HomeMy WebLinkAbout1998-08-18 Public hearingNOTICE OF PUBLIC HEARING
Notice is hereby given that the City Council of
Iowa City will hold a public hearing on August
18, 1998 at 7:00 p.m. in the Council Chambers
of the City of Iowa City, 410 E. Washington
Street, Iowa City, Iowa, regarding a proposed
Franchise Agreement and Ordinance Awarding
a Non-Exclusive Franchise for Cable Television
to McLeodUSA ATS, to operate a broadband
telecommunications system within the City of
Iowa City. Copy of the Application, Proposed
Franchise Agreement and Ordinance are on file
with the City Clerk and available for public
inspection.
Persons interested in expressing their views
concerning this matter, either verbally or in
writing, will be given the opportunity to be heard
at the above-mentioned time and place.
MARlAN k. KARR, CItY CLERK
andy\mclph.doc
Prepared by: Andrew P. Matthews, Asst. City Attomey,
410 E. Washington Street, Iowa City, IA 52240; 319-
356-5030
ORDINANCE NO.
AN ORDINANCE AWARDING A FRANCHISE
FOR CABLE TELEVISION TO McLeodUSA
ATS.
NOW, THEREFORE, BE IT ORDAINED BY THE
CITY COUNCIL OF THE CITY OF IOWA CITY,
IOWA:
SECTION Io PURPOSE. The purpose of this
ordinance is to award a franchise for cable
television to McLeodUSA ATS.
SECTION II. ENACTMENT. McLeodUSA ATS is
hereby granted a non-exclusive franchise to
operate a cable television system within the City
of Iowa City in accordance with Title 12, Chapter
4 of the City Code of Iowa City which established
standards, regulations and procedures for the
granting of a broadband telecommunications
franchise and the rules and regulations adopted
by the Iowa City Broadband
Telecommunications Commission, all ordinances
of the City of Iowa City, the franchise agreement
between the City of Iowa City and McLeodUSA
ATS, and all applicable rules and regulations of
the Federal Communications Commission and
the State of Iowa.
SECTION Ill. DURATION OF FRANCHISF. The
franchis~ shall continue in full force and effect for
a term of ten (10) years from its effective date.
SECTION IV. EFFECTIVE DATF. This
ordinance shall not become finally effective until
the grantee executes a franchise agreement with
the City of Iowa City and files an acceptance in
writing with the City Council of Iowa City and
payment of the costs as provided in Title 12,
Chapter 4 of the City Code.
SFCTION V. ORDINANCES RFPFALED. All
ordinances or parts of ordinances in conflict with
the provisions of this ordinance are hereby
repealed.
SFCTION VI. SFVFRABILITY. If any section,
provision or part of the Ordinance shall be
adjudged to be invalid or unconstitutional, such
adjudication shall not affect the validity of the
Ordinance as a whole or any section, provision
or part thereof not adjudged invalid or
unconstitutional.
Ordinance No.
Page 2
Passed and approved this
,1998.
MAYOR
A'I'rEST:
CITY CLERK
Approved by
cabletv/ord/mcleod .doc
day of
City of Iowa City
MEMORANDUM
Date:
To:
From:
Re:
August 14, 1998
City Council ~~~
Broadband Telecommunications Commission
Dale E. Helling, Assistant City Manager
Cable TV Franchise Agreement With McLeodUSA ATS
The Franchise Agreement negotiated with McLeodUSA is included with Council's agenda
materials. This agreement is very similar to the Franchise Agreement currently in effect with
TCI.
The McLeod agreement provides for a ten year franchise with a five percent franchise fee, and
a 50¢ per month per subscriber pass-through amount to help fund equipment, facilities, and
support for public, educational, and government access and community programming. It also
includes an additional payment of $161,365.95 per year (based on calendar year 1998), with a
CPI escalator, for funding public access and community programming and, in the McLeod
franchise, this language is expanded to include "other telecommunications needs" as may be
determined by the City. McLeod has agreed to provide the same number of local access
channels as does TCI. While we would like to have these services aligned on the same
numbered channels for both systems, this does not appear to fit in with McLeod's proposed line-
up. We will be working with them to attempt to achieve the best possible local access channel
line-up for meeting the needs and viewing habits of local access viewers.
McLeodUSA has agreed to construct a 750MHz system utilizing both optical fiber and coaxial
cable. By comparison, TCI is constructing a 550 MHz system spaced for upgrading to 750 MHz
in the future. McLeodUSA has agreed to a three year deadline for completion of construction.
There are numerous language modifications in the McLeodUSA agreement which reflect
construction of a new system as opposed to the upgrade of an existing system as in the case of
TCI. Likewise, certain equipment specifications, most of which are included in the appendices to
the agreement, have been modified to reflect current state-of-the-art and/or company
preferences for certain brands or types of equipment. All specified equipment appears to meet
the requirements for maintaining a fully operational system.
The franchise agreement negotiated with McLeodUSA appears to place neither company at a
competitive advantage or disadvantage, and we believe it creates the level playing field required
by federal law. Drew Shaffer, Andy Matthews, and I will be available at your upcoming meetings
at which this issue will be further considered. Please feel free to contact any of us individually
with any questions you may have.
cc: City Manager
City Attorney
Andy Matthews
Drew Shaffer
jw/mem/dh-rncleo.doc
August12,1998
Henry Royer
McLeodUSA
421 4m Avenue SE
Cedar Rapids, IA 52z~01
Re: Franchise Agreement
CITY OF I0 WA CITY
Dear Henry:
I have enclosed the latest, and hopefully the f'mal draft of the proposed franchise agreement between the
City of Iowa City and McLeod USA ATS. Please review it and if you have any questions, comments, or
concerns, I trust you will promptly let me know.
As I discussed with you over the telephone, we continue to have a concem with respect to Appendix N,
Access Channel Positions. This will likely be an area of concern as well for the Telecommunications
Commission when they meet in special session on August 17th, to consider the proposed ~-anchise. Our
concern is from a customer standpoint. If, as you propose, the access channels are positioned throughout
the system's offered channels, customers will have difficulty locating them. Customers have grown
accustomed to finding these channels of great public interest within a particular channel location and the
access channels have devoted a great deal of time and money on channel location recognition with the
public. You have indicated that this is not a technical issue, but rather a "marketing" issue for McLeod.
I'm not really sure what that all entails and as I suggested to you, I think it might be wise to set up a
conference call on Friday or next Monday to discuss this issue in greater detail before the Commission
meeting and the public hearing before the City Council. Please let me know if and when you and your
marketing person might be available to discuss this matter further.
Not knowing at this point how this access channel issue will be resolved, I am including in the proposed
franchise agreement your draft of Appendix N as well as our proposal for Appendix N.
I look forward to discussing these matters further with you.
Sincerely,
Andrew P. Matthews
Assistant City Attorney
cc: Dale Helling, Assistant City Manager
Drew Shaffer, Cable TV Administrator
410 EAST WASHINGTON STREET · IOWA CITY. IOWA S2240-1126 · (319) 356-5000 · FAX (319) .156-3009
FRANCHISE AGREEMENT
BETWEEN
THE CITY OF IOWA CITY, IOWA,
A MUNICIPAL CORPORATION,
McLeod USA Telecommunication Services, Inc.
d/b/a McLeod USA ATS
AN IOWA CORPORATION
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
XII.
XIII.
XIV.
XV.
XVI.
XVII.
XVIII.
XIX.
XX.
XI.
TABLE OF CONTENTS
NONEXCLUSIVE FRANCHISE ........................... 1
GRANTED TO ..................................... 1
RIGHT OF CITY TO ISSUE FRANCHISE .................... 2
TERM ............................................ 2
FRANCHISE NONEXCLUSIVE ............................ 2
DEFINITIONS ....................................... 2
SERVICE AREA ..................................... 2
SYSTEM AND CAPACITY .............................. 4
CONSTRUCTION .................................... 7
SYSTEM SERVICES .................................. 8
ACCESS CHANNELS, EQUIPMENT, FACILITIES, AND SERVICES . . . 9
INTERCONNECTION ................................. 12
SUBSCRIBER INFORMATION AND POLICY .................. 12
NON-DISCRIMINATION ............................... 14
RATES ........................................... 15
FRANCHISE RENEWAL ................................ 15
POLICE POWERS .................................... 15
FRANCHISE FEE AND PERFORMANCE BOND ................. 15
REGULATION ...................................... 16
REMEDIES ......................................... 16
COOPERATION ..................................... 17
XXll.
XXIII.
XXlV.
XXV.
XXVI.
XXVII.
XXVIII.
XXVIX.
WAIVER .......................................... 17
CUMULATIVE PROVISION .............................. 17
NO LIABILITY ...................................... 18
NOTICES .......................................... 18
CAPTIONS ........................................ 18
NO JOINT VENTURE .................................. 18
ENTIRE AGREEMENT ................................. 18
SEVERABILITY ...................................... 19
APPENDICES
A System Design Specifications
B Drop Technical Parameters
C Delivery System Equipment List
D Converter Specifications
E Test Equipment
F Preventative Maintenance Program
G Design Standards
H Franchisee's Construction Manual
Permit and Construction Process
J Deleted
K Programming
L Programming Categories
M Free Drop Locations
N Position of Access Channels
O Access Publicity
P Business and Repair Hours
BROADBAND TELECOMMUNICATIONS
FRANCHISE AGREEMENT
NONEXCLUSIVE FRANCHISE.
A. This section grants a ten-year nonexclusive Franchise to operate a cable
television system to McLeod USA Telecommunication Services, Inc., d/b/a McLeod
USA ATS (hereinafter referred to as Franchisee). The Franchise granted shall, as set
forth below, be subject to the provisions of the Broadband Telecommunications
Enabling Ordinance and this Franchise Agreement.
B. Subject to Section 626 of the Cable Television Consumer Protection and
Competition Act of 1992, as amended, and the Telecommunications Act of 1996, as
amended, the City Council reserves the right to refuse to select a Franchise holder if
such refusal is subsequently deemed to be in the public interest.
C. If the terms and conditions specified in this Franchise conflict or modify
the Ordinance, the provisions of the Ordinance shall apply.
II.
GRANTED TO McLeod USA ATS
A. Purpose. The purpose of this section is to award a Franchise for a cable
television system to Franchisee. Franchisee will endeavor to provide top quality cable
service.
B. Enactment. Franchisee is hereby granted a nonexclusive Franchise to
operate a cable television system within the City in accordance with the Ordinance
of this title, which establishes standards, regulations and procedures for the granting
of a cable television Franchise, this Franchise and the rules and regulations adopted
by the Iowa City Broadband Telecommunications Commission, all Ordinances of the
City and all applicable rules and regulations of the Federal Communications
Commission and the State.
C. Effective Date. This Franchise shall not become finally effective until
the Franchisee files an acceptance in writing with the City of Iowa City, The
Franchisee shall have up to sixty (60) days from the date the franchise is signed by
the Mayor to provide such written acceptance.
D. Use of Public Ways. For the purpose of operating and maintaining a
cable television system in the City, Franchisee may erect, in, over, under, or upon,
across, and along the public streets, alleys, and ways within the City such wires,
cables, fiber optics, conductors, ducts, conduits, vaults, manholes, amplifiers,
appliances, pedestals, attachments, and other property and equipment as are
necessary and appurtenant to the operation of the cable television system in the City
and in accordance with this Franchise and the Ordinance.
III.
RIGHT OF CITY TO ISSUE FRANCHISE.
Franchisee acknowledges and accepts the legal right of the City to issue this
Franchise.
IV. TERM.
The term of the Franchise shall be for a period of ten (10) years from the
effective date, unless sooner terminated as provided in the Ordinance, at which time
it shall expire and be of no further force and effect.
FRANCHISE NONEXCLUSIVE.
Consistent with the requirements of the Ordinance, this Franchise shall not
be construed as any limitation upon the right of the City to grant to other persons
rights, privileges, or authorities similar to the rights, privileges, and authorities herein
set forth, in the same or other streets, alleys, or other public ways or public places.
The City specifically reserves the right to grant at any time during the term of this
Franchise or renewal thereof, if any, such additional Franchises for a cable
communications system as it deems appropriate. In the event the Franchising
Authority enters into a franchise with any other person or entity other than the
Franchisee to enter into the City's streets and public ways for the purpose of
constructing or operating a cable television system to any part of the service area, the
material provisions thereof shall be reasonably comparable to those contained herein,
taking into account the size and population of the franchised area, including but not
limited to, franchise fee, external costs, access fees, if applicable, design, term,
density requirements and system capacity requirements.
VI. DEFINITIONS.
All definitions set forth in the Ordinance pertain to this Franchise and shall
be relevant to the purposes and meaning of this Franchise.
VII.
SERVICE AREA.
A. Service to all Residents. Franchisee shall offer cable television
residences service to all areas of the City which are in the corporate limits of the City
of Iowa City and that meet the density requirements under paragraph B of this
section, on the effective date of this Franchise.
2
B. New Residential Construction. Franchisee shall extend service to all
new residences in all unwired developments within six months of a request of a
subscriber in an area to be served by underground construction and within three
months of a request of a subscriber for areas to be served aerially, whenever density
of at least twenty (20) residential dwelling units per cable plant mile; as measured
from the existing facilities of Franchisee's cable system in the franchise area. For
purposes of this section, density per cable mile shall be computed by dividing the
number of residential dwelling units in the area by the length, in miles or fractions
thereof, of the total length of aerial or underground cable necessary to make service
available to the residential dwelling units in such area in accordance with Franchisee's
system design parameters. The cable length shall be measured from the nearest point
on the then-existing system. The total cable length shall exclude the drop cable
necessary to serve individual subscriber premises.
C. Contribution-in-aid. If an area does not meet the required number of
residential dwelling units per cable mile, Franchisee shall bear its pro-rata share of the
current construction costs based upon the actual number of residential dwelling units
per mile. For example, if there are 5 residential dwelling units in a residentially zoned
area, the Franchisee's share would be 5/20ths or ¼ of the construction cost. The
remaining construction costs shall be borne on a pro-rata basis by each cable
television subscriber. After completion of the project, should additional subscribers
request and receive cable television service, the pro-rata shares shall be recalculated.
Any new subscriber shall pay the new pro-rata share and all prior contributing
subscribers shall receive appropriate refunds. In any event, at the end of two (2)
years from the completion of residential construction in the area, the subscribers shall
no longer be eligible for refunds, and any amounts paid in construction costs will be
credited to the plant account of Franchisee.
D. Service Area. The service area of Franchisee shall be the entire
corporate boundaries of the City of Iowa City and include any areas annexed to the
City in the future.
E. Commercial Service. Franchisee shall, upon request, make service
available to all commercial/industrial establishments served aerially which are located
within 125 feet of the system at Franchisee's standard installation rate expense. For
commercial/industrial establishments served underground or for aerial extensions
beyond 125 feet, Franchisee shall, upon request, make service available on the basis
of a capital contribution in aid of construction, including cost of material, labor, and
easements. For the purpose of determining the amount of capital contribution in aid
of construction to be borne by the Franchisee and the commercial/industrial
establishments in the area in which service may be expanded, the Franchisee will
contribute an amount equal to the construction and other costs per mile, multiplied
by a fraction whose numerator equals the actual number of commercial/industrial
establishments per 1320 cable-bearing strand feet of its trunks or distribution cable,
3
and whose denominator equals eight (8) commercial/industrial establishments.
Commercial/industrial establishments who request service hereunder will bear the
remainder of the construction and other costs on a pro-rata basis. The Franchisee
may require that the payment of the capital contribution in aid of construction be
borne by such potential commercial/industrial establishments be paid in advance.
F. House Moving. Franchisee shall, upon the request of the City, move
and replace its facilities to accommodate house moves conducted on behalf of the
City, at a time and materials cost to the City. Wherever feasible, the City shall use
its best efforts to ensure that house moves follow the same or similar path.
VIII.
SYSTEM AND CAPACITY.
A. System. The parties understand and agree that Franchisee shall
construct a cable system which delivers cable television signals processed at 750
MHz (78 channels) utilizing a fiber to the node design or better. The system will use
all new fiber optics, and electronic and passive devices. The system will be designed
so that there are no more than five (5) amplifiers in cascade. Fiber optic receiver
nodes located throughout the plant will divide the distribution of cable signals to 600
homes per fiber node or less. The system shall be designed and constructed in
accordance with the design specifications in Appendix A, attached hereto and
incorporated by reference. The system shall be operated in accordance with
performance standards which meet or exceed FCC regulations.
B. Construction Timetable. The construction shall be completed within
three (3) years of the effective date of this Franchise. Franchisee shall provide a
neighborhood construction schedule which details the timeframe for construction in
each neighborhood and area of the City as soon as such schedule is completed, but
not later than 2 months before initiation of construction.
C. Construction Oversight. Franchisee will inspect 100% of all fiber and
coaxial cable to insure that it meets the specifications of the Ordinance and this
Franchise. After the audit of subscriber drops as specified in Section E. below,
Franchisee will inspect 35% of the subscriber drops. The Franchisee shall designate
an employee to act as a company representative by responding to public service
complaints on a daily basis during the rebuild and provide the City with the person's
name and telephone number.
D. Compliance with Applicable Law. In constructing, operating and
maintaining the system, Franchisee shall at all times comply with the Ordinance and
all applicable laws and regulations.
4
E. Drop Audit. Two years after the completion of construction, Franchisee
shall have audited and tested ninety-five (95) percent of the subscriber drops in the
City and all drops not meeting the standards of the National Electric Code or the
technical parameters in Appendix B, attached hereto and incorporated by reference,
shall be replaced when found to be substandard. The system shall be designed to
allow each subscriber drop to provide service to four (4) television outlets.
F. Equipment Quality. Equipment used for the distribution system,
headend and reception facilities shall be of good and durable quality and be serviced
and repaired on a regular basis and shall at all times be of equal or better quality than
the equipment listed in Appendix C, attached hereto and incorporated by reference.
G. Converters. Franchisee shall provide a converter equal to or better than
the Converter specified in Appendix D, attached hereto and incorporated by reference.
After the construction is complete and up to one year after digital converters are
offered by Franchisee within the State of Iowa to a system of similar size or smaller,
excluding experimental and demonstration projects, Franchisee shall make a digital
converter available to all subscribers requesting the digital level of service. Such
digital converters shall comply with the then national standards for digital technology
and shall provide state-of-the-art features equal to those being introduced during the
same year in other systems owned by Franchisee. All programming services
exclusively offering adult rated programming shall provide picture and audio
scrambling of services not purchased by a specific subscriber. Franchisee shall
maintain its trap system until the introduction of the converters described above and
be available thereafter, as needed, for subscribers not utilizing converters. The City
Council may, in its discretion, extend the time for the Franchisee, acting in good faith,
to provide digital converters. The timeframe for providing digital converters shall be
extended for any period during which the Franchisee demonstrates to the satisfaction
of the City that the Franchisee is being subjected to delay due to circumstances
reasonably beyond its control, such as acts of God and labor strikes.
H. Upstream Capacity for City Use. Franchisee shall reserve and give the
City the option to use the up and downstream capacity on the cable system not to
exceed one-half (~) MHz in either direction, to allow the City to collect data and other
signals from subscriber homes or City sites for non-commercial governmental and
educational purposes only. Franchisee shall cooperate with the City on pilot projects
and City-wide implementation, including but not limited to, City installation and use
of equipment which utilizes a larger amount of bandwidth than described above, if
necessary, so long as the actual bandwidth utilized by the City is the same or less
than that described above. Franchisee shall allow the City to co-locate necessary
equipment on the cable system provided said equipment does not interfere with the
system's integrity. The Franchisee shall provide such capacity to the City at a rate
which, at a maximum, shall be equal to the lowest rate provided to any commercial
5
customer or subsidiary company. Ongoing maintenance charges will be at cost and
at the City's option, such cost will be paid by the City or a third party.
I. Emergency Alert. Franchisee shall provide an all-channel audio-only
emergency alert system for use by the City. Emergency messages can be initiated
from any touch-tone phone with an access code. Franchisee agrees to upgrade the
emergency alert system at the Franchisee's own cost, by providing a text crawl on
the picture on all channels within five years of the effective date of this Franchise,
providing such equipment is available at a reasonable cost, which shall not exceed
~ 15,000. The emergency alert service shall be upgraded throughout the Franchise
term as set forth in FCC rules, regulations, or guidelines. The Franchisee shall not be
held responsible for any failure of the emergency alert system to operate during any
emergency.
J. Test Equipment. Throughout the term of the Franchise, Franchisee shall
have accessible to Iowa City within a 24-hour period, test equipment equal to or
better than that specified in Appendix E, attached hereto and incorporated by
reference.
K. Ongoing Preventive Maintenance.
preventive maintenance program specified in
incorporated by reference.
Franchisee will comply with the
Appendix F, attached hereto and
L. Interference on Channels 12 and 19. After the construction, Franchisee
will not use Channel 19 for video, but for alphanumeric purposes, if there exists
interference from radio/pagers on that channel. Franchisee will use its best efforts
to avoid off-air interference following completion of construction. Franchisee will use
its best efforts to locate IPTV on Channel 12, and if possible maintain that channel
location. During the term of the Franchise, Franchisee will provide notice to
consumers, on how interference problems experienced by customers on specific
channels can be alleviated, through TV ads and billing messages mailed to
subscribers.
M. Satellite Earth Station. The system configuration shall include earth
stations which shall ensure the ability to receive signals from operational
communications satellites that predominately carry programming services available to
cable systems throughout the life of the Franchise.
N. Standby Power. Franchisee shall provide adequate standby
power-generating capacity at the headend, sufficient to maintain standby power
system supplies, rated for at least two and one-half (2.5) hours duration at the hub
locations in the distribution network.
6
0. Parental Control Devices. Franchisee shall provide to subscribers, upon
request, parental control devices that allow any channel or channels to be locked out.
Such devices shall block both the video and the audio portion of such channels to the
extent that both are unintelligible. The cost to subscribers for parental control devices
is subject to FCC regulation.
P. Performance Testing. Franchisee shall perform all system tests and
maintenance procedures as required by and in accordance with: the FCC; Franchise;
Ordinance; Franchisee's standards of good operating practice; and the National Cable
Television Association's test procedure guidelines.
Q. Technical Standards. The cable communications system permitted to
be operated hereunder shall be installed and operated in conformance with the
Ordinance, this Franchise, and FCC rules and regulations. Any FCC technical
standards or guidelines related to the cable communications system and facilities shall
be deemed to be regulations under this Franchise. At such time as the FCC does not
regulate technical standards, Franchisee will continue to comply with the FCC
standards which were in effect on the effective date of this Franchise.
R. Employee Identification. Franchisee shall provide a standard
identification document to all employees, including employees of subcontractors, who
will be in contact with the public. Such documents shall include a telephone number
that can be used to verify identification. In addition, Franchisee shall use its best
efforts to clearly identify all field personnel, vehicles, and other major equipment that
are operating under the authority of Franchisee.
S. Stereo. Upon completion of the construction, the system will have the
capability and shall provide Broadcast Television Systems Committee (BTSC) stereo
signals.
IX.
CONSTRUCTION.
A. System Design Review. The City shall have the authority to review the
technical design plans of the system to ensure that the system design meets the
requirements of this Franchise, the Ordinance, as well as applicable portions of the
City Code governing construction within public rights-of-way and applicable portions
of the design standards included in Appendix G, attached hereto and incorporated by
reference. Franchisee shall provide the following design information: engineering
design maps; key for design maps; system level design information (e.g., block
diagram of headend, satellite or off-air studies, power supply map); test plan for the
coaxial cable to be used in the system; and contact engineer who will be available to
discuss project details. On a case by case basis, Franchisee may use coaxial cable
which meets manufacturer specifications. Franchisee shall preform end of the line
test to ensure that the coaxial cable plant tested performs according to manufacturer
7
specifications. In cases where the cable does not meet such specifications,
Franchisee shall replace the cable and shall use its best efforts to minimize disruption
to effected subscribers. The City shall protect the proprietary system design
information submitted by Franchisee. The Franchisee shall send the design
information to the location specified by the City as such maps are available to the
Franchisee. Franchisee's regional engineer will review the design with City designated
persons.
B. Construction Manual, Franchisee shall construct the system in
accordance with Franchisee's construction manual. See Appendix H, attached hereto
and incorporated by reference. The Franchisee shall follow the permitting process as
specified in Appendix I, attached hereto and incorporated by reference.
C. Underground Construction. Franchisee shall participate in and use Iowa
One Call and ensure that cable is buried at a depth of twelve inches (12") or lower.
Temporary drops will be buried within one month of installation, weather permitting.
D. Consumer Compatibility. Franchisee shall comply with FCC consumer
compatibility rules and guidelines and will use its best efforts to provide subscriber
friendly technology. The basic tier of service shall be offered in a format compatible
with FCC regulations.
E. Notification. Franchisee will notify subscribers and the public in general
as to when it plans to complete construction and as to when cable services will be
offered, using a combination of at least two of the following: bill stuffers; direct mail;
news releases; radio announcements; CSR training; and community bulletin board
announcements. Internal wiring shall comply with the Iowa City Electrical Code.
SYSTEM SERVICES.
A. Initial residential subscriberservices, Following construction, Franchisee
shall initially provide the same or similar programming as provided in Appendix K,
attached hereto and incorporated by reference.
B. Additional Services. Upon completion of construction, Franchisee shall
provide a good mix of entertainment and information programming generally available
to the cable television industry, taking into account the needs and interests of the
population of the City of Iowa City. At a minimum, the system shall provide the broad
categories of programming specified in Appendix L, attached hereto and incorporated
by reference. Prior to selecting all the new services to be offered, Franchisee shall
conduct a statistically valid consumer market survey by telephone of 200 randomly
selected homes to assess what new programming consumers are most interested in
receiving, in addition to those specified in Appendix L. Franchisee shall use its best
efforts to provide the programming that had the highest degree of community interest
8
and that would serve the community interests indicated in their own survey and in any
consumer market survey conducted on behalf of the City during the construction
process. The results of the consumer market survey will be provided to the City
within thirty (30) days of completion.
C. Leased Access Channels. Franchisee shall offer leased access channels
at such terms and conditions and rates as may be negotiated with each lessee subject
to the requirements of Section 612 of the Cable Act.
D. Cable Drops and Monthly Service. Franchisee shall provide one free
cable drop and free, basic and tier services, excluding premium services, audio
services, pay-per-view, etc., to locations already provided with free drops, locations
listed in Appendix M, attached hereto and incorporated by reference, and at any other
public buildings designated by the City. All non-premium programming and closed-
circuit training programming shall be transmitted to all of these locations on the cable
system, free of charge.
E. Institutional Channels. If allowed by Federal law and regulation, the
government and educational access channels shall be provided with the capability to
transmit for closed-circuit institutional programming. The Franchisee shall provide an
appropriate device for the reception of scrambled institutional programming offered
over the subscriber network on the scrambled government and educational access
channels to all local government and educational locations receiving free drops and
service. The necessary headend equipment for modulation, scrambling, and
cablecasting of the closed-circuit signals shall be provided by the Franchisee.
Franchisee shall provide channel scrambling as requested by the City and educational
institutions on the scrambled government and educational access channels.
F. Closed Captioning. Franchisee shall pass through all closed-circuit
signals received by the system for the hearing impaired. Closed-caption devices will
be provided for sale and installation by Franchisee.
G. InteractiveServices. FranchiseewillofferX*Press*/X*Changeservices,
(one per school) provided that these services remain available to the Franchisee, and
a guide to each school free of charge when such guides are available for Franchisee.
XI.
ACCESS CHANNELS, EQUIPMENT, FACILITIES, AND SERVICES.
In order to develop and promote public, educational, and government access
programming for the system's access channels, Franchisee hereby agrees to provide
the following:
9
A. Access Channels. Franchisee shall maintain the number and position of
the access channels as shown in Appendix N, attached hereto and incorporated by
reference. Franchisee shall provide the following number of dedicated access
channels: three (3) channels for government access; two (2) channels for educational
access; and one (1) channel for public access. The Franchisee, shall use its best
efforts to maintain the cable channel position of the access channels in existence on
the effective date of this Franchise. Upon the City's request, Franchisee shall activate
the following additional access channels on the basic tier; one (1) channel for
community programming and/or access and one (1) channel for educational access.
Upon the request of the City, whenever any public access channels as set forth in this
section shows documented proof of performance that they are in use 80% of the
cablecast week for any 6 week consecutive timeframe, given at least 8 hours per day,
7 days per week cablecast schedule, with at least 80% (of the time the channel is
programmed), unduplicated locally originated programming, the Franchisee shall make
such additional access channel(s) available as necessary for access use within 6
months of receipt of request by the City. The City agrees to share the above listed
access channels with other communities served by the same headend on a switched
basis. Franchisee shall provide automatic switching from a site selected by the City
for any switching needed by the City to allow City programming to be viewed within
the City while other communities may be viewing other governmental programs.
Other communities, such as Coralville, served by the same headend shall have remote
switching capability to allow programming to be viewed within their respective
municipalities while Iowa City programming continues to be viewed within the City
of Iowa City.
If Franchisee expands bandwidth, the City reserves ten percent of the
bandwidth for public, educational and government access use up to 100 analog
channels. Such bandwidth will be made available within six (6) months of a request
by the City. The City shall make such request when the governmental, educational,
and/or public access entities have demonstrated to the City that such additional
capacity is needed and usage meets the formula for bandwidth activation specified
above.
Such additional capacity shall be dedicated for the type of access
specified by the City. All active access channels shall be placed on the basic tier of
service, unless both parties mutually agree otherwise.
B. Access Equipment, Support, and Facilities. The Franchisee shall provide
the City with funds in monthly payments for equipment, facilities, and ongoing
support for public, educational, governmental access, and community access
programming, in an amount not to exceed the equivalent of fifty (50) cents per
subscriber per month for the entire term of this Franchise. The City shall provide
written notice to the Franchisee of the initial amount to be passed through and any
changes in the amount thereafter. Both parties agree that all such funds will not be
10
deducted from the franchise fee. The City agrees that all amounts paid by Franchisee
pursuant to this section may be added to the price of cable services and collected
from Franchisee's subscribers as "external costs" as such term is used in 47 C.F.R.
on the effective date of this Franchise. In addition, all amounts paid under this section
may be separately stated on subscriber's bills as permitted in 47 C.F.R. 76.985. Such
payments will be made by the Franchisee to the City on a monthly basis
C. Access Services. Franchisee agrees to provide the City and/or other
entities designated by the City, , to carry out the day-to-day operations of public
access and community programming, or any other telecommunications related need
or interest as identified by the City, annual payments based on 9161,365.95 for
calendar year 1998. Said amount shall be increased successively thereafter annually
for inflation for the term of the Franchise. Both parties agree that all said annual
payments will not be deducted from the franchise fee and agree that only the annual
inflation adjustments may be passed through to subscribers and may be separately
stated on subscriber's bills. This is in addition to the amount specified in paragraph
B above. All inflation adjustments shall be based upon the annual CPI-UI published
by the U.S. Department of Commerce. All annual payments shall be due January 1 st
of each year.
D. Publicity. Franchisee agrees to provide the publicity services as
specified in Appendix O, attached hereto and incorporated by reference.
E. Optical Transmission Equipment. The Franchisee agrees to provide one
digital, optical transmission package. The Franchisee agrees to connect the optical
equipment using coaxial cable or fiber optics with the Library, the Senior Center,
Civic Center, and a school site(including but not limited to the permanent access
channel(s), the library channel, the public access channel, the government channel,
the community programming channel and the educational access channel).
F. Closed Circuit Operations. Franchisee shall provide, free of charge, an
appropriate device for the reception of scrambled institutional programming offered
over the subscriber network to schools and government buildings receiving free drops
and service. The necessary headend equipment for modulation, scrambling, and
cablecasting of the closed-circuit signals on the educational, and government access
channels, shall also be provided. Franchisee shall provide channel scrambling as
requested by government and educational access channel operators. Franchisee shall
provide the City and schools with 185 converters and scrambling devices, free of
charge, within one hundred twenty (120) days of the completion of construction.
G. Signal Quality. Franchisee shall assure that the access channel delivery
system from the Civic Center and all other origination points specified herein meet the
same technical standards as the remainder of the system as set forth in Section VIII
herein.
11
H. Treatment. The Franchisee Will confer with the City on the content and
format of any separate line item on the monthly bill related to local programming.
I. Origination Sites. The Franchisee shall maintain and/or replace and
maintain throughout the franchise term, the active origination lines from the locations
from which local programming can be originated on the effective date of this
Franchise to the Franchisee's headend.
XII.
INTERCONNECTION.
A. Interconnection. Franchisee's system design shall allow originating
institution's signals (public, educational, and governmental channels) to be made
available in contiguous communities which are served by the Iowa City headend. If
legal and technically feasible, Franchisee agrees to allow interconnection with
communities not served by the Iowa City headend provided, however, that such
communities, the City, and/or a third party, supply and bear the cost for the
interconnect to Franchisee's headend or locations on the system easiest to reach
and/or at the least cost, related to access programming origina.tion distribution.
Access to Franchisee's headend and equipment will be limited to Franchisee's
personnel. Such personnel shall supervise any activity with regard to this Section.
B. University Cooperation. The Franchisee shall use its best efforts to
accommodate the telecommunications needs of the University, its staff, and students.
In the event the University proposes a joint venture or other proposal for services, the
Company shall review the proposal and respond within ninety (90) days of receipt.
XIII.
SUBSCRIBER INFORMATION AND POLICY.
A. Subscriber Information. At the time an installation or service agreement
is to be signed or at the time Franchisee solicits residents, Franchisee shall furnish to
each subscriber a simple, but thorough written explanation of all services offered; the
fees, charges, terms and conditions of such services; information regarding billing and
service calls; complaints; information regarding the availability of parental control
devices; and a complete statement of the subscriber's right to privacy in conformance
with 47 U.S. Section 631, as it may be amended. Thereafter, Franchisee shall
provide subscribers with privacy information and other information, as required by
FCC regulations, as amended. Such subscriber information shall be filed with the City
concurrent with distribution to subscribers.
B. Business Offices and Personnel. Franchisee shall establish and maintain
a business office within the City which shall, at a minimum, be open to receive
payments and subscriber equipment for the hours specified in the Appendix P,
attached hereto and incorporated by reference. Franchisee shall also provide
personnel, telephone service, including a locally listed telephone number, and other
12
equipment, as needed within the area, to ensure timely, efficient and effective service
to consumers and for the purpose of receiving inquiries, requests and complaints
concerning all aspects of the construction, installation, operation, and maintenance
of the system and for the payment of subscribers' service charges.
C. Subscriber Complaints. Pursuant to the Ordinance, Franchisee shall
promptly respond to and resolve all subscriber complaints. However, nothing herein
shall require Franchisee to maintain or repair any equipment not provided by it.
E). Major Outages. Franchisee shall maintain records of all major outages
defined as a discontinuation of cable service from one or more fiber nodes in the City
of Iowa City. Such records shall indicate the estimated number of subscribers
affected, the date and time of first notification or of Franchisee knowledge of the
outage, the date and time service was restored, the cause of the outage and a
description of the corrective action taken. Such records shall be available to the City
during normal business hours upon reasonable prior notice and retained in Franchisee's
files for not less than five (5) years. Upon written request of the City, a statistical
summary of such records shall be prepared by Franchisee and submitted to the City
annually.
E. Customer Handbook. Franchisee shall provide written customer policies
or a handbook to all new subscribers and, thereafter, upon request. Franchisee's
written customer policies or handbook shall, at a minimum, comply with all notice
requirements in the Ordinance and those promulgated by the FCC. If Franchisee's
operating rules are changed subscribers shall be notified in a timely manner. Rate and
consumer complaint information will be distributed annually to subscribers.
Franchisee shall file a consumer handbook with the City annually.
F. FCC Standards. Franchisee shall meet the FCC's Standards for
Customer Service. If Franchisee does not meet the busy standards in two (2)
consecutive quarters the Franchisee shall add a minimum of one telephone line or
make other changes in order to satisfy the telephone busy standards. Franchisee shall
provide to the City annual management data, including data from any service centers
used by the Franchisee related to compliance with the FCC's Standards for Customer
Service. At such time as Franchisee does not meet the FCC and/or the Ordinance
requirements for repair for one quarter, Franchisee shall take corrective action to
ensure that such standards are met during the next quarter. At such time as the FCC
no longer promulgates Consumer Service Standards the FCC standards in effect on
the effective date of this Franchise will be in force.
G. Downgrades. Subscribers shall have the right to have cable service
downgraded in accordance with FCC rules. No charge shall be made for
disconnection of basic service. The billing for such service will be effective
immediately and such disconnection or downgrade shall be made as soon as
13
practicable. A refund of unused service charges shall be paid to the customer within
forty-five (45) days from the date of termination of service.
H. Outages. Franchisee, upon subscriber request, shall credit the
subscriber's account for verifiable outages of eighteen (18) hours or more for the
levels of service affected by such outages. The Franchisee shall provide written
notice to subscribers quarterly of the availability of credits for outages.
I. Subscriber Contracts. All contracts between Franchisee and their
subscribers shall be in compliance with the Ordinance and this Franchise. Franchisee
shall file a copy of the Franchisee's subscriber contract with the City annually.
J. Negative Option Billing. Franchisee shall comply with Federal law
regarding negative option billing.
K. Payment Stations. Throughout the term of the Franchise, Franchisee
shall maintain, at a minimum, three payment sites in addition to the Franchisee's
office. Such payment stations shall be open during normal business hours and be
dispersed throughout the City. Franchisee will review the options for payment by
telephone and automatic withdrawals.
L. TDD. Within 180 days of the effective date of this Franchise,
Franchisee shall install a TDD machine to receive consumer messages from the
hearing impaired.
M. Repair Calls. Franchisee shall offer subscribers repair service
appointments in two hour windows. The Franchisee shall telephone the subscriber
prior to arriving for a repair call. Franchisee will conduct repair calls on weekdays and
Saturdays.
N. Installation. Subscriber service shall be installed within seven days of
a request during normal operating conditions.
O. Administrative Fee and Disconnects. Administrative fees are charged
on any accounts which have not been paid prior to the next billing cycle.
Disconnection of accounts due to non-payment occurs no sooner than after 45 days
of due date.
P. Subscriber Bill. Company shall include its name, address, and telephone
number on the subscriber bill and the portion of the bill retained by the subscriber.
XIV. NON-DISCRIMINATION.
14
Franchisee agrees that it shall not discriminate in providing service to the
public nor against any employee or applicant for employment because of race, color,
creed, religion, sex, disability, gender identity, national origin, gender identity, age,
sexual orientation, or marital status. In the employment of persons, Franchisee shall
fully comply with applicable local, state and federal law, and shall take affirmative
action to ensure that applicants are employed and that employees are treated during
employment without regard to their race, color, creed, religion, sex, disability, gender
identity, national origin, age, sexual orientation, or marital status.
XV. RATES.
The City shall have the ability to regulate rates in accordance with Federal
law,
XVI. FRANCHISE RENEWAL.
Subject to Section 626 of the Cable Television Consumer Protection and
Competition Act of 1992, as amended, and the Telecommunications Act of 1996, as
amended, this Franchise may be renewed by the City in accordance with the
Ordinance.
XVII. POLICE POWERS.
In accepting this Franchise, Franchisee acknowledges that its rights
hereunder are subject to the police powers of the City to adopt and enforce general
Ordinances necessary to the safety and welfare of the public and it agrees to comply
with all applicable general laws and Ordinances enacted by the City pursuant to such
power.
XVIII. FRANCHISE FEE AND PERFORMANCE BOND.
A. Franchise Payments. Franchisee shall pay to the City a Franchise fee
of five (5%) percent of gross annual revenues or the maximum amount permitted by
law, whichever is higher, during the period of its operation under the Franchise,
pursuant to the provisions of the Ordinance. Any increase in the franchise fee shall
be implemented as soon as practicable, but no longer than forty-five (45) days.
B. Bonds. Franchisee shall furnish a construction bond to City as specified
in the Ordinance during the construction of the rebuild. Franchisee shall furnish a
Letter of Credit of $75,000 which shall be replenished within ten (10) days of use by
the City as specified in the Ordinance to a total amount of $500,000. Franchisee
shall provide such Letter of Credit to the City within sixty (60) days of the effective
date of this Franchise. The Letter of Credit should be maintained during the life of the
15
Franchise, to guarantee the faithful performance of all its obligations under this
Franchise and the Ordinance.
XIX. REGULATION.
A. The City shall exercise appropriate regulatory authority under the
provisions of the Ordinance and this Franchise. Regulation may be exercised through
any duly designated City office or duly established Board or Commission or other body
of the City.
B. Franchisee, by accepting the rights hereby granted, agrees that it will
perform and keep all acts and obligations imposed, represented or promised by the
provisions of this Franchise, the Ordinance, and the proposal.
C. The Franchisee agrees to indemnify the City and to hold the City
harmless from all claims against it by third parties arising out of its compliance with
Section V to the extent that such claims are not barred by Section 635A of the Cable
Television Consumer Protection and Competition Act of 1992 (Limitation of Franchise
Authority Liability), or by any other provision of law.
XX. REMEDIES.
A. Schedule of Liquidated Damages. Because Franchisee's failure to
comply with certain material provisions of this Agreement and the Ordinance will
result in injury to the City or to subscribers, and because it will be difficult to estimate
the extent of such injury, the City and Franchisee hereby agree that the liquidated
damages and penalties stated in the Ordinance represent both parties' best estimate
of the damages resulting from the specified injury.
B. Violations. For the violation of any of the following, the City shall notify
Franchisee in writing of the violation. The City shall provide Franchisee with a
detailed written notice of any Franchise violation upon which it proposes to take
action, and there shall be a thirty (30) day period within which Franchisee may
demonstrate that a violation does not exist or cure an alleged violation or, if the
violation cannot be corrected in thirty (30) days, submit a plan satisfactory to the City
to correct the violation. If an alleged violation is proven to exist, and no cure or action
on a plan acceptable to the City has been received by the City within thirty (30) days,
such liquidated damages shall be chargeable to the Letter of Credit as set forth in the
Ordinance if not tendered by Franchisee within thirty (30) days. Franchisee may
petition the City Council for relief with just cause. The imposition of liquidated
damages shall not preclude the City from exercising the other enforcement provisions
of the Ordinance, including revocation, or other statutory or judicially imposed
penalties. Liquidated damages may be imposed as follows:
16
(1)
For failure to complete construction or extend service in
accordance with Franchise: $250/day for each day the violation
continues;
(2) For failure to comply with requirements for public, educational and
government access: $150/day for each day the violation continues;
(3) For failure to submit reports, maintain records, provide documents
or information: $150/day for each day the violation continues; and
(4)
For violation of customer service standards required by this
Franchise, the Ordinance, or by FCC regulation: $150/day per
standard violated.
(5)
For violation of the books and financial records provisions of this
Franchise and the Ordinance: up to ~150/day for each day the
violation continues.
(6) For violation of other material provisions of this Franchise or the
Ordinance: up to ~ 150/day for each day the violation continues.
XXI. COOPERATION.
The parties recognize that it is within their mutual best interests for the cable
television system to be operated as efficiently as possible in accordance with the
requirements set forth in this Agreement. To achieve this, parties agree to cooperate
with each other in accordance with the terms and provisions of this Franchise. Should
either party believe that the other is not acting timely or reasonably within the
confines of applicable regulations and procedures in responding to a request for
action, that party shall notify the person or agents specified herein. The person or
agent thus notified will use its best effort to facilitate the particular action requested.
XXII. WAIVER.
The failure of the City at any time to require performance by Franchisee of
any provision hereof shall in no way affect the right of the City hereafter to enforce
the same. Nor shall the waiver by the City of any breach of any provision hereof be
taken to be a waiver of any succeeding breach of such provision, or as a waiver of the
provision itself.
XXIII. CUMULATIVE PROVISION.
The rights and remedies reserved to the City by this Franchise are cumulative
and shall be in addition to and not in derogation of any other rights or remedies which
17
the City may have with respect to the subject matter of this Franchise, and a waiver
thereof at any time shall have no effect on the enforcement of such rights or remedies
at a future time.
XXIV. NO LIABILITY.
Nothing herein shall be deemed to create civil liability by one party for the
action, omissions or negligence of the other party, or of a party's agents, employees,
officers or assigns. Each party shall be solely liable for claims against it by third
parties, whether arising under the Cable Television Consumer Protection and
Competition Act of 1992 or under any other provision of law.
XXV. NOTICES.
All notices from Franchisee to the City pursuant to this Agreement shall be
sent to the following address for the conduct of matters related to the Franchise. All
notices to Franchisee should be sent to: Cable Administrator, City of Iowa City, 410
East Washington Street, Iowa City, Iowa 52244. All notices to McLeod USA shall
be sent to these addresses: McLeod USA, 4600 C Avenue, Cedar Rapids, IA 52406;
McLeod USA ATS, 421 4th Avenue SE, Cedar Rapids, IA 52401; and an Iowa City
or Coralville address yet to be determined.
XXVI. CAPTIONS.
Captions to sections throughout this Franchise are solely to facilitate the
reading and reference to the sections and provisions of the Agreement. Such captions
shall not affect the meaning or interpretation of the Agreement.
XXVII. NO JOINT VENTURE.
Nothing herein shall be deemed to create a joint venture or principal-agent
relationship between the parties, and neither party is authorized to, nor shall either
party act toward third persons or the public, in any manner which would indicate any
such relationship with the other.
XXVIII. ENTIRE AGREEMENT.
This Agreement and all attachments hereto, and the Ordinance and all
attachments thereto, as incorporated herein, represent the entire understanding and
agreement between the parties hereto with respect to the subject matter hereof,
supersede all prior oral negotiations between the parties, and can be amended,
supplemented, modified, or changed only as provided in said Ordinance.
18
XXVIX. SEVERABILITY.
If any section, subsection, sentence, clause, phrase, or portion of 'this
Agreement is, for any reason, held invalid or unconstitutional by any court of
competent jurisdiction, such portion shall be deemed a separate, distinct, and
independent provision and such holding shall not affect the validity of the remaining
portions of this Agreement, except as provided for in the Ordinance.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
ATTEST:
CITY OF IOWA CITY, IOWA,
a municipal corporation
Witness Mayor
McLeod USA Telecommunication Services, Inc.
Witness
Seal
Approved as to form and correctness.
cabletv\agt\franchis.fin
City Attorney
19
FRANCHISE APPENDICES
App. A
App. B
App. C
App. D
App. E
App. F
App. G
App. H
App. I
App. J
App. K
App. L
App. M
App. N
App. O
App. P
p. 4, VIII.A.
p. 5, VIII.E.
p. 5, VIII.F.
p. 5 VIII.G.
p. 6, VIII.J.
p. 6, VIII.K.
p. 8, IX.A.
p. 8, IX.B.
p. 8, IX.B.
p. 9, X.A.
p. 9, X.B.
p. 9, X.D.
p. 10, XI .A.
p. 12, XI.D.
p. 13, XIII.B.
System design specifications
Drop technical parameters
Delivery system equipment list
Converter specifications
Test equipment available to Iowa City within 24 hours
Preventive maintenance program
Design standards
Franchisee's construction manual
Permit and construction process
Deleted
Programming
Programming categories
Free drop locations
Position of access channels
Access publicity
Business and repair hours
APPENDIX A
General System Design Specifications (750 MHZ)
Distribution - End of Line NCTA standard methods:
Carrier/Noise
2nd order beats
Triple order beats
Cross modulation
Tap outputs 54 MHZ
Tap outputs 550 MHZ
49
51
51
51
8 db minimum
14 db minimum
Fiber Link (output node):
Carrier/Noise
2nd order beats
3rd order beats
Cross modulation
51
58
63
63
Note: Performance shall not degrade by more than 2 db at temperature extremes within the
system.
Note: These specifications may change based on technology changes as well as type of
active electronics being used.
APPENDIX B
Alcatel, Pirelli or equivalent.
Drop Technical Parameters
APPENDIX C
S~i~uti~c Allmaim of TVC pasmiv~$ aud taps - IGHZ
Pirrdli or Alc4tel filx-r or equivalent
Scientific Atlanta or Antec flier node or equivalent
Scientific Adamta or Antcc fiber tansminers
Cornscope coax
APPENDIX E
Test Equipment
1. I-[P 8591 C
2. WAVETEK 1754) capable of
s. Signal levels
b. C/N ratios
c. Numin%
cL Enl~'ess monitoring
3. ~ 8~91 C
4. WAV~'TEI~ MODEL I l ~7 Bench Sweep
5. STEALTH 3SR
6. WAVETEK 1750
7. Use carrier of 1750 METER or equivalent
8. VH)EOTEK or equivalent
9. TEKTRONIX MODEL TVI I0 cable tester
I0. Use other sources
APPENDIX F
The lows City Cable S~tem Oat will be coaso'a,t~ by le Pr--,"bi--,~'e will
Be divided into area desi~-tal by the eventusi duiln and will have am
APPENDIX G
6.01
6.02
6.03
DESIGN STANDARDS
EXCERPTED FROM THE IOWA CITY JOINT MUNICIPAL DESIGN STANDARDS
PART 6 - UTILITY WORK AND OTHER CONSTRUCTION
WITHIN PUBLIC RIGHT-OF-WAY
PERMIT REQUIRED:
A right-of-way construction permit is required to work within the public rights-
of-way of Iowa City, Coralville and North Liberty. Permits may be obtained
from the City Engineer in Iowa City and Coralville and from the Building Official
in North Liberty. Permits for utility work must be obtained by the owner of the
utility. A right-of-way construction permit is not required for sidewalk,
driveway, or mail box construction. See Parts 2 and 3 for the construction of
sidewalks and driveways and Section 6.03A for the construction of mailboxes.
TRAFFIC CONTROL:
The permittee is responsible for all traffic control and work site safety. Traffic
control shall meet the standards for Work Zone Traffic Control as defined in the
current edition of the Manual on Uniform Traffic Control Devices for Streets and
Highways. A traffic control plan may be required by the City Engineer.
The permittee shall provide adequate lighted barricades and/or fencing to
protect pedestrians. All excavations shall be fenced when the contractor is not
at the site.
There may be situations where the traffic load or site conditions will allow only
a portion of the street to be closed at one time. On collector and arterial
streets, contractors may be required to bore and jack to place a new utility
beneath the street surface.
MISCELLANEOUS CONSTRUCTION:
Mail Boxes - The base of all mail boxes shall be a minimum of 18 inches from
the edge of the pavement. Brick or other masonry support structures are not
allowed. Contact the local post office for current regulations regarding the
height and offset of the face of the box.
Retaining Walls - Private retaining walls are not allowed within the public right-
of-way without an agreement for temporary use of public right-of-way approved
by the City Council.
Monitoring Wells - Monitoring wells are allowed in the public right-of-way only
when it can be shown that the wells cannot be located on private property.
Monitoring wells are subject to special permit conditions.
6. 04
6.05
6.06
6.07
6.08
CLEAR ZONES:
A. On streets with curbs, the clear zone shall be 10' for four-lane facilities and 3'
for two-lane facilities. On streets without curbs, the clear zone shall be 10' for
two-lane and four-lane facilities.
B. Variances to clear zone requirements will be considered for overhead electrical
facilities where compliance will significantly impact existing trees. In no case
will a clear zone of less than 18 inches be allowed. A clear zone variance must
be approved by the City Engineer.
EXCA VA TION AND BACKFILL:
A.
Within public right-of-way, backfill shall consist of Class A crushed stone or
suitable job excavated material placed in one foot lifts compacted to 90%
Modified Proctor Density. If crushed stone is used, the top 12 inches of backfill
shall consist of suitable job excavated materials. Flowable mortar may be used
upon approval of mix design by the City Engineer. Sand backfill is not
permitted; however, sand may be used as utility bedding.
In all other areas backfill shall consist of suitable job excavated material placed
in one foot lifts and compacted to 85% Modified Proctor Density.
WORK AROUND TREES:
A. Use care to prevent work within the drip line of trees.
B. When work falls within the drip line of trees, contact the City Engineer or City
Forester.
RESTORATION OF BRICK STREET SURFACE:
A.
B.
Use care to salvage bricks during excavation.
Construct a 7 inch thick base of IDOT M-3 concrete. Allow enough depth for
installation of brick on a sand cushion.
Brick shall be placed on a sand cushion making sure the pattern and elevation
match the surrounding street.
A 50% sand and 50% Portland cement mixture shall be swept into the brick
joints and fogged with a mist of water to insure seating of the brick.
RESTORATION OF ASPHAL T OVERLAY ON BRICK STREETS:
A. Construct a 7 inch thick base of IDOT M-3 concrete flush with the top of the
surrounding bricks.
B. Tack and place h-inch IDOT Type A mix asphalt and compact to the proper
elevation.
6.09 RESTORATION OF ASPHALT OVERI, AY ON PORTLAND CEMENT CONCRETE
STREETS:
Construct a concrete base of the same thickness as was removed using M-3
mix. An IDOT type BT-3 joint shall be used to joint the base to existing
concrete. Use #5 epoxy coated bars, 24 inches in length, spaced 30 inches on
center drilled and grouted 9 inches into the existing slab. The concrete base
shall be flush with the existing concrete.
B. Tack and place %-inch Type A asphalt and compact to the proper elevation.
6. 10 RESTORATION OF PORTLAND CEMENT CONCRETE STREETS:
Concrete shall be removed to the nearest longitudinal joint and a minimum of
half the panel between transverse joints. Only full or half panels may be
removed. Full panels must be removed if the portion to remain is cracked or
settled.
B. Concrete shall be sawn to insure a clean break at the joints.
An IDOT type BT-3 joint shall be used to joint to existing concrete. Use #5
epoxy coated bars, 24 inches in length, spaced 30 inches on center drilled and
grouted 9 inches into the existing slab.
De
Place new concrete of the same thickness as was removed using IDOT Mo3
mix.
E. All joints shall be sawn and sealed according to IDOT detail RH-51.
6. 11 OTHER SURFACES:
All areas outside the paving which are disturbed shall be restored to their
original condition.
When approved by the governing authority, unimproved streets (rock or rock
and oil, seal coated streets, or asphaltic concrete surfaced streets) may be
repaired or restored with Bituminous Seal Coat consisting of one or more
applications of Binder Bitumen with one or more successive applications of
cover aggregate. Materials, Equipment and Construction methods shall be in
general conformity with Section 2307 of the current Iowa Department of
Transportation Standard Specifications for Highway and Bridge Construction.
6. 12 MAINTENANCE:
Seeding or sodding of disturbed areas shall be maintained until watering is no
longer required for self-sustaining growth.
The owner of the utility will be responsible for repair or maintenance of settled
areas within the right-of-way and pavement repairs for a period of five years
from the date the work is completed.
APPENDIX H
Franchisee's construction manual will be filed with the City Clerk before Construction begins.
APPENDIX I
Permit and Construction Process
Franchisee shall comply with all permit and construction requirements of the Iowa City City Code,
including, but not limited to Section 14-1A and 14- 2D.
APPENDIX "I"
CITY OF IOWA CITY, IOWA
PUBLXC WORKS DEPARTMENT
PUBLIC RIGHT-OF-WAY EXCAVATION PERMXT
O1O94
Date:
Company:
Contact Person:
Address:
Purpose and Location of Work:
Insurance Certificate on File:
Amount of Special Deposit:
Annual Deposit on File:
Phone #:
Is This a Brick Street? Yes []
CONDITIONS:
1}
2)
3}
4)
5)
No []
Calf for underground utility locations, Iowa One Call 1-800-292-8989
Traffic control standard must meet specifications in "Work Zone Traffic Control" - current edition manual.
The applicant agrees to carry on the construction, repair, and maintenance with serious regard to the safety of the
traveling public and adjacent property owners, and further agrees to save the City of Iowa City harmless of any damage
or losses that may be sustained by the traveling public on account of applicant's construction, repair, or maintenance
operations including applicant's agents, representatives, subcontractors, laborers, materialmen and successors.
The applicant agrees to indemnify and save harmless the City of Iowa City, its agencies and employees from any and all
causes of actions, suits at law or in equity for losses, damages, claims or demands including attorney fees, and from any
and all liability and expense of whatsoever nature, arising out of or in connection with the applicant's use or occupancy
of the public right-of-way.
The applicant agrees to restore the right-of-way to its previous condition upon completion of the work, and to do so to
the complete satisfaction of the City.
SKETCH OF JOB LAYOUT:
I have read and understand the conditions of this permit, and I am authorized to agree to said
conditions in all their particulars.
Applicant: Date:
SPECIAL PROVISIONS:
1)
2)
City Approval By:
Date:
NOv 9~ WHITE - PERMITTEE CANARY - ENGINEERING PINK - PUBLIC WORKS
APPENDIX K
Programming *
Channel Line-Up
KGAN (CBS)* Standard Fox Sports Midwest
WGN * Standard TV Food Network
TBS * Standard Univision
H BO Premium Speedvision
Disney Standard C-Span *
KWWL (NBC)* Standard C-Span 2'
KFXA (FOX),* Standard CNBC*
KCRG (ABC);~ Standard The Travel Channel
ESPN Standard BET
KTS (Kirkwood) * Standard FLIX
KIlN (PBS) * Standard CMT
Family Channel Standard The History Channel
CNN Standard Sci-Fi
Discovery Channel Standard Cartoon Network
A&E Standard Turner Classic Movies
USA Standard ESPN 2
EWTN * Standard Court TV
Prevue * Standard The Golf Channel
ETC * Standard CNNSI
Bloomberg Standard ESPNews
KPXR * Standard Game Show Network
Public Access/PIN* Standard Independent Film Channel
Nickelodeon Standard Discovery Home &Leisure
American Movie Classics Standard Discovery Science
TNN Standard Discovery Kids
MTV Standard MuchMusic
Knowledge TV Standard Classic Sports
Home Shopping Network* Standard Romance Classics
OVC* Standard HBO 2
Valuevision * Standard HBO 3
MSNBC Standard HBO Family
Lifetime Standard Cinemax
The WeEither Channel Standard Cinemax 2
TNT Standard Showtime
FX Standard Showtime 2
VH-1 Standard The Movie Channel
Animal Planet Standard STARZ!
Headline News Standard STARZ! 2
Learning Channel Standard Encore
Odyssey Standard Encore Love
E! Entertainment Standard Encore Mystery
Outdoor Life Standard Encore Western
Fox Sports Chicago Standard Viewer's Choice (VC-1)
Comedy Central Standard Sneak Prevue*
Bravo Standard Vieweds Choice (VC-4)
HBTV Standard Hot Choice
Nostalgia Television Standard Spice
TV Land Standard Playboy
Toon Disney Standard
Standard
Standard
Standard
Standard
Standard
Standard
Standard
Standard
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #1
Premium
Premium
Premium
Premium
Premium
Premium
Premium
Premium
Premi~m
Premi~m
PremIum
Premium
Premium
Premium
PPV
PPV
PPV
PPV
PPV
PPV
*Franchisee reserves the right to alter, change or modify programming at any time subject to
federal law,
APPENDIX L
Programming Categories
Needs aml iame~m oft/ ~ orlowa Ci~will ~aee!3ted by tbc Frax~..l~cc
Wid, iapet rl~m. le!~l~x,d C~e,,mkwk~eed w/l evw valid coasumermmteti~
Studks tier may I~ dcvcle!~.
6 Disney** Children
24 Nickelodeon** Children
50 Toon Disney** Children
69 Cartoon Network Children
80 Discovery Kids Children
11 KTS (Kirkwood)* Educational
15 Discovery Channel** Educational
16 A&E** Educational
20 ETC* Educational
28 Knowledge TV** Educational
38 Animal Planet** Educational
40 Learning Channel** Educational
47 HG'I'V** Educational
52 ']'V Food Network** Educational
54 Speedvision** Educational
63 ' The Travel Channel
67 The History Channel
78 Discovery Home & Liesure
79 Discovery Science
2 KGAN (CBS)*
3 WGN*
4 TBS*
7 KWWL (NBC)*
8 KFXA (FOX)*
9 KCRG (ABC)*
12 KIlN (PBS)*
13 Family Channel**
17 USA*'
26' TNN**
33 Lifetime**
35 TNT**
42 E! Entertainment**
45 Comedy Central**
46 Bravo**
48 Nostalgia Television**
49 TV Land**
53 Univision**
64 BET
68 Sci-Fi
76 Game Show Network
19 Prevue*
Educational
Educational
Educational
Educational
Genera/Programming
General Programming
General Programming
General Programming
General Programming
Genera/Programming
General Programming
Genera/Programming
General Programming
General Programming
General ProgrammIng
General Programming
Genera! Programming
General Programming
General ProgrammIng
General Programming
General Programming
General Programming
General Programming
General Programming
General Programming
Guides
99 Sneak Prevue*
5 HBO
25 American Movie Classics**
65 FLIX
70 Turner Classic Movies
77 Independent Film Channel
83 Romance Classics
84 HBO 2
85 HBO 3
86 HBO Family
87 Cinemax
88 Cinemax 2
89 Showtime
90 Showtime 2
91 The Movie Channel
92 STARZ!
93 STARZ 2
94 Encore
95 Encore Love
96 Encore Mystery
97 Encore Western
27
37 VH-1 **
66 CMT
81 MuchMusic
14 CNN"*
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Music
Music
Music
Music
News
21 8loomberg*'
32 MSNBC*'
34 The Weather Channel**
39 Headline News**
55 C-Span*
56 C-Span 2'
57 CNBC'
72 Court 'iV
98 Viewer's ChoKe (VC-1)
100 Viewers Choice (VC-4)
101 Hot Choice
102 Spice
103 Playboy
18 EWTN *
41 Odysssey**
22 KXPR*
23 Public Access/PIN*
29 Home Shopping Network*
30 QVC ·
31 Valuevision'
10 ESPN'*
43 Outdoor Life**
44 Sports Channel - Chicago**
News
News
News
News
News
News
News
,-PPV
PPV
PPV
PPV
PPV
Religious
Religious
Shopping/Paid
Programming
Shopping/Paid
Programming
Shopping/Paid
Programming
Shopping/Paid
Programming
Shopping/Paid
Programming
Sports
Sports
Sports
APPENDIX M
Iowa City School Sites
Community Education Center
City High
Coralville Central Elementary
Hoover Elementary
Horn Elementary
Kirkwood Elementary
Lemme Elementary
Lincoln Elementary
Longfellow Elementary
Lucas Elementary
Mann Elementary
Northwest Jr. High
Roosevelt Elementary
Shimek Elementary
Southeast Jr. High
Twain Elementary
West High School
Grant Wood Elementary
Irving Weber School
Free Drops
Other Schools
Regina Elementary
Regina High School
Willowwind School
Kirkwood Community College
Public Buildings
Civic Center
Senior Center
Recreation Center
Library
Fire Stations 1, 2, 3
Broadway St. Neighborhood Center
Pheasant Ridge Neighborhood Center
Other Sites
Future neighborhood centers
Future access organization(s) sites
APPENDIX N
Access Channel Positions
PATV
Government Channel
University of Iowa
Library
ECC
Channel 2
Channel 4
Channel 8
Channel 10
Channel 11
APPENDIX 0
The Company agrees to insert into subscriber handbooks,
information about local access channels. The cost of printing,
etc. of this information shall be the sole responsibility of the
access programming provider (government, education, public).
The Company reserves the right to approve content.
The Company agrees to allow billing messages or bill stuffers to
be included in subscribers' bills at the rate on one per year sub-
ject to approval of content by the Company, availability and
adequate advance notice· The cost of printing and insertion shall
be the responsibility of the access programming providers
(government, education, public).
APPENDIX P
Business and Repair Hours
Business Hours:
8 AM - 6 PM Monday-Friday
9 AM - 5 PM Saturday
Service Hours:
8 AM - 5 PM Monday- Saturday
On-call - 24 hours per day, seven days a week
August 5, 1998
Broadband Telecommunication Commission and The City Council
City of Iowa City
410 East Washington Street
Iowa City, Iowa 52240-1826
Re: Application for Competitive Cable Franchise
Enclosed is the information requested of McLeod USA ATS for our
application for a competitive Cable Franchise.
I. The filing fee in the amount ors I0,000
2. $25,000 proposal bond -- ~fl-yerfl
3. ~e focal application
4. ~e confoxed Franchise appendix
5. 1997 A~ual repoa of Mc~od USA
6. Cedar Rapids price sheet ( which may not be representative of
Coralvilleaowa CiW pfic~g )
The proposed Cable Franchise is still being fmalized by your Assistant Ci
Attorney, Andrew P. Matthews. There does not seem to be y particular~
disagreements with regard to substance.
Sincerely
Heury~'~er~
Vice President/General Manager
McLeod USA ATS
MCLEODUSA TECHNOLOGY PARK 6400 C STREET SW PO BOx 3177 CEDAR RAPIDS, IA 52406-3177
PHONE 319-364-0000 FAX 319-298-7015 http://www. mcleodusa.com
IctJSUI~3A AT~
Tt~ City of Iowa City
Applicafiou for C__.~bk Frauchisc
s~cnoiw A{
1- Aims is: check for Sl0,000 covcrin8 lbe mm-zcfuudable fee aud the
$25,000 ~ txmd. ·
SXCTION B
I. McLcodL'SA Tr.~comunmir. atiams Scxviccs lxr.., dba McLeoHUSA All
421 4'mAvcaucS0uthlhst
CatarRa;dds, Iawm 52403
2. ltisMc. LeodlJ~'aiaUmtiontoolxaazc&bnmfmstserviccsamzlmY
hours wCJldbe 8:00 am, k~ 6:00 p,,t Monday -Friday ~ lxam'uk hou~
o,, 8atu~y demwmacnt upan cummer ua~L
It is cunu~y out rotmica to eigram fixis off~ ~s: cmuplcm:ly se, if-sutikiem
~ Van. Mc, rc. Dir,-~,,~ nd --.,c C~ l~damZcr; Rob .Szxd~x.
~9-NotxppL,~. i:
APPENDIX A
GENERAL SYSTEM DESIGN SPECIFICATIONS ( 750 MHZ )
Distribution: End of line NCTA standard methods:
Carrier/noise 49
2~ order beats 51
Triple order beats 51
Cross modulation 51
Tap outputs 54 MHZ 8 db minimum
Tap outputs 550 MHZ 14 db minimum
Fiber Link (output node)
Carrier/noise 51
2"d order beats 58
3rd order beats 63
Cross modulation 63
Note: Performance shall not degrade by more that 2db at temperature extremes
Within the system.
Note: These specifications may change based on technology changes as well
As type of active electronics being used.
APPENDIX B
DROP TECHNICAL PARAMETERS
Alcatel, Pirelli or equivalent.
APPENDIX C
Scientific Atlanta or TVC passives and taps - 1GHZ
Pirrelli or Alcatel fiber or equivalent
Scientific Atlanta or Antec fiber node or equivalent
Scientific Atlamta or Antec fiber transmitters
Cornscope coax
APPENDIX D
CONVERTER SPECIFICATIONS
Scientific Atlanta or its equivalent.
APPENDIX E
TEST EQUIPMENT
1. HP 8591 C
2. WAVETEK 1750 capable of
a. Signal levels
b. C/N ratios
c. Num in %
d. Ingress monitoring
3. HP 8591 C
4. WAVETEK MODEL 1157 Bench Sweep
5. STEALTH 3SR
6. WAVETEK 1750
7. Use carrier of 1750 METER or equivalent
8. VIDEOTEK or equivalent
9. TEKTRONIX MODEL TV110 cable tester
I0. Use other sources
APPENDIX F
FRANCHISEE LEAKAGE PROCEDURES
The Iowa City Cable System that will be constructed by the Franchisee will
Be divided into area designated by the eventual design and will have an
Appropriate ongoing monitoring strategy.
JUL-30-B8 15,12 rKu~, ,~.
APPENDIX G
6.01
6.02
6.03
DESIGN STANDARDS
EXCERPTED FROM THE IOWA CITY JOINT MUNICIPAL DESIGN STANDARDS
PART 6 - UTILITY WORK AND OTHER CONSTRUCTION
WITHIN PUBLIC RIGHT-OF-WAY
PERMIT REQUIRED:
flUlit of-way construction pcrmit is required to work within the public righis-
-way of Iowa City, Coralvilla and North Liberty. Permits may be obtained
fron~ tim City Engineer in iowa City and Coralvilla and fronl the Building Official
North Liberty. Permits for utility work rllus[ be obtained by the owner of the
dtility. A riel~[-of-way constructiorl perufit is not required for sidewalk.
driveway, or mail box construction. See Parts 2 and 3 for the construction of
sidewalks and driveways and Section 6.03A.for the construction of mailboxes.
TRAFFIC CON TROL:
A
1'I'm pc;rnlittc. c is resl>onsible for all tralfic control and work site safety, Traffic
control sl~all meet The standards for Work Zone Traffic Control as defined in the
currur~t edition nf fi~e Manual o~ Uniform Traffic Control Devices for Streets and
HHIhways. A traffic cu~tro[ plan may be required by the City Fngineer.
]'he permittee sludl provide adequate lighted barricades and/or fencing to
proroot pedestrial~s. All excavations shall be fenced when the contractor is not
at tt~e site.
C
TITere ii~ay be sm~ations where the traffic load or site conditions will allow only
a pr~rrion of tl~c street [o !)e closed at one tinge. On collector and arterial
sirnets, cordtractOrS may be required to bore and jack to place a new utility
beneath tl~e street Starface.
MISCEL L A NEOUS CONS TRUC TION:
Mail Boxes 'l t~c base of all mail boxes shall be a minim~m of 18 irlcrms from
the ech. lu of the i~avemer~t. BriCk or other masonry support structures are f~ot
tillowed. Contact t/~u local post office for current regulations regardin9 tile
Imi.qhf and olls,:t of lhe face o~ tl~c box.
H,;[.-,n~in9 Walls Private retaining walls are not allowed within the i)ubl,c r~ght-
of. way witl,uu~ an agreement for t~n~pnrary use of public right-of-way approved
l,y ~l~e City Cut,~,c,I.
C.
Mo~fitornlg Well~ - Monitor,n9 wells are allowed ill the public right ul way only
widen it nan be s~lowr~ tha~ the wells cannot be located on private property.
Monitori~U w~lls are subject to special permit conditions.
JUL-30-g8
6,04
6.05
6.06
6.07
6.08
CL EAR ZONES:
0~, streets with curbs. the clear zone shall be 10' for four-lane facilities and 3'
for two-lane facilities. On streets withc)ut curbs, the clear zone sllall be 10' for
two lane and four-lane facilities.
Variances to clear zor~e requirements will be considered for overhead electrical
~acilities where compliance will significantly impact existing trees.. In no case
will a clear zone nf less than ] 8 inches be allowed. A clear zone vm'iance must
be al.~l)roved by the City Engineer.
EXCA VA TION AND BACKfiLL:
Within public ri.cihFof-way, backJill shall consist of Class A crushed stone or
suitable job excavated material placed in one toot lilts compacted to 90%
Modified Proctor Density. If crusl~ed stone is used, the top 12 inches of backfill
styall consist of suitable job excavated materials. Flowable mortar may be used
upon approval of mix design by the City Engineer. Sand backlill is no~
I~ernfittccl; llowever, sand may be used as utility bedding.
In all ott~er areas backfill shall consist of suitable job excavated nja~<;rlal placed
in one foot lifts and compacted to 85% Modified Proctor Density.
WORK A ROUND TREES:
A. Use care ~o prevent work within the drip line of trees.
WIden work tails wid~in the drip line of trees, contact the City Er~!]i~eer or City
Forester.
RESTORATiON OF BRICK STREET SURFACE.'
A. Use care to salvage bricks during excavation.
Cnnstruct a '/inch thick base of lOOT M-3 concrete. Alluw erich,Oh depth for
installation Of brick on a sand cushion.
C.
[~,rick shall be placed on a sand cushion making sure the patt,;rw~ arKI elevation
match the SurrOLP~ding street.
A SO'X, sand arid 50~,6 Portland cemer, t rnixture shall be swept into the brick
joil~ts al~d fogged with a mist of water to insure seating of the. brick.
RESTORATION OF ASPHAL T O VERLA Y ON BRICK STREETS.'
Cor~struct a 7 inch thick base of IDOT M-3 concrete flush with tie: top of the
s,.,rr<,unding bricks.
Tack and plat;~. a/,rinch IDOT 1 ype A ;nix asphalt a~{t c,m~pact tc~ the proper
c~ev~tior/.
JUL-30-88 18,12 FROM, ID, FA~E ~g
6.09
6.10
6.11
6.12
RESTORATION OF ASPHALT OVERLAY ON PORTLAND CEMENT CONCRETE
STREETS:
Constrllct a concrete base of tile sanle thickness as was ren~ovecJ using M-3
mix. An IDOT type BF-3 joint shall be used to joint the base to existing
concrete, Use//5 epoxy coated bars, 24 inches in lengtlL spaced 30 incl~es on
center drilled and greeted 9 inches into the existing slab. TI',; concrete base
. slyall be flush with the existing concrete.
R. Tack and place %-inch Type A asphalt and compact to the prol)er elevation.
RESTORATION OF PORTLAND CEMENT CONCRETE STREETS:
Concrete slyall be removed to the nearest Idngitudinal joint .and a nfinimun~ of
half rile panel between transverse joints. Only full or half panels may be
rernovcd, Full panels mus~ be removed if the portion to rentlain is cracked or
settled.
B. Concrete shall be sawn to insure a clean .break at the joinIs.
An IDOl' type B'I"-3 joint shall be used to joint to existing ~:oncrele. Use #5
cpoxy coated bars, 2d inches in Ic~gdt spaced 30 inches on center drilled and
grod~ed 9 inches i~[u the existing slab.
PlaCe; new concrete of the sarnc thickr~ess as was reaveveal using lOOT M. 3
mix.
E. All joints slyall be sawn and sealed according to lOOT detail RIt-S1.
0 THER SURFACES:
All areas oul. side the paving which are disturbed sl/all be restc~rc.d to their
uri.~iinal ccmdition.
Wlu:n apl:~rovecl by tile governing authority, tinimproved STreets (rock or rock
and oil. seal coated streets. or asphaltic concrete surfaced streets) n~ay
repaired or restored with Bituminous Seal Coat consistil~g of one or more
applications of Binder Bitumen with one or more successive applications of
cover aggregate. Materials. Equipment and Consr, ruc[io~ nleHK~ds shall be in
gee~cral conformity with Sectio~ 2307 of the current Iowa Department
'l'ranspnrtation Standard Specifications for Highway and Bridge Cue~sl. ruction.
MAIN TENA NCE:
.Se:eding or soclding or disturbed areas shall be maintained ~.ntil wLdu. ri~-.1 i~ ,~<>
Io~l~.],;r reCldired for sclf-sustairfir~tl grOwl. h.
Be
Ttlc owner of The utility will be responsible for repair or mair~tc:~lanc:,; c;l sellled
areas withir~ tt~: right-of-way and pavement. repairs for a period el five years
Iron~ the date the work is completed.
APPENDIX H
Franchisee's construction manual will be filed with the city clerk before'
Construction begins.
Does not apply.
APPENDIX I
Does not apply.
APPENDIX J
APPENDIX K
PROGRAMMING *
CHANNEL
LINE-UP
Z I(GAN (CB5)* Standard
3 WGN* Standard
4 TB5* Standard
5 HBO Premium
6 Disney Standard
7 KWWL (NBC)* Standard
8 · KFXA (FOX)* Standard
9 KCRG (ABe)* Standard
10 ESPN Standard 64 BET
11 KT5 (Kirkwood)* Standard 65 FLIX
12 KIIN (PB5)* Standard 66 CMT
13 Family Channel Standard 67 The H!story Channel
14 CNN Standard 68 5ci-Fi
15 Discovery Channel Standard 69 C~rtoon Network
16 A&E Standard 70 Turner Cl~sic Movies
17 USA Standard 71 ESPN Z
18 EWTN* Standard 72 Court TV
19 Prevue* Standard 73 :
20 ETC* Standard 74:
21::~'BI86mber9 Standard 75 ESPNews
ZZ I(PXR* Standard 76 Game Show Network
23 Public Access/PIN* Standard 77 Independent Film Channel
24 Nickelodeon Standard 78 Discovery Home &Leisure
25 American Movie Classics Standard 79 Discovery Science
26 'INN Standard 80 Discovery Kids
27 MTV Standard 81 MuchMusic
Z8 Knowledge TV Standard 82 Classic Sports
Z9 Home Shopping Network* Standard 83 Romance Classics
30 QVC* Standard 84 HBO 2
31 Valuevision* Standard 85 HBO 3
3Z MSNBC Standard 86 HBO Family
33 Lifetime Standard 87 Cinemax
34 The Weather Channel Standard 88 Cinemax 2
35 TNT Standard 89 Showtime
36 FX Standard 90 5howtime 2
37 VH-I Standard 91 The Movie Channel
38 Animal Planet Standard 92 5TARZ!
39 Headline News Standard 93 5TARZ! 2
40 Learning Channel Standard 94 Encore
41 Odyssey Standard 95 Encore Love
42 E! Entertainment Standard 96 Encore Mystery
43 Outdoor Life Standard 97 Encore Western
44 Fox Sports Chicago Standard 98 Viewer's Choice (VC-I)
45 Comedy Central Standard 99 Sneak Prorue*
46 Bravo Standard 100 Viewer's Choice (VC-4)
47 HGTV Standard 101 Hot Choice
48 Nostalgia Television ~ 5~andard 102 Spice
49 I'V Land Standard 103 Playboy
50 Toon Disney Standard
54 Speedvision Standard
55 C-Span* Standard
56 C-Span 2* Standard
57 CNBC* Standard
63 ~":TThe~Tro~;el cl~hhe 3~. '; ',fg-~Stonddrd
Value Tier #1
Value Tier #1
Value Tier #1
Value Tier #l
Value Tier #1
Value Tier #z
Value Tier #1
Value Tier #1
Value Tier #1
The'~,olf ChannEl
Value Tier #2
Value Tier #2
Value Tier #2
Value Tier ~2
Value Tier #Z
Value Tier #Z
Value Tier #Z
Value Tier #2
Value Tier #Z
Premium
Premium
Premium
Premium
Premium
Premium
Premium
Premium
Premium
Premmm
Premium
Premium
Premium
Premium
PPV
Standard
PPV
PPV
PPV
PPV
BASIC SERVICE
F""ITHE OTHER~UY5 DON'T HAVE THESE ]
Franchisee reserves the right to alter, change or modify programsning at any time subject
To federal law.
APPENDIX L
PROGRAM CATEGORIES
Needs and interests of the population of Iowa City will be analyzed by the Franchisee
With input from the Broadband Commission and what ever valid consumer marketing
Studies that may be developed.
6 Disney**
24 Nickelodeon**
50 Toon Disney**
69 Cartoon Network
80 Discovery Kids
11 KTS (Kirkwood)*
15 Discovery Channel**
16 A&E**
20 ETC*
28 Knowledge TV**
38 Animal Planet**
40 Learning Channel**
47 HGTV**
52 TV Food Network**
54 Speedvision**
Children
Children
Children
Children
Children
Educational
Educational
Educational
Educational
Educational
Educational
Educational
Educational
Educational
Educational
63 The Travel Channel
67 The History Channel
78 Discovery Home & Liesure
79 Discovery Science
2 KGAN (CBS)*
3 WGN*
4 TBS*
7 KWWL (NBC)*
8 KFXA (FOX)*
9 KCRG (ABC)*
12 KIlN (PBS)*
13 Family Channel**
17 USA**
26 TNN**
33 Lifetime**
35 TNT**
42 E! Entertainment**
45 Comedy Central**
46 Bravo**
48 Nostalgia Television**
49 TV Land**
53 Univision**
64 BET
68 Sci-Fi
76 Game Show Network
19 Prevue*
EdUcatiOnal
Educational
Educational
Educational
General Programming
General
General
General
General
General
General
General
General
General
General
General
General
General
General
General
General
General
General
General
General
Guides
Programming
Programming
Programming
Programming
Programming
Programming
Programming
Programming
Programming
Programming
Programming
Programming
Programming
Programming
Programming
Programming
Programming
Programming
Programming
Programming
99 Sneak Prevue*
5 HBO
25 American Movie Classics**
65 FLIX
70 Turner Classic Movies
77 Independent Film Channel
83 Romance Classics
84 HBO 2
85 HBO 3
86 HBO Family
87 Cinemax
88 Cinemax 2
89 Showtime
90 Showtime 2
91 The Movie Channel
92 STARZ!
93 STARZ 2
94 Encore
95 Encore Love
96 Encore Mystery
97 Encore Western
27 MTV**
37 VH-1 **
66 CMT
81 MuchMusic
14 CNN**
Guides ·
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Movies
Mowes
Movies
Mowes
Mowes
Movies
Music
Music
Music
Music
News
21 Bloomberg**
32 MSNBC**
34 The Weather Channel**
39 Headline News**
55 C-Span*
56 C-Span 2'
57 CNBC*
72 Court TV
98 Viewer's Choice (VC-1)
100 Viewer's Choice (VC-4)
101 Hot Choice
102 Spice
103 Playboy
18 EWTN*
41 Odysssey**
22 KXPR*
23 Public Access/PIN*
29 Home Shopping Network*
30 QVC*
31 Valuevision*
10 ESPN**
43 Outdoor Life**
44 Sports Channel - Chicago**
NeW s
News
News
News
News
News
News
News
PPV
PPV
PPV
PPV
PPV
Religious
Religious
Shopping/Paid
Programming
Shopping/Paid
Programming
Shopping/Paid
Programming
Shopping/Paid
Programming
Shopping/Paid
Programming
Sports
Sports
Spods
51 Fox Sports Midwest **
71 ESPN 2
73 The Golf Channel
74 CNNSI
75 ESPNews
82 Classic Sports
spo~ts
Sports
Sports
Sports
Sports
Sports
APPENDIX M
Iowa City ~clluOI SiTes
Cottl[Ti~lOily' EdLication C,,~nler
City High:
Coralviii0 CenTral Elementary
14never Elcn~cr~tary
Ilorn Elementary
Kirkwood Elementary
Lem~nc ~lcmentary
Lincoh~ [~lm'nm~tary
I..u~g~ellnw Elementary
Lucas ElaHlcntary
Manl~ F]~'~tllerltary
Northwest Jr. Higl~
Roosevelt Eh~n~enrary
Slfi~nuk Elementary
Southeast Jr. Higll
Twain EIc~cuLary
Wesl Higl~ Schc~l
Gra~t W~od Ele~cntary
Irving Weber Sct~oul
Free Drops
Ol. IK:r ,'qchools
Regina Elerne{fiary
Ru.c.li~Ls Hi.c]h School
Willc~wwind Sol sool
Kirkwood Col~ununity College
Puljlic I:lu.lclings
Civic C:nnlr:r
5enlor Cer~u:r
RI;Cl'l~,;I[i(ll Celll. gl'
LihrTffy
Fire St. aUc,,~ 1, 2, 3
Bro;.~lway St. Neighborl~ood Center
PIi021.$3n1' Ridgf: Nei.c_lhbnrhood Center
Othc;r
Futufc n¢:igl~borl~ood centers
r~nur4: ;,:c,::;s nrganization{s) sites
APPENDIX N
ACCESS CHANNEL POSITIONS
PATV Channel 23
Government Channel 104
University of Iowa Channel 11
Library Channel 105
ECC Channel 20
APPENDIX 0
'l'l~u Company agrees to iriserr into subsc:ribcr har~cfi3ooks,
infOrn~aTic}n about local access channels. The cost ~1 f~rinling,
ere. of this information shall be the sole r,Jsponsihility of lho
access pro.clramming provider (government, educerigid, public).
'l'l~e Company reserves the right to approve
Ihe Company agrees to allow billing messages ur bill .';luifers to
included in subscrib~.rs' bills at the rate on one I~e~ year sub-.
ject to approval of content by tho Comp;:my. avail,3bility and
L~dequate advance notice.' The cost of printing and i~lscrtion Sh~d[
the responsibility o[ the access progra~m~m~l i)roviders
(governn~ent, education. public).
McLeodUSA' Cable TV Information
Cedar Rapids Area
Channel Guide
2 KGAN (CBS)' Standard ~1 i I~O~ ~gortl:Mlclweat:
3 WGN' Standard 62~ TV:F~'.o,d.:Net~0rk_!
4 Tea' Standard 63; Uqlv!llPqj
5 HBO Premium 54 Speedvielon
g Disney Standard ia C-Span'
7 KW"WL (NBC)' Standard IS C*Spln 2'
8 KFXA (FOX)' Standard 17 CNBC'
9 KCRG (ABC)° Standard 11 thq Travel Channel i
10 ESPN Standard 14 BET
11 KTS (Kirkwood)' Standard g/ FLIX
12 KIlN (PBS)' Standard 16 CMT
13 Family Channel Standard 67 The History Chlnnel
14 CNN Standard 68 ScI-FI
t5 Discovery Channel Standard 69 Cartoon Network
16 A&E Standard 70 Turner Classic Movies
17 USA Standard 71 ESPN 2
t8 EWTN' Standard 72 CoudTV
19 Prorue' Standard 73 The Go!f Channel
20 ETC' Standard 74; CNNSI ]
21 Bloomberg Standard 71 ESPNews
22 KXPR' Standard 76 Game Show Network
23 Public AcceeelPIN' Standard 77 Independent Film Channel
24 Nickelodeon Standard 78 Discovery Home & LieBurs
25 American Movie Classics Standard 79 Discovery Science
26 TNN Standard 80 Discovery Kids
27 MTV Standard 81 MuchMusic
26 Knowledge 1'%/ Standard 82 Classic Sports
29 Home Shopping Networth' Standard 83 Romance Classic8
30 QVC' Standard 84 Hag 2
31 Valuevision* Standard 85 Hag 3
32 MSNBC Standard 86 Hag Family
33 LIfetime Standard 87 CInemas
34 The Weather Channel Standard 81 CInemas 2
36 TNT Standard 89 Showtime
37 VH-1 Standard g0 Showtime 2
38 Animal Pienet Standard 91 The Movie Channel
39 Headline News Standard 92 STARZI
40 Learning Channel Standard 93 8TARZ 2
41 Odyeesey Standard 94 Encore
42 El Entertainment Standard 96 Encore Love
43 Outdoor Life Standard 91 Encore Mystery
44 Fox Sport~ - Chicago Standard 97 Encore Weelern
4t Comedy Central Standard 98 Viewer'e Choice (VC-I)
46 Bravo Standard 99 Sneak Prorue'
47 HGTV Standard 100 Viewer'a Choice (VC4)
48 Nostalgia Television Standard 101 Hot Choice
49 TV Land Standard ' 102 Spice
t0 Toon Disney Stlnderd 103 Playboy ,
,
Standard Service ..........................$26.90
Value Tier I .................................$5.00
Value Tier 2 ................................$5.00
Canemax :L & 2 ............................$9.50
Encore MultiPlex ........................$2.75
HBO 1, 2, 3 & HBO Family ...........$11.50
Showtime 1 & 2 ...........................$9.50
STARZ! 1 & 2 ...............................$6.75
The Movie Channel .......................$8.50
Over 95 channels including 15
premium movie channels for $69.95.
All tiers and premsum Q~annels requll~ the pur~ase of Standard Serwce
*Bas~ service: $8.95
Standard
Standard
Standard
Standard
Vllue Tier I1
Value Tier il
Value Tier il
Vllue Tier il
Vllue Tier il
Value Tir 11
Vllue Tar el
Vllue Tir 11
Vllue Tar el
Vi ui Tier el ~
~lul TIlt ll
V~IU~ T~r 12
ViI~I TIlt 12
~11~t TIlt 1l
Vllue T~r 12
Value T~r 12
Value T~r 12
Value T~r 12
Value T~r t2
Premium
Premium
Premium
Premium
Premium
Premium
Premium
Premium
Premium
Premium
Premium
Premium
Premium
Premium
PPV
SMndard
PPV
PPV
PPV
PPV ~
That's a lot of channels, but
don't worry, we've got a
better way to surf. Our
interactive guide tells you
what's on, when it's on and
what it's about...and you
control it with your remote!
Value Tier channels can
purchased ala carte!
8L=T $1.75
Fux $z. Ts
CHT $1,75
The HIs~o~ Channet $1.75
~CFR $1.75
Turner Oas~c Movies $L75
Cou~ TV $ L 75
CNNSI $1.75
~s $1.75
Game Show ~ $1.75
Independent RIm Channel$1,75
Huchlvlusk: $1.75
C~1S~C Sports $1.75
Romance Classics $1.75
Installation is free
during our initial
introduction period!
298-6484
Cable T1/- l'elep~ne - internal
1f4 ~.l'~' ~.ltPLOR/
4"V tALK r.' ; l ~ ?
APPENDIX P
BUSINESS AND SERVICE HOURS
Business Hours: 8 AM- 6 PM Monday- Friday
9 AMoS PM Saturday
Service Hours: 8 AM - 5 PM Monday - Saturday
24/7 on call
COMPANY PROFILE
About McLeodUSA
McLcodUSA Incorporated provides integrated tclccon~munications services to businesses and
residences in the Midwest and Rocky Mountain states. Our ctlst(~lllcrs al*c located l~rimafily in Iowa,
Illinois, Wisconsin. Minnesota. Indiana. Missouri. North Dakota, South Dakota. Colorado and Wyoming.
Our "one-stop" approach integrates local. long distance, voice mail, paging and Intomet access services
on a single bill, tailored to the customer's needs. The Company's revenues arc derived primarily
the sale of these services, the sale and maintenance of competitive access services, direct marketing. and
the sale of advertising space in telephone directories.
In this report. you'll find a description of the opl3ortunity we see in this rapidly changing
industry. the plan we arc R~llowing to build the business. and the exciting R~ture we believe lies ahead
for our customers, our employees and our shareholders.
1997 Operating Highlights
· Net revenue increased 229% to S267.9 million.
· L<~cal lines increased 332% to 282,600.
· I.ocal service customers increased 846%, to 157.000.
· Cities served increased 147% to 227.
· Doubled route miles of fiber optics network reaching a new total of i.908 miles.
· Completed a private del3t offering in March and another in July providing
million in additional financing.
· Completed merger with Consolidated Communications Inc. in September.
bccon~ing the first Super Regional competitive local exchange carrier.
· In October. signed strategic relationship agreement to provide dedicated access service
to AT&T in 30 Midwestern cities.
/VJCLE()I)USAt INCORI'¢)RAI'ED AND SUBSIDIARIES
Financial Highlights
As of and jq~r the years endeel December 31, 1997, 1996 and 1995
(In thousands, except per share and operations data)
[ricohie
RcvcBue
Operating loss
Net loss
Net loss per share
Weighted average number of shares
Operations Local lines
Number of local service customers
Cities served
Route miles of fiber optic cable
Employees
Balance Sheet
Current assets
Working capital (deficit)
Property and equipment, net
Total assets
Long-term debt
Stockholders' equity
Other Financial Data
Capital expenditures, including acquisitions
EBITDA
1997
$ 267,886
$ (69,369)
$ (79,910)
$ (1.45)
54,974
282,600
157,000
227
4,908
4,941
517,869
378,617
373,8{)4
1,345,652
613,384
559,379
$ 601,137
$ (31,462)
1996
$ 81,323
$ (28,210)
$ (22,346)
$ (o.55)
40,506
65,400
16,600
92
2,352
2,077
1995
$ 28,998
$ (10,558)
$ (11,329)
$ (0.40)
28,004
35,800
8,400
50
218
419
224,401 $ 8,507
185,968 $ (1,208)
92,123 $ 16,119
452,994 $ 28,986
2,573 $ 3,6OO
4O3,429 $ 14,958
$ 173,782
$ (17,345)
$ 14,697
$ (8,723)
McLeodUSA ] Annual Report
Letter to Shareholders
McLeodUSA took a quantum leap forward in 1997, becoming the first Super
Regional competitive local exchange carrier in the nation. Our September merger
with Consolidated Con~munications Inc. (CCI) of Nlattoon, Illinois, united two
companies with complementaD, strategies, geographies and products, as well as
paralld commitments to our customers. employees and communities. This
CLARK E. MCLEoD
Chairman of the
Board and Chief
Executive Officer
combination provided the catalyst for significant grow~th and improvements in many
operational areas. We established many of the key anchor points in our
target geography, and we solidified the teain to execute our plan f~r the future.
McLeodUSA advanced "full steam ahead" in 1997, while much of the telecom-
munications indust~' was in turnsoil. Acquisitions were rampant; legislative and
regulato~2F battles raged. The Bell companies continued their reluctance to embrace
competition in spirit or in action, two years after the landmark Telecommunications
Act of 1996. Amid this turbulent environment, ' 'LeodUSA continued to execute
Mc
the plan we devised in 1994. By eve~T measure, we believe we achieved
substantial growth.
In our letter to you last year, we structured our message in three parts:
The OpportuniW, The Plan, and The Future. We revisit each of those
areas, listing our 1997 achievements and looking ahead to 1998.
McLeodUSA offers integrated teleconm~unications services to business and
residential customers in the Midw'est and Rocky Mountain states. We arc
actively building customer share by utilizing the local service of the Regional
Bell Operating Companies and providing excellent customer service. as we con-
stmct our own fiber optic network to car~~ our customers' calls.
McLeodUSA ~ Annual Report
Our long term contracts with two Bell companies in our geography ensure our
ability to lease lines and switches well into the fhture. These contracts permit
McLeodUSA to control local line f~atures, long distance service. w~ice mail and
Internet services for our customers while we build our' network.
However, wc believe that the Bell companies continue to inhibit true competition,
blocking entry through litigation and appeals, and creating regulator,/and legislative
obstacles. Consumers and business o~vners are demanding the right to choose their
telecommunications provider. At present, true choice does not exist. Until the day
consumers have a choice of proriders, each with its own network and sw'itches; until
STEPHEN C. GRAY
President and
Chief Operating Oj~cer
interconnection is prevalent; and until an on-line interface exists among competitive
proriders, it is an arduous task to mount a t~e challenge to the behemoths. In
spite of these hindrances, and f~eled by a tenacious spirit and indomitable drive,
we view the present business environment as a roadmap to opportunity.
Given the head start and entrenchment of our competitors, you may wonder
why we are so optimistic about our future in this marketplace. The
ansv,,er is simple. The k>rward-looking i~>cus of our 1994 strategy is
succcssfhl. Our sales and service teams are building customer share at
an aggressive pace. Our network construction continues
unabated. Our branding and clistribution strategies have proven -.-~
dl~ctive. And we are poised to take advantage of true competition.
Our Plan clemonstrates v,,hy vv'e 13elieve we are on the right track.
McLeodUSA Z] Annual Report
Cities Servefl~
92
50
95 96 97
"1X~ increased
our cities served
by 147% in
1997. Of the
135 markets
adde~L 69 are in
expansion
states."
DAVID BOATNER
Executive Vice President
Business Services
THE
Our strategy remains a three step process:
· Continue to build customer share.
· Concurrently build nem,'ork.
· Begin to migrate customers to our network, resulting in enhanced services for
customers and improving margins for McLeodUSA.
1~[ :ILl ) C1 ~ST( ) MER SI [ARE
.l/c~vL~c,/t,bctls. While many of our competitors seek national and international
expansion. our sights are set on second- and third-tier markets in the Midwest and
Rocky Mountain states writere x~;e concentrate on market penetration and eventual
domination.
We launched our Competitive Local Exchange sales activity in Iowa and Illinois
in 1994, and have added eight states to date. We continue to w;in customers from
the incumbent in all ten states, and now control one in three business lines in our
home state of Iov,/a (up fi'onl one in four last year), and more than one in five busi-
ness lines in our core Illinois markets (up from one in seven in 1996). In the final
quarter of 1997, our expansion states accounted for half our new~ lines sold and
installed, clearly demonstrating our abili~' to w;in customers in new areas through
effective sales, marketing and customer service.
In 1998 w'e will begin reporting business sales in Colorado and Wyoming and
have our sights set on fbur additional states in future years. Analysts estimate the
tclecomnmnications revenue potential in our 14-state area to be $23 billion by the
year 2007.
McLeodUSA 4 Annual Report
Local Service
Customers
13zzsiJw3:~' .Ycm'ic'cs. Nearly 30,000 McLeodUSA business customers rely on us as
their single source t~>r local and long distance service. Businesses want the simplicil3,,
of "one company. one number, one call" telecomnmnications sen,rice. The number
of bnsiness customers served by McLeodUSA in 1997 clinnbed by 141 percent. Our
face-to-face sales approach, our commitment to outstanding customer service, and
our proprietary, dynamic pricing structure held our attrition rate below one percent
-- the best in the industry. Beginning in the Iburth quarter of 1997 and contimfing
into 1998, vvc will continue to emphasize our business segment sales and service as
our primary telecommunications offering.
ResideJHia/N.,r~'ic'{5. By the end of 1996, 4,500 customers had selected our
Prin~clAne" integrated service product for their homes. One year later, that number
reached 63,800, an increase of 1,318 percent. demonstrating the hunger R~r simplicity
and choice.
In 1998, we will concentrate our marketing effbrts R>r PrimeLine service primarily
in four states: Iowa, Illinois, North Dakota and South Dakota. By focusing on
tclccom-intcnsive housd~olds and market penetration rather than geographic
expansion, we believe we can capture customer share, keep churn rates low,
maintain steady growth, and impg~ve operating margins.
Once the elements of tree competition are becoming really% we plan to increase
our investment in residential services by expanding our geography into additional
states where our business market share is well established and our branding strategy
is in place.
l~'rtHtc/h/cHl/O'. Our phone directory publishing subsidiary is one of the largest
non-Bell publishers of white and yellow page phone books in the country. We
157,000
CO
I
· 8~0
95 96 97
"Our customer
count grew 846°A
in 1997, a clear
indication of
demandj~r
simplicity and
choice."
AL RUFFgO
Executive Vice President
Consumer Services
McLeodUSA ~ Annual Report
7 million
95 96 97
"Our average
annual growth fir
this twoSear
period is over
40%. In 1998 we
will print nearly
15 million direc-
tories, an increase
of 50% over
1997."
ART CHRISTOFFERSEN
President
Publishing Company
gained well over one million additional directories in our merger with CCI in
September. Nine of the ten million directories distributed in 1997 canT the
McLeodUSA name, distinctive star and color scheme.
The first few pages of many of the directories serve as an effective product cata-
log, showcasing our telecommunications services. As the books reach homes and
businesses in the communities where we offer phone services, they create awareness
and elevate our credibiliW.
In 1998, we will distribute nearly 15 million directories reaching 26 million peo-
pie, ten percent of the nation's population. We are excited about our success in
attracting new telecorrnnunications customers in areas where our directories are well
established.
/)/S/F[I)II//eH! ,%)'.';/UHI. In 1996, our employee base grew fron~ 400 to 2,000. In
1997, we completed the year with well over 4,500 employees, including more than
1,500 talented individuals from our merger with CCI. About 25 percent of our
employees are dew>ted to sates and marketing activities.
We sell face-to-t~ce to our business customers, hiring professional salespeople
who live and work in those communities. We reach our residential customers by
direct marketing, attracting them to PrimeLine service and the many package options
available.
We finished 1997 wfith 282,600 local lines in service, an increase of 332 percent
R>r the year.
I3[ 'II.1 ) NEq\\,'ORK
We doubled our network miles of fiber optics in 1997 by adding over 2,500
miles. Nearly 900 of those additional miles were acquired in our merger with CCI.
Our year-end total was 4,900 miles and our network now includes six local/long
McLeodUSA 6 Annual Report
Route Miles
distance switches. In 1998, our goal is to add another 1,400 miles, 3 switches, and
build 36 new city rings, all featuring the most reliable, high capacity fiber available,
capable of transporting multiple voice, video and data services to our customers.
%'ll?llt',~/t' led(zti~,~es/~i/~s. x~b continue to benefit from our relationships with our
utility stockholders. They allow us access to their network of poles. ducts and
towers in exchange for their access to our network for internal telecommunications,
meter reading and electricit3,' monitoring. The resttit is a cost-effective fiber network
within and bem:een many of our key cities.
Late in 1997. wc announced a relationship allowing McLeodUSA to provide
dedicated access service to AT&T within 30 Midwestern cities. These second- and
third-tier cities in five states were selected by the two companies to provide a
catalyst fi>r the expansion of intra-city networks f~r McLeodUSA, and lower costs
and better services t~r AT&T. About 20 cities are scheduled fbr installation by the
end of 1998.
.Vc/tt'cH'Z? c'~$l,/llSlCT}'c'cl//~Hl. Our strategy provides three possible ways to reach
()ELF CLIStOIllCrS:
· Via resale through switches and lines leased from the Bell companies.
· Thgmgh "unbundled loops" canTing the local and long distance traffic on our
own network and switches but still using the Bell companies' lines to connect our
network to the customer's home or l>usiness.
· By directly building to homes and businesses.
I)cpcnding on economics and interconnection agreements with the incumbents,
we will use some coml3ination of the three methods to serve customers in the
ftmn-c. In terms of network cost justification, the significant point is that we are
able to select the best alternative in each situation f~r our custonqers.
4,908
218
95 96 97
"lY(~ have
600 network
profissionals
building and
operating our
network and
preparing to
migrate cus-
tOlllet traffiC."
KIRK KAALBERG
Executive Vice Presid
Network Services
McLeodUSA ? Annual Report
Local Lines
282,600
MIGIL~TE C[T~T()MFY6 T() Otq{
This is the important third step in our strategy to~w~rd profitability. McLcodUSA
plans to begin moving long distance traffic to our nem, ork in the second half of
1998, followed by local traffic in 1999 and 2000. Much of 1998 will be devoted to
preparing fhcilities lBr migrating customer calls to our ne~vork. Migration will bring
financial benefits to McLeodUSA. along with greater control to enable continued
excellent se~,'ice. It will also provide digital clari~,. superior reliabiliW, and
advanced fimctionality lk~r our customers.
65,400
35,800
95 96 97
'~14cLeodUSA
now controls
332% more local
lines than a year
ago, due in part
to the merger
with CCL "
RICHARD LUMPKIN
Vice Chairman
Did we accomplish our goals in 19977 Wc believe so. Our progress was
rewarding. but not w'ithout challenges. hnprovements in overall execution will be
our priori~' in 1998. along with these initiatives:
· Continue our succcssful branding strategy through 15 million telephone directories.
· Emphasize building our business line share in ten states, and t~cus residential
penetration in our core markets.
· Add approximately 1,400 more fiber miles to our nem:ork, construct 36 new city
rings, and add 3 switches.
· Begin migrating customers to our network, first with long distance traffic in the
second half of 1998, followed by local traffic beginning in 1999.
McLeodUSA B Annual Report
Total
Revenues
(In thousands)
Many of the challenges of 1997 will continue. Legal, legislative and regulatory
battles will undoubtedly persist. But we have a highly energized and capable team,
with a solid plan, well positioned for growth.
We thank our empk~yecs. oustonsets and shareholders fi3r their continued
confidence. The future holds the excitement of greater promise. We are eager to
achieve that promise.
'~r' .2. ' ·
Chairman of the Board and Chief Executive Officer
Stephen C. Gray (
Prcsictcnt and Chief Operating Officer
$267,886
95 96 97
"Ibtal revenues
increased 229%,
and telecommun
catiolB revellttes
reached $1 74
million in 1997.
BLAKE FISHER
Chief Financial and
Administrative Offtcer
and Treasurer
McLeodUSA 0 Annual Report
I I .
McLF. oDUSA IN(2('~l.~I>Ol~,A'l FD AND SUBSII)IARIES
Financial Section Table of Contents
Selected Consolidated Financial Data .................................................. 11
Management's Discussion and Analysis of Financial Condition and Results of Operations ........... 12
Consolidated Balance Sheets ........................................................ 22
Consolidated Statements of Operations ................................................ 23
Consolidated Statements of Stockholders' Equity ......................................... 24
Consolidated Statements of Cash Flows ................................................ 25
Notes to Consolidated Financial Statements ............................................. 26
Report of Independent Public Accountants .............................................. 42
Dircctors and Executive Manage~nent Team ............................................. 43
McLeodUSA IO Annual Report
l
ii,mJ:
Mc[ Ft~I~U,%A ]N(:t)Rl'ol~',l l.l) ,\NIl ,qUB~IDI,\IHI.'~
Selected Consolidated Financial Data
(/H t/~VtZS,IHdS, eXCept per '/7,H'e d, tttt)
Operations Statement Data:
RCVCI][IC
Operating expenses: Cost of service
Selling, general and administrative
Depreciation and amortization
Other
'Ibtal operating cxpcnscs
Operating loss
Interest income (expense), net
Other income
Income mxcs
Net loss
Loss per Co['lll]loll share
Weighted average Colllrlloll
shares outstanding
Year Ended December 31,
1997': 1996'~ 1995~ 1994 1993
$ 267,886 $ 81,323 $ 28,998 $ 8,014 $ 1,550
155,430 52,624 19,667 6,212 1,528
143,918 46,044 18,054 12,373 2,390
33,275 8,485 1,835 772 235
4,632 2,380 - - ~
337,2~5 109,533 39,556 19,357 4,153
(69,369) (28,210) (10,558) (1,1,343) (2,603)
(11,967) 5,369 (771) (73) 163
1,426 495 - - -
$ (79,910) $ (22,346) $ (11,329) $(11,416) S (2,440)
$ (1.45) $ (.55) $ (.40) $ (.53) $ (.17)
54,974 40,506 28,004 21,464 14,761
Balance Sheet Data: Current assets
Working capital (deficit)
Property and equipment, net
]btal assets
Long-term dcbt
Stockholders' equip,
December 31,
1997" 1996" 1995' 1994 1993
517,869 $ 224,401 $ 8,507 $ 4,862 $ 7,077
378,617 $ 185,968 $ (1,208) $ 1,659 $ 5,962
373,8(}4 $ 92,123 $ 16,119 $ 4,716 S 1,958
$1,345,6$2 $ 452,994 $ 28,986 $ 10,687 $ 9,051
613,384 $ 2,573 S 3,600 $ 3,500 -
559,379 $ 403,429 $ 14,958 $ 3,291 $ 7,936
Other Financial Data:
Capital cxpcnditurcs, including acquisitions
EBITDA"
Year Ended Dcccmbcr31,
1997"' 1996''~ 1995' 1994 1993
601,137 $ 173,782 $ 14,697 $ 3,393 $ 2,052
(31,462) $ (17,345) $ (8,723) $ (10,571) $ (2,368)
l'hc a~quisiti. I~ of M~'R, Ruf}hlo (2t,dy, Md.codUSA I~ublisl~ittg attd CCI in April
1 ')')5, Jub I qg~, Scptcml~cr 1996 and Scptcml~cr 1997, respectively, af}i'ct r}nc ~, ,m-
parability ,,t'lhc bi~tc}rical data prc~cntcd m lhc historical data tbr prior periods shown.
h~ch~dc~ opcrationN of [ 2( ;I f~, ,m September 25, 1997 t,) l )cccmbcr 31, 1997.
Includc~ opcration~ of Rt~fiMo t ]~dv fi'on~ ]tdy I6, 1996 m December 31, 1996 and
operation, of Mcl codUSA Publishing flora September 21. 1990 to December 31.
h~dudcN ( ~( 2I, x~hid~ xv,th .kqui~cd by the (2ompany on September 24, 14~)7.
Includes Ruflido (2odv and Mcl.c,~dUSA Publislting, whiclt wcrc acquired bv the
(2on~pany on july 15, 1996 and September 20, 1496. respectively.
EB[I'DA consist~ ,flopcrating It~ss bdbrc depreciation, amortization and other nonre
cutting operating expenses. The Company Ina~ included EBH'DA data because it is a
measure commonly used in tbc industry. EBIT[ )A i~ not a measure of financial per-
Ibrmancc under generally accepted accounting principles and should not bc considered
an alternative to I/ct inc{,mc as a ~nGtsurc of performance or to cash flows as a measure
of liquidity.
McLeodUSA ]1 Annual Report
IV[¢~I.I.I~DLJSA IN(~tlRI,¢~R~.III) \ND 5;tlI~$1I~lAl~,lt,~,
Management's Discussion and Analysis of Financial Condition and Results of Operations
The fidlowing discussio~ and analysis should be read in conjunction with the C~mtpany~ Consolidated Financial
Statements and the notes thereto and the otherfin,racial data appearing elsewhere in this Annual Report.
Overview
The Company derives its revenue from (i) the sale of "bundled" local and long distance telecommunications services
to end users, (ii) telccommunications network maintenance services and telephone equipment sales, service and instal-
lation, (iii) special access, private line and data services, (iv) the sale of advertising space in telephone directories, (v)
local exchange services through the operation of an independent local exchange company, Illinois Consolidated
Telephone Company CICTC"), acquired as part of the acquisition of CCI in September 1997 (the "CCI
Acquisition"), (vi) tclemarkcting services and (vii) other telecommunications services, including ccllular, operator, pay-
phone and paging services. The Company began providing local exchange services and other telecommunication ser-
vices as a rcsult of the CCI Acquisition in September 1997, telephone directory advertising as a result of its acquisi*
tion of Telecom*USA Publishing Group, Inc., now known as McLeodUSA Media Group, Inc. CMcLeodUSA
Ptphlishing") in September 1996, and tclemarketing services as a result of its acquisition of Ruffalo, Cody & Associates,
h~.': CRuff~alo Cody") in July 1996. The table set forth below summarizes the Company's percentage of revenues from
th'_/se sour.eel: -: I,:'-2
~ILocal .~n~.. long distance telecommunications services
· ICqetCg0r-k:maintcnance and equipment services
g~Specia~cess, private line and data services
Telephone directory advertising
Local exchange services (ICTC)
Telemarketing services
Other telecommunications services
Year Ended December 31,
1997' 1996 1995
41% 51% 74°A~
8 7 17
6 13 9
30 19
5 10
100% 100% 100%
' hlcludes revenues t~om (ZCI t~om Septembcr 2%, I~ 97 through t)ecember 31. 1997.
The Company began offering "bundled" local and long distance services to business customers in January 1994. At
the end of 1995, the Company began offering, on a test basis, long distance services to residential customers. In June
1996, the Company began marketing and providing to residential customers in Cedar Rapids, Iowa and Iowa City,
Iowa an integrated package of telccommunications services, marketed under the name PrimeLine'% that includes local
and long distance service, voice mail, paging, lntcrnct access and travel card services. During 1997, the Company
expanded the states in which it o~crs service to bnsiness customers to include Iowa, Illinois, Indiana, Minnesota,
Wisconsin, North Dakota, South Dakota, Colorado and Wyoming. During 1997, the Company also expanded its
PrimeLine'"' service to certain additional cities in Iowa and Illinois and began offering the service to customers in North
Dakota, South Dakota, Wisconsin and Colorado. The Company plans to continue its efforts to market and provide
local, long distance and other telecommunications services to business customers and market its PrimeLine'"' service to
residential customers. The Company believes its cffbrts to market its integrated tclecommunications services have
been enhanced by its Julv 1996 acquisition of Ruffalo Cody, which specializes in direct marketing and telemarketing
services, including tclecommunications sales: its September 1996 acquisition of McLcodUSA Publishing, which pub-
lishes and distributes competitive "white page" and "yellow page" telephone directories in nineteen states in the mid-
western and Rocky Mountain regions of the United States, including most of the Company's target markets; and its
September 1997 acquisition of CCI, including its subsidiary Consolidated Communications Directories Inc.
CCCD'), which publishes and distributes "white page" and "ycllow page" telephone directories in 38 states and the
United States Virgin Islands.
McLeodUSA ~ annual Report
Mi~I,t:t~DUSA IN<?(~l~,l~t)l.~A[ I:D AND StII~,'~II~IAI',IPs
In September 1997, the Company completed the CCI Acquisition. For the period from January 1, 1997 tl~rough
September 24, 1997, CC1 had revenucs of $194.3 million and net income of $5.6 million. As a result of the CCI
Acquisition, the Company now owns all of the former CCI subsidiaries, including ICTC, an independent local
exchange carrier which was serving over 89,000 access lines in east central Illinois as of Decembcr 31, 1997:
Consolidated Comn~unications Tclccom Scrviccs Inc. CCCTS"), a competitive local cxchange carrier which was offer-
ing integrated local, long distance and other tclccommunications seNices to over 6,700 customers in central and
southern lllinois and in Indiana as of December 31, 1997; CCD, a telephone directory company that as of December
31, 1997 was publishing and distributing over 4 million competitive annual "white page" and "yellow page" telephone
directories; an operator service company; an inmate pay-phone company; a fhll seNice telemarkcting agency; a major-
ity interest in a cable television company serving customers in Greene, Sangamon and Mcnard counties in Illinois and
Benton Harbor, Michigan; and a minority interest in a cellular telephone partnership serving parts of east central
lllinois. The (Zompany believes the CCI Acquisition ~vill allo~v it to enhance its effbrts to of}~r its tclccommunica-
tions services in adjoining target markets including expansion into Indiana and Missouri, states where CC1 provided
tclccommunications services.
The Company's principal operating expenses consist of cost of seaice; selling, general and administrative expenses
("SG&A"); and dcprcciation and amortization. Cost of service primarily includes local seaices purchased f~om uvo
Regional Bell Operating Cornpanics, costs to terminate the long distance calls of the Company's customers throngh
interexchange carriers, costs of printing and distributing the telephone directories published by McLeodUSA
l~nblishing and CCD, costs associated with maintaining the Iowa Communications Network and costs associated with
operating the Company's nc~ork. The Iowa (2ommunications Network is a fiber optic network that links certain of
the State of Iowa's schools, libraries and other public buildings. SG&A consists of sales and marketing, customer ser-
vice and administrative expenses. Depreciation and amortization include depreciation of the Company's telecommu-
nications ne~ork and equipment: amortization of goodwill and other intangibles related to the Company's acquisi-
tinns, amortization cxpcnse related to the excess of estimated fair market value in aggregate of certain options over the
aggregate exercise price of such options granted to certain officers, other employees and directors; and amortizatiou of
nnc-timc installation costs associated with transferring customers' local line service gore thc Regional Bell Operating
Companies to the Company's local tclecommunications service.
As the Company expands into new markets, both cost of service and SG&A will increase. The Company expects
to incur cost of service and SG&A expcnscs prior to achieving significant revenues in new markets. Fixed costs relat-
ed to leasing of central office facilities needed to provide telephone services must bc incurred prior to generating rev-
cnuc in new markets, whilc signiricant levels of marketing activity may be necessary in the new markets in order fBr
the Company to build a customer base large enough to generate sufficient revenue to offset such fixed costs and mar-
kcting expenses.
In January and February 1996, the Company granted options to purchase an aggregate of 965,166 and 688,502
shares of its Class A Conm~on Stock, respectively, at an exercisc price of $2.67 per share, to certain directors, ofricers
and other employees. The estimated fair market value of these options, in the aggregate, at the date of grant was later
determined to exceed the aggregate exercise price by approximately $9.2 million. Additionally, in September 1997,
the Company granted options to purchase an aggregate of 1,468,945 shares of its Class A Common Stock at an exer-
cise price of $24.50 to certain employees of CCI. The fhir market value of these options, in the aggregate, at the date
of grant exceeded the aggregate exercise price by approximatdy $15.8 million. These amounts are being amortized on
a monthly basis over the flint-year vesting period of the options.
The Company has experienced operating losses since its inception as a result of efforts to build its customer base,
develop and construct its network infrastructure, build its internal stafring, develop its systems and expand into new
markets. The Company expects to continue to ~cus on increasing its customer base and geographic coverage,
Accordingly, the Con~pany expects that its cost of service, SG&A and capital expenditures will continue to increase
significantly, all of which may have a negative impact on operating results. As a result of the CCI Acquisition, the
Company anticipates a reduction in operating losses and the generation of positivc cash flows from op~ions
fhturc. The anticipated financial benefits t~om thc CCI Acquisition are "forward-looking statcmcn~5~thi~'-~he
meaning of the I'rivate Securities Litigation Refbrm Act of 1995. The financial benefits the Compan.~-'W]!l actually
McLeodUSA ~3 Annual Report
N'I<7[.I.t>I~USA IN< t~RI'~R.\I'I:I) ANI) S( l~h[l)IAl([l N
derive fi'om the C(2I Acquisition may difl~r materially as a result of a variety of factors, including technological, rcg-
ulatory or other developments in the Company's business, the difficulty of assimilating CCI's opcrations and person-
nel, the possible inability of management to maximize the financial and strategic position of the Company through
successful incorporation of CCI into the Company's operations, and the risks of entering markets in ~vhich the
Company has little or no direct prior experience. In addition, the projected increases in capital expenditures will con-
tinuc to generate negative cash flows f~om construction activities during the ncxt several years while the Company
installs and expands its fiber optic network and develops and constructs its proposed PCS system. The Company may
also be ~rced to change its pricing policies to respond to a changing competitive environment, and there can be no
assurance that the Company will bc able to maintain its operating margin. Thcrc can bc no assurance that growth in
the Con~pany's revenue or customer base will continue or that the Company will be able to achieve or sustain
profitability or positive cash flows.
The Company has generated net operating losses since its inception and, accordingly, has incurred no income tax
expense. 'Fhc Company has reduced the net deferred tax assets generated by these losses by a valuation allowance
which of'f~cts the net def~:rred tax assct due to the uncertainty of realizing the benefit of the tax loss carryforwards. The
Company will reduce the valuation allowance when, based on the weight of available cvidencc, it is more likely than
not that some portion or all of the dcfi:rred tax assets will be realized.
Year Ended i 997 Compared with Year Ended 1996
gcvcnuc ~w~s $267.9 million for the year ended December 31, 1997, an increase of $186.6 million or 229% f~om
$81.3 million fi>r 1996. This increase ~vas duc to the many acquisitions completed in 1997 and 1996 as well as the
increase in local and long distance customers. Revenue from the sale of local and long distance tclecommunications
services accounted fbr 568.6 million of the increase, including $23.1 million contributed by CCI f~om September 25,
1997 to December 31, 1997. Local exchange services generated by ICTC represented $16.1 million for the period
f~om September 25, 1997 to December 31, 1997, ~r which there were no corresponding 1996 revenues. Private line
and data revenues accounted f~r $6.9 million of increased revenues over 1996 ~vhich was primarily attributable to the
CCI Acquisition. Network maintenance and equipmcnt revenue increased $ l 5.0 million over 1996 due to the acqui-
sitions of Digital Comn~unications of Iowa, Inc. ("Digital Communications"), ESI Communications, Inc. CESI
Communications") and CCI. Other telecommunications revenue, which ~vas due entirely to the CCI Acquisition,
represented 59.9 million of 1997 rcvenucs with no corresponding 1996 amount. Directory revenues increased $65.9
n~illion f~om 1996 to 1997 and were due to a full year of McLcodUSA Publishing revenues in 1997 and the acquisi-
ti<m of C(2D on September 24, 1997. The increase in tclemarketing revenncs from 1996 to 1997 of $4.1 million was
duc almost entirely to the (2C1 Acquisition.
Cost of service increased from $52.6 million fi~r the year ended December 31, 1996 to $155.4 million ~r the year
ended December 31, 1997, representing an increase of $1{)2.8 million or 195{~}. This increase in cost of service was
due primarily to the growth in the Company's local and long distance telccommunicarions services and to the acqui-
sitions of RuffSrio Cody, Md.codUSA Publishing, Digital Communications, ES1 Communications and CCI, which
contributed an aggregate of $62.2 million to the increase. Cost of service as a percentage of revenue decreased f}om
65?/0 f~r the year ended December 31, 1996 to 58~6 fbr the year ended December 31, 1997, primarily as a result of
the eftbet of these acquisitions. The cost of providing local and long distance services as a percentage of local and long
distance tclccomn~unications revenue increased from 70{~ fbr the year ended December 3 l, 1996 to 73t~ fbr the year
ended December 31, 1997, primarily as a result of increased line costs associated ~vith the Company's accelerated
expansion into new markets.
SG&A increased from $46 million fi~r the year cnded December 31, 1996 to $143.9 million ~r the year ended
Dcccmbcr 31, 1997, an increase of $97.9 million or 213%. The acquisitions of Ruffalo Cody, McLcodUSA
P~lishing, I)igital Comn~unications, ES[ Communications and CCI contributed an aggregate of $54.3 million to
t~qncrcasS'~_ Also contributing to this increase wcrc increased costs of $43,6 million primarily related to expansion of
s~ing~ c~t~mer support and administration activities to support the Company's growth.
McLeodUSA ]4 Annual Report
Depreciation and amortization expenses increased f}om $8.5 million for the year ended December 31, 1996 to
$33.3 million fbr the year ended December 3 I, 1997, representing an increase of $24.8 million or 292%. The increase
was primarily duc to $14.3 million related ro the acquisitions of Ruffhlo Cody, McLeodUSA Publishing, Digital
Comnmnications, ESI Comnaunications and CCI, and $3.8 million due primarily to the growth of the Company's
network in 1997.
Other operating expenses in 1997 represented thc realization of a purchase accounting adiusttnent related to the cap-
italization of costs associated with McLcodUSA Publishing and CCD directories in progress at the time of the acqui-
sitions.
Interest income increased from $6 million for rhc year ended December 31, 1996 to $22.7 million fbr the Far
ended December 31, 1997. This increase resuhed f~om increased earnings on investments made with a portion of the
proceeds from the Company's offerings of Class A Common Stock in June and November 1996 and f~om the private
offbrings of the $500 million aggregate principal amount at maturity 10Z°A~ Senior Discount Notes due March 1,2007
(the "Senior Discount Notes"), and the $225 million aggregate principal amount at maturity 9N~F0 Senior Notes due
July 15, 2007 (the "Senior Notes") in March 1997 and July 1997, respectivel>~
Gross interest expense increased from $869,000 fbr the year ended December 31, 1996 to $39. l million fbr the year
ended December 31, 1997. This increase was primarily a result of accretion of interest on the Senior Discount Notes
of $26.8 million and accrual of interest on the Senior Notes of $9.5 million. Interest expense of appg~ximately $4.4
million and $204,000 was capitalized as part of the Company's construction of fiber optic network during the years
ended December 31, 1997 and 1996, respectively.
Net loss increased f~on~ S22.3 rot/lion fi~r the year ended December 31, 1996 to $79.9 million fbr the Far euded
December 31, 1997, an increase of $57.6 million. This increase resulted primarily f~om the following three factors:
the construction and cxpansion of the Company's ne~ork which require significant expenditures, a substantial por-
tion of which is incur~vd before the realization of revenues; the increased depreciation expense related to those net-
works and amortization of intangibles related to acquisitions~ and net interest expense on indebtedness to fhnd mar-
ket expansion, network development and acquisitions.
Operating loss bcf~>re depreciation, amorfi'zation and other non-recurring operating expenses increased from a neg-
ative $17.3 million for rhc year ended December 31, 1996 to a negative $31.5 naillion fbr the year ended December
31, 1997, an increase of $14.2 million. The change reflected the increase in the operating loss incurred in 1997 due
primarily m the expansion of the Company's local, long distance and other telccommunications services as described
above.
Year Ended 1996 Compared with Year Ended 1995
Revenue increased f~'om $29 naillion fbr the year ended December 31, 1995 to $81.3 million fbr the year ended
December 31, 1996, representing an increase of $52.3 million or 180%. Revenue f~om the sale of local and long dis-
tance tclccommunications services accounted fbr $19.9 milliou of this increase. Included in the year ended December
31, 1996 revenue was $8.6 million of revenue ~on3 Ruf~alo Cod~q which was acquired on July 15, 1996, and $
million in revenue f~om McLeodUSA Publishing, which was acquired on September 20, 1996. Excluding these acqui-
sitions, 1996 revenue would have been $57.6 naillion.
Cost of service increased i~om $19.7 million ~br the year ended December 31, 1995 m $52.6 million ibr the year
ended December 31, 1996. an increase of $32.9 million or 168~Yb. This increase in cost of service was due primarily
:o the growth in the Company's local and long distance telecommunications sob'ices and to rl~c acquisitions of Ruffhlo
2ody and McLeodUSA I~ublishing, which contributed $4.5 million and $6.7 million, respectively, to the increase.
f - - t.o -
Zost of service as a percentage of revenue decreased f~om 68%% to 65%, primarily as a resttit o the cfkcL~~ these
itions. The cost of providing local and brag-distance services as a percentage of local and long distalfe'~ tcleco~nu-
~ications revenue increased f~om 68~N~ tbr the year ended December 31, 1995 to 70% fbr the veer ct~Dec~ber
.1, 1996, primarily as a result of an increased numbcr of higher vohm~e, price-sensitive customers and'.~qcreasedqoca[:
nc costs associated with expansion into new markets. ~... "' c~l .
7~. -~ -,~
MckeodUSA 15 Annual Report
SG&A increased fi-om $18.1 million fi~r the 5,ear ended December 31, 1995 to $46 million for the year ended
December 31, 1996, an increase of S27.9 million or 155%. The acquisitions of RufGlo Cody and McLeodUSA
Publishing contributed $3.3 million and $7.3 million, respectiveb~ to the increase. Increased costs of $17.3 million
related to expansion of selling, customer support and administration activities to support the Company's growth also
contributed to this incrcasc.
Depreciation and amortization expenses increased f~om $1.8 million f~r the year ended December 31, 1995 to $8.5
million fi~r the ycar cndcd December 31, 1996, an increase of $6.7 million or 362%. This increase consisted of $2.1
million related to the acquisitions of Rnf~Mo Cody and McLeodUSA Publishing; amortization expense of $2 million
related to the excess of estimated aggregate fair market value of certain options over the aggregate exercise price of such
options granted to certain officers, other employees, and directors; and $2.6 million due primarily to the growth of
the Company's network in 1996.
Other operating expense in 1996 represented the realization of a purchase accounting adjustment related to the cap-
italization of costs associated with directories in progress at the time the Company acquired McLeodUSA Publishing.
The Company had net interest income of $5.4 million for the year ended December 31, 1996 compared to net
interest expense of $771,000 fi>r the year ended December 31, 1995 as a result of earnings on investments made with
a portion of the proceeds of the Company's public offerings of Class A Common Stock during 1996 and decreased
interest expense on reduced borro~vings as a result of the Company's repayment of all amounts outstanding under a
bank credit facility maintained by the Company f~om May 1994 until June 1996 (the "Credit Facility") with a por-
tion of the net proceeds from the Company's initial public offering of Class A Common Stock. The Company also
had other non-operating income of $495,000 f~r the year ended December 31, 1996.
Net loss increased f~om $11.3 million fi3r the year ended December 31, 1995 to $22.3 million for the year ended
December 31, 1996, an increase of $1 l million. This increase resulted primarily from the expansion of the local and
long distance businesses, amortization and other operating expenses related to the acquisitions of Ruffalo Cody and
McLcodUSA Publishing and amortization expense related to stock options granted to certain officers, other employ-
ees and directors. The development of the Company's business and the construction and expansion of its ne~ork
require significant expenditures, a substantial portion of which is incurred before the realization of revenues.
~pcrating loss bc[i~rc depreciation, amortization and other non-recurring operating expenses increased from a ncg-
at4ee $8.7 j~llion ~r the year ended December 31, 1995 to a negative $17.3 million for the year ended December
3~-1996, a~ increase of $8.6 million. The change reflected the increase in the operating loss incurred in 1996 due
[TriJnarily ~' the expansion of the Company's local, long distance and other telccommunications seaices and the fac-
~ dcsC~'d above.
~Year ~'fi~a 1995 Compared with Year Ended 1994
<~, Rcvcn~ increased from $8 million in 1994 to $29 million in 1995, representing an increase of $21 million or
262'M}. Revenue f~om the increase in the sale of local and long distance telecommunications seaices accounted for
$16.9 n~illion of this increase. Revenue f~om tclccon~munications ne~ork maintenance services was $4.9 million in
1995 The Con~pany acquired MWR %lecom, Inc. CMWR"), a competitive access provider that offers most of the
Cou~pany's special access and private line services, in April 1995 in an acquisition accounted for as a purchase. MWR
represented $1.6 million of the Company's revenue in 1995.
Cost of service increased from $6.2 million in 1994 to $19.7 million in 1995, an increase of $13.5 million or 217%.
This increase in cost of service resulted primarily ffon~ costs ~r providing local and long distance services. Cost of ser-
vice as a percentage of revenue decreased from 78% in 1994 to 68% in 1995, principally as a result of certain
ccononlics of scale.
SG&A increased fi'om $12.4 million in 1994 to $18.1 million in 1995, an increase of $5.7 million or 46%. This
increase was duc to increased compensation resulting f~otn selling and customer support activities of $2.8 million,
additional administrative personnel expense of $1.6 million and associated costs of $1.3 million required to handle the
gro~vth experienced primarily in local and long distance revenues.
McLeodUSA 16 Annual Report
Dcprcciation and amortization expenscs increased from $772,000 in 1994 to $1.8 million in 1995, an increase of
$1 million or 138%. This increase consisted of depreciation of $362,000 related to the additinnal fiber optic network
purchased and built during 1995:$304,000 of depreciation rclated to capital costs associated with the gro~vth of the
Company; $266,01)0 resulting from the amortization of one-time installation costs primarily associated with transfL~r-
ring customcrs' local line service from the Regional Bell Operating Companies to the Company's tclemanagemcnt ser-
vicc; and amortization of goodwill of $117,000 related to the Company's acquisition of MWR in 1995.
Net interest expense increased from $73,000 in 1994 to $771,000 in 1995. This net increase resulted from an
increase in interest expense nf $692,000 due to the need for additional secured debt in 1995 to fund the Company's
growth and operating losses and a decrease in intercst income of $6,000 resulting from reduced investment of fimds
dne to tbc use of fi. mds necded tn satisfy working capital needs.
The Company's net loss decreased from $11.4 million in 1994 to $l 1.3 million in 1995, a &crease of $87,000.
This decrease resulted from the ability of the Company to gcnerate additional service income while reducing customer
acquisition and support costs as a percentage of service income.
Operating loss bcf~re depreciation, amortization and other non-recurring operating expenses improved from a neg-
ative $10.6 million in 1994 to a negative $8.7 million in 1995, an improvement of $1.9 million. The improvement
rc~cctcd the dccrcasc in the net loss and the increase in depreciation and amortization in 1995 resulting from the cap-
ita[ expenditures necessary to support the Company's revenue growth.
Liquidit), and Capital Resources
The Company's total assets increased from $453 million at December 31, 1996 to $1.3 billion at December 31,
1997, primarily due to the net proceeds of approximately $506.6 million f~om the Company's private offerings of the
Senior Discount Notes and the Senior Notes in March 1997 and July 1997, respectively, and the acquisition oF CCI
in September 1997. At December 31, 1997, the Company's current assets of $517.9 million exceeded its current lia-
bilities of $139.3 million, providing ~vorking capital of $378.6 millinn, ~vhich represents an increasc of $192.6 mil-
lion compared to December 31, 1996 primarily attributable to the net proceeds f~om the private of'f~rings of the
Senior Discount Notes and the Senior Notes. At Deccmbcr 31, 1996, the Company's current assets of $224.4 mil-
lion exceeded current liabilities of $38.4 million, providing working capital of $186 million.
Net cash used in operating activities totaled $8.8 million fbr the year ended December 31, 1997 and $11.8 million
}~}r the year ended December 31, 1996. During the year ended December 31, 1997, cash for operating activities was
used primarily to [hnd the Company's net loss of $79.9 million for such period. The Company also required cash to
f~md the growth in accounts receivable and dd~rred line installation costs of $15.9 million and $9.7 million, respec-
tively, as a rcsnlt of the expansion of the Con~pany's local and long distance telecommunications services, offset by
increases in accounts payable and accrued expenses of $27. l million, ddbrred revenues nf $7.2 million and customer
dcpnsits of $3 million. During tbe year cndcd December 31, 1996, cash for operating activities was used primarily to
fhnd the Company's net loss of $22.3 million for such period. The Company also required cash to fired the growth
in trade receivables of $9.3 million offset by an increase in ddbrred revenue of $9.5 million.
Net cash used in investing activities totaled $242.8 million during the year ended December 31. 1997 and $283.1
million during the year ended December 31, 1996. The expansion of the Company's local and long distance tclecom-
munications services, development and construction of the Company's fiber optic telecon~munications nem'orks and
nthcr capital expenditures resulted in purchases of equipment and fiber optic cable and othcr property and equipment
totaling $151.3 million and $70.3 million during the years ended December 31, 1997 and 1996, respectively.
In April and June 1997, the FCC granted the Company 26 ~'D" and "E" block frequency PCS licensestUd in
September 1997 the Company acquired one additional "E" block f~cqucncy PCS license as a r~lt of t~o CCI
Acquisition (the "CC[ PCS IAcensc"), giving the Company 27 PCS licenses in a total of 25 markets Z~ing~as 0f
Iowa, Illinois, Minnesota, Nebraska and South Daknta. The Company paid the FCC an aggregate
$32.8 million tk,r the 26 PCS licenses granted to the Company by the FCC in April and June 19975Z~%e Cdbppany:
McLeodUSA ~ Annual Report
made a deposit of $4.8 million with the FCC at the beginning of the bidding process in 1996 and paid approximate-
ly $28 million during 1997 for the 26 PCS licenses. CCI paid the FCC for the CCI PCS License prior to the CCI
Acquisition. The Company will be required to make significant additional expenditures to develop, construct and
operate a PCS system.
The Company used cash of $23.5 million to acquire substantially all of the assets of ESI Communications and relat-
ed entities in June 1997 and certain telcphone dircctorics published by Fronteer Financial Holdings, Inc., Indiana
Directories, Inc., Smart Pages Inc. and Yellow Pages Publishers, Inc. in February 1997, March 1997, Scptcmbcr 1997
and September 1997, respectively.
On September 24, 1997, the Company issued an aggregate of 8,488,586 shares of Class A Common Stock and paid
approximately $155 million in cash to thc shareholders of CCI in exchange for all of the outstanding shares of CCI
in a transaction accounted fbr using thc purchase method of accounting. The total purchase price was approximate-
ly $382.1 million based on the average closing sales price of the Class A Common Stock on The Nasdaq National
Market five days before and after the date of the Merger Agreement. The total purchase price includes approximate-
Iv $3.4 million of estimated direct acquisition costs.
These uses of cash from investing activities during the year ended December 31, 1997 were partially offset by net pro-
ceeds of$120.2 million from the sales and maturities of available for sale securities.
Net cash received from financing activities was $487 million during the ycar ended December 31, 1997, primarily
as a result of the Company's private offerings of the Senior Discount Notes in March 1997 and the Senior Notes in
July 1997. Cash received from financing activities during the year ended December 31, 1996 was $391.4 million and
was primarily obtained from the Company's public offerings of Class A Common Stock in June and November 1996.
The Company paid off and canceled the Credit Facility in June 1996 with a portion of the proceeds from its initial
public offering.
On March 4, 1997, the Company completed a private offering of the Senior Discount Notes. The Senior Discount
Notes were issued at an original issue discount in which the Company received approximately $288.9 million in net
proceeds. All of the Senior Discount Notes were exchanged for $500 naillion aggregate principal amount at maturity
10 1/2 % Senior Discount Notes due March 1, 2007 (the "Senior Discount Exchange Notes") pursuant to an exchange
offer which expired on August 24, 1997. The form and terms of the Senior Discount Exchange Notes are identical
in all material respects to the form and terms of the Senior Discount Notes except that (i) the Senior Discount
Exchange Notes have been registered under the Securities Act and (ii) holders of the Senior Discount Exchange Notes
are not entitled to certain rights under a registration agreement relating to the Senior Discount Notes. The Senior
Discount Exchange Notes accrctc from March 4, 1997 at a rate of 10Z% per year, compounded semi-annually to an
aggregate principal amount of $500 million by March 1,2002. As of December 31, 1997, the accreted balance of the
Senior Discount Exchange Notes was $326.8 million. Interest will not accrue on the Senior Discount Exchange Notes
prior to March 1,2002. Thereafter, interest will accrue at a rate of 10% per annum and will be payable in cash scmi*
annually in arrears on March I and September 1 of each year, commencing September 1, 2002. The Senior Discount
Exchange Notes arc redeemable, at the option of the Company, in whole or in part, at any time on or after March 1,
2002, at 105.25 % of their principal amount at maturity, plus accrued and unpaid interest, declining to 100% of their
principal amount at maturity plus accrued and unpaid jutcrest, on or after March l, 2005. In the event of certain
equity investments in the Company by certain strategic investors on or before March 1, 2000, the Company may at
its option, use all or a portion of the net proceeds thetel}ore to redeem up to a maximum of 33X% of the original
principal amount of the Senior Discount Exchange Notes at a redemption price of 110.5% of the acefeted value there-
of. In addition, in the event of a Change of Control (as defined in the indenture governing the Senior Discount
Exchange Notes (the "Senior Discount Note Indenture")) of the Company, each holder of Senior Discount Exchange
Notes will have the right to require the Company to repurchase all or any part of such holdcr's Senior Discount
Exchange Notes at a purchase price equal to 101% of the accrcted value thereof prior to March 1, 2002, or 101% of
the principal amount thereof plus accrued and unpaid interest, if any, on or after March 1, 2002. The Senior Discount
Exchange Notes will nmature on March 1, 2007.
0n July 21, 1997, the company completed a private offering of the Senior Notes in which thc Company received
net proceeds of approximately $217.7 million. All of the Senior Notes were exchanged for $225 million aggregate
McLeodUSA Annual Report
principal amount at maturity 9Z% Senior Notes duc July 15, 2007 (the "Senior Exchange Notes") pursuant to an
exchange offer which expired on January 9, 1998. The form and terms of the Senior Exchange Notes are identical in
all material respects to the form and terms of the Senior Notes except that (i) the Senior Exchange Notes have been
registered under the Securities Act and (ii) holders of the Senior Exchange Notes are not entitled to certain rights under
a registration agreement relating to the Senior Notes. Interest on the Senior Exchange Notes accrues at the rate of
9 1/4% per annum and is payable in cash semi-annually in arrears on July 15 and January l 5, commencing January 15,
1998. The Senior Exchange Nogcs arc redeemable at the option of the Company, in whole or in part, at any time on
or after July 15, 2002 at 104.625% of their principal amount at maturity, plus accrued and unpaid interest, declining
to 100.000% of their principal amount at maturity; plus accrued and unpaid interest, on or after July 15, 2005. In
the event of certain equity investments in the Company by certain strategic investors on or before July 15, 2000, the
Company ma); at its option, use all or a portion of the net proceeds fi'om such sale to redeem up to 33Z% of the orig-
inal principal amount of rhc Senior Exchange Noges at a redemption price equal to 109.25 % of the principal amount
of the Senior Exchange Notes plus accrued and unpaid interest thereon, if any, to but excluding the redemption date,
provided that at least 66 2/3% of the original principal amount of the Senior Exchange Notes would remain outstand-
ing immediately after giving effect to such redemption. In addition, in the event of a Change of Control (as defined
in the indenture governing the Senior Exchange Notes (the "Senior Note Indenture") of the Cornpany; each holder
of Senior Exchange Notes shall have the right to require the Company to repurchase all or any part of such holder's
Senior Exchange Notes at a purchase price equal to 101% of the principal amount of the Senior Exchange Notes ten-
dered by such holder plus accrued and unpaid interest, if any, to any Change of Control Payment Date (as defined in
the Senior Note Indenture). The Senior Exchange Notes will mature on July 15, 2007.
The Senior Discount Exchange Notes and the Senior Exchange Notes are senior unsecurcd obligations of the
Company ranking pari passu in right of payment with all other existing and future senior unsecured obligations of the
(Company and senior to all existing and future subordinated debt of the Company. The Senior Discount Exchange
Notes and the Senior Exchange Notes arc effectively subordinated to all existing and future secured indebtedness of
the Company and its subsidiaries to the extent of the value of the assets securing such indebtedness. The Senior
Discount Exchange Notes and the Senior Exchange Notes also are effectivley subordinated to all existing and future
third-party indebtedness and other liabilities of the Company's subsidiaries.
The Senior Discount Note Indenture and the Senior Note Indenture impose operating and financial restrictions on
the Company and its subsidiaries. These restrictions affect, and in certain cases significantly limit or prohibit, among
other things, the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends or make
distributions in respect of the Company's or such subsidiaries' capital stock, redeem capital stock, make other restrict-
ed payments, enter into sale and leaseback transactions, create liens upon assets, enter into transactions with affiliates
or related persons, sell assets, or consolidate, merge or sell all or substantially all of their assets. There can be no assur-
ance that such covenants will not adversely affect the Company's ability to finance its future operations or capital needs
or to engage in other business activities that may be in the interests of the Company
As of December 3 l, 1997, the Company estimates that its aggregate capital requirements for 1998, 1999 and 200{)
will be approximately $750 million. The Company's estimated capital requirements include the estimated cost of (i)
developing and constructing its fiber optic network, which in the fhture is expected to include the expansion of intra-
city fiber networks, (ii) market expansion activities, (iii) developing, constructing and operating a PCS system and (iv)
completing construction of its new corporate headquarters and associated buildings. These capital requirements are
expected to be funded, in large part, out of the approximately $217.7 million in net proceeds from the issuance of the
Senior Notes, approximately $148.9 million in net proceeds remaining from the issuance of the Senior Discount
Notes, additional debt and equity issuances and lease payments to the Company for portions of the Company's net-
works.
The Company may require additional capital in the future for business activities related to those specified and
also for acquisitions, joint ventures and strategic alliances, as well as to fund operating deficits and net losses. These
activities cotrid require significant additional capital not included in the foregoing estimated aggregate capital requirements ("7 -- ' ~ ~"~
McLeodUSA 19 Annual Report
N4cI,I. oI~LINA IN{iORP~RAI FD ANI~ StIBNII~IAR[I.S
The Company's estimate of its future capital requirements is a "forward-looking statement" within the meaning of
the saf;: harbor provisions of the Private Securitics Litigation Refbrm Act of 1995. Thc Company's actual capital
requirements may differ materially as a result of regulatory, technological and competitive developments (including
new opporttmities) in the Company's industry.
The Company expects to meet its additional capital needs with the proceeds from credit facilities and other bor-
rowings, and additional debt and equity issuances. As of the date hereof, the Company is negotiating with a major
bank to obtain one or more syndicated credit facilitics. There can be no assurance, however, that the Company will
be successfull in obtaining such credit facilities on terms acceptable to the Company or at all, or that the Company will
otherwise bc successful in producing sufficient cash flows or raising sufficient debt or equity capital to meet its strate-
gic objectives, or that such funds, if available at all, will be available on a timely basis or on terms that are acceptable
to the Company. Failure to generate or raise sufficient funds may require the Company to delay or abandon some of
its future expansion plans or expenditures, which could have a material adverse effect on the Company. See "Business-
Risk Factors-Significant Capital Requirements."
Market Risk
At December 31, 1997, marketable equity securities of the Company are recorded at fair value of $27.5 million.
The marketable equity securities held by the Company have exposure to price risk. A hypothetical ten percent adverse
change in quoted market prices would amount to a decrease in the recorded value of investments of approximately
$2.8 million. The Company believes its exposure to market rate fluctuations on all othcr investments is nominal due
to the short-term nature of its investment portfolio.
The Company has no material future earnings or cash flow exposures from changes in intcrest rates on its long-term
debt obligations, as substantially all of the Company's long-term debt obligations are fixed rate obligations.
Year 2000 Date Conversion
The Company is currently working to verify system readiness for the processing of date-sensitive information by the
Company's computerized information systems. The Year 2000 problem impacts computer programs and hardware
timers using two digits (rather than four) to define the applicable year. Any of the Company's programs that have
time-sensitive functions may recognize a date using "00" as the year 1900 rather than 2000, which could result in mis-
calculations or system failures. The Company has recently initiated a review of its computer systems and programs to
determine which, if any, systems and programs are not capable of recognizing the year 2000 and to verify system readi-
ness for the millennium date change. The Company is in the process of confirming wkh its key vendors that they will
bc Year 2000 ready. The total cost of addressing potential problems, which will be expensed as incurred, is not known
as of the date hereof. Based on preliminary information, however, such costs are not currently expected to have a mate-
rial adverse effect on the Company's financial position, results of operations or cash fio~vs in fhturc periods. However,
if the Company, its customers or vendors arc unable to resolve such processing issues in a timely manner, it could have
a material adverse effect on future operations. Accordingly, the Company plans to devote the necessary resources to
resolve all significant Year 2000 issues in a timely manner. While the Company's efforts are designed to bc successful,
becaus of the complexity of the Year 2000 issues and the interdependence of organizations using computer systems,
there can be no assurance that the Company's efforts or those of a third party with which the Company interacts will
be satisfactorily completed in a timely fashion.
Effect of New Accounting Standards
In June 1997, the Financial Accounting Standards Board CFASB") issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," CSFAS 130"). This pronouncement, cffective for calendar
year 1998 financial statements, requires comprehcnsivc income and its components to be reported either in a separate
financial statement, combined and included with the statement of income or included in a statement of changes in
McLeodUSA 20 Annual Report
McI,I'<~DUSA [NtZ<)RI'{~RAi} I}/\ND 5[:BslI)IAI',[I'5
stockholders' equity. Comprehensive income includes all changes in equity during a period except those resulting from
investment by owners and distribution to owners. The impact on rhc Company's financial statements as a result of
adopting SFAS 130 is not expected to be material.
Also in June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," (SFAS 131 "). This pronouncement, also effective for calendar
year 1998 financial statements, requires reporting segment information consistent with the way executive management
of an entity disaggregates its operations internally to assess performance and makc decisions rcgarding resource alloca-
tions. Among information to bc disclosed, SFAS 131 requires an entity to report a measure of segment profit or loss,
certain specific revenue and expense items and segment assets. SFAS 131 also requires reconciliations of total segment
revenues, total segment profit or loss and total segment assets to the corresponding amounts shown in the entity's con-
soildated financial statements. The Company is in the process of identifying reportable segments and has not yet
determined the effect of implementing SFAS 131.
Inflation
The Company does not believe that inflation has had a significant impact on the Company's consolidated opera-
tions.
McLeodUSA 21 A .... IReport
Consolidated Balance Sheets
December 31, 1997 1996, and 1995 (In thousands, except shares)
Assets
Current Assets
cash and cash equivalents
Investment in available-for-sale securities
Trade receivables, net
Inventory
Deferred expenses
Prepaid expenses and other
Total current assets
Property and Equipment
land and building
Telecommunications networks
Furniture, fixtures and equipment
Networks in progress
Building in progress
Less accumulated depreciation
Investments, Intangibles and other Assets
Investments in available for sale securities
Other investments
Goodwill, net
Other intangibles, net
other
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt
Contracts and notes payable
Accounts payable
Accrued payroll and payroll related expenses
Other accrued liabilities
Deferred revenue, current portion
Customer deposits
Total current liabilities
Long Term Debt, less current maturities
Deferred Revenue, less current portion
Other long-term liabilities
C_~ s
Stockholders' Equity
Capital stock:
Common Class A, $.01 par value: authorized 250,000,000 shares; issued and
outstanding 1997 61,799,4 l 2 shares and 1996 36, 172,817 shares
Common. Class B, convertiblc, $.01 par value; authorized 22.(10(),000 shares;
_::- iss~y~ and outstanding 1997 ntn~c; 1996 15,625,929 sharcs
Additiq~%ljf~d-in capital
~cumula~dcficit
/'/0reali~TtH~s on invcsmwnts bold by Consolidated Communications, [nc CCC;I")
,. _ . ':-.2
;:':
1997
1996
$ 331,9-i I $ 96,480
34,696 80,518
108,472 27,56{}
3,992 1,6(}{}
27,641 12, 156
I 1,127 6,087
% 17,869 224.4()1
3%.42(} 2,246
19~A)46 32,041
7(),579 22,302
81,432 35,481
11),002 6, 103
39q,479 98, 173
21,67~ 6,050
373,804 92, 123
30,189
273,359
97,935
52,496
453,979
$ 1,34%,652 $
47,474
57,012
25,915
5.819
136,470
4%2,994
S 6,01)4 $ 793
4%354 15,807
21.454 7,259
36,793 3,095
I (L381 1,793
I 2,710 9,686
139,252 38,433
613,38.i 2,573
12,664 8,559
2(},973
618
688,964
(127,738)
(2,468}
559,379
1,34$,6%2 $
362
156
450,736
(47,825)
403,429
452,994
T/Id ttl'tOilt/,dil)'ttl,~ llOh'5 drt' tell integral/p,trt <(/' t/,esr cvnso/idate'd J~'n,~nci,d sttttcmcnts.
McLeodUSA 22 Annual Report
Mtl,l~t~l~LY,c,A INC<IP, I't~I',AI EI) ,.\N[) 8LTI~,$IDIARII.,S
Consolidated Statements of Operations
};c'ars k'Hded December 31, l 997, 1996 and 1995 (In thottsands, except per share data)
1997 1996 1995
Revenue:
Telecommunications:
Local and long distance $I 10,023 $ 41,399 $ 21,474
local exchange services 16, 117 - ~
Private line and data 17, 174 10,272 2,551
Network maintenance and equipment 20,965 5,936 4,973
Other telecommunications 9,t)07 -- -
Total telecommunications revenue 174, 186 57,607 28,998
Directory 81,055 15, 152 -
Telemarketing 12,64~ 8,564
Total revenue 267,886 81,323 28,998
Operating expenses:
Cost of'service I q~,431} 52,624 19,667
Selling, general and administrative 143,918 46,044 18,054
Depreciation and amortization 33,27=, 8,485 1,835
Other 4,632 2,380 -
Total operating expenses 337,255 109,533 39,556
Operating loss (69,369) (28,210) ( 10,558)
Nonoperating income (expense):
Interest income 22,660 6,034 139
lnterest {expense) (34,627) (665) (910)
Other income 1,426 495
Total nonoperating income (expense) ( 10,541 ) 5,864 (771)
Loss before income taxes (79,910) (22,346) (11,329)
5(79,9l ) $(22,346) $(11,329)
S (1.4% $ (0.55) $ (0.40)
54,974 40,506 28,{}04
7'hc accom/~,HO, iH.g HoteS ,m'e an iHtegra[ part of these conso/idated./~nancia[ statements.
McLeodUSA ~] Annual Report
M<:I.F{~i}USA ]N( t~I~,I~{~R,\I I.D \ND St!I;SII~IAP, II.S
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995 (In thousands, except shares)
Balance, December 31, 1994
Net loss
Common stock
Issuance of 4,279,414 shares of Class B
Common stock
lssuance of 3,676,058 shares of Class B
common stock m connection with the
acquisition of MWR Telecom Inc.
Reissuance of 22,500 shares of treasury stock
Amoritization of fair value of stock options issued
to nonemployees
Balance, December 31, 1995 Net loss
Issuance of 19,424,316 shares of Class A
Common stock
Issuance of 361,420 shares of Class A common
stock in connection with the acquisition of
Ruffalo, Cody & Associates, Inc.
Options to purchase 158,009 shares of Class A
common stock granted in collllcctioll with the
acquisition of Ruffalo, Cody & Associates, Inc.,
less cash to be received upon exercise of options
Amortization of fair value of stock options issued
to nonemployees
Amortization of compensation expense related to
stock options
Balance, December 31, 1996 Net loss
Issuance of l, 137,883 shares of Class A
Common Stock
Release of 56,177 shares of Class A common
stock from escrow
Issuance of 84,430 shares of Class A common
stock in conncctitm with the acquisition of
Digital Communicatkms of Iowa, Inc.
Issuance of 8,488,596 shares of Class A
common stock in connection with the
acquisition of CCI
lssuance of 55,500 shares of Class A common stock
in connection with thc acquisition of certain assets
of Onetel Corp.
lssuance of 140,000 shares of Class A common stock
in connection with the acquisitkm of ownership
interests of Colorado Directory Company LLC
Issuance of 38,080 of Class A common stock
to participants in the Employee Stock Purchase Plan
conversion of 15,625,929 shares of Class B
common stock to l q,625,t)29 shares of Class
Common stock
Amoritization of compensation expense related to
stock options
Adjustment to record investments in available-for-
sale securities at fair market value
Balance December 31, 1997
Additional
Common Stock l~aid-ln
Class A Class B ( ;apital
$ 145 S 76 $ 17,253 $ (14,151))
19 - 4,278 -
43 9,652 -
Unrcalizcd
Accumulatcd I.oss on
Deficit Investments
- 37
- - 6 -
- 632 -
164 156 40,117 (25,479)
(22,346)
194 - 396,021}
4 8,941
- 3,301 -
- - 34 1 -
~ 2,016 -
362 156 450,736 (47,825)
~ (79,910)
11 881 -
1 1,346
2,249
85 223,590
- 1,962
4,479
728
156 (156)
2,993
.... (2,468)
618 S $ 688,964 $ 1127,735) $ (2,468) $
T/~e acco,U, auyin~e notes arc an i,tQgra/ part of these consolidated financial statentents.
McLeodUSA Annual Report
Stock '[btal
$ 133) $ 3,291
4,297
9.695
- 8,333
33 39
632
14,958
- (22,346)
- 396,214
- 8,945
3,31} I
341
- 2,016
- 403,429
- (79,9 1 O)
- 892
- 1,347
- 2,25O
223,675
- 1,963
4,48O
728
2.993
- (2,468)
- $ 559,379
Mc I I~l~L;.k;A lx/17(~l,.l'()lC\l I. II ?\NIl NLIF;SlI)IARIE>
Consolidated Statements of Cash Flows
}>,trs l:ndcd l)c,'cmher ,31, 1997, 1996 a,d 1995 (In thorns,trials)
Cash Flows from Operating Activities Net loss
Adjustmcnts to reconcile net loss to net cash (used in) operating activities:
Depreciation
Amortization
Accretion of interest on senior discount notes
Changes in assets and liabilities, net effects of acquisitions:
(Increase) in trade receivables
(Increase) in inventory
Decrease in deferred expenses
(Increase) in deferred line installation costs
lncrease in accounts payable and accrued expenses
lncrease in deferred revenue
lncrease in customer deposits
Other, net
Net cash (used in) operating activities
Cash Flows from Investing Activities
Purchase of property and equipment
Available for sale securities:
Purchases
Sales
Maturities
Business acquisitions
Deposits on PCS licenses
Other
Net cash (used in) investing activities
Cash Flows from Financing Activities
Proceeds from line of credit agreements
Paymcnts on line of credit agreements
Payments on contracts and notes payable
Proceeds from long-term debt
Payments on long-term debt
Net proceeds from issuance of common stock
Reissuance of treasury stock
Other
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents:
Beginning
Ending
Supplemental disclosure of cash Flow Information
Cash payment for interest, net of interest capitalized 1997 $4,440;
1996 $204; 1995 $62
Supplemental Schedule of Noncash Investing and Financing Activities
Release of 56, 1 77 shares of (Class A common stock from escrow
(Capital Iease incurred from the acquisition of property and equipment
1997 1996 1995
S 179,910} $ (22,346)
S (11329)
17,622 3,944 1,299
1%.653 4,882 1.168
26,754 -
(15,937) 19,317) (3,575)
(773) (2) (269)
1,218 1,966
(9,669) (1,289) (806)
27,117 3,192 4,084
7,186 9,505 9
3,(124 1,366 II
11,041) (3,703) (70)
18,756) 111,802) 19,478)
( 151,280) (70,290) (5,272)
1115,985) 1207,681) -
102,368 17,577 ~
133,817 62,389 ~
( l ,q 1,892) 180,081 ) -
127,t/7%) 14,889) ~
( 1,863) (133) 1266)
1242,8111) 1283,1/18) (5,538)
- 55,925
~ (59.825)
(18.967) ~
506.626 2.060
(2252) (2,065)
1.620 396,214
~ 1919)
487.027 391,390
235,461 96,480
96,48{) -
331,941 $ 96,480
300 $
$ 1.76-4 $
$ 1,347
S 3.367
McLeodUSA IS Annual Report
42,200
142,100)
13,992
39
885
15,016
261
M<I,E.~DUSA [Nto¢~P,I'ORAIEI~ ANI> SLIBc, II>[AP, IIS
Notes To Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: The Company is a diversified telecommunications company, incorporated in Deleware, that
provides a broad range of products and services to business customers in Iowa, Illinois, North Dakota. South Dakota,
Minnesota, Wisconsin, Indiana, Colorado and Wyoming and residential customers in Iowa, Illinois, North Dakota,
South Dakota, Wisconsin and Colorado. The Company's serviccs primarily include local and long-distance telecom-
munications services, telecommunications network maintenance services and telephone cquipmcnt sales, service and
installation, private line and data services, the sale of advertising space in telephone directories, the operation of an
independent local exchange company. and telemarketing services. The Company's business is highly competitive and
is subject to various federal. state and local regulations. In 1997, thc Company's stockholders approved a change in
its name to McLcodUSA Incorporated from McLcod, Inc.
Accounting Estimates: The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amouut of assets and lia-
bilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
A summary of thc Company's significant accounting policies is as follows:
Principles of consolidation. The accompanying financial statements include those of thc Company and its sub-
sidiaries, substantially all of which are wholly owned. All significant intercompany items and transactions have been
eliminated in consolidation.
Regulatory accounting: Illinois Consolidated Telephone Company ("ICTC"), an independent local exchangc carri-
er and a wholly owned subsidiary of the Company. prcpares its financial statements in accordance with thc provi-
sions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effbcts of Certain Types of
Regulation" ("SFAS No. 71 "). The provisions of SFAS No. 71 require, among other things, that regulated enterpris-
es reflect rate actions of regulators in their financial statemcnts, when appropriate. These rate actions can provide rea-
sonable assurance of the existence of an asset, rcduce or eliminate the value of an asset, or impose a liability on a reg-
ulated enterprise. SFAS No. 71 also specifies that the actions of a regulator can eliminate only liabilities imposed by
the regulator.
Cash and cash equivalents. For purposes of reporting cash flows. the Company considers all highly liquid debt
instruments purchased with a maturity of three months or less and all certificates of deposit, regardless of maturity,
to be cash equivalents.
lnvestments: Management dctermincs the appropriate classification of the securitics at the time they are acquircd
and evaluates the appropriateness of such classifications at each balance sheet date. The Company has classified its
securities as available-for-sale. Available-for-sale securities are stated at fair value, and unrealized holding gains and
losses. net of the related deferred tax eftbet, are reported as a component of stockholders' equity. Realized gains and
Inssos are determined on the basis of the specific securities sold.
Trade receivables: In accordance with the industry practice for the publication of telephone directories, trade receiv-
ables include certain unbillcd revenue from installment contracts. It is anticipated that a substantial portion of all
sg& amounts outstanding at December 31, 1997 and 1996 will be collected within one year (see Note 2).
Inventory: Inventory is carried principally at the lower of average cost or market and consists primarily of new and
reusable parts to maintain fiber optic networks and parts and equipment used in the maintenance and installation of
telephone systems.
r '. '7' ·
-~: :
('.'D
McLeodUSA ~6 Annual Report
M~21,[~i~I~[ISA ]N(Z()I>,[,()RAIEI) ANI~ SLII',,~II~IARIES
Property and Equipment: Property and equipment is stated at cost. Construction costs, including interest, are capi-
talized during the installation of fiber optic telecommunications networks and the construction of the Company's
headquarters buildings.
ICTC's property and equipment for its regulated operations is summarized as follows at December 31, 1997 (In
thousands):
Telephone plant: In service
Under construction
Less accumulated depreciation
$ 91,274
2,228
93,502
(6~9)
$ 92,883
When regulated property and equipment are retired, the original cost, net of salvage, is charged against accumu-
lated depreciation. The cost of maintenance and repairs of property and equipment including the cost of replacing
minor items not constituting substantial betterments is charged to operating expense.
The provision for depreciation of regulated property and equipment is based upon remaining life rates for prop-
erty placed in service through 1980 and equal life rates fi}r property additions placed in service after 1980. The reg-
ulatcd provision is equivalent to an annual composite rate of 5.75% for 1997.
The provision for depreciation of nonregulated property and equipment is recorded using the straight-line method
based on the following estimated useful lives:
Years
Buildings 20-39
Telecommunications networks 5-15
Furniture, fixtures and equipment 2-10
The Company's telecommunications networks are subject to technological risks and rapid market changes due to
new products and services and changing customer demand. These changes may result in changes in the estimated
economic lives of these assets.
Other Investment: Other investments primarily includes $21,772,000 for a minority interest in a limited partner-
ship which provides cellular services to customers in east central Illinois. The Company follows the equity method
of accounting for this investment, which recognizes the Company's proportionate share of the income and losses
accruing to it under the terms of its partnership agreement.
Goodwill: Goodwill resulting from the Company's acquisitions is being amortized over a range of 15 to 30 years
using the straight-line method and is periodically reviewed for impairment based upon an assessment of future oper-
ations to ensure that it is appropriately valued. Accumulated amortization on goodwill totaled $5,834,000 and
$1,049,000, at December 31, 1997 and 1996, respectively.
Other tangibles: Other intangibles consist of customer lists and noncompete agreements related to the Company's
acquisitions, deferred line installation costs incurred in the establishment of local access lines for customers and fran-
chise rights to provide cable services to customers in three Illinois counties and in a Michigan city. The customer lists
and noncompete agrccmcnts are being amortized using the straight-line method over periods ranging from 3 to 15
years. The deferred line installation costs are being amortized using the straight-line method over 36 to 60 months,
which approximates the average lives of residential and business customer contracts. The franchise rights are being
amortized using the straight-line method over periods ranging from 10 to 15 years. Accumulated amortization on
the other intangibles totaled $9,158,000 and $1,830,000 at December 31, 1997 and 1996, respectively.
McLeodUSA 27 Annual Report
,"vI~J,t(~[)LIS~'\ [N~ ()1<]'(~1',,,\1 I-:I/,',NI) SLIB~,iI)I,\RIt-L~
Note 1. Nature of Business and Significant Accounting Policies -(continued)
lncome tax matters. The Company recognizes deferred tax assets and liabilities for the expected future tax conse-
quences of events that have been included in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities arc determined based on the differencc between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the ycar in which the differences are expected to reverse. Net
deferred tax assets are reduced by a valuation allowance when appropriate (scc Note 6). Deferred tax assets and lia-
bilities arc adjusted for the effects of changes in tax laws and rates on the date of enactment.
Deferred Revenue: Amounts received in advance under long-term leases of fiber optic telccommunications networks
are recognized as revenue on a straight-line basis over the lifc of thc lcascs.
Revenue recognition. Revenues for local and long-distance services are recognized when subscribers use telecommunications services.
The revenue from long-term leases of fiber optic telecommunications networks is recognized over
the term of the lease. Base annual revenue for telecommunications network maintenance is recognized on a straight-
line basis over the term of the contract. Additional services provided under these contracts are recognized as the ser-
vices are performed.
ICTC's toll revenue is provided through a combination of billed carrier access charges, traditional end-user billed
toll revenues, interstate tariffed subscriber line charges and ICTC's share of revenues and cxpcnscs from the non-traf-
fic sensitive pool administered by the National Exchange Carrier Association.
As allowcd by the FCC, IC'FC's presubscribed rate of return on interstate access revenues for 1997 was 11 .25°A~.
The FCC further restrictcd overall interstate revenues to a maximum 11.50°A~ rate of return on related investments,
or to a maximum of 11.65o/o rate of return on related investments per an}, individual rate clement.
Fees from telemarketing contracts are recognized as revenue in the period thc services arc performed.
Revenues from directories are recorded upon publication.
Customer deposits consist of cash received from customers at the time a sales contract is signed. They are record-
ed as revenue when the related directory is published or when the related service is performed.
Cost of service and deferred expense: Cost of service includes local and long-distance services purchased from certain
Regional Bell Operating Companies and interexchange carriers, the cost of providing local exchange services to cus-
tomers in ICTC's service area and the cost of operating the Company's fiber optic telecommunications networks.
Cost of service also includes prodnction costs associated with the publication of directories and direct costs associat-
ed with telemarketing services and the sale and installation of telephone systems.
Deferred expenses consist of production and selling costs on unpublished directory advertising orders. They are
expenses when the related directory is published and the related revenue of the director}, is recognized.
Stock options issued to employees: In fiscal year 1996, the Company adopted the provisions of SFAS No. 123,
Accounting./br Stock-Based Compensation, which establishes a fair value based method for the financial reporting of
its stock-based employee compensation plans. However, as allowed by the new standard, the Company has elected
to continue to measure compensation using the intrinsic value based method as prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock issue to employees. Under this method, compensation is measured as
the difference between the market value of the stock on the grant date, less the amount required to be paid for the
stock. The difference, if any, is charged to expense over the vesting period of the options.
The estimated market value used for the stock options granted was determined on a periodic basis by the
Company Board of Directors prior to the Company's initial public offering on June 10, 1996 (see Note 8).
Subsequent to the Company's initial public offering, the market value used for stock options granted is based upon
the closing price of the Class A Common stock on the day before the grant date.
McLeodUSA '~8 Annual Report
N']t I,I()[)USA [N~,~)P,I'~)RAI} D AND St:B~II)IARIE,~
Stock options issues to nonemployees. The Company uses the Black-Scholes model to determine the fair value of the
stock options issued to nonemployees at the date of grant. This amount is amortized to expense over the vesting peri-
od of the options.
Loss per common share. In In December 1997. the Company adopted the provisions of SFAS No. 128.Earnings per
Share, which specifies the computation, presentation and disclosure requirements for earnings per share for entities
with publicly held connnon stuck. Loss per common share has been computed using the weighted average number
of shares of common stock outstanding after giving effect to the recapitalization in 1996 (see Note 8) and has been
restated according m the provisions of SFAS No. 128. All stock options granted are anti-dilutive, and therefore
excluded from the computation of earnings per share. In the future. these stock options may become dilutive.
Fair value of financial instruments. The carrying amount of cash and cash equivalents approximates fair value due
to the short maturity of the instruments. The fair value of the Company's investment in available-for-sale securities
is disclosed in Note 3. For other investments for which there are no quoted market prices, a reasonable estimate of
fair value could not be made without incurring excessive cost. The $25.3 naillion carrying amount of the quoted
investments at December 31, 1997 represents the original cost of the investments, which management believes is
not impaired. The fair market value of the Company's long term debt is estimated to be $661 million based on the
market rates for the same or similar issues or the current rates offered to the Company for debt with similar maturity
ties.
Reclassification. Certain items in the 1996 consolidated financial statements have been reclassified to be consistent
with the classification in the 1997 consolidated financial statements.
Note 2. Trade Receivables
The composition of trade receivables, net is as follows:
Billed
Unbilled
Less allowance for doubtful accounts and discounts
December 31,
1997 1996
(In thousands)
$ 86.309 $ 22,846
34,114 8,613
120,423 31,459
(11.951) (3.899)
$ 108,472 $ 27,560
Note 3. Investments
At December 31, 1997, the Company }acid $4.493,000, $94,341,000 and $27,491,000 in repurchase agreements,
corporate debt securities and marketable equity securities, respectively. At December 31. 1996, the Company held
$147.439.000, $54,759.000 and $7.850.000 in corporate debt securities, United States Government and govern-
mental agency securities and mortgage-backed securities. respectively. The Company has classified these securities as
available for sale, and at December 31, 1997 and 1996, the debt securities' amortized cost approximates fair value.
The marketable equity securities have been recorded at their fair market value at December 31, 1997. The available-
for sale securities have been classified as cash and cash equivalents, investment in available-for-sale securities-current
and investment in available for sale securities-long-term, with $91.629.000, $34.696,000 and none, respectively.
being recorded in each classification at December 31, 1997. At December 31. 1996, $82,056,000. $80,518.000 and
$47.474,000, respectively, were recorded in each classification.
The contractual maturities of the available-for-sale securities are as follows:
Due within one year
Due after one year through three years
Due after three years
Mortgage-backed securities
December 31, 1997 1996
(In thousands)
$ 126.325 $ 161.205
- 40,731
- 262
~ 7,850
$ 126.325 $ 210,048
McLeodUSA 29 Annual Report
MeZ[,FOI)(),%,~ IN','t}F~Pt~RAIFD AND SUI'~SIDIARIFq
Note 3. Investments-(continued)
Expected maturities will differ from contractual maturities because the issuers of certain debt securities have the
right to call or propay their obligations without any penalties. The amount classified as current assets on the accom-
panying balance sheets represent the expected maturities of the debt securities during the next year.
Note 4. Pledged Assets and Debt
Debt offerings: On March 4, 1997, the Company completed a private offering of 10Z% Senior Discount Notes
(the "Senior Discount Notes") due March 1, 2007 at an original issue discount in which the Company received
approximately $288.9 million in net proceeds. The Company filed a registration statement with the Securities and
Exchange Commission ("SEC') for the registration of $500 million principal amount at maturity of 10Z% Senior
Discount Notes due March 1, 2007 (the "Senior Discount Exchange Notes") to be offered in exchange for the Senior
Discount Notes (the "Senior Discount Exchange Offer"). The registration statement was declared effective by the
SEC on July 28, 1997 and the Senior Discount Exchange Offer was commenced. The Senior Discount Exchange
Offer expired on August 24, 1997, at which time all of the Senior Discount Notes were exchanged for the Senior
Discount Exchange Notes. The fbrm and terms of the Senior Discount Exchange Notes are identical in all material
respects to the fbrm and terms of the Senior Discount Notes except that (i) the Senior Discount Exchange Notes
have been rcgistcred under the Securities Act of 1933 (the "Securities Act") and (ii) holders of the Senior Discount
Exchange Notes arc not entitled to certain rights under a registration agreement relating to the Senior Discount
Notes. The Senior Discount Exchange Notes rank pari passu in right of payment with all existing and future senior
unsecurcd indebtedness of the Company and rank senior in right of payment to all existing and future subordinat-
ed indebtedness of the Company. The Senior Discount Exchange Notes acefete interest at a rate of 10~% per year,
compounded semi-annually, to an aggregate principal amount of $500 million by March 1, 2002. Interest will not
accrue on the Senior Discount Exchange Notes for five years, after which time the Senior Discount Exchange Notes
will accrue interest at l OZ, Wo, payable semi-annually. Thc indenture related to the Senior Discount Exchange Notes
contains certain covenants which, among other things, restrict the ability of the Company to incur additional indebt-
edness, pay dividends or make distributions of the Company's or its subsidiaries' stock, enter into sale and leaseback
transactions, create liens, enter into transactions with affiliates or related persons, or consolidate, merge or sell all of
its assets.
On July 21, 1997, the Company completed a private offering of $225 million aggregate principal amount of
Senior Notes due July 15, 2007 (the "Senior Notes"). The Company received net proceeds of approximately $217.7
million from the Senior Note offering. Interest on the Senior Notes is payable in cash semi-annually in arrears on
July 15 and January 15 of each year at a rate of 9Z% per annum, commencing January 15, 1998. The Senior Notes
rank pari passu in right of payment with all existing and fhture senior unsccured indebtedness of the Company and
rank senior in right of payment to all existing and fhture subordinated indebtedness of the Company. As of
December 31, 1997, the Senior Notes had not been registered under the Securities Act and thcrefbre cannot be
offered for resale, resold or otherwise transferred unless so registered or unless an applicable exemption from the reg-
istration requirements of the Securities Act is available. The Company has filed a registration statement with the
SEC tbr the registration of $225 million aggregate principal amount of 9Z% Senior Notes due July 15, 2007 (the
"Exchange Notes") to be offered in exchange fbr the Senior Notes (the "Exchange Offer"). The registration statement
was declared effective by the SEC on December 1, 1997, and the Exchange Offer was commenced on December 2,
1997. The Exchange Offbr expired on January 9, 1998, at which time all of the Senior Notes were exchanged for the
Exchange Notes. The f~}rm and terms of the Exchange Notes are identical in all material respects to the f~}rm and
terms of the Senior Notes except that (i) the Exchange Notes have been registered under the Securities Act and (ii)
holders of the Exchange Notes will not be entitled to certain rights under a registration agreement relating to the
Senior Notes. The indentures relating to the Senior Notes and the Exchange Notes contain certain covenants which
are materially the same as the covenants relating to the Senior Discount Exchange Notes.
'
McLeodUSA ]0 Annual Report
Mf:I.t.t~i>USA lN<jt}l,~l't~l~Al l..[) AND StIBSlDIARII. q
The Company's debt consisted of the following at December 31, 1997 and 1996:
Contracts payable, unsecured, non-interest bearing, due in various installments
with the final payment to be made in 1998
Notes payable, banks, bearing interest at 6.1875%, due in various installments
through October 1997 (A)
10 1/2% Senior Discount Notes
9 1/4% Senior Notes
CCI unsccured senior notes payable, with semiannual interest payments
at 7.75% payable April 1 and October 1. Annual principal payments
of $1,428,571 arc due beginning October 1, 1998 until maturity in
October 2004
CCI Series A Senior Unscented Notes, with semiannual interest payments
at 6.83o/0 payable June 1 and December l. Annual principal payments of
$909,091 are due beginning December 1,2001 until maturity in
December 2010
CCI Series B Senior Unscented Notes, with semiannual interest payments
at 6.71% payable June 1 and December 1. Annual principal payments
of $454,546 are due beginning December 1, 2001 until maturity in
December 2010
Greene County Parmers, Inc. senior notes due in quarterly payments of
$450,000 bearing interest at 6.35% and maturing in April 2001
ICTC Series K, 8.620o/0 First Mortgage Bonds due September 2022 (B)
ICTC Series L, 7.(150°A~ First Mortgage Bonds due October 2013 (B)
Note payable, duc January 1. 1997, including interest at 6.625%.
Collatcralized by a second lien on publishing rights to purchased
directories
Contracts payable, to finance company, due in various monthly payments,
including interest at 3.90%, through March 2000, collateralized by
equipment with a depreciated cost of $2,915,000 at September 30, 1997
Note payable duc in various annual installments, including interest at
8.25'~, through 2006, Collateralized by publishing rights to purchased
directories
Other long-term borrowings, due in various installments bearing interest at
rates ranging fi*om 0% to 8.625% through March 2004
Incentive compensation agreements, due in various estimated amounts
plus interest at 6.()~ through January 2001 (see Note 1 11
Less current maturities
1997 1996
(In thousands)
$ 1,056 $
5,50(}
6,556
326,754
225,000
10,(100
- 500
2,637 -
995 1,008
2,092 248
1,610 1,610
619,388 3,366
6,004 793
613384 $ 2,573
(A) CCI and 1CTC have various short-term line of credit agreements with certain financial institutions totaling
$25,000,000 of which $5,500,000 in borrowings were outstanding at December 31, 1997.
(B) ICTC's first mortgage bonds are collateralizcd by substantially all real and personal property of the subsidiary.
The bond indenture contains various provisions restricting, among other things, the payment of dividends and
repurchase of its own stock. Early redemption of the Series K and Series L Bonds is permitted.
In 1996, the Company used a portion of the proceeds from the Company's initial public offering (see Note 81 to
pay off all existing indebtedness under three line of credit facilities, which were then cancelled. Options to purchase
(',lass B common stock wcrc granted to a stockholder which had guaranteed borrowings under two of the facilities.
Tbc Company used rhc Black-Scholes model to determine the value of the options, which was approximately
McLeodUSA 3] Annual Report
N/I('[.I. oI)LJSA IN(:L~I.~II~I~,,\I El)',ND SLrl~5,1I~I,\I~It:S
Note 4. Pledged Assets and Debt-(continued)
$3,400,000, at the date of grant. This value was being amortized over the vesting period of the options. Upon can-
collation of the credit facilities, the options' vesting schedule and amortization of the fair value of the options were
terminated. At December 31, 1997 and 1996, a total of 1,300,688 Class B common stock options arc outstanding.
The credit facilities required interest payments and facility fees to be paid at various rates. Due to the inclusion of
the amortization of the fair value of these options in interest expense, the effective average interest rate on the bor-
rowings under these credit facilities was approximately 15% and 270/o for the years ended December 31, 1996 and
1995, respectively.
Principal payments required on the outstanding debt at December 31, 1997 arc as follows (In thousands):
1998 $ 6,004
1999 5,191
2000 5,417
2001 13,071
2002 3, 111
Later years 586,594
$619,388
Note 5. Leases and Commitments
Leases.' The Company leases certain of its office and network facilities under noncancelable agreements which
expire at various times through September 2022. These agreements require various monthly rentals plus the payment
of applicable property taxes, maintenance and insurance. The Company also leases vehicles and equipment under
agreements which expire at various times through December 2003 and require various monthly rentals.
The total minimum rental commitment at December 31, 1997 under the leases mentioned above is as fbllows (In
thousands):
1998 $ 13,738
1999 10,197
2000 4,480
2001 2,765
2002 1,918
Thereafter 2,987
$ 36,085
Thc total rental expense included in the consolidated statements doperations for 1997, 1996 and 1995 is approx-
imately $8,060,000, $3,640,000 and $1,558,000, respectively, which also includes short-term rentals for office facil-
ities.
Network construction During 1995, the Company was awarded contracts from the State of Iowa to build fiber optic
tclccommunications network segments throughout the State of Iowa. As of December 31, 1997, the contracts call
for the construction of 224 network segments. Upon completion of each segment, the Company will receive approx-
imately $115,000 for a seven-year lease to certain capacity on that segment. The Company will recognize this rev-
enue of approximately $25,760,000 on a straight-line basis over the term of the lease based on the relationship of
individual segment costs to total projected costs. For the years ended December 31, 1997, 1996 and 1995, revenue
of g:94,000, $445,000 and none, respectively, had been recognized under these contracts.
. ..X
t t'- :'..5
, :,'Z
McLeodUSA ]~ Annual Report
~\l'lt lII tll)L!5;A IN~-],.~RP,,~I',AI I.D .\N[;.
The Company estimates that minimum future construction costs required to fulfill its obligations under the 1995
contract with the State of Iowa would bc approximately $11,339,000. The Company, however, expects that its actu-
al construction costs will be higher with respect to such network segments, because the Company is adding more
fiber and route miles than is contractually required with respect to such construction, in order to optimize the design
of its network. The Company anticipates that the minimum costs to complete this project will be incurred as follows
(In thousands):
1998 $ 7,41~~
1999 3,923~''
Buildings: In August 1996, the Company purchased approximately 194 acres of land on which the Company is
constructing its headquarters and associated buildings. Of the land purchased, approximately 75 acres was purchased
from a subsidiary of a stockholder for approximately $692,000. At December 31, 1997, the total remaining con-
tracted commitments on the building in progress, is approximately $ l 5.1 million.
Note 6. Income Tax Matters
Net deferred taxes consisted of the following components as of December 31, 1997 and 1996:
Deferred tax assets:
Net operating loss carryforwards
Accruals and reserves not currently deductible
Deferred revenues
Intangibles and other assets
Other
Less valuation allowance
Deferred tax liabilities:
Property and equipment
Other investments
Differences in revenue recognition
Deferred line installation cost
Other intangibles
Other
1997 1996
(In thousands)
6(},335 $ 19,419
15,910 4,033
7,093 285
3,669 -
2,125 571
89, 132 24,308
29,532 16,211
59,600 8,097
24,620 2,202
15,333 -
12,140 -
3,945 833
3,318 3,698
244 1,364
59,600 8,097
- $ -
A valuation allowance has been recognized to offset the related net deferred tax assets due to the uncertainty of
realizing the benefit of the loss carryfnrwards. The Company has available net operating loss carryforwards totaling
approximately $15(3.1 million which expire in various amounts in the years 2008 to 2017.
The income tax rate differs from the U. S. Federal income tax rate fbr 1.997, 1996 and 1995 due to the following:
1997 1996 1995
"Expected" tax (benefit) rate
Percent increase (decrease) in income taxes resulting from:
Change in valuation allowance
Tax deductions due to exercises in incentive stock options
Net deferred liability balance purchased in CCI transaction
(sec Note I 1)
Other
(35)% (35)% (35)%
15 35 27
(2) (9) -
21 - -
1 9 8
- % - % - %
McLeodUSA 33 Annual Report
N'IcIA~t~i~USA IN<Tt~RI't31~,AI Fl) AND SLII'~SII~IARII.'~
Note 7. Stock-based Compensation Plans
At December 31, 1997, the Company has various stock-based compensation plans which are described below.
Grants under the Company's stock option plans are accounted for in accordance with Accounting Principles Board
(APB) Opinion No. 25 and related Interpretations. The Company granted a total of 1,653,688 stock nptions in
January and February 1996 at an exercise price of $2.67 per share. The estimated aggregate fair market value of these
options at the date of grant was later determined to exceed the aggregate exercise price by approximately $9,190,000.
Additionally, in September 1997, the Company granted a total of 1,468,945 stock options at an cxercisc price of
$24.50 per share. The aggregate fair market value of these options at the date of grant exceeded the aggregate exer-
cise price by approximately $15,790,000. As a result, the Company is amortizing these amounts over the four-year
vesting period of the options. Compensation cost of $2,993,000 and $2,016,000 has been charged to income for the
year ended December 3 l, 1997 and 1996, respectively, using the intrinsic value based method as prescribed by APB
No. 25. Had compensation cost for all of the stock-based compensation plans been determined based on the grant
date fair values of awards granted during 1997, 1996 and 1995, as prescribed by SFAS No. 123, reported nct loss and
loss per common share would have been as follows:
':' · .... December 31,
. :' ': 1997 1996 1995
' . . (In thousands, except per share data)
Pro forma net loss $ (93,855) $ (24,776) $ (11,646)
Pro forma loss per common share (1.71) (0.61) (0.42)
I ., '..)
2~92 1923 and ~995 bwentiz,e Stock Option P/,ms.' The Company has rcserved 4,215,557 shares of Class A com-
mon stock'gr issuance to e~nployees under the 1992, 1993 and 1995 Incentive Stock Option Plans. Options out-
standing under these plans were granted at prices equal to the estimated fair market value on the dates of grant as
determined by the Company's Board of Dircctors. Under thc 1992 and 1993 plans, all options granted become exer-
cisablc at a rate of 25% per year, on a cumulative basis, and expire seven years after the date of grant. Under the 1995
plan, all options, except for options granted to the Company's chairman and chief executive officer, become exercis-
able at a rate of 25% per year, on a cumulative basis, beginning five years from the date of grant. The options grant-
cd to thc Company's chairman and chief executive officer vest at a rate of 20% per year on a cumulative basis. All
options granted under the 1995 plan expire ten )'ears after thc date of grant except for the options granted to the
Company's chairman and chief executive officer, which expire five years after the date of grant. These plans have bccn
supcrscded by the 1996 Employee Stock Option Plan, and no future grants of options will be made under these
plans.
1996 Employee Stock Option Plan: In 1997, the Company's stockholders approved an amendment to the 1996
Employee Stock Option Plan to increase the number of Class A common shares available under the plan to
37,500,000 shares from 4,525,000 shares. At December 31, 1997, after adjusting for option exercises, the Company
has reserved 37,396,370 sharcs of Class A common stock [Br issuance to employees under the plan, which supersedes
the 1992, 1993 and 1995 Incentive Stock Option Plans. The exercise price for options granted under this plan is the
fair market value of the Company's Class A common stock on the day before the grant date (or 110% of the fair mar-
ket value if the grantee beneficially owns more than 10% of the outstanding Class A common stock). The options
granted expire ten years after the grant date (or five years after the grant date if the grantee beneficially owns more
than 10% of the outstanding Class A common stock), and vest over periods determined by the Compensation
Committee; however, no more than $100,000 worth of stock covered by the options may become exercisable in any
calendar year by an individual employee. The 1996 Plan will terminate in March 2006, unless terminated earlier by
the Board of Directors.
Directors' Stock Option Plan: The Company has reserved 478,124 shares of Class A common stock for issuance
under the Directors' Plan to directors who are not officers or employees of the Company. The Director's Plan was
adopted and approvcd by the stockholders in 1993 and amended and restated on March 28, 1996 to be a
formula plan providing for an automatic grant of options to eligible directors. Each eligible director who com-
mences service on the Board of Directors after the amendment and restatement of the plan will be granted an initial
option to purchase 10,000 shares of Class A common stock. An additional option to purchase 5,000 shares of Class
A common stock will be granted after each of the next two annual meetings to each eligible director who remains for
the two-year period. Options granted under the Directors' Plan vest at a rate of 25<~} per year, on a cumulative basis,
McLeodUSA 34 Annual Report
and expire seven years after the date of grant (ten years after the date of grant fbr options granted under the amend-
ed and restated plan). However, upon a change in control of the Company as defined in the Directors' Plan, all
options will become fully exercisable. The Company has the right to repurchase any Class A common stock issued
pursuant to the exercise of an option granted under this plan that is offered for sale to an individual who is not an
employee or director of the Company. The Directors' Plan will terminate in March 2006, unless terminated earlier
by the Board of Directors.
The fair value of each grant under the Company's stock option plans is estimated at the grant date using the Black-
Scholes option-pricing model with the following weighted-average assumptions for grants in 1997, 1996 and 1995,
respectively: no expected dividends, risk-tree iutcrest rates of 5.48%, 6.08<~ and 6.30%; price volatility of 48.6YYa
1997 and 40% in 1996 and 1995 and expected lives of 4 years for all three years.
Employee Stock Purchase Plan: Under the stock purchase plan, employees may purchase up to an aggregate of
1,000,000 shares of Class A common stock through payroll deductions. Employees of the Company who have been
employed more than six months and who arc regularly scheduled to work more than 20 hours per week are eligible
to participate in the plan, provided that they own less than five percent of the total combined voting power of all
classes of stock of the Company. The purchase price for each share will be determined by the Compensation
Committee, but may not bc less than 90% of the closing price of the Class A common stock on the first or last trad-
ing day of the payroll deduction period, whichever is lower. No employee may purchase in any calendar year Class
A common stock having an aggregate fair value in excess of'S25,000. Upon termination of employment, an employ-
ee other than a participating employee who is subiecr to Section 16(b) under the Securities Exchange Act of 1934,
as amended, will bc refunded all monies in his or her account and the employce's option to purchase shares will ter-
minate. The plan will terminate in March 2006, unless terminated earlier by the Board of Directors. The Company
has implemented this plan effective February 1, 1997. Under the plan, the Company sold 38,080 shares of Class A
common stock in 1997. The fair value of the employees' purchase rights was calculated for disclosure purposes using
tile Black-Scholcs model with tile J~dlowiug assumptions: an expected life of 11 months; a risk-gee interest rate of
5.40~'~; expected wfiatility of 48.63<5~>; and no expected dividends. The fair value of each purchase right granted in
1997 was $6.35.
A summary of the status of the Company's stock option plans as of' and for the ycars ended December 31, 1997,
1996 and 1995 is as follows (In thousands, except price data):
Shares
Weighted-
Average
Exercise
Price
Outstanding at January l, 1995
Granted
Exercised
Fordhired
Outstanding at December 31, 1995
Granted
Exercised
Forfeited
Outstanding at December 3 l, 1996
Granted
Exercised
Forfited
Outstanding at December 31, 1997
3,122
2,006
(11)
(248>
4,869
3,502
(491 )
(336)
7,544
6,674
(I ,~38)
(2,472)
10,608
0.82
2.18
0.29
1.75
1.33
13.14
1.30
7.64
6.54
26.72
1.15
29.74
14.40
McLeodUSA 3~ Annual Report
Mtz[.Pt~I>USA ]NeZ(}RP{IP, AI'FD ?,ND SUBSII)IARIFS
Note 7. Stock-based Compensation Plans-(continued)
Number of Options
1997 1996 1995
Exercisable, end of year
Weighted-average fair value per option of options granted during the year
2,397 2,324 1,581
$ 12,24 $ 5.74 $ 0.86
Other pertinent information related to the options outstanding at December 31, 1997 is as follows (In thousands,
except life and price data):
Options Outstanding Options Exercisable
Weighted-Average Weighted-
Number Remaining Weighted-Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$0.27 to $1.47 1,618 2.54 $ 0.79 1,516 $ 0.74
$1.73 to $2.93 2,958 5.08 2.40 842 2.31
$4.29 to $9.30 52 6.65 7.34 27 5.69
$17.75 to $24.75 4,426 9.31 20.76 11 20.23
$27.50 to $35.25 1,554 9.83 33.58 1 28.82
10,608 7.15 14.40 2,397 1.45
In addition, options to purchase shares of Class B common stock were granted to a stockholder which had guaran-
teed borrowings under certain credit facilities which were paid off with a portion of the proceeds from the Company's
initial public offering (see Note 8) and subsequently cancelled. These options have a weighted-average exercise price
of $1.79 and are fully vested at December 31, 1997.
Note 8. Capital Stock Infbrmation and Investor Agreement
Public offerings: On June 10, 1996, the Company undertook an initial public offering of Class A common stock
which yielded net proceeds of approximately $258 million. On November 20, 1996, the Company completed an
additional public offering of Class A common stock which yielded net proceeds of approximately $138 million in
additional capital.
Recapitalization: In May 1997, the Company's stockholders approved an increase in the authorized Class A com-
mon stock from 75,000,000 shares of $.01 par value stock to 250,000,000 shares of $.01 par value stock. In March
1996, the Company's Board of Directors had authorized an increase in the authorized Class A common stock to
75,000,000 shares of $.01 par value stock from 15,000,000 shares of $.01 par value stock and an increase in the
authorized Class B common stock to 22,000,000 shares orS.01 par value stock from 15,000,000 shares orS.01 par
value stock. All Class B common stock has rights identical to Class A common stock other than their voting rights,
which are equal to .40 vote per share. Each share of Class B common stock is convertible into one share of Class A
common stock at the option of the holder. The restated Articles of Incorporation also authorizes the Board of
Directors to issue up to 2,000,000 shares orS.01 par value preferred stock. The terms of the preferred stock are deter-
mined at the time of issuance. No preferred shares were issued or outstanding at December 31, 1997. Also in March
1996, the Board of Directors declared a 3.75 to l stock split for both the Class A and Class B common stock which
was effected in the form of a stock dividend. All references to share and per share amounts give retroactive effect to
this stock split and recapitalization.
stockholders' agreement: Certain of the Company's principal stockholders have entered into a Stockholders'
"Agreement which amended and restated a prior Investor Agreement, and became effective on September 24, 1997.
This agreement provides for the election of directors designated by certain principal stockholders and prevents cer-
tain principal stockholders from disposing of any equity securities of the Company fbr a period of one year unless
consented to by the Board of Directors. In addition, certain principal stockholders agreed that for a period of two
years they will not acquire any securities or options issued by the Company, except as allowed by previous agreements
or by the Board of Directors.
McLeodUSA 36 Annual Report
M¢:[.EoI)USA IN(:t)RI't)P, AI'FI) AND SUB'-;IDIARIES
Note 9. Change-ofLControl Agreements
The Company has entered into change-of-control agreements with certain executive employees, which provide fbr
certain payments in connection with termination of employment after a change of control (as defined within the
agreements) of the Company. The change-of-control agreements terminate on December 31, 2006 unless a change-
of-control occurs during the six-month period prior to December 31, 2006, in which case the agreements terminate
on December 31, 2007. The agreements provide that if an executive terminates his or her employment within six
months after a change-ofLcontrol or if the executive's employment is terminated within 24 months after a change-of-
control in accordance with the terms and conditions set forth in the agreements, the executive will be entitled to cer-
tain benefits. The benefits include cash compensation, immediate vesting of outstanding stock options and coverage
under the Company's group health plan.
Note 10. Retirement Plans and Postretirement Benefits
CCI, a wholly owned subsidiary of the Company, maintains noncontributory defined pension
plans covering substantially all of its salaried and hourly employees. The pension benefit formula ug;~d*T{n the~4ete~- · ':'
mination of pension cost is based on the highest five consecutive calendar years' base earnings within~,iast ~a cal~ .
endar years immediately preceding retirement or termination. It is CCI's policy to fund pension costs~s'they~r&rue
subject to any applicable Internal Revenue Code limitations. " v'. ' -"
The components of pension cost ~r 1997 are as ~Bllows (In thousands):
Service costswbenefits earned during the period
Interest cost on projected benefit obligation
Actual return on plan assets
Net amortization and deferral
Net pension cost
$ 655
944
(2,085)
1,035
$ 549
The funded status of the pension plans as of December 31, 1997 is as follows (In thousands):
Actuarial present value of accumulated benefit obligation:
Vested
Nonvested
]btal
Additional benefits
Actuarial present value of projected benefit obligation
Plan assets at fair value
Plan assets in excess of projected benefit obligation
Unrecognized transition obligation
Unrecognized prior service cost
Unrecognized gain on assets
Accrued liability for pensions
$ 45,735
58O
46,315
5,8O5
52,120
65,694
(13,574)
157
(3,425)
22,963
$ 6,121
The assets of tire plans consist primarily of equity and fixed income securities. Actuarial assumptions used to cal-
culate the projected benefit obligation were a 7% discount rate, a 8% rate of return on plan assets, and an estimat-
ed 5% fhturc compensation level increase.
In 1997, the Company offered salaried plan participants a choice between transferring their plan assets to the
hourly defined benefit plan or participating in the 1996 Employee Stock Option Plan, as the salaried defined bene-
fit plan will be terminated effective April 1, 1998. This plan change substantially reduced the expected future bene-
fits under the defined benefit pension plans and has been reflected in the above amounts. The Company continues
to maintain the defined bcncfit pension plan for substantially all hourly employees of CCI.
McLeodUSA 37 Annual Report
Mc:I,EoDUSA IN(2(~I.~I'(~I~,AI ED ,~NI} SkrI~,SII)I,~I,~IE%
Note 10. Retirement Plans and Postretirement Benefits-(continued)
In addition to providing pension benefits, CCI provides an optional rctirce medical program to its salaried and
union retirees and spouses under age 65 and life insurance coverage f~r the salaried retirees. All retirees are required
to contribute to the cost of their medical coverage while thc salaried life insurance coverage is provided at no cost to
the retiree. Cash payments were approximately $297,000 in 1997.
The components of postretirement benefit costs for 1997 are as follows (In thousands):
Service costs--benefits earned during the period
Interest cost on projected benefit obligation
Actual return on plan assets
Net amortization and deferral
Net postretirement benefit cost
$ 163
156
97
$ 416
The fhnded status of the postretirement benefit plans as of December 31, 1997 is as follows (In thousands):
Fair value of plan assets
Accumulated benefit obligation:
Retirees and beneficiaries
Fully eligible active employees
Other active employees
Total accumulated postretirement benefit obligation
2,306
986
1,706
4,998
Accumulated benefit obligation in excess of plan assets
Unrecognized transition obligation (being amortized over 20 years)
Unrecognized net gain
Accrued postretirement benefit cost
4,998
(4,733)
5,852
$ 6,117
The postretirement benefit obligation is calculated assuming that health-care costs will increase by 8% in 1998,
and that the rate of increase thereafter (the health-care cost trend rate) will decline to 5% in 2004 and subsequent
years. The health-care cost trend rate has a significant effect on the amounts reported i~ar costs each year as ~vell as
on the accumulated postretirement benefit obligation. For example, a one percentage point increase each year in the
health-care trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1998 by
approximatcly $347,000 and the aggregate of the service and interest cost components of the net periodic postre-
tirement benefit cost by approximately $62,000. The weighted average discount rate used in determining the bene-
fit obligation was 7% in 1997.
The postretirement medical and life insurance benefit plans have been modified effective January 1, 1998 to pro-
vide benefits only to employees meeting certain age and years of service requirements as of January 1, 1998.
CCI also has a nonqualified deferred compensation plan, which allows selected employees to defer a portion of any
ctmapensati~n received. Those deferred amounts are invested in various fhnds at December 31, 1997 to provide assets
aqc.'t acQun'l~ated earnings to offset the deferred compensation amounts due to the participating employees.
.':
~lf~ ad~tio~, the Company has various 401 (k) profit-sharing plans available to eligible employees. The Company's
contr~buuons to the plans are discretionary. The Company contributed approximately $1,252,000, $242,000 and
$4q7000 forlhe years ended December 31, 1996, 1995 and 1994, respectively.
~$~IVR 7??e~om, hn'. (AlU'/R).' On April 28, 1995, the Company issued 3,676,058 shares or approximately $8.3 mil-
lio~ 8fthe Company's Class B common stock in exchange for all of the outstanding common stock of MWR. MWR
provides fiber optics telecommunication services between interexchange carriers and their customers in the Des
Moines, Iowa area. In addition, the Company granted an option to the seller to purchase 3,529,414 shares of Class
B common stock t~r $2.27 per share. This option was exercised on June 15, 1995.
McLeodUSA 38 Annual Report
M~:[A~{~I)USA [NCtlRI't)RArEI)AND SUB~;II)IARIFS
Rz(ff;do. Cody &. Asso,.i, ztes. hu.. (Rqffh/o Cody): On July 15, 1996, the Company acquired Ruffalo Cody for a total
purchase price of approximately $17.3 million, which consisted of approximately $5.1 million in cash (including
approximately $243,000 in direct acquisition costs), 361,420 shares of Class A common stock and 158,009 options
to purchase shares of Class A common stock granted to the holders of Ruffalo Cody options. An additional $50,782
in cash and 56,177 shares of Class A common stock were delivered to certain stockholders of Ruffalo Cody upon ful-
fillment of certain conditions relating to ongoing revenues from an agreement with a major long distance carrier to
provide telemarketing services. The long distance carrier terminated this contract effective December 31, 1996.
McI. cod&"3)q P,b/ishi,g: On September 20, 1996, the Company acquired McLeodUSA Publishing for a total pur-
chase price of approximately $76.1 million, which consisted of approximately $74.5 million in cash (including
approximately $436,000 in direct acquisition costs) and $1.6 million resulting from the Company entering into an
incentive compensation program with all holders of nonvested McLeodUSA Publishing options, which provides for
payments to be made to these individuals on January 1 of the year following the year in which the corresponding
options would have vested.
7bt, d (),,,zztni,'atio,s .~,stems. Dec. (TCSI).' On December 9, 1996, the Company purchased the customer base and
certain other assets ofTCSI fi~r a cash purchase price of approximately $534,000.
Digital Comm,nic, ttions of low, t. bw. (DCI): In January 1997, the Company issued 84,430 shares of Class A com-
mon stock in exchange for all the outstanding shares of DCI, in a transaction accounted for as a purchase. The total
purchase price was approximately $2.3 million based on the average closing market price of the Company's Class A
common stock at the timc of the acquisition.
I')'o,tccr tq,as2ci, d Ho/diu~s. Ltd. (b)'o,tee~9.' In January 1997, McLeodUSA Publishing exercised its option to
acquire six directories from Frontcer fi~r a total cash purchase price of approximately $3.9 million.
lndi, tmt I)ircctories. Inc. ([tl{[itllltt Directories).' On March 31, 1997, McLeodUSA Publishing acquired 26 telephone
directories published by Indiana Directories fbr a total cash purchase price of approximately $10 million.
E%'/Co,t,tz,dcatio,s, Inc. (gql).' On June 10, 1997, the Company acquired substantially all of the assets of ESI
and related entities for a total cash purchase price of approximately $15.2 million.
Smart Pages. hn'. ,rod }'i'//ow Pages Publishers. btc. (&hart Pages): On September 22, 1997, McLeodUSA Publishing
acquired 2 telephone directories published by Smart Pages, Inc. and Yellow Pages Publishers, Inc. ("Smart Pages") at
a purchase price to be determined based on the sunr of the revenues derived from the last Smart Pages editions of the
directories. The purchase price is currently estimated to be approximately $2 million.
CCI.' On September 24, 1997, pursuant to the terms and conditions of an Agreement and Plan of Reorganization
dated June 14, 1997 (the "Merger Agreement"), the Company issued 8,488,586 shares of Class A Common Stock
and paid approximately $ l 55 million in cash to the shareholders of CCI in exchange for all of the outstanding shares
of CCl in a transaction accounted for using the purchase method of accounting. The total purchase price was approx-
imately $382.1 million bascd on the average closing price of the Company's Class A Common Stock five days before
and after the date of the Merger Agreement. The purchase price includes approximately $3.4 million of direct acqui-
sition costs.
Om'Tt.:L ()mp. (O,cTEL).' On Octobcr 15, 1997, the Company issued 55,500 shares of Class A common stock as
consideration fi.~r certain assets of OneTEL. The total purchase price was approximately $2 million based on the clos-
ing price of the Company's Class A common stock on the purchase date.
(,)dol~t/o l)ircctmy (,)HtU,dl0' L[.C (()ffOt~lr/O Directorl,).' On Dcccmber 31, 1997, the Company ii~d 1~00
shares of Class A common stuck as consideration Gr all of the outstanding membership and ownership intc~s of ,. ,,
Colorado Directory. The total purchase price was approximately $4.5 million based on the closi~.price
Company's Class A common stock on the purchase date. ..~2, -. c.:l ,
L'( "" -~..~ ,
McLeodUSA 3{~ Annual Report
N{t:[.Ft~I~I,JSr~ ]NCt)I~,I,t)RATEI)AND SLrI:,SII)I,\I~,IE5,
Note l 1. Acquisitions-(continued)
The following table summarizes the purchase price price allocations for the Company's business acquisitons:
qi'ansactitm Year
1995 1996 1997
Ruflldo McLeodUSA Indiana Smart Colorado
MWR Cod), Publishing TCSI DCI Fronteer Directories ESI Pages CCI OneTEL Director),
(In thousands)
(lash purchase price $ - $ 4,808 $ 74,060 $ %54 $ $ 1,500 $ 6,000 $1~,228 $ 749 $155,000 $ $
Acquisition costs 243 436 29 - 3,379 7 -
Incentive agrcctnents - 1,610 .....
Contracts payable - - - 1,867 4,031 - 1,124 - -
('~ption agreement - - - 500 - _
Pro~r~issory nt>tc - - 100 -
Stock issued 8,333 8,945 - 2,250 - - 223,675 1,963 4,480
()ptions to purchase
Class A comnton stock 3,911
Less cash to be received
upon option exercise (6101 ......
58,333 $17,297 $ 76,106 $534 $2,279 $3,867 $10,031 $15,228 $ 1,973 $382,054 $1,970 $4,480
\X~,rking capital
acquired, net
Fair value of other assets
acquired
Intalrgiblcs
l,iabilities assumed
393 758 8,367 13 543 2,170 - 39,384 (300)
5,298 1,379 4,408 30 658 - 150 493 - 173,045 - 55
2,642 1%160 64,315 491 1,118 3,867 9,881 13,336 1,973 251,168 2,27O 4,425
(984) (40) - (7711 - (81,5431 -
$8,333 $17,297 $76,106 $534 $2,279 $3,867 $10,031 $15,228 $1,973 $382,054 $1,970 $4,480
(tfhcse aceJuts~ttons have been accounted for as purchases and the results of operations are included in the consoil-
' ted financial statements since the dates of acquisition.
The Una~flitcd consolidated results of operations for the years ended Dccember 31 1997 and 1996 on a pro fi~rma
b~s~s a? '[l%~hgh the above entities had been acquired as of the beginning of the respective periods are as fbllo~vs:
: ,.' ..: 1997 1996
· :> (In thousands, except per share data))
tq~cvcntle $ 471,436 $ 397,508
Net loss (86,530) (19,8641
Loss per common share ( 1.571 (0.49)
The pro forma financial information is presented for infk~rmarional purposes only' and is not necessaril,~ indicative
of the operating results that would have occurred had the acquisitions been consummated as of the above dates, nor
arc such operating results necessarily indicative of future operating results.
Note 12. Related Party Transactions
The Company has entered into agreements with two stockholders that gives certain rights-of-way to the Company
f~r the construction of its telccomtnunications network in exchange fi~r capacity on the network.
The Company provided and purchased services from various companies, the principals of which are stockholders
or directors of McLcodUSA Incorporated or arc affiliates. Revenues [~om services provided totaled $53,000,
$254,0(}0 and $103,000 and services purchased, primarily rent and legal services, totaled S1,732,000, $934,000 and
$675,000, fi~r the years ended December 31, 1997, 1996 and 1995, respectively.
During 1997, the Company also acquired two condominium units fi'om a Company director ~r a total purchase
price of $171,000 and purchased a 15,000 square fi~ot building, which is to bc used as a support facility' fi~r its fiber
optic nct~vork, from a stockholder fi~r a cash purchase price of $500,000.
McLeodUSA 40 A .... I Repor,
~'vItzI.I.'()I~USA INtZ',>RI'()F, AIEI~ AND SUI~3IDIARIFS
In addition, at December 31, 1997 the Company has two $75,000 notes receivable from officers. The notes bcar
interest at the applicable federal interest rate for mid-term loans and require intercst-only payments fbr two years and
then annual $25,000 payments plus interest until paid in full.
Note 13. Quarterly Data-(Unaudited)
The iQ~llowing tables include summarized quarterly financial data for the years ended December 31,:
First
Quarters
Second Third Fourth'
(In thousands, except per share data)
1997:
Revenue $ 35,747 $ 46,523 $ 49,325 $136,291
Operating loss (15,168) (15,668) (20,074) (18,459)
Net loss (13,355) (16,496) (23,705) (26,354)
Loss per common share (0.26) (0.31) (0.45) (0.43)
1996:
Revenue $ 12,488 $ 13,918 $ 19,091 $ 35,826
Operating loss (4,076) (4,791 ) (7,689) ( 11,654)
Net loss (4,340) (4,543) (4,535) (8,928)
Loss per common share (0.14) (0.13) (0.10) (0.18)
The fi>urth quarter 19')7 results include the operations of CCI, whid~ was acquired on Scptcmbcr 24, 1997.
McLe~dUSA 41 Annual Report
M<2L}.{~i)USA ]N('t~I~,I'ORAIFI)AND SUB',IDIAI~,IFS,
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
McLeodUSA Incorporated:
Wc have audited the accompanying consolidated balance sheets of McLeodUSA Incorporated and sub-
sidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockhold-
ers' equity, and cash flows for each of the three years in the period ended December 31, 1997. Thcsc financial
statements arc thc responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statenrants are
frec of material misstatement. An audit includes examining, on a test basis, evidcncc supporting the a~nounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis fbr our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of McLeodUSA Incorporated and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 28, 1998
McLeodUSA 4~ Annual Report
,'vltl,t<~I>USA [Nt2~)RI't)RATI-I)ANI) SLIBSII)IARII. N
Directors and Executive Management Team
DIRECTORS
Clark E. McLeod
Chairman of the Board and C/Hef Executive Officer
McLeodUSA
Richard A. Lumpkin
Vice Chairman
McLeodUSA
Thomas M. Collins ......
Chairman af Shuttleworth & hzgersoll, PC
(a /au, fir~n)
Robert J. Curroy
President
21st (.~ntury
(a cabh' television compa~)
Blake O. Fisher, Jn
C~iq'Hnancial and Administradve O~cer
and ~easurer
McLeodU3~
Stephen (2. Gray
President and Chief Operating
McLeodUSA
Lee Liu
Chairman qf the Board and Chief Executive Office,'
IES lndustrie~ lHc.
(an eh'ctric and gas
Paul D. Rhines`~'
Founder and Genera/
Agop Venture gtrtners HL
(a ventnre capita/]irm)
Ronald W. Stepien"
gvecutive Vice President ~larketing and De/iveCy
blidAnwrican Ene~g Company
Gtn electric and Fs uti/iO0
(1L4h'mbrr qf t/w Atedit (jommitt¢c
(2)Ah'mho' qf t/~c (.~iHI~Fll3HliOll
SENIOR EXECUTIVES
Clark E. McLeod
Chairman of the Board and Chief Executive Officer
Richard A. Lumpkin
Wce (7hairman
Stephen C. Gray
President and Chief Operating Officer
Blake O. Fisher, Jr.
Chief Financial and Administrative Officer
and 7~easurer
Arthur L. Christofi~rsen
Group President - Pub/ishing Services
Dennis L. Erickson
President - Illinois Consolidated 7~/ephone Company
and Executive Vice President - Integrated Business
Syste,zs
David M. Boatner
Evecutive Vice President - Business Services
Stephen K. Brandenburg
Executive Vice President attd Chief h~rmation Officer
Kirk E. Kaalberg
Executive Vice President - Nettt,ork Services
J. Lyle Patrick
Executive Vice President - Public Po/i53~_and
cco,,n,ing
Albert ~ Ruffalo c:,
E~ecutive Wce President - Gnsumer ~>vices Gq .:
S[even J. Shirar __. p" :z ' ,,.:
EvFclltive Wee h'esident - ~lecommz~ttatson~..
Marketing
Casey D. Mahon
Senior Wee PresidenL General Counsel and Secretary
(retired 1/3 1/98)
Randall Rings
Vice President, Genera/C~unse/and Secreta~
McLeodUSA 43 Annual Reporl
SHAREHOLDER INFORMATION
Corporate Address
McLcodUSA
McLeodUSA %chnok~gy Park
6400 C Street SW
PO Box 3177
Cedar Rapids, IA 52406-3177
Phone 319-298-7800
Fax 319-298-7015
%Vorld Wide Web Site: l, ttp://u,ww. mch~odusa. com
Registrar and Transt~r Agent
Norwest Sbarcowncr Services
PO Box 64854
St. Paul, MN 55164-0854
qlzlcphonc: 1-800-468-9716
Market Prices and Dividend Information
The prices in the table belo~v represent the high
and low sales price for McLeodUSA Class A
Com~non Stock fbr each quarter of 1997.
No cash dividends have been declared, and plans
fbr the foreseeable future are to retain future earnings
to support operations and finance the Company's
expansion. Furthermore, the Company will effectively
be prohibited from paying cash dividends for the fore-
seeable future pursuant to restrictions contained in the
indenture relating to certain outstanding Notes of the
Company
As of December 31, 1997, McLeodUSA had
approximately 7,000 stockholders based on the
number of holders of record and an estimate of the
number of individual participants represented by
security position listings.
h~quirics regarding stock transfbrs, lost certificates or
address changes should be directed to the transfer
agent at the above address.
Form 10-K and Quarterly Reports/Investor Contact
A copy of the Form 10-K Annual Report of
McLcodUSA, as filed ~vith the Securities and
Exchange Commission, is available without charge to
stockholders upnn written request. The Company
will also provide stockholders with copies of the cor-
porate news releases issued in conjunction with the
report of quarterly results. Requests for these ite~ns
and other investor contacts should be directed to
Bryce E. Nemitz, Vice President, Communications
and Investor Relations Officer.
Nasdaq Symbol
Tbc (:ompany's Class A Common Stock trades on
The Nasdaq Stock Market ' under the symbol MCLD.
1997
High Low
First Quarter $28.75 $17.375
Second Quarter $34.25 $16.375
Third Quarter $40.00 $28.625
Fourth Quarter $41.75 $32.00
This Annual Report contains forward-looking state-
ments that involve risks and uncertainties, including,
but not limited to, expansion plans, availability of
financing and regulatory approvals, the number of
potential customers in a target market, the existence of
strategic alliances or relationships, technological,
regulatory or other developments in the Company's
business, changes in the competitive climate in which
the Company operates and the emergence of future
opportunities, all of which could cause actual results
and experiences of McLeodUSA Incorporated to differ
materially from expectations expressed in the forward-
looking statements contained herein. These and other
applicable risks are summarized in the Co~rg.any's
al e
Annual Report on Form 10-K for its ~ y a~nded
December 31, 1997, which is filed wi~ ~'he S~aritie,~s_~
and Exchange Commission. -~
:;--;McLeodUSA
McLEoDUSA TECHNOLOGY PARK
6400 C STREET SW
PO Box 3177
CEDAR RAPIDS, IOWA 52406-3177