,
its 12% senior notes due 2008 and its 11 1/2% senior notes due 2009. CapRock is
soliciting consents from holders of the outstanding principal amount of each
series of notes to amend the respective indentures governing the notes to
provide that the merger will neither violate the indentures nor constitute a
change of control thereunder, and upon receipt of the requisite consents will
enter into supplemental indentures with the trustee under the indentures to
effect these amendments.
Additionally, as required by the merger agreement, CapRock is
soliciting consents to amend the indentures governing each series of notes to
eliminate most of the restrictive covenants and reporting requirements contained
in the indentures. The consent of holders of a majority of the outstanding
principal amount of each series of notes is required to effect these amendments,
which, if the requisite consents are received, will become effective upon the
later of the effective time of the merger and 20 business days after
commencement of the exchange offers described below. Obtaining the foregoing
requisite consents is a condition to the completion of the merger.
The merger agreement requires that McLeodUSA prepare and file a
registration statement on Form S-4 to effect exchange offers to acquire all of
the outstanding CapRock 12% notes and CapRock 11 1/2% notes in exchange for a
like principal amount of notes of McLeodUSA having the same interest rate,
payment, maturity and redemption terms as the applicable CapRock notes. Such
registration statement on Form S-4 was filed with the SEC on October 19, 2000.
41
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS
The following summary of the material terms and provisions of the
merger agreement, the voting and option agreement and the voting agreement is
qualified in its entirety by reference to such agreements. The merger agreement,
the voting and option agreement and the voting agreement are attached as
Appendices A, B and C, respectively, to this proxy statement/prospectus and are
considered part of this document.
Structure of the Merger
Subject to the terms and conditions of the merger agreement and in
accordance with Delaware and Texas law, at the effective time of the merger,
Cactus Acquisition Corp., a wholly-owned subsidiary of McLeodUSA, will merge
with and into CapRock. CapRock will continue its corporate existence under the
laws of the State of Texas under the name "CapRock Communications Corp." as a
wholly-owned subsidiary of McLeodUSA. At the effective time of the merger, the
separate corporate existence of Cactus Acquisition Corp. will terminate. The
articles of incorporation and by-laws of CapRock will become the articles of
incorporation and by-laws of the surviving corporation of the merger, except
that Article 4 of such articles of incorporation will be amended to reduce the
number of shares of authorized capital stock of the surviving corporation.
Conversion of CapRock Common Stock; Treatment of Options
At the effective time of the merger, each issued and outstanding share
of CapRock common stock, other than shares directly owned by CapRock, McLeodUSA
or Cactus Acquisition Corp., will be converted into the right to receive 0.3876
of a share of McLeodUSA Class A common stock, which is the exchange ratio, as
well as cash, without interest, for fractional shares.
Each share of CapRock common stock directly owned by CapRock, McLeodUSA
or Cactus Acquisition Corp. will automatically be canceled and will cease to
exist at the effective time of the merger without the payment of any
consideration. Each share of common stock of Cactus Acquisition Corp. issued and
outstanding immediately prior to the effective time of the merger will be
converted into a validly issued, fully paid and non-assessable share of common
stock of the surviving corporation of the merger.
If, prior to the effective time of the merger, McLeodUSA changes, or
establishes a record date for changing, the number of shares of McLeodUSA Class
A common stock issued and outstanding as a result of any stock split, stock
dividend, recapitalization, subdivision, reclassification, combination, exchange
of shares or any similar transaction and the record date of such change is prior
to the effective date of the merger, the exchange ratio will be proportionately
adjusted to reflect the change.
In addition, no fractional shares of McLeodUSA Class A common stock
will be issued in the merger. For each fractional share that would otherwise be
issued, a CapRock stockholder will receive cash in an amount equal to the
fractional share multiplied by the closing price of a share of McLeodUSA Class A
common stock on the closing date of the merger, as such price is quoted on the
Nasdaq National Market, less any required withholding tax. No interest will be
paid or accrue on any cash in lieu of fractional shares payable to the CapRock
stockholders.
Upon completion of the merger, each outstanding option to acquire
shares of CapRock common stock which was granted prior to the date of the merger
agreement will become fully vested and exercisable.
Prior to the effective time of the merger, McLeodUSA and CapRock will
take such actions as may be necessary or advisable to enable McLeodUSA, at its
option, either to:
. assume each option to acquire shares of CapRock common stock
outstanding immediately prior to the merger or
. issue a substitute option to acquire shares of McLeodUSA Class A
common stock in respect of each outstanding CapRock stock option
42
As to each substitute option, as soon as reasonably practicable after
the merger, McLeodUSA will issue to each holder of a CapRock stock option a
document evidencing the foregoing substitution by McLeodUSA.
At the effective time of the merger, each CapRock stock option
outstanding immediately prior to the effective time of the merger that McLeodUSA
elects to assume will be amended and converted into, and each substitute stock
option issued by McLeodUSA in respect of a CapRock stock option outstanding
immediately prior to the effective time of the merger will be, an option to
acquire, on the same terms and conditions as were applicable under such CapRock
stock option (provided that the date of grant of a substitute option will be
deemed to be the date on which the corresponding CapRock stock option was
granted), the number of shares of McLeodUSA Class A common stock (rounded down
to the nearest whole share) determined by multiplying:
. the number of shares of CapRock common stock subject to such
CapRock stock option by
. the exchange ratio,
at a price per share of McLeodUSA Class A common stock (rounded up
to the nearest whole cent) equal to:
. the aggregate exercise price for the shares of CapRock common stock
otherwise purchasable pursuant to the CapRock stock option divided
by
. the aggregate number of shares of McLeodUSA Class A common stock
deemed purchasable in accordance with the foregoing
As soon as practicable after the effective time of the merger,
McLeodUSA will cause a number of shares of McLeodUSA Class A common stock equal
to the number of shares issuable with respect to the CapRock stock options as
adjusted in accordance with the merger agreement to be registered under the
Securities Act on a registration statement on Form S-8. This registration
statement will be kept effective, and the current status of any prospectus will
be maintained, for so long as such options remain outstanding.
Exchange of Certificates
For the benefit of the holders of CapRock common stock outstanding
immediately prior to the effective time, McLeodUSA has agreed to deposit with
Wells Fargo Bank Minnesota, N.A., or another bank or trust company acceptable to
McLeodUSA and CapRock, as exchange agent in the merger, certificates
representing the shares of McLeodUSA Class A common stock issuable to CapRock
stockholders under the merger agreement. After the effective time of the merger,
McLeodUSA will make available to the exchange agent cash necessary to pay
dividends and other distributions, if any, and to make payments for fractional
shares of McLeodUSA Class A common stock all as provided for in the merger
agreement.
As soon as reasonably practicable after the effective time of the
merger, the exchange agent will mail a letter of transmittal to each holder of
CapRock common stock. The letter of transmittal will contain instructions with
respect to the surrender to the exchange agent of CapRock common stock
certificates.
CapRock stockholders should not return their stock certificates with
the enclosed proxy, nor should they forward them to the exchange agent unless
and until they receive the letter of transmittal, at which time they should
forward them only in accordance with the instructions accompanying the letter of
transmittal.
Until holders of certificates previously representing CapRock common
stock have surrendered those certificates to the exchange agent for exchange,
the holder will not receive dividends or distributions on the McLeodUSA Class A
common stock into which such shares have been converted with a record date after
the effective time of the merger, and will not receive cash for any fractional
shares of McLeodUSA Class A common stock. When holders surrender such
certificates, they will receive any unpaid dividends and any cash for fractional
shares of McLeodUSA Class A common stock without interest.
43
Any shares of McLeodUSA Class A common stock and cash that remain
undistributed by the exchange agent one year after the effective time of the
merger will be delivered to McLeodUSA upon demand. After this period,
certificates representing CapRock common stock must be surrendered for exchange
to McLeodUSA. Any shares of McLeodUSA Class A common stock and cash that remain
undistributed by the exchange agent two years after the effective time of the
merger will become, to the extent permitted by applicable law, the property of
McLeodUSA. None of McLeodUSA, Cactus Acquisition Corp., CapRock or the exchange
agent will be liable for any shares of McLeodUSA Class A common stock, dividends
or distributions on this stock or cash for fractional shares delivered to a
public official under any abandoned property, escheat or similar laws.
If a certificate representing CapRock common stock has been lost,
stolen or destroyed, the exchange agent will issue the consideration properly
payable in accordance with the merger agreement upon the making of an affidavit
of such loss, theft or destruction by the claimant, and, if required by
McLeodUSA or the exchange agent, the posting of a bond as indemnity against any
claim that may be made against McLeodUSA, CapRock or the exchange agent with
respect to such certificate.
In the event of a transfer of ownership of CapRock common stock which
is not registered in the transfer records of CapRock, a certificate representing
the proper number of shares of McLeodUSA Class A common stock may be issued to a
person other than the person in whose name the certificate so surrendered is
registered if:
. such certificate is properly endorsed or otherwise is in proper
form for transfer
. the person requesting such issuance will (1) pay any transfer or
other taxes resulting from the issuance of shares of McLeodUSA
Class A common stock to a person other than the registered holder
of such certificate or (2) establish to McLeodUSA that such tax has
been paid or is not applicable
All shares of McLeodUSA Class A common stock issued upon conversion of
shares of CapRock common stock, including any cash paid instead of any
fractional shares of McLeodUSA Class A common stock, will be issued in full
satisfaction of all rights relating to such shares of CapRock common stock.
For a description of the McLeodUSA Class A common stock and a
description of the differences between the rights of the holders of CapRock
common stock, on the one hand, and holders of McLeodUSA Class A common stock, on
the other, see "McLeodUSA Capital Stock and Comparison of Stockholder Rights."
Continuation of Employee Benefits
During the six-month period following the effective time, McLeodUSA
will cause the surviving corporation in the merger
. to maintain the CapRock benefit plans, other than equity-based
arrangements, in effect on the date of the merger agreement or
. to replace all or any of the CapRock benefit plans with employee
benefit plans and programs maintained for similarly situated
employees of McLeodUSA, provided that the aggregate level of
benefits, other than equity-based arrangements, will be
substantially comparable to the aggregate level of benefits
provided by the CapRock benefit plans in effect on the date of the
merger agreement
To the extent that any plan of McLeodUSA or any of its affiliates
becomes applicable to any employee or former employee of CapRock or its
subsidiaries, McLeodUSA will grant, or cause to be granted, to such employees or
former employees credit for their service with CapRock and its subsidiaries and
any of their predecessors for the purpose of determining eligibility to
participate and nonforfeitability of benefits under such plans of McLeodUSA and
for purposes of benefit accrual under vacation and severance pay plans, but only
to the extent such service was credited under similar plans of CapRock and its
subsidiaries.
44
McLeodUSA will cause CapRock or the surviving corporation in the merger
to honor in accordance with their respective terms, as in effect on the date of
the merger agreement, CapRock benefit agreements as disclosed in the merger
agreement.
Effective Time
The merger will become effective upon the filings of the certificate of
merger and the articles of merger with the Secretary of State of Delaware and
the Secretary of State of Texas, respectively, or such later time as is agreed
upon by McLeodUSA and CapRock and specified in the certificate of merger and the
articles of merger. The filings of the certificate of merger and the articles of
merger will occur as soon as practicable, but no later than the second business
day, after satisfaction or waiver of the conditions to the completion of the
merger described in the merger agreement unless another date is agreed to in
writing by McLeodUSA and CapRock. CapRock and McLeodUSA anticipate that, if the
merger agreement is approved at the special meeting, the merger will be
completed promptly after such approval.
Representations and Warranties
The merger agreement contains customary representations and warranties
of McLeodUSA and CapRock relating to, among other things:
. corporate organization and similar corporate matters
. subsidiaries
. capital structure
. authorization, execution, delivery, performance and enforceability
of, and required consents, approvals, orders and authorizations of
governmental authorities relating to, the merger agreement and
related matters
. documents filed with the SEC, the accuracy of information contained
in such documents and the absence of undisclosed liabilities
. the accuracy of information supplied in connection with this proxy
statement/prospectus and the registration statement of which it is
a part
. absence of events that would constitute a material adverse change
since December 31, 1999
. outstanding and pending litigation
. no defaults under certain contracts
. satisfaction or inapplicability of certain state takeover statutes'
requirements
. engagement and payment of fees of brokers, investment bankers,
finders and financial advisors
. required stockholder vote of CapRock and no required stockholder
vote of McLeodUSA
. absence of any action by or knowledge of any fact reasonably
likely to prevent the merger from qualifying as a reorganization
under Section 368(a) of the Internal Revenue Code
The merger agreement also contains customary representations of CapRock
relating to, among other things:
. compliance with applicable laws
. absence of changes in benefit plans
. matters relating to the Employee Retirement Income Security Act
. filing of tax returns and payment of taxes
45
. receipt of fairness opinion from its financial advisor
. intellectual property
The foregoing representations and warranties will not survive the
effective time of the merger.
Business of CapRock and Its Subsidiaries Pending the Merger
Under the merger agreement, CapRock has agreed that, unless consented
to in writing by McLeodUSA, which consent will not be unreasonably withheld,
prior to the effective time of the merger, it will, and will cause its
subsidiaries to, carry on their respective businesses in the ordinary course and
comply with all applicable laws, rules and regulations and will use its
commercially reasonable efforts to preserve their assets and technology and
their relationships with customers, suppliers, licensors, licensees,
distributors and others having business dealings with them.
In addition, CapRock has agreed that, except as expressly permitted in
the merger agreement and subject to certain exceptions, unless consented to in
writing by McLeodUSA, which consent will not be unreasonably withheld, neither
it nor any of its subsidiaries may, among other things:
. declare, set aside or pay any dividends or make other distributions
in respect of any of its capital stock, other than certain
dividends and distributions by a wholly-owned subsidiary to its
parent
. split, combine or reclassify any of its capital stock, or issue or
authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock
. purchase, redeem or otherwise acquire, any shares of capital stock
of CapRock or its subsidiaries or any rights, warrants, calls or
options to acquire any such securities other than any purchase of
CapRock common stock held for more than six months in connection
with a cashless exercise of CapRock stock options
. issue, deliver, sell, pledge or otherwise encumber or subject to
any lien any shares of capital stock, any other voting securities
or any securities convertible into, or exchangeable for, or any
rights, warrants, calls or options to acquire, any such securities
or any stock appreciation rights or other rights that are linked to
the price of CapRock common stock other than (1) the issuance of
CapRock common stock upon the exercise of CapRock stock options
outstanding on the date of the merger agreement in accordance with
their terms, (2) grants of CapRock stock options to existing
employees, including executive officers, in amounts, to individuals
and on terms as agreed by CapRock and McLeodUSA and (3) grants of
CapRock stock options to new employees who are not executive
officers in the ordinary course of business, to the extent that the
aggregate number of shares of CapRock common stock issuable under
such grants, does not exceed 350,000 in any calendar quarter on
terms consistent with past practice, except that such options will
be subject to four year vesting and such vesting will not
accelerate upon completion of the merger
. amend the articles of incorporation, by-laws or other comparable
organizational documents of CapRock or its subsidiaries
. directly or indirectly acquire or agree to acquire by merging or
consolidating with, or by purchasing assets of, or by any other
manner, any business or any person, other than purchases of raw
materials or supplies in the ordinary course of business consistent
with past practice
. directly or indirectly sell, lease, license, sell and leaseback,
mortgage or otherwise encumber or subject to any lien or otherwise
dispose of any of its properties or assets other than sales or
licenses of goods in the ordinary course of business consistent
with past practice or sales of any properties or assets of a
wholly-owned subsidiary of CapRock to CapRock or another wholly-
owned subsidiary
. incur any debt for borrowed money or guarantee any such debt of
another person, issue or sell any debt securities or warrants or
other rights to acquire any debt securities of CapRock or any of
its
46
subsidiaries, guarantee any debt securities of another person,
enter into any "keep well" or other agreement to maintain any
financial statement condition of another person or enter into any
arrangement having the economic effect of any of the foregoing,
except for (1) short-term borrowings incurred in the ordinary
course of business consistent with past practice, (2) intercompany
debt between CapRock and any of its subsidiaries or between such
subsidiaries and (3) in connection with certain financing
arrangements entered into in connection with the merger
. make any loans, advances or capital contributions to, or
investments in, any other person, other than employee advances in
the ordinary course of business consistent with past practice
. repay, redeem, repurchase or otherwise retire, or otherwise make
any payment in respect of, any debt for borrowed money or any debt
securities, or any rights, warrants, calls or options to acquire
any debt securities, other than as required by their terms as in
effect on the date of the merger agreement
. make any new capital expenditures, other than cash payments for
capital expenditures, excluding capitalized selling, general and
administrative costs and capitalized interest, in amounts not to
exceed in the aggregate $100,000,000 for the calendar quarter
ending December 31, 2000 and $80,000,000 for the calendar quarter
ending March 31, 2001
. pay, discharge, settle or satisfy any material claims, including
claims of stockholders, liabilities, obligations or litigation,
other than the payment, discharge, settlement or satisfaction in
the ordinary course of business consistent with past practice or in
accordance with its terms, of liabilities reflected or reserved
against in the most recent consolidated financial statements of
CapRock or incurred since the date of such financial statements
. waive the benefits of, or agree to modify in any material manner,
terminate or fail to enforce, or consent to any material matter
with respect to which its consent is required under, any
confidentiality, standstill or similar agreement to which CapRock
or any of its subsidiaries is a party or a beneficiary
. except as may be required to comply with applicable law, enter
into, adopt or amend in any material respect or terminate any
benefit plan, collective bargaining agreement or other union
agreement or benefit agreement of CapRock, or materially change any
actuarial or other assumption used to calculate funding obligations
for any benefit plan, or change the manner in which contributions
to any benefit plan are made or the basis on which such
contributions are determined
. except for normal increases in cash compensation in the ordinary
course of business consistent with past practice that, in the
aggregate, do not materially increase benefits or compensation
expenses of CapRock or its subsidiaries or increases required by
applicable law, increase the compensation, bonus or other benefits
of any director, officer or other employee or consultant or pay any
benefit or amount not required by a benefit plan or arrangement as
in effect on the date of the merger agreement to any such person,
take any action to fund or in any other way secure the payment of
compensation of benefits under any benefit agreement or benefit
plan of CapRock or take any action to accelerate the vesting or
payment of any compensation or benefit under any benefit agreement
or benefit plan of CapRock, other than the completion of the merger
or the exercise by McLeodUSA of its option to purchase CapRock
common stock which generally will accelerate the vesting of the
CapRock stock options, as required under the terms of the stock
options, and of restricted shares of CapRock common stock, as
required under the terms of various restricted stock agreements
. authorize, commit or agree to take, any of the actions described
above
No Solicitation by CapRock
The merger agreement provides that CapRock will not, nor will it permit
any of its subsidiaries to, nor will it authorize or permit any of its or their
directors, officers or employees or any investment banker, financial advisor,
attorney, accountant or other representative retained by it or any of its
subsidiaries to, directly or indirectly through another person
47
. solicit, initiate or encourage or take any other action designed
to, or which reasonably could be expected to, facilitate, any
inquiries or the making of any proposal that constitutes a takeover
proposal as described below
. participate in any discussions or negotiations regarding, or
furnish to any person any information with respect to, or otherwise
cooperate in any way with respect to, any takeover proposal
The merger agreement provides that the term "takeover proposal" means:
. any inquiry, proposal or offer from any person relating to, or that
is reasonably likely to lead to, any direct or indirect acquisition
or purchase of a business that constitutes 20% or more of the
revenues, net income, EBITDA or assets of CapRock and its
subsidiaries, taken as a whole, or 20% or more of any class or
series of equity securities of CapRock or any of its subsidiaries
. any tender offer or exchange offer that if completed would result
in any person beneficially owning 20% or more of any class or
series of equity securities of CapRock or any of its subsidiaries
. any merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving CapRock
or any of its subsidiaries in which any person would own 20% or
more of CapRock or any resulting parent company of CapRock, in each
case other than the transactions contemplated by the merger
agreement.
The merger agreement does not preclude CapRock from, prior to the
holders of a majority of the outstanding shares of CapRock common stock
approving the merger agreement, in response to a bona fide written takeover
proposal, which did not result from a breach of this provision of the merger
agreement, that the CapRock board of directors determines in good faith, after
consultation with outside counsel and a financial advisor of nationally
recognized reputation, constitutes or is reasonably likely to lead to a superior
proposal, to the extent that its board of directors determines in good faith,
after consultation with outside counsel, that it is appropriate to do so in
order to comply with its fiduciary duties to CapRock stockholders under
applicable law, subject to providing prior notice to McLeodUSA:
. furnishing under a customary confidentiality agreement information
about CapRock and its subsidiaries to any person making such
takeover proposal provided that all such information is also
furnished to McLeodUSA
. participating in discussions or negotiations regarding such
takeover proposal
The merger agreement provides that the term "superior proposal" means
any bona fide, binding written offer not solicited by or on behalf of CapRock or
any of its subsidiaries made by any person that if completed would result in
such person owning, directly or indirectly, more than 50% of the then
outstanding shares of CapRock common stock, or of the surviving entity in a
merger or its parent, or all or substantially all the assets of CapRock and its
subsidiaries, taken as a whole, and otherwise on terms that the CapRock board of
directors determines in good faith, after consultation with a financial advisor
of nationally recognized reputation, taking into account the person making the
offer, the legal, financial, regulatory and other aspects of the offer deemed
appropriate by the CapRock board of directors and any changes to the terms of
the merger agreement proposed by McLeodUSA to be reasonably likely to obtain any
required approvals on a timely basis and to be more favorable to CapRock
stockholders from a financial point of view than the merger.
Neither the CapRock board of directors nor any committee of the CapRock
board of directors will:
. withdraw, or modify in manner adverse to McLeodUSA, or propose
publicly to withdraw, or modify in a manner adverse to McLeodUSA,
the recommendation or declaration of advisability by the CapRock
board of directors or such committee of the CapRock board of
directors of the merger or the merger agreement
. recommend, or propose to recommend, the approval or adoption of any
other takeover proposal
48
. adopt or approve, or propose publicly to adopt or approve, any
takeover proposal or withdraw, or propose to withdraw, its approval
of the merger and the merger agreement
. approve or recommend, or propose to approve or recommend, or
execute or enter into any letter of intent, agreement in principle,
acquisition agreement, memorandum of understanding, merger
agreement, option agreement, joint venture agreement, partnership
agreement or other similar agreement related to or that is
reasonably likely to lead to any takeover proposal
provided, however, that at any time prior to the holders of a majority of the
outstanding shares of CapRock common stock approving the merger agreement, the
CapRock board of directors may, in response to a superior proposal that was
unsolicited after the date of the merger agreement and that did not result from
a breach of the no solicitation provisions described above, withdraw its
recommendation of the merger agreement and the merger and recommend the approval
of a superior proposal to the extent that the CapRock board of directors
determines in good faith, after consultation with outside counsel, that it is
necessary to do so in order to comply with its fiduciary duties to CapRock
stockholders under applicable law, except that no withdrawal of the CapRock
board of directors' recommendation of the merger agreement and recommendation of
a superior proposal may be made without providing three business days' written
notice to McLeodUSA.
In addition to the obligations of the "no solicitation" provisions
described above, the merger agreement provides that CapRock will immediately
advise McLeodUSA orally and in writing of any request for information or of any
takeover proposal, or of any inquiry CapRock reasonably believes could lead to a
takeover proposal, the terms and conditions of such request, takeover proposal
or inquiry and the identity of the person making such request, takeover proposal
or inquiry. CapRock will keep McLeodUSA informed on a prompt basis of the status
and details, including amendments or changes or proposed amendments or changes,
of any such request, takeover proposal or inquiry.
Nothing in the merger agreement prohibits the CapRock board of
directors from taking and disclosing to CapRock stockholders a position
contemplated by Rules 14d-9 and 14e-2 promulgated under the Securities Exchange
Act or from making any disclosure to CapRock stockholders if, in the good faith
judgment of the CapRock board of directors, after consultation with outside
counsel, failure to disclose would be inconsistent with its obligations under
applicable law, except that in no event will CapRock or its board of directors
take or agree to take any action contrary to the no solicitation provisions in
the merger agreement.
Directors' and Officers' Insurance and Indemnification
McLeodUSA and Cactus Acquisition Corp. have agreed that all rights to
indemnification and exculpation from liabilities for acts or omissions occurring
at or prior to the effective time, and rights for advancement of expenses,
existing in favor of the current or former directors or officers, employees or
agents of CapRock and its subsidiaries as provided for in their respective
articles or certificates of incorporation or by-laws, or comparable
organizational documents, and any indemnification or other similar agreements of
CapRock as in effect as of the date of the merger agreement will be assumed by
the surviving corporation in the merger at the effective time and will not be
amended, repealed or otherwise modified after the effective time in any manner
that would adversely affect the rights of the individuals who on or prior to the
effective time were directors, officers, employees or agents of CapRock or its
subsidiaries, and McLeodUSA will, and will cause the surviving corporation to,
including, if necessary, by providing the surviving corporation with sufficient
funding, honor all such indemnification provisions.
The merger agreement provides that for six years after the effective
time of the merger, McLeodUSA will, and will cause the surviving corporation in
the merger to, including, if necessary, by providing such surviving corporation
with sufficient funding, maintain directors' and officers' liability insurance
for acts or omissions occurring prior to the effective time of the merger
covering those persons who were, as of the date of the merger agreement, covered
by CapRock's directors' and officers' liability insurance policy, on terms no
less favorable than those in effect on the date of the merger agreement.
McLeodUSA's obligation to provide this insurance coverage is subject to a cap of
200% of the current annual premium paid by CapRock for its existing insurance
coverage. If McLeodUSA cannot maintain the existing or equivalent insurance
coverage without exceeding the 200% cap,
49
McLeodUSA is required to maintain only that amount of insurance coverage which
can be obtained by paying an annual premium equal to the 200% cap.
McLeodUSA has further agreed that, if the surviving corporation in the
merger were to consolidate or merge with another entity and not be the surviving
entity of such consolidation or merger or transfers or conveys all or
substantially all of its property to any person, its successors will assume
these obligations.
Conditions to Completion of the Merger
Each party's obligation to effect the merger is subject to the
satisfaction or waiver of various conditions which include, in addition to other
customary closing conditions, the following:
. holders of a majority of the outstanding shares of CapRock common
stock having approved the merger agreement (holders of such a
majority have agreed to approve the merger agreement)
. the waiting period applicable to the merger under the HSR Act
having expired or been terminated
. McLeodUSA and CapRock must have received reasonably satisfactory
evidence that each party has obtained all material consents,
approvals or authorizations of governmental entities legally
required in connection with the transactions contemplated by the
merger agreement and all other consents, approvals or
authorizations required in connection with the transactions
contemplated by the merger agreement, except where the failure to
obtain such other consents or authorizations could not reasonably
be likely to have a material adverse effect on either McLeodUSA or
CapRock
. no judgment, order, decree, injunction, statute, law, ordinance,
rule or regulation, entered, enacted, promulgated, enforced or
issued by any court or other governmental entity of competent
jurisdiction or other legal restraint or prohibition is in effect,
and there is not pending any suit, action or proceeding by any
governmental entity, (1) preventing, or seeking to prevent, the
completion of the merger or (2) which otherwise could reasonably be
expected to have a material adverse effect on either McLeodUSA or
CapRock
. the registration statement of which this proxy statement/prospectus
forms a part having been declared effective under the Securities
Act and no stop order suspending its effectiveness will have been
issued and no proceedings for that purpose will have been initiated
or threatened by the SEC
. McLeodUSA will have received all federal or state securities
permits and other authorizations necessary to issue McLeodUSA Class
A common stock in, and to complete, the merger
. the shares of McLeodUSA Class A common stock issuable to CapRock
stockholders in the merger having been approved for quotation on
the Nasdaq National Market, subject to official notice of issuance
In addition, each party's obligation to effect the merger is further
subject to the satisfaction or waiver of the following additional conditions:
. the representations and warranties of each other party set forth in
the merger agreement that are qualified as to materiality being
true and correct, and those that are not qualified as to
materiality being true and correct in all material respects, in
each case as of the date of the merger agreement and as of the date
on which the merger is to be completed with the same effect as
though made on and as of the date on which the merger is to be
completed, or, if such representations and warranties expressly
relate to an earlier date, then as of such date
. each other party to the merger agreement having performed in all
material respects all obligations required to be performed by it
under the merger agreement on or prior to the date on which the
merger is to be completed
. with respect only to CapRock's obligation to effect the merger,
CapRock having received from Munsch Hardt Kopf & Harr, P.C. on the
date on which the registration statement is filed with the SEC
50
and on the date on which the merger is to be completed, an opinion
in each case dated as of such respective date and stating that the
merger will qualify for United States federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code
. with respect only to CapRock's obligation to effect the merger,
McLeodUSA must have performed all material payment obligations
under certain financing arrangements entered into in connection
with the merger agreement, McLeodUSA must not be in default under
any such financing arrangements and such financing arrangements
must be in full force and effect as of the date on which the merger
is to be completed
. with respect only to McLeodUSA's obligation to effect the merger,
CapRock must have obtained the requisite consents to make the
amendments described under "The Merger--CapRock Debt Securities,"
to the indentures governing CapRock's public debt in form and
substance satisfactory to McLeodUSA in its sole discretion and the
indenture trustees will have executed such amendments
The merger agreement provides that a "material adverse change" or
"material adverse effect" means, when used in connection with CapRock or
McLeodUSA, any change, effect or event that, individually or when taken together
with all other such changes, effects or events, is or is reasonably likely to be
materially adverse to the business, operations, condition (financial or
otherwise), assets or liabilities of a person and its subsidiaries, taken as a
whole, other than:
. adverse effects caused by changes in the economy generally or in
securities markets generally or in such person's industry, and
those of its subsidiaries, in general and not specifically relating
to such entity
. the loss of personnel or suppliers or the delay or cancellation of
orders for the person's services or similar occurrences which are
the direct and proximate result of the announcement of the merger
agreement
. certain other events set forth in the merger agreement
. litigation brought by or threatened against such person or any
member of its board of directors based upon the merger agreement
Termination of the Merger Agreement
The merger agreement may be terminated at any time prior to the
effective time of the merger, even if the merger agreement has been approved by
CapRock stockholders:
. by mutual written consent of CapRock and McLeodUSA
. by either McLeodUSA or CapRock, if the CapRock stockholders do not
approve the merger agreement
. by either McLeodUSA or CapRock, if the merger has not been
completed by March 31, 2001, except that this right to terminate
the merger agreement will not be available to any party whose
failure to perform any of its obligations under the merger
agreement has resulted in the failure of the merger to occur on or
before that date
. by either McLeodUSA or CapRock, if there is any law or regulation
that makes completion of the merger illegal or prohibited or if any
decree, judgment, injunction, order or other action by any
governmental entity having competent jurisdiction prohibiting
completion of the merger will have become final and non-appealable,
after the party seeking to terminate the merger agreement under
this provision has used its commercially reasonable efforts to
prevent the entry of and to remove such law, regulation, decree,
judgment, injunction or order
. by either McLeodUSA or CapRock, if the other party has breached in
any material respect any of its representations, warranties or
covenants or other agreements contained in the merger agreement,
which breach or failure to perform would give rise to the failure
of a condition to the merger described in the
51
eighth and ninth bullet points under "--Conditions to Completion of
the Merger" and has not been or cannot be cured within 30 calendar
days after receiving written notice from the other party
. by McLeodUSA, if the CapRock board of directors withdraws, or
modifies in a manner adverse to McLeodUSA, its recommendation of
the merger agreement and the merger or recommends another takeover
proposal
. by McLeodUSA, if CapRock has not obtained the requisite consents to
the amendments of the indentures governing CapRock's public debt
described under "The Merger--CapRock Debt Securities" and such
indenture trustees have not executed such amendments or waivers
within 30 days following the date of the merger agreement
. by CapRock, if McLeodUSA has breached or failed to perform in any
material respect any of its covenants or other agreements contained
in certain financing arrangements entered into in connection with
the merger agreement and has not cured the breach or failure within
30 days after written notice
Expenses; Termination Fee
The merger agreement provides that each party will pay its own costs
and expenses in connection with the merger agreement and the transactions
contemplated by the merger agreement, except that McLeodUSA and CapRock will
each pay one-half of the expenses incurred in connection with the filing,
printing and mailing of this proxy statement/prospectus and the filing fees for
the premerger notification and report forms under the HSR Act.
CapRock must pay to McLeodUSA a termination fee of $7.85 million if:
. CapRock or its stockholders receive a takeover proposal or a
takeover proposal otherwise becomes publicly known and
. either CapRock or McLeodUSA then terminates the merger agreement
because the merger has not been completed by March 31, 2001 or the
CapRock stockholders do not approve the merger agreement or
McLeodUSA terminates the merger agreement because the CapRock board
of directors has withdrawn, or modified in a manner adverse to
McLeodUSA, its recommendation of the merger agreement and the
merger or has recommended another takeover proposal and
. CapRock or any of its subsidiaries enters into an agreement for any
takeover proposal (for purposes of this provision only, "takeover
proposal" has the same meaning as under "--No Solicitation by
CapRock", except that references to 20% are deemed references to
30%) within 12 months of the termination of the merger agreement
Waiver and Amendment of the Merger Agreement
Waiver. At any time prior to the effective time of the merger, any
party to the merger agreement may, as to the other parties, agree to:
. extend the time for the performance of any obligation or other act
required to be performed under the merger agreement
. waive any inaccuracies in the representations and warranties
contained in the merger agreement or in any document delivered in
accordance with the merger agreement
. waive compliance with any of the agreements or conditions
contained in the merger agreement, unless the CapRock stockholders
have already approved the merger agreement and, then any waiver
which requires further stockholder approval will not be made
without such approval
Amendment. The merger agreement may be amended by the parties to the
merger agreement at any time prior to the effective time of the merger. However,
once the CapRock stockholders have approved the merger
52
agreement, they must also approve any subsequent amendment if the amendment, by
law, requires further approval by the CapRock stockholders.
Voting Agreements
Several CapRock stockholders have entered into agreements with respect
to the voting of their shares of CapRock common stock in connection with the
merger agreement. Under the terms of these agreements, until the date on which
the merger is completed or the merger agreement is terminated in accordance with
its terms, each such person has agreed, among other things:
. to vote, or cause to be voted, the shares of CapRock common stock
owned beneficially or of record by such person at any meeting of
CapRock stockholders in favor of the approval of the merger
agreement
. to vote, or cause to be voted, the shares of CapRock common stock
owned beneficially or of record by such person at any meeting of
CapRock stockholders against any takeover proposal or any
amendment to the CapRock articles of incorporation or by-laws or
other proposal, action or transaction involving CapRock or any of
its subsidiaries or its stockholders that could reasonably be
expected to prevent or materially impede or delay the completion
of the merger
. to grant to McLeodUSA, or the persons designated by the McLeodUSA
board of directors proxies and appoint such persons as attorneys-
in-fact to vote the shares of CapRock common stock owned
beneficially or of record by such person in favor of the approval
of the merger agreement and against any takeover proposal or any
amendment to the CapRock articles of incorporation or by-laws or
other proposal, action or transaction involving CapRock or any of
its subsidiaries or its stockholders that could reasonably be
expected to prevent or materially impede or delay the completion of
the merger
. not to sell, transfer, pledge, assign or otherwise dispose of,
including by gift, any of the shares of CapRock common stock owned
by such person (except pursuant to the option described below)
. not to grant any proxies, deposit any shares of CapRock common
stock into a voting trust or enter into another voting agreement
with respect to any shares of CapRock common stock
. not to take any action which would have the effect of preventing or
inhibiting such person from performing its obligations under the
voting agreement
. not to, nor permit any of its subsidiaries to, authorize or permit
any of the directors, officers, employees or partners of such
person or any of its subsidiaries to, directly or indirectly,
solicit, initiate or encourage or take any other action designed to
facilitate, any takeover proposal
By entering into these agreements, the holders of approximately 52% of
the outstanding shares of CapRock common stock entitled to vote at the special
meeting have agreed to vote in favor of the approval of the merger agreement and
against any takeover proposal.
Grant of Option
Certain CapRock stockholders who have entered into the above-described
agreements with respect to the voting of their shares of CapRock common stock,
representing approximately 39% of the outstanding shares of CapRock common
stock, have granted to McLeodUSA an irrevocable option to purchase the shares of
CapRock common stock that are owned beneficially or of record by such
stockholders pursuant to a voting and option agreement.
McLeodUSA may exercise the option if, on or after the date of the
merger agreement, any corporation, partnership, individual, trust or any person
other than McLeodUSA or any of its affiliates shall have:
53
. commenced or announced an intention to commence a bona fide tender
offer or exchange offer for any shares of CapRock common stock, the
result of which would result in the beneficial ownership by such
person of 20% or more of the then voting equity of CapRock
. filed a form under the HSR Act reflecting an intent to acquire
CapRock or any of its assets or securities
. solicited proxies in a solicitation subject to the proxy rules
under the Securities Exchange Act, executed any written consent or
become a participant in any solicitation with respect to CapRock
common stock
McLeodUSA may also exercise the option if, on or after the date of the
merger agreement:
. CapRock stockholders do not approve the merger agreement
. the CapRock board of directors withdraws, or modifies in a manner
adverse to McLeodUSA, its recommendation of the merger agreement
and the merger or recommends another takeover proposal
. any other event occurs which would require CapRock to pay McLeodUSA
the termination fee provided for in the merger agreement, but
without the necessity of McLeodUSA having terminated the merger
agreement
. the person who granted McLeodUSA the option commits a material
breach of its obligations described under "--Voting Agreements"
The option is payable in cash or stock, at the discretion of McLeodUSA,
at an exercise price per share equal to:
. if in cash, 0.3876 (the exchange ratio in the merger) multiplied by
the average closing price of McLeodUSA Class A common stock for the
five trading days preceding the date on which the option is
exercised or
. if in stock, 0.3876 of a share of McLeodUSA Class A common stock
The voting and option agreement provides that the aggregate cash
exercise price paid to a stockholder when aggregated with all other cash
purchases of CapRock common stock by McLeodUSA will be limited to that amount of
cash that would permit any subsequent acquisition of CapRock by McLeodUSA that
occurs to qualify as a tax free reorganization under Section 368 (a) of the
Internal Revenue Code. Furthermore, if McLeodUSA exercises the option and
CapRock within 12 months thereafter completes any takeover proposal, McLeodUSA
will pay to such CapRock stockholder an amount of additional consideration equal
to 50% of the difference between the aggregate price paid by McLeodUSA upon
exercise of the option and the aggregate amount received by McLeodUSA in the
takeover proposal for the shares of CapRock common stock purchased by McLeodUSA
upon exercise of the option.
McLeodUSA may exercise the option in whole or in part, at its
discretion. However, if it elects to exercise the option only in part, McLeodUSA
must purchase the total number of shares it is seeking pro rata from the CapRock
stockholders who have granted the option to McLeodUSA.
Prior to the termination of the option, the stockholder may not,
without the consent of McLeodUSA, sell, transfer, pledge, assign or otherwise
dispose of any of the shares of CapRock common stock that are subject to the
option or take any other action that would prevent the stockholder from
fulfilling its obligations in connection with the grant of the option.
The option will terminate upon the earliest of:
. the effective time of the merger
. the termination of the merger agreement other than as described
immediately below
. nine months following the termination of the merger agreement if
the merger agreement is terminated:
54
- by either McLeodUSA or CapRock because the CapRock stockholders
do not approve the merger agreement
- by McLeodUSA because the CapRock board of directors withdraws,
or modifies in a manner adverse to McLeodUSA, its recommendation
of the merger agreement and the merger or recommends another
takeover proposal
Credit Agreement
In connection with the merger agreement, CapRock Fiber and CapRock
Telecommunications, as borrowers, CapRock and The Chase Manhattan Bank, as
lender and administrative agent, entered into a credit agreement as of October
2, 2000, for a revolving credit facility of up to $100 million. The principal
terms of the facility are described below:
Availability. The availability under the facility is up to:
. $50 million from October 2, 2000 to December 31, 2000
. $100 million from January 1, 2001 to the maturity date of May 30,
2001
Rates and Fees. Loans under the facility bear interest, depending on
the type of loan, at:
. adjusted base rate plus 3.5% per year or
. the London interbank offered rate plus 4.5% per year
The commitment fee is:
. for each day on which CapRock uses 50% or less of the total amount
available under the credit agreement, 1.50% of undrawn amounts
. for each day on which CapRock uses 75% or less of the total amount
available under the credit agreement, 1.25% of undrawn amounts
. for each day on which CapRock uses more than 75% of the total
amount available under the credit agreement, 1.00% of undrawn
amounts
Prepayment. CapRock may at its option prepay any borrowings at par at
any time. Mandatory prepayments are required upon:
. the sale, transfer or other disposition of certain assets of
CapRock or any of its subsidiaries
. the receipt of any casualty or insurance proceeds by CapRock or any
of its subsidiaries, subject to exceptions or
. the receipt by CapRock or any of its subsidiaries of proceeds from
debt or equity offerings
Security. The facility is secured by a guarantee by CapRock and its
domestic non-borrower subsidiaries, a pledge of the stock held by CapRock and
its domestic subsidiaries and a security agreement covering substantially all of
the available assets of CapRock and its domestic subsidiaries.
Covenants. The covenants in the credit agreement limit CapRock's
ability, directly or through subsidiaries, to:
. breach the merger agreement in a manner involving an intentional
misrepresentation, fraud, bad faith or willful misconduct
55
. fail to provide notices of material events or furnish certain
financial and other information
. incur additional indebtedness or liens or enter into sale/leaseback
transactions
. pay dividends or make other distributions, other than stock
dividends or to fund administrative expenses or existing
indebtedness
. make investments
. repurchase equity interests or subordinated obligations
. consummate asset sales
. enter into transactions with affiliates
. engage in any business other than a telecommunications business or
other business conducted on the date of the credit agreement
. merge or consolidate with any other person other than with
McLeodUSA, or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its assets
In addition, CapRock must satisfy financial covenants, including those
relating to:
. minimum access lines in service
. maximum consolidated senior secured debt to contributed capital
. minimum consolidated revenue
. minimum EBITDA
Other Agreements
Indefeasible Right of Use Agreement. McLeodUSA agreed to pay $29.3
million to CapRock to acquire rights to dark fibers from CapRock through an
indefeasible right of use (IRU) agreement signed on October 19, 2000. This
agreement is based on arm's length negotiations and includes the following
terms:
. initial payment of $19.3 million at signing, with the balance due
upon acceptance of fibers
. IRU includes: fibers on the ring encompassing Dallas to Monroe, LA
to Little Rock to Tulsa to Oklahoma City back to Dallas with an
additional overlay of fibers on the Dallas to Little Rock segment
(via Oklahoma City and Tulsa)
. in addition to dark fibers, the IRU includes certain rights for
McLeodUSA in associated conduit and colocation space of CapRock
. McLeodUSA has rights to swap or exchange some of the fibers for
dark fibers in other CapRock routes
. McLeodUSA also has a first right of refusal on additional fibers
when CapRock's remaining available fibers on specified routes reach
defined levels
. CapRock and McLeodUSA each retain specified demand rights relative
to the fibers covered by the IRU that have not been lit
Master Services Agreement. The parties also entered into a master
services agreement with a one-year term under which CapRock will lease DS-1,
DS-3 and/or OC-N telecommunications capacity to McLeodUSA at various specified
prices. Up to 50,000 DS-3 miles may be swapped or exchanged between the parties
for equal or similarly valued capacity along each other's telecommunications
system.
56
INFORMATION ABOUT McLEODUSA AND CACTUS ACQUISITION CORP.
General
McLeodUSA provides selected telecommunications services to customers
nationwide. McLeodUSA provides integrated communications services, including
local services in many Midwest and Rocky Mountain states and long distance and
advanced data services in all 50 states. McLeodUSA is a facilities-based
telecommunications provider with 361 ATM switches, 37 voice switches, nearly
824,000 local lines and more than 9,000 employees. McLeodUSA expanded its
marketplace for advanced data and Internet services to all 50 states through its
March 30, 2000 acquisition of Splitrock Services. The network acquired in the
Splitrock transaction is capable of transmitting integrated next-generation
data, video and voice services, reaching 800 cities and 90% of the U.S.
population. In the next 12 months, McLeodUSA plans to distribute 30 million
telephone directories in 26 states, serving a population of 52 million.
McLeodUSA is a Nasdaq-100 company traded under the symbol "MCLD."
McLeodUSA offers local, long distance, Internet access, data, voice
mail and paging services from a single company on a single bill. McLeodUSA
believes it is the first company in many of its markets to offer one-stop
shopping for communications services tailored to customers' specific needs.
McLeodUSA's core business is providing communications services in
competition with existing local telephone companies, including:
. local and long distance services
. dial and dedicated Internet access
. higher bandwidth Internet access services, such as digital
subscriber line (DSL) and cable modem
. value-added services such as virtual private networks and web
hosting
. bandwidth leasing and colocation services
. facilities and services dedicated for a particular customer's use
. telephone and computer sales, leasing, networking, service and
installation
. other communications services, including video, cellular, operator,
payphone, mobile radio, wireless communications and paging services
McLeodUSA also derives revenue from the following services related to
its core business:
. sale of advertising in print and electronic telephone directories
. traditional local telephone company services in east central
Illinois and southeast South Dakota
. telemarketing services
In most of its local service markets, McLeodUSA competes with the
existing local phone company by leasing its lines and switches. In certain
limited local service markets in Illinois, Iowa, Minnesota and South Dakota,
McLeodUSA operates its own lines and switches. McLeodUSA provides long distance
services by using its own communications network facilities and leasing capacity
from long distance and local communications providers.
McLeodUSA has developed and continues to develop fiber optic
communications networks in many of its target local markets in the Midwest and
Rocky Mountain regions to carry additional communications traffic on its own
network. McLeodUSA is actively developing enhancements to its national network
and associated next-generation services.
McLeodUSA owns and operates a broadband access network that is marketed
to various businesses throughout the United States. As part of its ongoing
efforts to enhance its network and data services, McLeodUSA is acquiring
indefeasible rights to use dark fiber optic strands in a nationwide network that
will cover more than
57
15,000 route miles. This national network allows McLeodUSA to transmit
integrated next-generation data, video and voice services on both a retail and
wholesale basis.
McLeodUSA wants to be the leading and most admired provider of
integrated communications services in its markets. To achieve this goal,
McLeodUSA is:
. aggressively capturing customer share and generating revenue using
leased communications network capacity
. concurrently building its own communications network
. migrating customers to its own communications network to provide
enhanced services and reduce operating costs
The principal elements of the business strategy of McLeodUSA are to:
Provide integrated communications services. McLeodUSA believes it can
rapidly penetrate its target markets and build customer loyalty by providing an
integrated product offering to business and residential customers.
Build customer share through branding. McLeodUSA believes it can create
and strengthen brand awareness in its target markets by branding its
communications services with the trade name McLeodUSA in combination with the
distinctive black-and-yellow motif of its telephone directories.
Provide outstanding customer service. McLeodUSA customer service
representatives are available 24 hours a day, seven days a week, to answer
customer calls. The customer-focused software and systems of McLeodUSA allow its
representatives immediate access to its customer and network data, enabling a
rapid and effective response to customer requests.
Emphasize small and medium sized businesses. McLeodUSA primarily
targets small and medium sized businesses because it believes it can rapidly
capture customer share by providing face-to-face business sales and strong
service support to these customers.
Expand its fiber optic communications network. McLeodUSA is building a
state-of-the-art fiber optic communications network to deliver multiple services
and reduce operating costs.
Expand intra-city fiber optic communications network. Within selected
cities, McLeodUSA plans to extend its network directly to its customers'
locations. This will allow McLeodUSA to provide expanded services and reduce the
expense of leasing communications facilities from the local exchange carrier.
Explore acquisitions and strategic alliances. McLeodUSA plans to pursue
acquisitions, joint ventures and strategic alliances to expand or complement its
business.
Leverage proven management team. The McLeodUSA executive management
team consists of veteran telecommunications managers who successfully
implemented similar customer-focused telecommunications strategies in the past.
As of June 30, 2000, McLeodUSA estimated, based on the combined
McLeodUSA and CapRock business plans, capital requirements and growth
projections as of that date, that McLeodUSA would require $1.5 billion through
2002 to fund its planned capital expenditures and operating expenses. McLeodUSA
expects to meet these funding needs through the existing cash balances of
McLeodUSA and CapRock, McLeodUSA's existing lines of credit and income from
future operations. The estimated aggregate capital requirements of McLeodUSA
include the projected cost of:
58
. expanding its fiber optic communications network, including
national and intra-city fiber optic communications networks
. adding voice and ATM switches
. expanding operations in existing and new markets
. developing wireless services in limited markets
. funding general corporate purposes
. completing recent acquisitions, including the merger
. constructing, acquiring, developing or improving telecommunications
assets
The projected funding plan assumes that (a) the indentures governing
the CapRock 12% senior notes due 2008 and the CapRock 11 1/2% senior notes due
2009 are amended to provide that the acquisition of CapRock does not constitute
a change of control and (b) such notes will either remain outstanding as amended
to remove various covenants or be exchanged for a like principal amount of notes
of McLeodUSA pursuant to the terms of the exchange offers. McLeodUSA may meet
any additional capital needs by issuing additional debt or equity securities or
borrowing funds from one or more lenders.
The actual amount and timing of the future capital requirements of
McLeodUSA are subject to risks and uncertainties and may differ materially from
its estimates. Accordingly, McLeodUSA may need additional capital to continue to
expand its markets, operations, facilities, network and services. See "Risk
Factors--Failure to Raise Necessary Capital Could Restrict the Ability of
McLeodUSA to Develop Its Network and Services and Engage in Strategic
Acquisitions."
_______________
The principal executive offices of McLeodUSA are located at McLeodUSA
Technology Park, 6400 C Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177,
and its phone number is (319) 790-7800.
Cactus Acquisition Corp. Cactus Acquisition Corp. is a Delaware
corporation and a wholly-owned subsidiary of McLeodUSA. McLeodUSA formed Cactus
Acquisition Corp. on September 28, 2000 to facilitate the merger. Cactus
Acquisition Corp. has not transacted any business other than that incident to
its formation and to completion of the merger.
Additional Information
A detailed description of the McLeodUSA business, executive
compensation, various benefit plans, including stock option plans, voting
securities and the principal holders of these securities, relationships and
transactions between McLeodUSA and its directors, executive officers and
principal stockholders, financial statements and other matters related to
McLeodUSA is incorporated by reference or set forth in the McLeodUSA Annual
Report on Form 10-K for the year ended December 31, 1999 and the McLeodUSA
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000 and June
30, 2000, incorporated by reference into this proxy statement/prospectus.
Stockholders desiring copies of these documents may contact McLeodUSA at its
address or telephone number indicated under "Where You Can Find More
Information."
59
SELECTED CONSOLIDATED FINANCIAL DATA OF McLEODUSA
The information in the following unaudited table is based on historical
financial information included in the prior SEC filings of McLeodUSA, including
the McLeodUSA Annual Report on Form 10-K for the fiscal year ended December 31,
1999 and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
The following summary financial information should be read in connection with
this historical financial information including the notes which accompany such
financial information. This historical financial information is considered a
part of this document. See "Where You Can Find More Information." The audited
historical financial statements of McLeodUSA as of December 31, 1999, 1998 and
1997, and for each of the three years in the period ended December 31, 1999 were
audited by Arthur Andersen LLP, independent public accountants.
The information in the following table reflects financial information
for the following companies McLeodUSA has acquired:
Acquired Company Date Acquired
---------------- -------------
MWR Telecom, Inc.................................................. April 28, 1995
Ruffalo, Cody & Associates, Inc................................... July 15, 1996
Telecom*USA Publishing Group, Inc................................. September 20, 1996
Consolidated Communications, Inc.................................. September 24, 1997
Ovation Communications, Inc....................................... March 31, 1999
Splitrock Services, Inc........................................... March 30, 2000
The operations statement data and other financial data in the table
include the operations of these companies beginning on the dates they were
acquired. The balance sheet data in the table include the financial position of
these companies at the end of the periods presented. These acquisitions affect
the comparability of the financial data for the periods presented.
The pro forma information presented in the operations statement data
and other financial data in the table includes the operations of Ovation,
Splitrock and CapRock as if they had been acquired at the beginning of the
periods presented and the as adjusted information in the balance sheet data in
the table includes the Ovation, Splitrock and CapRock financial position as of
the date presented. The 1999 pro forma amounts include adjustments to the
CapRock 1999 historical financial statements to give effect to the issuance by
CapRock in May 1999 of $210 million of its 11 1/2% senior notes as if the note
issuance had occurred at the beginning of such period.
The information in the table also reflects the following debt and
equity securities that McLeodUSA has outstanding:
Description of Securities Principal Amount Date Issued
------------------------- ---------------- -----------
10 1/2% senior discount notes due March 1, 2007.................... $500 million March 4, 1997
9 1/4% senior notes due July 15, 2007............................. $225 million July 21, 1997
8 3/8% senior notes due March 15, 2008............................. $300 million March 10, 1998
9 1/2% senior notes due November 1, 2008........................... $300 million October 30, 1998
8 1/8% senior notes due February 15, 2009.......................... $500 million February 22, 1999
Series A preferred stock........................................... $287 million August 23, 1999
Series B preferred stock........................................... $687 million September 15, 1999
Series C preferred stock........................................... $313 million September 15, 1999
Senior Secured Credit Facilities................................... $575 million May 30, 2000
The operations statement data and other financial data in the table
include the effects of the issuances beginning on the dates the securities were
issued. The balance sheet data in the table include the effects of these
issuances at the end of the periods presented. The pro forma information
presented in the operations statement data and other financial data in the table
includes the effects of the issuance of the 8 1/8% senior notes, the Series A, B
and C preferred stock and the Senior Secured Credit Facilities as if they had
occurred at the beginning of 1999.
On June 30, 1999, McLeodUSA announced that its board of directors had
declared a two-for-one stock split to be effected in the form of a stock
dividend. The record date for the stock split was July 12, 1999.
60
Stockholders of record at the market close on that date received one additional
share of McLeodUSA Class A common stock for each share held. Distribution of the
additional shares took place on July 26, 1999. On February 29, 2000, McLeodUSA
announced that its board of directors had declared a three-for-one stock split
to be effected in the form of a stock dividend. The record date for the stock
split was April 4, 2000. Stockholders of record at the market close on that date
received two additional shares of McLeodUSA Class A common stock for each share
held. Distribution of the additional shares took place on April 24, 2000. All
information in the selected consolidated financial data has been adjusted to
reflect the two-for-one stock split and the three-for-one stock split.
(table begins on the next page)
61
Selected Consolidated Financial Data of McLeodUSA
(In thousands, except per share data)
Year Ended December 31,
----------------------------------------------------
Pro Forma
---------
1995 1996 1997 1998 1999 1999
---------- ---------- --------- ----------- ---------- -----------
(unaudited)
Operations Statement Data:
Revenue................................. $ 28,998 $ 81,323 $ 267,886 $ 604,146 $ 908,792 $ 1,210,667
---------- ---------- ---------- ----------- ---------- -----------
Operating expenses:
Cost of service....................... 19,667 52,624 151,190 323,208 457,085 699,401
Selling, general and administrative... 18,054 46,044 148,158 260,931 392,687 481,488
Depreciation and amortization......... 1,835 8,485 33,275 89,107 190,695 346,131
Other................................. -- 2,380 4,632 5,575 -- --
---------- ---------- ---------- ----------- ---------- -----------
Total operating expenses ............. 39,556 109,533 337,255 678,821 1,040,467 1,527,020
Operating loss.......................... (10,558) (28,210) (69,369) (74,675) (131,675) (316,353)
Interest income (expense), net.......... (771) 5,369 (11,967) (52,234) (94,244) (191,068)
Other income............................ -- 495 1,426 1,997 5,637 7,163
Income taxes............................ -- -- -- -- -- --
---------- ---------- ---------- ----------- ---------- -----------
Net loss................................ (11,329) (22,346) (79,910) (124,912) (220,282) (500,528)
Preferred stock dividends............... -- -- -- -- (17,727) (54,375)
---------- ---------- ---------- ----------- ---------- -----------
Loss applicable to common stock......... $ (11,329) $ (22,346) $ (79,910) $ (124,912) $ (238,009) $ (554,633)
========== ========== ========== =========== ========== ===========
Loss per common share................... $ (.07) $ (.09) $ (.24) $ (.33) $ (.54) $ (.99)
========== ========== ========== =========== ========== ===========
Weighted average common shares
outstanding........................... 168,024 243,036 329,844 376,842 443,130 559,751
========== ========== ========== =========== ========== ===========
Six Months Ended June 30,
---------------------------
Pro Forma
---------
1999 2000 2000
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
Operations Statement Data:
Revenue $ 403,771 $ 620,082 $ 769,055
----------- ----------- -----------
Operating expenses:
Cost of service......................................................... 205,507 344,426 466,226
Selling, general and administrative..................................... 178,339 256,563 309,973
Depreciation and amortization........................................... 78,708 163,193 213,415
Other................................................................... -- -- 872
----------- ----------- -----------
Total operating expenses................................................ 462,554 764,182 990,486
Operating loss............................................................ (58,783) (144,100) (221,431)
Interest income (expense), net............................................ (50,666) (42,077) (70,486)
Other income.............................................................. 562 1,971 1,996
Income taxes.............................................................. -- -- --
----------- ----------- -----------
Net loss.................................................................. (108,887) (184,206) (289,921)
Preferred stock dividends................................................. -- (27,204) (27,204)
----------- ----------- -----------
Loss applicable to common stock........................................... $ (108,887) $ (211,410) $ (317,125)
=========== =========== ===========
Loss per common share..................................................... $ (.26) $ (.40) $ (.54)
=========== =========== ===========
Weighted average common shares outstanding................................ 423,210 529,109 590,221
=========== =========== ===========
62
Selected Consolidated Financial Data of McLeodUSA
(In thousands, except per share data)
December 31, June 30, 2000
-------------------------------------------- -------------
1995 1996 1997 1998 1999 Actual Pro Forma
-------- -------- -------- -------- -------- ---------- ---------
(unaudited) (unaudited)
Balance Sheet Data:
Current assets...................... $ 8,507 $ 224,401 $ 517,869 $ 793,192 $ 1,569,473 $ 1,647,070 $ 1,879,002
Working capital (deficit)........... $ (1,208) $ 185,968 $ 378,617 $ 613,236 $ 1,272,794 $ 859,997 $ 913,955
Property and equipment, net......... $ 16,119 $ 92,123 $ 373,804 $ 629,746 $ 1,270,032 $ 1,897,962 $ 2,321,001
Total assets........................ $ 28,986 $ 452,994 $ 1,345,652 $ 1,925,197 $ 4,203,147 $ 7,069,543 $ 7,791,496
Long-term debt...................... $ 3,600 $ 2,573 $ 613,384 $ 1,245,170 $ 1,763,725 $ 2,370,370 $ 2,718,588
Redeemable convertible preferred
stock............................. $ -- $ -- $ -- $ -- $ 1,000,000 $ 1,000,000 $ 1,000,000
Stockholders' equity................ $ 14,958 $ 403,429 $ 559,379 $ 462,806 $ 1,108,542 $ 2,878,436 $ 3,074,207
Year Ended December 31,
---------------------------------------------------------------
Pro Forma
---------
1995 1996 1997 1998 1999 1999
-------- --------- --------- --------- --------- ----
(unaudited)
Other Financial Data:
Capital expenditures
Property, plant and equipment............... $ 6,364 $ 79,845 $ 179,255 $ 289,923 $ 580,003 $ 820,756
Business acquisitions....................... $ 8,333 $ 93,937 $ 421,882 $ 49,737 $ 736,626 $ 3,376,180
EBITDA(1)...................................... $ (8,723) $ (17,345) $ (31,462) $ 20,007 $ 59,020 $ 29,778
Six Months Ended June 30,
-------------------------
Pro Forma
---------
1999 2000 2000
---------- ---------- ----
(unaudited) (unaudited) (unaudited)
Other Financial Data:
Capital expenditures
Property, plant and equipment........................................ $ 220,390 $ 559,834 $ 804,163
Business acquisitions................................................ $ 525,161 $ 2,052,925 $ 2,415,523
EBITDA(1)............................................................... $ 19,925 $ 19,093 $ (7,144)
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. McLeodUSA has included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
63
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been prepared
to give effect to:
. the issuance of the 8 1/8% senior notes in February 1999
. the acquisition of Ovation Communications, Inc. in March 1999
. the issuance of the 6.75% Series A preferred stock in August 1999
. the issuance of the Series B preferred stock and Series C preferred stock in
September 1999
. the acquisition of Splitrock Services, Inc. in March 2000
. the completion of the Senior Secured Credit Facilities in May 2000
. the merger
For purposes of this pro forma presentation, the issuance of the 8 1/8%
senior notes is referred to as the "Notes Offering" and the issuance of the
Series A, Series B and Series C preferred stock are collectively referred to as
the "Preferred Stock Issuances." The Unaudited Pro Forma Condensed Consolidated
Balance Sheet assumes that the merger was consummated on June 30, 2000.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations
include the operations of Ovation Communications, Inc., the operations of
Splitrock Services, Inc., and the operations of CapRock as if the acquisition of
Ovation and Splitrock and the merger with CapRock were consummated on January 1,
1999 and the related weighted average share amounts have been adjusted to give
effect to the shares issued in the transactions as if they had been issued on
January 1, 1999. The CapRock results have been adjusted to give effect to the
issuance in May 1999 by CapRock of $210 million of its 11 1/2 % senior notes due
2009 as if the issuance was consummated on January 1, 1999. It also assumes that
interest related to the Notes Offering and the Senior Secured Credit Facilities,
dividends related to the Preferred Stock Issuances and the additional
depreciation and amortization due to the increased value of tangible and
intangible assets acquired through the acquisition of Ovation, Splitrock and the
merger with CapRock, using the purchase method of accounting, began January 1,
1999. The unaudited pro forma financial information is derived from and should
be read in conjunction with the Consolidated Financial Statements of McLeodUSA
and the related notes thereto included in the McLeodUSA Annual Report on Form
10-K for the fiscal year ended December 31, 1999. The pro forma adjustments for
the acquisitions of Ovation and Splitrock, the Notes Offering and the Preferred
Stock Issuances are incorporated by reference from a Current Report on Form 8-
K/A filed with the SEC on June 13, 2000.
For purposes of allocating the net purchase price among the various assets
to be acquired, McLeodUSA has preliminarily considered the carrying value of the
acquired assets to approximate their fair value, with all of the excess of the
net purchase price being attributed to intangible assets, primarily goodwill.
McLeodUSA intends to more fully evaluate the acquired assets following
consummation of the merger and, as a result, the allocation of the net purchase
price among the acquired tangible and intangible assets may change.
The unaudited pro forma financial information is provided for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the merger been consummated at the beginning of 1999,
nor is it necessarily indicative of future operating results or financial
position.
(table begins on the next page)
64
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Balance Sheets
(In thousands, except share and per share information)
As of June 30, 2000
Adjustments for Pro Forma for
CapRock CapRock
McLeodUSA CapRock Transaction Transaction
--------- ------- ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 931,318 $ 3,680 $ -- $ 934,998
Other current assets............................. 715,752 245,596 (17,344)/(2)/ 944,004
------------ ---------- ----------- ------------
Total Current Assets........................ 1,647,070 249,276 (17,344) 1,879,002
Property and Equipment, net........................... 1,897,962 423,039 -- 2,321,001
Intangible assets..................................... 3,373,029 -- 63,123/(1)/ 3,436,152
Other assets ......................................... 151,482 3,859 -- 155,341
------------ ---------- ---------- ------------
Total Assets................................ $ 7,069,543 $ 676,174 $ 45,779 $ 7,791,496
============ ========== ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities................................... $ 787,083 $ 144,964 $ 33,000/(3)/ $ 965,047
Long-term debt, less current maturities............... 2,370,370 348,218 -- 2,718,588
Other long-term liabilities........................... 33,654 5,254 (5,254)/(2)/ 33,654
------------ ---------- ----------- ------------
Total Liabilities........................... 3,191,107 498,436 27,746 3,717,289
------------ ---------- ---------- ------------
Redeemable convertible preferred stock................ 1,000,000 -- -- 1,000,000
------------ ---------- ---------- ------------
Stockholders' Equity:
Preferred stock.................................. 12 -- -- 12
Common stock..................................... 5,817 387 (237) 5,967
Additional paid-in capital....................... 3,497,346 191,808 3,813 3,692,967
Treasury Stock, at cost.......................... -- (678) 678 --
Retained earnings (deficit)...................... (706,669) (13,570) 13,570 (706,669)
Accumulated other comprehensive income........... 81,930 (209) 209 81,930
------------ ---------- ---------- ------------
Total Stockholders' Equity.................. 2,878,436 177,738 18,033 3,074,207
------------ ---------- ---------- ------------
Total Liabilities and Stockholders'
Equity................................... $ 7,069,543 $ 676,174 $ 45,779 $ 7,791,496
============ ========== ========== ============
(1) The adjustment for the merger reflects the preliminary allocation of the
net purchase price of CapRock to the net assets of CapRock that are to be
acquired, including intangible assets, and record the issuance of
15,023,318 shares of McLeodUSA Class A common stock valued at $13.77 per
share. The value of $13.77 per share represents the average closing price
of McLeodUSA Class A common stock on the Nasdaq National Market for the 10
trading days beginning five days prior to the date the merger agreement
was announced, October 2, 2000, and ending four days after such
announcement. The net purchase price of approximately $579 million is
equal to (1) the product of (A) the total number of shares of CapRock
common stock attributable to outstanding CapRock common stock and options
with exercise prices below the closing price of $5.063 (totaling
39,001,954) as of October 2, 2000, multiplied by (B) the conversion ratio
of 0.3876, multiplied by (C) $13.77, the value of a share of McLeodUSA
Class A common stock (calculated as described above), minus (2) the
aggregate option proceeds to be received (approximately $0.3 million) plus
(3) the principal amount of outstanding CapRock senior notes ($360
million) and the estimated liabilities directly attributable to the merger
($11 million). The allocation of the net purchase price to the net assets,
excluding debt, (approximately $516 million) and debt ($360 million) of
CapRock as of June 30, 2000, results in goodwill of approximately $63
million.
(2) To eliminate CapRock's deferred tax assets and deferred tax liabilities.
McLeodUSA expects to continue to be in a net deferred tax asset position
after the merger and will continue to provide a valuation allowance on the
net deferred tax assets.
(3) Reflects an increase in current liabilities related to banking, legal and
accounting fees, write-off of debt issuance costs and unaccreted discount
on CapRock's senior notes and other matters directly attributable to the
merger under EITF 95-3.
65
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statements of Operations
(In thousands, except per share information)
Twelve months Ended December 31, 1999
-------------------------------------
Pro Forma Pro Forma
for Pro Forma Adjustments for
Splitrock Adjustment for for Credit CapRock As for CapRock CapRock
Acquisition/(2)/ Credit Facilities Facilities Adjusted/(4)/ Acquisition Acquisition
--------------- ----------------- ---------- ------------- ----------- -----------
Operations Statement Data:
Revenue $1,018,044 $ -- $1,018,044 $192,623 $ -- $1,210,667
---------- -------- ---------- -------- ------- ----------
Operating expenses:
Cost of service....................... 583,725 -- 583,725 115,676 -- 699,401
Selling, general and administrative... 424,953 -- 424,953 56,535 -- 481,488
Depreciation and amortization......... 333,277 -- 333,277 9,698 3,156/(5)/ 346,131
Other................................. -- -- -- -- -- --
---------- -------- ---------- -------- ------- ----------
Total operating expenses............. 1,341,955 -- 1,341,955 181,909 3,156 1,527,020
---------- -------- ---------- -------- ------- ----------
Operating income (loss)............... (323,911) -- (323,911) 10,714 (3,156) (316,353)
Interest income (expense), net........ (127,456) (36,493)/(3)/ (163,949) (27,119) -- (191,068)
Other nonoperating income (expense)... 5,637 -- 5,637 1,526 -- 7,163
Income taxes.......................... -- -- -- (5,505) (5,505)/(6)/ --
---------- -------- ---------- -------- ------- ----------
Net income (loss)..................... (445,730) (36,493) (482,223) (9,374) (8,661) (500,258)
Preferred stock dividends............. (54,375) -- (54,375) -- -- (54,375)
---------- -------- ---------- -------- ------- ----------
Earnings applicable to common stock... $ (500,105) $(36,493) $ (536,598) $ (9,374) $(8,661) $ (554,633)
========== ======== ========== ======== ======= ==========
Loss per common and common
equivalent share..................... $ (0.92) $ (0.99) $ (0.99)
========== ========== ==========
Weighted average common and common
equivalent shares outstanding....... 544,728 544,728 15,023 559,751
========== ========== ======= ==========
Other Financial Data:
EBITDA/(1)/............................... $ 9,366 $ -- $ 9,366 $ 20,412 $ -- $ 29,778
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. McLeodUSA has included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
(2) The "Pro Forma for Splitrock Acquisition" information is derived from the
Pro Forma Financial Statements that were filed by McLeodUSA with the SEC
on a Current Report on Form 8-K/A on June 13, 2000.
(3) McLeodUSA used cash on hand and funds drawn from the Senior Secured
Credit Facilities to retire the outstanding Splitrock 11 3/4% senior
notes in July 2000. This adjustment records the pro forma annual interest
expense of approximately $66 million on the Senior Secured Credit
Facilities, reduced by the interest expense on the Splitrock 11 3/4%
senior notes as previously reported in the "Pro Forma for Splitrock
Acquisition."
(4) As adjusted financial information gives effect to the issuance by CapRock
of $210 million of its 11 1/2% senior notes due 2009 in May 1999 as if
such issuance had occurred on January 1, 1999. See "CapRock
Communications Corp.--Unaudited Pro Forma Condensed Statement of
Operations."
(5) To amortize intangibles acquired in the merger over 20 years.
(6) To eliminate CapRock's income tax benefit.
66
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statements of Operations
(In thousands, except per share information)
Six Months Ended June 30, 2000
---------------------------------------------------------------------------------------------
Adjustments
for Pro Forma for
Splitrock Splitrock Adjustments for Pro Forma for
McLeodUSA Splitrock/(2)/ Acquisition/(2)/ Aquisition Credit Facilities Credit Facilities
--------- ------------- ----------- ---------- ----------------- -----------------
Operations Statement Data:
Revenue....................... $ 620,082 $ 35,037 $ -- $ 655,119 $ -- $ 655,119
--------- -------- --------- ---------- --------- ----------
Operating expenses:
Cost of service............. 344,426 42,580 -- 387,006 -- 387,006
Selling, general and
administrative............ 256,563 10,012 -- 266,575 -- 266,575
Depreciation and
amortization.............. 163,193 12,470 27,097 202,760 -- 202,760
Other....................... -- 872 -- 872 -- 872
--------- -------- --------- ---------- --------- ----------
Total operating expenses.. 764,182 65,934 27,097 857,213 -- 857,213
--------- -------- --------- ---------- --------- ----------
Operating income (loss)......... (144,100) (30,897) (27,097) (202,094) -- (202,094)
Interest income (expense),
net....................... (42,077) (6,302) -- (48,379) (15,086)/(3)/ (63,465)
Other nonoperating income
(expense)................. 1,971 -- -- 1,971 -- 1,971
Income taxes................ -- -- -- -- -- --
--------- -------- --------- ---------- --------- ----------
Net income (loss)........... (184,206) (37,199) (27,097) (248,502) (15,086) (263,588)
Preferred stock dividends... (27,204) -- -- (27,204) -- (27,204)
--------- -------- --------- ---------- --------- ----------
Earnings applicable to
common stock.............. $(211,410) $(37,199) $ (27,097) $ (275,706) $ (15,086) $ (290,792)
========= ======== ========= ========== ========= ==========
Loss per common and common
equivalent share.......... $ (0.40) (0.48) $ (0.51)
========= ========== ==========
Weighted average common and
common equivalent shares
outstanding............... 529,109 46,089 575,198 575,198
========= ========= ========== ==========
Other Financial Data:
EBITDA/(1)/................. $ 19,093 $(17,555) $ -- $ 1,538 $ -- $ 1,538
------------------------------------------------------
Adjustments Pro Forma
for CapRock for CapRock
CapRock Acquisition Acquisition
------- ----------- -----------
Operations Statement Data:
Revenue....................... $113,936 $ -- $ 769,055
-------- -------- ---------
Operating expenses:
Cost of service............. 79,220 466,226
Selling, general and
administrative............ 43,398 309,973
Depreciation and
amortization.............. 9,077 1,578/(4)/ 213,415
Other....................... -- 872
-------- -------- ---------
Total operating expenses.. 131,695 1,578 990,486
-------- -------- ---------
Operating income (loss)......... (17,759) (1,578) (221,431)
Interest income (expense),
net....................... (7,021) -- (70,486)
Other nonoperating income
(expense)................. 25 -- 1,996
Income taxes................ 9,118 (9,118)/(5)/ --
-------- -------- ---------
Net income (loss)........... (15,637) (10,696) (289,921)
Preferred stock dividends... -- -- (27,204)
-------- -------- ---------
Earnings applicable to
common stock.............. $(15,637) $(10,696) $(317,125)
======== ======== =========
Loss per common and common
equivalent share......... $ (0.54)
=========
Weighted average common and
common equivalent shares
outstanding............... 15,023 590,221
======== =========
Other Financial Data:
EBITDA/(1)/................. $ (8,682) $ -- $ (7,144)
____________
/(1)/ EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. McLeodUSA has included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
/(2)/ The "Splitrock" column represents Splitrock's Statement of Operations for
the period of January 1, 2000 through March 30, 2000, the date of the
acquisition of Splitrock by McLeodUSA. The Splitrock financial statements
and the information in the "Adjustments for Splitrock Acquisition" column
are from the Pro Forma Financial Statements that were filed by McLeodUSA
with the SEC on a Current Report on Form 8-K/A on June 13, 2000.
/(3)/ McLeodUSA used cash on hand and funds drawn from the Senior Secured
Credit Facilities to retire the outstanding Splitrock 11 3/4 % senior
notes in July 2000. This adjustment records the pro forma interest
expense on the Senior Secured Credit Facilities reduced by the interest
expense on the Splitrock 11 3/4% senior notes as previously reported in
the "Pro Forma for Splitrock Acquisition."
/(4)/ To amortize intangibles acquired in the merger over 20 years.
/(5)/ To eliminate CapRock's income tax benefit.
67
CapRock Communications Corp.
Unaudited Pro Forma Condensed Statements of Operations
(In thousands, except per share information)
The following unaudited pro forma financial information has been
prepared to give effect to the issuance by CapRock of $210 million of its 11
1/2% senior notes due 2009 in May 1999 as if such issuance had occurred on
January 1, 1999. The unaudited pro forma financial information is derived from
and should be read in conjunction with the financial statements of CapRock and
the related notes thereto included in the CapRock Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, which is incorporated by reference into
this proxy statement/prospectus. The pro forma adjustments are based upon
available information and assumptions that management believes to be reasonable.
Twelve Months ended December 31, 1999
-------------------------------------
Adjustments Pro Forma
---------
CapRock for May 1999 Notes for May 1999 Notes
------- ------------------ ------------------
Operations Statement Data:
Revenue $ 192,623 $ -- $ 192,623
--------- --------- ----------
Operating expenses:
Cost of service 115,676 -- 115,676
Selling, general and administrative 56,535 -- 56,535
Depreciation and amortization 9,698 -- 9,698
Other -- -- --
--------- --------- ----------
Total operating expenses 181,909 -- 181,909
Operating income (loss) 10,714 -- 10,714
Interest income (expense), net (17,861) (9,258) (27,119)
Other nonoperating income (expense) 1,526 -- 1,526
Income tax benefit (expense) 2,080 3,425 5,505
--------- --------- ----------
Net income (loss) (3,541) (5,833) (9,374)
Preferred stock dividends -- -- --
--------- --------- ----------
Earnings applicable to common stock $ (3,541) $ (5,833) $ (9,374)
========= ========= ==========
Loss per common and common equivalent
share $ (0.11) $ (0.30)
========= ==========
Weighted average common and common
equivalent shares outstanding 31,727 31,727
========= ==========
68
INFORMATION ABOUT CAPROCK
Overview
CapRock. CapRock is a facilities-based integrated communications
service provider primarily to small and medium-sized business and communications
carrier customers in the Southwestern United States. CapRock offers business
customers an integrated bundle of communications products and services including
local exchange, domestic and international long distance, enhanced voice, data,
Internet, DSL and dedicated private line services. Additionally, CapRock offers
its communications-intensive business and carrier customers dark fiber, high
bandwidth dedicated fiber infrastructure, terminating access for domestic and
international long distance and ATM, frame relay and IP data transport services.
CapRock's communications services are provided through resale and over
its fiber, voice and data networks. As of June 30, 2000, CapRock's network
covered approximately 4,500 route miles (including 22 metro fiber loops in key
markets). Additionally, as of June 30, 2000, CapRock provided switch-based
competitive local exchange services in 13 markets. As of June 30, 2000, CapRock
had 12 voice and 17 data switches installed and operational on its network.
CapRock had 61 central office collocations as of June 30, 2000. CapRock
is implementing its DSL footprint through its recent agreement with a third
party supplier of DSL services. These collocations enable CapRock to provide
local and other services over its own network infrastructure, thereby lowering
its cost of providing these services.
CapRock's Network. CapRock's fiber network is comprised primarily of 96
fiber strands pulled through one of four conduits buried below ground. A key
element of CapRock's strategy is to reduce the cost basis of fiber it retains
for its own use by sharing construction costs with other carriers and to quickly
recover its investment by selling excess dark fiber. CapRock plans to retain at
least 24 fiber strands throughout its entire network. CapRock is also building a
competitive local exchange service in 48 markets where it will provide Class 5
switching functionality and DSL services to its local customers. CapRock's data
network will consist of data switches and fiber capacity that will connect all
of these markets, supporting ATM, frame relay and IP traffic. In many of these
local markets CapRock will install equipment to backhaul its voice and data
traffic to one of its switches in order to significantly lower its capital
requirements.
Information Technology Systems and Electronic Bonding. CapRock is
automating most of the processes involved with switching a customer to its
network in order to decrease the time between receipt of a customer order and
completion of service installation. To achieve this goal, CapRock is acquiring,
integrating and developing information technology systems and platforms to
support its operations. CapRock has established and will continue to implement
"electronic bonding," which is the on-line and real-time connections of its
operating systems with those of ILECs. Additionally, CapRock has developed and
intends to roll out web-enabled ordering, billing and customer service features
to its customers.
CapRock has completed testing and began utilizing electronic bonding
with Southwestern Bell Telephone. Electronic bonding with Southwestern Bell has
enabled CapRock to reduce its provisioning times from approximately 25 business
days to as few as five business days. Orders submitted with electronic bonding
are also less likely to be rejected by Southwestern Bell, resulting in a greater
percentage of customers being transitioned to CapRock's facilities in a shorter
amount of time.
Joint Build Projects. CapRock has entered into joint fiber construction
agreements with AT&T, Enron Broadband Services, Inc., Pathnet, Inc. and
360networks, Inc. The joint construction arrangements provide several benefits,
including reduction of construction costs, accelerated construction, and the
freeing up of resources to focus attention on the construction of additional
portions of CapRock's network. To further recover the cost of building its fiber
network, CapRock has sold and intends to continue to sell excess dark fiber.
Sales Organization. CapRock uses a direct sales force to sell its
communications products and services to business customers. CapRock believes
that its face-to-face sales efforts coupled with its personalized customer care
are highly effective in capturing and retaining market share among small and
medium-sized businesses. CapRock had 251 sales force employees as of June 30,
2000. CapRock provides its sales force with financial incentives that promote a
high level of ongoing customer care and loyalty.
69
Additionally, as of June 30, 2000, CapRock had 267 independent sales
agents who contributed to its sales efforts throughout the region, primarily in
smaller markets. CapRock's agent program was established in 1996, and consists
primarily of independent telephone equipment vendors authorized by CapRock to
market its products and services. Authorized agents receive recurring
commissions based on product, pricing, volume of usage and customer loyalty.
CapRock has six agent managers who actively recruit new independent sales
agents.
Litigation. On July 26, 2000, a stockholder class action complaint was
filed in the United States District Court for the Northern District of Texas on
behalf of all purchasers of CapRock common stock during the period between April
28, 2000 and July 6, 2000. Additional stockholder suits have been filed
subsequently, also in the United States District Court for the Northern District
of Texas. The named defendants in these lawsuits, which allege that CapRock made
material misstatements or omissions of fact in violation of Section 10(b) of the
Securities Exchange Act, include CapRock and certain of its officers and
directors. The plaintiffs in the lawsuits seek monetary damages. CapRock intends
to vigorously defend the pending suits and any other similar suits subsequently
filed.
______________
CapRock is a Texas corporation that was formed on February 3, 1998 to
be a holding company for its predecessor companies. The principal executive
offices of CapRock are located at 15601 Dallas Parkway, Suite 700, Dallas, Texas
75001, and its phone number is (972) 982-9550.
Additional Information
A detailed description of the CapRock business, executive compensation,
various benefit plans, including stock option plans, voting securities and the
principal holders of these securities, relationships and transactions between
CapRock and its executive officers, directors and principal stockholders,
financial statements and other matters related to CapRock is incorporated by
reference or set forth in the CapRock registration statement on Form S-3
(333-32910), the CapRock Annual Report set forth on Form 10-K for the year ended
December 31, 1999 and the CapRock Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2000 and June 30, 2000, incorporated into this proxy
statement/prospectus by reference. Stockholders desiring copies of such
documents may contact CapRock at its address or telephone number indicated under
"Where You Can Find More Information."
70
Selected Consolidated Financial Data of CapRock
The following table sets forth financial data as of and for the years ended
December 31, 1995, 1996, 1997, 1998 and 1999 and as of and for the six months
ended June 30, 1999 and 2000. The business combination among CapRock's
predecessor companies was completed on August 26, 1998 and was accounted for as
a pooling of interests. Accordingly, these Consolidated Financial Statements
include CapRock's three predecessor companies (CapRock Telecommunications Corp.,
CapRock Fiber Network, LTD. and IWL Communications, Incorporated) as though
these entities were always a part of CapRock.
In May 1998, IWL Communications changed its fiscal year end to coincide
with the fiscal years of CapRock, CapRock Telecommunications and CapRock Fiber.
The Consolidated Statement of Operations for the year ended December 31, 1996
combines the operating activity of IWL Communications for the year ended June
30, 1996 with the operating activity of CapRock Telecommunications and CapRock
Fiber for the year ended December 31, 1996. The net income of IWL Communications
in the amount of approximately $260,000 for the six month period ended December
31, 1996 was excluded from the Consolidated Statement of Operations for the year
ended December 31, 1996 as a result of the non-conforming year ends for such
period. This amount was included as an adjustment to retained earnings in the
Consolidated Statement of Stockholders' Equity and Comprehensive Income in 1997.
IWL Communications' cash flow for this period was added to the 1997 beginning
balance in the Consolidated Statement of Cash Flows.
As of and for the Year Ended December 31,
-----------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- --------- ---------
(in thousands, except per share data)
Statement of Operations Data:
Revenues............................................ $ 29,407 $ 50,970 $ 75,349 $ 121,774 $ 192,623
Costs of Services................................... 21,185 39,357 52,471 83,221 115,676
-------- -------- -------- --------- ---------
Gross profit.................................. 8,222 11,613 22,878 38,553 76,947
Operating expenses:
Selling, general and administrative............. 7,326 8,983 14,074 23,528 56,535
Merger related expenses......................... - - - 2,313 -
Depreciation and amortization................... 1,186 1,536 3,346 4,887 9,698
-------- -------- -------- --------- ---------
Total operating expenses..................... 8,512 10,519 17,420 30,728 66,233
-------- -------- -------- --------- ---------
Operating income (loss)............................. (290) 1,094 5,458 7,825 10,714
Interest expense, net............................... (484) (585) (1,603) (6,441) (17,861)
Other income (expense).............................. 151 42 220 106 1,526
-------- -------- -------- --------- ---------
Income (loss) before income taxes and
extraordinary item.............................. (623) 551 4,075 1,490 (5,621)
Income tax expense (benefit)........................ 48 227 1,513 1,267 (2,080)
-------- -------- -------- --------- ---------
Income (loss) before extraordinary item............. (671) 324 2,562 223 (3,541)
Extraordinary item - extinguishment of debt......... 645 - - - -
-------- -------- -------- --------- ---------
Net income (loss)............................. $ (26) $ 324 $ 2,562 $ 223 $ (3,541)
======== ======== ======== ========= =========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item.............................. $ (623) $ 551 $ 4,075 $ 1,490 $ (5,621)
Pro forma income taxes, as if CapRock
Fiber were a C corporation...................... (211) 143 1,475 1,267 (2,080)
-------- -------- -------- --------- ---------
Income (loss) before extraordinary item......... (412) 408 2,600 223 (3,541)
Extraordinary item, net of taxes................ 397 - - - -
-------- -------- -------- --------- ---------
Pro forma net income (loss)................... $ (15) $ 408 $ 2,600 $ 223 $ (3,541)
======== ======== ======== ========= =========
Historical and pro forma income (loss) per
common share:
Income (loss) before extraordinary item......... $ (0.02) $ 0.01 $ 0.09 $ 0.01 $ (0.11)
Extraordinary item, net of tax.................. $ 0.02 - - - -
-------- -------- -------- --------- ---------
Basic and diluted............................... $ - $ 0.01 $ 0.09 $ 0.01 $ (0.11)
======== ======== ======== ========= =========
Weighted average shares outstanding:
Basic........................................... 25,926 27,146 27,984 28,899 31,727
Diluted......................................... 25,936 27,156 28,481 30,028 31,727
71
Selected Consolidated Financial Data of CapRock
(In thousands, except per share data)
Six Months Ended
June 30,
----------
1999 2000
-------- ---------
Statement of Operations Data:
Revenues........................................... $ 74,596 $ 113,936
Costs of Services.................................. 44,919 79,220
-------- ---------
Gross profit................................. 29,677 34,716
Operating expenses:
Selling, general and administrative............ 25,012 43,398
Merger related expenses........................ - -
Depreciation and amortization.................. 3,337 9,077
-------- ---------
Total operating expenses.................... 28,349 52,475
-------- ---------
Operating income (loss)............................ 1,328 (17,759)
Interest expense, net.............................. (7,134) (7,021)
Other income (expense)............................. (135) 25
-------- ---------
Income (loss) before income taxes and
extraordinary item............................. (5,941) (24,755)
Income tax expense (benefit)....................... (2,335) (9,118)
-------- ----------
Income (loss) before extraordinary item............ (3,606) (15,637)
Extraordinary item - extinguishment of debt........ - -
-------- ---------
Net income (loss)............................ $ 3,606 $ (15,637)
======== =========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item............................. $ (5,941) $ (24,755)
Pro forma income taxes, as if CapRock
Fiber were a C corporation..................... (2,335) (9,118)
-------- ---------
Income (loss) before extraordinary item........ (3,606) (15,637)
Extraordinary item, net of taxes............... - -
-------- ---------
Pro forma net income (loss).................. $ (3,606) $ (15,637)
======== =========
Historical and pro forma income (loss) per
common share:
Income (loss) before extraordinary item........ $ (0.12) $ (0.47)
Extraordinary item, net of tax................. - -
-------- ---------
Basic and diluted.............................. $ (0.12) $ (0.47)
======== =========
Weighted average shares outstanding:
Basic.......................................... 30,321 33,406
Diluted........................................ 30,321 33,406
72
Selected Consolidated Financial Data of CapRock
(In thousands, except per share data)
As of and for the Year Ended December 31,
-----------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- --------- ---------
Balance Sheet Data:
Working capital (deficit)........................... $ (797) $ (2,153) $ (305) $ 102,489 $ 216,145
Property, plant and equipment, net.................. 6,705 15,901 27,341 59,607 228,601
Total assets........................................ 13,198 28,522 49,389 191,966 548,835
Long-term debt and capital lease obligations........ 2,443 13,254 21,062 145,187 347,502
Stockholders' equity................................ 3,552 3,886 14,086 16,062 96,030
Operating Data:
EBITDA(1)........................................... $ 896 $ 2,630 $ 8,804 $ 15,025 $ 20,412
Cash flows provided by (used in) operations......... 827 781 4,112 7,125 (13,302)
Cash flows used in investing activities............. (1,919) (9,350) (12,987) (134,350) (264,623)
Cash flows provided by financing activities......... 903 8,605 12,114 123,990 283,338
Capital expenditures................................ (2,282) (10,212) (13,631) (36,855) (201,289)
Six Months Ended
June 30,
----------
1999 2000
--------- ---------
Balance Sheet Data:
Working capital (deficit)........................ $ 337,555 $ 104,312
Property, plant and equipment, net............... 97,360 423,039
Total assets..................................... 479,533 676,174
Long-term debt and capital lease obligations..... 347,012 348,218
Stockholders' equity............................. 94,939 177,738
Operating Data:
EBITDA(1)........................................ $ (4,665) $ (8,682)
Cash flows provided by (used in) operations...... (14,897) 50,799
Cash flows used in investing activities.......... (258,169) (159,910)
Cash flows provided by financing activities...... 283,872 107,113
Capital expenditures............................. (45,717) (216,263)
(1) EBITDA consists of operating income or loss before interest, income taxes,
depreciation and amortization and other nonrecurring operating expenses.
EBITDA is a measure commonly used in the communications industry. EBITDA is
not a measure of financial performance under generally accepted accounting
principles and should not be considered as an alternative to net income as
a measure of performance nor as an alternative to cash flow as a measure of
liquidity.
73
McLEODUSA CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS
If the merger is completed, shares of CapRock common stock will be
converted into shares of McLeodUSA Class A common stock. As a result, CapRock
stockholders, whose rights are currently governed by the Texas Business
Corporation Act, the CapRock articles of incorporation and bylaws, will become
McLeodUSA stockholders, whose rights are governed by the Delaware General
Corporation Law, the McLeodUSA certificate of incorporation and bylaws.
The following is a description of the capital stock of McLeodUSA,
including the McLeodUSA Class A common stock to be issued in the merger, and a
summary of the material differences between the rights of CapRock stockholders
and McLeodUSA stockholders. These differences arise from the differences between
the Texas Business Corporation Act and the Delaware General Corporation Law, as
well as the CapRock articles of incorporation and bylaws and the McLeodUSA
certificate of incorporation and bylaws. Although it is impractical to compare
all of the aspects in which the state corporate laws and the companies'
governing instruments differ with respect to stockholders' rights, the following
discussion summarizes the significant differences between them.
DESCRIPTION OF McLEODUSA CAPITAL STOCK
The following summary description of the capital stock of McLeodUSA is
based on the provisions of the McLeodUSA certificate of incorporation and bylaws
and the applicable provisions of the Delaware General Corporation Law. For
information on how to obtain copies of the McLeodUSA certificate of
incorporation and bylaws, see "Where You Can Find More Information."
Authorized and Outstanding Capital Stock of McLeodUSA
Under the McLeodUSA certificate of incorporation, McLeodUSA has
authority to issue 2,034,000,000 shares of capital stock, consisting of
2,000,000,000 shares of McLeodUSA 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 serial preferred stock, par value $.01 per share; and
10,000,000 shares of Class II serial preferred stock, par value $.001 per share.
As of the record date, [_________] shares of McLeodUSA Class A common stock, no
shares of McLeodUSA Class B common stock, [_________] shares of 6.75% Series A
cumulative convertible preferred stock, par value $.01 per share, 275,000 shares
of Series B cumulative convertible preferred stock, par value $.01 per share,
125,000 shares of Series C convertible preferred stock, par value $.01 per
share, and no shares of Class II serial preferred stock, par value $.001 per
share, were issued and outstanding.
The rights of the holders of McLeodUSA Class A common stock, Class B
common stock, Series A preferred stock, Series B preferred stock and Series C
preferred stock discussed below are subject to any rights that the McLeodUSA
board of directors may confer on holders of McLeodUSA preferred stock and Class
II preferred stock that may be issued in the future. These rights may adversely
affect the rights of the holders of any or all of these classes and series of
McLeodUSA securities.
McLeodUSA Class A Common Stock
Voting Rights. Each holder of McLeodUSA Class A common stock is
entitled to attend all special and annual meetings of the stockholders of
McLeodUSA and, together with the holders of shares of McLeodUSA Class B common
stock and the holders of all other classes of stock entitled to attend and vote
at such meetings, to vote upon any matter, including, without limitation, the
election of directors, properly considered and acted upon by the stockholders of
McLeodUSA. Holders of McLeodUSA Class A common stock are entitled to one vote
per share.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of McLeodUSA, whether voluntary or involuntary, the holders of
McLeodUSA Class A common stock, the holders of McLeodUSA Class B common stock
and holders of any class or series of stock entitled to participate with the
McLeodUSA Class A and Class B common stock, will become entitled to participate
in the distribution of any assets of McLeodUSA remaining after McLeodUSA has
paid, or provided for payment of, all debts and liabilities of McLeodUSA and
after McLeodUSA has paid, or set aside for payment, to the holders of any class
of stock having preference over the McLeodUSA Class A common stock and McLeodUSA
Class B common stock in the event of dissolution, liquidation or winding up the
full preferential amounts, if any, to which they are entitled.
74
Dividends. Subject to the rights of the holders of McLeodUSA preferred
stock and McLeodUSA Class II preferred stock, dividends may be paid on the
McLeodUSA Class A common stock, the McLeodUSA Class B common stock and on any
class or series of stock entitled to participate with the McLeodUSA Class A and
Class B common stock when and as declared by the McLeodUSA board of directors.
No Preemptive or Conversion Rights. The holders of McLeodUSA Class A
common stock have no preemptive or subscription rights to purchase additional
securities issued by McLeodUSA nor any rights to convert their McLeodUSA Class A
common stock into other securities of McLeodUSA or to have their shares redeemed
by McLeodUSA.
McLeodUSA Class B Common Stock
Voting Rights. Each holder of McLeodUSA Class B common stock is
entitled to attend all special and annual meetings of the stockholders of
McLeodUSA and, together with the holders of shares of McLeodUSA Class A common
stock and the holders of all other classes of stock entitled to attend and vote
at such meetings, to vote upon any matter, including, without limitation, the
election of directors, properly considered and acted upon by the stockholders of
McLeodUSA. Holders of McLeodUSA Class B common stock are entitled to .40 vote
per share.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of McLeodUSA, whether voluntary or involuntary, the holders of
McLeodUSA Class B common stock, the holders of McLeodUSA Class A common stock
and the holders of any class or series of stock entitled to participate with the
McLeodUSA Class B and Class A common stock, will become entitled to participate
in the distribution of any assets of McLeodUSA remaining after McLeodUSA has
paid, or provided for payment of, all debts and liabilities of McLeodUSA and
after McLeodUSA has paid, or set aside for payment, to the holders of any class
of stock having preference over the McLeodUSA Class B common stock and McLeodUSA
Class A common stock in the event of dissolution, liquidation or winding up the
full preferential amounts, if any, to which they are entitled.
Dividends. Subject to the rights of the holders of McLeodUSA preferred
stock and McLeodUSA Class II preferred stock, dividends may be paid on the
McLeodUSA Class B common stock, the McLeodUSA Class A common stock and on any
class or series of stock entitled to participate with the McLeodUSA Class B and
Class A common stock when and as declared by the McLeodUSA board of directors.
Conversion into McLeodUSA Class A Common Stock; No Other Preemptive or
Conversion Rights. The shares of McLeodUSA Class B common stock may be converted
at any time at the option of the holder into fully paid and nonassessable shares
of McLeodUSA Class A common stock at the rate of one share of McLeodUSA Class A
common stock for each share of McLeodUSA Class B common stock, as adjusted for
any stock split. Except for this conversion right, the holders of McLeodUSA
Class B common stock have no preemptive or subscription rights to purchase
additional securities issued by McLeodUSA nor any rights to convert their
McLeodUSA Class B common stock into other securities of McLeodUSA or to have
their shares redeemed by McLeodUSA.
McLeodUSA Preferred Stock
The McLeodUSA certificate of incorporation authorizes the McLeodUSA
board of directors, from time to time and without further stockholder action, to
provide for the issuance of up to 2,000,000 shares of McLeodUSA preferred stock,
in one or more series, and to fix the relative rights and preferences of the
shares, including voting powers, dividend rights, liquidation preferences,
redemption rights and conversion privileges. As of the record date, [_________]
shares of Series A preferred stock, 275,000 shares of Series B preferred stock,
and 125,000 shares of Series C preferred stock, are issued and outstanding.
Because of its broad discretion to create and issue McLeodUSA preferred stock
and Class II preferred stock without stockholder approval, the McLeodUSA board
of directors could adversely affect the voting power of the holders of McLeodUSA
Class A common stock and, by issuing shares of McLeodUSA preferred stock and
Class II preferred stock with preferential voting, conversion or redemption
rights, could discourage any attempt to obtain control of McLeodUSA.
McLeodUSA Series A Preferred Stock
Ranking. The Series A preferred stock, with respect to dividend rights
and rights on liquidation, dissolution or winding-up, ranks:
. junior to all McLeodUSA debt obligations
75
. junior to "Senior Stock," which is each class of McLeodUSA
capital stock or series of preferred stock or Class II preferred
stock established after the Series A preferred stock by the
McLeodUSA board of directors that has terms which expressly
provide that such class or series will rank senior to the Series
A preferred stock
. on a parity with "Parity Stock," which is each class of capital
stock or series of preferred stock or Class II preferred stock
established after the Series A preferred stock by the McLeodUSA
board of directors that has terms which expressly provide that
such class or series will rank on a parity with the Series A
preferred stock (and which includes the Series B preferred stock
and Series C preferred stock, as described below)
. senior to "Junior Stock," which is all classes of McLeodUSA
common stock, including McLeodUSA Class A common stock and Class
B common stock, and any other class of McLeodUSA capital stock
established after the Series A preferred stock by the McLeodUSA
board of directors whose terms do not expressly provide that such
class or series ranks senior to, or on a parity with, the Series
A preferred stock
Voting Rights. The holders of Series A preferred stock, except as
otherwise required under Delaware law or as provided in the Series A preferred
stock certificate of designations, are not entitled to vote on any matter
required or permitted to be voted upon by the McLeodUSA stockholders. If the
Series A preferred stock does vote, each outstanding share of Series A preferred
stock has one vote, excluding shares of Series A preferred stock held by
McLeodUSA or any entity controlled by McLeodUSA, which shares have no votes. The
Series A preferred stock certificate of designations provides that if dividends
on the Series A preferred stock are in arrears and unpaid for six or more
dividend periods, whether or not consecutive, then the holders of the
outstanding shares of Series A preferred stock will be entitled to elect to
serve on the McLeodUSA board of directors the lesser of (1) two additional
members to the McLeodUSA board of directors or (2) that number of directors
constituting at least 25% of the members of the McLeodUSA board of directors,
and the number of members of the McLeodUSA board of directors will be
immediately and automatically increased by that number. These voting rights will
continue until all dividends in arrears on the Series A preferred stock are paid
in full, at which time the term of any directors elected according to the
provisions of this paragraph (subject to the right of holders of any other
preferred stock to elect these directors) shall terminate and the number of
directors constituting the McLeodUSA board of directors will be immediately and
automatically decreased by that number (until the occurrence of any such
subsequent event). While any shares of Series A preferred stock are outstanding,
McLeodUSA may not authorize, create or increase the authorized amount of any
class or series of Senior Stock with respect to the payment of dividends or
amounts upon liquidation, dissolution or winding-up without the consent of the
holders of at least two-thirds of the outstanding shares of Series A preferred
stock. McLeodUSA may, however, without the consent of any holder of Series A
preferred stock, create additional classes of capital stock or issue series of
Parity Stock or Junior Stock.
Liquidation Preference. Upon the voluntary or involuntary liquidation,
dissolution or winding-up of McLeodUSA, and subject to the rights of the
creditors of McLeodUSA and holders of Senior Stock and Parity Stock, each holder
of Series A preferred stock will be entitled to be paid, out of the assets of
McLeodUSA available for distribution to stockholders, an amount equal to the
liquidation preference of $250 per share of Series A preferred stock held by the
holder, plus accumulated and unpaid dividends on the Series A preferred stock to
the date fixed for liquidation, dissolution or winding-up (including an amount
equal to a prorated dividend for the period from the last dividend payment date
to the date fixed for liquidation, dissolution or winding-up) before any
distribution is made on any Junior Stock, including McLeodUSA Class A common
stock.
Dividends. Subject to the rights of any holders of Senior Stock and
Parity Stock, holders of shares of Series A preferred stock will be entitled to
receive, when, as and if declared by the McLeodUSA board of directors out of
funds of McLeodUSA legally available for payment, cumulative dividends at the
annual rate of 6.75% per share on the liquidation preference of $250 per share
of Series A preferred stock (equivalent to $16.875 per share annually).
Dividends on the Series A preferred stock are payable quarterly and accrue from
the most recent date as to which dividends have been paid. Any dividend on the
Series A preferred stock shall be, at the option of McLeodUSA, payable (1) in
cash or (2) through the issuance of shares of McLeodUSA Class A common stock.
Conversion into McLeodUSA Class A Common Stock; No Other Preemptive or
Conversion Rights. Shares of Series A preferred stock are convertible, in whole
or in part, at any time, at the option of the holders of the Series A preferred
stock, into shares of McLeodUSA Class A common stock at the conversion price of
$9.69 per share, subject to adjustment upon the happening of various events.
This amount is referred to herein as the Conversion Price. McLeodUSA has the
option to convert all of the shares of Series A preferred stock into shares of
76
McLeodUSA Class A common stock at the Conversion Price if, on or after August
15, 2002, the closing price of McLeodUSA Class A common stock has equaled or
exceeded 135% of the Conversion Price for at least 20 out of 30 consecutive days
on which the Nasdaq National Market is open for the transaction of business.
Except for this conversion right, the holders of the Series A preferred stock
have no preemptive or preferential right to purchase or subscribe to stock,
obligations, warrants or any other securities of any class of McLeodUSA.
Provisional Redemption. McLeodUSA may redeem Series A preferred stock
at a redemption price of 104.5% of the liquidation preference, plus accumulated
and unpaid dividends, if any, to the redemption date, on or after August 15,
2001, but prior to August 15, 2002, if the closing price of McLeodUSA Class A
common stock equals or exceeds 150% of the Conversion Price for at least 20
trading days within any 30 trading day period. This type of redemption is called
a Provisional Redemption. If McLeodUSA undertakes a Provisional Redemption, the
holders of shares of Series A preferred stock that are called for redemption
also will receive a payment (referred to as the "additional payment") in an
amount equal to the present value of the aggregate value of the dividends that
would thereafter have been payable on the Series A preferred stock (whether or
not such dividends have been declared) for the period from the date of the
Provisional Redemption to August 15, 2002. McLeodUSA may effect any Provisional
Redemption, in whole or in part, at its option, by payment of the redemption
price, including any additional payment, in cash, through delivery of shares of
McLeodUSA Class A common stock or a combination thereof, subject to applicable
law.
Optional Redemption. Except under the foregoing circumstances for a
Provisional Redemption, and except under certain circumstances set forth in the
McLeodUSA certificate of incorporation (as set forth below), McLeodUSA may not
redeem the Series A preferred stock prior to August 15, 2002. Thereafter, each
share of the Series A preferred stock may be redeemed, at the option of
McLeodUSA, in whole or in part, at any time or from time to time at the
following redemption prices, plus accumulated and unpaid dividends, if any, to
the date fixed for redemption, payable in cash. This type of redemption is
referred to herein as an Optional Redemption. If redeemed during the 12-month
period commencing on August 15 (or, if such date is not a date on which the
Nasdaq National Market is open for business, then on the next day the Nasdaq
National Market is open for business) of the years set forth below, the Optional
Redemption prices, expressed as a percentage of the liquidation preference per
share, shall be:
Period
Year Redemption
- ---- Price
--------
2002....................................................... 103.3750%
2003....................................................... 102.2500%
2004....................................................... 101.1250%
2005 and thereafter........................................ 100.0000%
Notwithstanding any of the foregoing provisions relating to a
Provisional Redemption or an Optional Redemption, the McLeodUSA certificate of
incorporation provides that McLeodUSA may redeem shares of any class of its
capital stock (including the Series A preferred stock) to the extent necessary
to prevent the loss or secure the reinstatement of any license, operating
authority or franchise from any governmental agency. Any redemption of shares of
Series A preferred stock under such circumstances will be at the price, and on
the other terms and conditions, specified in the McLeodUSA certificate of
incorporation. These provisions are described below under "--Certain Charter and
Statutory Provisions--Mandatory Redemption."
McLeodUSA Series B and Series C Preferred Stock
Ranking. The Series B preferred stock and Series C preferred stock,
with respect to dividend rights and rights on liquidation, dissolution or
winding-up, ranks:
. junior to all McLeodUSA debt obligations
. junior to "Senior Stock," which is each class of McLeodUSA
capital stock or series of preferred stock or Class II preferred
stock established after the Series B preferred stock and Series C
preferred stock by the McLeodUSA board of directors that has
terms which expressly provide that the class or series will rank
senior to the Series B preferred stock and Series C preferred
stock
. on a parity with "Parity Stock," which is the Series A preferred
stock and each class of capital stock or series of preferred
stock or Class II preferred stock established after the Series B
preferred stock and Series C preferred stock by the McLeodUSA
board of directors that has terms which expressly provide
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that the class or series will rank on a parity with the Series B
preferred stock and Series C preferred stock
. senior to "Junior Stock," which is all classes of McLeodUSA common
stock, including McLeodUSA Class A common stock and Class B common
stock, and any other class of McLeodUSA capital stock established
after the Series B preferred stock and Series C preferred stock by the
McLeodUSA board of directors whose terms do not expressly provide that
such class or series ranks senior to, or on a parity with, the Series
B preferred stock and Series C preferred stock
Voting Rights. The holders of Series B preferred stock, except as otherwise
required under Delaware law or as provided in the Series B preferred stock
certificate of designations, are not entitled to vote on any matter required or
permitted to be voted upon by the McLeodUSA stockholders other than, voting
separately as a series, to designate and elect two directors to the McLeodUSA
board of directors. However:
(1) the entitlement of the holders of Series B preferred stock to
designate two directors for election to the McLeodUSA board of
directors, and the exclusive right of the holders of Series B
preferred stock to vote, separately as a series, for the election of
such designees to the McLeodUSA board of directors, shall cease
immediately upon less than 110,000 shares of Series B preferred stock
being outstanding, and the holders of the outstanding shares of the
Series B preferred stock shall be entitled to designate one director
for election to the McLeodUSA board of directors and, voting
separately as a series, shall have the exclusive right to vote for the
election of such designee to the McLeodUSA board of directors, and to
designate one non-voting board observer, for as long as, and only for
so long as, less than 110,000 shares of Series B preferred stock but
more than 55,000 shares of Series B preferred stock remain
outstanding;
(2) the entitlement of the holders of outstanding shares of Series B
preferred stock to designate one director for election to the
McLeodUSA board of directors, and the exclusive right of the holders
of outstanding shares of Series B preferred stock to vote separately
as a series for the election of such designee to the McLeodUSA board
of directors, and the exclusive right of the holders of outstanding
shares of Series B preferred stock to designate one non-voting board
observer, and the rights of such non-voting board observer, shall
cease immediately upon 55,000 or fewer shares of Series B preferred
stock being outstanding, and the holders of the outstanding shares of
Series B preferred stock shall be entitled to designate two non-voting
board observers for as long as, and only for as long as, 55,000 or
fewer (but at least one) shares of Series B Preferred Stock remain
outstanding; and
(3) immediately upon no shares of Series B preferred stock being
outstanding, the entitlement of the holders of Series B preferred
stock to designate two non-voting board observers, and the rights of
such board observers, shall cease.
In exercising any such votes, each outstanding share of Series B
preferred stock has one vote.
The holders of Series C preferred stock, except as otherwise required
under Delaware law or as provided in the Series C preferred stock certificate of
designations, are not entitled to vote on any matter required or permitted to be
voted upon by the McLeodUSA stockholders other than, voting separately as a
series, to designate and elect one non-voting board observer to the McLeodUSA
board of directors for so long as any shares of Series C preferred stock remain
issued and outstanding.
In addition, the Series B preferred stock certificate of designations
provides that if dividends on the Series B preferred stock are in arrears and
unpaid for six or more dividend periods (whether or not consecutive) or
McLeodUSA has failed to discharge a redemption obligation as required under the
Series B preferred stock certificate of designations, then the holders of the
outstanding shares of Series B preferred stock will be entitled to elect one
additional director to serve on the McLeodUSA board of directors, and the number
of members of the McLeodUSA board of directors will be immediately and
automatically increased by this number. These voting rights will continue until
either all dividends in arrears on the Series B preferred stock are paid in full
or the redemption obligation is fulfilled, as the case may be, at which time the
term of the director elected according to the provisions of this paragraph shall
terminate and the number of directors constituting the McLeodUSA board of
directors will be immediately and automatically decreased by one (until the
occurrence of any such subsequent event).
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Similarly, the Series C preferred stock certificate of designations
provides that if McLeodUSA has failed to discharge a redemption obligation as
required under the Series C preferred stock certificate of designations then the
holders of the outstanding shares of Series C preferred stock will be entitled
to elect one additional director to serve on the McLeodUSA board of directors,
and the number of members of the McLeodUSA board of directors will be
immediately and automatically increased by this number. These voting rights of
the Series C preferred stock will continue until such time as such redemption
obligation is fulfilled at which time the term of the director elected according
to the provisions of this paragraph shall terminate and the number of directors
constituting the McLeodUSA board of directors will be immediately and
automatically decreased by one (until the occurrence of any such subsequent
event).
The Series B preferred stock certificate of designations also provides
that without the consent of a majority of the outstanding shares of the Series B
preferred stock, McLeodUSA may not amend, alter or repeal any provision of its
certificate of incorporation or the Series B certificate of designations so as
to adversely affect the preferences, rights or powers of the Series B preferred
stock or to authorize the issuance of, or to issue any, additional shares of
Series B preferred stock, provided that any amendment to change the dividend or
the liquidation preference of the Series B preferred stock will require the
written consent of the holders of two-thirds of the outstanding shares of Series
B preferred stock. The Series B preferred stock certificate of designations also
provides that the consent of a majority of the outstanding shares of Series B
preferred stock is required for McLeodUSA to create, authorize or issue any
Senior Securities. The Series C preferred stock certificate of designations
provides for similar voting rights with respect to the Series C preferred stock.
Liquidation Preference. Upon the voluntary or involuntary liquidation,
dissolution or winding-up of McLeodUSA, and subject to the rights of the
creditors of McLeodUSA and holders of Senior Stock and Parity Stock, the holders
of the Series B preferred stock and Series C preferred stock taken together will
be entitled to be paid, out of the assets of McLeodUSA available for
distribution to stockholders, an amount equal to the greater of (1) the
liquidation preference of $2,500 per share of Series B preferred stock and
Series C preferred stock, plus accumulated and unpaid dividends thereon to the
date fixed for liquidation, dissolution or winding-up (including an amount equal
to a prorated dividend for the period from the last dividend payment date to the
date fixed for liquidation, dissolution or winding-up) or (2) the aggregate
amount that would have been received with respect to the shares of Series B
preferred stock and Series C preferred stock if these shares had been converted
to McLeodUSA Class A common stock immediately prior to the liquidation,
dissolution or winding-up, before any distribution is made on any Junior Stock,
including McLeodUSA Class A common stock. If, upon any liquidation, dissolution
or winding-up, the assets or proceeds of McLeodUSA, shall be insufficient to pay
in full the amounts under clause (1) of the preceding sentence and liquidating
payments on all Parity Securities, then the assets or proceeds, shall (A) be
distributed among the shares of Series B preferred stock and Series C preferred
stock taken together and all other Parity Securities ratably in accordance with
the respective amounts that would be payable on such shares and any other Parity
Securities if all amounts payable thereon were paid in full and (B) the amount
distributable under clause (A) to the Series B preferred stock and Series C
preferred stock taken together, shall be distributed to the holders of the
Series B preferred stock and Series C preferred stock according to the formulas
specified in the Series B preferred stock certificate of designations and Series
C preferred stock certificate of designations.
Dividends. Subject to the rights of any holders of Senior Stock and Parity
Stock, holders of shares of Series B preferred stock will be entitled to
receive, when, as and if declared by the McLeodUSA board of directors out of
funds of McLeodUSA legally available for payment, cumulative dividends at the
annual rate of $127.273 per share. Dividends on the Series B preferred stock are
payable quarterly and accrue from the most recent date as to which dividends
have been paid. Holders of shares of Series C preferred stock are not entitled
to receive any dividends on their shares of Series C preferred stock.
Notwithstanding the above, if at any time prior to September 15, 2004, McLeodUSA
pays a dividend in cash or property other than in shares of capital stock on its
Class A common stock then McLeodUSA must also declare and pay a dividend on the
Series B preferred stock and Series C preferred stock in an amount equal to that
which would have been paid if the Series B preferred stock and Series C
preferred stock taken together had been converted into McLeodUSA Class A common
stock on the date established as the record date with respect to such dividend
on the McLeodUSA Class A common stock. The dividend shall be distributed to the
holders of the Series B preferred stock and Series C preferred stock according
to the formulas specified in the Series B preferred stock certificate of
designations and Series C preferred stock certificate of designations.
Conversion into McLeodUSA Class A Common Stock; No Other Preemptive or
Conversion Rights. Shares of Series B preferred stock and Series C preferred
stock are convertible, in whole or in part, at any time, at the
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option of the holders of the shares, into shares of McLeodUSA Class A common
stock at the conversion price of $12.1666 per share, subject to adjustment upon
the happening of various events; provided that upon the exercise by any holder
of Series B preferred stock of this conversion option, a proportional amount,
based on the percentage of each series of shares outstanding, of the Series C
preferred stock shall automatically convert in accordance with the terms of the
Series C preferred stock certificate of designations. Except for this conversion
right, the holders of the Series B preferred stock and Series C preferred stock
have no preemptive or preferential right to purchase or subscribe to stock,
obligations, warrants or any other securities of any class of McLeodUSA.
Optional Redemption. Except under certain circumstances set forth in the
McLeodUSA certificate of incorporation (as set forth below), McLeodUSA may not
redeem the Series B preferred stock and Series C preferred stock prior to
September 15, 2006. Thereafter, each share of the Series B preferred stock and
Series C preferred stock may be redeemed, at the option of McLeodUSA, in whole
or in part, at any time or from time to time at a redemption price per share
equal to the liquidation preference of that share, plus accumulated and unpaid
dividends, if any, to the date fixed for redemption, payable in cash; provided
that McLeodUSA shall only be entitled to redeem shares of the Series B Preferred
Stock if shares of the Series C Preferred Stock are also redeemed on a
proportional basis based on the percentage of each series of shares then
outstanding. This type of redemption is referred to herein as an Optional
Redemption.
Notwithstanding any of the foregoing provisions relating to an Optional
Redemption, the McLeodUSA certificate of incorporation provides that McLeodUSA
may redeem shares of any class of its capital stock (including the Series B
preferred stock and Series C preferred stock) to the extent necessary to prevent
the loss or secure the reinstatement of any license, operating authority or
franchise from any governmental agency. Any redemption of shares of Series B
preferred stock and Series C preferred stock under such circumstances will be at
the price, and on the other terms and conditions, specified in the McLeodUSA
certificate of incorporation. These provisions are described below under
"--Certain Charter and Statutory Provisions--Mandatory Redemption."
Mandatory Redemption. To the extent McLeodUSA shall have funds legally
available therefor, during the 180-day period commencing on September 15, 2009,
the holders of the Series B preferred stock and Series C preferred stock shall
have the right to cause McLeodUSA to redeem at any time in whole or from time to
time in part outstanding shares of Series B preferred stock and Series C
preferred stock, if any, at a redemption price per share in cash equal to the
liquidation preference, plus accumulated and unpaid dividends, if any, without
interest; provided that upon any election by holders of the Series B preferred
stock to exercise this redemption right McLeodUSA shall be required to redeem a
proportional amount of the Series C preferred stock.
McLeodUSA Class II Preferred Stock
The McLeodUSA certificate of incorporation authorizes the McLeodUSA board
of directors, from time to time and without further stockholder action, to
provide for the issuance of up to 10,000,000 shares of McLeodUSA Class II
preferred stock, in one or more series, and to fix the relative rights and
preferences of the shares, including voting powers, dividend rights, liquidation
preferences, redemption rights and conversion privileges. As of the record date,
no shares of Class II preferred stock are issued and outstanding. All shares of
Class II preferred stock to be issued, from time to time, in one or more series,
shall rank on a parity with the Series A preferred stock, Series B preferred
stock and Series C preferred stock (the "Existing Preferred Stock") with respect
to dividend rights and rights on liquidation, dissolution and winding up of
McLeodUSA, except (1) where the terms of the series of Class II preferred stock
may expressly provide that such series shall be junior to the Existing Preferred
Stock and (2) subject to any required approval or consent of the holders of
Existing Preferred Stock, the terms of any series of Class II preferred stock
may expressly provide that it shall be senior to the Existing Preferred Stock.
Because of its broad discretion to create and issue McLeodUSA preferred stock
and Class II preferred stock without stockholder approval, the McLeodUSA board
of directors could adversely affect the voting power of the holders of McLeodUSA
Class A common stock and, by issuing shares of McLeodUSA preferred stock and
Class II preferred stock with preferential voting, conversion or redemption
rights, could discourage any attempt to obtain control of McLeodUSA.
STOCKHOLDERS' AGREEMENTS
On March 10, 2000, McLeodUSA entered into a further amendment and
restatement of a stockholders' agreement originally entered into on November 18,
1998 with several of its significant stockholders consisting of Alliant Energy
Corporation and various of its affiliates, Clark and Mary McLeod, and Richard
and Gail Lumpkin and various trusts for the benefit of their family.
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The further amended and restated November 1998 stockholders' agreement
provides, among other things, that:
. until December 31, 2001, the parties will not sell any equity
securities of McLeodUSA, or any other securities convertible into or
exchangeable for equity securities of McLeodUSA, without receiving the
prior written consent of the McLeodUSA board of directors, except for
transfers of the restricted securities specifically permitted by the
agreement
. to the extent the McLeodUSA board of directors approves a transfer of
equity securities of McLeodUSA by a party, the other parties are
automatically granted transfer rights
. the McLeodUSA board of directors will determine on a quarterly basis
the aggregate number, if any, of shares of Class A common stock, not
to exceed in the aggregate 900,000 shares per quarter, that the
parties may sell during designated trading periods following the
release of the quarterly financial results of McLeodUSA
. to the extent the McLeodUSA board of directors grants registration
rights to a party in connection with a sale of securities of McLeodUSA
by that party, it will grant similar registration rights to the other
parties
. the McLeodUSA board of directors will determine for each of 2000 and
2001 the aggregate number, if any, of shares of Class A common stock,
not to exceed in the aggregate on a per year basis a number of shares
equal to 15% of the total number of shares of Class A common stock
beneficially owned by the parties as of December 31, 1998, to be
registered by McLeodUSA under the Securities Act for sale by the
parties
. in any underwritten offering of shares of Class A common stock, other
than an offering on a registration statement on Form S-4 or Form S-8
or any other form which would not permit the inclusion of shares of
Class A common stock owned by the parties, the McLeodUSA board of
directors will determine the aggregate number, if any, of shares of
Class A common stock, not to exceed on a per year basis a number of
shares equal to 15% of the total number of shares of Class A common
stock beneficially owned by the parties as of December 31, 1998, to be
registered by McLeodUSA for sale by the parties in the offering
. McLeodUSA may subsequently determine not to register any shares of the
parties under the Securities Act and may either not file a
registration statement or otherwise withdraw or abandon a registration
statement previously filed
Under the further amended and restated November 1998 stockholders'
agreement, as amended, each party also agreed, until it owns less than 7,500,000
shares of Class A common stock, to vote its shares and take all action within
its power to:
. establish the size of the McLeodUSA board of directors at up to 14
directors
. cause to be elected to the McLeodUSA board of directors one director
designated by Alliant Energy for so long as it owns at least 7,500,000
shares of Class A common stock
. cause to be elected to the McLeodUSA board of directors three
directors who are executive officers of McLeodUSA designated by Clark
McLeod for so long as Clark and Mary McLeod collectively own at least
7,500,000 shares of Class A common stock
. cause Richard Lumpkin to be elected to the McLeodUSA board of
directors for so long as Richard Lumpkin and various other parties
related to Mr. Lumpkin collectively own at least 7,500,000 shares of
Class A common stock
. cause to be elected to the McLeodUSA board of directors up to nine
non-employee directors nominated by the board
The further amended and restated November 1998 stockholders' agreement
terminates on December 31, 2001. In addition, if during each of 2000 and 2001
McLeodUSA has not provided a party a reasonable opportunity to sell an aggregate
number of shares of Class A common stock equal to not less than 15% of the total
number of shares of Class A common stock beneficially owned by a party as of
December 31, 1998, then that party may terminate the agreement as it applies to
that party.
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On March 10, 2000, McLeodUSA also entered into a further amendment and
restatement of a stockholders' agreement originally entered into on January 7,
1999 with the parties to the stockholders' agreement described above and M/C
Investors L.L.C. and Media/Communications Partners III Limited Partnership in
connection with the acquisition by McLeodUSA of Ovation Communications, Inc.
The further amended and restated January 1999 stockholders' agreement
provides that, until December 31, 2001, the M/C entities will not sell any
equity securities of McLeodUSA, or any other securities convertible into or
exchangeable for equity securities of McLeodUSA, received pursuant to
McLeodUSA's acquisition of Ovation Communications, without receiving the prior
written consent of the McLeodUSA board of directors, except for transfers of the
restricted securities specifically permitted by the agreement. The further
amended and restated January 1999 stockholders' agreement also contains various
provisions intended to insure that the M/C entities and the parties to the
further amended and restated November 1998 stockholders' agreement are treated
on a basis generally similar to one another in connection with permitted sales
and registration of securities of McLeodUSA under such agreements. In addition,
for so long as the M/C entities own at least 7,500,000 shares of Class A common
stock, the M/C entities have agreed to vote their shares in accordance with the
voting agreement contained in the further amended and restated November 1998
stockholders' agreement, as amended, and the other parties have agreed to vote
their shares to cause to be elected to the McLeodUSA board of directors one
director designated by the M/C entities.
The further amended and restated January 1999 stockholders' agreement
terminates on December 31, 2001. In addition, if (1) during each of 2000 and
2001, McLeodUSA has not provided the M/C entities an opportunity to register
under the Securities Act for sale an aggregate number of shares of Class A
common stock equal to not less than 15% of the total number of shares of Class A
common stock beneficially owned by the M/C entities as a result of the
acquisition of Ovation Communications, or (2) the further amended and restated
November 1998 stockholders' agreement has been terminated by all parties to such
agreement, then the M/C entities may terminate the further amended and restated
January 1999 stockholders' agreement. The further amended and restated January
1999 stockholders' agreement will be terminated with respect to parties other
than the M/C entities and McLeodUSA at the time as the further amended and
restated November 1998 stockholders' agreement is terminated with respect to
such other parties.
On August 10, 2000, McLeodUSA entered into an amended and restated
stockholders' agreement originally entered into on March 30, 2000 with Kwok Li
and Linsang Partners, LLC, a limited liability company controlled by Mr. Li, in
connection with the acquisition of Splitrock Services by McLeodUSA. Such amended
and restated stockholders' agreement provides, among other things, that:
. until December 31, 2002, Mr. Li and Linsang Partners will not sell
approximately 30.1 million shares of Class A common stock which were
received pursuant to McLeodUSA's acquisition of Splitrock Services
without receiving the prior written consent of the McLeodUSA board of
directors, except for transfers of the restricted securities
specifically permitted by the agreement
. the shares of Class A common stock restricted by the stockholders'
agreement do not include approximately 4.4 million shares of Class A
common stock which were also received by Mr. Li, his wife and Linsang
Partners
. for the period commencing as of August 10, 2000 and ending December
31, 2000, Mr. Li and Linsang Partners may sell up to an aggregate
number of shares of Class A common stock which result in aggregate
gross proceeds of $105 million
. for each of 2001 and 2002, Mr. Li and Linsang may sell up to an
aggregate of 4.2 million shares of Class A common stock, provided that
if Mr. Li and Linsang transfer more than 200,000 shares of Class A
common stock on any single day and McLeodUSA determines that such
transfer has adversely affected its stock price, then McLeodUSA may
impose a 30 day suspension period on any further sales by the parties
. Mr. Li may pledge to a nationally recognized financial institution
certain shares of Class A common stock to permit certain financings by
Mr. Li, provided the pledgee of such shares takes the shares subject
to the restrictions in the stockholders' agreement
. the stockholders' agreement terminates on December 31, 2002
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LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitations of Director Liability. Section 102(b)(7) of the Delaware
General Corporation Law authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care. Although
Section 102(b)(7) does not change directors' duty of care, it enables
corporations to limit available relief to equitable remedies such as injunction
or rescission. The McLeodUSA certificate of incorporation limits the liability
of directors to McLeodUSA or its stockholders to the full extent permitted by
Section 102(b)(7). Specifically, directors of McLeodUSA are not personally
liable for monetary damages to McLeodUSA or its stockholders for breach of the
director's fiduciary duty as a director, except for liability for:
. any breach of the director's duty of loyalty to McLeodUSA or its
stockholders
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law
. any transaction from which the director derived an improper personal
benefit
Indemnification. To the maximum extent permitted by law, the McLeodUSA
bylaws provide for mandatory indemnification of directors and officers of
McLeodUSA against any expense, liability or loss to which they may become
subject, or which they may incur as a result of being or having been a director
or officer of McLeodUSA. In addition, McLeodUSA must advance or reimburse
directors and officers for expenses incurred by them in connection with
indemnifiable claims. McLeodUSA also maintains directors' and officers'
liability insurance.
CERTAIN CHARTER AND STATUTORY PROVISIONS
Classified Board. The McLeodUSA certificate of incorporation provides for
the division of the McLeodUSA board of directors into three classes of
directors, serving staggered three-year terms. The McLeodUSA certificate of
incorporation further provides that the approval of the holders of at least two-
thirds of the shares entitled to vote on the certificate of incorporation and
the approval of a majority of the entire McLeodUSA board of directors are
necessary for the alteration, amendment or repeal of specific sections of the
McLeodUSA certificate of incorporation relating to the election and
classification of the McLeodUSA board of directors, limitation of director
liability, indemnification and the vote requirements for these amendments to the
McLeodUSA certificate of incorporation. These provisions may have the effect of
deterring hostile takeovers or delaying changes in control or management of
McLeodUSA.
Section 203 of the Delaware General Corporation Law. McLeodUSA is subject
to the provisions of Section 203 of the Delaware General Corporation Law. In
general, this statute prohibits a publicly held Delaware corporation such as
McLeodUSA from engaging in a business combination with an interested stockholder
for a period of three years after the date of the transaction in which the
person became an interested stockholder, unless:
. prior to that date, the corporation's board of directors approved
either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder,
. upon consummation of the transaction that resulted in that person
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding, for purposes of determining
the number of shares outstanding, shares owned by specified directors
or specified employee stock plans, or
. on or after the date the stockholder became an interested stockholder,
the business combination is approved by the corporation's board of
directors and authorized by the affirmative vote, and not by written
consent, of at least two-thirds of the outstanding voting stock of the
corporation excluding that stock owned by the interested stockholder
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person, other than the corporation and any direct or indirect
wholly-owned subsidiary of the corporation, who together with affiliates and
associates, owns or, as an affiliate or associate, within three years prior, did
own 15% or more of the corporation's outstanding voting stock.
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Section 203 expressly exempts from the requirements described above any
business combination by a corporation with an interested stockholder who became
an interested stockholder at a time when the section did not apply to the
corporation. As permitted by the Delaware General Corporation Law, the original
McLeodUSA certificate of incorporation provided that it would not be governed by
Section 203. Several stockholders, including Clark and Mary McLeod and Alliant
Energy Corporation, became interested stockholders within the meaning of Section
203 while that certificate of incorporation was in effect. Accordingly, future
transactions between McLeodUSA and any of these stockholders will not be subject
to the requirements of Section 203.
Mandatory Redemption. The McLeodUSA certificate of incorporation empowers
the McLeodUSA board of directors to redeem any of the McLeodUSA outstanding
capital stock at a price determined by the McLeodUSA board of directors, which
price will be at least equal to the lesser of:
. fair market value, as determined in accordance with the McLeodUSA
certificate of incorporation, or
. in the case of a "Disqualified Holder," such holder's purchase price,
if the stock was purchased within one year of such redemption,
. to the extent necessary to prevent the loss or secure the
reinstatement of any license, operating authority or franchise from
any governmental agency. A "Disqualified Holder" is any holder of
shares of stock of McLeodUSA whose holding of McLeodUSA stock may
result in the loss of, or failure to secure the reinstatement of, any
license or franchise from any governmental agency held by McLeodUSA or
any of its subsidiaries to conduct any portion of the business of
McLeodUSA or any of its subsidiaries. Under the Telecommunications Act
of 1996, non-U.S. citizens or their representatives, foreign
governments or their representatives, or corporations organized under
the laws of a foreign country may not own, in the aggregate, more than
20% of a common carrier licensee or more than 25% of the parent of a
common carrier licensee if the FCC determines that the public interest
would be served by prohibiting this ownership.
Unanimous Written Consent to Stockholder Action Without a Meeting. The
McLeodUSA certificate of incorporation provides that no corporate stockholder
action may be taken without a meeting of stockholders unless there is unanimous
written consent of the McLeodUSA stockholders, except to the extent otherwise
provided under the terms of any series of McLeodUSA preferred stock or Class II
preferred stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the McLeodUSA Class A common stock is
Wells Fargo Bank Minnesota, N.A.
COMPARISON OF McLEODUSA CLASS A COMMON STOCK AND CAPROCK COMMON STOCK
The rights of CapRock stockholders are currently governed by the Texas
Business Corporation Act, the CapRock articles of incorporation and the CapRock
bylaws. In accordance with the merger agreement, at the effective time of the
merger each issued and outstanding share of CapRock common stock will be
converted into the right to receive 0.3876 of a share of McLeodUSA Class A
common stock. Accordingly, upon completion of the merger, the rights of CapRock
stockholders who become stockholders of McLeodUSA will be governed by the
Delaware General Corporation Law and the McLeodUSA certificate of incorporation
and bylaws. The following are summaries of the material differences between the
rights of CapRock stockholders and the rights of McLeodUSA stockholders. For
additional information, see "Where You Can Find More Information."
Authorized Capital
CapRock. As of the record date, the authorized capital stock of CapRock
consisted of (1) 200,000,000 shares of CapRock common stock, par value $.01 per
share, of which [_________] shares were issued and outstanding and (2)
20,000,000 shares of preferred stock, par value $.01 per share, of which no
shares were issued and outstanding.
McLeodUSA. As of the record date, the authorized capital stock of McLeodUSA
consisted of (1) 2,000,000,000 shares of McLeodUSA Class A common stock, of
which [__________] shares were issued and outstanding; (2) 22,000,000 shares of
McLeodUSA Class B common stock, par value $.01 per share, of which no
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shares were issued and outstanding; (3) 2,000,000 shares of McLeodUSA serial
preferred stock, par value $.01 per share, of which (a) [__________] shares of
6.75% Series A cumulative convertible preferred stock, par value $.01 per share,
(b) 275,000 shares of Series B cumulative convertible preferred stock, par value
$.01 per share, and (c) 125,000 shares of Series C convertible preferred stock,
par value $.01 per share, were issued and outstanding; and (4) 10,000,000 shares
of Class II serial preferred stock, par value $.001 per share, of which no
shares were issued and outstanding.
Board of Directors
CapRock. Under the Texas Business Corporation Act, the articles of
incorporation or bylaws of a corporation may set the number of directors or
provide the manner of determining the number of directors. The CapRock bylaws
provide the number of directors of CapRock will not be less than one and will be
determined from time to time by resolution adopted by the CapRock stockholders
or the CapRock board of directors. The current number of CapRock directors is
six. The Texas Business Corporation Act permits the bylaws of a corporation to
provide that directors be divided into classes. The CapRock bylaws do not
provide for classification of the board of directors. Under the Texas Business
Corporation Act and the CapRock bylaws, directors are elected at the annual
stockholders meeting by a plurality of the voting rights represented by the
shares present in person or represented by proxy and entitled to vote in the
election, and hold office until the next annual meeting of stockholders and
until his or her successor is duly elected and qualified.
The Texas Business Corporation Act and the CapRock bylaws provide that a
quorum at any meeting of the CapRock board of directors consists of a majority
of the total number of directors. The CapRock bylaws provide that a majority of
the directors present at any meeting at which a quorum is present is required to
approve any CapRock board of directors' action, except for the appointment of
committees by the CapRock board of directors, which requires a majority of the
full board of directors, and the filling of vacancies on the board of directors,
which may be acted upon by a majority of the remaining directors, though less
than a quorum.
McLeodUSA. The Delaware General Corporation Law permits the certificate of
incorporation or the bylaws of the corporation to govern the number and terms of
directors. The McLeodUSA certificate of incorporation provides that the number
of directors will be specified in the McLeodUSA bylaws. Under the McLeodUSA
bylaws, the number of McLeodUSA directors will be between three and 15, with the
specific number determined by resolution of the McLeodUSA board of directors.
The current number of McLeodUSA directors is 13. The Delaware General
Corporation Law permits the certificate of incorporation to provide for the
division of directors into up to three classes, with the term of office of each
class of directors expiring in successive years. Under the McLeodUSA certificate
of incorporation, the McLeodUSA board of directors is divided into three classes
as nearly equal in number as possible, and the McLeodUSA directors are elected
for three-year terms by a plurality of the voting rights represented by the
shares present in person or represented by proxy at the annual stockholders
meeting and entitled to vote in the election.
Under the McLeodUSA bylaws, a quorum at any meeting of the McLeodUSA board
of directors consists of a majority of the total number of directors, and a
majority of the directors present at any meeting at which a quorum is present,
is required to approve any McLeodUSA board of directors' action except as may be
otherwise specifically provided by the Delaware General Corporation Law, or the
McLeodUSA certificate of incorporation or bylaws.
Cumulative Voting
CapRock. Under the Texas Business Corporation Act, stockholders are allowed
to cumulate their votes in the election of directors unless prohibited in the
corporation's articles of incorporation. The CapRock articles of incorporation
expressly prohibit cumulative voting.
McLeodUSA. The Delaware General Corporation Law permits cumulative voting
for the election of directors if provided for by the certificate of
incorporation. The McLeodUSA certificate of incorporation does not provide for
cumulative voting.
Newly Created Directorships and Vacancies
CapRock. Under the Texas Business Corporation Act, the number of directors
may be increased or decreased by amendment to, or in the manner provided in, the
articles of incorporation or the bylaws, but any
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decrease may not shorten the term of any incumbent director. Under the CapRock
bylaws, the number of directors may be increased or decreased by resolution of
the CapRock stockholders or the CapRock board of directors. Under the Texas
Business Corporation Act and the CapRock bylaws, any directorship to be filled
by reason of an increase in the number of directors may be filled by election at
an annual or special meeting of stockholders called for that purpose or by the
vote of the CapRock board of directors, for the term of office continuing only
until the next election of directors by the stockholders. The board of directors
may not fill more than two such directorships during the period between two
successive annual meetings of stockholders.
Under the Texas Business Corporation Act and the CapRock bylaws, any
vacancy occurring in the board of directors may be filled by election at an
annual or special meeting of stockholders called for that purpose or by the vote
of a majority of the remaining directors, even if less than a quorum of the
board of directors. A director elected to fill a vacancy will be elected for the
unexpired term of his or her predecessor in office.
McLeodUSA. Under the Delaware General Corporation Law and the McLeodUSA
certificate of incorporation, vacancies and newly created directorships
resulting from an increase in the authorized number of directors elected by all
of the holders of McLeodUSA Class A common stock and McLeodUSA Class B common
stock may be filled by a majority of the McLeodUSA directors then in office,
even if less than a quorum, or by a sole remaining director. When the number of
directors is changed, any newly created or eliminated directorship will be
apportioned among the classes of directors so as to make all classes as nearly
equal in number as possible. A decrease in the number of directors may not
shorten the term of the incumbent director.
Removal of Directors
CapRock. Under the Texas Business Corporation Act and the CapRock bylaws,
any director or the entire board of directors of a corporation with an
unclassified board, such as CapRock, may be removed, with or without cause, by
the vote of the holders of a majority of the shares entitled to vote at any
meeting of stockholders called expressly for such purpose.
McLeodUSA. Neither the McLeodUSA certificate of incorporation nor the
bylaws includes a provision setting forth the procedure for the removal of
directors. Under the Delaware General Corporation Law, any director or the
entire board of directors of a corporation with a classified board, such as
McLeodUSA, may be removed by the holders of a majority of shares then entitled
to vote at an election of directors, but only for cause.
Committees of the Board of Directors
CapRock. Under the Texas Business Corporation Act and the CapRock bylaws,
the CapRock board of directors may designate one or more committees, from among
its members. The CapRock bylaws provide that these committees may be appointed
by a resolution adopted by a majority of the full CapRock board of directors.
The CapRock board of directors currently has an audit committee, a compensation
committee and a nominating committee.
McLeodUSA. Under the Delaware General Corporation Law and the McLeodUSA
bylaws, the McLeodUSA board of directors may designate one or more committees,
which must consist of McLeodUSA directors. The McLeodUSA board of directors
currently has a compensation committee, an audit committee and an executive
committee.
Officers
CapRock. Under the Texas Business Corporation Act and the CapRock bylaws,
the CapRock principal officers consist of a President and a Secretary, elected
by the CapRock board of directors. The CapRock board of directors may elect or
appoint a chairman of the board and other officers and assistant officers. Any
two or more offices may be held by the same person. Under the CapRock bylaws,
the board of directors may remove any officer when it deems removal will serve
the best interest of CapRock, by a majority vote of the directors present at a
meeting of the CapRock board of directors where a quorum is represented.
McLeodUSA. Under the Delaware General Corporation Law and the McLeodUSA
bylaws, the McLeodUSA officers consist of a President, a Secretary and a
Treasurer, and other officers and assistant officers as may be elected or
appointed by the McLeodUSA board of directors. Any number of offices may be held
by the same person, except that in no event shall the President and Secretary be
the same person. The McLeodUSA board of
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directors may remove any officer, with or without cause, by the affirmative vote
of a majority of the McLeodUSA board of directors.
Special Meetings of Stockholders
CapRock. The Texas Business Corporation Act provides that a special meeting
of stockholders may be called by the president, the board of directors or other
persons authorized in the corporation's articles of incorporation or bylaws, or
by holders of not less than 10% of all shares entitled to vote at the meeting,
unless the articles of incorporation provide for a different percentage not
greater than 50%. The CapRock bylaws provide that special meetings of
stockholders may be called by the chief executive officer, the president, the
board of directors, or the holders of not less than 10% of all shares entitled
to vote at the meeting.
McLeodUSA. Under the Delaware General Corporation Law, the board of
directors or any person authorized in the corporation's certificate of
incorporation or bylaws may call a special meeting of stockholders. Under the
McLeodUSA bylaws, a special meeting of the McLeodUSA stockholders may be called
by the board of directors, the chairperson, the chief executive officer or the
president.
Quorum at Stockholder Meetings
CapRock. Under the Texas Business Corporation Act and the CapRock bylaws,
the holders of record of a majority of the shares entitled to vote at a
stockholder meeting, present in person or represented by proxy, constitute a
quorum for the transaction of business. In the absence of a quorum, the
stockholders present in person or represented by proxy at a meeting may adjourn
the meeting until a quorum is present or represented.
McLeodUSA. Under the McLeodUSA bylaws, the holders of a majority of the
voting rights represented by the shares issued and outstanding and entitled to
vote at the meeting, and who are present in person or represented by proxy,
constitute a quorum at all meetings of the stockholders for the transaction of
business. Where a separate vote by a class or classes is required, a majority of
the outstanding shares of the class or classes, present in person or represented
by proxy, will constitute a quorum entitled to take action with respect to that
vote on that matter. The holders of a majority of the voting rights represented
by the shares represented at a meeting, whether or not a quorum is present, may
adjourn the meeting from time to time.
Stockholder Action by Written Consent
CapRock. Under the Texas Business Corporation Act, stockholders may take
any action without a meeting, without prior notice and without a vote if all
stockholders entitled to vote on the matter consent to the action in writing. If
a corporation's articles of incorporation so provide, stockholders may take any
action under the Texas Business Corporation Act by a consent signed by the
holders of shares having not less than the minimum number of votes that would be
necessary to take such action at a meeting. The CapRock articles of
incorporation and bylaws provide that any action required to be taken or that
may be taken at any meeting of stockholders, may be taken without a meeting,
without prior notice, and without a vote, if written consents are signed by the
holders of shares having not less than the minimum number of votes that would be
necessary to take such action at a meeting.
McLeodUSA. Under the Delaware General Corporation Law unless the
certificate of incorporation provides otherwise, stockholders may take any
action without a meeting, without prior notice and without a vote, if written
consents are signed by the holders of not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting. Under the
McLeodUSA certificate of incorporation, the McLeodUSA stockholders may not take
corporate action without a meeting unless there is unanimous written consent of
the stockholders entitled to vote on the matter, except to the extent otherwise
provided under the terms of any series of preferred stock or Class II preferred
stock.
Advance Notice of Stockholder-Proposed Business at Annual Meetings
CapRock. Neither the CapRock articles of incorporation nor the bylaws
include a provision which requires that advance notice be given to CapRock of
stockholder-proposed business to be conducted at annual meetings.
McLeodUSA. Neither the McLeodUSA certificate of incorporation nor the
bylaws include a provision which requires that advance notice be given to
McLeodUSA of stockholder-proposed business to be conducted at annual meetings.
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Amendment of Governing Documents
CapRock. Under the Texas Business Corporation Act, an amendment of the
articles of incorporation requires a resolution of the board of directors and
the approval of the holders of at least two-thirds of the outstanding shares
entitled to vote on the amendment, unless the articles of incorporation require
the vote of a different number, not less than a majority, of shares. Each class
or series of stock affected must also approve by at least a two-thirds vote
amendments that make changes that adversely affect the rights of that class or
series, unless the articles of incorporation require a vote of a different
number, not less than a majority, of shares. The CapRock articles of
incorporation require only a majority of the outstanding shares entitled to vote
on the amendment to approve the amendment. If any class or series of shares is
entitled to vote as a class on the amendment, a majority of the outstanding
shares within each class or series entitled to vote must approve the amendment
in addition to a majority of the outstanding shares otherwise entitled to vote
on the amendment.
Under the Texas Business Corporation Act, a corporation's board of
directors may amend or repeal the corporation's bylaws or adopt new bylaws
unless (1) the articles of incorporation reserve the power exclusively to the
stockholders in whole or in part or (2) the stockholders in amending, repealing
or adopting a particular bylaw expressly provide that the board of directors may
not amend or repeal that bylaw. Unless the articles of incorporation or a bylaw
adopted by the stockholders provide otherwise, the stockholders may amend,
repeal or adopt bylaws even though the bylaws may also be amended, repealed or
adopted by the board of directors. Neither the CapRock articles of incorporation
nor the bylaws provide otherwise, nor do they restrict the CapRock board of
directors in amending or repealing the bylaws.
McLeodUSA. Under the Delaware General Corporation Law, an amendment to a
corporation's certificate of incorporation requires the recommendation of a
corporation's board of directors, the approval of a majority of all shares
entitled to vote on the amendment, voting together as a single class, and the
approval of a majority of the outstanding stock of each class entitled to vote
separately on the amendment unless a higher vote is required in the
corporation's certificate of incorporation. The McLeodUSA certificate of
incorporation provides that it may be amended in accordance with and as
prescribed by Delaware law. The McLeodUSA certificate of incorporation further
provides that the affirmative vote of at least two-thirds of the voting rights
represented by the shares entitled to vote on the amendment and the affirmative
vote of a majority of the entire McLeodUSA board of directors is required to
amend, alter or repeal Sections 5.1 (election of directors) and 5.3 (limitation
of liability), Article 6 (indemnification), and Article 8 (amendment of
certificate of incorporation) of the McLeodUSA certificate of incorporation.
Under the Delaware General Corporation Law, stockholders have the power to
amend, adopt or repeal a corporation's bylaws. The corporation's certificate of
incorporation may also grant this power to the board of directors. The McLeodUSA
certificate of incorporation grants the McLeodUSA board of directors the power
to adopt, amend and repeal the McLeodUSA bylaws.
Vote Required for Mergers
CapRock. Under the Texas Business Corporation Act, a merger may become
effective without the approval of the surviving corporation's stockholders in
certain circumstances. Where stockholder approval is necessary, approval of a
merger requires a two-thirds affirmative vote of the outstanding shares entitled
to vote on the merger, and in circumstances where a class or series of shares
are entitled to vote as a class, the merger must be approved by the holders of
two-thirds of the outstanding shares of each class or series entitled to vote,
unless the articles of incorporation otherwise require a different number of
shares. The CapRock articles of incorporation and bylaws require the affirmative
vote of a majority of the outstanding shares, or class of shares, entitled to
vote on such action.
McLeodUSA. Under the Delaware General Corporation Law, a merger may become
effective without the approval of the corporation's stockholders in certain
circumstances. Where stockholder approval is required, a merger may be adopted
by the affirmative vote of a majority of the outstanding stock entitled to vote
on the merger.
Required Vote for Disposition of Assets
CapRock. Under the Texas Business Corporation Act, the sale, lease,
exchange or other disposition of all, or substantially all, the property and
assets of a corporation if not made in the usual and regular course of business
requires the approval of the holders of at least two-thirds of the outstanding
shares entitled to vote thereon, unless
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the articles of incorporation require the vote of a different number of shares.
The CapRock articles of incorporation and bylaws require the affirmative vote of
a majority of the outstanding shares, or class of shares, entitled to vote on
such action.
McLeodUSA. Under the Delaware General Corporation Law, a corporation may
sell, lease or exchange all or substantially all of its property and assets if
authorized by a majority of the outstanding stock entitled to vote on the
disposition.
Preemptive Rights
CapRock. Under the Texas Business Corporation Act, a stockholder has
preemptive rights, unless the articles of incorporation limit those rights. The
CapRock articles of incorporation expressly deny preemptive rights to any holder
of shares of any class of stock of CapRock, solely as a result of being a
stockholder. The CapRock articles of incorporation, however, reserve the right
of CapRock to grant preemptive rights by contract.
McLeodUSA. Under the Delaware General Corporation Law, a stockholder does
not have preemptive rights unless the corporation's certificate of incorporation
specifically grants those rights. The McLeodUSA certificate of incorporation
does not grant preemptive rights.
Business Combination with an Interested Stockholder
CapRock. Part 13 of the Texas Business Corporation Act generally prevents
an "affiliated" stockholder or its affiliates or associates from entering into
or engaging in a "business combination" with a public corporation during the
three-year period immediately following the affiliated stockholder's acquisition
of shares unless specific conditions are satisfied. This prohibition does not
apply to public corporations whose original articles of incorporation contain a
provision expressly electing not to be governed by this Part 13. The original
CapRock articles of incorporation expressly elect not to be governed by Part 13
of the Texas Business Corporation Act.
McLeodUSA. McLeodUSA is subject to the provisions of Section 203 of the
Delaware General Corporation Law as generally described above under "--Certain
Charter and Statutory Provisions--Section 203 of the Delaware General
Corporation Law."
Dissenters' Appraisal Rights
CapRock. Under the Texas Business Corporation Act, a stockholder is
entitled to dissent from and obtain the appraised value of his or her shares in
connection with any plan of merger or exchange or disposition of all or
substantially all, of the corporation's assets if the Texas Business Corporation
Act requires a stockholder vote on the action.
However, a stockholder does not have the right to dissent from any plan of
merger in which there is a single surviving or new corporation, or from any plan
of exchange, if (1) the shares held by the stockholder are listed on a national
securities exchange, listed on the Nasdaq Stock Market, designated a national
market security by the National Association of Securities Dealers, Inc. or held
of record by not less than 2,000 stockholders; (2) the stockholder is not
required by the terms of the plan of merger or the plan of exchange to accept
for his or her shares any consideration that is different than the consideration
to be provided to any other holder of shares of the same class or series; and
(3) the stockholder is not required by the terms of the plan of merger or the
plan of exchange to accept for his or her shares consideration other than shares
of a corporation which immediately after the effective date of the merger will
be listed on a national securities exchange, approved for quotation as a
national market security by the National Association of Securities Dealers,
Inc., held of record by not less than 2,000 stockholders, or cash in lieu of
fractional shares the stockholder is otherwise entitled to receive.
McLeodUSA. Under the Delaware General Corporation Law, stockholders
generally have the right to demand and receive payment in cash for the fair
value of their stock in an appraisal proceeding in lieu of the consideration
stockholders would otherwise receive in a merger or consolidation if the terms
of the agreement of merger or consolidation require the stockholder to accept in
exchange for his shares anything other than shares of stock in the corporation
surviving or resulting from the merger or consolidation, shares of any other
corporation that at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a national
market system security by the National Association of Securities Dealers, Inc.,
or held or record by more than 2,000 holders, cash in lieu of fractional shares,
or any combination thereof. A stockholder does
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not have appraisal rights if the shares of the corporation are listed on a
national securities exchange or designated as a national market system security
by the National Association of Securities Dealers, Inc. or held of by record by
more than 2,000 holders, or if the corporation will be the surviving corporation
of a merger and the merger does not require the vote of the corporation's
stockholders.
A Delaware corporation's certificate of incorporation may provide that
appraisal rights shall be available in the event of the sale of all or
substantially all of a corporation's assets or adoption of an amendment to its
certificate of incorporation. The McLeodUSA certificate of incorporation does
not provide for such rights.
Dividends
CapRock. Under the Texas Business Corporation Act, the board of directors
of a corporation may authorize a corporation to make distributions only out of
its surplus (the excess of net assets over stated capital). Under the CapRock
articles of incorporation, the holders of shares of CapRock common stock are
entitled to receive cash dividends, when and if declared by the CapRock board of
directors, subject to the preferences of the CapRock preferred stock.
McLeodUSA. Under the Delaware General Corporation Law, a corporation may
pay dividends out of surplus. If there is no surplus, dividends may be declared
out of net profits for the current or preceding fiscal year unless the capital
of the corporation has been decreased to an amount less than the aggregate
amount of the capital represented by the issued and outstanding stock having a
preference upon the distribution of assets. Under the McLeodUSA certificate of
incorporation, holders of shares of McLeodUSA Class A common stock are entitled
to receive dividends equally on each share, when and if declared by the
McLeodUSA board of directors out of assets legally available therefor, after
payment of all dividends to holders of shares of any class of stock having
preference over the Class A common stock.
Liquidation Rights
CapRock. Under the Texas Business Corporation Act, a corporation
liquidating its assets must satisfy its debts and liabilities followed by
distributions to its stockholders, according to their respective rights and
interests. The CapRock articles of incorporation provide that upon liquidation,
dissolution or winding up of CapRock, after payment in full has been made to
holders of any series of preferred stock ranking senior to the CapRock common
stock, the holders of CapRock common stock are entitled to receive, pro rata,
all of the remaining assets and funds of CapRock.
McLeodUSA. Under the Delaware General Corporation Law, a dissolved
corporation or successor entity must pay claims against the corporation,
followed by unpaid dividends to the holders of preferred stock before making
distributions to the holders of common stock. Under the McLeodUSA certificate of
incorporation, in the event of any dissolution, liquidation, or winding up of
McLeodUSA, the holders of McLeodUSA Class A common stock shall become entitled
to participate in the distribution of any assets of McLeodUSA remaining after
McLeodUSA has paid all debts and liabilities and the full preferential amounts
due to any class of McLeodUSA stock having preference over McLeodUSA Class A
common stock.
Indemnification of Directors and Officers
CapRock. Under the Texas Business Corporation Act, a corporation is
permitted to provide indemnification or advancement of expenses against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by a person in connection with a proceeding resulting from that person
being or having been a director, officer or agent of the corporation only if
that person conducted himself in good faith; in the case of conduct in his
official capacity, he reasonably believed that his conduct was in the
corporation's best interests; in all other cases, he reasonably believed that
his conduct was at least not opposed to the corporation's best interests; and in
the case of any criminal proceeding, he had no reasonable cause to believe his
conduct was unlawful. If, however, the person is found liable to the corporation
or is found liable on the basis that he received improper personal benefit,
indemnification is limited to the reasonable expenses actually incurred by the
person in connection with the proceeding. Indemnification will not be available
if the person is found liable for willful or intentional misconduct in the
performance of his duty to the corporation.
Under the Texas Business Corporation Act, any of the following can
determine whether indemnification is appropriate under Texas law: a majority
vote of a quorum consisting of directors who at the time of the vote are not
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party to the proceeding; if such a quorum cannot be obtained, a majority vote of
a special committee of the board of directors consisting of at least two
directors who at the time of the vote are not party to the proceeding; special
legal counsel; or stockholder vote excluding shares held by directors party to
the proceeding.
Under the Texas Business Corporation Act a corporation must indemnify a
director if the director is wholly successful, on the merits or otherwise, in
the defense of the proceeding.
The CapRock articles of incorporation and bylaws provide that CapRock will
indemnify and advance expenses to the maximum extent permitted by Texas law.
Under the Texas Business Corporation Act and the CapRock bylaws, CapRock may
purchase and maintain liability insurance or make other arrangements for such
director indemnification.
McLeodUSA. McLeodUSA is subject to Section 145 of the Delaware General
Corporation Law pertaining to indemnification of officers and directors, as
generally described above under "--Description of McLeodUSA Capital Stock--
Limitation on Liability and Indemnification."
Limitation of Personal Liability of Directors
CapRock. Under the Texas Miscellaneous Corporation Laws Act, a
corporation's articles of incorporation may eliminate or limit all monetary
liability of directors to the corporation or its stockholders for conduct in the
performance of the director's duties. A corporation may not limit the liability
of a director for a breach of the director's duty of loyalty to the corporation
or its stockholders, an act or omission not in good faith, an act or omission
that involves intentional misconduct or a knowing violation of the law,
obtaining an improper personal benefit from the corporation, or violating
applicable statutes that expressly provide for the liability of a director. The
CapRock articles of incorporation eliminate the monetary liability of CapRock's
directors to the fullest extent permitted by law.
McLeodUSA. McLeodUSA is subject to Section 102(b)(7) of the Delaware
General Corporation Law which authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care as generally
described above under "--Description of McLeodUSA Capital Stock--Limitation on
Liability and Indemnification."
Inspection of Books and Records
CapRock. Under the Texas Business Corporation Act, any person who has been
a stockholder of record for at least six months preceding his demand, or who is
the holder of at least five percent of all of the outstanding shares of a
corporation, is entitled to examine the corporation's books and records for any
proper purpose.
McLeodUSA. Under the Delaware General Corporation Law, any stockholder of a
Delaware corporation making a written demand may examine the corporation's books
and records for any proper purpose.
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LEGAL MATTERS
The validity of the McLeodUSA Class A common stock offered in the merger
will be passed upon by Hogan & Hartson L.L.P., Washington, D.C.
Federal income tax consequences relating to the merger will be passed upon
for CapRock by Munsch Hardt Kopf & Harr, P.C., Dallas, Texas.
EXPERTS
The consolidated financial statements and schedule of McLeodUSA and
subsidiaries as of December 31, 1999 and 1998, and for each of the three years
ended December 31, 1999, incorporated by reference in this registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements of Splitrock Services, Inc. as of
December 31, 1999 and 1998, and for the period from March 5, 1997 (date of
inception) to December 31, 1997 and for each of the two years in the period
ended December 31, 1999, incorporated by reference in this registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements of CapRock Communications Corp. as of
December 31, 1998 and 1999 and for each of the years in the three-year period
ended December 31, 1999 are incorporated by reference in this registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, incorporated by reference herein and, upon the authority of said
firm as experts in accounting and auditing.
OTHER MATTERS
As of the date of this proxy statement/prospectus, the CapRock board of
directors does not know of any matters that will be presented for consideration
at the special meeting other than as described in this proxy
statement/prospectus. However, the enclosed proxies will confer discretionary
authority on the individuals named as proxies to vote the shares represented by
the proxies as to any other matters that come before the special meeting and are
voted upon. The individuals named as proxies intend to vote in accordance with
their best judgment as to any other such matters.
SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS
CapRock will hold an annual meeting of its stockholders in the year 2001
only if the merger has not already been completed. If an annual meeting is held,
a proposal by a stockholder intended to be included in the proxy statement and
form of proxy related to the 2001 CapRock annual meeting of stockholders must be
received by CapRock no later than January 15, 2001, pursuant to the proxy
soliciting rules of the SEC.
For any proposal that is not submitted for inclusion in next year's proxy
statement but is instead presented directly at the 2001 CapRock annual meeting
of stockholders, the CapRock management will be able to vote proxies in its
discretion if CapRock:
. receives notice of the proposal before the close of business on March
31, 2001, and advises stockholders in the 2001 proxy statement about
the nature of the matter and how the CapRock management intends to
vote on such matter or
. does not receive notice of the proposal prior to the close of business
on March 31, 2001
WHERE YOU CAN FIND MORE INFORMATION
McLeodUSA has filed a registration statement with the SEC of which this
proxy statement/prospectus forms a part. The registration statement registers
the distribution to CapRock stockholders of the shares of McLeodUSA Class A
common stock to be issued in connection with the merger. The registration
statement, including the attached exhibits and schedules, contains additional
relevant information about McLeodUSA Class A
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common stock. The rules and regulations of the SEC allow McLeodUSA to omit some
of the information included in the registration statement from this proxy
statement/prospectus.
In addition, both McLeodUSA and CapRock have filed reports, proxy
statements and other information with the SEC under the Securities Exchange Act.
You may read and copy any of this information at the following locations of the
SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661-2511
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, like McLeodUSA and CapRock,
that file electronically with the SEC. The address of that site is
http://www.sec.gov. The SEC file number for McLeodUSA's documents filed under
the Securities Exchange Act is 0-20763, and the SEC file number for CapRock's
documents filed under the Securities Exchange Act is 0-24581.
The SEC allows McLeodUSA and CapRock to "incorporate by reference"
information into this proxy statement/prospectus. This means that McLeodUSA and
CapRock can disclose important information to you by referring you to another
document filed separately with the SEC. The information incorporated by
reference is considered to be a part of this proxy statement/prospectus, except
for any information that is superseded by information included directly in this
document.
This proxy statement/prospectus incorporates by reference the documents
listed below that McLeodUSA and CapRock have previously filed or will file with
the SEC. They contain important information about McLeodUSA and CapRock and
their financial condition.
McLeodUSA SEC Filings (File No. 0-20763)
. Annual Report on Form 10-K for its fiscal year ended December 31,
1999, filed on March 30, 2000
. Quarterly Reports on Form 10-Q for the quarterly periods ended March
31, 2000 and June 30, 2000, filed on May 15, 2000 and August 14, 2000,
respectively
. Current Reports on Form 8-K filed on January 19, 2000, January 21,
2000, February 3, 2000, February 11, 2000, March 14, 2000, April 14,
2000, May 24, 2000, June 1, 2000 and October 13, 2000, and the amended
Current Report on Form 8-K/A filed on June 13, 2000
. All documents filed with the SEC by McLeodUSA under Sections 13(a),
13(c), 14 and 15(d) of the Securities Exchange Act after the date of
this proxy statement/prospectus and prior to the date of the special
meeting are considered to be a part of this proxy
statement/prospectus, effective the date such documents are filed
. The description of McLeodUSA Class A common stock set forth in the
McLeodUSA registration statement filed under Section 12 of the
Securities Exchange Act on Form 8-A on May 24, 1996, including any
amendment or report filed with the SEC for the purpose of updating
such description
. The consolidated financial statements of Splitrock Services, Inc. and
subsidiary appearing on pages F-1 through F-16 of the Registration
Statement on Form S-4 (Registration No. 333-48248) filed October 19,
2000
CapRock SEC Filings (File No. 0-24581)
. Annual Report on Form 10-K for its fiscal year ended December 31,
1999, filed on March 30, 2000
. Quarterly Reports on Form 10-Q for the quarterly periods ended March
31, 2000 and June 30, 2000 filed on May 15, 2000 and August 14, 2000,
respectively
93
. Current Reports on Form 8-K filed on April 20, 2000, July 10, 2000
(two), August 3, 2000, August 16, 2000 and October 10, 2000
. All documents filed with the SEC by CapRock under Sections 13(a),
13(c), 14 and 15(d) of the Securities Exchange Act after the date of
this proxy statement/prospectus and prior to the date of the special
meeting are considered to be a part of this proxy
statement/prospectus, effective the date such documents are filed
. The description of CapRock common stock set forth in the CapRock
registration statement filed under Section 12 of the Securities
Exchange Act on Form 8-A on July 6, 1998, including any amendment or
report filed with the SEC for the purpose of updating such description
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
You can obtain any of the documents listed above from the SEC, through the
SEC's Internet Web site at the address described above, or directly from
McLeodUSA or CapRock, by requesting them in writing or by telephone at the
following addresses:
McLeodUSA Incorporated CapRock Communications Corp.
McLeodUSA Technology Park 15601 Dallas Parkway,
6400 C Street SW, P.O. Box 3177 Suite 700
Cedar Rapids, IA 52406-3177 Dallas, TX 75001
Attn: General Counsel Attn: Chief Financial Officer
Telephone (319) 790-7775 Telephone (972) 982-9550
These documents are available from McLeodUSA and CapRock without charge,
excluding any exhibits to them unless the exhibit is specifically listed as an
exhibit to the registration statement of which this proxy statement/prospectus
forms a part. If you request any documents, McLeodUSA or CapRock will mail them
to you by first class mail, or another equally prompt means, within two business
days after your request is received. In order to ensure delivery of the
documents in advance of the special meeting, any request should be made at least
five business days prior to the date of the special meeting.
This document is a prospectus of McLeodUSA and a proxy statement of CapRock
for the special meeting. McLeodUSA has supplied all information contained in, or
considered a part of, this proxy statement/prospectus relating to McLeodUSA, and
CapRock has supplied all information contained in, or considered a part of, this
proxy statement/prospectus relating to CapRock.
Neither McLeodUSA nor CapRock has authorized anyone to give any information
or make any representation about the merger or McLeodUSA or CapRock that is
different from, or in addition to, that contained in this proxy
statement/prospectus or in any of the materials that McLeodUSA or CapRock has
incorporated into this document. Therefore, if anyone does give you information
of this sort, you should not rely on it. The information contained in this
document speaks only as of the date of this document unless the information
specifically indicates that another date applies.
94
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
Dated as of October 2, 2000,
By and Among
MCLEODUSA INCORPORATED,
CACTUS ACQUISITION CORP.
And
CAPROCK COMMUNICATIONS CORP.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
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ARTICLE I
The Merger
Section 1.01. The Merger............................................... A-1
Section 1.02. Closing.................................................. A-1
Section 1.03. Effective Time........................................... A-2
Section 1.04. Effects of the Merger.................................... A-2
Section 1.05. Articles of Incorporation and By-laws.................... A-2
Section 1.06. Board of Directors of the Surviving Corporation.......... A-2
ARTICLE II
Effect of the Merger on the Capital Stock of the
Constituent Corporations; Exchange of Certificates
Section 2.01. Effect on Capital Stock................................... A-2
(a) Capital Stock of Sub..................................... A-2
(b) Cancelation of Treasury Stock and Parent-Owned Stock..... A-2
(c) Conversion of Company Common Stock....................... A-3
(d) Anti-Dilution Provisions................................. A-3
(e) Options.................................................. A-3
Section 2.02. Exchange of Certificates.................................. A-3
(a) Exchange Agent........................................... A-3
(b) Exchange Procedure....................................... A-3
(c) Distributions with Respect to Unsurrendered
Certificates............................................. A-4
(d) No Further Ownership Rights in Company Common Stock...... A-4
(e) No Fractional Shares..................................... A-4
(f) Termination of Merger Consideration Obligation; No
Liability................................................ A-4
(g) Lost Certificates........................................ A-5
(h) Withholding Rights....................................... A-5
ARTICLE III
Representations and Warranties
Section 3.01. Representations and Warranties of the Company............. A-5
(a) Organization, Standing and Power......................... A-5
(b) Subsidiaries............................................. A-6
(c) Capital Structure........................................ A-6
(d) Authority; Noncontravention.............................. A-7
(e) SEC Documents; Undisclosed Liabilities................... A-8
(f) Information Supplied..................................... A-9
(g) Absence of Certain Changes or Events..................... A-9
(h) Litigation............................................... A-10
(i) Compliance with Applicable Laws.......................... A-10
(j) Contracts................................................ A-11
(k) Absence of Changes in Benefit Plans...................... A-11
(l) ERISA Compliance......................................... A-11
i
Page
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(m) Taxes...................................................... A-13
(n) Voting Requirements........................................ A-14
(o) State Takeover Statutes.................................... A-14
(p) Brokers.................................................... A-14
(q) Opinion of Financial Advisor............................... A-14
(r) Intellectual Property...................................... A-14
Section 3.02. Representations and Warranties of Parent and Sub............ A-15
(a) Organization, Standing and Power........................... A-15
(b) Capital Structure.......................................... A-15
(c) Authority; Noncontravention................................ A-17
(d) SEC Documents; Undisclosed Liabilities..................... A-18
(e) Information Supplied....................................... A-18
(f) No Material Adverse Change................................. A-19
(g) Litigation................................................. A-19
(h) Contracts.................................................. A-19
(i) Voting Requirements........................................ A-19
(j) State Takeover Statutes.................................... A-19
(k) Brokers.................................................... A-19
(l) Capitalization of Sub; No Prior Activities of Sub.......... A-19
(m) Taxes...................................................... A-19
ARTICLE IV
Covenants Relating to Conduct of Business
Section 4.01. Conduct of Business......................................... A-19
(a) Conduct of Business by the Company......................... A-19
(b) Other Actions.............................................. A-21
(c) Certain Tax Matters........................................ A-22
(d) Advice of Changes.......................................... A-22
Section 4.02. No Solicitation............................................. A-22
ARTICLE V
Additional Agreements
Section 5.01. Preparation of the Form S-4 and the Proxy Statement........ A-24
Section 5.02. Company Shareholders Meeting............................... A-25
Section 5.03. Access to Information; Confidentiality..................... A-25
Section 5.04. Commercially Reasonable Efforts............................ A-25
Section 5.05. Company Stock Options...................................... A-26
Section 5.06. Employee Benefit Plans; Existing Agreements................ A-26
Section 5.07. Indemnification, Exculpation and Insurance................. A-27
Section 5.08. Fees and Expenses.......................................... A-27
Section 5.09. Public Announcements....................................... A-28
Section 5.10. Affiliates................................................. A-28
Section 5.11. Nasdaq Quotation........................................... A-28
Section 5.12. Tax Treatment.............................................. A-28
Section 5.13. Further Assurances......................................... A-29
Section 5.14. Transfer Taxes............................................. A-29
ii
Page
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Section 5.15. Approvals.................................................. A-29
Section 5.16. Consent of Noteholders..................................... A-29
Section 5.17. Notes Exchange Offer....................................... A-30
ARTICLE VI
Conditions Precedent
Section 6.01. Conditions to Each Party's Obligation To Effect the Merger.. A-30
(a) Shareholder Approval....................................... A-30
(b) HSR Act.................................................... A-30
(c) Consents................................................... A-30
(d) No Restraints.............................................. A-30
(e) Form S-4................................................... A-30
(f) Nasdaq Quotation........................................... A-31
Section 6.02. Conditions to Obligations of Parent and Sub................. A-31
(a) Representations and Warranties............................. A-31
(b) Performance of Obligations of the Company.................. A-31
(c) Consent Solicitation....................................... A-31
Section 6.03. Conditions to Obligations of the Company.................... A-31
(a) Representations and Warranties............................. A-31
(b) Performance of Obligations of Parent and Sub............... A-31
(c) Tax Opinions............................................... A-31
(d) Financing Arrangements..................................... A-31
Section 6.04. Frustration of Closing Conditions........................... A-32
ARTICLE VII
Termination, Amendment and Waiver
Section 7.01. Termination................................................ A-32
Section 7.02. Effect of Termination...................................... A-32
Section 7.03. Amendment.................................................. A-33
Section 7.04. Extension; Waiver.......................................... A-33
ARTICLE VIII
General Provisions
Section 8.01. Nonsurvival of Representations and Warranties.............. A-33
Section 8.02. Notices.................................................... A-33
Section 8.03. Definitions................................................ A-34
Section 8.04. Interpretation............................................. A-35
Section 8.05. Counterparts............................................... A-35
Section 8.06. Entire Agreement; No Third-Party Beneficiaries............. A-35
Section 8.07. Governing Law.............................................. A-36
Section 8.08. Assignment................................................. A-36
Section 8.09. Enforcement................................................ A-36
iii
Page
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Annex I Index of Defined Terms......................................... 37
Exhibit A Form of Affiliate Letter.......................................
Exhibit B Form of Company Tax Representation Letter......................
Exhibit C Form of Parent Tax Representation Letter.......................
iv
AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of October 2, 2000,
among MCLEODUSA INCORPORATED, a Delaware corporation ("Parent"), CACTUS
ACQUISITION CORP., a Delaware corporation and a wholly owned subsidiary of
Parent ("Sub"), and CAPROCK COMMUNICATIONS CORP., a Texas corporation (the
"Company").
WHEREAS the respective Boards of Directors of Parent, Sub and the Company
have approved and declared advisable this Agreement and the merger of Sub with
and into the Company (the "Merger"), upon the terms and subject to the
conditions set forth in this Agreement, whereby each issued and outstanding
share of common stock, par value $0.01 per share, of the Company (the "Company
Common Stock"), other than any such shares directly owned by Parent, Sub or the
Company, will be converted into the right to receive shares of Class A common
stock, par value $0.01 per share, of Parent (the "Parent Class A Common
Stock");
WHEREAS for U.S. Federal income tax purposes, it is intended that (a) the
Merger will qualify as a "reorganization" within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), and the rules
and regulations promulgated thereunder, (b) Parent, Sub and the Company will
each be a "party" to such reorganization within the meaning of Section 368(b)
of the Code and (c) this Agreement is intended to constitute a "plan of
reorganization" for U.S. Federal income tax purposes;
WHEREAS pursuant to the aforementioned "plan of reorganization" the Company
and Parent will undertake the actions described in Sections 5.16 and 5.17 of
this Agreement;
WHEREAS simultaneously with the execution and delivery of this Agreement and
as a condition and inducement to the willingness of Parent and Sub to enter
into this Agreement, Parent and certain shareholders of the Company are
entering into a voting agreement, certain shareholders of the Company are
entering into a voting agreement with Jere W. Thompson, Jr. and Parent and
certain shareholders of the Company are entering into a voting and option
agreement (collectively, the "Voting and Option Agreement") pursuant to which,
among other things, such shareholders have agreed to vote to approve this
Agreement and to take certain other actions in furtherance of the Merger upon
the terms and subject to the conditions set forth therein; and
WHEREAS Parent, Sub and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties hereto agree
as follows:
ARTICLE I
The Merger
Section 1.01. The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the General Corporation Law of
the State of Delaware (the "DGCL") and the Texas Business Corporation Act (the
"TBCA"), Sub shall be merged with and into the Company at the Effective Time.
At the Effective Time, the separate corporate existence of Sub shall cease and
the Company shall continue as the surviving corporation (the "Surviving
Corporation") and shall succeed to and assume all the rights and obligations of
Sub in accordance with the DGCL and the TBCA.
Section 1.02. Closing. Upon the terms and subject to the conditions set
forth in this Agreement, the closing of the Merger (the "Closing") will take
place at 10:00 a.m. on the second Business Day after satisfaction or (to the
extent permitted by applicable law) waiver of the conditions set forth in
Article VI (other than those conditions that by their nature are to be
satisfied at the Closing, but subject to the satisfaction or waiver of those
conditions), at the offices of Cravath, Swaine & Moore, Worldwide Plaza, 825
Eighth Avenue, New York, New York 10019, unless another time, date or place is
agreed to by the parties hereto; provided, however, that if all the conditions
set forth in Article VI shall not have been satisfied or (to the extent
permitted
A-1
by applicable law) waived on such second Business Day, then the Closing will
take place on the first Business Day on which all such conditions shall have
been satisfied or (to the extent permitted by applicable law) waived. The date
on which the Closing occurs is referred to in this Agreement as the "Closing
Date".
Section 1.03. Effective Time. Upon the terms and subject to the conditions
set forth in this Agreement, as soon as practicable on or after the Closing
Date, a certificate of merger, articles of merger or other appropriate
documents (in any such case, the "Certificate of Merger") shall be duly
prepared, executed and acknowledged by the parties in accordance with the
relevant provisions of the DGCL and the TBCA and filed with the Secretaries of
State of the State of Delaware and the State of Texas. The Merger shall become
effective at such time as the Certificate of Merger is duly filed with the
Secretary of State of the State of Delaware and the Secretary of State of the
State of Texas, or at such other time as Parent and the Company shall agree
and specify in the Certificate of Merger. The time the Merger becomes
effective is referred to in this Agreement as the "Effective Time".
Section 1.04. Effects of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL and Article 5.06 of the TBCA.
Section 1.05. Articles of Incorporation and By-laws. (a) The Articles of
Incorporation of the Company, as in effect immediately prior to the Effective
Time, shall be the Articles of Incorporation of the Surviving Corporation
until thereafter changed or amended as provided therein or by applicable law;
provided, however, Article IV of such Articles of Incorporation shall be
amended at the Effective Time as set forth below:
(i) Article IV of such Articles of Incorporation shall be amended to
read in its entirety as follows:
"ARTICLE IV
Shares
The aggregate number of shares which the Corporation shall have the
authority to issue is one thousand (1,000) shares of common stock, par value
of one cent ($.01) per share.".
(b) The By-laws of the Company, as in effect immediately prior to the
Effective Time, shall be the By-laws of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable law.
Section 1.06. Board of Directors of the Surviving Corporation. The
directors of Sub immediately prior to the Effective Time shall be the
directors of the Surviving Corporation, until the earlier of their death,
resignation or removal or until their respective successors are duly elected
and qualified, as the case may be.
ARTICLE II
Effect of the Merger on the Capital Stock of the Constituent Corporations;
Exchange of Certificates
Section 2.01. Effect on Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of the holder of any shares of
capital stock of the Company, Parent or Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of capital
stock of Sub shall be converted into a validly issued, fully paid and
nonassessable share of common stock of the Surviving Corporation.
(b) Cancelation of Treasury Stock and Parent-Owned Stock. Each share of
Company Common Stock that is directly owned by the Company, Sub or Parent
shall automatically be canceled and shall cease to exist, and no
consideration shall be delivered in exchange therefor.
A-2
(c) Conversion of Company Common Stock. Subject to Section 2.02(e), each
share of Company Common Stock issued and outstanding immediately prior to
the Effective Time (other than shares to be canceled in accordance with
Section 2.01(b)) shall be converted into the right to receive 0.3876 (the
"Exchange Ratio") fully paid and nonassessable shares of Parent Class A
Common Stock (the "Merger Consideration"). At the Effective Time, all such
shares of Company Common Stock shall no longer be outstanding and shall
automatically be canceled and shall cease to exist, and each holder of a
certificate that immediately prior to the Effective Time represented any
such shares of Company Common Stock (a "Certificate") shall cease to have
any rights with respect thereto, except the right to receive the Merger
Consideration, certain dividends or other distributions in accordance with
Section 2.02(c) and any cash in lieu of fractional shares of Parent Class A
Common Stock to be issued or paid in consideration therefor upon surrender
of such Certificate in accordance with Section 2.02(e), in each case
without interest.
(d) Anti-Dilution Provisions. In the event Parent changes (or
establishes a record date for changing) the number of shares of Parent
Class A Common Stock issued and outstanding prior to the Effective Time as
a result of a stock split, stock dividend, recapitalization, subdivision,
reclassification, combination, exchange of shares or similar transaction
with respect to the outstanding Parent Class A Common Stock and the record
date therefor shall be prior to the Effective Time, the Exchange Ratio
shall be proportionately adjusted to reflect such stock split, stock
dividend, recapitalization, subdivision, reclassification, combination,
exchange of shares or similar transaction.
(e) Options. The effect of the Merger on Company Stock Options is set
forth in Section 5.05.
Section 2.02. Exchange of Certificates. (a) Exchange Agent. Prior to the
Effective Time, Parent shall designate Wells Fargo, or another bank or trust
company having (or whose parent has) net capital of not less than
$1,000,000,000 and that is reasonably acceptable to Parent and the Company, to
act as exchange agent (the "Exchange Agent") for the payment of the Merger
Consideration and shall deposit with the Exchange Agent at the Effective Time,
for the benefit of the holders of the Certificates, for exchange in accordance
with this Article II, through the Exchange Agent, certificates representing
shares of Parent Class A Common Stock issuable pursuant to Section 2.01 upon
surrender of the Certificates. Parent shall make available to the Exchange
Agent from time to time as required after the Effective Time cash necessary to
pay dividends and other distributions in accordance with Section 2.02(c) and to
make payments in lieu of any fractional shares of Parent Class A Common Stock
in accordance with Section 2.02(e).
(b) Exchange Procedure. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
Certificate (i) a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
held by such person shall pass, only upon proper delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Parent may reasonably specify) and (ii) instructions
for use in surrendering the Certificates in exchange for the Merger
Consideration with respect thereto. Upon surrender of a Certificate for
cancelation to the Exchange Agent, together with such letter of
transmittal, duly completed and validly executed, and such other documents
as may reasonably be required by the Exchange Agent pursuant to such letter
of transmittal, the holder of such Certificate shall be entitled to receive
promptly in exchange therefor (x) a certificate or certificates
representing the number of whole shares of Parent Class A Common Stock that
such holder has the right to receive pursuant to the provisions of this
Article II, (y) certain dividends or other distributions in respect of such
Parent Class A Common Stock pursuant to Section 2.02(c) and (z) cash in
lieu of any fractional share of Parent Class A Common Stock in accordance
with Section 2.02(e), and the Certificate so surrendered shall forthwith be
canceled. In the event of a transfer of ownership of Company Common Stock
that is not registered in the transfer records of the Company, a
certificate representing the proper number of shares of Parent Class A
Common Stock may be issued to a person other than the person in whose name
the Certificate so surrendered is registered if such Certificate shall be
properly endorsed or otherwise be in proper form for transfer and the
person requesting such issuance shall pay any transfer or other taxes
required by reason of the issuance of shares of Parent Class A Common Stock
to a person other than the registered holder of
A-3
such Certificate or establish to the reasonable satisfaction of Parent that
such tax has been paid or is not applicable. Until surrendered as
contemplated by this Section 2.02(b), each Certificate shall be deemed at
any time after the Effective Time to represent only the right to receive
upon such surrender the Merger Consideration that the holder thereof has
the right to receive pursuant to the provisions of this Article II, certain
dividends or other distributions in accordance with Section 2.02(c) and any
cash in lieu of any fractional share of Parent Class A Common Stock in
accordance with Section 2.02(e). No interest shall be paid or shall accrue
on any cash payable upon surrender of any Certificate.
(c) Distributions with Respect to Unsurrendered Certificates. No
dividends or other distributions declared or made with respect to Parent
Class A Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Certificate with respect to the
shares of Parent Class A Common Stock that such holder has the right to
receive upon surrender of such Certificate and no cash payment in lieu of
any fractional share of Parent Class A Common Stock shall be paid to any
such holder pursuant to Section 2.02(e) until the holder of record of such
Certificate shall surrender such Certificate in accordance with this
Article II. Subject to the effect of applicable abandoned property, escheat
or similar laws, following surrender of any such Certificate there shall be
paid to the record holder of any certificate representing whole shares of
Parent Class A Common Stock issued in exchange therefor, without interest,
(i) promptly after the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time theretofore
paid with respect to such whole shares of Parent Class A Common Stock and
the amount of any cash in lieu of a fractional share of Parent Class A
Common Stock to which such holder is entitled pursuant to Section 2.02(e)
and (ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and with a payment date subsequent to such surrender payable with
respect to such whole shares of Parent Class A Common Stock.
(d) No Further Ownership Rights in Company Common Stock. All shares of
Parent Class A Common Stock issued upon the surrender for exchange of the
Certificates in accordance with the terms of this Article II (including any
cash paid pursuant to this Article II) shall be deemed to have been issued
(and paid) in full satisfaction of all rights pertaining to the shares of
Company Common Stock previously represented by such Certificates. At the
close of business on the day on which the Effective Time occurs, the stock
transfer books of the Company shall be closed and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation or the Exchange
Agent for transfer or any other reason, they shall be canceled and
exchanged as provided in this Article II.
(e) No Fractional Shares. (i) No certificates or scrip representing
fractional shares of Parent Class A Common Stock shall be issued upon the
surrender for exchange of the Certificates, no dividend or distribution of
Parent shall relate to such fractional share interests and such fractional
share interests shall not entitle the owner thereof to vote or to any
rights of a shareholder of Parent.
(ii) Notwithstanding any other provision of this Agreement, each
holder of shares of Company Common Stock exchanged pursuant to the
Merger who would otherwise have been entitled to receive a fraction of
a share of Parent Class A Common Stock shall receive, in lieu thereof,
cash (without interest) in an amount, less the amount of any
withholding taxes that may be required thereon, equal to such
fractional part of a share of Parent Class A Common Stock multiplied by
the per share closing price of Parent Class A Common Stock on the
Closing Date, as such price is quoted on The Nasdaq National Market
("Nasdaq"). For purposes of this Section 2.02(e), all fractional shares
to which a single record holder of Company Common Stock would otherwise
be entitled shall be aggregated and calculations shall be rounded to
three decimal places.
(f) Termination of Merger Consideration Obligation; No Liability. Any
portion of the Merger Consideration which remains undistributed to the
holders of Company Common Stock for one year after the Effective Time shall
be delivered to Parent, upon demand. Any holders of Company Common Stock
A-4
who have not theretofore complied with this Article II shall thereafter
look only to Parent for the shares of Parent Class A Common Stock to which
they are entitled pursuant to Section 2.01, any dividends or other
distributions with respect to Parent Class A Common Stock to which they are
entitled pursuant to Section 2.02(c) and any cash in lieu of fractional
shares of Parent Class A Common Stock to which they are entitled pursuant
to Section 2.02(e). None of Parent, Sub, the Company or the Exchange Agent
shall be liable to any person in respect of any Merger Consideration, any
dividends or distributions with respect thereto or any cash in lieu of
fractional shares of Parent Class A Common Stock, in each case delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law. If any Certificate shall not have been surrendered prior to
two years after the Effective Time (or immediately prior to such earlier
date on which any Merger Consideration, any dividends or distributions
payable to the holder of such Certificate or any cash payable in lieu of
fractional shares of Parent Class A Common Stock pursuant to this Article
II, would otherwise escheat to or become the property of any Governmental
Entity), any such Merger Consideration, dividends or distributions in
respect thereof or such cash shall, to the extent permitted by applicable
law, become the property of Parent, free and clear of all claims or
interest of any person previously entitled thereto.
(g) Lost Certificates. If any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required
by the Exchange Agent or Parent, the posting by such person of a bond in
such reasonable amount as it may reasonably direct as indemnity against any
claim that may be made against Parent, the Company or the Exchange Agent
with respect to such Certificate, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificate the Merger
Consideration, any unpaid dividends and distributions in respect thereof
and any cash in lieu of fractional shares of Parent Class A Common Stock,
in each case pursuant to this Agreement.
(h) Withholding Rights. Parent, Sub or the Exchange Agent shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Company Common Stock
such amounts as Parent, Sub or the Exchange Agent is required to deduct and
withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign tax law. To the extent that amounts
are so withheld and paid over to the appropriate taxing authority by
Parent, Sub or the Exchange Agent, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the holder of the
shares of Company Common Stock in respect of which such deduction and
withholding was paid by Parent, Sub or the Exchange Agent.
ARTICLE III
Representations and Warranties
Section 3.01. Representations and Warranties of the Company. Except as
expressly set forth on the disclosure schedule (with specific reference to the
Section or Subsection of this Agreement to which the information stated in such
disclosure relates and such other Sections or Subsections to the extent a
matter is disclosed in such a way as to make its relevance to such other
Section or Subsection readily apparent) delivered by the Company to Parent
prior to the execution of this Agreement (the "Company Disclosure Schedule") or
the Company Filed SEC Documents, the Company represents and warrants to Parent
and Sub as follows:
(a) Organization, Standing and Power. Each of the Company and its
Subsidiaries is (i) duly organized, validly existing and in good standing
under the laws of the jurisdiction in which it is organized, (ii) has the
requisite corporate, company or partnership power and authority to carry on
its business as now being conducted and (iii) is duly qualified or licensed
to do business and is in good standing in each jurisdiction in which the
nature of its business or the ownership, leasing or operation of its
properties makes such qualification or licensing necessary, other than
(except in the case of clauses (i) and (ii) above with respect to the
Company) where the failure to be so organized, existing, qualified or
licensed or in good standing individually or in the aggregate could not
reasonably be expected to have a Material
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Adverse Effect on the Company. The Company has made available to Parent and
its Representatives prior to the execution of this Agreement true and
complete copies of its Articles of Incorporation and By-laws and the
certificate of incorporation and by-laws (or similar organizational
documents) of each Subsidiary of the Company, in each case as amended to
the date of this Agreement. The Company has made available to Parent and
its Representatives true and complete copies of the minutes of all meetings
of the shareholders of the Company, the Board of Directors of the Company
and each committee of the Board of Directors of the Company.
(b) Subsidiaries. Section 3.01(b) of the Company Disclosure Schedule
sets forth a true and complete list of all the Subsidiaries of the Company
as of the date of this Agreement. All the outstanding shares of capital
stock of, or other equity or voting interests in, each Subsidiary of the
Company have been validly issued and are fully paid and nonassessable and
are owned directly or indirectly by the Company, free and clear of all
Liens and free of any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other equity or voting interests. Except
for the capital stock of, or other equity or voting interests in, its
Subsidiaries, the Company does not beneficially own directly or indirectly
any capital stock or other equity or voting interest in any person.
(c) Capital Structure. The authorized capital stock of the Company
consists of 200,000,000 shares of Company Common Stock and 20,000,000
shares of preferred stock, par value $0.01 per share (the "Company
Preferred Stock"). As of the close of business on September 30, 2000, (i)
38,729,536 shares of Company Common Stock (excluding shares held by the
Company as treasury shares, but including 65,000 shares of restricted stock
which the Company has requested that the Company's transfer agent issue,
but which have not been issued as of the date hereof) were issued and
outstanding, (ii) 30,314 shares of Company Common Stock were held by the
Company as treasury shares, (iii) 400,000 shares of Company Common Stock
were reserved for issuance under the 1998 Director Stock Option Plan and
7,745,907 shares of Company Common Stock were reserved for issuance under
the 1998 Equity Incentive Plan, which amount is calculated pursuant to the
1998 Equity Incentive Plan and is equal to 20% of the shares of Company
Common Stock issued and outstanding on October 1, 2000 (subject to
adjustment as provided in the 1998 Equity Incentive Plan), provided,
however, that in no event will more than 50,000,000 shares of Company
Common Stock be reserved for issuance under the 1998 Equity Incentive Plan;
of which 6,843,946 shares of Company Common Stock were subject to
outstanding Company Stock Options (including 340,570 shares of Company
Common Stock that are subject to Company Stock Options originally granted
under the CapRock Telecommunications Nonqualified Stock Option Plan, the
CapRock Services Employee Incentive Stock Option Plan, the CapRock Services
1997 Stock Option Plan and the CapRock Services 1997 Director Stock Option
Plan and which were assumed by the Company) and (iv) no shares of Company
Preferred Stock were issued and outstanding or were held by the Company as
treasury shares. The Company has delivered to Parent a true and complete
list, as of the close of business on September 30, 2000, of all outstanding
Company Stock Options, the number of shares of Company Common Stock subject
to each such Company Stock Option, the grant dates and exercise prices of
each such Company Stock Option, the vesting schedule of each Company Stock
Option and the names of the holders thereof. Except as set forth above, as
of the close of business on September 30, 2000, no shares of capital stock
of, or other equity or voting interests in, the Company or options,
warrants or other rights to acquire any such stock, securities or interests
were issued, reserved for issuance or outstanding. During the period from
September 30, 2000, to the date of this Agreement, (x) there have been no
issuances by the Company or any of its Subsidiaries of shares of capital
stock of, or other equity or voting interests in, the Company or any of its
Subsidiaries other than issuances of shares of Company Common Stock
pursuant to the exercise of Company Stock Options outstanding on such date
as required by their terms as in effect on the date of this Agreement and
(y) there have been no issuances by the Company or any of its Subsidiaries
of options, warrants or other rights to acquire shares of capital stock of,
or other equity or voting interests in, the Company or any of its
Subsidiaries. There are no outstanding stock appreciation rights,
performance units or rights (other than the Company Stock Options) to
receive shares of Company Common Stock on a deferred basis or otherwise
linked to the price of Company Common Stock granted under the Company Stock
Plans or otherwise. All outstanding shares of capital stock of the Company
are,
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and all shares that may be issued pursuant to the Company Stock Plans will
be, when issued in accordance with the terms thereof, duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. There are no bonds, debentures, notes or other indebtedness of the
Company or any of its Subsidiaries, and, except as set forth above, no
securities or other instruments or obligations of the Company or any of its
Subsidiaries, in each case having the right to vote (or convertible into,
or exchangeable for, securities having the right to vote) on any matters on
which shareholders of the Company or any of its Subsidiaries may vote,
except for any Company Stock Options issued after the date hereof in
accordance with Section 4.01. Except as set forth above or as otherwise
contemplated herein, there are no Contracts to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound obligating the Company or any of its Subsidiaries to
issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of capital stock of, or other equity or voting interests
in, or securities convertible into, or exchangeable or exercisable for,
shares of capital stock of, or other equity or voting interests in, the
Company or any of its Subsidiaries or obligating the Company or any of its
Subsidiaries to issue, grant, extend or enter into any such security,
option, warrant, call, right or Contract. As of the date of this Agreement,
the issued and outstanding Subject Shares (as such term is defined in the
Voting and Option Agreement) represent at least a majority of the shares of
Company Common Stock on an outstanding basis. There are not outstanding
contractual obligations of the Company or any of its Subsidiaries to (I)
repurchase, redeem or otherwise acquire any shares of capital stock of, or
other equity or voting interests in, the Company or any of its Subsidiaries
or (II) vote or dispose of any shares of the capital stock of, or other
equity or voting interests in, the Company or any of its Subsidiaries. As
of the date of this Agreement, there are no irrevocable proxies and no
voting agreements to which the Company is a party with respect to any
shares of the capital stock of, or other equity or voting interests in, the
Company or any of its Subsidiaries.
(d) Authority; Noncontravention. The Company has the requisite corporate
power and authority to execute and deliver this Agreement and, subject to
receipt of the Company Shareholder Approval, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate action on the part of the Company and no other corporate
proceedings on the part of the Company are necessary to approve this
Agreement or to consummate the transactions contemplated hereby, subject to
the receipt of the consent of the holders of the Notes referred to in
Section 5.16 and, in the case of the consummation of the Merger, to receipt
of the Company Shareholder Approval. This Agreement has been duly executed
and delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance
with its terms. The Board of Directors of the Company, at a meeting duly
called and held at which all directors of the Company were present, duly
and unanimously adopted resolutions (i) approving and declaring advisable
this Agreement, the Merger and the other transactions contemplated hereby,
(ii) declaring that it is in the best interests of the Company's
shareholders that the Company enter into this Agreement and consummate the
Merger on the terms and subject to the conditions set forth in this
Agreement, (iii) directing that this Agreement be submitted to a vote at a
meeting of the Company's shareholders and (iv) recommending that the
Company's shareholders approve this Agreement. The execution and delivery
of this Agreement do not, and the consummation of the transactions
contemplated by this Agreement and the Voting and Option Agreement and
compliance with the provisions hereof do not and will not conflict with, or
result in any violation or breach of, or default (with or without notice or
lapse of time, or both) under, or give rise to a right of, or result in,
termination, cancelation or acceleration of any obligation or loss of a
benefit under, or result in the creation of any Lien upon any of the
properties or assets of the Company or any of its Subsidiaries under, or
give rise to any increased, additional, accelerated or guaranteed rights or
entitlements under, any provision of (A) the Articles of Incorporation or
the By-laws of the Company or the comparable organizational documents of
any of its Subsidiaries, (B) any loan or credit agreement, note, bond,
debenture, mortgage, indenture, guarantee, lease or other contract,
commitment, agreement, instrument, arrangement, understanding, obligation,
undertaking, permit, concession, franchise, certificate, license or similar
authorization, whether oral or written (each, including
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all amendments thereto, a "Contract"), applicable to the Company or any of
its Subsidiaries or their respective properties or assets or (C) subject to
the governmental filings and other matters referred to in the following
sentence, any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or any of its Subsidiaries or their
respective properties, operations or assets, other than, in the case of
clauses (B) and (C), any such conflicts, violations, breaches, defaults,
rights, losses, Liens or entitlements that individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on the
Company or prevent or materially delay the consummation of the Merger. No
consent, approval, order or authorization of, action by or in respect of,
or registration, declaration or filing with, any Federal, state, local or
foreign government, any court, administrative, regulatory or other
governmental agency, commission or authority or any non-governmental self-
regulatory agency, commission or authority (each a "Governmental Entity")
is required by or with respect to the Company or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by the
Company, or the consummation by the Company of the Merger or the other
transactions contemplated by this Agreement or the Voting and Option
Agreement, except for (1) the filing of a premerger notification and report
form by the Company under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"); (2) the filing with the Securities and
Exchange Commission (the "SEC") of (A) a proxy statement relating to the
Company Shareholders Meeting (such proxy statement, as amended or
supplemented from time to time, the "Proxy Statement"), and (B) such
reports under Section 13(a), 13(d), 15(d) or 16(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as may be required
in connection with this Agreement, the Voting and Option Agreement and the
transactions contemplated by this Agreement or the Voting and Option
Agreement; (3) the filing of the Certificate of Merger with the Secretaries
of State of the State of Delaware and the State of Texas and appropriate
documents with the relevant authorities of other states in which the
Company is qualified to do business; (4) filings with and approvals of the
Federal Communications Commission (the "FCC") as required under the
Communications Act of 1934, as amended (the "Communications Act"), and the
rules and regulations promulgated thereunder; (5) filings with and
approvals of any state public service commissions ("PUCs") or similar
regulatory bodies as required by applicable statutes, laws, rules,
ordinances and regulations; (6) filings with and approvals of the Federal
Aviation Administration (the "FAA") as required by applicable statutes,
laws, rules, ordinances and regulations; (7) filings with and approvals of
foreign antitrust or communications regulatory authorities; and (8) such
other consents, approvals, orders or authorizations the failure of which to
be made or obtained individually or in the aggregate could not reasonably
be expected to have a Material Adverse Effect on the Company or prevent or
materially delay the consummation of the Merger.
(e) SEC Documents; Undisclosed Liabilities. The Company (or its public
predecessor) has filed all required reports, schedules, forms, statements
and other documents (including exhibits and all other information
incorporated therein) with the SEC since January 1, 1998 (collectively, the
"Company SEC Documents"). No Subsidiary of the Company is required to file
any report, schedule, form, statement or other document with the SEC. As of
their respective dates, the Company SEC Documents complied in all material
respects with the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), or the Exchange Act, as the case may be, and the
rules and regulations of the SEC promulgated thereunder applicable to such
Company SEC Documents, and none of the Company SEC Documents when filed
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Except to the extent that information contained in
any Company SEC Document has been revised or superseded by a later filed
Company SEC Document, none of the Company SEC Documents contains any untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading.
The financial statements (including the related notes) included in the
Company SEC Documents comply as to form, as of their respective dates of
filing with the SEC, in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with
respect thereto (the "Accounting Rules"), have been prepared in accordance
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with generally accepted accounting principles ("GAAP") (except, in the case
of unaudited statements, as permitted by the Accounting Rules) applied on a
consistent basis during the periods involved (except as may be indicated in
the related notes) and fairly present in all material respects the
consolidated financial position of the Company and its consolidated
Subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case
of unaudited statements, to normal recurring year-end audit adjustments).
Neither the Company nor any of its Subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or
otherwise) which individually or in the aggregate could reasonably be
expected to have a Material Adverse Effect on the Company.
(f) Information Supplied. None of the information supplied or to be
supplied by the Company or any of its Subsidiaries specifically for
inclusion or incorporation by reference in (i) the registration statement
on Form S-4 to be filed with the SEC by Parent in connection with the
issuance of Parent Class A Common Stock in the Merger (the "Form S-4")
will, at the time the Form S-4 becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are
made, not misleading or (ii) the Proxy Statement will, at the date it is
first mailed to the Company's shareholders or at the time of the Company
Shareholders Meeting, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. The Proxy Statement will comply
as to form in all material respects with the requirements of the Exchange
Act and the rules and regulations thereunder. No representation or warranty
is made by the Company with respect to statements made or incorporated by
reference in the Proxy Statement or the Form S-4 based on information
supplied by Parent or Sub specifically for inclusion or incorporation by
reference in the Proxy Statement or the Form S-4, as the case may be.
(g) Absence of Certain Changes or Events. Except as disclosed in the
Company SEC Documents filed and publicly available prior to the date of
this Agreement (as amended to the date of this Agreement, the "Company
Filed SEC Documents"), since December 31, 1999, the Company and its
Subsidiaries have conducted their businesses only in the usual and ordinary
course consistent with past practice, and since such date there has not
been (i) any Material Adverse Change in the Company, (ii) any declaration,
setting aside or payment of any dividend or other distribution (whether in
cash, stock, property or otherwise) with respect to any of the Company's or
any of its Subsidiaries capital stock or any other equity interests or
securities, except for dividends or other distributions declared, set aside
or paid by a wholly owned Subsidiary of the Company to its parent, (iii)
any purchase, redemption or other acquisition of any shares of capital
stock or any other equity interests or securities of the Company (other
than in connection with the cashless exercises of Company Stock Options) or
any of its Subsidiaries or any rights, warrants, calls or options to
acquire such shares or other equity interests or securities, (iv) any
split, combination or reclassification of any of the Company's or any of
its Subsidiaries' capital stock or other equity interests or securities or
any issuance or the authorization of any issuance of any other securities
in respect of, in lieu of or in substitution for shares of capital stock or
other equity interests or securities of the Company or any of its
Subsidiaries, (v) (A) any granting by the Company or any of its
Subsidiaries to any current or former director, officer, employee or
consultant of the Company or its Subsidiaries of any increase in
compensation, bonus or other benefits or any granting of any type of
compensation or benefits to an employee not previously receiving or
entitled to receive such type of compensation or benefit, except for normal
increases in cash compensation in the ordinary course of business
consistent with past practice or as was required under any agreement or
Company Benefit Plan in effect on December 31, 1999 and specifically
identified on the Company Disclosure Schedule, (B) any granting by the
Company or any of its Subsidiaries to any current or former director,
officer, employee or consultant of any right to receive any severance or
termination pay, or increases therein, other than in the ordinary course of
business consistent with past practice and consistent with the Company's
current severance plans in effect on the date hereof as specifically
described in Section 3.01(g) of the Company Disclosure Schedule, or (C) any
entry by the Company or any of its Subsidiaries into, or any amendments of,
(I) any employment (other
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than at-will), deferred compensation, consulting, severance, termination or
indemnification agreement or any other agreement, plan or policy with or
involving any current or former director, officer, employee or consultant
(collectively, the "Company Benefit Agreements") or (II) any Company
Benefit Plan, or (D) any amendment to, or modification of, any Company
Stock Option, (vi) any payment of any benefit or the grant or amendment of
any award (including in respect of stock options, stock appreciation
rights, performance units, restricted stock or other stock based or stock
related awards or the removal or modification of any restrictions in any
Company Benefit Agreement or Company Benefit Plan or any awards made
thereunder) except as required to comply with any applicable law or any
Company Benefit Agreement or Company Benefit Plan existing on December 31,
1999 or as described on the list delivered pursuant to the third sentence
of Section 3.01(c), (vii) any damage, destruction or loss, whether or not
covered by insurance, that individually or in the aggregate could
reasonably be expected to have a Material Adverse Effect on the Company,
(viii) except insofar as may have been required by a change in GAAP or
applicable law, any material change in financial or tax accounting methods,
principles or practices by the Company or any of its Subsidiaries, (ix) any
material tax election or any settlement or compromise of any material tax
liability or refund or (x) any revaluation by the Company or any of its
Subsidiaries of any of the material assets of the Company or any of its
Subsidiaries.
(h) Litigation. There is no suit, action, proceeding, claim, grievance
or investigation pending or, to the Knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries that
individually or in the aggregate could reasonably be expected to have a
Material Adverse Effect on the Company nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator
outstanding against the Company or any of its Subsidiaries that has had, or
that could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company.
(i) Compliance with Applicable Laws. (i) The Company and its
Subsidiaries hold all permits, licenses, variances, exemptions, orders,
registrations, certificates and approvals of all Governmental Entities
which are required for them to own, lease or operate their assets and to
carry on their businesses (the "Company Permits") except where the failure
to hold such Company Permits individually or in the aggregate could not
reasonably be expected to have a Material Adverse Effect on the Company.
The Company and its Subsidiaries are in compliance in all respects with the
terms of the Company Permits and all applicable statutes, laws, ordinances,
rules and regulations except where the failure to so comply individually or
in the aggregate could not reasonably be expected to have a Material
Adverse Effect on the Company. Except for the Company Permits with the FCC
and any PUCs, the Merger, in and of itself, would not cause the revocation
or cancelation of any Company Permit, except for any cancelation or
revocation that individually or in the aggregate could not reasonably be
expected to have a Material Adverse Effect on the Company. As of the date
hereof, Section 3.01(i) of the Company Disclosure Schedule sets forth a
true and complete list of all Company Permits obtained from the FCC and any
state PUC.
(ii) Except as could not reasonably be expected to have individually
or in the aggregate a Material Adverse Effect on the Company, the
Company and its Subsidiaries are in compliance in all respects with all
applicable Environmental Laws, and the Company and its Subsidiaries
have, and are in compliance in all respects with, all permits required
under any applicable Environmental Law for the conduct of their
respective businesses except where the failure to so comply
individually or in the aggregate could not reasonably be expected to
have a Material Adverse Effect on the Company. Neither the Company nor
any of its Subsidiaries has received any written communication which is
still in effect from any Governmental Entity or person that alleges
that the Company or any of its Subsidiaries is in violation of, or
subject to liability under, any Environmental Law, that individually or
in the aggregate could reasonably be expected to have a Material
Adverse Effect on the Company. To the Knowledge of the Company, neither
the Company nor any of its Subsidiaries has released, generated,
treated, stored, disposed of or transported Hazardous Materials, or
arranged for any such activities, in a manner that individually or in
the aggregate could reasonably be expected to result in a material
liability of the Company.
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"Environmental Laws" means all Federal, state and local laws (including
common law), regulations, rules, ordinances, codes, decrees, judgements and
orders, in each case relating to pollution, protection of the environment,
natural resources or human health and safety.
"Hazardous Materials" means (i) any petroleum or petroleum byproducts, radon
gas, asbestos in any form that is or could become friable, urea formaldehyde
foam insulation and (ii) any chemical, material, substance or waste that is
regulated pursuant to any Environmental Law.
(j) Contracts. Neither the Company nor any of its Subsidiaries is in
violation or breach of or in default under (nor does there exist any
condition that upon the passage of time or the giving of notice or both
would cause such a violation or breach of or default under) any Contract to
which it is a party or by which it or any of its properties or assets is
bound, except for violations or defaults that individually or in the
aggregate could not reasonably be expected to have a Material Adverse
Effect on the Company. Since December 31, 1999 and prior to the date
hereof, none of the Company or its Subsidiaries has entered into any
Contract with any Affiliate of the Company that would have been required to
be filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, had the Company been a party to such
Contract as of December 31, 1999. Neither the Company nor any of its
Subsidiaries is a party to or bound by any non-competition agreement or any
other similar agreement or obligation which purports to limit in any
respect the manner in which, or the localities in which, all or any portion
of the business of the Company or its Subsidiaries, is conducted (or of
Parent following the Effective Time).
(k) Absence of Changes in Benefit Plans. Since December 31, 1999, there
has not been any adoption or material amendment of any bonus, pension,
savings, profit sharing, deferred compensation, incentive compensation,
stock ownership, stock purchase, stock option, stock appreciation, phantom
stock, retirement, vacation, severance, disability, death benefit,
hospitalization, medical, welfare benefit or other plan, arrangement or
understanding (whether or not legally binding) providing compensation or
benefits to any current or former director, officer, employee or consultant
of the Company or any of its Subsidiaries (collectively, the "Company
Benefit Plans"), or any material change in any actuarial or other
assumption used to calculate funding obligations with respect to any
Company Benefit Plan, or any material change in the manner in which
contributions to the Company Benefit Plan are made or the basis on which
such contributions are determined.
(l) ERISA Compliance. (i) Section 3.01(l) of the Company Disclosure
Schedule sets forth a true and complete list of all the Company Benefit
Plans. With respect to the Company Benefit Plans, no liability has been
incurred and to the Knowledge of the Company there exists no condition or
circumstances in connection with which the Company or any of its
Subsidiaries could be subject to any liability that individually or in the
aggregate could reasonably be expected to have a Material Adverse Effect on
the Company under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), the Code or any other applicable law.
(ii) Each Company Benefit Plan has been administered in accordance
with its terms, except for any failures so to administer any Company
Benefit Plan that individually or in the aggregate could not reasonably
be expected to have a Material Adverse Effect on the Company. The
Company, its Subsidiaries and all the Company Benefit Plans are in
compliance with the applicable provisions of ERISA, the Code and all
other applicable laws and the terms of all applicable collective
bargaining agreements, except for any failures to be in such compliance
that individually or in the aggregate could not reasonably be expected
to have a Material Adverse Effect on the Company.
(iii) All Company Benefit Plans that are intended to be qualified
under Section 401(a) of the Code have received favorable determination
letters from the Internal Revenue Service with respect to "TRA" (as
defined in Section 1 of Rev. Proc. 91-66 or 93-39), to the effect that
such Company Benefit Plans are qualified and exempt from Federal income
taxes under Sections 401(a) and 501(a), respectively, of the Code, and
no such determination letter has been revoked nor, to the Knowledge of
the Company, has revocation been threatened, nor has any such Company
Benefit Plan been
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amended since the date of its most recent determination letter or
application therefor in any respect that individually or in the
aggregate could reasonably be expected to adversely affect its
qualification. Except as individually or in the aggregate could not
reasonably be expected to have a Material Adverse Effect on the
Company, there is no pending or, to the Knowledge of the Company,
threatened litigation relating to the Company Benefit Plans.
(iv) Except as individually or in the aggregate could not reasonably
be expected to have a Material Adverse Effect on the Company, none of
the Company, any of its Subsidiaries or any person or entity that,
together with the Company or any of its Subsidiaries, is treated as a
single employer (a "Commonly Controlled Entity") under Section 414(b),
(c), (m) or (o) of the Code, has maintained, contributed to or been
obligated to contribute to any Company Benefit Plan that is subject to
Title IV of ERISA with respect to which the Company or any Commonly
Controlled Entity has unfunded liabilities based upon the assumptions
utilized in the most recent audited financial statements of the Company
included in the Company Filed SEC Documents under any Company Benefit
Plan subject to ERISA. Neither the Company nor any of its Subsidiaries,
nor to the Knowledge of the Company, any officer of the Company or any
of its Subsidiaries or any of the Company Benefit Plans that are
subject to ERISA, any trusts created thereunder or any trustee or
administrator thereof, has engaged in a "prohibited transaction" (as
such term is defined in Section 406 of ERISA or Section 4975 of the
Code), other than those exempt transactions in respect of which the
prohibitions of Section 4975(c) of the Code do not apply by reason of
Section 4975(d) of the Code, or any other breach of fiduciary
responsibility that could reasonably be expected to subject the
Company, any of its Subsidiaries or any officer of the Company or any
of its Subsidiaries to the tax or penalty on prohibited transactions
imposed by such Section 4975 or to any liability under Section 502(i)
or 502(1) of ERISA, except for any such tax, penalty or liability that
individually or in the aggregate could not reasonably be expected to
have a Material Adverse Effect on the Company. Except as individually
or in the aggregate could not reasonably be expected to have a Material
Adverse Effect on the Company, all contributions and premiums required
to be made under the terms of any Company Benefit Plan as of the date
hereof have been timely made or have been reflected on the most recent
consolidated balance sheet filed or incorporated by reference in the
Company Filed SEC Documents.
(v) Except as individually or in the aggregate could not reasonably
be expected to have a Material Adverse Effect on the Company, each
Company Benefit Plan that is a welfare benefit plan, to the extent
applicable, complies in all material respects with the applicable
requirements of Section 4980B(f) of the Code.
(vi) The Company and its Subsidiaries are in compliance with all
Federal, state, local and foreign requirements regarding employment,
except for any failures to comply that individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on
the Company. Neither the Company nor any of its Subsidiaries is a party
to any collective bargaining or other labor union contract applicable
to persons employed by the Company or any of its Subsidiaries and as of
the date of this Agreement no such collective bargaining agreement is
being negotiated by the Company or any of its Subsidiaries. There is no
labor dispute, strike or work stoppage against the Company or any of
its Subsidiaries pending or, to the Knowledge of the Company,
threatened, which may interfere with the respective business activities
of the Company or any of its Subsidiaries, except where such dispute,
strike or work stoppage individually or in the aggregate could not
reasonably be expected to have a Material Adverse Effect on the
Company. To the Knowledge of the Company, none of the Company, any of
its Subsidiaries or any of their respective directors, officers,
employees or representatives has committed any unfair labor practice in
connection with the operation of the respective businesses of the
Company or any of its Subsidiaries, and there is no action, charge or
complaint against the Company or any of its Subsidiaries by the
National Labor Relations Board or any comparable governmental agency
pending or threatened in writing, in each case except where
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such practices, actions, charges or complaints, individually or in the
aggregate could not reasonably be expected to have a Material Adverse
Effect on the Company.
(vii) (A) Except for the vesting of Company Stock Options (other
than those granted pursuant to Section 4.01(a)(ii)) and restricted
shares of Company Common Stock granted under the Company's 1998 Equity
Incentive Plan as required pursuant to the terms thereof upon
consummation of the Merger or the exercise of the option under the
Voting and Option Agreement, no employee of the Company or its
Subsidiaries will be entitled to any additional benefits or any
acceleration of the time of payment or vesting of any benefits under
any Company Benefit Plan or Company Benefit Agreement as a result of
the transactions contemplated by this Agreement or the Voting and
Option Agreement, (B) no amount payable, or economic benefit provided,
by the Company or its Subsidiaries (including any acceleration of the
time of payment or vesting of any benefit) could be considered an
"excess parachute payment" under Section 280G of the Code and (C) no
person is entitled to receive any additional payment from the Company
or its Subsidiaries or any other person (a "Parachute Gross-Up
Payment") in the event that the excise tax under Section 4999 of the
Code is imposed on such person.
(m) Taxes. (i) Each of the Company and its Subsidiaries has filed or has
caused to be filed all tax returns and reports required to be filed by it
and all such returns and reports are complete and correct, or requests for
extensions to file such returns or reports have been timely filed, granted
and have not expired, except to the extent that such failures to file, to
be complete or correct or to have extensions granted that remain in effect
individually or in the aggregate are not reasonably likely to have a
Material Adverse Effect on the Company. The Company and each of its
Subsidiaries has paid or caused to be paid (or the Company has paid on its
behalf) all taxes shown as due on such returns and reports, and the most
recent financial statements contained in the Company Filed SEC Documents
reflect an adequate reserve for all taxes payable by the Company and its
Subsidiaries (in addition to any reserve for deferred taxes established to
reflect timing differences between book and tax items) for all taxable
periods and portions thereof accrued through the date of such financial
statements.
(ii) No deficiencies for any taxes have been proposed, asserted or
assessed in writing against the Company or any of its Subsidiaries or
any Company Consolidated Group that are not adequately reserved for,
except for deficiencies that individually or in the aggregate are not
reasonably likely to have a Material Adverse Effect on the Company. All
material assessments for taxes due with respect to completed and
settled examinations or any concluded litigation have been fully paid.
The Federal income tax returns of the Company and its Subsidiaries
consolidated in such returns have been examined by the Internal Revenue
Service or have closed by virtue of the applicable statute of
limitations for all years through 1994. There is no currently effective
agreement or other document extending, or having the effect of
extending, the period of assessment or collection of any taxes.
(iii) Neither the Company nor any of its Subsidiaries has taken or
agreed to take any action or knows of any fact, agreement, plan or
other circumstance that is reasonably likely to prevent the Merger from
qualifying as a "reorganization" within the meaning of Section 368(a)
of the Code.
(iv) There are no material Liens for taxes (other than for taxes not
yet due and payable) on the assets of the Company or any of its
Subsidiaries.
(v) No deduction of any amount that would otherwise be deductible
with respect to tax periods ending on or before the Effective Time
could be disallowed under Section 162(m) of the Code.
(vi) Neither the Company nor any of its Subsidiaries has constituted
either a "distributing corporation" or a "controlled corporation" in a
distribution of stock qualifying for tax-free treatment under Section
355 of the Code (x) in the two years prior to the date of this
Agreement or (y) in a distribution which could otherwise constitute
part of a "plan" or "series of related transactions" (within the
meaning of Section 355(e) of the Code) in conjunction with the Merger.
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(vii) As used in this Agreement (1) "taxes" shall include all (x)
Federal, state, local or foreign income, property, sales, excise, use
and other taxes or similar governmental charges, including any
interest, penalties or additions with respect thereto, (y) liability
for the payment of any amounts of the type described in clause (x) as a
result of being a member of an affiliated, consolidated, combined or
unitary group, and (z) liability for the payment of any amounts as a
result of being party to any tax sharing agreement or as a result of
any express or implied obligation to indemnify any other person with
respect to the payment of any amounts of the type described in clause
(x) or (y) and (2) the "Company Consolidated Group" means any
affiliated group within the meaning of Section 1504(a) of the Code, in
which the Company (or any Subsidiary of the Company) is or has ever
been a member.
(n) Voting Requirements. The affirmative vote at the Company Shareholder
Meeting or any adjournment or postponement thereof of the holders of a
majority of the voting power of all outstanding shares of Company Common
Stock in favor of approving this Agreement (the "Company Shareholder
Approval") is the only vote of the holders of any class or series of the
Company's capital stock necessary to approve or adopt this Agreement. No
other approval of the shareholders of the Company is required with respect
to this Agreement or the transactions contemplated hereby.
(o) State Takeover Statutes. The Company has elected in its Articles of
Incorporation not to be governed by Part Thirteen of the TBCA. To the
Knowledge of the Company, no other state takeover statute is applicable to
the Merger or the other transactions contemplated by this Agreement or the
Voting and Option Agreement.
(p) Brokers. No broker, investment banker, financial advisor or other
person, other than Salomon Smith Barney, Inc., the fees, commissions and
expenses of which will be paid by the Company, is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission, or the
reimbursement of expenses, in connection with the transactions contemplated
by this Agreement or the Voting and Option Agreement based upon
arrangements made by or on behalf of the Company. The Company has furnished
to Parent true and complete copies of all agreements under which any such
fees, commissions or expenses are payable and all indemnification and other
agreements related to the engagement of the persons to whom such fees,
commissions or expenses are payable.
(q) Opinion of Financial Advisor. The Company has received the opinion
of Salomon Smith Barney, Inc., dated the date of this Agreement and in
customary form, to the effect that, as of such date, the Exchange Ratio is
fair from a financial point of view to the shareholders of the Company
(other than Parent and its Affiliates), a signed copy of which has been or
promptly will be delivered to Parent.
(r) Intellectual Property. (i) The Company and its Subsidiaries own, or
are validly licensed or otherwise have the right to use, all patents,
patent rights, trademarks, trade secrets, trade names, service marks,
copyrights, technology, know-how and other proprietary intellectual
property rights and computer programs (collectively, the "Intellectual
Property Rights") used in the business of the Company and its Subsidiaries,
except for such Intellectual Property Rights the failure of which to own,
license or otherwise have the right to use individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on the
Company.
(ii) Neither the Company nor any of its Subsidiaries has interfered
with, infringed upon, misappropriated or otherwise come into conflict
with any Intellectual Property Rights of any other person except for
any such interference, infringement, misappropriation or other conflict
that individually or in the aggregate could not reasonably be expected
to have a Material Adverse Effect on the Company. Neither the Company
nor any of its Subsidiaries has received any written charge, complaint,
claim, demand or notice alleging any such interference, infringement,
misappropriation or other conflict (including any claim that the
Company or any such Subsidiary must license or refrain from using any
Intellectual Property Rights or other proprietary information of any
other person) which has not been settled or otherwise fully resolved.
To the Company's Knowledge, no other
A-14
person has interfered with, infringed upon, misappropriated or
otherwise come into conflict with any Intellectual Property Rights of
the Company or any of its Subsidiaries except for any such
interference, infringement, misappropriation or other conflict that
individually or in the aggregate could not reasonably be expected to
have a Material Adverse Effect on the Company.
(iii) As the business of the Company and its Subsidiaries is
presently conducted and proposed to be conducted without giving effect
to any change with respect thereto that may be made by Parent, to the
Company's Knowledge, Parent's use after the Closing of the Intellectual
Property Rights which are material to the conduct of the business of
the Company and its Subsidiaries, taken as a whole, will not interfere
with, infringe upon, misappropriate or otherwise come into conflict
with the Intellectual Property Rights of any other person.
Section 3.02. Representations and Warranties of Parent and Sub. Except as
expressly set forth on the disclosure schedule (with specific reference to the
Section or Subsection of this Agreement to which the information stated in such
disclosure relates and such other Sections or Subsections to the extent a
matter is disclosed in such a way as to make its relevance to such other
Section or Subsection readily apparent) delivered by Parent to the Company
prior to the execution of this Agreement (the "Parent Disclosure Schedule") or
the Parent Filed SEC Documents, Parent represents and warrants to the Company
as follows:
(a) Organization, Standing and Power. Each of Parent and its
Subsidiaries is (i) duly organized, validly existing and in good standing
under the laws of the jurisdiction in which it is organized, (ii) has the
requisite corporate, company or partnership power and authority to carry on
its business as now being conducted and (iii) is duly qualified or licensed
to do business and is in good standing in each jurisdiction in which the
nature of its business or the ownership, leasing or operation of its
properties makes such qualification or licensing necessary, other than
(except in the case of clauses (i) and (ii) above with respect to Parent)
where the failure to be so organized, existing, qualified or licensed or in
good standing individually or in the aggregate could not reasonably be
expected to have a Material Adverse Effect on Parent. Parent has made
available to the Company and its Representatives prior to the execution of
this Agreement true and complete copies of its Amended and Restated
Certificate of Incorporation and Amended and Restated By-laws, in each case
as amended to the date of this Agreement.
(b) Capital Structure. (i) The authorized capital stock of Parent
consists of 2,000,000,000 shares of Parent Class A Common Stock, 22,000,000
shares of Class B common stock, par value $0.01 per share (the "Parent
Class B Common Stock"), 2,000,000 shares of serial preferred stock, par
value $0.01 per share (the "Parent Preferred Stock"), of which 1,150,000
shares have been designated as 6.75% Series A Cumulative Convertible
Preferred Stock (the "Parent Series A Preferred Stock"), 275,000 shares
have been designated as Series B Cumulative Convertible Preferred Stock
(the "Parent Series B Preferred Stock") and 125,000 shares have been
designated as Series C Convertible Preferred Stock (the "Parent Series C
Preferred Stock"), and 10,000,000 shares of Class II preferred stock, par
value $0.001 per share (the "Parent Class II Preferred Stock"). As of the
close of business on August 31, 2000, (i) 583,802,894 shares of Parent
Class A Common Stock were issued and outstanding, (ii) no shares of Parent
Class A Common Stock were held by Parent as treasury shares, (iii)
29,659,181 shares of Parent Class A Common Stock were reserved for issuance
upon the conversion of the Parent Series A Preferred Stock, (iv) 56,506,847
shares of Parent Class A Common Stock were reserved for issuance upon the
conversion of the Parent Series B Preferred Stock, (v) 25,684,930 shares of
Parent Class A Common Stock were reserved for issuance upon the conversion
of the Parent Series C Preferred Stock, (vi) 307,448 shares of Parent Class
A Common Stock were reserved for issuance in connection with the
acquisition by Parent of Dakota Telecommunications Group, Inc. on March 5,
1999 (the "Dakota Acquisition Stock"), (vii) 240,000 shares of Parent Class
A Common Stock were reserved for issuance pursuant to stock option
agreements entered into in connection with the acquisition by Parent of the
assets of Noverr Publishing, Inc. on June 16, 1999 (the "Noverr Options"),
(viii) 1,473,216 shares of Parent Class A Common Stock were reserved for
issuance pursuant to a Stock Option Agreement dated August 21, 1998 between
Parent and QST Enterprises, Inc. (the "QST Options"), (ix) 59,358 shares of
Parent Class A Common Stock
A-15
were reserved for issuance pursuant to Stock Option Agreements dated
December 29, 1998, between Parent and certain stockholders of Inlet, Inc.
(the "Inlet Options"), (x) 229,029 shares of Parent Class A Common Stock
were reserved for issuance in connection with the Stock Option Agreement
dated January 28, 1998, between Parent and Diamond Partners Incorporated
(the "Diamond Partners Options"), (xi) up to 267,826,074 shares of Parent
Class A Common Stock were reserved for issuance pursuant to the 1992, 1993
and 1995 Incentive Stock Option Plans, the 1996 Employee Stock Option Plan,
the Directors' Stock Option Plan and other stock option grants (such plans
and arrangements, collectively, the "Parent Stock Plans"), of which
130,233,437 shares were subject to outstanding stock options or other
rights to purchase or receive shares of Parent Class A Common Stock (such
stock options or other rights, together with the Noverr Options, the QST
Options, the Inlet Options and the Diamond Partners Options, the "Parent
Stock Options"), (xii) 3,691,797 shares of Parent Class A Common Stock were
reserved for issuance pursuant to the Employee Stock Purchase Plan (the
"Parent ESPP"), (xiii) 4,696,856 shares of Parent Class A Common Stock were
reserved for issuance pursuant to the 401(k) Profit Sharing Plan (the
"Parent 401(k)"), (xiv) no shares of Parent Class B Common Stock were
issued and outstanding or were held by Parent as treasury shares, (xv)
7,804,128 shares of Parent Class B Common Stock were reserved for issuance
pursuant to the grant of options to a significant non-employee stockholder
(the "Parent Class B Options"), (xvi) 7,804,128 shares of Parent Class A
Common Stock were reserved for issuance upon the conversion of the shares
of Parent Class B Common Stock issued upon the exercise of the Parent Class
B Options, (xvii) 1,149,580 shares of Parent Series A Preferred Stock were
issued and outstanding, (xviii) 275,000 shares of Parent Series B Preferred
Stock were issued and outstanding, (xix) 125,000 shares of Parent Series C
Preferred Stock were issued and outstanding, (xx) no shares of Parent
Series A Preferred Stock, Parent Series B Preferred Stock or Parent Series
C Preferred Stock were held by Parent as treasury shares and (xxi) no
shares of Parent Class II Preferred Stock were issued and outstanding or
were held by Parent as treasury shares. Except as set forth above, as of
the close of business on August 31, 2000, no shares of capital stock of, or
other equity or voting interests in, Parent or options, warrants or other
rights to acquire any such stock, securities or interests were issued,
reserved for issuance or outstanding. During the period from August 31,
2000, to the date of this Agreement, (x) there have been no issuances by
Parent or any of its Subsidiaries of shares of capital stock of, or other
equity or voting interests in, Parent other than issuances of shares of
Parent Class A Common Stock pursuant to the exercise of Parent Stock
Options outstanding on such date as required by their terms as in effect on
the date of this Agreement or the issuance of the Dakota Acquisition Stock
and (y) except for issuances of Parent Stock Options to employees in the
ordinary course of business, there have been no issuances by Parent or any
of its Subsidiaries of options, warrants or other rights to acquire shares
of capital stock of, or other equity or voting interests in, Parent, other
than rights that may have arisen under the Parent ESPP or the
Parent 401(k). As of the date of this Agreement, there are no outstanding
stock appreciation rights, performance units or rights (other than the
Parent Stock Options, the Parent Class B Options and any rights that may
have arisen under the Parent ESPP or the Parent 401(k) or in respect of the
Dakota Acquisition Stock) to receive shares of Parent Class A Common Stock
or Parent Class B Common Stock on a deferred basis or otherwise linked to
the price of Parent Class A Common Stock granted under the Parent Stock
Plans or otherwise. All outstanding shares of capital stock of Parent are,
and all shares that may be issued pursuant to the Parent Stock Plans, the
Parent ESPP, the Parent 401(k) or the Parent Class B Options or in
connection with any acquisition described above for which shares have been
reserved will be, when issued in accordance with the terms thereof, duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. As of the date of this Agreement, there are no bonds,
debentures, notes or other indebtedness of Parent or any of its
Subsidiaries, and, except as set forth above, no securities or other
instruments or obligations of Parent or any of its Subsidiaries the value
of which is in any way based upon or derived from any capital or voting
stock of Parent, in each case having the right to vote (or convertible
into, or exchangeable for, securities having the right to vote) on any
matters on which stockholders of Parent or any of its Subsidiaries may
vote, except for any Parent Stock Options issued after the date hereof.
Except as set forth above or as otherwise contemplated herein, as of the
date of this Agreement, there are no Contracts to which Parent or any of
its Subsidiaries is a party or by which Parent or any of its Subsidiaries
is bound obligating Parent or any of its Subsidiaries to issue, deliver or
A-16
sell, or cause to be issued delivered or sold, additional shares of capital
stock of, or other equity or voting interests in, or securities convertible
into, or exchangeable or exercisable for, shares of capital stock of, or
other equity or voting interests in, Parent or any of its Subsidiaries or
obligating Parent or any of its Subsidiaries to issue, grant, extend or
enter into any such security, option, warrant, call, right or Contract. As
of the date of this Agreement, there are not outstanding contractual
obligations of Parent or any of its Subsidiaries to (I) repurchase, redeem
or otherwise acquire any shares of capital stock of, or other equity or
voting interests in, Parent or any of its Subsidiaries or (II) vote or
dispose of any shares of the capital stock of, or other equity or voting
interests in, Parent or any of its Subsidiaries. As of the date of this
Agreement, there are no irrevocable proxies and no voting agreements to
which Parent is a party with respect to any shares of the capital stock of,
or other equity or voting interests in, Parent or any of its Subsidiaries.
(ii) Section 3.02(b)(ii) of the Parent Disclosure Schedule sets
forth a true and complete list of each of Parent's Subsidiaries as of
the date hereof. All the outstanding shares of capital stock of, or
other equity or voting interests in, each Subsidiary of Parent have
been validly issued and are fully paid and nonassessable and are owned
directly or indirectly by Parent, free and clear of any Liens and free
of any restriction on the right to vote, sell or otherwise dispose of
such capital stock or other ownership interests. Except for the capital
stock or other ownership interests of its Subsidiaries, as of the date
hereof, Parent does not beneficially own directly or indirectly any
material capital stock of, or other material equity or voting interest
in, any person.
(c) Authority; Noncontravention. Each of Parent and Sub has the
requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by Parent and Sub
and the consummation by Parent and Sub of the transactions contemplated by
this Agreement have been duly authorized by all necessary corporate action
on the part of Parent and Sub, as applicable, and no other corporate
proceedings on the part of Parent are necessary to approve this Agreement
or to consummate the transactions contemplated hereby. This Agreement has
been duly executed and delivered by Parent and Sub and constitutes the
legal, valid and binding obligations of Parent and Sub, enforceable against
Parent and Sub in accordance with its terms. The Board of Directors of
Parent, at a meeting duly called and held at which all directors of Parent
were present, duly and unanimously adopted resolutions approving and
declaring advisable this Agreement, the Voting and Option Agreement, the
Merger and other transactions contemplated hereby or thereby. The execution
and delivery of this Agreement do not, and the consummation of the
transactions contemplated by this Agreement and the Voting and Option
Agreement and compliance with the provisions hereof and thereof do not and
will not conflict with, or result in any violation or breach of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of, or result in, termination, cancelation or acceleration of any
obligation or loss of a benefit under, or result in the creation of any
Lien upon any of the properties or assets of Parent or any of its
Subsidiaries under, or give rise to any increased, additional, accelerated
or guaranteed rights or entitlements under, any provision of (A) the
Amended or Restated Certificate of Incorporation or the Amended and
Restated By-laws of Parent or the comparable organizational documents of
any of its Subsidiaries, (B) any Contract applicable to Parent or any of
its Subsidiaries or their respective properties or assets or (C) subject to
the governmental filings and other matters referred to in the following
sentence, any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Parent or any of its Subsidiaries or their
respective properties, operations or assets, other than, in the case of
clauses (B) and (C), any such conflicts, violations, breaches, defaults,
rights, losses, Liens or entitlements that individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on
Parent or prevent or materially delay the consummation of the Merger. No
consent, approval, order or authorization of, action by or in respect of,
or registration, declaration or filing with, any Governmental Entity is
required by or with respect to Parent or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by Parent and
Sub or the consummation by Parent and Sub of the transactions contemplated
by this Agreement or the Voting and Option Agreement, except for (1) the
filing of a premerger notification and report form by Parent under the HSR
Act; (2) the filing with the SEC of
A-17
(A) the Proxy Statement and the Form S-4, and (B) such reports under
Section 13(a), 13(d), 15(d) or 16(a) of the Exchange Act, as may be
required in connection with this Agreement, the Voting and Option Agreement
and the transactions contemplated by this Agreement or the Voting and
Option Agreement; (3) the filing of the Certificate of Merger with the
Secretaries of State of the State of Delaware and the State of Texas and
appropriate documents with the relevant authorities of other states in
which the Company is qualified to do business; (4) filings with and
approvals of the FCC as required under the Communications Act, and the
rules and regulations promulgated thereunder; (5) such filings with and
approvals of Nasdaq to permit the shares of Parent Class A Common Stock
that are to be issued in connection with the Merger to be quoted on Nasdaq;
(6) filings with and approvals of any state PUCs or similar regulatory
bodies as required by applicable statutes, laws, rules, ordinances and
regulations; (7) filings with and approvals of the FAA as required by
applicable statutes, laws, rules, ordinances and regulations; (8) filings
with and approvals of any foreign antitrust or communications regulatory
authorities; and (9) such other consents, approvals, orders or
authorizations the failure of which to be made or obtained individually or
in the aggregate could not reasonably be expected to have a Material
Adverse Effect on Parent or prevent or materially delay the consummation of
the Merger.
(d) SEC Documents; Undisclosed Liabilities. Parent has filed all
required reports, schedules, forms, statements and other documents
(including exhibits and all other information incorporated therein) with
the SEC since January 1, 1998 (collectively, "Parent SEC Documents"). No
Subsidiary of Parent is required to file any report, schedule, form,
statement or other document with the SEC. As of their respective dates,
Parent SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations of the SEC promulgated thereunder applicable
to such Parent SEC Documents, and none of the Parent SEC Documents when
filed contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Except to the extent that information contained in
any Parent SEC Document has been revised or superseded by a later filed
Parent SEC Document, none of the Parent SEC Documents contains any untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading.
The financial statements (including the related notes) included in the
Parent SEC Documents comply as to form, as of their respective dates of
filing with the SEC, in all material respects with the Accounting Rules,
have been prepared in accordance with GAAP (except, in the case of
unaudited statements, as permitted by the Accounting Rules) applied on a
consistent basis during the periods involved (except as may be indicated in
the related notes) and fairly present in all material respects the
consolidated financial position of Parent and its consolidated Subsidiaries
as of the dates thereof and the consolidated results of their operations
and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal recurring year-end audit adjustments).
Neither Parent nor any of its Subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or
otherwise) which individually or in the aggregate could reasonably be
expected to have a Material Adverse Effect on Parent.
(e) Information Supplied. None of the information supplied or to be
supplied by Parent or any of its Subsidiaries specifically for inclusion or
incorporation by reference in (i) the Form S-4 will, at the time the Form
S-4 becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they are made, not misleading or (ii) the
Proxy Statement will, at the date it is first mailed to the Company's
shareholders or at the time of the Company Shareholders Meeting, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Form S-4 will comply as to form in all material respects
with the requirements of the Securities Act and the rules and regulations
thereunder. No representation or warranty is made by Parent with respect to
statements made or incorporated by reference in the Proxy
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Statement or the Form S-4 based on information supplied by the Company
specifically for inclusion or incorporation by reference in the Proxy
Statement or the Form S-4, as the case may be.
(f) No Material Adverse Change. Except as disclosed in the Parent SEC
Documents filed and publicly available prior to the date of this Agreement
(as amended to the date of this Agreement, the "Parent Filed SEC
Documents"), since December 31, 1999, Parent and its Subsidiaries have
conducted their businesses only in the ordinary course consistent with past
practice, and since such date there has not been any Material Adverse
Change in Parent.
(g) Litigation. There is no suit, action, proceeding, claim, grievance
or investigation pending or, to the Knowledge of Parent, threatened against
or affecting Parent or any of its Subsidiaries that individually or in the
aggregate could reasonably be expected to have a Material Adverse Effect on
Parent nor is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against Parent or any of its
Subsidiaries that has had, or that could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Parent.
(h) Contracts. Neither Parent nor any of its Subsidiaries is in
violation or breach of or in default under (nor does there exist any
condition that upon the passage of time or the giving of notice or both
would cause such a violation or breach of or default under) any Contract to
which it is a party or by which it or any of its properties or assets is
bound, except for violations or defaults that individually or in the
aggregate could not reasonably be expected to have a Material Adverse
Effect on Parent. Since December 31, 1999 and prior to the date hereof,
none of Parent or its Subsidiaries has entered into any Contract with any
Affiliate of Parent that would have been required to be filed as an exhibit
to Parent's Annual Report on Form 10-K for the fiscal year ended December
31, 1999, had Parent been a party to such Contract as of December 31, 1999.
(i) Voting Requirements. No approval of the stockholders of Parent is
required with respect to this Agreement or the transactions contemplated
hereby.
(j) State Takeover Statutes. Except as provided in Section 3.01(o), to
the Knowledge of Parent, no other state takeover statute is applicable to
the Merger or the other transactions contemplated by this Agreement or the
Voting and Option Agreement.
(k) Brokers. No broker, investment banker, financial advisor or other
person, other than Goldman, Sachs & Co., the fees, commissions and expenses
of which will be paid by Parent, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission, or the
reimbursement of expenses, in connection with the transactions contemplated
by this Agreement or the Voting and Option Agreement based upon
arrangements made by or on behalf of Parent.
(l) Capitalization of Sub; No Prior Activities of Sub. Sub was formed
solely for the purpose of engaging in the transactions contemplated hereby,
has engaged in no other business activities and has conducted its
operations only as contemplated hereby. The authorized capital stock of Sub
consists of 1,000 shares of common stock, par value $0.01 per share, all of
which are duly authorized, validly issued, fully paid and nonassessable and
held of record by Parent.
(m) Taxes. Neither Parent nor any of its Subsidiaries has taken or
agreed to take any action or knows of any fact, agreement, plan or other
circumstance that is reasonably likely to prevent the Merger from
qualifying as a "reorganization" within the meaning of Section 368(a) of
the Code.
ARTICLE IV
Covenants Relating to Conduct of Business
Section 4.01. Conduct of Business. (a) Conduct of Business by the
Company. Except as set forth in Section 4.01(a) of the Company Disclosure
Schedule, as otherwise expressly permitted by this Agreement or as consented to
in writing by Parent (which consent shall not be unreasonably withheld), during
the period from
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the date of this Agreement to the Effective Time, the Company shall, and shall
cause its Subsidiaries to, carry on their respective businesses in the ordinary
course and comply with all applicable laws, rules and regulations and use its
commercially reasonable efforts to preserve their assets and technology and
their relationships with customers, suppliers, licensors, licensees,
distributors and others having business dealings with them. In addition,
without limiting the generality of the foregoing, during the period from the
date of this Agreement to the Effective Time, except as set forth in Section
4.01(a) of the Company Disclosure Schedule, as otherwise expressly permitted by
this Agreement or as consented to in writing by Parent (which consent shall not
be unreasonably withheld), the Company shall not, and shall not permit any of
its Subsidiaries to:
(i) (x) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock, property or otherwise) in respect
of, any of its capital stock or other equity or voting interests or
securities, except for dividends and distributions (including liquidating
distributions) by a direct or indirect wholly owned Subsidiary of the
Company to its parent, (y) split, combine or reclassify any of its capital
stock or other equity or voting interests or securities or, other than as
allowed in clause (ii) below, issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock or any other equity or voting interests or securities, or (z)
purchase, redeem or otherwise acquire any shares of capital stock or other
equity or voting interests or securities of the Company or any of its
Subsidiaries or any rights, warrants, calls or options to acquire any such
shares or other equity or voting interests or securities other than any
purchase of Company Common Stock held for more than six months in
connection with a cashless exercise of Company Stock Options;
(ii) issue, deliver, sell, grant, pledge or otherwise encumber or
subject to any Lien any shares of its capital stock, any other equity or
voting interests or securities or any securities convertible into, or
exchangeable for, or any rights, warrants, calls or options to acquire, any
such shares, equity or voting interests or securities or convertible
securities or any stock appreciation rights or other rights that are linked
to the price of Company Common Stock, other than (x) the issuance of shares
of Company Common Stock upon the exercise of the Company Stock Options
outstanding as of the date hereof in accordance with their terms on the
date hereof, (y) grants of Company Stock Options to existing employees
(including executive officers) in amounts, to individuals and on terms as
agreed by the Company and Parent or (z) grants of Company Stock Options to
new employees who are not executive officers in the ordinary course of
business, to the extent that the aggregate number of shares of Company
Common Stock issuable under such grants (whether or not vested), does not
exceed 350,000 in any calendar quarter on terms consistent with past
practice (except that Company Stock Options granted pursuant to this clause
(z) shall vest in equal annual amounts over a four-year period from the
date of grant), except, in the case of clauses (y) and (z), that the
vesting of such Company Stock Options shall not accelerate upon the
consummation of the Merger;
(iii) amend the Company's Articles of Incorporation or By-laws or the
comparable organizational documents of any of its Subsidiaries;
(iv) directly or indirectly acquire or agree to acquire by merging or
consolidating with, or by purchasing the assets of, or by any other manner,
any business or any person, other than purchases of raw materials or
supplies in the ordinary course of business consistent with past practice;
(v) directly or indirectly sell, lease, license, sell and leaseback,
mortgage or otherwise encumber or subject to any Lien or otherwise dispose
of any of its properties or assets other than (A) sales or licenses of
services in the ordinary course of business consistent with past practice
or (B) sales of any properties or assets of a direct or indirect wholly
owned Subsidiary of the Company to the Company or another direct or
indirect wholly owned Subsidiary of the Company;
(vi) (A) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or
rights, warrants, calls or options to acquire any debt securities of the
Company or any of its Subsidiaries, guarantee any debt securities of
another person, enter into any "keep well" or other agreement to maintain
any financial statement condition of another person or enter into any
arrangement having the economic effect of any of the foregoing, other than
(x) short-term
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borrowings incurred in the ordinary course of business consistent with past
practice, (y) intercompany indebtedness between the Company and any of its
wholly owned Subsidiaries or between such wholly owned Subsidiaries and (z)
in connection with the Financing Arrangements, (B) make any loans, advances
or capital contributions to, or investments in, any other person, other
than employee advances in the ordinary course of business consistent with
past practice, or (C) repay, redeem, repurchase or otherwise retire, or
otherwise make any payment in respect of, any indebtedness for borrowed
money or any debt securities, or any rights, warrants, calls or options to
acquire any debt securities, other than as required by their terms as in
effect on the date of this Agreement;
(vii) make any capital expenditure or expenditures, other than cash
payments for capital expenditures (excluding capitalized selling, general
and administrative costs and capitalized interest) in amounts not to exceed
in the aggregate $100,000,000 for the calendar quarter ending December 31,
2000 and $80,000,000 for the calendar quarter ending March 31, 2001;
(viii) (x) pay, discharge, satisfy or settle any material claims
(including claims of shareholders), liabilities, obligations (whether
absolute, accrued, asserted or unasserted, contingent or otherwise), or
litigation (whether or not commenced prior to the date of this Agreement),
other than the payment, discharge, satisfaction or settlement, in the
ordinary course of business consistent with past practice or in accordance
with its terms, of any liability reflected or reserved against in the most
recent consolidated financial statements (or the related notes) of the
Company included in the Company Filed SEC Documents (for amounts not in
excess of the amount reflected on, or reserved against in, such financial
statements) or incurred since the date of such financial statements or (y)
waive the material benefits of, or agree to modify in any material manner,
or terminate or fail to enforce, or consent to any material matter with
respect to which its consent is required under, any confidentiality,
standstill or similar agreement to which the Company or any of its
Subsidiaries is a party or of which the Company or any of its Subsidiaries
is a beneficiary;
(ix) except as may be required to comply with applicable law, enter
into, adopt, amend in any material respect or terminate any Company Benefit
Plan, collective bargaining agreement or other union agreement or Company
Benefit Agreement, or materially change any actuarial or other assumption
used to calculate funding obligations with respect to any Company Benefit
Plan, or change the manner in which contributions to any Company Benefit
Plan are made or the basis on which such contributions are determined;
(x) (A) except for normal increases in cash compensation in the ordinary
course of business consistent with past practice that, in the aggregate, do
not materially increase benefits or compensation expenses of the Company or
its Subsidiaries or increases required by applicable law, increase the
compensation, bonus or other benefits of any current or former director,
officer, employee or consultant or pay any benefit or amount not required
by a Company Benefit Agreement or Company Benefit Plan as in effect on the
date of this Agreement to any such person, (B) take any action to fund or
in any other way secure the payment of compensation or benefits under any
Company Benefit Agreement or Company Benefit Plan or (C) take any action to
accelerate the vesting or payment of any compensation or benefit under any
Company Benefit Agreement or Company Benefit Plan other than the
consummation of the Merger or the exercise of the option under the Voting
and Option Agreement which will accelerate the vesting of Company Stock
Options (other than those Company Stock Options granted pursuant to
Section 4.01(a)(ii)) and restricted shares of Company Common Stock granted
under the Company's 1998 Equity Incentive Plan as required pursuant to the
terms thereof; or
(xi) authorize, commit or agree to take, any of the foregoing actions.
The Company designates Leo Cyr and Parent designates Blake Fisher as their
designees for operational issues between the date of this Agreement and the
Effective Time, in each case until a replacement is designated by the Company
or Parent.
(b) Other Actions. Except as required by applicable law or as expressly
permitted by this Agreement, the Company and Parent shall not, and shall
not permit any of their respective Subsidiaries to,
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knowingly take any action that could reasonably be expected to, result in
(i) any of the representations and warranties of such party set forth in
this Agreement that are qualified as to materiality becoming untrue at the
Effective Time, (ii) any of such representations and warranties that are
not so qualified becoming untrue in any material respect at the Effective
Time, or (iii) any of the conditions to the Merger set forth in Article VI
not being satisfied.
(c) Certain Tax Matters. During the period from the date of this
Agreement to the Effective Time, the Company shall, and shall cause each of
its Subsidiaries to, (i) timely file all material tax returns ("Post-
Signing Returns") required to be filed by it (after taking into account any
applicable extension); (ii) timely pay all material taxes due and payable
in respect of such Post-Signing Returns that are so filed; (iii) accrue a
reserve in its books and records and financial statements in accordance
with past practice for all taxes payable by it for which no Post-Signing
Return is due prior to the Effective Time; (iv) promptly notify Parent of
any suit, claim, action, investigation, proceeding or audit (collectively,
"Actions") pending against or with respect to the Company or any of its
Subsidiaries in respect of any material tax and not settle or compromise
any such Action without Parent's consent; (v) not make any material tax
election without Parent's consent and (vi) cause any and all existing tax
sharing agreements, tax indemnity obligations and similar agreements,
arrangements and practices with respect to taxes to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is otherwise bound (other than any such agreements,
arrangements or obligations solely among the Company and any of its
Subsidiaries) to be terminated as of the Closing Date so that after such
date neither the Company nor any of its Subsidiaries shall have any further
rights or liabilities thereunder.
(d) Advice of Changes. The Company and Parent shall promptly advise the
other party orally and in writing to the extent it has Knowledge of (i) any
representation or warranty made by it contained in this Agreement that is
qualified as to materiality becoming untrue or inaccurate in any respect or
any such representation or warranty that is not so qualified becoming
untrue or inaccurate in any material respect or (ii) the failure of it to
comply with or satisfy in any material respect any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement and
(iii) any change or event that has had, or that could reasonably be
expected to have, a Material Adverse Effect on such party or on the truth
of their respective representations and warranties or the ability of the
conditions set forth in Article VI to be satisfied; provided, however, that
no such notification shall affect the representations, warranties,
covenants or agreements of the parties (or remedies with respect thereto)
or the conditions to the obligations of the parties under this Agreement.
Section 4.02. No Solicitation. (a) From and after the date of this
Agreement, the Company shall not, nor shall it permit any of its Subsidiaries
to, nor shall it authorize or permit any of the directors, officers or
employees of the Company or any of its Subsidiaries or any investment banker,
financial advisor, attorney, accountant or other representative retained by it
or any of its Subsidiaries (collectively, the "Representatives") to, directly
or indirectly through another person, (i) solicit, initiate or encourage, or
take any other action designed to, or which reasonably could be expected to,
facilitate, any inquiries or the making of any proposal that constitutes a
Company Takeover Proposal or (ii) participate in any discussions or
negotiations regarding, or furnish to any person any information with respect
to, or otherwise cooperate in any way with, any Company Takeover Proposal.
Notwithstanding the foregoing, at any time prior to obtaining the Company
Shareholder Approval, in response to a bona fide written Company Takeover
Proposal that the Board of Directors of the Company determines in good faith
(after consultation with outside counsel and a financial advisor of nationally
recognized reputation) constitutes or is reasonably likely to lead to a Company
Superior Proposal, and which Company Takeover Proposal was unsolicited after
the date hereof and did not otherwise result from a breach of this Section
4.02, the Company may, to the extent its Board of Directors determines in good
faith (after consultation with outside counsel) that it is appropriate to do so
in order to comply with its fiduciary duties to the Company's shareholders
under applicable law, and after giving Parent notice of such Company Takeover
Proposal and determination of necessity, (x) furnish information with respect
to the Company and its Subsidiaries to the person making such Company Takeover
Proposal (and its Representatives) pursuant to a customary confidentiality
agreement, provided, that all such information is provided to Parent prior to
or
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substantially concurrent with the time it is provided to such person, and (y)
participate in discussions or negotiations with the person making such Company
Takeover Proposal (and its Representatives) regarding such Company Takeover
Proposal.
The term "Company Takeover Proposal" means any inquiry, proposal or offer
from any person relating to, or that is reasonably likely to lead to, any
direct or indirect acquisition or purchase, in one transaction or a series of
transactions, of a business that constitutes 20% or more of the revenues, net
income, EBITDA or the assets of the Company and its Subsidiaries, taken as a
whole, or 20% or more of the Company Common Stock or the capital stock of, or
any other equity or voting interests in, any Subsidiary of the Company, any
tender offer or exchange offer that if consummated would result in any person
beneficially owning 20% or more of the Company Common Stock or the capital
stock of, or any other equity or voting interests in, any Subsidiary of the
Company, or any merger, consolidation, business combination, recapitalization,
liquidation, dissolution, joint venture, binding share exchange or similar
transaction involving the Company or any of its Subsidiaries pursuant to which
any person or the shareholders of any person would own 20% or more of the
Company or any resulting parent company of the Company, other than the
transactions contemplated by this Agreement or the Voting and Option Agreement.
The term "Company Superior Proposal" means any bona fide, binding written
offer not solicited by or on behalf of the Company or any of its Subsidiaries
made by any person that if consummated would result in such person (or its
shareholders) owning, directly or indirectly, more than 50% of the shares of
Company Common Stock then outstanding (or of the surviving entity in a merger
or the direct or indirect parent of the surviving entity in a merger) or all or
substantially all the assets of the Company and its Subsidiaries, taken as a
whole, and otherwise on terms that the Board of Directors of the Company
determines in good faith (after consultation with a financial advisor of
nationally recognized reputation), taking into account the person making the
offer, the legal, financial, regulatory and other aspects of the offer deemed
appropriate by the Board of Directors of the Company and any changes to the
terms of this Agreement proposed by Parent in response to such offer or
otherwise, to be reasonably likely to obtain any required approvals on a timely
basis and to be more favorable to the Company's shareholders from a financial
point of view than the Merger.
(b) Neither the Board of Directors of the Company nor any committee
thereof shall (or shall agree to resolve to) (i) (A) withdraw (or modify in
a manner adverse to Parent), or propose to withdraw (or modify in a manner
adverse to Parent), the recommendation or declaration of advisability by
such Board of Directors or such committee thereof of this Agreement or the
Merger or (B) recommend, or propose to recommend, the approval or adoption
of any Company Takeover Proposal (any action described in this clause (i)
being referred to herein as a "Company Adverse Recommendation Change"),
(ii) adopt or approve, or propose publicly to adopt or approve, any Company
Takeover Proposal or withdraw, or propose to withdraw, its approval of this
Agreement or the Merger, or (iii) approve or recommend, or propose to
approve or recommend, or cause or permit the Company or any of its
Subsidiaries to enter into any letter of intent, agreement in principle,
acquisition agreement, memorandum of understanding, merger agreement,
option agreement, joint venture agreement, partnership agreement or other
similar agreement (each, an "Acquisition Agreement") constituting or
related to, or that is intended to or is reasonably likely to lead to, any
Company Takeover Proposal (other than a confidentiality agreement referred
to in Section 4.02(a)). Notwithstanding the foregoing, at any time prior to
obtaining the Company Shareholder Approval, the Board of Directors of the
Company may, in response to a Company Superior Proposal that was
unsolicited after the date hereof and that did not otherwise result from a
breach of this Section 4.02, make a Company Adverse Recommendation Change
to the extent such Board of Directors determines in good faith (after
consultation with outside counsel) that it is necessary to do so in order
to comply with its fiduciary duties to the Company's shareholders under
applicable law; provided, however, that no Company Adverse Recommendation
Change may be made until after the third Business Day following Parent's
receipt of written notice (a "Notice of Company Superior Proposal") from
the Company advising Parent that the Board of Directors of the Company has
received a Company Superior Proposal and intends to make a Company Adverse
Recommendation Change and specifying the terms and conditions of such
Company Superior Proposal (it being understood and agreed that any
amendment to the price or any other
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material term of a Company Superior Proposal shall require a new Notice of
Company Superior Proposal and new three Business Day period).
(c) In addition to the obligations of the Company set forth in
paragraphs (a) and (b) of this Section 4.02, the Company shall immediately
advise Parent orally and in writing of any request for information or of
any Company Takeover Proposal, or of any inquiry the Company reasonably
believes could lead to a Company Takeover Proposal, the terms and
conditions of such request, Company Takeover Proposal or inquiry and the
identity of the person making such request, Company Takeover Proposal or
inquiry. The Company will keep Parent informed on a prompt basis of the
status and details (including amendments or changes or proposed amendments
or changes) of any such request, Company Takeover Proposal or inquiry.
(d) Nothing contained in this Section 4.02 shall prohibit the Company
from taking and disclosing to its shareholders a position contemplated by
Rule 14d-9 or 14e-2 promulgated under the Exchange Act or from making any
disclosure to the Company's shareholders if, in the good faith judgment of
the Board of Directors of the Company, after consultation with outside
counsel, failure so to disclose would be inconsistent with its obligations
under applicable law; provided, however, that, in no event shall the
Company nor its Board of Directors nor any committee thereof take, agree or
resolve to take any action prohibited by Section 4.02(b).
ARTICLE V
Additional Agreements
Section 5.01. Preparation of the Form S-4 and the Proxy Statement. (a) As
soon as practicable following the date of this Agreement, the Company and
Parent shall prepare and file with the SEC the Proxy Statement and the Company
and Parent shall prepare and Parent shall file with the SEC the Form S-4, in
which the Proxy Statement will be included as a prospectus. Each of the Company
and Parent shall use its commercially reasonable efforts to have the Form S-4
declared effective under the Securities Act as promptly as practicable after
such filing and keep the Form S-4 effective for so long as necessary to
complete the Merger. The Company will use its commercially reasonable efforts
to cause the Proxy Statement to be mailed to the Company's shareholders as
promptly as practicable after the Form S-4 is declared effective under the
Securities Act. Parent shall also take any action (other than qualifying to do
business in any jurisdiction in which it is not now so qualified or to file a
general consent to service of process) reasonably required to be taken under
any applicable state securities laws in connection with the issuance of Parent
Class A Common Stock in the Merger and the Company shall furnish all
information concerning the Company and the holders of capital stock of the
Company as may be reasonably requested in connection with any such action. No
filing of, or amendment or supplement to, or correspondence to the SEC or its
staff with respect to, the Form S-4 will be made by Parent, or the Proxy
Statement will be made by the Company, without providing the other party a
reasonable opportunity to review and comment thereon. Parent will advise the
Company, promptly after it receives notice thereof, of the time when the Form
S-4 has become effective or any supplement or amendment thereto has been filed,
the issuance of any stop order, the suspension of the qualification of the
Parent Class A Common Stock issuable in connection with the Merger for offering
or sale in any jurisdiction, or any request by the SEC for amendment of the
Form S-4 or the Proxy Statement or comments thereon and responses thereto or
requests by the SEC for additional information and will, as promptly as
practicable, provide to the Company copies of all correspondence and filings
with the SEC with respect to the Form S-4. The Company will advise Parent,
promptly after it receives notice thereof, of any request by the SEC for
amendment of the Proxy Statement or comments thereon and responses thereto or
requests by the SEC for additional information and will, as promptly as
practicable, provide to Parent copies of all correspondence and filings with
the SEC with respect to the Proxy Statement. If at any time prior to the
Effective Time any information relating to the Company or Parent, or any of
their respective Affiliates, directors or officers, should be discovered by the
Company or Parent which should be set forth in an amendment or supplement to
any of the Form S-4 or the Proxy Statement, so that any of such documents would
not include any misstatement of a material fact or omit
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to state any material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading, the party that
discovers such information shall promptly notify the other parties hereto and
an appropriate amendment or supplement describing such information shall be
promptly filed with the SEC and, to the extent required by law, disseminated to
the shareholders of Parent and the shareholders of the Company. For purposes of
Sections 3.01(f), 3.02(e) and 5.01, information concerning or related to
Parent, Sub or any of Parent's other Subsidiaries will be deemed to have been
provided by Parent, and information concerning or related to the Company, its
Subsidiaries or the Company Shareholders Meeting will be deemed to have been
provided by the Company.
Section 5.02. Company Shareholders Meeting. The Company (i) shall, as soon
as practicable following the date of this Agreement, establish a record date
(which shall be as soon as practicable following the date of this Agreement)
for, duly call, give notice of, convene and hold a meeting of its shareholders
(the "Company Shareholders Meeting") for the purpose of obtaining the Company
Shareholder Approval and (ii) except as provided in Section 4.02(b), shall,
through its Board of Directors, recommend to its shareholders the approval of
this Agreement. The Company agrees that its obligations pursuant to clause (i)
of the first sentence of this Section 5.02 shall not be affected by the
commencement, public proposal, public disclosure or communication to the
Company of any Company Takeover Proposal, and such obligations shall not be
affected by any action that the Company takes under Section 4.02(b).
Section 5.03. Access to Information; Confidentiality. Subject to the
existing confidentiality agreements between Parent and the Company
(collectively, the "Confidentiality Agreement"), upon reasonable notice, each
of Parent and the Company shall, and shall cause each of its Subsidiaries to,
afford to the other party and to the Representatives of such other party,
reasonable access during normal business hours during the period prior to the
Effective Time to all their respective properties, books, Contracts, personnel
and records and, during such period, each of the Company and Parent shall, and
shall cause each of its Subsidiaries to, furnish promptly to the other party
all other information concerning its business, properties and personnel as such
other party may reasonably request. Neither Parent nor the Company shall be
required to provide access to or disclose information where such access or
disclosure would contravene any applicable law, rule, regulation, order or
decree or would, with respect to any pending matter, result in a waiver of the
attorney-client privilege or the protection afforded attorney work-product.
Parent and the Company shall use their respective commercially reasonable
efforts to obtain from third parties any consents or waivers of confidentiality
restrictions with respect to any such information being provided by it. No
review pursuant to this Section 5.03 shall have an effect for the purpose of
determining the accuracy of any representation or warranty given by either
party hereto to the other party hereto. Each of the Company and Parent will
hold, and will direct its Representatives and Affiliates to hold, any nonpublic
information in accordance with the terms of the Confidentiality Agreement.
Section 5.04. Commercially Reasonable Efforts. (a) Upon the terms and
subject to the conditions set forth in this Agreement, each of the parties
agrees to use its commercially reasonable efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, and to assist and cooperate
with the other parties in doing, all things necessary, proper or advisable to
consummate and make effective, in the most expeditious manner practicable, the
Merger and the other transactions contemplated by this Agreement and the Voting
and Option Agreement, including using commercially reasonable efforts to
accomplish the following: (i) the taking of all reasonable acts necessary to
cause the conditions to Closing to be satisfied as promptly as practicable,
(ii) the obtaining of all necessary actions or nonactions, waivers, consents
and approvals from Governmental Entities and the making of all necessary
registrations and filings (including filings with Governmental Entities, if
any) and the taking of all reasonable steps as may be necessary to obtain an
approval or waiver from, or to avoid an action or proceeding by, any
Governmental Entity, (iii) the obtaining of all necessary consents, approvals
or waivers from third parties, (iv) the defending of any lawsuits or other
legal proceedings, whether judicial or administrative, challenging this
Agreement and the Voting and Option Agreement or the consummation of the Merger
or the other transactions contemplated hereby or thereby, including seeking to
have any stay or temporary restraining order entered by any court or other
Governmental Entity vacated or
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reversed and (v) the execution and delivery of any additional instruments
necessary to consummate the Merger and the other transactions contemplated by,
and to fully carry out the purposes of, this Agreement and the Voting and
Option Agreement. Nothing in this Agreement shall be deemed to require Parent
to agree to, or proffer to, divest or hold separate any assets or any portion
of any business of Parent, the Company or any of their respective Subsidiaries
if the Board of Directors of Parent determines that so doing would materially
impair the benefits intended to be obtained by Parent in the Merger. Without
limiting the generality of the foregoing, the Company and Parent shall each
cooperate with the other in the defense of any litigation against Parent or the
Company and/or its directors relating to the transactions contemplated by this
Agreement or the Voting and Option Agreement.
(b) In connection with and without limiting the foregoing, the Company
and its Board of Directors and Parent and its Board of Directors shall use
their respective commercially reasonable efforts to (1) take all action
necessary to ensure that no state takeover statute or similar statute or
regulation is or becomes applicable to this Agreement, the Voting and
Option Agreement, the Merger or any of the other transactions contemplated
by this Agreement or the Voting and Option Agreement and (2) if any state
takeover statute or similar statute or, rule or regulation becomes
applicable to this Agreement, the Voting and Option Agreement, the Merger
or any other transactions contemplated by this Agreement or the Voting and
Option Agreement, take all action necessary to ensure that the Merger and
the other transactions contemplated by this Agreement or the Voting and
Option Agreement may be consummated as promptly as practicable on the terms
contemplated by this Agreement or the Voting and Option Agreement and
otherwise to minimize the effect of such statute, rule or regulation on
this Agreement, the Voting and Option Agreement, the Merger and the other
transactions contemplated by this Agreement or the Voting and Option
Agreement.
Section 5.05. Company Stock Options. (a) At or as soon as practicable after
the Effective Time, the Company and Parent will take such steps as are
necessary to implement the arrangements provided in Section 5.05 of the Company
Disclosure Schedule.
(b) The arrangements referenced in paragraph (a) above with respect to
any Company Stock Options to which Section 421(a) of the Code applies shall
be and are intended to be effected in a manner which is consistent with
Section 424(a) of the Code.
(c) At or prior to the Effective Time, Parent shall take all action
necessary to authorize and reserve for issuance a sufficient number of
shares of Parent Class A Common Stock issuable in respect of the Company
Stock Options adjusted as described in paragraph (a) above. As soon as
reasonably practicable following the Effective Time, Parent shall cause a
number of shares of Parent Class A Common Stock equal to the number of
shares issuable in respect of the Company Stock Options adjusted as
described in paragraph (a) above to be registered under the Securities Act
pursuant to a registration statement on Form S-8 (or another appropriate
form). Such registration statement shall be kept effective (and the current
status of the prospectus or prospectuses required thereby shall be
maintained) for so long as any such options may remain outstanding.
Section 5.06. Employee Benefit Plans; Existing Agreements. (a) During the
six-month period following the Effective Time (the "Transition Period"), Parent
shall cause the Surviving Corporation (i) to maintain the Company Benefit Plans
(other than equity-based arrangements) in effect on the date of this Agreement
or (ii) to replace all or any of the Company Benefit Plans with employee
benefit plans and programs maintained for similarly situated employees of
Parent, provided that the aggregate level of benefits (other than equity-based
arrangements) shall be substantially comparable to the aggregate level of
benefits provided by the Company Benefit Plans in effect on the date of this
Agreement.
(b) To the extent that any plan of Parent or any of its Affiliates (a
"Parent Plan") becomes applicable to any employee or former employee of the
Company or its Subsidiaries, Parent shall grant, or cause to be granted, to
such employees or former employees credit for their service with the
Company and its Subsidiaries (and any of their predecessors) for the
purpose of determining eligibility to participate and
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nonforfeitability of benefits under such Parent Plan and for purposes of
benefit accrual under vacation and severance pay plans (but only to the
extent such service was credited under similar plans of the Company and its
Subsidiaries).
(c) Parent shall cause the Company or the Surviving Corporation, as
applicable, to honor in accordance with their respective terms (as in
effect on the date of this Agreement), the Company Benefit Agreements
disclosed on the Company Disclosure Schedule.
(d) Subject to compliance by Parent with its obligations under Sections
5.06(a), (b) and (c), nothing contained in this Section 5.06 or elsewhere
in this Agreement shall be construed to prevent the termination of
employment of any individual employee of the Company or its Subsidiaries or
any change in the employee benefits available to any such individual
employee or the amendment or termination of any particular Company Benefit
Plan to the extent permitted by its terms as in effect immediately prior to
the Effective Time.
Section 5.07. Indemnification, Exculpation and Insurance. (a) Parent and Sub
agree that all rights to indemnification and exculpation from liabilities for
acts or omissions occurring at or prior to the Effective Time (and rights for
advancement of expenses) now existing in favor of the current or former
directors or officers, employees or agents of the Company and its Subsidiaries
as provided in their respective articles or certificates of incorporation or
by-laws (or comparable organizational documents) and any indemnification or
other similar agreements of the Company as in effect on the date hereof shall
be assumed by the Surviving Corporation in A-the Merger, without further
action, as of the Effective Time and shall survive the Merger and shall
continue in full force and effect in accordance with their terms, and shall not
be amended, repealed or otherwise modified after the Effective Time in any
manner that would adversely affect the rights thereunder of the individuals who
on or prior to the Effective Time were directors, officers, employees or agents
of the Company or its Subsidiaries, and Parent shall, and shall cause the
Surviving Corporation to (including, if necessary, by providing the Surviving
Corporation with sufficient funding), honor all such indemnification
provisions.
(b) In the event that the Surviving Corporation or any of its successors
or assigns (i) consolidates with or merges into any other person and is not
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers or conveys all or substantially all of its
properties and assets to any person, then, and in each such case, Parent
shall cause proper provision to be made so that the successors and assigns
of the Surviving Corporation assume the obligations set forth in this
Section 5.07.
(c) For six years after the Effective Time, Parent shall, and shall
cause the Surviving Corporation to (including, if necessary, by providing
the Surviving Corporation with sufficient funding), maintain in effect and
honor the Company's current directors' and officers' liability insurance
covering acts or omissions occurring prior to the Effective Time covering
each person currently covered by the Company's directors' and officers'
liability insurance policy on terms with respect to such coverage and
amounts no less favorable than those of each such policy in effect on the
date hereof, provided that Parent may substitute therefor policies no less
favorable in any material respect to such insured persons; provided
however, that in no event shall Parent be required to pay aggregate
premiums for insurance under this Section 5.07(c) in excess of 200% of the
amount of the aggregate premiums paid by the Company in 2000 on an
annualized basis for such purpose (which 2000 annualized premiums are
hereby represented and warranted to be $131,250), provided that Parent
shall nevertheless be obligated to provide such coverage as may be obtained
for such 200% amount.
(d) The provisions of this Section 5.07 (i) are intended to be for the
benefit of, and will be enforceable by, each indemnified party, his or her
heirs and his or her representatives and (ii) are in addition to, and not
in substitution for, any other rights to indemnification or contribution
that any such person may have by contract or otherwise.
Section 5.08. Fees and Expenses. (a) Except as provided in this Section
5.08, all fees and expenses incurred in connection with the Merger, this
Agreement, the Voting and Option Agreement and the transactions contemplated
hereby and thereby shall be paid by the party incurring such fees or expenses,
whether or not the
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Merger is consummated, except that each of Parent and the Company shall bear
and pay one-half of (i) the costs and expenses incurred in connection with the
filing, printing and mailing of the Form S-4 and the Proxy Statement (including
SEC filing fees) and (ii) the filing fees for the premerger notification and
report forms under the HSR Act.
(b) In the event that (A) a Company Takeover Proposal shall have been
made to the Company or any of its Subsidiaries or shall have been made
directly to the shareholders of the Company generally or shall have
otherwise become publicly known or any person shall have publicly announced
an intention (whether or not conditional) to make a Company Takeover
Proposal, (B) thereafter this Agreement is terminated by either Parent or
the Company pursuant to Section 7.01(b)(i) or (ii) or by Parent pursuant to
Section 7.01(e) and (C) within 12 months after such termination, the
Company or any of its Subsidiaries enters into an Acquisition Agreement
with respect to, or consummates, any Company Takeover Proposal (solely for
purposes of this Section 5.08(b)(i)(C), the term "Company Takeover
Proposal" shall have the meaning set forth in Section 4.02 except that
references to 20% therein shall be deemed to be references to 30%), then
the Company shall pay Parent a fee equal to $7.85 million (the "Termination
Fee"), payable by wire transfer of same day funds to an account designed by
Parent in the case of a payment as a result of any event referred to in
Section 5.08(b)(i)(C), upon the first to occur of such events. The Company
acknowledges that the agreements contained in this Section 5.08(b) are an
integral part of the transactions contemplated by this Agreement, and that,
without these agreements, Parent would not enter into this Agreement;
accordingly, if the Company fails promptly to pay the amount due pursuant
to this Section 5.08(b), and, in order to obtain such payment, Parent
commences a suit that results in a judgment against the Company for the fee
set forth in this Section 5.08(b), the Company shall pay to Parent its
costs and expenses (including attorneys' fees and expenses) in connection
with such suit, together with interest on the amount of the fee from the
date such payment was required to be made until the date of payment at the
prime rate of Citibank, N.A. in effect on the date such payment was
required to be made.
Section 5.09. Public Announcements. Parent and the Company will consult with
each other before issuing, and provide each other the opportunity to review,
comment upon and concur with, any press release or other public statements with
respect to the transactions contemplated by this Agreement, including the
Merger or the Voting and Option Agreement and shall not issue any such press
release or make any such public statement prior to such consultation, except as
either party may determine is required by applicable law or by obligations
pursuant to any listing agreement with any national securities exchange or
national trading system. The parties agree that the initial press release to be
issued with respect to the transactions contemplated by this Agreement and the
Voting and Option Agreement shall be in the form previously agreed to by the
parties.
Section 5.10. Affiliates. The Company shall deliver to Parent at least 30
calendar days prior to the Closing Date a letter identifying all persons who
are, at the time this Agreement is submitted for approval by the shareholders
of the Company, "affiliates" of the Company for purposes of Rule 145 under the
Securities Act. The Company shall use its commercially reasonable efforts to
cause each such person, and each other person who becomes such an "affiliate",
to deliver to Parent as of the Closing Date a written agreement substantially
in the form attached as Exhibit A hereto.
Section 5.11. Nasdaq Quotation. Parent shall use its commercially reasonable
efforts to cause the shares of Parent Class A Common Stock issuable in the
Merger (and the shares of Parent Class A Common Stock issuable upon exercise of
Company Stock Options adjusted as described in Section 5.05(a)) to be approved
for quotation on Nasdaq, subject to official notice of issuance, as promptly as
practicable after the date of this Agreement.
Section 5.12. Tax Treatment. Each of Parent and the Company shall use its
commercially reasonable efforts to cause the Merger to qualify, and will not
(either before or after consummation of the Merger) take or fail to take any
actions if such actions or such failure to take any actions could reasonably be
expected to prevent the Merger from qualifying, as a "reorganization" within
the meaning of Section 368(a) of the Code
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and to obtain the opinions of counsel referred to in Section 6.03(c), including
the execution of the letters of representation referred to therein.
Section 5.13. Further Assurances. The Company shall take, or shall cause to
be taken, any action required by the terms of any note, indenture, credit
agreement, warrant or other financing instrument or preferred stock, as
promptly as possible, as a result of the Merger or the transactions
contemplated by this Agreement or the Voting and Option Agreement.
Section 5.14. Transfer Taxes. All stock transfer, real estate transfer,
documentary, stamp, recording and other similar taxes (including interest,
penalties and additions to any such taxes) incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the
Company.
Section 5.15. Approvals. The Board of Directors or Compensation Committee of
the Company and Parent shall each grant all approvals and take all other
actions required pursuant to Rules 16b-3(d) and 16b-3(e) under the Exchange Act
to cause the disposition in the Merger of the Company Common Stock and Company
Stock Options and the acquisition in the Merger of Parent Class A Common Stock
and Parent Stock Options, if any, including approving the right to surrender
options as set forth in the Company Stock Plans to be exempt from the
provisions of Section 16(b) of the Exchange Act.
Section 5.16. Consent of Noteholders. (a) As soon as practicable following
the date of this Agreement, the Company (i) shall prepare and commence a
consent solicitation, on terms acceptable to Parent in its sole discretion (the
"Consent Solicitation"), with respect to (A) all holders of the outstanding 12%
Senior Notes due 2008 of the Company (the "12% Notes") and (B) all holders of
the outstanding 11 1/2% Senior Notes due 2009 of the Company (the "11 1/2%
Notes" and, together with the 12% Notes, the "Notes") and (ii) in order that
the consummation of the Merger and the other transactions contemplated by this
Agreement shall not violate the Indentures, and shall not require a "change of
control" offer to be made to the holders of the Notes (the "Merger
Amendments"), shall use commercially reasonable efforts to (A) amend the
Indenture dated as of July 16, 1998 (the "12% Indenture"), among the Company,
CapRock Telecommunications Corp., CapRock Fiber Network, Ltd., IWL
Communications, Incorporated, and the Chase Manhattan Trust Company, National
Association, relating to the 12% Notes and the Indenture dated as of May 18,
1999 (the "11 1/2% Indenture" and, together with the 12% Indenture, the
"Indentures"), between the Company and Chase Manhattan Trust Company, National
Association, relating to the 11 1/2% Notes or (B) obtain appropriate waivers
from the holders of each of the 12% Notes and the 11 1/2% Notes under their
respective Indentures.
(b) As part of the Consent Solicitation, the Company shall also use
commercially reasonable efforts to amend the Indentures to eliminate
substantially all the restrictive covenants contained therein, including
Section 7.04 and Articles 8 and 10 (other than Sections 10.01, 10.02,
10.03, 10.08, 10.09, 10.12, 10.17 and 10.21) of the 12% Indenture and
Section 7.04 and Articles 8 and 10 (other than Sections 10.01, 10.02,
10.03, 10.08, 10.09 and 10.12) of the 11 1/2% Indenture (or in each case as
agreed by Parent and the Company) on terms acceptable to Parent in its sole
discretion (the "Covenant Amendments" and, together with the Merger
Amendments, the "Amendments").
(c) Promptly upon receipt of the Requisite Consent with respect to the
Consent Solicitation, the Company shall, and shall use its commercially
reasonable efforts to cause the indenture trustees under the Indentures to,
execute supplemental indentures incorporating the Amendments. The Merger
Amendments shall be effective immediately upon execution by the Company and
the indenture trustees following receipt of the Requisite Consent. The
Covenant Amendments shall be effective upon the later of (i) the Effective
Time and (ii) 20 Business Days following commencement by Parent of the
Notes Exchange Offer as set forth in Section 5.17.
(d) The Company and Parent shall cooperate with each other with respect
to the Consent Solicitation and the preparation, form and content of the
solicitation materials to be distributed to the holders of the Notes.
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(e) "Requisite Consent" means the written consent of the holders of at
least a majority of the aggregate principal amount of the outstanding 12%
Notes as to any amendment or waiver in respect of the 12% Indenture and the
holders of at least a majority of the aggregate principal amount of the
outstanding 11 1/2% Notes as to any amendment or waiver in respect of the
11 1/2% Indenture.
Section 5.17. Notes Exchange Offer. (a) As soon as practicable after the
date of this Agreement, Parent shall prepare and file with the SEC a
registration statement on Form S-4 (the "Exchange Offer Statement") in order to
effect an exchange offer (the "Notes Exchange Offer") to acquire all of the
outstanding 12% Notes and 11 1/2% Notes in exchange for notes of Parent (the
"Parent Notes") having the same interest rate, payment, maturity and redemption
terms as the Notes and otherwise with terms that are substantially identical to
those of the 8 1/2% Senior Notes Due 2009 of Parent (the "Exchange
Consideration"), all as more fully set forth in the Exchange Offer Statement.
Parent shall use commercially reasonable efforts to have the Exchange Offer
Statement declared effective, to commence the Notes Exchange Offer and to mail
such Exchange Offer Statement to the holders of the Notes as promptly as
practicable.
(b) The Exchange Offer Statement will set forth the terms and conditions
with respect to the Notes Exchange Offer; provided that without limiting
the foregoing, Parent's obligation to consummate the Exchange Offer shall
be conditioned on receipt of the Requisite Consent and execution of the
Amendments related thereto and on consummation of the Merger.
(c) Parent and the Company shall cooperate with each other with respect
to the Exchange Offer and the preparation, form and content of the Exchange
Offer Statement to be distributed to the holders of the Notes.
ARTICLE VI
Conditions Precedent
Section 6.01. Conditions to Each Party's Obligation To Effect the
Merger. The respective obligation of each party to effect the Merger is subject
to the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Shareholder Approval. The Company Shareholder Approval shall have
been obtained.
(b) HSR Act. The waiting period (and any extension thereof) applicable
to the Merger under the HSR Act shall have been terminated or shall have
expired.
(c) Consents. Each party shall have received reasonably satisfactory
evidence that Parent or the Company shall have obtained (i) all material
consents, approvals, authorizations, qualifications and orders of all
Governmental Entities legally required in connection with this Agreement
and the transactions contemplated by this Agreement and (ii) all other
consents, approvals, authorizations, qualifications and orders of
Governmental Entities or third parties required in connection with this
Agreement and the transactions contemplated by this Agreement, except, in
the case of this clause (ii), for those the failure of which to be obtained
individually or in the aggregate could not reasonably be expected to have a
Material Adverse Effect on the Company or Parent, as the case may be.
(d) No Restraints. No judgment, order, decree, injunction, statute, law,
ordinance, rule or regulation, entered, enacted, promulgated, enforced or
issued by any court or other Governmental Entity of competent jurisdiction
or other legal restraint or prohibition (collectively, "Restraints") shall
be in effect, and there shall not be pending any suit, action or proceeding
by any Governmental Entity, (i) preventing, or seeking to prevent, the
consummation of the Merger or (ii) which otherwise could reasonably be
expected to have a Material Adverse Effect on the Company or Parent, as the
case may be.
(e) Form S-4. The Form S-4 shall have become effective under the
Securities Act. No stop order suspending the effectiveness of the Form S-4
shall have been issued by the SEC and no proceedings for that purpose shall
have been initiated or, to the knowledge of Parent or the Company,
threatened by the
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SEC and not concluded or withdrawn. Parent shall have received all other
federal or state securities permits and other authorizations necessary to
issue Parent Class A Common Stock in exchange for Company Common Stock and
to consummate the Merger.
(f) Nasdaq Quotation. The shares of Parent Class A Common Stock issuable
to the Company's shareholders in the Merger (and the shares of Parent Class
A Common Stock issuable upon exercise of Company Stock Options adjusted as
described in Section 5.05(a)) as contemplated by this Agreement shall have
been approved for quotation on Nasdaq, subject to official notice of
issuance.
Section 6.02. Conditions to Obligations of Parent and Sub. The obligation of
Parent and Sub to effect the Merger is further subject to satisfaction or
waiver of the following conditions:
(a) Representations and Warranties. The representations and warranties
of the Company set forth herein that are qualified as to materiality shall
be true and correct, and those that are not so qualified shall be true and
correct in all material respects, in each case as of the date hereof and as
of the Closing Date, with the same effect as if made at and as of such time
(except to the extent expressly made as of an earlier date, in which case
as of such date). Parent shall have received a certificate signed by the
chief executive officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date. Parent shall
have received a certificate signed by the chief executive officer of the
Company to such effect.
(c) Consent Solicitation. The Company shall have obtained the Requisite
Consent with respect to the Consent Solicitation in form and substance
satisfactory to Parent in its sole discretion and the indenture trustees
shall have executed the Amendments in connection therewith.
Section 6.03. Conditions to Obligations of the Company. The obligations of
the Company to effect the Merger and the other transactions contemplated herein
are further subject to satisfaction or waiver of the following conditions:
(a) Representations and Warranties. The representations and warranties
of Parent and Sub set forth herein that are qualified as to materiality
shall be true and correct, and those that are not so qualified shall be
true and correct in all material respects, in each case as of the date
hereof and as of the Closing Date, with the same effect as if made at and
as of such time (except to the extent expressly made as of an earlier date,
in which case as of such date). The Company shall have received a
certificate signed by the chief executive officer of Parent to such effect.
(b) Performance of Obligations of Parent and Sub. Parent and Sub shall
have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date. The
Company shall have received a certificate signed by the chief executive
officer of Parent to such effect.
(c) Tax Opinions. The Company shall have received from Munsch Hardt Kopf
& Harr, P.C., counsel to the Company, on the date on which the Form S-4 is
filed with the SEC and on the Closing Date, an opinion, in each case dated
as of such respective date and to the effect that: (i) the Merger will
qualify for U.S. Federal income tax purposes as a "reorganization" within
the meaning of Section 368(a) of the Code and (ii) the Company and Parent
will each be a "party to a reorganization" within the meaning of Section
368(b) of the Code. The issuance of such opinion shall be conditioned upon
the receipt by such counsel of representation letters from each of the
Company and Parent in substantially the same form as Exhibits B and C,
respectively.
(d) Financing Arrangements. The financing arrangements dated as of the
date hereof, among Parent, the Company and the lenders party thereto (the
"Financing Arrangements") shall be in full force and effect as of the
Closing Date, and Parent shall have performed all of its material payment
obligations
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thereunder from the date of its effectiveness through and including the
Closing Date and shall not be in default thereunder as of the Closing Date.
Section 6.04. Frustration of Closing Conditions. None of Parent, Sub or the
Company may rely on the failure of any condition set forth in Section 6.01,
6.02 or 6.03, as the case may be, to be satisfied if such failure was caused by
such party's failure to use its commercially reasonable efforts to consummate
the Merger and the other transactions contemplated by this Agreement and the
Voting and Option Agreement, as required by and subject to Section 5.04.
ARTICLE VII
Termination, Amendment and Waiver
Section 7.01. Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after the Company Shareholder
Approval:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company:
(i) if the Merger shall not have been consummated by March 31, 2001;
provided, however, that the right to terminate this Agreement pursuant
to this Section 7.01(b)(i) shall not be available to any party whose
failure to perform any of its obligations under this Agreement results
in the failure of the Merger to be consummated by such time;
(ii) if the Company Shareholder Approval shall not have been
obtained at a Company Shareholders Meeting duly convened therefor or at
any adjournment or postponement thereof;
(iii) if any Restraint having any of the effects set forth in
Section 6.01(d) shall be in effect and shall have become final and
nonappealable; provided that the party seeking to terminate this
Agreement pursuant to this Section 7.01(b)(iii) shall have used its
commercially reasonable efforts to prevent the entry of and to remove
such Restraint;
(c) by Parent, if the Company shall have breached or failed to perform
in any material respect any of its representations, warranties, covenants
or other agreements contained in this Agreement, which breach or failure to
perform (A) would give rise to the failure of a condition set forth in
Section 6.02(a) or (b), and (B) has not been or is incapable of being cured
by the Company within 30 calendar days after its receipt of written notice
from Parent;
(d) by the Company, if Parent shall have breached or failed to perform
in any material respect any of its representations, warranties, covenants
or other agreements contained in this Agreement, which breach or failure to
perform (A) would give rise to the failure of a condition set forth in
Section 6.03(a) or (b), and (B) has not been or is incapable of being cured
by Parent within 30 calendar days after its receipt of written notice from
the Company;
(e) by Parent, in the event a Company Adverse Recommendation Change
shall have occurred;
(f) by the Company, if Parent shall have breached or failed to perform
in any material respect any of its covenants or other agreements contained
in the Financing Arrangements, which breach or failure to perform has not
been or is incapable of being cured by Parent within 30 calendar days after
its receipt of written notice from the Company; or
(g) by Parent, if the condition described in Section 6.02(c) shall not
be satisfied within 30 days following the date of this Agreement.
Section 7.02. Effect of Termination. In the event of termination of this
Agreement by either the Company or Parent as provided in Section 7.01, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Parent or the Company, other than the provisions
of
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Section 3.01(p), Section 3.02(k), the last sentence of Section 5.03, Section
5.08, this Section 7.02 and Article VIII, which provisions survive such
termination, and except to the extent that such termination results from the
willful and material breach by a party of any of its representations,
warranties, covenants or agreements set forth in this Agreement, including
Section 4.02.
Section 7.03. Amendment. This Agreement may be amended by the parties at any
time before or after the Company Shareholder Approval; provided, however, that
after any such approval, there shall not be made any amendment that by law
requires further approval by the shareholders of the Company without the
further approval of such shareholders. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties.
Section 7.04. Extension; Waiver. At any time prior to the Effective Time, a
party may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties of the other parties contained in this Agreement
or in any document delivered pursuant to this Agreement or (c) subject to the
proviso of Section 7.03, waive compliance by the other party with any of the
agreements or conditions contained in this Agreement. Any agreement on the part
of a party to any such extension or waiver shall be valid only if set forth in
an instrument in writing signed on behalf of such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of such rights.
ARTICLE VIII
General Provisions
Section 8.01. Nonsurvival of Representations and Warranties. None of the
representations, warranties, covenants or agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Effective
Time. This Section 8.01 shall not limit any covenant or agreement of the
parties which by its terms contemplates performance after the Effective Time.
Section 8.02. Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, telecopied (which is confirmed) or sent by
overnight courier (providing proof of delivery) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Parent or Sub, to
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW
P.O. Box 3177
Cedar Rapids, IA 52406-3177
Telecopy No.: Separately supplied
Attention: Randall Rings, Esq.
Vice President, General Counsel and Secretary
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
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Telecopy No.: Separately supplied
Attention: Robert I. Townsend, III, Esq.;
and
(b) if to the Company, to
CapRock Communications Corp.
15601 Dallas Parkway, Suite 700
Dallas, TX 75248
Telecopy No.: Separately supplied
Attention: Leo J. Cyr
President and Chief Operating
Officer
with a copy to:
Munsch Hardt Kopf & Harr, P.C.
4000 Fountain Place
1445 Ross Avenue
Dallas, TX 75202
Telecopy No.: Separately supplied
Attention: Mike Hainsfurther, Esq.
Section 8.03. Definitions. For purposes of this Agreement:
(a) an "Affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person, where "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management policies of a person, whether through the
ownership of voting securities, by contract, as trustee or executor, or
otherwise;
(b) "Business Day" means any day other than Saturday, Sunday or any
other day on which banks are legally permitted to be closed in New York;
(c) "Company Stock Option" means any option to purchase Company Common
Stock granted under the Company Stock Plans, including options assumed by
the Company;
(d) "Company Stock Plans" means the 1998 Equity Incentive Plan and the
1998 Director Stock Option Plan of the Company, the CapRock
Telecommunications Nonqualified Stock Option Plan, the CapRock Services
Employee Incentive Stock Option Plan, the CapRock Services 1997 Stock
Option Plan and the CapRock Services 1997 Director Stock Option Plan;
(e) "Knowledge" of any person that is not an individual means, with
respect to any specific matter, the knowledge of such person's executive
officers and other officers having primary responsibility for such matter,
in each case after due inquiry;
(f) "Liens" means any mortgage, lien, pledge, encumbrance, security
interest, deed of trust, option, encroachment, reservation, order, decree,
judgment, condition, restriction, charge, agreement, claim or equity of any
kind, other than: (i) taxes not yet due or the validity of which is being
contested in good faith by appropriate proceedings, and as to which the
Company or Parent, as the case may be, shall, if appropriate under GAAP,
have set aside in its financial statements and on its books and records
adequate
A-34
reserves; and (ii) deposits under workmen's compensation, unemployment
insurance, social security and other similar laws, or to secure the
performance of bids, tenders or contracts (other than for the repayment of
borrowed money) or to secure statutory obligations or surety or appeal
bonds, or to secure indemnity, performance or other similar bonds in the
ordinary course of business;
(g) "Material Adverse Change" or "Material Adverse Effect" means any
change, effect or event that, individually or when taken together with all
other such changes, effects or events, is or is reasonably likely to be
materially adverse to the business, operations, condition (financial or
otherwise), assets or liabilities of a person and its Subsidiaries, taken
as a whole, other than (i) adverse effects caused by changes in the economy
generally or in securities markets generally or in such person's industry
(and those of its Subsidiaries) in general and not specifically relating to
such entity; (ii) the loss of personnel or suppliers or the delay or
cancellation of orders for the person's services or similar occurrences
which are the direct and proximate result of the announcement of this
Agreement and the transactions contemplated hereby; (iii) events set forth
in Section 8.03(g) of the Company Disclosure Schedule; or (iv) litigation
brought by or threatened against such person or any member of its Board of
Directors based upon this Agreement and the transactions contemplated
hereby;
(h) "person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity; and
(i) a "Subsidiary" of any person means another person, an amount of the
voting securities, other voting rights or voting partnership interests of
which is sufficient to elect at least a majority of its Board of Directors
or other governing body (or, if there are no such voting interests, 50% or
more of the equity interests of which) is owned directly or indirectly by
such first person.
Section 8.04. Interpretation. When a reference is made in this Agreement to
an Article, Section, Subsection or Exhibit, such reference shall be to an
Article, Section or Subsection of, or an Exhibit to, this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to
be followed by the words "without limitation". The words "hereof", "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement. All terms defined in this Agreement shall have the defined meanings
when used in any certificate or other document made or delivered pursuant
hereto unless otherwise defined therein. The definitions contained in this
Agreement are applicable to the singular as well as the plural forms of such
terms and to the masculine as well as to the feminine and neuter genders of
such term. Any agreement, instrument or statute defined or referred to herein
or in any agreement or instrument that is referred to herein means such
agreement, instrument or statute as from time to time amended, modified or
supplemented, including (in the case of agreements or instruments) by waiver or
consent and (in the case of statutes) by succession of comparable successor
statutes and references to all attachments thereto and instruments incorporated
therein. References to a person are also to its permitted successors and
assigns. Terms used herein that are defined under GAAP are used herein as so
defined.
Section 8.05. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties.
Section 8.06. Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the documents and instruments referred to herein), the Voting and
Option Agreement, and the Confidentiality Agreement (a) constitute the entire
agreement, and supersede all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter of this
Agreement and (b) except for the provisions of Article II and Section 5.07, are
not intended to confer upon any person other than the parties any rights or
remedies.
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Section 8.07. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflict of
laws thereof (except to the extent that the provisions of the TBCA shall be
mandatorily applicable to the Merger).
Section 8.08. Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by either of the parties hereto without
the prior written consent of the other party. Any assignment in violation of
the preceding sentence shall be void. Subject to the preceding two sentences,
this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
Section 8.09. Enforcement. The parties agree that irreparable damage would
occur and that the parties would not have any adequate remedy at law in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any Federal court located in the
State of Delaware or in Delaware state court, this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each
of the parties hereto (a) consents to submit itself to the personal
jurisdiction of any Federal court located in the State of Delaware or any
Delaware state court in the event any dispute arises out of this Agreement or
any of the transactions contemplated by this Agreement, (b) agrees that it will
not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, and (c) agrees that it will not bring
any action relating to this Agreement or any of the transactions contemplated
by this Agreement in any court other than a Federal court sitting in the State
of Delaware or a Delaware state court.
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IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized, all as of
the date first written above.
MCLEODUSA INCORPORATED,
/s/ Blake O. Fisher, Jr.
By: _________________________________
Name:
Title:
CACTUS ACQUISITION CORP.,
/s/ Blake O. Fisher, Jr.
By: _________________________________
Name:
Title:
CAPROCK COMMUNICATIONS CORP.,
/s/ Jere W. Thompson, Jr.
By: _________________________________
Name:
Title:
A-37
ANNEX I
TO THE MERGER AGREEMENT
Index of Defined Terms
Term Page
- ---- ----
Accounting Rules.......................................................... A-8
Actions................................................................... A-22
Acquisition Agreement..................................................... A-23
Affiliate................................................................. A-34
Agreement................................................................. A-1
Amendments................................................................ A-29
Business Day.............................................................. A-34
Certificate of Merger..................................................... A-2
Certificate............................................................... A-3
Closing................................................................... A-1
Closing Date.............................................................. A-2
Code...................................................................... A-1
Commonly Controlled Entity................................................ A-12
Communications Act........................................................ A-8
Company................................................................... A-1
Company Adverse Recommendation Change..................................... A-23
Company Benefit Agreements................................................ A-10
Company Benefit Plans..................................................... A-11
Company Common Stock...................................................... A-1
Company Consolidated Group................................................ A-14
Company Disclosure Schedule............................................... A-5
Company Filed SEC Documents............................................... A-9
Company Permits........................................................... A-10
Company Preferred Stock................................................... A-6
Company SEC Documents..................................................... A-8
Company Shareholder Approval.............................................. A-14
Company Shareholders Meeting.............................................. A-25
Company Stock Option...................................................... A-34
Company Stock Plans....................................................... A-34
Company Superior Proposal................................................. A-23
Company Takeover Proposal................................................. A-23
Confidentiality Agreement................................................. A-25
Consent Solicitation...................................................... A-29
Contract.................................................................. A-8
Covenant Amendments....................................................... A-29
Dakota Acquisition Stock.................................................. A-15
DGCL...................................................................... A-1
Diamond Partners Options.................................................. A-16
Effective Time............................................................ A-2
11 1/2% Indenture......................................................... A-29
11 1/2% Notes............................................................. A-29
Environmental Laws........................................................ A-11
ERISA..................................................................... A-11
Exchange Act.............................................................. A-8
Exchange Agent............................................................ A-3
Exchange Consideration.................................................... A-30
A-38
Term Page
- ---- ----
Exchange Offer Statement.................................................. A-30
Exchange Ratio............................................................ A-3
FAA....................................................................... A-8
FCC....................................................................... A-8
Financing Arrangements.................................................... A-31
Form S-4.................................................................. A-9
GAAP...................................................................... A-9
Governmental Entity....................................................... A-8
Hazardous Materials....................................................... A-11
HSR Act................................................................... A-8
Indentures................................................................ A-29
Inlet Options............................................................. A-16
Intellectual Property Rights.............................................. A-14
Knowledge................................................................. A-34
Liens..................................................................... A-34
Material Adverse Change................................................... A-35
Material Adverse Effect................................................... A-35
Merger.................................................................... A-1
Merger Amendments......................................................... A-29
Merger Consideration...................................................... A-3
Nasdaq.................................................................... A-4
Notes..................................................................... A-29
Notes Exchange Offer...................................................... A-30
Notice of Company Superior Proposal....................................... A-23
Noverr Options............................................................ A-15
Parachute Gross-Up Payment................................................ A-13
Parent.................................................................... A-1
Parent Class A Common Stock............................................... A-1
Parent Class B Common Stock............................................... A-15
Parent Class B Options.................................................... A-16
Parent Class II Preferred Stock........................................... A-15
Parent Disclosure Schedule................................................ A-15
Parent ESPP............................................................... A-16
Parent Filed SEC Documents................................................ A-19
Parent Notes.............................................................. A-30
Parent Plan............................................................... A-26
Parent Preferred Stock.................................................... A-15
Parent SEC Documents...................................................... A-18
Parent Series A Preferred Stock........................................... A-15
Parent Series B Preferred Stock........................................... A-15
Parent Series C Preferred Stock........................................... A-15
Parent Stock Options...................................................... A-16
Parent Stock Plans........................................................ A-16
Parent 401(k)............................................................. A-16
Post-Signing Returns...................................................... A-22
Proxy Statement........................................................... A-8
PUC(s).................................................................... A-8
QST Options............................................................... A-15
Representatives........................................................... A-22
Requisite Consent......................................................... A-30
A-39
Term Page
- ---- ----
Restraints................................................................. A-30
SEC........................................................................ A-8
Securities Act............................................................. A-8
Sub........................................................................ A-1
Subsidiary................................................................. A-35
Surviving Corporation...................................................... A-1
Taxes...................................................................... A-14
TBCA....................................................................... A-1
Termination Fee............................................................ A-28
Transition Period.......................................................... A-26
12% Indenture.............................................................. A-29
12% Notes.................................................................. A-29
Voting and Option Agreement................................................ A-1
A-40
APPENDIX B
VOTING AND OPTION AGREEMENT
VOTING AND OPTION AGREEMENT dated as of October 2, 2000 (this "Agreement"),
among MCLEODUSA INCORPORATED, a Delaware corporation ("Parent"), and the
parties listed on Schedule A attached hereto (each, a "Shareholder" and,
collectively, the "Shareholders").
WHEREAS Parent, Cactus Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Parent ("Sub"), and CapRock Communications Corp., a
Texas corporation (the "Company"), propose to enter into an Agreement and Plan
of Merger dated as of the date hereof (as the same may be amended or
supplemented, the "Merger Agreement"; terms used but not defined herein shall
have the meanings set forth in the Merger Agreement) providing for, among other
things, the merger of Sub with and into the Company upon the terms and subject
to the conditions set forth in the Merger Agreement;
WHEREAS each Shareholder owns (of record or beneficially) the number of
shares of Company Common Stock set forth opposite such Shareholder's name on
Schedule A hereto (such shares, together with any other shares of capital stock
of the Company or other voting securities of the Company acquired (of record or
beneficially) by the Shareholders after the date hereof and during the term of
this Agreement (including through the exercise of any warrants, stock options
or similar instruments), being collectively referred to herein as the "Subject
Shares");
WHEREAS each Shareholder has agreed to grant Parent an irrevocable option to
purchase such Shareholder's Subject Shares; and
WHEREAS as a condition to its willingness to enter into the Merger
Agreement, Parent has required that each Shareholder enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements set forth herein and in the Merger
Agreement, the parties hereto agree as follows:
Section 1. Grant of Option. Each Shareholder hereby grants Parent an
irrevocable option (the "Option") to purchase such Shareholder's Subject Shares
on the terms and subject to the conditions set forth below:
(a) Exercise. At any time or from time to time prior to the termination
of the Option granted hereunder in accordance with the terms of this
Agreement, Parent (or a wholly owned subsidiary of Parent designated by
Parent) may exercise the Option, in whole or in part, if on or after the
date hereof:
(i) any corporation, partnership, individual, trust, unincorporated
association, or other entity or person (as defined in Section 13(d)(3)
of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) other than Parent or any of its affiliates (as defined in the
Exchange Act) (a "Third Party"), shall have:
(A) commenced or announced an intention to commence a bona fide
tender offer or exchange offer for any shares of Company Common
Stock, the consummation of which would result in beneficial
ownership (as defined under Rule 13d-3 of the Exchange Act) by such
Third Party (together with all such Third Party's affiliates and
associates (as such term is defined in the Exchange Act)) of 20% or
more of the then voting equity of the Company (either on a primary
or a fully diluted basis);
(B) filed a Notification and Report Form under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), reflecting an intent to acquire the Company or any assets or
securities of the Company; or
(C) solicited proxies in a solicitation subject to the proxy
rules under the Exchange Act, executed any written consent or become
a participant in any solicitation (as such terms are defined in
Regulation 14A under the Exchange Act), in each case with respect to
the Company Common Stock; or
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(ii) the events described in Section 7.01(b)(ii) or (e) of the
Merger Agreement or any other event that would require the Company to
pay Parent the Termination Fee set forth in Section 5.08 of the Merger
Agreement occurs (but without the necessity of Parent having terminated
the Merger Agreement) or, upon a material breach by such Shareholder of
the covenants in Section 3 of this Agreement.
Each of the events described in clauses (i) and (ii) hereof shall be
referred to herein as a "Trigger Event." Such Shareholder shall notify Parent
promptly in writing of the occurrence of any Trigger Event; provided, however,
such notice shall not be a condition to the right of Parent to exercise the
Option.
(b) Exercise Procedure. In the event Parent wishes to exercise the
Option, Parent shall deliver to such Shareholder a written notice (an
"Exercise Notice") specifying the total number of such Shareholder's
Subject Shares it wishes to purchase. Provided that the conditions set
forth in paragraph (g) hereof to such Shareholder's obligation to sell its
Subject Shares to Parent hereunder have been satisfied or waived, Parent
shall, upon delivery of the Exercise Notice and tender of the applicable
aggregate Exercise Price (as defined below), immediately be deemed to be
the holder of record of such Subject Shares purchasable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such Subject Shares shall not
theretofore have been delivered to Parent. Each closing of a purchase of
such Subject Shares (a "Closing") shall occur at a place, on a date and at
a time designated by Parent in an Exercise Notice delivered at least two
(2) business days prior to the date of the Closing.
(c) Termination of the Option. The Option shall terminate upon the
earliest of: (i) the Effective Time of the Merger; (ii) the termination of
the Merger Agreement for reasons other than those described in clause (iii)
below; and (iii) nine (9) months following the termination of the Merger
Agreement pursuant to Section 7.01(b)(ii) or (e) thereof. Notwithstanding
the foregoing, if the Option cannot be exercised by reason of any
applicable judgment, decree, order, law or regulation, the Option shall
remain exercisable and shall not terminate until the earlier of (x) the
date on which such impediment shall become final and not subject to appeal,
and (y) 5:00 p.m. New York City Time, on the tenth (10th) business day
after such impediment shall have been removed. Notwithstanding the
termination of the Option, Parent shall be entitled to purchase the Subject
Shares with respect to which Parent had exercised the Option prior to such
termination.
(d) Exercise Price. The purchase price per share of Company Common
Stock purchased pursuant to the Option (the "Exercise Price") shall be (i)
an amount in cash equal to the product of (x) the Exchange Ratio multiplied
by (y) the average closing price of Parent Class A Common Stock for the
five (5) trading days preceding the date the Option is exercised (the "Cash
Exercise Price") or (ii) a number of shares of Parent Class A Common Stock
equal to the Exchange Ratio (the "Stock Exercise Price"); provided,
however, that the aggregate Cash Exercise Price paid to such Shareholder
when aggregated with all other cash purchases of Company Common Stock
including cash in lieu of fractional shares by Parent shall be limited to
that amount of cash that would permit any subsequent acquisition of the
Company by Parent that occurs to qualify as a tax free reorganization under
the provisions of Section 368(a) of the Code.
(e) Additional Consideration. Notwithstanding the terms of this Section
1 or any other provision in this Agreement, in the event that (i) Parent
exercises in whole or in part the Option granted in this Agreement and (ii)
the Company thereafter consummates an Alternative Transaction (as defined
in Section 4(b) below) within twelve months of the exercise of the Option,
Parent shall pay any Shareholder from whom it purchased Subject Shares in
connection with the exercise of the Option an amount of additional
consideration equal to 50% of the difference between the applicable
aggregate Exercise Price previously paid by Parent to such Shareholder and
the aggregate amount received by Parent in the Alternative Transaction for
such Subject Shares. The form of such additional consideration shall be in
the sole discretion of Parent and may be cash, additional shares of Parent
Class A Common Stock or the form of consideration received by Parent in the
Alternative Transaction; provided, however, that Parent shall not
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be permitted to pay such additional consideration in the form of Parent
Class A Common Stock if a Material Adverse Change shall have occurred with
respect to Parent.
(f) Pro Rata Exercise. In the event Parent determines to exercise the
Option in whole or in part, Parent hereby covenants and agrees that it will
purchase the aggregate number of shares of Company Common Stock being
sought pro rata from the Shareholders who have entered into this Agreement.
(g) Conditions to Closing. The obligation of such Shareholder to sell
such Shareholder's Subject Shares to Parent hereunder is subject to the
conditions that (i) all waiting periods, if any, under the HSR Act
applicable to the sale of such Subject Shares by Shareholder and the
acquisition of such Subject Shares by Parent hereunder shall have expired
or have been terminated; (ii) all consents, approvals, orders or
authorizations of, or registrations, declarations or filings with, any
federal, state or local administrative agency or commission or other
federal, state or local governmental authority or instrumentality, if any,
required in connection with the sale of such Subject Shares by such
Shareholder and the acquisition of such Subject Shares by Parent hereunder
shall have been obtained or made, as the case may be; and (iii) no
preliminary or permanent injunction or other order by any court of
competent jurisdiction prohibiting or otherwise restraining such sale shall
be in effect.
(h) Closing. At any Closing,
(i) such Shareholder shall deliver to Parent a certificate or
certificates evidencing such Subject Shares being purchased, duly
endorsed in blank, or with appropriate stock powers, duly executed in
blank, in proper form for transfer, with the signature of such
Shareholder thereon guaranteed, and with all applicable taxes paid or
provided for;
(ii) Parent shall deliver to such Shareholder (A) by wire transfer
of immediately available funds to the account or accounts specified in
writing by such Shareholder the aggregate Cash Exercise Price for the
Subject Shares so designated and being purchased for cash, and (B) one
or more certificates representing shares of Parent Class A Common Stock
equal to the aggregate Stock Exercise Price for the Subject Shares so
designated and being purchased by delivery of Parent Class A Common
Stock; and
(iii) at which Parent is exercising the Option in part, Parent shall
present and surrender this Agreement to such Shareholder, and such
Shareholder shall deliver to Parent an executed new agreement with the
same terms as this Agreement evidencing the right to purchase the
balance of such Subject Shares purchasable hereunder.
Section 2. Representations and Warranties of Each Shareholder. Each
Shareholder hereby represents and warrants to Parent as follows:
(a) Organization; Authority; Execution and Delivery; Enforceability.
Such Shareholder (i) is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, if applicable,
and (ii) has the requisite corporate, company, partnership or other power
and authority to execute and deliver this Agreement, to consummate the
transactions contemplated hereby and to comply with the terms hereof. The
execution and delivery by such Shareholder, the consummation by such
Shareholder of the transactions contemplated hereby and compliance by such
Shareholder with the provisions hereof have been duly authorized by all
necessary corporate, company, partnership or other action on the part of
such Shareholder and no other corporate, company, partnership or other
proceedings on the part of such Shareholder are necessary to authorize this
Agreement, to consummate the transactions contemplated hereby or to comply
with the provisions hereof. This Agreement has been duly executed and
delivered by such Shareholder and constitutes a valid and binding
obligation of such Shareholder and, assuming this Agreement constitutes a
valid and binding obligation of Parent, is enforceable against such
Shareholder in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other laws affecting the rights and remedies of creditors
generally and general principles of equity (whether considered in a
proceeding in
B-3
equity or at law). The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and compliance with
the provisions hereof do not and will not conflict with, or result in any
violation or breach of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of, or result in,
termination, cancelation or acceleration of any obligation or to loss of a
material benefit under, or result in the creation of any Lien in or upon
any of the properties or assets of such Shareholder under, or give rise to
any increased, additional, accelerated or guaranteed rights or entitlements
under, any provision of (i) any certificate of incorporation or by-laws,
partnership agreement or limited liability company agreement (or similar
organizational documents) of such Shareholder, (ii) any Contract to which
such Shareholder is a party or any of the properties or assets of such
Shareholder is subject or (iii) subject to the governmental filings and
other matters referred to in the following sentence, any (A) statute, law,
ordinance, rule or regulation or (B) judgment, order or decree, in each
case, applicable to such Shareholder or its properties or assets, other
than, in the case of clauses (ii) and (iii), any such conflicts,
violations, breaches, defaults, rights, losses, Liens or entitlements that
individually or in the aggregate could not reasonably be expected to impair
in any material respect the ability of any Shareholder to perform its
obligations under this Agreement or prevent or materially impede or delay
the consummation of any of the transactions contemplated by this Agreement.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to such Shareholder in connection with the execution and delivery
of this Agreement by such Shareholder, the consummation by such Shareholder
of the transactions contemplated hereby or the compliance by such
Shareholder with the provisions hereof, except for (1) filings under the
HSR Act and any other applicable competition, merger control, antitrust or
similar law or regulation, (2) filings with the SEC of such reports under
the Exchange Act as may be required in connection with this Agreement and
the transactions contemplated hereby and (3) such other consents,
approvals, orders, authorizations, registrations, declarations and filings
the failure of which to be obtained or made individually or in the
aggregate could not reasonably be expected to impair in any material
respect the ability of such Shareholder to perform its obligations under
this Agreement or prevent or materially impede or delay the consummation of
any of the transactions contemplated hereby.
(b) The Subject Shares. (i) Such Shareholder is the record and
beneficial owner of, and has good and marketable title to, the Subject
Shares set forth opposite its name on Schedule A hereto, free and clear of
any Liens except as set forth on Schedule A. As of the date hereof, other
than as set forth on Schedule A hereto, such Shareholder does not own (of
record or beneficially) any shares of capital stock of the Company, and no
Shareholder owns (of record or beneficially) any options, warrants, rights
or other similar instruments to acquire any capital stock or other voting
securities of the Company. Except as set forth on Schedule A, such
Shareholder has the sole right to Transfer (as defined in Section 4(c)) and
direct the voting of the Subject Shares set forth opposite its name on
Schedule A hereto, and none of such Subject Shares is subject to any voting
trust or other agreement, arrangement or restriction with respect to the
Transfer or the voting of such Subject Shares, except as set forth in
Sections 1, 4 and 5 of this Agreement.
(ii) In the event Parent exercises its Option pursuant to Section 1,
upon delivery of the Subject Shares covered thereby and payment of the
aggregate Exercise Price therefor as contemplated in Section 1, Parent
will receive good and valid title to such Subject Shares free and clear
of any Liens.
(c) Investment Representations of Each Shareholder. Each Shareholder
represents, warrants, and covenants to Parent as follows:
(i) such Shareholder understands that any issuance of Parent Class A
Common Stock to such Shareholder pursuant to this Agreement (the
"Restricted Securities") is intended to be exempt from registration
under the Securities Act by virtue of Section 4(2) of the Securities
Act or Regulation D promulgated thereunder, and that no registration
statement relating to the issuance of the Restricted Securities has
been or will be filed with the SEC or any state securities commission;
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(ii) such Shareholder intends to acquire the Restricted Securities
solely for its own account, for investment purposes only and not with a
view to the resale or distribution other than pursuant to an effective
resale registration statement;
(iii) such Shareholder agrees not to sell (other than pursuant to an
effective resale registration statement), transfer, exchange, pledge or
otherwise dispose of, or make any offer or agreement relating to the
Restricted Securities and/or any option, right or other interest with
respect to the Restricted Securities that such Shareholder may acquire,
unless: (A) counsel representing such Shareholder, which counsel is
reasonably satisfactory to Parent and Parent's legal counsel, shall
have advised Parent in a written opinion letter satisfactory to Parent
and Parent's legal counsel, and upon which Parent and Parent's legal
counsel may rely, that no registration under the Securities Act would
be required in connection with the proposed sale, transfer, exchange,
pledge or other disposition, and (B) all transferees (and other
subsequent transferees) who receive the Restricted Securities agree to
be bound by the investment and other restrictions to which such
Shareholder was subject;
(iv) such Shareholder is an "accredited investor" as defined in Rule
501 of Regulation D under the Securities Act, has the capacity to
protect such Shareholder's interests in connection with this Agreement,
and has such knowledge and experience in financial, tax and business
matters to be capable of evaluating the merits and risks of an
investment in the Restricted Securities and in protecting such
Shareholder's interests in connection with the investment and, in such
Shareholder's judgment, has obtained sufficient information from Parent
to evaluate the merits and risks of an investment in the Restricted
Securities;
(v) such Shareholder acknowledges that (A) it has conducted its own
investigation and review of the business and affairs of Parent, (B) it
has not relied on any representations or warranties of Parent
concerning the business and affairs of Parent or an investment in the
Subject Shares, (C) it has had the opportunity to ask questions of and
receive information and answers from Parent concerning the terms and
conditions of this Agreement, the Restricted Securities and other
matters pertaining to an investment in the Restricted Securities, and
(D) it has been given the opportunity to verify the information
provided to it in order for such Shareholder to evaluate the merits and
risks of an investment in the Restricted Securities, and all such
questions have been answered and all such information has been provided
to the full satisfaction of such Shareholder;
(vi) such Shareholder further acknowledges, represents, agrees and
is aware that the representations, warranties, agreements, undertakings
and acknowledgments made by such Shareholder in this Agreement are made
with the intent that they be relied upon by Parent in determining the
suitability of such Shareholder as an investor in the Restricted
Securities; and
(vii) such Shareholder undertakes to notify Parent immediately of
any change in any representation, warranty or other information
relating to such Shareholder set forth herein.
Section 3. Representations and Warranties of Parent. Parent hereby
represents and warrants to each Shareholder as follows:
(a) Organization; Authority; Execution and Delivery;
Enforceability. Parent (i) is duly incorporated, validly existing and in
good standing under the laws of its jurisdiction of incorporation and (ii)
has all requisite corporate power and authority to execute and deliver this
Agreement, to consummate the transactions contemplated hereby and to comply
with the terms hereof. The execution and delivery of this Agreement by
Parent, the consummation by Parent of the transactions contemplated hereby
and compliance by Parent with the provisions hereof have been duly
authorized by all necessary corporate action on the part of Parent and no
other corporate proceedings on the part of Parent are necessary to
authorize this Agreement, to consummate the transactions contemplated
hereby or to comply with the provisions hereof. This Agreement has been
duly executed and delivered by Parent and, assuming due execution by each
Shareholder, constitutes a valid and binding obligation of Parent
enforceable against Parent in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency,
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fraudulent conveyance, reorganization, moratorium and other laws affecting
the rights and remedies of creditors generally and general principles of
equity (whether considered in a proceeding in equity or at law). The
execution and delivery of this Agreement, the consummation of the
transactions contemplated hereby and compliance with the provisions hereof
do not and will not conflict with, or result in any violation or breach of,
or default (with or without notice or lapse of time, or both) under, or
give rise to a right of, or result in, termination, cancelation or
acceleration of any obligation or to loss of a material benefit under, or
result in the creation of any Lien in or upon any of the properties or
assets of Parent under, or give rise to any increased, additional,
accelerated or guaranteed rights or entitlements under, any provision of
(i) the Amended and Restated Certificate of Incorporation or Amended and
Restated By-laws of Parent, (ii) any Contract to which Parent is a party or
any of its properties or assets is subject or (iii) subject to the
governmental filings and other matters referred to in the following
sentence, any (A) statute, law, ordinance, rule or regulation or (B)
judgment, order or decree, in each case, applicable to Parent or its
properties or assets, other than, in the case of clauses (ii) and (iii),
any such conflicts, violations, breaches, defaults, rights, losses, Liens
or entitlements that individually or in the aggregate could not reasonably
be expected to impair in any material respect the ability of Parent to
perform its obligations under this Agreement or prevent or materially delay
the consummation of any of the transactions contemplated by this Agreement.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Parent in connection with the execution and delivery of this
Agreement by Parent, the consummation by Parent of the transactions
contemplated hereby or compliance by Parent with the provisions hereof,
except for (1) filings under the HSR Act and any other applicable
competition, merger control, antitrust or similar law or regulation, (2)
filings with the SEC of such reports under the Exchange Act as may be
required in connection with this Agreement and the transactions
contemplated hereby and (3) such other consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of
which to be obtained or made individually or in the aggregate could not
reasonably be expected to impair in any material respect the ability of
Parent to perform its obligations under this Agreement or prevent or
materially delay the consummation of any of the transactions contemplated
hereby.
(b) Investment Representations of Parent. Parent represents, warrants,
and covenants to the Shareholder as follows (except as contemplated by this
Agreement and the Merger Agreement and the transactions contemplated
thereby):
(i) Parent does not now have, and as of any Closing will not have,
any present plan or intention to sell, transfer, exchange, pledge or
otherwise dispose of, or to effect any other transaction which would
result in a reduction in the risk of ownership of, the Subject Shares;
(ii) Parent understands that any sale of the Subject Shares
hereunder is intended to be exempt from registration, and that no
registration statement relating to the sale of the Subject Shares in
connection with this Agreement has been or will be filed with the SEC
or any state securities commission;
(iii) Parent intends to acquire the Subject Shares solely for its
own account, for investment purposes only and not with a view to the
resale or distribution thereof;
(iv) Parent agrees not to sell, transfer, exchange, pledge or
otherwise dispose of, or make any offer or agreement relating to the
Subject Shares and/or any option, right or other interest with respect
to the Subject Shares that Parent may acquire, unless: (A) counsel
representing Parent, which counsel is reasonably satisfactory to the
Company and the Company's legal counsel, shall have advised the Company
in a written opinion letter satisfactory to the Company and the
Company's legal counsel, and upon which the Company and the Company's
legal counsel may rely, that no registration under the Securities Act
would be required in connection with the proposed sale, transfer,
exchange, pledge or other disposition, and (B) all transferees (and
other subsequent transferees) who receive the Subject Shares agree to
be bound by the investment and other restrictions to which Parent was
subject;
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(v) Parent is an "accredited investor" as defined in Rule 501 of
Regulation D under the Securities Act, has the capacity to protect such
Parent's interests in connection with this Agreement, and has such
knowledge and experience in financial, tax and business matters to be
capable of evaluating the merits and risks of an investment in the
Subject Shares and in protecting Parent's interests in connection with
the investment and, in Parent's judgment, has obtained sufficient
information from the Company to evaluate the merits and risks of an
investment in the Subject Shares;
(vi) Parent acknowledges that (A) it has conducted its own
investigation and review of the business and affairs of the Company,
(B) it has not relied on any representations or warranties of the
Company concerning the business and affairs of the Company or an
investment in the Subject Shares, (C) it has had the opportunity to ask
questions of and receive information and answers from the Company
concerning the terms and conditions of this Agreement, the Subject
Shares and other matters pertaining to an investment in the Subject
Shares, and (D) it has been given the opportunity to verify the
information provided to it in order for Parent to evaluate the merits
and risks of an investment in the Subject Shares, and all such
questions have been answered and all such information has been provided
to the full satisfaction of Parent;
(vii) Parent further acknowledges, represents, agrees and is aware
that the representations, warranties, agreements, undertakings and
acknowledgments made by Parent in this Agreement are made with the
intent that they be relied upon by such Shareholder and the Company in
determining the suitability of Parent as an investor in the Subject
Shares; and
(viii) Parent undertakes to notify the Company immediately of any
change in any representation, warranty or other information relating to
Parent set forth herein.
Section 4. Covenants of Each Shareholder. Each Shareholder covenants and
agrees as follows:
(a) At any meeting of the shareholders of the Company called to vote
upon the Merger Agreement, the Merger or any of the other transactions
contemplated by the Merger Agreement, or at any adjournment or postponement
thereof, or in any other circumstances upon which a vote, consent, adoption
or other approval (including by written consent solicitation) with respect
to the Merger Agreement, the Merger or any of the other transactions
contemplated by the Merger Agreement is sought, such Shareholder shall vote
(or cause to be voted) all the Subject Shares of such Shareholder (owned of
record or beneficially) in favor of, and shall consent in writing to (or
cause to be consented in writing to), the approval of the Merger Agreement
and the terms thereof and of the Merger and each of the other transactions
contemplated by the Merger Agreement.
(b) At any meeting of the shareholders of the Company, or at any
adjournment or postponement thereof, or in any other circumstances upon
which a vote, consent, adoption or other approval (including by written
consent solicitation) is sought, such Shareholder shall vote (or cause to
be voted) all the Subject Shares of such Shareholder (owned of record or
beneficially) against, and shall not consent in writing to (and shall cause
not to be consented in writing to), any of the following (or any agreement
to enter into, effect, facilitate or support any of the following): (i) any
Company Takeover Proposal or transaction or occurrence that if proposed and
offered to the Company or its shareholders (or any of them) would
constitute a Company Takeover Proposal (collectively, "Alternative
Transactions") or (ii) any amendment of the Company's Articles of
Incorporation or By-laws or other proposal, action or transaction involving
the Company or any of its Subsidiaries or any of its shareholders, which
amendment or other proposal, action or transaction could reasonably be
expected to prevent or materially impede or delay the consummation of the
Merger or the other transactions contemplated by the Merger Agreement or
the consummation of the transactions contemplated by this Agreement or to
deprive Parent of any material portion of the benefits anticipated by
Parent to be received from the consummation of the Merger or the other
transactions contemplated by the Merger Agreement or this Agreement, or
change in any manner the voting rights of the Company Common Stock
(collectively, "Frustrating Transactions").
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(c) Other than pursuant to this Agreement, such Shareholder shall not
(i) sell, transfer, pledge, assign or otherwise dispose of (including by
gift) (collectively, "Transfer"), or consent to or permit any Transfer of,
any Subject Shares of such Shareholder or any interest therein, or enter
into any Contract, option or other arrangement (including any profit
sharing arrangement) with respect to the Transfer of, or the creation or
offer of any derivative security in respect of, any Subject Shares of such
Shareholder, to or with any person or (ii) enter into any voting
arrangement, whether by proxy, voting agreement or otherwise, with respect
to any Subject Shares of such Shareholder, and shall not commit or agree to
take any of the foregoing actions. Such Shareholder shall not, nor shall
such Shareholder permit any entity under such Shareholder's control to,
deposit any Subject Shares of such Shareholder in a voting trust.
(d) Such Shareholder shall not, nor shall such Shareholder permit any of
its Subsidiaries to, nor shall it authorize or permit any director,
officer, employee or partner of such Shareholder or any of its Subsidiaries
or any Representative of such Shareholder or any of its Subsidiaries to,
directly or indirectly, (i) solicit, initiate or encourage, or take any
other action designed to facilitate, any Alternative Transaction or
Frustrating Transaction, (ii) enter into any agreement with respect to any
Alternative Transaction or Frustrating Transaction or (iii) except to the
extent the Company shall have previously done so in accordance with Section
4.02(a) of the Merger Agreement, enter into, continue or otherwise
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or otherwise cooperate in any way
with, or assist or participate in any effort or attempt by any person with
respect to, any Alternative Transaction or Frustrating Transaction.
(e) Such Shareholder shall use its commercially reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done, and
to assist and cooperate with the other parties in doing all things
necessary, proper or advisable to consummate and make effective, in the
most expeditious manner practicable, the transactions contemplated by this
Agreement and the Merger Agreement. Such Shareholder shall not commit or
agree to take any action inconsistent with the transactions contemplated by
this Agreement or the transactions contemplated by the Merger Agreement.
(f) Such Shareholder shall not, nor shall such Shareholder permit any of
its Subsidiaries to, nor shall it authorize or permit any director,
officer, employee or partner of such Shareholder or any of its Subsidiaries
or any Representative of such Shareholder or any of its Subsidiaries to,
directly or indirectly, issue any press release or make any other public
statement with respect to the Merger Agreement, this Agreement, the voting
agreement dated the date hereof among Parent and certain shareholders of
the Company (the "Voting Agreement"), the Merger or any of the other
transactions contemplated by the Merger Agreement, the Voting Agreement or
this Agreement, without the prior written consent of Parent, except as may
be required by applicable law.
(g) Notwithstanding anything to the contrary contained herein, nothing
in this Section 4 shall prohibit any Shareholder from, in his capacity as
an officer and/or director of the Company, taking any actions, on behalf of
the Company, that the Company is permitted to take under Section 4.02 of
the Merger Agreement.
Section 5. Grant of Proxy; Appointment of Proxy. (a) Each Shareholder hereby
agrees to, promptly upon Parent's request, grant to, and appoint, Parent and
persons designated by the board of directors of Parent, in their respective
capacities as designees of Parent, and any individual who shall hereafter
succeed to any office of Parent held by such individual, and each of them
individually, such Shareholder's proxy and attorney-in-fact (with full power of
substitution), for and in the name, place and stead of such Shareholder, to
vote all such Shareholder's Subject Shares (owned of record or beneficially),
or grant a consent or approval in respect of such Subject Shares, (i) in favor
of the approval of the Merger Agreement and the terms thereof and of the Merger
and each of the other transactions contemplated by the Merger Agreement and
(ii) against any Alternative Transaction or any Frustrating Transaction.
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(b) Each Shareholder represents that any proxies heretofore given in
respect of such Shareholder's Subject Shares are not irrevocable, and that
all such proxies are hereby revoked.
(c) Each Shareholder hereby affirms that the agreement to grant a proxy
set forth in this Section 5 is given in connection with the execution of
the Merger Agreement and that such agreement is given to secure the
performance of the duties of such Shareholder under this Agreement. Each
Shareholder hereby further affirms that any such proxy will be coupled with
an interest and may under no circumstances be revoked unless and until this
Agreement is terminated in accordance with Section 9 of this Agreement.
Each Shareholder hereby ratifies and confirms all that such proxy may
lawfully do or cause to be done by virtue hereof. Each such proxy shall be
executed in accordance with the provisions of Article 2.29 of the TBCA.
Section 6. Further Assurances. Each Shareholder shall from time to time
execute and deliver, or cause to be executed and delivered, such additional or
further consents, documents and other instruments as Parent may request for the
purpose of effectuating the matters covered by this Agreement, including the
grant of proxies set forth in Section 5.
Section 7. Certain Events. (a) Each Shareholder agrees that this Agreement
and the obligations hereunder shall attach to such Shareholder's Subject Shares
and shall be binding upon any person or entity to which legal or beneficial
ownership of such Subject Shares shall pass, whether by operation of law or
otherwise, including such Shareholder's heirs, guardians, administrators or
successors, and such Shareholder further agrees to take all actions necessary
to effectuate the foregoing. Each Shareholder agrees that each certificate
representing the Subject Shares of such Shareholder shall be inscribed with the
legend required by Section 7(b). In the event of any stock split, stock
dividend, reclassification, merger, reorganization, recapitalization or other
change in the capital structure of the Company affecting the capital stock of
the Company, the number of Subject Shares listed on Schedule A hereto opposite
the name of each Shareholder shall be adjusted appropriately. In the event of
any change in the Company Common Stock or Parent Class A Common Stock by reason
of stock dividends, stock splits, mergers (other than the Mergers),
recapitalizations, combinations, exchange of shares or the like, the type and
number of shares or securities subject to the Option, and the purchase price
per share provided in Section 1(d) hereof, shall be adjusted appropriately, and
proper provision shall be made in the agreements governing such transaction so
that Parent shall receive, upon exercise of the Option, the number and class of
shares or other securities or property that Parent would have received in
respect of the Company Common Stock if the Option had been exercised
immediately prior to such event or the record date therefor, as applicable. In
addition, in the event of any other acquisition of additional shares of capital
stock of the Company or other voting securities of the Company by any
Shareholder (including through the exercise of any warrants, stock options or
similar instruments), the number of Subject Shares listed on Schedule A hereto
opposite the name of such Shareholder shall be adjusted appropriately. This
Agreement and the representations, warranties, covenants, agreements and
obligations hereunder shall attach to any additional shares of capital stock of
the Company or other voting securities of the Company issued to or acquired by
any Shareholder directly or indirectly (including through the exercise of any
warrants, stock options or similar instruments).
(b) Each Shareholder shall cause the certificated Subject Shares held by
him to have a legend placed conspicuously on such certificate to the
following effect:
The shares of common stock evidenced by this certificate are subject to
a Voting and Option Agreement dated October 2, 2000, entered into by the
record owner of such shares and McLeodUSA Incorporated.
For all uncertificated Subject Shares, each Shareholder shall request that
the Company send notice of such voting agreement as required by Article 2.19(D)
of the TBCA. Each Shareholder shall cause a counterpart of this Agreement to be
deposited with the Company at its principal place of business or registered
office where it shall be subject to the same right of examination by a
shareholder of the Company, in person or by agent or attorney, as are the books
and records of the Company.
B-9
Section 8. Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise, by any of the parties hereto without
the prior written consent of the other parties hereto, except that Parent may
assign, in its sole discretion, any of or all its rights, interests and
obligations under this Agreement to any of its direct or indirect wholly owned
Subsidiaries, provided that no such assignment shall relieve Parent of any of
its obligations under this Agreement. Any purported assignment in violation of
this Section 8 shall be void. Subject to the preceding sentences of this
Section 8, this Agreement shall be binding upon, inure to the benefit of and be
enforceable by, the parties hereto and their respective successors and assigns.
Section 9. Termination. Except as set forth below, this Agreement shall
terminate at the time when the Option would otherwise expire under Section
1(c); provided, however, that the provisions of Sections 4(a), 4(b), 4(d), 4(e)
and 5 shall terminate upon the earliest of (i) the Effective Time and (ii) the
termination of the Merger Agreement in accordance with its terms. In the event
of the termination of this Agreement pursuant to this Section 9, except as set
forth herein, this Agreement shall forthwith become null and void, there shall
be no liability on the part of any of the parties, and except as set forth in
this Section 9 all rights and obligations of each party hereto shall cease;
provided, however, that no such termination of this Agreement shall relieve any
party hereto from any liability for any willful and material breach of any
provision of this Agreement prior to termination.
Section 10. General Provisions. (a) Amendments. This Agreement may not be
amended except by an instrument in writing signed by all of the parties hereto.
(b) Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, telecopied (with confirmation) or sent by
overnight or same-day courier (providing proof of delivery) to Parent in
accordance with Section 8.02 of the Merger Agreement and to the
Shareholders at their respective addresses set forth on Schedule A hereto
(or at such other address for a party as shall be specified by like
notice).
(c) Interpretation. When a reference is made in this Agreement to a
Section or a Schedule, such reference shall be to a Section of, or a
Schedule to, this Agreement unless otherwise indicated. The headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. Whenever
the words "include", "includes" or "including" are used in this Agreement,
they shall be deemed to be followed by the words "without limitation". The
words "hereof", "herein" and "hereunder" and words of similar import when
used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement. The term "or" is not exclusive.
The definitions contained in this Agreement are applicable to the singular
as well as the plural forms of such terms. Any agreement or instrument
defined or referred to herein or in any agreement or instrument that is
referred to herein means such agreement or instrument as from time to time
amended, modified or supplemented. References to a person are also to its
permitted successors and assigns.
(d) Counterparts; Effectiveness. This Agreement may be executed in one
or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more counterparts have
been signed by each of the parties hereto and delivered to the other party.
The effectiveness of this Agreement shall be conditioned upon the execution
and delivery of the Merger Agreement by each of the parties thereto.
(e) Entire Agreement; No Third-Party Beneficiaries. This Agreement and
the Merger Agreement (including the documents and instruments referred to
herein) (i) constitute the entire agreement and supersede all prior
agreements and understandings, both written and oral, among the parties
hereto with respect to the subject matter of this Agreement and (ii) are
not intended to confer upon any person other than the parties hereto (and
the persons specified as proxies in Section 5) any rights or remedies.
B-10
(f) Governing Law. This agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to its
principles of conflicts of laws (except to the extent that the provisions
of the TBCA shall be mandatorily applicable to this Agreement).
(g) Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that
any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible to the fullest extent permitted by applicable law in an acceptable
manner and to the end that the transactions contemplated hereby are
fulfilled to the extent possible.
Section 11. Enforcement. The parties agree that irreparable damage would
occur and that the parties will not have any adequate remedy at law in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in any Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (i) consents to submit itself to the
personal jurisdiction of any court of the United States located in the State of
Delaware or of any Delaware state court in the event any dispute arises out of
this Agreement or the transactions contemplated by this Agreement, (ii) agrees
that it will not attempt to deny or defeat such personal jurisdiction by motion
or other request for leave from any such court, (iii) agrees that it will not
bring any action relating to this Agreement or the transactions contemplated by
this Agreement in any court other than a court of the United States located in
the State of Delaware or a Delaware state court and (iv) waives any right to
trial by jury with respect to any claim or proceeding related to or arising out
of this Agreement or any transaction contemplated by this Agreement.
Section 12. Agent for Service of Process. Each Shareholder hereby appoints
the Company, with offices on the date hereof as provided for in Section 8.02 of
the Merger Agreement, as its authorized agent (the "Authorized Agent"), upon
whom process may be served in any suit, action or proceeding arising out of or
relating to this Agreement or any transaction contemplated by this Agreement
that may be instituted in any court described in Section 11. Each Shareholder
agrees to take any and all action, including the filing of any and all
documents, that may be necessary to establish and continue such appointment in
full force and effect as aforesaid. Each Shareholder agrees that service of
process upon the Authorized Agent shall be, in every respect, effective service
of process upon such Shareholder.
Section 13. Shareholder Capacity. No person executing this Agreement who is
or becomes during the term hereof a director or officer of the Company makes
any agreement or understanding herein in his or her capacity as such director
or officer. Each Shareholder signs solely in his or her capacity as the record
holder and beneficial owner of, or the trustee of a trust whose beneficiaries
are the beneficial owners of, such Shareholder's Subject Shares and nothing
herein shall limit or affect any actions taken by a Shareholder in its capacity
as an officer or director of the Company to the extent specifically permitted
by the Merger Agreement.
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IN WITNESS WHEREOF, Parent has caused this Agreement to be signed by its
officer thereunto duly authorized and each Shareholder has caused this
Agreement to be signed by its officer thereunto duly authorized, all as of the
date first written above.
MCLEODUSA INCORPORATED,
/s/ Blake O. Fisher, Jr.
By: _________________________________
Name:
Title:
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SHAREHOLDERS:
/s/ Jere W. Thompson
-------------------------------------
Jere W. Thompson
WILLIAMSBURG CORPORATION,
By: /s/ Jere W. Thompson ____________
Name:Jere W. Thompson
Title:President
/s/ Margaret D. Thompson
-------------------------------------
Margaret D. Thompson
/s/ Jere W. Thompson, Jr.
-------------------------------------
Jere W. Thompson, Jr.
GREENWAY HOLDINGS, LTD.,
By: /s/ Jere W. Thompson, Jr. _______
Name:Jere W. Thompson, Jr.
Title:President
CAPROCK SYSTEMS INC.,
By: /s/ Jere W. Thompson, Jr. _______
Name:Jere W. Thompson, Jr.
Title:President
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SHAREHOLDERS:
/s/ Mark Langdale
-------------------------------------
Mark Langdale
/s/ Mark Langdale
-------------------------------------
Mark Langdale, as trustee for
Mark Langdale 1999 Trust
u/a/d April 12, 1999
/s/ Mark Langdale
-------------------------------------
Mark Langdale, as trustee for
Patricia Langdale 1999 Trust
u/a/d April 12, 1999
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SHAREHOLDERS:
CAPROCK INVESTORS,
By: /s/ Jere W. Thompson, Jr. _______
Name: Jere W. Thompson, Jr.
Title: Managing Joint Venturer
SHAREHOLDERS:
/s/ Timothy W. Rogers
-------------------------------------
Timothy W. Rogers
B-15
APPENDIX C
VOTING AGREEMENT
VOTING AGREEMENT dated as of October 2, 2000 (this "Agreement"), among
MCLEODUSA INCORPORATED, a Delaware corporation ("Parent"), and the parties
listed on Schedule A attached hereto (each, a "Shareholder" and, collectively,
the "Shareholders").
WHEREAS Parent, Cactus Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Parent ("Sub"), and CapRock Communications Corp., a
Texas corporation (the "Company"), propose to enter into an Agreement and Plan
of Merger dated as of the date hereof (as the same may be amended or
supplemented, the "Merger Agreement"; terms used but not defined herein shall
have the meanings set forth in the Merger Agreement) providing for, among other
things, the merger of Sub with and into the Company upon the terms and subject
to the conditions set forth in the Merger Agreement;
WHEREAS each Shareholder owns (of record or beneficially) the number of
shares of Company Common Stock set forth opposite such Shareholder's name on
Schedule A hereto (such shares, together with any other shares of capital stock
of the Company or other voting securities of the Company acquired (of record or
beneficially) by the Shareholders after the date hereof and during the term of
this Agreement (including through the exercise of any warrants, stock options
or similar instruments), being collectively referred to herein as the "Subject
Shares"); and
WHEREAS as a condition to its willingness to enter into the Merger
Agreement, Parent has required that each Shareholder enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements set forth herein and in the Merger
Agreement, the parties hereto agree as follows:
Section 1. Representations and Warranties of Each Shareholder. Each
Shareholder hereby represents and warrants to Parent as follows:
(a) Organization; Authority; Execution and Delivery;
Enforceability. Such Shareholder (i) is duly organized, validly existing
and in good standing under the laws of its jurisdiction of organization, if
applicable, and (ii) has the requisite corporate, company, partnership or
other power and authority to execute and deliver this Agreement, to
consummate the transactions contemplated hereby and to comply with the
terms hereof. The execution and delivery by such Shareholder, the
consummation by such Shareholder of the transactions contemplated hereby
and compliance by such Shareholder with the provisions hereof have been
duly authorized by all necessary corporate, company, partnership or other
action on the part of such Shareholder and no other corporate, company,
partnership or other proceedings on the part of such Shareholder are
necessary to authorize this Agreement, to consummate the transactions
contemplated hereby or to comply with the provisions hereof. This Agreement
has been duly executed and delivered by such Shareholder and constitutes a
valid and binding obligation of such Shareholder and, assuming this
Agreement constitutes a valid and binding obligation of Parent, is
enforceable against such Shareholder in accordance with its terms, except
as enforceability may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other laws affecting the rights
and remedies of creditors generally and general principles of equity
(whether considered in a proceeding in equity or at law). The execution and
delivery of this Agreement, the consummation of the transactions
contemplated hereby and compliance with the provisions hereof do not and
will not conflict with, or result in any violation or breach of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of, or result in, termination, cancelation or acceleration of any
obligation or to loss of a material benefit under, or result in the
creation of any Lien in or upon any of the properties or assets of such
Shareholder under, or give rise to any increased, additional, accelerated
or guaranteed rights or entitlements under, any provision of (i) any
certificate of incorporation or by-laws, partnership agreement or limited
liability company agreement (or similar organizational documents) of such
Shareholder, (ii) any Contract to which such Shareholder is a party or any
of the properties or assets of such Shareholder is
C-1
subject or (iii) subject to the governmental filings and other matters
referred to in the following sentence, any (A) statute, law, ordinance,
rule or regulation or (B) judgment, order or decree, in each case,
applicable to such Shareholder or its properties or assets, other than, in
the case of clauses (ii) and (iii), any such conflicts, violations,
breaches, defaults, rights, losses, Liens or entitlements that individually
or in the aggregate could not reasonably be expected to impair in any
material respect the ability of any Shareholder to perform its obligations
under this Agreement or prevent or materially impede or delay the
consummation of any of the transactions contemplated by this Agreement. No
consent, approval, order or authorization of, or registration, declaration
or filing with, any Governmental Entity is required by or with respect to
such Shareholder in connection with the execution and delivery of this
Agreement by such Shareholder, the consummation by such Shareholder of the
transactions contemplated hereby or the compliance by such Shareholder with
the provisions hereof, except for (1) filings under the HSR Act and any
other applicable competition, merger control, antitrust or similar law or
regulation, (2) filings with the SEC of such reports under the Exchange Act
as may be required in connection with this Agreement and the transactions
contemplated hereby and (3) such other consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of
which to be obtained or made individually or in the aggregate could not
reasonably be expected to impair in any material respect the ability of
such Shareholder to perform its obligations under this Agreement or prevent
or materially impede or delay the consummation of any of the transactions
contemplated hereby.
(b) The Subject Shares. Such Shareholder is the record and beneficial
owner of, and has good and marketable title to, the Subject Shares set
forth opposite its name on Schedule A hereto, free and clear of any Liens
except as set forth on Schedule A. As of the date hereof, other than as set
forth on Schedule A hereto, such Shareholder does not own (of record or
beneficially) any shares of capital stock of the Company, and no
Shareholder owns (of record or beneficially) any options, warrants, rights
or other similar instruments to acquire any capital stock or other voting
securities of the Company. Except as set forth on Schedule A, such
Shareholder has the sole right to Transfer (as defined in Section 3(c)) and
direct the voting of the Subject Shares set forth opposite its name on
Schedule A hereto, and none of such Subject Shares is subject to any voting
trust or other agreement, arrangement or restriction with respect to the
Transfer or the voting of such Subject Shares, except as set forth in
Sections 3 and 4 of this Agreement.
Section 2. Representations and Warranties of Parent. Parent hereby
represents and warrants to each Shareholder as follows: Parent (i) is duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation and (ii) has all requisite corporate power and
authority to execute and deliver this Agreement, to consummate the transactions
contemplated hereby and to comply with the terms hereof. The execution and
delivery of this Agreement by Parent, the consummation by Parent of the
transactions contemplated hereby and compliance by Parent with the provisions
hereof have been duly authorized by all necessary corporate action on the part
of Parent and no other corporate proceedings on the part of Parent are
necessary to authorize this Agreement, to consummate the transactions
contemplated hereby or to comply with the provisions hereof. This Agreement has
been duly executed and delivered by Parent and, assuming due execution by each
Shareholder, constitutes a valid and binding obligation of Parent enforceable
against Parent in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other laws affecting the rights and remedies of creditors
generally and general principles of equity (whether considered in a proceeding
in equity or at law). The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and compliance with the
provisions hereof do not and will not conflict with, or result in any violation
or breach of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of, or result in, termination, cancelation or
acceleration of any obligation or to loss of a material benefit under, or
result in the creation of any Lien in or upon any of the properties or assets
of Parent under, or give rise to any increased, additional, accelerated or
guaranteed rights or entitlements under, any provision of (i) the Amended and
Restated Certificate of Incorporation or Amended and Restated By-laws of
Parent, (ii) any Contract to which Parent is a party or any of its properties
or assets is subject or (iii) subject to the governmental filings and other
matters referred to in
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the following sentence, any (A) statute, law, ordinance, rule or regulation or
(B) judgment, order or decree, in each case, applicable to Parent or its
properties or assets, other than, in the case of clauses (ii) and (iii), any
such conflicts, violations, breaches, defaults, rights, losses, Liens or
entitlements that individually or in the aggregate could not reasonably be
expected to impair in any material respect the ability of Parent to perform its
obligations under this Agreement or prevent or materially delay the
consummation of any of the transactions contemplated by this Agreement. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Entity is required by or with respect to Parent
in connection with the execution and delivery of this Agreement by Parent, the
consummation by Parent of the transactions contemplated hereby or compliance by
Parent with the provisions hereof, except for (1) filings under the HSR Act and
any other applicable competition, merger control, antitrust or similar law or
regulation, (2) filings with the SEC of such reports under the Exchange Act as
may be required in connection with this Agreement and the transactions
contemplated hereby and (3) such other consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of which to
be obtained or made individually or in the aggregate could not reasonably be
expected to impair in any material respect the ability of Parent to perform its
obligations under this Agreement or prevent or materially delay the
consummation of any of the transactions contemplated hereby.
Section 3. Covenants of Each Shareholder. Each Shareholder covenants and
agrees as follows:
(a) At any meeting of the shareholders of the Company called to vote
upon the Merger Agreement, the Merger or any of the other transactions
contemplated by the Merger Agreement, or at any adjournment or postponement
thereof, or in any other circumstances upon which a vote, consent, adoption
or other approval (including by written consent solicitation) with respect
to the Merger Agreement, the Merger or any of the other transactions
contemplated by the Merger Agreement is sought, such Shareholder shall vote
(or cause to be voted) all the Subject Shares of such Shareholder (owned of
record or beneficially) in favor of, and shall consent in writing to (or
cause to be consented in writing to), the approval of the Merger Agreement
and the terms thereof and of the Merger and each of the other transactions
contemplated by the Merger Agreement.
(b) At any meeting of the shareholders of the Company, or at any
adjournment or postponement thereof, or in any other circumstances upon
which a vote, consent, adoption or other approval (including by written
consent solicitation) is sought, such Shareholder shall vote (or cause to
be voted) all the Subject Shares of such Shareholder (owned of record or
beneficially) against, and shall not consent in writing to (and shall cause
not to be consented in writing to), any of the following (or any agreement
to enter into, effect, facilitate or support any of the following): (i) any
Company Takeover Proposal or transaction or occurrence that if proposed and
offered to the Company or its shareholders (or any of them) would
constitute a Company Takeover Proposal (collectively, "Alternative
Transactions") or (ii) any amendment of the Company's Articles of
Incorporation or By-laws or other proposal, action or transaction involving
the Company or any of its Subsidiaries or any of its shareholders, which
amendment or other proposal, action or transaction could reasonably be
expected to prevent or materially impede or delay the consummation of the
Merger or the other transactions contemplated by the Merger Agreement or
the consummation of the transactions contemplated by this Agreement or to
deprive Parent of any material portion of the benefits anticipated by
Parent to be received from the consummation of the Merger or the other
transactions contemplated by the Merger Agreement or this Agreement, or
change in any manner the voting rights of the Company Common Stock
(collectively, "Frustrating Transactions").
(c) Other than pursuant to this Agreement, such Shareholder shall not
(i) sell, transfer, pledge, assign or otherwise dispose of (including by
gift) (collectively, "Transfer"), or consent to or permit any Transfer of,
any Subject Shares of such Shareholder or any interest therein, or enter
into any Contract, option or other arrangement (including any profit
sharing arrangement) with respect to the Transfer of, or the creation or
offer of any derivative security in respect of, any Subject Shares of such
Shareholder, to or with any person or (ii) enter into any voting
arrangement, whether by proxy, voting agreement or otherwise, with respect
to any Subject Shares of such Shareholder, and shall not commit or agree to
take any of the foregoing actions. Such Shareholder shall not, nor shall
such Shareholder permit any entity
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under such Shareholder's control to, deposit any Subject Shares of such
Shareholder in a voting trust.
(d) Such Shareholder shall not, nor shall such Shareholder permit any of
its Subsidiaries to, nor shall it authorize or permit any director,
officer, employee or partner of such Shareholder or any of its Subsidiaries
or any Representative of such Shareholder or any of its Subsidiaries to,
directly or indirectly, (i) solicit, initiate or encourage, or take any
other action designed to facilitate, any Alternative Transaction or
Frustrating Transaction, (ii) enter into any agreement with respect to any
Alternative Transaction or Frustrating Transaction or (iii) except to the
extent the Company shall have previously done so in accordance with Section
4.02(a) of the Merger Agreement, enter into, continue or otherwise
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or otherwise cooperate in any way
with, or assist or participate in any effort or attempt by any person with
respect to, any Alternative Transaction or Frustrating Transaction.
(e) Such Shareholder shall use its commercially reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done, and
to assist and cooperate with the other parties in doing all things
necessary, proper or advisable to consummate and make effective, in the
most expeditious manner practicable, the transactions contemplated by this
Agreement and the Merger Agreement. Such Shareholder shall not commit or
agree to take any action inconsistent with the transactions contemplated by
this Agreement or the transactions contemplated by the Merger Agreement.
(f) Such Shareholder shall not, nor shall such Shareholder permit any of
its Subsidiaries to, nor shall it authorize or permit any director,
officer, employee or partner of such Shareholder or any of its Subsidiaries
or any Representative of such Shareholder or any of its Subsidiaries to,
directly or indirectly, issue any press release or make any other public
statement with respect to the Merger Agreement, this Agreement, the voting
and option agreement dated the date hereof among Parent and certain
shareholders of the Company (the "Voting and Option Agreement"), the Merger
or any of the other transactions contemplated by the Merger Agreement, the
Voting and Option Agreement or this Agreement, without the prior written
consent of Parent, except as may be required by applicable law.
(g) Notwithstanding anything to the contrary contained herein, nothing
in this Section 3 shall prohibit any Shareholder from, in his capacity as
an officer and/or director of the Company, taking any actions, on behalf of
the Company, that the Company is permitted to take under Section 4.02 of
the Merger Agreement.
Section 4. Grant of Proxy; Appointment of Proxy. (a) Each Shareholder hereby
agrees to, promptly upon Parent's request, grant to, and appoint, Parent and
persons designated by the board of directors of Parent, in their respective
capacities as designees of Parent, and any individual who shall hereafter
succeed to any office of Parent held by such individual, and each of them
individually, such Shareholder's proxy and attorney-in-fact (with full power of
substitution), for and in the name, place and stead of such Shareholder, to
vote all such Shareholder's Subject Shares (owned of record or beneficially),
or grant a consent or approval in respect of such Subject Shares, (i) in favor
of the approval of the Merger Agreement and the terms thereof and of the Merger
and each of the other transactions contemplated by the Merger Agreement and
(ii) against any Alternative Transaction or any Frustrating Transaction.
(b) Each Shareholder represents that any proxies heretofore given in
respect of such Shareholder's Subject Shares are not irrevocable, and that
all such proxies are hereby revoked.
(c) Each Shareholder hereby affirms that the agreement to grant a proxy
set forth in this Section 4 is given in connection with the execution of
the Merger Agreement and that such agreement is given to secure the
performance of the duties of such Shareholder under this Agreement. Each
Shareholder hereby further affirms that any such proxy will be coupled with
an interest and may under no circumstances be revoked unless and until this
Agreement is terminated in accordance with Section 8 of this Agreement.
Each Shareholder hereby ratifies and confirms all that such proxy may
lawfully do or cause to be done by virtue hereof. Each such proxy shall be
executed in accordance with the provisions of Article 2.29 of the TBCA.
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Section 5. Further Assurances. Each Shareholder shall from time to time
execute and deliver, or cause to be executed and delivered, such additional or
further consents, documents and other instruments as Parent may request for the
purpose of effectuating the matters covered by this Agreement, including the
grant of proxies set forth in Section 4.
Section 6. Certain Events. (a) Each Shareholder agrees that this Agreement
and the obligations hereunder shall attach to such Shareholder's Subject Shares
and shall be binding upon any person or entity to which legal or beneficial
ownership of such Subject Shares shall pass, whether by operation of law or
otherwise, including such Shareholder's heirs, guardians, administrators or
successors, and such Shareholder further agrees to take all actions necessary
to effectuate the foregoing. Each Shareholder agrees that each certificate
representing the Subject Shares of such Shareholder shall be inscribed with the
legend required by Section 6(b). In the event of any stock split, stock
dividend, reclassification, merger, reorganization, recapitalization or other
change in the capital structure of the Company affecting the capital stock of
the Company, the number of Subject Shares listed on Schedule A hereto opposite
the name of each Shareholder shall be adjusted appropriately. In addition, in
the event of any other acquisition of additional shares of capital stock of the
Company or other voting securities of the Company by any Shareholder (including
through the exercise of any warrants, stock options or similar instruments),
the number of Subject Shares listed on Schedule A hereto opposite the name of
such Shareholder shall be adjusted appropriately. This Agreement and the
representations, warranties, covenants, agreements and obligations hereunder
shall attach to any additional shares of capital stock of the Company or other
voting securities of the Company issued to or acquired by any Shareholder
directly or indirectly (including through the exercise of any warrants, stock
options or similar instruments).
(b) Each Shareholder shall cause the certificated Subject Shares held by
him to have a legend placed conspicuously on such certificate to the
following effect:
The shares of common stock evidenced by this certificate are subject
to a Voting Agreement dated October 2, 2000 entered into by the record
owner of such shares and McLeodUSA Incorporated.
For all uncertificated Subject Shares each Shareholder shall request that
the Company send notice of such voting agreement as required by Article 2.19(D)
of the TBCA. Each Shareholder shall cause a counterpart of this Agreement to be
deposited with the Company at its principal place of business or registered
office where it shall be subject to the same right of examination by a
shareholder of the Company, in person or by agent or attorney, as are the books
and records of the Company.
Section 7. Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise, by any of the parties hereto without
the prior written consent of the other parties hereto, except that Parent may
assign, in its sole discretion, any of or all its rights, interests and
obligations under this Agreement to any of its direct or indirect wholly owned
Subsidiaries, provided that no such assignment shall relieve Parent of any of
its obligations under this Agreement. Any purported assignment in violation of
this Section 7 shall be void. Subject to the preceding sentences of this
Section 7, this Agreement shall be binding upon, inure to the benefit of and be
enforceable by, the parties hereto and their respective successors and assigns.
Section 8. Termination. Except as set forth below, this Agreement shall
terminate upon the earliest of (i) the Effective Time and (ii) the termination
of the Merger Agreement in accordance with its terms. In the event of the
termination of this Agreement pursuant to this Section 8, except as set forth
herein, this Agreement shall forthwith become null and void, there shall be no
liability on the part of any of the parties, and except as set forth in this
Section 8 all rights and obligations of each party hereto shall cease;
provided, however, that no such termination of this Agreement shall relieve any
party hereto from any liability for any willful and material breach of any
provision of this Agreement prior to termination.
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Section 9. General Provisions. (a) Amendments. This Agreement may not be
amended except by an instrument in writing signed by all of the parties hereto.
(b) Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, telecopied (with confirmation) or sent by
overnight or same-day courier (providing proof of delivery) to Parent in
accordance with Section 8.02 of the Merger Agreement and to the
Shareholders at their respective addresses set forth on Schedule A hereto
(or at such other address for a party as shall be specified by like
notice).
(c) Interpretation. When a reference is made in this Agreement to a
Section or a Schedule, such reference shall be to a Section of, or a
Schedule to, this Agreement unless otherwise indicated. The headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. Whenever
the words "include", "includes" or "including" are used in this Agreement,
they shall be deemed to be followed by the words "without limitation". The
words "hereof", "herein" and "hereunder" and words of similar import when
used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement. The term "or" is not exclusive.
The definitions contained in this Agreement are applicable to the singular
as well as the plural forms of such terms. Any agreement or instrument
defined or referred to herein or in any agreement or instrument that is
referred to herein means such agreement or instrument as from time to time
amended, modified or supplemented. References to a person are also to its
permitted successors and assigns.
(d) Counterparts; Effectiveness. This Agreement may be executed in one
or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more counterparts have
been signed by each of the parties hereto and delivered to the other party.
The effectiveness of this Agreement shall be conditioned upon the execution
and delivery of the Merger Agreement by each of the parties thereto.
(e) Entire Agreement; No Third-Party Beneficiaries. This Agreement and
the Merger Agreement (including the documents and instruments referred to
herein) (i) constitute the entire agreement and supersede all prior
agreements and understandings, both written and oral, among the parties
hereto with respect to the subject matter of this Agreement and (ii) are
not intended to confer upon any person other than the parties hereto (and
the persons specified as proxies in Section 4) any rights or remedies.
(f) Governing Law. This agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to its
principles of conflicts of laws (except to the extent that the provisions
of the TBCA shall be mandatorily applicable to this Agreement).
(g) Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that
any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible to the fullest extent permitted by applicable law in an acceptable
manner and to the end that the transactions contemplated hereby are
fulfilled to the extent possible.
Section 10. Enforcement. The parties agree that irreparable damage would
occur and that the parties will not have any adequate remedy at law in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in any Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (i) consents to submit itself to the
personal jurisdiction of any court of the United States located in the State of
Delaware or of any Delaware state court in the event any dispute arises out of
this Agreement or the transactions contemplated by this Agreement, (ii)
C-6
agrees that it will not attempt to deny or defeat such personal jurisdiction by
motion or other request for leave from any such court, (iii) agrees that it
will not bring any action relating to this Agreement or the transactions
contemplated by this Agreement in any court other than a court of the United
States located in the State of Delaware or a Delaware state court and (iv)
waives any right to trial by jury with respect to any claim or proceeding
related to or arising out of this Agreement or any transaction contemplated by
this Agreement.
Section 11. Agent for Service of Process. Each Shareholder hereby appoints
the Company, with offices on the date hereof as provided for in Section 8.02 of
the Merger Agreement, as its authorized agent (the "Authorized Agent"), upon
whom process may be served in any suit, action or proceeding arising out of or
relating to this Agreement or any transaction contemplated by this Agreement
that may be instituted in any court described in Section 10. Each Shareholder
agrees to take any and all action, including the filing of any and all
documents, that may be necessary to establish and continue such appointment in
full force and effect as aforesaid. Each Shareholder agrees that service of
process upon the Authorized Agent shall be, in every respect, effective service
of process upon such Shareholder.
Section 12. Shareholder Capacity. No person executing this Agreement who is
or becomes during the term hereof a director or officer of the Company makes
any agreement or understanding herein in his or her capacity as such director
or officer. Each Shareholder signs solely in his or her capacity as the record
holder and beneficial owner of, or the trustee of a trust whose beneficiaries
are the beneficial owners of, such Shareholder's Subject Shares and nothing
herein shall limit or affect any actions taken by a Shareholder in its capacity
as an officer or director of the Company to the extent specifically permitted
by the Merger Agreement.
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IN WITNESS WHEREOF, Parent has caused this Agreement to be signed by its
officer thereunto duly authorized and each Shareholder has caused this
Agreement to be signed by its officer thereunto duly authorized, all as of the
date first written above.
MCLEODUSA INCORPORATED,
/s/ Blake O. Fisher, Jr.
By: _________________________________
Name:
Title:
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SHAREHOLDERS:
/s/ Timothy M. Terrell
-------------------------------
Timothy M. Terrell
C-9
APPENDIX D
[Salomon Smith Barney Letterhead]
October 2, 2000
The Board of Directors
CapRock Communications Corp.
15601 Dallas Parkway, Suite 700
Dallas, Texas 75248
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of CapRock Communications Corp.
("CapRock") of the Exchange Ratio (defined below) set forth in the Agreement
and Plan of Merger, dated as of October 2, 2000 (the "Merger Agreement"), among
McLeodUSA Incorporated ("McLeodUSA"), Cactus Acquisition Corp., a wholly owned
subsidiary of McLeodUSA ("Sub"), and CapRock. As more fully described in the
Merger Agreement, Sub will be merged with and into CapRock (the "Merger")
pursuant to which each outstanding share of the common stock, par value $0.01
per share, of CapRock ("CapRock Common Stock") (other than shares owned by
CapRock, Sub or McLeodUSA) will be converted into the right to receive 0.3876
of a share (the "Exchange Ratio") of the Class A common stock, par value $0.01
per share, of McLeodUSA (the "McLeodUSA Common Stock").
In arriving at our opinion, we reviewed drafts of the Merger Agreement and
held discussions with certain senior officers, directors and other
representatives and advisors of CapRock and certain senior officers and other
representatives and advisors of McLeodUSA concerning the businesses, operations
and prospects of CapRock and McLeodUSA, respectively. We examined certain
publicly available business and financial information relating to CapRock and
McLeodUSA as well as certain financial forecasts and other information and data
for CapRock and McLeodUSA which were provided to or otherwise discussed with us
by the managements of CapRock and McLeodUSA, respectively, including
information relating to certain strategic implications and operational benefits
anticipated to result from the Merger. We reviewed the financial terms of the
Merger as set forth in the Merger Agreement in relation to, among other things:
current and historical market prices and trading volumes of CapRock Common
Stock and McLeodUSA Common Stock; the historical and projected earnings and
other operating data of CapRock and McLeodUSA; and the capitalization and
financial condition of CapRock and McLeodUSA. In this regard, we have also
considered, in light of the capital resources available to CapRock, CapRock's
current cash requirements for working capital, including for short-term
obligations to suppliers, and its other near-term liquidity needs. We
considered, to the extent publicly available, the financial terms of certain
other similar transactions recently effected which we considered relevant in
evaluating the Merger and analyzed certain financial, stock market and other
publicly available information relating to the businesses of other companies
whose operations we considered relevant in evaluating those of CapRock and
McLeodUSA. We also evaluated the pro forma financial impact of the Merger on
McLeodUSA. In connection with our engagement, we were requested to approach,
and we held discussions with, third parties to solicit indications of interest
in the possible acquisition of all or a part of CapRock or in providing
financing to CapRock. In addition to the foregoing, we conducted such other
analyses and examinations and considered such other information and financial,
economic and market criteria as we deemed appropriate in arriving at our
opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed
by or discussed with us. With respect to financial forecasts and other
information and data provided to or otherwise reviewed by or discussed with us,
we have been advised by the respective managements of CapRock and McLeodUSA
that such forecasts and other information and data were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
respective managements of CapRock and McLeodUSA as to the future financial
performance of CapRock and McLeodUSA, respectively,
D-1
and the strategic implications and operational benefits anticipated to result
from the Merger. We have assumed, with your consent, that the Merger will be
consummated in accordance with the terms of the Merger Agreement and the other
agreements entered into in connection therewith, and will be treated as a tax-
free reorganization for federal income tax purposes. We also have assumed, with
your consent, that in the course of obtaining the necessary regulatory or third
party approvals for the Merger, no limitations, restrictions or conditions will
be imposed that would have an adverse effect on CapRock or McLeodUSA or the
contemplated benefits to CapRock of the Merger. Our opinion, as set forth
herein, relates to the relative values of CapRock and McLeodUSA. We are not
expressing any opinion as to what the value of McLeodUSA Common Stock actually
will be when issued pursuant to the Merger or the price at which McLeodUSA
Common Stock will trade subsequent to the Merger. We have not made or been
provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of CapRock or McLeodUSA or of the
solvency of either entity, nor have we made any physical inspection of the
properties or assets of CapRock or McLeodUSA. Our opinion does not address the
relative merits of the Merger as compared to any alternative business
strategies that might exist for CapRock or the effect of any other transaction
in which CapRock might engage. Our opinion is necessarily based upon
information available to us, and financial, stock market and other conditions
and circumstances existing and disclosed to us, as of the date hereof.
Salomon Smith Barney Inc. has acted as financial advisor to CapRock in
connection with the proposed Merger and will receive a fee for such services, a
significant portion of which is contingent upon the consummation of the Merger.
We have in the past provided investment banking services to CapRock and
McLeodUSA, respectively, unrelated to the proposed Merger, for which services
we have received compensation. In the ordinary course of our business, we and
our affiliates may actively trade or hold the securities of CapRock and
McLeodUSA for our own account or for the account of our customers and,
accordingly, may at any time hold a long or short position in such securities.
In addition, we and our affiliates (including Citigroup Inc. and its
affiliates) may maintain other business relationships with CapRock, McLeodUSA
and their respective affiliates.
Our advisory services and the opinion expressed herein are provided solely
for the information of the Board of Directors of CapRock in its evaluation of
the proposed Merger, and our opinion is not intended to be and does not
constitute a recommendation to any stockholder as to how such stockholder
should vote on any matters relating to the proposed Merger.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Exchange Ratio is fair,
from a financial point of view, to the holders of CapRock Common Stock (other
than McLeodUSA and its affiliates).
Very truly yours,
/s/ Salomon Smith Barney Inc.
SALOMON SMITH BARNEY INC.
D-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in non-derivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have had
no reasonable cause to believe his or her conduct was unlawful. In addition, the
DGCL does not permit indemnification in an action or suit by or in the right of
the corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for costs the court deems proper in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended.
The Amended and Restated Certificate of Incorporation of McLeodUSA (the
"McLeodUSA Certificate") contains provisions that provide that no director of
McLeodUSA shall be liable for breach of fiduciary duty as a director except for
(1) any breach of the director's duty of loyalty to McLeodUSA or its
stockholders; (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (3) liability under
Section 174 of the DGCL; or (4) any transaction from which the director derived
an improper personal benefit. The McLeodUSA Certificate contains provisions that
further provide for the indemnification of directors and officers to the fullest
extent permitted by the DGCL. Under the Bylaws of McLeodUSA, McLeodUSA is
required to advance expenses incurred by an officer or director in defending any
such action if the director or officer undertakes to repay such amount if it is
determined that the director or officer is not entitled to indemnification. In
addition, McLeodUSA has entered into indemnity agreements with each of its
directors pursuant to which McLeodUSA has agreed to indemnify the directors as
permitted by the DGCL. McLeodUSA has obtained directors' and officers' liability
insurance against certain liabilities, including liabilities under the
Securities Act.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
------- Exhibit Description
Number -------------------
------
2.1 Agreement and Plan of Merger by and among McLeodUSA, Cactus
Acquisition Corp. and Caprock Communications Corp., dated as of
October 2, 2000 (included as Appendix A to the proxy
statement/prospectus included in this Registration Statement).
3.1 Amended and Restated Certificate of Incorporation of McLeodUSA
(filed as Exhibit 3.1 to Registration Statement on Form S-1,
File No. 333-3112 (the "Initial Form S-1") and incorporated
herein by reference).
3.2 Amended and Restated Bylaws of McLeodUSA (filed as Exhibit 3.2
to Registration Statement on Form S-1, File No. 333-13885 (the
"November 1996 Form S-1"), and incorporated herein by
reference).
3.3 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of McLeodUSA (filed as Exhibit 3.3
to Registration Statement on Form S-4, File No. 333-27647 (the
"July 1997 Form S-4"), and incorporated herein by reference).
3.4 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of McLeodUSA (filed as Exhibit 3.8
to the Quarterly Report on Form 10-Q, File No. 0-20763, filed
with the SEC on May 15, 2000 (the "May 2000 Form 10-Q"), and
incorporated herein by reference).
3.5 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of McLeodUSA (filed as Exhibit 3.9
to the Quarterly Report on Form 10-Q, File No. 0-20763, filed
with the SEC on August 14, 2000 (the "August 2000 Form 10-Q"),
and incorporated herein by reference).
3.6 Certificate of Change of Registered Agent and Registered Office
of McLeodUSA (filed as Exhibit 3.4 to Annual Report on Form 10-
K, File No. 0-20763, filed with the SEC on March 9, 1998 (the
"1997 Form 10-K") and incorporated herein by reference).
3.7 Certificate of Designations of the 6.75% Series A preferred
stock, par value $.01 per share, of McLeodUSA (filed as Exhibit
3.1 to the Current Report on Form 8-K, File No. 0-20763, filed
with the SEC on August 9, 1999 and incorporated herein by
reference).
3.8 Certificate of Designations of the Series B preferred stock,
par value $.01 per share, of McLeodUSA (filed as Exhibit 3.6 to
the Registration Statement on Form S-4, File No. 333-95941,
filed with the SEC on February 1, 2000 (the "February 2000 Form
S-4"), and incorporated herein by reference).
3.9 Certificate of Designations of the Series C preferred stock,
par value $.01 per share, of McLeodUSA (filed as Exhibit 3.7 to
the February 2000 Form S-4 and incorporated herein by
reference).
4.1 Form of Class A Common Stock Certificate of McLeodUSA (filed as
Exhibit 4.1 to the Initial Form S-1 and incorporated herein by
reference).
4.2 Indenture dated March 4, 1997 between McLeodUSA and United
States Trust Company of New York, as Trustee, relating to the
10 1/2% Senior Discount Notes Due 2007 of McLeodUSA (filed as
Exhibit 4.2 to Annual Report on Form 10-K, File No. 0-20763,
filed with the SEC on March 31, 1997 (the "1996 Form 10-K") and
incorporated herein by reference).
4.3 Initial Global 10 1/2% Senior Discount Note Due March 1, 2007
of McLeodUSA, dated March 4, 1997 (filed as Exhibit 4.3 to the
1996 Form 10-K and incorporated herein by reference).
4.4 Form of Certificated 10 1/2% Senior Discount Note Due March 1,
2007 of McLeodUSA, (filed as Exhibit 4.4 to the 1996 Form 10-K
and incorporated herein by reference).
4.5 Investor Agreement dated as of April 1, 1996 among McLeodUSA,
IES Investments Inc., Midwest Capital Group Inc., MWR
Investments Inc., Clark and Mary McLeod, and certain other
stockholders (filed as Exhibit 4.8 to the Initial Form S-1 and
incorporated herein by reference).
4.6 Amendment No. 1 to Investor Agreement dated as of October 23,
1996 by and among McLeodUSA, IES Investments Inc., Midwest
Capital Group Inc., MWR Investments Inc., Clark E. McLeod and
Mary E. McLeod (filed as Exhibit 4.3 to the November 1996 Form
S-1 and incorporated herein by reference).
4.7 Form of 10 1/2% Senior Discount Exchange Note Due 2007 of
McLeodUSA (filed as Exhibit 4.8 to the July 1997 Form S-4 and
incorporated herein by reference).
4.8 Indenture dated as of July 21, 1997 between McLeodUSA and
United States Trust Company of New York, as Trustee, relating
to the 9 1/4% Senior Notes Due 2007 of McLeodUSA (filed as
Exhibit 4.9 to the July 1997 Form S-4 and incorporated herein
by reference).
4.9 Form of Initial Global 9 1/4% Senior Note Due 2007 of McLeodUSA
(filed as Exhibit 4.10 to the July 1997 Form S-4 and
incorporated herein by reference).
4.10 Stockholders' Agreement dated June 14, 1997 among McLeodUSA,
IES Investments Inc., Midwest Capital Group, Inc., MWR
Investments Inc., Clark E. McLeod, Mary E. McLeod and Richard
A. Lumpkin on behalf of each of the shareholders of
Consolidated Communications Inc. listed in Schedule 1 thereto
(filed as Exhibit 4.12 to the July 1997 Form S-4 and
incorporated herein by reference).
4.11 Amendment No. 1 to Stockholders' Agreement dated as of
September 19, 1997 by and among McLeodUSA, IES Investments
Inc., Midwest Capital Group, Inc., MWR Investments Inc., Clark
E. McLeod, Mary E. McLeod and Richard A. Lumpkin on behalf of
each of the shareholders of Consolidated Communications Inc.
listed in Schedule I thereto (filed as Exhibit 4.1 to the
Quarterly Report on Form 10-Q, File No. 0-20763, filed with the
SEC on November 14, 1997 and incorporated herein by reference).
4.12 Form of 9 1/4% Senior Exchange Note Due 2007 of McLeodUSA
(filed as Exhibit 4.14 to the 1997 Form 10-K and incorporated
herein by reference).
4.13 Indenture dated as of March 16, 1998 between McLeodUSA and
United States Trust Company of New York, as Trustee, relating
to the 8 3/8% Senior Notes Due 2008 of McLeodUSA (filed as
Exhibit 4.15 to Registration Statement on Form S-4, File No.
333-52793 (the "May 1998 Form S-4"), and incorporated herein by
reference).
4.14 Form of Global 8 3/8% Senior Note Due 2008 of McLeodUSA
(contained in the Indenture filed as Exhibit 4.13).
4.15 Stockholders' Agreement dated November 18, 1998 by and among
McLeodUSA, IES Investments Inc., Clark E. McLeod, Mary E.
McLeod, and Richard A. Lumpkin and each of the former
shareholders of Consolidated Communications Inc. ("CCI") and
certain permitted transferees of the former CCI shareholders
(filed as Exhibit 99.1 to the Current Report on Form 8-K, File
No. 0-20763, filed with the SEC on November 19, 1998 and
incorporated herein by reference).
4.16 Indenture dated as of October 30, 1998 between McLeodUSA and
United States Trust Company of New York, as Trustee, relating
to the 9 1/2% Senior Notes Due 2008 of McLeodUSA (filed as
Exhibit 4.19 to Registration Statement on Form S-4, File No.
333-69621 (the "December 1998 Form S-4"), and incorporated
herein by reference).
4.17 Form of Global 9 1/2% Senior Note Due 2008 of McLeodUSA
(contained in the Indenture filed as Exhibit 4.16).
4.18 Stockholders' Agreement dated as of January 7, 1999, by and
among McLeodUSA, IES Investments Inc., Clark E. McLeod, Mary E.
McLeod, Richard A. Lumpkin, Gail G. Lumpkin, M/C Investors
L.L.C. and Media/Communications Partners III Limited
Partnership (filed as Exhibit 4.1 to the Current Report on Form
8-K, File No. 0-20763, filed with the SEC on January 14, 1999
and incorporated herein by reference).
4.19 Indenture dated as of February 22, 1999 between McLeodUSA and
United States Trust Company of New York, as Trustee, relating
to the 8 1/8% Senior Notes Due 2009 of McLeodUSA (filed as
Exhibit 4.22 to Annual Report on Form 10-K, File No. 0-20763,
filed with the SEC on March 24, 1999 (the "1998 Form 10-K") and
incorporated herein by reference).
4.20 Form of Global 8 1/8% Senior Note Due 2009 of McLeodUSA
(contained in the Indenture filed as Exhibit 4.19).
4.21 Form of 6.75% Series A preferred stock certificate (filed as
Exhibit 4.1 to the Current Report on Form 8-K, File No. 0-
20763, filed with the SEC on August 9, 1999 and incorporated
herein by reference).
4.22 Form of Series B preferred stock certificate (filed as Exhibit
4.22 to the February 2000 Form S-4 and incorporated herein by
reference).
4.23 Form of Series C preferred stock certificate (filed as Exhibit
4.23 to the February 2000 Form S-4 and incorporated herein by
reference).
4.24 Second Amended and Restated November 1998 Stockholders'
Agreement dated December 17, 1999 by and among certain Alliant
Entities, Clark and Mary McLeod, Richard Lumpkin and certain
CCI Shareholders (filed as Exhibit 4.24 to Annual Report on
Form 10-K, File No. 0-20763, filed with the SEC on March 30,
2000 (the "1999 Form 10-K") and incorporated herein by
reference).
4.25 Second Amended and Restated January 1999 Stockholders'
Agreement dated December 17, 1999 by and among certain Alliant
Entities, Clark and Mary McLeod, Richard Lumpkin, certain CCI
Shareholders and the M/C Stockholders (filed as Exhibit 4.25 to
the 1999 Form 10-K and incorporated herein by reference).
4.26 Stockholders' Agreement dated as of March 30, 2000 by and among
McLeodUSA, Kwok Li and Linsang Partners, LLC (filed as Exhibit
4.26 to the May 2000 Form 10-Q and incorporated herein by
reference).
4.27 Third Amended and Restated November 1998 Stockholders'
Agreement dated as of March 10, 2000 by and among by and among
certain Alliant Entities, Clark and Mary McLeod, Richard
Lumpkin and certain CCI Shareholders (filed as Exhibit 4.27 to
the May 2000 Form 10-Q and incorporated herein by reference).
4.28 Third Amended and Restated January 1999 Stockholders' Agreement
dated as of March 10, 2000 by and among certain Alliant
Entities, Clark and Mary McLeod, Richard Lumpkin, certain CCI
Shareholders and the M/C Stockholders (filed as Exhibit 4.28 to
the May 2000 Form 10-Q and incorporated herein by reference).
4.29 Amendment No. 1 to Third Amended and Restated November 1998
Stockholders' Agreement, dated as of July 7, 2000 (filed as
Exhibit 4.29 to the Registration Statement on Form S-4, File
No. 333-48248, filed with the SEC on October 19, 2000 (the
"October 2000 Form S-4") and incorporated herein by reference).
4.30 Amendment No. 1 to Third Amended and Restated January 1999
Stockholders' Agreement, dated as of July 7, 2000 (filed as
Exhibit 4.30 to the October 2000 Form S-4 and incorporated
herein by reference).
4.31 Amended and Restated Stockholders' Agreement dated as of August
10, 2000, by and among McLeodUSA Incorporated, Kwok Li and
Linsang Partners, LLC (filed as Exhibit 4.31 to the October
2000 Form S-4 and incorporated herein by reference).
4.32 Warrant Agreement dated as of July 29, 1998 by and between
Harris Trust Company of New York (formerly Bank of Montreal
Trust Company) and Splitrock Services, Inc. (filed as Exhibit
10.12 to the Registration Statement on Form S-4 of Splitrock
Services, Inc., File No. 333-61293, filed with the SEC on
August 12, 1998 and incorporated herein by reference).
4.33 Form of Splitrock Warrant Certificate (filed as Exhibit 4.7 to
Post-Effective Amendment No. 1 to the Registration Statement on
Form S-1 of Splitrock Services, Inc., File No. 333-63001, filed
with the SEC on July 16, 1999 and incorporated herein by
reference).
4.34 First Supplemental Warrant Agreement by and between Splitrock
Services, Inc. and Harris Trust Company of New York, dated as
of February 24, 2000 (filed as Exhibit 4.11 to Post-Effective
Amendment No. 1 on Form S-3 to the Registration Statement on
Form S-1 of Splitrock Services, Inc., File No. 333-63001, filed
with the SEC on March 13, 2000 and incorporated herein by
reference).
4.35 Second Supplemental Warrant Agreement by and between Splitrock
Services, Inc., Splitrock Holdings, Inc. and Harris Trust
Company of New York, dated as of March 30, 2000 (filed as
Exhibit 4.37 to the May 2000 Form 10-Q and incorporated herein
by reference).
4.36 Third Supplemental Warrant Agreement by and between Splitrock
Services, Inc., Splitrock Holdings, Inc., McLeodUSA and Harris
Trust Company of New York, dated as of March 30, 2000 (filed as
Exhibit 4.38 to the May 2000 Form 10-Q and incorporated herein
by reference).
4.37 Credit Agreement dated as of May 31, 2000 among McLeodUSA,
various Lenders and The Chase Manhattan Bank, as Agent (filed
as Exhibit 4.39 to the August 2000 Form 10-Q and incorporated
herein by reference).
4.38 Form of Promissory Note under the Credit Agreement dated as of
May 31, 2000 among McLeodUSA, various Lenders and The Chase
Manhattan Bank, as Agent (filed as Exhibit 4.40 to the August
2000 Form 10-Q and incorporated herein by reference).
4.39 Form of Indenture between McLeodUSA and United States Trust
Company of New York, as Trustee, relating to the 12% Senior
Notes Due 2008 of McLeodUSA (filed as Exhibit 4.43 to the
October 2000 Form S-4 and incorporated herein by reference).
4.40 Form of Indenture between McLeodUSA and United States Trust
Company of New York, as Trustee, relating to the 11 1/2% Senior
Notes Due 2009 of McLeodUSA (filed as Exhibit 4.44 to the
October 2000 Form S-4 and incorporated herein by reference).
*5.1 Opinion of Hogan & Hartson L.L.P. regarding the legality of the
securities being registered.
*8.1 Opinion of Munsch Hardt Kopf & Harr, P.C. regarding tax
matters.
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
*23.2 Consent of Arthur Andersen LLP regarding financial statements
of McLeodUSA.
*23.3 Consent of Arthur Andersen LLP regarding financial statements
of Splitrock Services, Inc.
23.4 Consent of Munsch Hardt Kopf & Harr, P.C. (included in Exhibit
8.1).
*23.5 Consent of KPMG LLP regarding CapRock Communications Corp.
*23.6 Consent of Salomon Smith Barney Inc.
24.1 Power of attorney (included on signature page).
*99.1 Form of Proxy for Special Meeting of Stockholders of CapRock
Communications Corp.
99.2 Voting and Option Agreement between McLeodUSA and various
stockholders of CapRock Communications Corp. (included as
Appendix B to the proxy statement/prospectus included in this
Registration Statement).
99.3 Voting Agreement between McLeodUSA and a stockholder of CapRock
Communications Corp. (included as Appendix C to the proxy
statement/prospectus included in this Registration Statement).
*99.4 Voting Agreement between Jere W. Thompson, Jr. and various
stockholders of CapRock Communications Corp.
__________________
* Filed herewith.
(b) Financial Statement Schedules.
The following financial statement schedule was filed with the McLeodUSA
Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 0-
20763), filed with the SEC on March 30, 2000, and is incorporated herein by
reference:
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are inapplicable
or the information required to be set forth therein is contained, or
incorporated by reference, in the Consolidated Financial Statements of McLeodUSA
or notes thereto.
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the proxy
statement/prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
this Registration Statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
this Registration Statement when it became effective.
The undersigned registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-
effective amendment hereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in this Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in this Registration Statement when it
becomes effective; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
The undersigned registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to remove from registration by
means of a post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through the use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by Form S-4 with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
Form S-4.
The undersigned registrant hereby undertakes that every prospectus (i) that is
filed pursuant to the immediately preceding paragraph, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of Securities Act, McLeodUSA has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cedar Rapids, Iowa, on this 20/th/ day
of October, 2000.
McLEODUSA INCORPORATED
By: /s/ Clark E. McLeod
-------------------
Clark E. McLeod
Chairman and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Clark E. McLeod and Stephen C. Gray, jointly and
severally, each in his own capacity, his true and lawful attorneys-in-fact, with
full power of substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents with full power and authority to do so and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons, in the capacities
indicated below, on this 20/th/ day of October, 2000.
Signature Title
- --------- ------
/s/ Clark E. McLeod Chairman, Chief Executive Officer and
- ---------------------------
Director
Clark E. McLeod (Principal Executive Officer)
___________________________ Vice Chairman and Director
Richard A. Lumpkin
/s/ Stephen C. Gray President, Chief Operating Officer and
- ------------------------------
Stephen C. Gray Director
/s/ Roy A. Wilkens Chief Technology Officer, President
- ---------------------------------
Roy A. Wilkens and Chief Executive Officer of Network
and Data Services operations, and
Director
/s/ J. Lyle Patrick Group Vice President--Finance and
- --------------------------------- Accounting and Chief Financial and
J. Lyle Patrick
Accounting Officer (Principal
Financial Officer and Principal
Accounting Officer)
/s/ Anne K. Bingaman Director
- ---------------------------------
Anne K. Bingaman
/s/ Erskine B. Bowles Director
- ---------------------------------
Erskine B. Bowles
/s/ Peter H.O. Claudy Director
- ---------------------------------
Peter H.O. Claudy
/s/ Thomas M. Collins Director
- ---------------------------------
Thomas M. Collins
/s/ Robert J. Currey Director
- ---------------------------------
Robert J. Currey
/s/ Theodore J. Forstmann Director
- ---------------------------------
Theodore J. Forstmann
/s/ Daniel R. Hesse Director
- ---------------------------------
Daniel R. Hesse
/s/ James E. Hoffman Director
- ---------------------------------
James E. Hoffman
_________________________________ Director
Paul D. Rhines
INDEX TO EXHIBITS
Exhibit
- ------- Exhibit Description
Number -------------------
- ------
2.1 Agreement and Plan of Merger by and among McLeodUSA, Cactus
Acquisition Corp. and Caprock Communications Corp., dated as of
October 2, 2000 (included as Appendix A to the proxy
statement/prospectus included in this Registration Statement).
3.1 Amended and Restated Certificate of Incorporation of McLeodUSA
(filed as Exhibit 3.1 to Registration Statement on Form S-1, File
No. 333-3112 (the "Initial Form S-1") and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of McLeodUSA (filed as Exhibit 3.2 to
Registration Statement on Form S-1, File No. 333-13885 (the
"November 1996 Form S-1"), and incorporated herein by reference).
3.3 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of McLeodUSA (filed as Exhibit 3.3 to
Registration Statement on Form S-4, File No. 333-27647 (the "July
1997 Form S-4"), and incorporated herein by reference).
3.4 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of McLeodUSA (filed as Exhibit 3.8 to the
Quarterly Report on Form 10-Q, File No. 0-20763, filed with the
SEC on May 15, 2000 (the "May 2000 Form 10-Q"), and incorporated
herein by reference).
3.5 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of McLeodUSA (filed as Exhibit 3.9 to the
Quarterly Report on Form 10-Q, File No. 0-20763, filed with the
SEC on August 14, 2000 (the "August 2000 Form 10-Q"), and
incorporated herein by reference).
3.6 Certificate of Change of Registered Agent and Registered Office
of McLeodUSA (filed as Exhibit 3.4 to Annual Report on Form 10-K,
File No. 0-20763, filed with the SEC on March 9, 1998 (the "1997
Form 10-K") and incorporated herein by reference).
3.7 Certificate of Designations of the 6.75% Series A preferred
stock, par value $.01 per share, of McLeodUSA (filed as Exhibit
3.1 to the Current Report on Form 8-K, File No. 0-20763, filed
with the SEC on August 9, 1999 and incorporated herein by
reference).
3.8 Certificate of Designations of the Series B preferred stock, par
value $.01 per share, of McLeodUSA (filed as Exhibit 3.6 to the
Registration Statement on Form S-4, File No. 333-95941, filed
with the SEC on February 1, 2000 (the "February 2000 Form S-4"),
and incorporated herein by reference).
3.9 Certificate of Designations of the Series C preferred stock, par
value $.01 per share, of McLeodUSA (filed as Exhibit 3.7 to the
February 2000 Form S-4 and incorporated herein by reference).
4.1 Form of Class A Common Stock Certificate of McLeodUSA (filed as
Exhibit 4.1 to the Initial Form S-1 and incorporated herein by
reference).
4.2 Indenture dated March 4, 1997 between McLeodUSA and United States
Trust Company of New York, as Trustee, relating to the 10 1/2%
Senior Discount Notes Due 2007 of McLeodUSA (filed as Exhibit 4.2
to Annual Report on Form 10-K, File No. 0-20763, filed with the
SEC on March 31, 1997 (the "1996 Form 10-K") and incorporated
herein by reference).
4.3 Initial Global 10 1/2% Senior Discount Note Due March 1, 2007 of
McLeodUSA, dated March 4, 1997 (filed as Exhibit 4.3 to the 1996
Form 10-K and incorporated herein by reference).
4.4 Form of Certificated 10 1/2% Senior Discount Note Due March 1,
2007 of McLeodUSA, (filed as Exhibit 4.4 to the 1996 Form 10-K
and incorporated herein by reference).
4.5 Investor Agreement dated as of April 1, 1996 among McLeodUSA, IES
Investments Inc., Midwest Capital Group Inc., MWR Investments
Inc., Clark and Mary McLeod, and certain other stockholders
(filed as Exhibit 4.8 to the Initial Form S-1 and incorporated
herein by reference).
4.6 Amendment No. 1 to Investor Agreement dated as of October 23,
1996 by and among McLeodUSA, IES Investments Inc., Midwest
Capital Group Inc., MWR Investments Inc., Clark E. McLeod and
Mary E. McLeod (filed as Exhibit 4.3 to the November 1996 Form S-
1 and incorporated herein by reference).
4.7 Form of 10 1/2% Senior Discount Exchange Note Due 2007 of
McLeodUSA (filed as Exhibit 4.8 to the July 1997 Form S-4 and
incorporated herein by reference).
4.8 Indenture dated as of July 21, 1997 between McLeodUSA and United
States Trust Company of New York, as Trustee, relating to the 9
1/4% Senior Notes Due 2007 of McLeodUSA (filed as Exhibit 4.9 to
the July 1997 Form S-4 and incorporated herein by reference).
4.9 Form of Initial Global 9 1/4% Senior Note Due 2007 of McLeodUSA
(filed as Exhibit 4.10 to the July 1997 Form S-4 and incorporated
herein by reference).
4.10 Stockholders' Agreement dated June 14, 1997 among McLeodUSA, IES
Investments Inc., Midwest Capital Group, Inc., MWR Investments
Inc., Clark E. McLeod, Mary E. McLeod and Richard A. Lumpkin on
behalf of each of the shareholders of Consolidated Communications
Inc. listed in Schedule 1 thereto (filed as Exhibit 4.12 to the
July 1997 Form S-4 and incorporated herein by reference).
4.11 Amendment No. 1 to Stockholders' Agreement dated as of September
19, 1997 by and among McLeodUSA, IES Investments Inc., Midwest
Capital Group, Inc., MWR Investments Inc., Clark E. McLeod, Mary
E. McLeod and Richard A. Lumpkin on behalf of each of the
shareholders of Consolidated Communications Inc. listed in
Schedule I thereto (filed as Exhibit 4.1 to the Quarterly Report
on Form 10-Q, File No. 0-20763, filed with the SEC on November
14, 1997 and incorporated herein by reference).
4.12 Form of 9 1/4% Senior Exchange Note Due 2007 of McLeodUSA (filed
as Exhibit 4.14 to the 1997 Form 10-K and incorporated herein by
reference).
4.13 Indenture dated as of March 16, 1998 between McLeodUSA and
United States Trust Company of New York, as Trustee, relating
to the 8 3/8% Senior Notes Due 2008 of McLeodUSA (filed as
Exhibit 4.15 to Registration Statement on Form S-4, File No.
333-52793 (the "May 1998 Form S-4"), and incorporated herein by
reference).
4.14 Form of Global 8 3/8% Senior Note Due 2008 of McLeodUSA
(contained in the Indenture filed as Exhibit 4.13).
4.15 Stockholders' Agreement dated November 18, 1998 by and among
McLeodUSA, IES Investments Inc., Clark E. McLeod, Mary E.
McLeod, and Richard A. Lumpkin and each of the former
shareholders of Consolidated Communications Inc. ("CCI") and
certain permitted transferees of the former CCI shareholders
(filed as Exhibit 99.1 to the Current Report on Form 8-K, File
No. 0-20763, filed with the SEC on November 19, 1998 and
incorporated herein by reference).
4.16 Indenture dated as of October 30, 1998 between McLeodUSA and
United States Trust Company of New York, as Trustee, relating
to the 9 1/2% Senior Notes Due 2008 of McLeodUSA (filed as
Exhibit 4.19 to Registration Statement on Form S-4, File No.
333-69621 (the "December 1998 Form S-4"), and incorporated
herein by reference).
4.17 Form of Global 9 1/2% Senior Note Due 2008 of McLeodUSA
(contained in the Indenture filed as Exhibit 4.16).
4.18 Stockholders' Agreement dated as of January 7, 1999, by and
among McLeodUSA, IES Investments Inc., Clark E. McLeod, Mary E.
McLeod, Richard A. Lumpkin, Gail G. Lumpkin, M/C Investors
L.L.C. and Media/Communications Partners III Limited
Partnership (filed as Exhibit 4.1 to the Current Report on Form
8-K, File No. 0-20763, filed with the SEC on January 14, 1999
and incorporated herein by reference).
4.19 Indenture dated as of February 22, 1999 between McLeodUSA and
United States Trust Company of New York, as Trustee, relating
to the 8 1/8% Senior Notes Due 2009 of McLeodUSA (filed as
Exhibit 4.22 to Annual Report on Form 10-K, File No. 0-20763,
filed with the SEC on March 24, 1999 (the "1998 Form 10-K") and
incorporated herein by reference).
4.20 Form of Global 8 1/8% Senior Note Due 2009 of McLeodUSA
(contained in the Indenture filed as Exhibit 4.19).
4.21 Form of 6.75% Series A preferred stock certificate (filed as
Exhibit 4.1 to the Current Report on Form 8-K, File No. 0-
20763, filed with the SEC on August 9, 1999 and incorporated
herein by reference).
4.22 Form of Series B preferred stock certificate (filed as Exhibit
4.22 to the February 2000 Form S-4 and incorporated herein by
reference).
4.23 Form of Series C preferred stock certificate (filed as Exhibit
4.23 to the February 2000 Form S-4 and incorporated herein by
reference).
4.24 Second Amended and Restated November 1998 Stockholders'
Agreement dated December 17, 1999 by and among certain Alliant
Entities, Clark and Mary McLeod, Richard Lumpkin and certain
CCI Shareholders (filed as Exhibit 4.24 to Annual Report on
Form 10-K, File No. 0-20763, filed with the SEC on March 30,
2000 (the "1999 Form 10-K") and incorporated herein by
reference).
4.25 Second Amended and Restated January 1999 Stockholders'
Agreement dated December 17, 1999 by and among certain Alliant
Entities, Clark and Mary McLeod, Richard Lumpkin, certain CCI
Shareholders and the M/C Stockholders (filed as Exhibit 4.25 to
the 1999 Form 10-K and incorporated herein by reference).
4.26 Stockholders' Agreement dated as of March 30, 2000 by and among
McLeodUSA, Kwok Li and Linsang Partners, LLC (filed as Exhibit
4.26 to the May 2000 Form 10-Q and incorporated herein by
reference).
4.27 Third Amended and Restated November 1998 Stockholders'
Agreement dated as of March 10, 2000 by and among by and among
certain Alliant Entities, Clark and Mary McLeod, Richard
Lumpkin and certain CCI Shareholders (filed as Exhibit 4.27 to
the May 2000 Form 10-Q and incorporated herein by reference).
4.28 Third Amended and Restated January 1999 Stockholders' Agreement
dated as of March 10, 2000 by and among certain Alliant
Entities, Clark and Mary McLeod, Richard Lumpkin, certain CCI
Shareholders and the M/C Stockholders (filed as Exhibit 4.28 to
the May 2000 Form 10-Q and incorporated herein by reference).
4.29 Amendment No. 1 to Third Amended and Restated November 1998
Stockholders' Agreement, dated as of July 7, 2000 (filed as
Exhibit 4.29 to the Registration Statement on Form S-4, File
No. 333-48248, filed with the SEC on October 19, 2000 (the
"October 2000 Form S-4") and incorporated herein by reference).
4.30 Amendment No. 1 to Third Amended and Restated January 1999
Stockholders' Agreement, dated as of July 7, 2000 (filed as
Exhibit 4.30 to the October 2000 Form S-4 and incorporated
herein by reference).
4.31 Amended and Restated Stockholders' Agreement dated as of August
10, 2000, by and among McLeodUSA Incorporated, Kwok Li and
Linsang Partners, LLC (filed as Exhibit 4.31 to the October
2000 Form S-4 and incorporated herein by reference).
4.32 Warrant Agreement dated as of July 29, 1998 by and between
Harris Trust Company of New York (formerly Bank of Montreal
Trust Company) and Splitrock Services, Inc. (filed as Exhibit
10.12 to the Registration Statement on Form S-4 of Splitrock
Services, Inc., File No. 333-61293, filed with the SEC on
August 12, 1998 and incorporated herein by reference).
4.33 Form of Splitrock Warrant Certificate (filed as Exhibit 4.7 to
Post-Effective Amendment No. 1 to the Registration Statement on
Form S-1 of Splitrock Services, Inc., File No. 333-63001, filed
with the SEC on July 16, 1999 and incorporated herein by
reference).
4.34 First Supplemental Warrant Agreement by and between Splitrock
Services, Inc. and Harris Trust Company of New York, dated as
of February 24, 2000 (filed as Exhibit 4.11 to Post-Effective
Amendment No. 1 on Form S-3 to the Registration Statement on
Form S-1 of Splitrock Services, Inc., File No. 333-63001, filed
with the SEC on March 13, 2000 and incorporated herein by
reference).
4.35 Second Supplemental Warrant Agreement by and between Splitrock
Services, Inc., Splitrock Holdings, Inc. and Harris Trust
Company of New York, dated as of March 30, 2000 (filed as
Exhibit 4.37 to the May 2000 Form 10-Q and incorporated herein
by reference).
4.36 Third Supplemental Warrant Agreement by and between Splitrock
Services, Inc., Splitrock Holdings, Inc., McLeodUSA and Harris
Trust Company of New York, dated as of March 30, 2000 (filed as
Exhibit 4.38 to the May 2000 Form 10-Q and incorporated herein
by reference).
4.37 Credit Agreement dated as of May 31, 2000 among McLeodUSA,
various Lenders and The Chase Manhattan Bank, as Agent (filed
as Exhibit 4.39 to the August 2000 Form 10-Q and incorporated
herein by reference).
4.38 Form of Promissory Note under the Credit Agreement dated as of
May 31, 2000 among McLeodUSA, various Lenders and The Chase
Manhattan Bank, as Agent (filed as Exhibit 4.40 to the August
2000 Form 10-Q and incorporated herein by reference).
4.39 Form of Indenture between McLeodUSA and United States Trust
Company of New York, as Trustee, relating to the 12% Senior
Notes Due 2008 of McLeodUSA (filed as Exhibit 4.43 to the
October 2000 Form S-4 and incorporated herein by reference).
4.40 Form of Indenture between McLeodUSA and United States Trust
Company of New York, as Trustee, relating to the 11 1/2% Senior
Notes Due 2009 of McLeodUSA (filed as Exhibit 4.44 to the
October 2000 Form S-4 and incorporated herein by reference).
*5.1 Opinion of Hogan & Hartson L.L.P. regarding the legality of the
securities being registered.
*8.1 Opinion of Munsch Hardt Kopf & Harr, P.C. regarding tax
matters.
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
*23.2 Consent of Arthur Andersen LLP regarding financial statements
of McLeodUSA.
*23.3 Consent of Arthur Andersen LLP regarding financial statements
of Splitrock Services, Inc.
23.4 Consent of Munsch Hardt Kopf & Harr, P.C. (included in Exhibit
8.1).
*23.5 Consent of KPMG LLP regarding CapRock Communications Corp.
*23.6 Consent of Salomon Smith Barney Inc.
24.1 Power of attorney (included on signature page).
*99.1 Form of Proxy for Special Meeting of Stockholders of CapRock
Communications Corp.
99.2 Voting and Option Agreement between McLeodUSA and various
stockholders of CapRock Communications Corp. (included as
Appendix B to the proxy statement/prospectus included in this
Registration Statement).
99.3 Voting Agreement between McLeodUSA and a stockholder of CapRock
Communications Corp. (included as Appendix C to the proxy
statement/prospectus included in this Registration Statement).
*99.4 Voting Agreement between Jere W. Thompson, Jr. and various
stockholders of CapRock Communications Corp.
__________________
*Filed herewith.