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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
[X] Definitive Proxy Statement RULE 14A-6(E)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
McLEODUSA INCORPORATED
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
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McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
(319) 364-0000
May 7, 1999
[LOGO OF MCLEODUSA APPEARS HERE]
Dear Stockholder:
On behalf of the Board of Directors of McLeodUSA Incorporated, it is my
pleasure to invite you to the 1999 Annual Meeting of Stockholders. The Annual
Meeting will be held on Wednesday, June 2, 1999 at 10:00 a.m., local time, at
the Collins Plaza Hotel, 1200 Collins Road NE, Cedar Rapids, Iowa.
The Annual Meeting has been called for the following purposes:
(1) To elect three directors to serve on the Board of Directors in the
class of directors whose term expires in 2002, to elect one director to
serve on the Board of Directors in the class of directors whose term
expires in 2001, and to elect one director to serve on the Board of
Directors in the class of directors whose term expires in 2000;
(2) To approve the Second Amended and Restated Directors Stock Option
Plan;
(3) To ratify the Board of Directors' appointment of Arthur Andersen LLP
as the independent public accountants of McLeodUSA for the 1999 fiscal
year; and
(4) To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof, all as more fully described in
the accompanying Proxy Statement.
The Board of Directors has approved the matters being submitted by McLeodUSA
for stockholder approval at the Annual Meeting and recommends that
stockholders vote "FOR" such proposals. It is important that your views be
represented at the Annual Meeting. Whether or not you plan to attend the
Annual Meeting, please complete, date, sign and return the enclosed proxy card
in the postage prepaid envelope or give your proxy by calling the toll-free
telephone number as described in the instructions on the proxy card.
Sincerely,
/s/ Clark E. McLeod
Clark E. McLeod
Chairman and Chief Executive Officer
<PAGE>
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
(319) 364-0000
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 2, 1999
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders of
McLeodUSA Incorporated, a Delaware corporation, will be held on Wednesday,
June 2, 1999 at 10:00 a.m., local time, at the Collins Plaza Hotel, 1200
Collins Road NE, Cedar Rapids, Iowa, for the purpose of considering and voting
upon the following matters:
1. To elect three directors to serve on the Board of Directors in the
class of directors whose term expires in 2002, to elect one director to
serve on the Board of Directors in the class of directors whose term
expires in 2001, and to elect one director to serve on the Board of
Directors in the class of directors whose term expires in 2000;
2. To approve the Second Amended and Restated Directors Stock Option
Plan;
3. To ratify the Board of Directors' appointment of Arthur Andersen LLP
as the independent public accountants of McLeodUSA for the 1999 fiscal
year; and
4. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this notice.
Pursuant to the Bylaws of McLeodUSA, the Board of Directors has fixed April
12, 1999 as the record date for the determination of stockholders entitled to
notice of and to vote at the Annual Meeting and at all adjournments thereof.
Only stockholders of record at the close of business on that date will be
entitled to vote at the Annual Meeting and any adjournment thereof. A list of
all stockholders entitled to vote at the Annual Meeting will be open for
examination by any stockholder for any purpose germane to the Annual Meeting
during ordinary business hours for a period of ten (10) days before the Annual
Meeting at the offices of McLeodUSA located at 6400 C Street SW, Cedar Rapids,
Iowa 52406.
By Order of the Board of Directors
/s/ Clark E. McLeod
Clark E. McLeod
Chairman and Chief Executive Officer
Cedar Rapids, Iowa
May 7, 1999
Whether or not you plan to attend the Annual Meeting, please complete, date,
sign and return the enclosed proxy card in the postage prepaid envelope or
give your proxy by calling the toll-free telephone number as described in the
instructions on the proxy card. If you sign and return your proxy card without
specifying a choice, your shares will be voted in accordance with the
recommendations of the Board of Directors. You may, if you wish, revoke your
proxy at any time before it is voted by filing with the Secretary of McLeodUSA
a written revocation or a duly executed proxy bearing a later date, or by
attending the Annual Meeting and voting in person. If you submitted your proxy
by telephone, you may also revoke it by submitting a new proxy using the same
procedures at a later date.
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McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
(319) 364-0000
----------------
PROXY STATEMENT
1999 ANNUAL MEETING OF STOCKHOLDERS
JUNE 2, 1999
----------------
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
This Proxy Statement and the accompanying proxy card are furnished to
stockholders of McLeodUSA Incorporated in connection with the solicitation by
the Board of Directors of McLeodUSA (the "Board of Directors") of proxies to
be used at the 1999 Annual Meeting of Stockholders to be held on Wednesday,
June 2, 1999 at 10:00 a.m., local time, at the Collins Plaza Hotel, 1200
Collins Road NE, Cedar Rapids, Iowa, and at any adjournment thereof.
If the enclosed proxy card is properly executed and returned to McLeodUSA in
time to be voted at the Annual Meeting, the shares represented thereby will be
voted in accordance with instructions marked thereon. EXECUTED BUT UNMARKED
PROXIES WILL BE VOTED:
. "FOR" PROPOSAL 1 TO ELECT THE BOARD OF DIRECTORS' FIVE NOMINEES FOR
DIRECTOR
. "FOR" PROPOSAL 2 TO APPROVE THE SECOND AMENDED AND RESTATED DIRECTORS
STOCK OPTION PLAN
. "FOR" PROPOSAL 3 TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS
INDEPENDENT PUBLIC ACCOUNTANTS OF McLEODUSA FOR THE 1999 FISCAL YEAR
If any other matters properly come before the Annual Meeting, the persons
named in the accompanying proxy will vote the shares represented by such
proxies on such matters in accordance with their best judgment.
Instead of submitting a signed proxy card, stockholders may submit their
proxies by telephone using the control number and instructions on the proxy
card. Telephone proxies must be used in conjunction with, and will be subject
to, the information and terms contained on the proxy card. These procedures
may not be available to stockholders who hold their shares through a broker,
nominee, fiduciary or other custodian.
The presence of a stockholder at the Annual Meeting will not automatically
revoke such stockholder's proxy. Stockholders may, however, revoke a proxy at
any time before its exercise by filing with the Secretary of McLeodUSA a
written revocation or a duly executed proxy bearing a later date, or by
attending the Annual Meeting and voting in person. A stockholder who submits a
proxy by telephone may also revoke it by submitting a new proxy using the same
procedures at a later date.
The cost of solicitation of proxies will be borne by McLeodUSA. In addition
to the solicitation of proxies by mail, McLeodUSA, through its officers,
directors or employees, also may solicit proxies personally or by telephone or
other means. Such persons will not be specifically compensated for such
solicitation activities. Arrangements also will be made with brokerage houses
and other custodians, nominees and fiduciaries for forwarding solicitation
materials to the beneficial owners of shares held of record by such persons,
and McLeodUSA will reimburse such persons for their reasonable expenses
incurred in that connection.
The close of business on April 12, 1999 has been fixed by the Board of
Directors as the Record Date for determination of stockholders entitled to
vote at the Annual Meeting. As of the Record Date, the outstanding voting
stock of McLeodUSA consisted of 74,465,155 shares of Class A common stock, par
value $.01 per share (the "Class A common stock"). Each holder of Class A
common stock is entitled to one vote per share with respect to all matters as
to which a vote is taken at the Annual Meeting.
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The Bylaws of McLeodUSA provide that the holders of a majority of the voting
rights of the shares of common stock issued and outstanding and entitled to
vote shall constitute a quorum at the Annual Meeting. Stockholders' votes will
be tabulated by persons appointed by the Board of Directors to act as
inspectors of election for the Annual Meeting.
Assuming the presence of a quorum at the Annual Meeting, a plurality of the
votes cast at the Annual Meeting is required for election of directors and a
majority of the voting rights present and entitled to vote at the Annual
Meeting is required to approve the Second Amended and Restated Directors Stock
Option Plan and to ratify the appointment of Arthur Andersen LLP as
McLeodUSA's independent public accountants. Unless otherwise required by
applicable law or the Certificate of Incorporation or Bylaws of McLeodUSA, the
affirmative vote of a majority of the voting rights present and entitled to
vote at the Annual Meeting is required to decide any other matter submitted to
a stockholder vote. The Certificate of Incorporation does not provide for
cumulative voting in the election of directors.
Abstentions and broker non-votes will be treated as shares that are present,
in person or by proxy, and entitled to vote for purposes of determining the
presence of a quorum at the Annual Meeting. Broker non-votes will not be
counted as present or entitled to vote on any matter presented at the Annual
Meeting. As a result, broker non-votes will not have any effect on Proposals
1, 2 or 3. Abstentions will be counted as shares that are present and entitled
to vote on matters presented at the Annual Meeting. As a result, abstentions
will not have any effect on Proposal 1 but will have the same effect as a vote
against Proposals 2 and 3.
As of the Record Date, Clark E. and Mary E. McLeod beneficially owned
9,570,285 shares of Class A common stock, Interstate Energy Corporation
(collectively with its subsidiaries, "Interstate Energy") beneficially owned
10,323,288 shares of Class A common stock, MHC Investment Company
(collectively with its affiliates, "MHC Investment"), beneficially owned
6,759,866 shares of Class A common stock, Richard A. Lumpkin beneficially
owned 5,067,778 shares of Class A common stock, and Media/Communications
Partners III Limited Partnership and M/C Investors L.L.C. (collectively,
"M/C") together beneficially owned 3,913,859 shares of Class A common stock,
representing approximately 12.8%, 13.6%, 9.1%, 6.8% and 5.3%, respectively, or
approximately 47.6% in the aggregate, of the voting rights of the shares of
Class A common stock entitled to vote at the Annual Meeting. Mr. and
Mrs. McLeod, Interstate Energy, MHC Investment, Mr. Lumpkin and M/C have
advised McLeodUSA that they intend to vote in favor of approval of all matters
described in this Proxy Statement. Consequently, approval of all the Proposals
set forth in this Proxy Statement is virtually assured. Mr. and Mrs. McLeod,
Interstate Energy, MHC Investment, Mr. Lumpkin, M/C and several other
stockholders also have entered into one or more voting agreements with respect
to the election of directors. See "Principal Holders of Voting Securities--
Stockholders' Agreements."
This Proxy Statement, the Notice of Annual Meeting of Stockholders, the
proxy card and McLeodUSA's Annual Report to Stockholders were first mailed to
stockholders on or about May 11, 1999.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF
THE PROPOSALS SET FORTH IN THIS PROXY STATEMENT.
2
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ELECTION OF DIRECTORS
(Proposal 1)
The Bylaws of McLeodUSA provide that the Board of Directors shall consist of
not fewer than three directors nor more than fifteen directors and that the
number of directors, within such limits, shall be determined by resolution of
the Board of Directors. The Board of Directors currently consists of nine
directors, divided into three classes of directors serving staggered three-
year terms, and will be expanded to ten directors as a result of the election
of directors at the Annual Meeting. At the Annual Meeting, five directors will
be elected, three in the class of directors whose term expires in 2002, one in
the class of directors whose term expires in 2001 and one in the class of
directors whose term expires in 2000. The Board of Directors has nominated for
director Stephen C. Gray, Paul D. Rhines and Roy A. Wilkens to be elected at
the Annual Meeting, each for a three-year term, Peter H.O. Claudy to be
elected at the Annual Meeting for a two-year term and Robert J. Currey to be
elected at the Annual Meeting for a one-year term.
Unless otherwise specified on the proxy card, it is the intention of the
persons named in the proxy to vote the shares represented by each properly
executed proxy for the election as directors of Messrs. Gray, Rhines, Wilkens,
Claudy and Currey. The Board of Directors believes that such nominees will
stand for election and will serve if elected. If any person nominated by the
Board of Directors fails to stand for election or is unable to accept
election, the proxies will be voted for the election of such other person or
persons as the persons named in the accompanying proxy shall determine in
accordance with their best judgment. Pursuant to the Bylaws, directors are
elected by plurality vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ITS NOMINEES
FOR DIRECTORS.
3
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Information as to Nominees and Continuing Directors
The following table sets forth information regarding the Board of Directors'
five nominees for election as directors and those directors who will continue
to serve as such after the Annual Meeting.
<TABLE>
<CAPTION>
Age at
March 31, Director Term
Nominees: 1999 Since Expiring Position(s) Held with the Company
--------- --------- -------- -------- ---------------------------------
<C> <S> <C> <C> <C>
Stephen C. Gray......... 39 1992 2002 President, Chief Operating Officer and Director
Paul D. Rhines(2)....... 54 1993 2002 Director
Roy A. Wilkens.......... 56 -- 2002 --
Peter H.O. Claudy(1).... 37 1999 2001 Director
Robert J. Currey........ 52 1997 2000 Director
<CAPTION>
Continuing Directors:
---------------------
<C> <S> <C> <C> <C>
Clark E. McLeod......... 51 1991 2000 Chairman, Chief Executive Officer and Director
Blake O. Fisher, Jr. ... 54 1996 2000 Group Vice President, Regional President -- Western
Region and Director
Richard A. Lumpkin...... 63 1997 2001 Vice Chairman and Director
Thomas M. Collins(1)(2). 70 1993 2001 Director
Lee Liu(2).............. 65 1993 2000 Director
</TABLE>
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(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
The principal occupations for the past five years of each of the five
nominees for director and the five directors whose terms of office will
continue after the Annual Meeting are set forth below.
Clark E. McLeod. Mr. McLeod founded McLeodUSA and has served as Chairman,
Chief Executive Officer and a director of McLeodUSA since its inception in
June 1991. His previous business venture, Teleconnect Company ("Teleconnect"),
an Iowa-based long distance telecommunications company, was founded in January
1980. Mr. McLeod served as Chairman and Chief Executive Officer of Teleconnect
from January 1980 to December 1988, and from December 1988 to August 1990, he
served as President of Telecom*USA, Inc. ("Telecom*USA"), the successor to
Teleconnect following its merger with SouthernNet, Inc. in December 1988. By
1990, Telecom*USA had become America's fourth largest long distance
telecommunications company with nearly 6,000 employees. MCI Communications
Corporation ("MCI") purchased Telecom*USA in August 1990 for $1.25 billion.
See "Principal Holders of Voting Securities--Stockholders' Agreements."
Richard A. Lumpkin. Mr. Lumpkin has served as Vice Chairman and a director
of McLeodUSA since September 1997. Mr. Lumpkin was elected as an officer and a
director of McLeodUSA based on the requirements of the merger agreement
between McLeodUSA and Consolidated Communications Inc. ("CCI"). He has
continued to serve as a director pursuant to the requirement of the
Stockholders' Agreement (as defined herein). Mr. Lumpkin served as Chairman
and Chief Executive Officer of CCI from 1990 to September 24, 1997, the date
CCI was acquired by McLeodUSA. He continues to serve as Chairman and Chief
Executive Officer of Illinois Consolidated Telephone Company ("ICTC"), an
independent local exchange company and wholly owned subsidiary of CCI, a post
he has held since January 1990. From its formation in 1984 to 1990,
Mr. Lumpkin served as President of CCI. From 1968 to 1990, Mr. Lumpkin held
various executive positions at ICTC, including Vice President of Operations
and Treasurer. He is a director of Ameren Corporation, an electric utility
holding company, First Mid-Illinois Bancshares, Inc., a bank holding company
("First Mid-Illinois Bancshares"), and First Mid-Illinois Bancshares' wholly
owned subsidiary, First Mid-Illinois Bank & Trust, a bank. Mr. Lumpkin served
as a director of International Teldata Corporation, an information technology
company until his resignation on January 4, 1999. Mr. Lumpkin is Chairman of
the Board of Illuminet Holdings, Inc. ("Illuminet"), a telecommunications
company. See "Principal Holders of Voting Securities--Stockholders'
Agreements."
4
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Stephen C. Gray. Mr. Gray has been Chief Operating Officer of McLeodUSA
since September 1992, President since October 1994 and a director since April
1993. Mr. Gray is one of Mr. McLeod's nominees to the Board of Directors.
Before joining McLeodUSA, Mr. Gray served from August 1990 to September 1992
as Vice President of Business Services at MCI, where he was responsible for
MCI's local access strategy and for marketing and sales support of the
Business Markets division. From February 1988 to August 1990, he served as
Senior Vice President of National Accounts and Carrier Services for
Telecom*USA, where his responsibilities included sales, marketing, key
contract negotiations and strategic acquisitions and combinations. Before
joining Telecom*USA, from August 1983 to February 1988, Mr. Gray held a
variety of management positions with WilTel, Inc. and Clay Desta
Communications Inc., long distance telephone companies. See "Principal Holders
of Voting Securities--Stockholders' Agreements."
Blake O. Fisher, Jr. Mr. Fisher has served as a director of McLeodUSA since
October 1996 and as Group Vice President and Regional President since
September 1998. Mr. Fisher is one of Mr. McLeod's nominees to the Board of
Directors. Mr. Fisher served as Executive Vice President, Corporate
Administration and Chief Financial Officer from September 1996 through
September 1998, as Chief Financial and Administrative Officer from October
1997 to September 1998 and as Treasurer from February 1996 to September 1998.
Mr. Fisher also served as one of Interstate Energy's nominees to the Board of
Directors from April 1993 to February 1996. He served as Executive Vice
President and Chief Financial Officer of IES Industries Inc., a diversified
electric utility holding company and predecessor to Interstate Energy, from
January 1991 to February 1996. Mr. Fisher also served as President of IES
Utilities Inc., an electric utility, from February 1995 to February 1996.
Before joining IES, Mr. Fisher held a variety of management positions with
Consumers Power Company, an electric utility, including Vice President of
Finance and Treasurer. See "Principal Holders of Voting Securities--
Stockholders' Agreements."
Thomas M. Collins. Mr. Collins has served as a director of McLeodUSA since
April 1993. Mr. Collins is Of Counsel at Shuttleworth & Ingersoll, P.C., a law
firm in Cedar Rapids, Iowa, where he has practiced law since 1952. Mr. Collins
was a director of Teleconnect and its successor, Telecom*USA, from 1985 to
August 1990. He is also a director of APAC TeleServices, Inc., a telemarketing
company. See "Compensation Committee Interlocks and Insider Participation."
Paul D. Rhines. Mr. Rhines has served as a director of McLeodUSA since April
1993. Since 1997, Mr. Rhines has been Executive Vice President and Managing
Member of Marshall Venture Capital, L.C., which is the General Partner of
Marshall Capital Fund, L.P., a venture capital limited partnership. He is a
founder and a general partner of R.W. Allsop & Associates, L.P. and R.W.
Allsop & Associates II L.P., two venture capital limited partnerships
established in Cedar Rapids, Iowa, in 1981 and 1983, respectively. He is also
a founder and general partner of MARK Venture Partners L.P., a limited
partnership which is the general partner of Allsop Venture Partners III, L.P.,
a venture capital limited partnership established in Cedar Rapids, Iowa in
1987. He has also served since 1980 as Executive Vice President and a director
of RWA, Inc., a venture capital management firm. Mr. Rhines was a director of
Teleconnect and its successor, Telecom*USA, from 1982 to 1990. He is also a
director of American Safety Razor Company, a consumer product manufacturing
company.
Robert J. Currey. Mr. Currey has served as a director of McLeodUSA since
September 1997. Mr. Currey was elected as a director of McLeodUSA based on the
requirements of the merger agreement between McLeodUSA and CCI. Mr. Currey
also served as Group President, Telecommunications Services between October
1997 and March 6, 1998; he resigned his position as an executive officer of
McLeodUSA effective March 6, 1998. Mr. Currey served as President of CCI from
March 1990 to September 24, 1997, the date CCI was acquired by McLeodUSA. From
June 1988 to March 1990, Mr. Currey served as Senior Vice President,
Operations and Engineering of Citizens Utility Co., a diversified utility
company. From 1987 to 1988, he served as Executive Vice President of US
SPRINT, an interexchange carrier, and from 1984 to 1987, he served as Senior
Vice President, Operations for United Telecommunications, Inc., a
telecommunications company. Prior to 1984, Mr. Currey served as an Assistant
Vice President with Ameritech and also held a succession of management
5
<PAGE>
positions in operations, personnel, labor relations and marketing. Mr. Currey
is President of 21st Century Telecom Group, Inc., a cable and Internet
services company. Mr. Currey is also a director of Brenton Banks Inc., a bank
holding company.
Lee Liu. Mr. Liu has served as a director of McLeodUSA since April 1993,
during which time he has been the nominee of IES and its successor, Interstate
Energy, to the Board of Directors. Mr. Liu has been Chairman of IES Industries
and its successor, Interstate Energy Corporation, since July 1993. Mr. Liu
previously served as Chairman of IES Industries from May 1986 to July 1991. He
also served as Chief Executive Officer of IES Industries from May 1986 to
April 1998 and as President from May 1986 to November 1996. Mr. Liu has worked
for IES and its successor, Interstate Energy, since 1957. Mr. Liu is also a
director of Eastman Chemical Company, a chemical company, and the Principal
Financial Group, a financial services company. See "Principal Holders of
Voting Securities--Stockholders' Agreements."
Peter H.O. Claudy. Mr. Claudy has served as a director of McLeodUSA since
April 1999 during which time he has been the nominee of M/C to the Board of
Directors. Mr. Claudy is a general partner of M/C Venture Partners, a $250
million private equity fund and affiliate of M/C, and has specialized in
investing in telecommunications companies since 1991. He originated and held
primary responsibility for the M/C equity investment in Ovation
Communications, Inc., now a subsidiary of McLeodUSA. Mr. Claudy performs the
same role for M/C Venture Partners' investment in, and serves on the board of,
Florida Digital Networks, a competitive local exchange carrier. He also serves
as a director of HarvardNet, a data communications company serving the New
England region, and Triad Cellular, a wireless telecommunications company. See
"Principal Holders of Voting Securities--Stockholders' Agreements."
Roy A. Wilkens. Mr. Wilkens has served as a director of Splitrock Services,
Inc. since April 1998. Mr. Wilkens was President of The Williams Pipeline
Company when he founded WilTel Network Services as an operating unit of The
Williams Companies, Inc. in 1985. He was founder/Chief Executive Officer of
WilTel Network Services from 1985 to 1997. In 1995, WilTel Network Services
was acquired by LDDS Communications, which now operates under the name
WorldCom. Mr. Wilkens served as Vice Chairman of WorldCom until his retirement
in 1997. In 1992, Mr. Wilkens was appointed by President George Bush to the
National Security Telecommunications Advisory Council. He also has served as
chairman of both the Competitive Telecommunications Association (CompTel) and
the National Telecommunications Network. Mr. Wilkens is a member of the board
of directors of Paging Network, Inc., UniDial Inc. and InvenSys Corporation.
6
<PAGE>
Corporate Governance and Related Matters
The Board of Directors conducts its business through meetings and through
its committees. The Board of Directors acts as a nominating committee for
selecting candidates to stand for election as directors. Pursuant to the
Bylaws, other candidates also may be nominated by any stockholder, provided
such other nomination(s) are submitted in writing to the Secretary of
McLeodUSA no later than 90 days prior to the meeting of stockholders at which
such directors are to be elected, together with the identity of the nominator
and the number of shares of McLeodUSA's stock owned, directly and indirectly,
by the nominator. No such nominations have been received as of the date hereof
in connection with the Annual Meeting.
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee, among other things, recommends the firm to be
appointed as independent accountants to audit the financial statements,
discusses the scope and results of the audit with the independent accountants,
reviews with management and the independent accountants the interim and year-
end operating results, considers the adequacy of the internal accounting
controls and audit procedures and reviews the non-audit services to be
performed by the independent accountants. The current members of the Audit
Committee are Messrs. Collins and Claudy. The Compensation Committee reviews
and recommends the compensation arrangements for management and administers
the stock option plans and stock purchase plan. The current members of the
Compensation Committee are Messrs. Collins, Rhines and Liu.
During the fiscal year ended December 31, 1998, the Board of Directors met
eleven (11) times. During the same period, the Audit Committee met three (3)
times and the Compensation Committee met ten (10) times. During the fiscal
year ended December 31, 1998, no director attended fewer than 75% of the total
of all meetings of the Board of Directors and any committee on which he
served.
Directors Compensation
Directors of McLeodUSA who are also employees receive no directors fees.
Non-employee directors receive directors fees of $1,000 for each Board and
committee meeting attended in person and $500 for each Board and committee
meeting attended by telephone. In addition, directors are reimbursed for their
reasonable out-of-pocket travel expenditures incurred. Directors of McLeodUSA
are also eligible to receive grants of stock options under the Amended and
Restated Directors Stock Option Plan (the "Amended and Restated Directors
Plan").
Under the Amended and Restated Directors Plan, an aggregate of 550,000
shares of Class A common stock are reserved for purchase pursuant to option
grants to directors of McLeodUSA who are not officers or employees of
McLeodUSA (each an "Eligible Director"). Options for 450,000 shares of Class A
common stock had been granted under the Amended and Restated Directors Plan
and options to purchase 152,314 shares of Class A common stock had been
exercised as of the Record Date. Under the Amended and Restated Directors
Plan, each Eligible Director who commences service as a director is granted an
initial option ("Initial Option") to purchase 10,000 shares of Class A common
stock. Each such Eligible Director also is granted an additional option
("Additional Option") to purchase 5,000 shares of Class A common stock
immediately after each of the subsequent two annual meetings of stockholders
if the Eligible Director continues to be an Eligible Director. The Amended and
Restated Directors Plan will terminate automatically on March 28, 2006, unless
terminated earlier by the Board of Directors. Stockholders of McLeodUSA are
being asked to consider and vote upon an amendment and restatement of the
Amended and Restated Directors Plan which, among other things, would (i)
increase the number of shares of Class A common stock reserved for purchase
pursuant to option grants to an aggregate of 1,100,000 shares of Class A
common stock, and (ii) modify the formula for the automatic grant of options
to provide for the grant of (x) an Initial Option to purchase from 10,000 to
20,000 shares of Class A common stock to each Eligible Director who commences
service as a director on or after the Board's approval of the amendment and
restatement of the Amended and Restated Directors Plan, such amount to be
determined by the Board in its discretion, (y) an Additional Option to
purchase up to 10,000 shares of Class A common stock after each subsequent
annual meeting of stockholders if the Eligible Director continues to be an
Eligible Director, such amount to be determined by the Board in its
discretion, and (z) such discretionary options ("Discretionary Option"), in
addition to the foregoing Initial Options and Additional Options, to Eligible
Directors as may be determined by the Board; provided that no more than an
aggregate of 100,000 shares of Class A common stock may be granted as
Discretionary Options under the plan as amended and restated. See "Approval of
the Second Amended and Restated Directors Stock Option Plan."
Other than the compensation described above, none of the directors received
any other compensation from McLeodUSA in 1998 in connection with their service
as directors.
7
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary Compensation Table
The following table sets forth information concerning the cash and non-cash
compensation paid or accrued during the periods indicated to the Chief
Executive Officer and the four other most highly compensated officers of
McLeodUSA whose combined salary and bonus exceeded $100,000 during the fiscal
year ended December 31, 1998 (the "Named Executive Officers").
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------------
Annual
Compensation Securities
Name and Principal ----------------- Underlying All Other
Position Year Salary Bonus Options Compensation(1)
- ------------------ ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Clark E. McLeod......... 1998 $228,077 $122,732 100,000 $1,883,200(2)
Chairman and Chief 1997 185,262 79,216 223,000 3,000
Executive Officer 1996 156,269 72,422 135,500 48,200(3)
Stephen C. Gray......... 1998 228,077 122,732 100,000 3,200
President and Chief 1997 184,728 199,216 253,000 3,000
Operating Officer 1996 156,269 72,422 105,500 3,200
Blake O. Fisher, Jr. ... 1998 176,193 92,607 35,000 3,200
Group Vice President,
Regional 1997 143,484 131,048 168,000 --
President--Western
Region 1996 97,654 28,392 238,625 --
Arthur L.
Christoffersen......... 1998 176,538 68,000 63,000 3,200
Group Vice President--
Publishing Services, 1997 154,524 -- 197,000 3,000
President--McLeodUSA
Publishing Company 1996(4) 51,782 106,815 -- --
Richard A. Lumpkin...... 1998 161,231 194,309 40,000 3,200
Vice Chairman 1997(5) 60,411 28,469 45,000 59,250(6)
1996 -- -- -- --
</TABLE>
- --------
(1) Unless otherwise indicated, all other compensation represents matching
contributions made by McLeodUSA to the McLeodUSA Incorporated 401(k) Plan
on behalf of the Named Executive Officers.
(2) Includes $1,880,000 of premiums paid on split dollar life insurance
policies for the benefit of the McLeod Family 1998 Special Trust. For
additional information, see "--Certain Transactions."
(3) Includes $45,000 paid by McLeodUSA to the FTC to cover the filing fee for
a HSR Act notification filed by Mr. and Mrs. McLeod in connection with
their November 1996 purchase of Class A common stock.
(4) Includes amounts received from September 20, 1996 (the date McLeodUSA
acquired TelecomHUSA Publishing Group, Inc.) to December 31, 1996.
(5) Includes amounts received from September 24, 1997 (the date McLeodUSA
acquired CCI) to December 31, 1997.
(6) Represents the payment of accumulated vested vacation at the time
McLeodUSA acquired CCI.
8
<PAGE>
Option Grants
The following table sets forth information with respect to grants of stock
options to each of the Named Executive Officers during the year ended December
31, 1998.
<TABLE>
<CAPTION>
Individual Grants Potential Realized
---------------------------------------------------------------------- Value at Assumed Annual
Number of Percent of Rates of Stock
Securities Total Options Price Appreciation for
Underlying Granted to Option Term
Options Employees in Exercise -----------------------
Name Granted Fiscal Year Price Grant Date Expiration Date 5% 10%
---- ---------- ------------- -------- ----------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Clark E. McLeod......... 100,000(1) 1.6% $29.75 December 31, 1998 December 31, 2008 $ 1,870,962 $ 4,741,384
Stephen C. Gray......... 100,000(1) 1.6 29.75 December 31, 1998 December 31, 2008 1,870,962 4,741,384
Blake O. Fisher, Jr..... 35,000(1) 0.6 29.75 December 31, 1998 December 31, 2008 654,837 1,659,484
Arthur L.
Christoffersen......... 23,000(2) 0.4 41.625 April 3, 1998 April 3, 2008 602,088 1,525,809
40,000(1) 0.6 29.75 December 31, 1998 December 31, 2008 748,385 1,896,554
Richard A. Lumpkin...... 40,000(1) 0.6 29.75 December 31, 1998 December 31, 2008 748,385 1,896,554
</TABLE>
- --------
(1) These options vest according to the following schedule: 25% per year for
four years.
(2) These options vest according to the following schedule: 1/3 at 56 months
with an additional 1/3 at each of 63 and 70 months.
Aggregate Option Exercises and Fiscal Year-End Values
The following table sets forth information with respect to the Named
Executive Officers concerning the exercise of options during fiscal year 1998,
the number of securities underlying unexercised options at the 1998 year-end
and the year-end value of all unexercised in-the-money options held by such
individuals.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at Fiscal Year- In-the-Money Options
Shares End at Fiscal Year-End(2)
Acquired on Value ------------------------- -------------------------
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Clark E. McLeod......... 123,750 $4,415,709 172,813 318,937 $5,441,031 $3,831,220
Stephen C. Gray......... 217,202 6,367,453 459,697 374,250 13,354,521 4,835,810
Blake O. Fisher, Jr. ... 41,250 1,363,181 114,969 261,593 2,822,977 4,190,904
Arthur L.
Christoffersen......... -- -- 15,000 245,000 -- 1,909,500
Richard A. Lumpkin...... -- -- 11,250 73,750 -- 60,000
</TABLE>
- --------
(1) Represents the difference between the exercise price and the closing price
of Class A common stock on The Nasdaq Stock Market on the date of
exercise.
(2) Represents the difference between the exercise price and the closing price
of Class A common stock on The Nasdaq Stock Market on December 31, 1998.
9
<PAGE>
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1998, no member of the Board of
Directors served as a director or a member of the compensation committee of
any other company of which any executive officer served as a member of the
Board of Directors.
During 1998 McLeodUSA paid 2060 Partnership, L.P. $1,654,000 for the rental
of office and parking spaces in Cedar Rapids, Iowa. 2001 Development Company
("2001"), an Iowa corporation, is the general partner and 80% owner of 2060
Partnership, L.P. Alliant and McLeodUSA own 54.55% and 3.03%, respectively, of
the outstanding stock of 2001. The directors and officers of 2001 included Lee
Liu and Thomas M. Collins, directors of McLeodUSA, and Clark E. McLeod, a
director and executive officer of McLeodUSA.
During 1998 McLeodUSA paid $86,000 to Shuttleworth & Ingersoll, P.C., a law
firm in Cedar Rapids, Iowa, for legal services rendered. McLeodUSA plans to
retain the firm in 1999. McLeodUSA provides local and long distance telephone
service for Shuttleworth & Ingersoll, P.C. Shuttleworth & Ingersoll, P.C. paid
McLeodUSA $64,000 for these services in 1998. Thomas M. Collins is Of Counsel
at Shuttleworth & Ingersoll, P.C.
For a description of certain other transactions, see "--Certain
Transactions."
Employment, Confidentiality and Non-Competition Agreements
McLeodUSA has employment, confidentiality and non-competition agreements
with most members of senior management, including the Named Executive
Officers. These agreements typically provide that the applicable senior
management employee may not compete with McLeodUSA during the term of his or
her employment and for a one or two-year period following a termination for
cause, a resignation or a voluntary termination of employment. The agreements
also provide that employees subject to the agreements may not disclose any
confidential information of McLeodUSA while employed by McLeodUSA or
thereafter. The agreements have an indefinite term but may be terminated on 30
days' written notice by either party, provided, however, that the
confidentiality and non-competition obligations will survive any such
termination. As partial consideration for the execution of the employment,
confidentiality and non-competition agreements, McLeodUSA has granted to the
employees signing such agreements options to purchase shares of Class A common
stock at exercise prices which are based on the fair market value of the Class
A common stock on the date of grant. Such options were granted pursuant to the
1996 Plan (as defined herein).
Change-of-Control Agreements
McLeodUSA has entered into change-of-control agreements with its executive
officers, including the Named Executive Officers, which provide for payments
and benefits in connection with specified terminations of employment after a
change of control of McLeodUSA. The change-of-control agreements terminate on
December 31, 2006, unless a change of control has occurred during the six
months preceding December 31, 2006, in which case the agreements terminate on
December 31, 2007. If an executive who is a party to a change-of-control
agreement terminates employment within six months after a "change of control"
or, if within 24 months after a "change of control," the executive's
employment is terminated by McLeodUSA (other than for "disability," "cause,"
death or "retirement") or by the executive following a "material reduction" in
responsibilities or compensation (as such terms are defined in the change-of-
control agreements):
(1) the executive will be entitled to a lump sum payment equal to 12
or 24 times the executive's "average monthly compensation" (as
defined in the change-of-control agreements) during the 12 months
immediately preceding the change of control or the date of
termination, whichever average monthly compensation is higher
(2) all of the executive's outstanding options to purchase stock of
McLeodUSA will become immediately exercisable in full
(3) if the executive elects to continue coverage under the group
health plan, McLeodUSA will continue to pay the employer portion
of the premiums for such coverage for the longer of 24 months or
the period of coverage provided by Section 4980B of the Internal
Revenue Code of 1986 (the "Code")
10
<PAGE>
An executive who is entitled to payment(s) pursuant to a change-of-control
agreement is subject to a non-compete provision generally restricting the
executive from competing with McLeodUSA for a two-year period after the
termination of employment.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors has prepared the
following report on policies with respect to the compensation of executive
officers for 1998.
The Board of Directors established the Compensation Committee in March 1996.
Since that time, decisions on compensation of executive officers have been
made by the Compensation Committee. The Compensation Committee also
administers the stock option plans and stock purchase plan. No member of the
Compensation Committee is an employee of McLeodUSA. Prior to March 1996, there
were no Board committees and the full Board of Directors determined all
executive compensation matters. During 1998, the Compensation Committee
consisted of Paul D. Rhines, Thomas M. Collins and Lee Liu.
Compensation Policies Toward Executive Officers
The compensation policies are designed to
.attract, motivate and retain experienced and qualified executives
.increase the overall performance of McLeodUSA
.increase stockholder value
.increase the performance of individual executives
The Compensation Committee seeks to provide competitive salaries based upon
individual performance together with annual cash bonuses awarded based on the
overall performance of McLeodUSA relative to corporate objectives, taking into
account individual contributions, teamwork and performance levels. The
Compensation Committee believes that the level of base salaries plus bonuses
of executives should generally be managed to approximate the 25th percentile
of the competitive market. In addition, it is the policy of McLeodUSA to grant
stock options to executives upon their commencement of employment and annually
thereafter in order to strengthen the alliance of interest between such
executives and stockholders and to give executives the opportunity to reach
the top compensation levels of the competitive market depending on the
performance of McLeodUSA (as reflected in the market price of the Class A
common stock).
The following describes in more specific terms the elements of compensation
that implement the Compensation Committee's compensation policies, with
specific reference to compensation reported for 1998:
Base Salaries. Base salaries of executives are initially determined by
evaluating the responsibilities of the position, the experience and knowledge
of the individual, and the competitive marketplace for executive talent,
including a comparison to base salaries for comparable positions at peer
public companies in the same geographic region. Base salaries for executive
officers are reviewed annually by the Compensation Committee based upon, among
other things, individual performance and responsibilities.
Annual salary adjustments are recommended by the Chief Executive Officer and
Chief Operating Officer by evaluating the performance of each executive
officer after considering new responsibilities and the previous year's
performance. The Compensation Committee performs the same review of the Chief
Executive Officer's and Chief Operating Officer's performance. Individual
performance ratings take into account such factors as achievement of specific
goals that are driven by the strategic plan and attainment of specific
individual objectives. The factors impacting base salary levels are not
assigned specific weights but are subject to adjustments by the Compensation
Committee.
11
<PAGE>
Bonuses. Annual bonuses to executive officers are based on both corporate
and individual performance, as measured by reference to factors which reflect
objective performance criteria over which management generally has the ability
to exert some degree of control. These corporate performance factors consist
of revenue and earnings targets established in the annual budget. Bonuses for
1998 were based upon the achievement of such financial and operating factors.
Stock Options. A third component of executive officers' compensation is the
1996 Employee Stock Option Plan (the "1996 Plan") pursuant to which McLeodUSA
grants executive officers and certain other employees options to purchase
shares of Class A common stock.
The Compensation Committee grants stock options to executives in order to
align their interests with the interests of the stockholders. Stock options
are considered by the Compensation Committee to be an effective long-term
incentive because the executives' gains are linked to increases in the stock
value which in turn provides stockholder gains. The Compensation Committee
generally grants options to new executive officers and other key employees
upon their commencement of employment with McLeodUSA and annually thereafter.
The options generally are granted at an exercise price equal to the market
price of the Class A common stock at the date of the grant. Options granted to
executive officers typically vest over a period of one to six years following
the date of grant. The maximum option term is ten years (or five years in the
case of an incentive stock option (as defined in the Code) granted to an
optionee beneficially owning more than 10% of the outstanding Class A common
stock). The full benefit of the options is realized upon appreciation of the
stock price in future periods, thus providing an incentive to create value for
McLeodUSA's stockholders through appreciation of stock price. Management of
McLeodUSA believes that stock options have been helpful in attracting and
retaining skilled executive personnel.
Stock option grants made to executive officers in 1998 reflect significant
individual contributions relating to operations and implementation of
development and growth programs. Certain newly hired executive officers also
received stock option grants at the time of the commencement of their
employment. During 1998, McLeodUSA granted stock options covering a total of
3,922,376 shares of Class A common stock to 4,450 employees, including options
covering an aggregate of 667,000 shares of Class A common stock to fourteen
executive officers. The per share option exercise prices of such options
ranged from $29.75 to $41.63 for the fourteen executive officers and from
$24.25 to $46.63 for non-executive officer employees, which generally equaled
the fair market value of a share of Class A common stock on the respective
dates of grant.
Other. McLeodUSA has adopted a contributory retirement plan (the "401(k)
Plan") for all of its employees (including executive officers) age 21 and over
with at least three months of service to McLeodUSA. The 401(k) Plan provides
that each participant may contribute up to 15% of his or her salary (not to
exceed the annual statutory limit). McLeodUSA generally makes matching
contributions to each participant's account equal to 50% of such participant's
contribution up to 2% of such participant's annual compensation, plus a
discretionary annual match of up to another 50% of such participant's
contribution up to 2% of such participant's annual compensation. Thus, the
total matching contribution can be up to 4% of the participant's annual
compensation.
Chief Executive Officer Compensation
The executive compensation policy described above is applied in setting Mr.
McLeod's compensation. Mr. McLeod generally participates in the same executive
compensation plans and arrangements available to the other senior executives.
Accordingly, his compensation consists of annual base salary, annual bonus,
and long-term equity-linked compensation. The Compensation Committee's general
approach in establishing Mr. McLeod's compensation is to be competitive with
peer companies, but to have a large percentage of his target compensation
based upon the long-term performance of McLeodUSA, as reflected in the market
price of the Class A common stock.
Mr. McLeod's compensation during the year ended December 31, 1998 included
$228,077 in base salary and $122,732 in a cash bonus. Mr. McLeod's salary and
bonus payments for 1998 were based on, among other matters, the 1997
performance of McLeodUSA and the 1997 compensation of chief executive officers
of peer companies, although his compensation was not targeted to any
particular group of these companies.
12
<PAGE>
Compensation Deductibility Policy
Under Section 162(m) of the Code, and applicable Treasury regulations, no
tax deduction is allowed for annual compensation in excess of $1 million paid
to any of the five most highly compensated executive officers. Performance-
based compensation that has been approved by stockholders, however, is
excluded from the $1 million limit if, among other requirements, the
compensation is payable only upon attainment of pre-established, objective
performance goals and the board committee that establishes such goals consists
only of "outside directors" as defined for purposes of Section 162(m). All of
the members of the Compensation Committee qualify as "outside directors." The
Compensation Committee intends to maximize the extent of tax deductibility of
executive compensation under the provisions of Section 162(m) so long as doing
so is compatible with its determinations as to the most appropriate methods
and approaches for the design and delivery of compensation to executive
officers of McLeodUSA.
Respectfully submitted,
Compensation Committee
Paul D. Rhines, Chairman
Thomas M. Collins
Lee Liu
13
<PAGE>
Comparative Stock Performance
The following chart sets forth comparative information regarding cumulative
stockholder return on Class A common stock since the initial public offering
was completed in June 1996. Total stockholder return is measured by dividing
total dividends (assuming dividend reinvestment) plus share price change for a
period by the share price at the beginning of the measurement period. The
cumulative stockholder return of McLeodUSA based on an investment of $100 at
June 11, 1996, when the Class A common stock was first traded on The Nasdaq
Stock Market, at its closing price of $25.125, is compared to the cumulative
total return of the Standard & Poor's 500 Stock Index and The Nasdaq
Telecommunications Stocks Index, comprised of publicly traded companies which
are principally in the telecommunications business, during that same period.
Comparison of Cumulative Total Returns
Comparison of Thirty Month Cumulative Total Return*
Among McLeodUSA Incorporated, The S&P 500 Stock Index
and The Nasdaq Telecommunications Stocks Index
<TABLE>
<CAPTION>
McLeodUSA S & P 500 Nasdaq Telecommunications
Incorporated Stock Index Stock Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Jun. 11, 1996 100 100 100
Jun. 28, 1996 95.5224 99.9493 97.406
Sep. 30, 1996 131.3433 102.4383 93.6688
Dec. 31, 1996 101.4295 110.3984 93.4999
Mar. 31, 1997 70.6468 112.8396 87.3982
Jun. 30, 1997 134.3284 131.9195 107.6996
Sep. 30, 1997 156.9652 141.1807 125.3594
Dec. 31, 1997 127.3632 144.6309 132.7733
Mar. 31, 1998 168.1592 168.1491 164.2026
Jun. 30, 1998 154.7264 178.8108 168.9852
Sep. 30, 1998 87.0647 157.4268 151.5731
Dec. 31, 1998 124.3781 216.9193 183.2019
- --------
</TABLE>
* $100 invested on June 11, 1996, including reinvestment of dividends. Fiscal
year ending December 31, 1998.
14
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act"),
requires the directors, officers and beneficial owners of more than 10% of the
Class A common stock of McLeodUSA to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership of equity securities of
McLeodUSA and to file subsequent reports when there are changes in such
ownership. Officers, directors and beneficial owners of more than 10% of the
Class A common stock are required by SEC regulations to furnish McLeodUSA with
copies of all Section 16(a) reports they file.
Based on its review of these reports and on written representations from the
reporting persons that no other reports were required, McLeodUSA believes that
during the fiscal year ended December 31, 1998 all Section 16(a) filing
requirements applicable to the officers, directors and greater than ten
percent beneficial owners were complied with, except that one Form 4 for each
of Stephen C. Gray and Paul D. Rhines was filed late.
Certain Transactions
McLeodUSA has entered into various agreements with InvenSys USA, Inc. and
several of its affiliates including InvenSys Limited (collectively and d/b/a
Orillion, "Orillion") pursuant to which Orillion provides information
technology development, programming and consulting services, and investment
management services to McLeodUSA. Pursuant to these agreements, McLeodUSA has
paid Orillion approximately $650,000 since January 1, 1998. Clark E. McLeod
and Roy A. Wilkens are directors of OrillionUSA, Inc.
McLeodUSA provides paging services, customer premise equipment ("CPE"),
labor and services for CPE, long distance service, 800 service and private
lines to First Mid-Illinois Bancshares. First Mid-Illinois Bancshares paid
McLeodUSA $559,000 for these services in 1998. Richard A. Lumpkin, Margaret
Lumpkin Keon and Mary Lumpkin Sparks own approximately 11.3%, 6.8% and 6.9% of
the capital stock of First Mid-Illinois Bancshares, respectively. Richard A.
Lumpkin is also a director of First Mid-Illinois Bancshares. Mr. Lumpkin is
also a director, executive officer and significant stockholder of McLeodUSA
and Mrs. Keon and Mrs. Sparks are significant stockholders of McLeodUSA.
Illuminet paid McLeodUSA $1,696,000 in 1998 for the rental of building space
and for DS-1 usage and transmission facilities in the form of private leased
lines. McLeodUSA paid Illuminet $1,326,000 in 1998 for database verification
services and SS7 link services. Richard A. Lumpkin is the Chairman of the
Board of Directors of Illuminet.
Ameren Corporation and Central Illinois Public Service Company collectively
paid McLeodUSA $1,380,000 in 1998 for private line services and long distance
services. Richard A. Lumpkin is a director of Ameren Corporation, the parent
company of Central Illinois Public Service Company.
In April 1997, McLeodUSA, Clark E. McLeod, Stephen C. Gray and Blake O.
Fisher, Jr. jointly purchased a jet aircraft for an aggregate of approximately
$2.25 million. Subsequently, the ownership was reallocated and Arthur L.
Christoffersen and Richard A. Lumpkin each purchased an interest. In
connection with the ownership reallocation, McLeodUSA paid approximately $1.35
million for a 60% ownership percentage and Messrs. McLeod, Gray, Fisher,
Christoffersen and Lumpkin each paid approximately $180,000 for an ownership
percentage of 8% each. During 1998, Messrs. Fisher and Christoffersen sold
their ownership back to McLeodUSA for $180,000 each and Mr. McLeod purchased
an additional 4% ownership from McLeodUSA for $90,000, increasing his
ownership percentage from 8% to 12%. McLeodUSA and Messrs. McLeod, Gray and
Lumpkin are parties to a Joint Ownership Agreement by which they have agreed
to share the operational expenses of the aircraft in proportion to their
respective ownership interest in the aircraft (72% by McLeodUSA, 12% by Mr.
McLeod and 8% each by Messrs. Gray and Lumpkin). Messrs. McLeod and Fisher are
directors and executive officers of McLeodUSA and Mr. Christoffersen is an
executive officer of McLeodUSA.
15
<PAGE>
McLeodUSA has entered into two agreements with Interstate Energy pursuant to
which Interstate Energy has agreed to grant McLeodUSA access to certain of
Interstate Energy's towers, rights-of-way, conduits and poles in exchange for
capacity on the McLeodUSA communications network.
In February 1996, McLeodUSA entered into two agreements with MHC Investment,
pursuant to which MHC Investment has agreed to grant McLeodUSA access to
certain of MHC Investment's towers, rights-of-way, conduits and poles in
exchange for capacity on the McLeodUSA communications network.
On July 18, 1995 and March 29, 1996, respectively, McLeodUSA loaned $75,000
to each of Kirk E. Kaalberg and Stephen K. Brandenburg in exchange for
unsecured notes executed by Mr. Kaalberg and Mr. Brandenburg, respectively.
Interest accrues on both loan amounts at the applicable rate as determined in
accordance with Internal Revenue Service regulations. Pursuant to the terms of
the notes executed by Mr. Kaalberg and Mr. Brandenburg, respectively, one
annual interest-only payment was made in 1997. Mr. Brandenburg made an annual
interest-only payment in 1998 and will make annual payments of $25,000 plus
accrued interest in each of the next three years. Mr. Kaalberg made an annual
payment of $25,000 plus accrued interest in 1998 and will make similar
payments in each of the next two years. Mr. Brandenburg is an executive
officer of McLeodUSA and Mr. Kaalberg was an executive officer of McLeodUSA
until his resignation effective May 5, 1999.
In December 1998, McLeodUSA entered into a split dollar arrangement for life
insurance policies owned by the McLeod Family 1998 Special Trust on the joint
lives of Clark and Mary McLeod. The McLeod Family 1998 Special Trust agreed to
assign the policies to McLeodUSA as collateral for the payment by McLeodUSA of
the premiums for these policies. No loans have been taken against these
policies. In 1998, the premium payments paid by McLeodUSA on these policies
totaled $1,880,000. The aggregate face amount of the policies is $113,000,000.
The McLeod Family 1998 Special Trust is sole owner and beneficiary of each
policy. McLeodUSA has agreed with Clark and Mary McLeod that one of the
principal reasons for entering into this arrangement is to avoid any need for
their heirs to liquidate their holdings of Class A common stock at or soon
after the death of one or both of them. Clark and Mary McLeod have agreed to
restrictions on their ability to sell or otherwise dispose of their shares of
Class A common stock. See "Principal Holders of Voting Securities--
Stockholders' Agreements." McLeodUSA also paid premiums of $138,257 for a
universal life policy on Clark and Mary McLeod with a face value of
$13,500,000. McLeodUSA is the beneficiary of this policy.
In March 1996, the Board of Directors adopted a policy requiring that any
material transactions between McLeodUSA and persons or entities affiliated
with officers, directors or principal stockholders of McLeodUSA be on terms no
less favorable to McLeodUSA than reasonably could have been obtained in arms'
length transactions with independent third parties or be approved by a
majority of disinterested directors.
For a description of certain other transactions, see "--Compensation
Committee Interlocks and Insider Participation."
16
<PAGE>
APPROVAL OF SECOND AMENDED AND RESTATED DIRECTORS STOCK OPTION PLAN
(Proposal 2)
General
On March 25, 1999, the Board of Directors approved, subject to stockholder
approval at the Annual Meeting, the Second Amended and Restated Directors
Stock Option Plan (the "Second Amended and Restated Directors Plan"), which is
an amendment and restatement of the Amended and Restated Directors Plan. The
Second Amended and Restated Directors Plan, among other things, would (i)
increase the number of shares of Class A common stock reserved for purchase
pursuant to option grants to an aggregate of 1,100,000 shares of Class A
common stock (subject to adjustment upon the occurrence of certain events as
described below), and (ii) modify the formula for the automatic grant of
options to provide for the grant of (x) an Initial Option to purchase from
10,000 to 20,000 shares of Class A common stock to each Eligible Director
(i.e., a non-employee member of the Board of Directors) who commences service
as a director on or after the Board's approval of the amendment and
restatement of the Amended and Restated Directors Plan, such amount to be
determined by the Board in its discretion, (y) an Additional Option to
purchase up to 10,000 shares of Class A common stock after each subsequent
annual meeting of stockholders if the Eligible Director continues to be an
Eligible Director, such amount to be determined by the Board in its
discretion, and (z) such Discretionary Options, in addition to the foregoing
Initial Options and Additional Options, to Eligible Directors as may be
determined by the Board; provided that no more than an aggregate of 100,000
shares of Class A common stock may be granted as Discretionary Options under
the plan as amended and restated.
The purpose of the plan is to enable eligible directors of McLeodUSA to
purchase shares of Class A common stock and thus to encourage stock ownership
by directors of McLeodUSA and to encourage the continued service of directors
of McLeodUSA. As of the Record Date, there were a total of four directors of
McLeodUSA eligible to participate in the plan, and no other persons were
eligible to participate in the plan.
The Second Amended and Restated Directors Plan
The following summary of the Second Amended and Restated Directors Plan does
not purport to be complete, and is subject to, and qualified in its entirety
by, reference to the complete text of the Second Amended and Restated
Directors Plan, which is attached hereto as Appendix A and is incorporated
herein by reference.
The predecessor plan to the Amended and Restated Directors Plan was adopted
by the Board of Directors and approved by the stockholders in 1993. Amendments
to such plan were adopted by the Board and approved by the stockholders in
1995 and 1996; the plan was further amended by the Board in 1997. Under the
Amended and Restated Directors Plan, McLeodUSA may grant options to purchase
up to 550,000 shares of Class A common stock to Eligible Directors. As of the
Record Date, options for 450,000 shares of Class A common stock had been
granted and options to purchase 152,314 shares of Class A common stock had
been exercised. Under the Second Amended and Restated Directors Plan, the
number of shares reserved for purchase pursuant to options is increased to an
aggregate of 1,100,000 shares of Class A common stock. Assuming the Second
Amended and Restated Directors Plan is approved, the aggregate value (based on
the closing price of Class A common stock on The Nasdaq Stock Market on the
Record Date) of the remaining 947,686 shares of Class A common stock that
would be reserved for issuance under the plan would be approximately $49.2
million.
Under the Amended and Restated Directors Plan, each Eligible Director who
commenced service as a director after the prior amendment of the plan was
granted an Initial Option to purchase 10,000 shares of Class A common stock.
Each such Eligible Director also was granted an Additional Option to purchase
5,000 shares of Class A common stock for each of the next two years if the
Eligible Director continued to be an Eligible Director.
Under the Second Amended and Restated Directors Plan, each Eligible Director
who commences service as a director on or after the Board's approval of the
amendment of the plan will be granted an Initial Option to
17
<PAGE>
purchase from 10,000 to 20,000 shares of Class A common stock, such amount to
be determined by the Board of Directors in its discretion. Each such Eligible
Director also will be granted an Additional Option to purchase up to 10,000
shares of Class A common stock after each subsequent annual meeting of the
stockholders if the Eligible Director continues to be an Eligible Director,
such amount to be determined by the Board of Directors in its discretion.
Lastly, each Eligible Director may receive Discretionary Options to purchase
shares of Class A common stock as may be determined by the Board of Directors
in its discretion; provided that no more than an aggregate of 100,000 shares
of Class A common stock may be granted as Discretionary Options under the
Second Amended and Restated Directors Plan.
Following the approval of the Second Amended and Restated Directors Plan by
the Board of Directors on March 25, 1999, the Board of Directors granted
Discretionary Options to purchase 15,000 shares of Class A common stock under
the plan to each of Messrs. Collins, Liu and Rhines at an exercise price of
$38.25, representing the fair market value of the Class A common stock on the
date of grant. Such options vest at the rate of 25% of the shares subject to
the option one year after the date of grant and with respect to an additional
25% of the shares subject to the option in each of the three subsequent years.
The grant of such Discretionary Options to Messrs. Collins, Liu and Rhines is
subject to stockholder approval, and approval of the Second Amended and
Restated Directors Plan by the stockholders of McLeodUSA also will be deemed
to constitute approval of such grants. The grants to Messrs. Collins, Liu and
Rhines reduce the aggregate number of shares of Class A common stock that are
available and may be granted as Discretionary Options under the Second Amended
and Restated Directors Plan from 100,000 shares to 55,000 shares. If the
Second Amended and Restated Directors Plan is approved by stockholders at the
Annual Meeting, each Eligible Director will be entitled to receive option
grants under such plan as amended in connection with their initial election to
the Board of Directors at such meeting or their continuation as a director of
McLeodUSA following such meeting, as the case may be.
The Amended and Restated Directors Plan provides that it shall be
administered by the Chief Financial Officer of McLeodUSA or such other person
as is appointed by the Board of Directors to serve as administrator. Because
the formula grants are amended pursuant to the Second Amended and Restated
Directors Plan to provide for the award of options within certain ranges as
determined by the Board of Directors in its discretion, the Second Amended and
Restated Directors Plan provides that it shall be administered by the Board of
Directors which shall have the full power and authority to take all actions
and to make all determinations required or provided for under the plan and any
option or option agreement entered into in connection with the plan.
The option exercise price for stock options granted under the Amended and
Restated Directors Plan is the greater of the fair market value or the par
value of the Class A common stock on the date of grant of the option. Options
granted under the plan may be exercised with respect to 25% of the shares
subject to such option one year after the option is granted and with respect
to an additional 25% of the shares subject to such option in each of the three
subsequent years. The Second Amended and Restated Directors Plan amends the
foregoing option price provision to provide that the option exercise price for
stock options may not be less than 100% of the fair market value of the Class
A common stock on the date of grant of the option.
The Amended and Restated Directors Plan provides that upon any dissolution
or liquidation of McLeodUSA, or upon a reorganization, merger or consolidation
in which McLeodUSA is not the surviving corporation, or upon the sale of all
or substantially all of the assets of McLeodUSA to another corporation, or
upon any transaction (including a merger or reorganization in which McLeodUSA
is the surviving corporation) approved by the Board of Directors which results
in any person or entity owning 80% or more of the total combined voting power
of all classes of stock of McLeodUSA, the plan and the options issued
thereunder will terminate, unless provision is made in connection with such
transaction for the continuation of the plan and/or the assumption of the
options or for the substitution for such options of new options covering the
stock of a successor corporation or a parent or subsidiary thereof, with
appropriate adjustments as to the number and kinds of shares and the per share
exercise price, in which event the plan (if applicable) and the options
granted will continue in the manner and under the terms so provided. In the
event of termination of the plan and the options issued thereunder, all
outstanding options will be exercisable to the extent such option was
otherwise exercisable at the time such termination occurs during such period
immediately prior to the occurrence of such termination as the Board of
Directors in its discretion will determine. In
18
<PAGE>
addition, in the event of a change of control, as defined in the plan, all
outstanding options become exercisable. No changes in the foregoing provisions
are made in the Second Amended and Restated Directors Plan, except that
clarifying language was added to provide that all options granted shall be
fully vested and exercisable in connection with (i) any continuation of the
plan, the assumption of the options theretofore granted, or the substitution
for such options of new options upon the occurrence of the circumstances
described above, and (ii) the termination of the plan upon the occurrence of
the circumstances described above.
If the outstanding shares of Class A common stock are increased or decreased
or changed into or exchanged for a different number or kind of shares or
securities of McLeodUSA, by reason of any recapitalization, reclassification,
stock split-up, combination of shares, exchange of shares, stock dividend or
other distribution payable in capital stock, or other increase or decrease in
such shares effected without receipt of consideration by McLeodUSA, an
appropriate and proportionate adjustment will be made in the number and kinds
of shares subject to the plan, and in the number, kinds and per share exercise
price of shares subject to the unexercised portion of options granted prior to
any such change. Any such adjustment in an outstanding option, however, will
be made without a change in the total price applicable to the unexercised
portion of the option but with a corresponding adjustment in the per share
option price. If McLeodUSA shall be the surviving corporation in any
reorganization, merger or consolidation, any outstanding option shall pertain
to and apply to the securities to which a holder of the number of shares of
Class A common stock subject to such option would have been entitled
immediately following such transaction with a corresponding adjustment of the
exercise price as specified in the plan. The foregoing provisions remain
unchanged as a result of the Second Amended and Restated Directors Plan.
Payment for shares purchased may be made either in cash or by exchanging
shares of Class A common stock with a fair market value equal to the total
option exercise price or cash for any difference. Options may be exercised by
directing that certificates for the shares purchased be delivered to a
licensed broker as agent for the Eligible Director, provided that the broker
tenders to McLeodUSA cash or cash equivalents equal to the option exercise
price plus the amount of any taxes that McLeodUSA may be required to withhold
in connection with the exercise of the option. The foregoing provision remains
unchanged as a result of the Second Amended and Restated Directors Plan.
The Amended and Restated Directors Plan provides that upon termination of
service of an Eligible Director in all capacities other than by reason of
death or permanent and total disability, any option granted pursuant to the
plan will terminate. Under the Second Amended and Restated Directors Plan,
upon termination of service of an Eligible Director in all capacities other
than by reason of death, permanent and total disability or retirement (which
is defined as a termination of service on or after reaching age 62 if the
Eligible Director has served for at least three years), any unvested option
granted pursuant to the plan will terminate and the Eligible Director may
exercise his or her outstanding vested options at any time until the date on
which such outstanding options expire in accordance with their terms.
The Amended and Restated Directors Plan provides that if an Eligible
Director's service with McLeodUSA terminates by reason of death or permanent
and total disability, his or her options, whether or not then exercisable, may
be exercised within three months after such death or disability but not later
than the date the option would otherwise expire. The Second Amended and
Restated Directors Plan extends the exercise period
from three months to 180 days after such death or disability unless a later
date is otherwise provided in the particular option agreement (but not later
than the date the option would otherwise expire). In addition, under the
Second Amended and Restated Directors Plan, if the Eligible Director's service
terminates by reason of retirement, the options continue to vest for two
additional years, and the vested options can be exercised at any time after
such termination of service (but not later than the date the option would
otherwise expire).
The Board of Directors at any time may terminate, suspend or amend the
Second Amended and Restated Directors Plan, provided that no termination,
suspension or amendment of such plan may, without the consent of the Eligible
Director to whom an option has been granted, adversely affect the rights of
the holder of the option. All options expire 10 years after the date of grant.
The Second Amended and Restated Directors Plan will terminate in 2009, unless
terminated at an earlier date by the Board of Directors. No changes in such
provisions were made as a result of the Second Amended and Restated Directors
Plan except that the plan's termination date was extended from 2006 to 2009
and certain additional clarifying changes were made.
19
<PAGE>
The federal income tax consequences of the Second Amended and Restated
Directors Plan are discussed below under the caption "Federal Income Tax
Consequences of the Second Amended and Restated Directors Plan."
Plan Benefits
The table below provides information regarding the number of shares of Class
A common stock subject to options granted under the Second Amended and
Restated Directors Plan since the inception of the plan in 1993 and the Record
Date to (i) the Named Executive Officers, (ii) the nominees for election as
directors, (iii) all executive officers of McLeodUSA as a group, (iv) all non-
executive officer directors as a group, (v) all non-executive officer
employees as a group (including all officers who are not executive officers),
and (vi) associates of any director, executive officer or nominee as a group.
Plan Benefits
<TABLE>
<CAPTION>
Options Weighted
Granted Average
(Number of Exercise
Name and Position(s) Shares) Price
- -------------------- ---------- --------
<S> <C> <C>
Clark E. McLeod........................................... -- --
Chairman, Chief Executive Officer and Director
Richard A. Lumpkin........................................ -- --
Vice Chairman and Director
Stephen C. Gray........................................... -- --
President, Chief Operating Officer and Director Nominee
Blake O. Fisher, Jr....................................... 84,375 $1.59
Group Vice President, Regional President-Western Region
and Director
Thomas M. Collins......................................... 99,375(1) 7.12
Director
Lee Liu................................................... 99,375(1) 7.12
Director
Peter H.O. Claudy......................................... -- --
Director Nominee
Robert J. Currey.......................................... -- --
Director Nominee
Paul D. Rhines............................................ 99,375(1) 7.12
Director Nominee
Roy A. Wilkens............................................ -- --
Director Nominee
Executive Officer Group................................... 84,375 1.59
(4 persons)
Non-Executive Officer Director Group...................... 298,125(1) 7.12
(5 persons)
Non-Executive Officer Employee Group...................... -- --
(0 persons)
Associates of any Director, Executive Officer or Nominee
as a Group............................................... -- --
(0 persons)
</TABLE>
20
<PAGE>
(1) Includes options to purchase 15,000 shares of Class A common stock granted
on March 25, 1999 to each of Messrs. Collins, Liu and Rhines, which vest
at the rate of 25% of the shares subject to the option one year after the
date of grant and with respect to an additional 25% of the shares subject
to the option in each of the three subsequent years. Such option grants
are subject to stockholder approval.
In addition, if the Second Amended and Restated Directors Plan is approved
by stockholders at the Annual Meeting, each Eligible Director also will be
entitled to receive option grants under such plan as amended and described
above in connection with their initial election to the Board of Directors at
such meeting or their continuation as a director of McLeodUSA following such
meeting, as the case may be.
Federal Income Tax Consequences of the Second Amended and Restated Directors
Plan
Each option granted under the Second Amended and Restated Directors Plan is
a non-qualifying (non-incentive) option. The grant of an option is not a
taxable event for the Eligible Director or McLeodUSA. Upon exercising an
option, an Eligible Director will recognize ordinary income in an amount equal
to the difference between the exercise price and the fair market value of the
Class A common stock on the date of exercise. McLeodUSA will be entitled to a
business expense deduction in the same amount. Upon a subsequent sale or
exchange of shares acquired pursuant to the exercise of an option, the
Eligible Director will have taxable gain or loss, measured by the difference
between the amount realized on the disposition and the tax basis of the shares
(generally, the amount paid for the shares plus the amount treated as ordinary
income at the time the option was exercised).
If, pursuant to an option agreement, the Eligible Director surrenders shares
of Class A common stock in payment of part or all of the exercise price for
options, no gain or loss will be recognized with respect to the shares
surrendered (regardless of whether the shares were acquired pursuant to the
exercise of an incentive option) and the Eligible Director will be treated as
receiving an equivalent number of shares pursuant to the exercise of the
option in a nontaxable exchange. The basis of the shares surrendered will be
treated as the substituted tax basis for an equivalent number of option shares
received and the new shares will be treated as having been held for the same
holding period as had expired with respect to the transferred shares. However,
the fair market value of any shares received in excess of the number of shares
surrendered (i.e., the difference between the aggregate option exercise price
and the aggregate fair market value of the shares received pursuant to the
exercise of the option) will be taxed as ordinary income. Under current federal
income tax law the highest tax rate on ordinary income is 39.6%, and long-term
capital gains are subject to a maximum tax rate of 20%. Gain on a sale of stock
acquired as a consequence of the exercise of an option should qualify as long-
term if the stock has been held for more than one year (after exercise). Because
of certain provisions in the law relating to the "phase out" of personal
exemptions and certain limitations on itemized deductions, the federal income
tax consequences to a particular taxpayer of receiving additional amounts of
ordinary income or capital gain may be greater than would be indicated by
application of the foregoing tax rates to the additional amount of income or
gain.
Required Vote
The affirmative vote of a majority of the voting rights present and entitled
to vote at the Annual Meeting is required to approve the Second Amended and
Restated Directors Plan. Approval of the Second Amended and Restated Directors
Plan by stockholders also will be deemed to constitute approval of grants made
under such plan, as amended, as described above.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2.
21
<PAGE>
RATIFICATION OF THE APPOINTMENT
OF THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS
FOR THE 1999 FISCAL YEAR
(Proposal 3)
At the recommendation of the Audit Committee of the Board of Directors, the
Board of Directors has appointed the firm of Arthur Andersen LLP as the
independent accountants for McLeodUSA for the fiscal year ending December 31,
1999.
On March 27, 1997, McLeodUSA engaged Arthur Andersen LLP as its principal
independent accountants, to replace McGladrey & Pullen, LLP, the former
independent accountants of McLeodUSA, effective with such engagement. The
decision to change independent accountants was made following a review of
competitive proposals submitted by Arthur Andersen LLP and two other major
public accounting firms, and was recommended by the Audit Committee of the
Board of Directors and approved by the Board. McGladrey & Pullen, LLP did not
resign and did not decline to stand for re-election.
During the two fiscal years ended December 31, 1996 and 1995, and the
interim period subsequent to December 31, 1996, there had been no
disagreements with McGladrey & Pullen, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which would have caused McGladrey & Pullen, LLP to make reference in
their report to such disagreements if not resolved to their satisfaction.
McGladrey & Pullen, LLP's reports on the financial statements of McLeodUSA
for the fiscal years ended December 31, 1996 and 1995 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
McLeodUSA previously provided McGladrey & Pullen, LLP with a copy of this
disclosure and requested that McGladrey & Pullen, LLP furnish it with a letter
addressed to the SEC stating whether it agrees with the above statements. A
copy of the McGladrey & Pullen, LLP letter addressed to the SEC is filed as an
exhibit to McLeodUSA's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
During the two fiscal years ended December 31, 1998 and 1997, there have
been no disagreements with Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which would have caused Arthur Andersen LLP to make reference in
their report to such disagreements if not resolved to their satisfaction.
Arthur Andersen LLP's reports on the financial statements of McLeodUSA for
the fiscal years ended December 31, 1998 and 1997 contained no adverse opinion
or disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope or accounting principles.
Stockholder ratification of Proposal 3 is not required by the Bylaws or
otherwise. However, the Board of Directors is submitting Proposal 3 to the
stockholders for ratification as a matter of good corporate practice. If the
stockholders fail to ratify Proposal 3, the Board of Directors will reconsider
whether or not to retain Arthur Andersen LLP. Even if Proposal 3 is ratified,
the Board of Directors in its discretion may direct the appointment of a
different independent accountant at any time during the year if the Board of
Directors determines that such a change would be in the best interests of
McLeodUSA and its stockholders.
Representatives of Arthur Andersen LLP will be present at the Annual Meeting
and will have the opportunity to make a statement if they so desire and will
be available to respond to appropriate questions.
The affirmative vote of a majority of the voting rights present at the
Annual Meeting is required to approve Proposal 3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 3.
22
<PAGE>
STOCK OWNED BY MANAGEMENT
The following beneficial ownership table sets forth information regarding
beneficial ownership of Class A common stock as of the Record Date by:
.each director and director nominee
.each Named Executive Officer
.all executive officers and directors as a group
Under the Exchange Act, a person is deemed to be a "beneficial owner" of a
security if he or she has or shares the power to vote or direct the voting of
such security or the power to dispose or direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities
of which that person has the right to acquire beneficial ownership within 60
days. More than one person may be deemed to be a beneficial owner of the same
securities. The percentage ownership of each stockholder is calculated based
on the total number of outstanding shares of Class A common stock as of the
Record Date plus those shares of Class A common stock that such stockholder
has the right to acquire within 60 days. Consequently, the denominator for
calculating such percentage may be different for each stockholder.
The table is based upon information supplied by the directors and executive
officers. Unless otherwise indicated in the footnotes to the table, each of
the stockholders listed has sole voting and dispositive power with respect to
the shares shown as beneficially owned.
The number of option shares includes shares of Class A common stock that the
individuals named in the table have the right to acquire within 60 days from
the Record Date upon exercise of options.
<TABLE>
<CAPTION>
Beneficial
Ownership
-------------------------------
Number of Number of
Option Shares and
Name of Beneficial Owner Shares Option Shares Percent
------------------------ --------- ------------- -------
<S> <C> <C> <C>
Clark E. McLeod(1)(2)....................... 235,623 9,570,285 12.8
Richard A. Lumpkin(1)(3).................... 11,250 5,067,778 6.8
Stephen C. Gray(4).......................... 392,173 740,634 1.0
Arthur L. Christoffersen.................... 61,467 61,467 *
Blake O. Fisher, Jr. ....................... 189,562 222,133 *
Thomas M. Collins........................... 77,344 269,618 *
Paul D. Rhines.............................. 77,344 114,920 *
Lee Liu..................................... 27,344 39,544 *
Robert J. Currey............................ 37,500 37,500 *
Peter H. O. Claudy(5)....................... -- -- *
Roy A. Wilkens.............................. -- 100,000 *
Directors and executive officers as a group
(19 persons)............................... 1,574,735 17,527,132 23.0%
</TABLE>
- --------
* Less than one percent.
23
<PAGE>
(1) Richard Anthony Lumpkin, Gail G. Lumpkin, Margaret L. Keon, Mary Lee
Sparks and all of their children, along with Steven L. Grissom, David R.
Hodgman and BankOne, Texas, N.A., individually, or as trustees or settlors
for trusts for the benefit of members of the family of Richard Adamson
Lumpkin, MHC Investment, Interstate Energy, M/C Partners III Limited
Partnership, Clark E. McLeod and Mary E. McLeod are parties to one or more
stockholders' agreement and, accordingly, may constitute a group within
the meaning of Section 13(d)(3) of the Exchange Act. As of the Record
Date, these stockholders beneficially owned an aggregate of 37,461,893
shares of Class A common stock, including 1,300,688 shares that Interstate
Energy has the right to acquire upon exercise of options, and 235,623 and
11,250 shares that Messrs. McLeod and Lumpkin, respectively, have the
right to purchase upon exercise of options, within 60 days from the Record
Date, representing an ownership interest of 50.0%. See "Principal Holders
of Voting Securities--Stockholders' Agreements."
(2) Includes 4,296,471 shares of Class A common stock held of record by Mary
E. McLeod, Mr. McLeod's wife, over which Mr. McLeod has shared voting
power and 200,000 shares of Class A common stock held by the McLeod
Charitable Foundation for which both Mr. McLeod and Mrs. McLeod are
directors and over which both have shared voting and dispositive power.
Also includes 125,000 shares of Class A common stock held by the Clark E.
McLeod Unitary Trust and 125,000 shares of Class A common stock held by
the Mary E. McLeod Unitary Trust for which Mr. McLeod is a trustee and
over which Mr. McLeod has shared voting and investment power. Mr. McLeod's
address is c/o McLeodUSA Incorporated, McLeodUSA Technology Park, 6400 C
Street SW, P.O. Box 3177, Cedar Rapids, IA 52406-3177.
(3) Includes 311,127 shares of Class A common stock held of record by Gail G.
Lumpkin, Mr. Lumpkin's wife, over which Mr. Lumpkin has shared voting
power. Includes 2,245,081 shares of Class A common stock held by various
trusts for the benefit of the family of Richard Adamson Lumpkin over which
Mr. Lumpkin has shared voting and investment power. Includes 2,500,320
shares of Class A common stock held by various trusts for the benefit of
the family of Richard Adamson Lumpkin over which Mr. Lumpkin has shared
investment power. Includes 11,250 shares of Class A common stock that Mr.
Lumpkin has the right of purchase within 60 days from the Record Date
pursuant to options. Mr. Lumpkin's address is c/o McLeodUSA Incorporated,
McLeodUSA Technology Park, 6400 C Street SW, P.O. Box 3177, Cedar Rapids,
IA 52406-3177.
(4) Includes 3,750 shares of Class A common stock held of record by the
Stephen Samuel Gray Irrevocable Trust, and 3,750 shares of Class A common
stock held of record by the Elizabeth Mary Fletcher Gray Education Trust,
of which Mr. Gray is the trustee. Includes 26,250 shares of Class A common
stock held of record by Morgan Stanley Dean Witter & Co. for the benefit
of Mr. Gray.
(5) Mr. Claudy was elected as a director of McLeodUSA on April 28, 1999. Mr.
Claudy is the nominee of M/C under the Ovation Stockholders' Agreement.
See "Principal Holders of Voting Securities--Stockholders' Agreements."
24
<PAGE>
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth information as of the Record Date with
respect to the ownership of shares of Class A common stock by each person
believed by management to be the beneficial owner of more than five percent of
the outstanding Class A common stock. The information is based on the most
recent Schedule 13D or 13G filed with the SEC on behalf of such persons or
other information made available to McLeodUSA. Except as otherwise indicated,
the reporting persons have stated that they possess sole voting and sole
dispositive power over the entire number of shares reported.
<TABLE>
<CAPTION>
Beneficial
Ownership
------------------
Number of
Name of Beneficial Owner Shares Percent
------------------------ ---------- -------
<S> <C> <C>
Interstate Energy Corporation(1)....................... 10,323,288 13.6%
Clark E. McLeod(2)..................................... 9,570,285 12.8%
MHC Investment Company(3).............................. 6,759,866 9.1%
Fidelity Management & Research Company(4).............. 5,106,800 6.9%
Putnam Investments, Inc.(5)............................ 7,389,757 9.9%
Richard A. Lumpkin(2).................................. 5,067,778 6.8%
Mary E. McLeod(2)(6)................................... 4,746,471 6.4%
Media/Communications Partners III Limited
Partnership(7)........................................ 3,728,608 5.0%
</TABLE>
- --------
(1) Includes 1,300,688 shares of Class A common stock that Alliant Energy
Investments, Inc., a wholly owned subsidiary of Interstate Energy
Corporation, has the right to acquire upon exercise of options and
8,977,600 shares of Class A common stock of which Alliant Energy
Investments is the holder of record. Interstate Power Company, a wholly
owned subsidiary of Interstate Energy Corporation, is the record holder of
45,000 shares of Class A common stock. The address of Interstate Energy
Corporation, 222 West Washington Avenue, P.O. Box 192, Madison, WI 53701.
(2) See "Stock Owned by Management."
(3) MHC Investment Company is a wholly owned indirect subsidiary of
MidAmerican Energy Holdings Company. The address of MHC Investment Company
is c/o MidAmerican Energy Holdings Company, 666 Grand Ave., Des Moines, IA
50309. Includes 23,438 shares of Class A common stock held of record by
each of Ronald W. Stepien and Russell E. Christiansen, an officer and a
retired officer, respectively, of MidAmerican Energy Company and former
directors of McLeodUSA. Includes 28,125 shares of Class A common stock
that Mr. Stepien and 28,125 shares of Class A common stock that Mr.
Christiansen have the right to purchase within 60 days from the Record
Date upon exercise of options. MHC Investment Company has the power to
direct the disposition of such shares.
(4) Fidelity Management & Research Company is a wholly owned subsidiary of FMR
Corp. The address of FMR Corp. is 82 Devonshire Street, Boston, MA 02109.
The amount of the beneficial ownership was disclosed on a Schedule 13G
filed by FMR Corp. on February 12, 1999.
(5) The address of Putnam Investment, Inc. is One Post Office Square, Boston,
MA 02109. The amount of the beneficial ownership was disclosed on a
Schedule 13G filed by Putnam Investment Inc. on April 9, 1999.
(6) Includes 200,000 shares of Class A common stock held by the McLeod
Charitable Foundation for which Mrs. McLeod is a director and over which
she has shared voting and dispositive power. Also includes 125,000 shares
of Class A common stock held by the Mary E. McLeod Unitary Trust and
125,000 shares of Class A common stock held by the Clark E. McLeod Unitary
Trust for which Mrs. McLeod is a trustee and over which Mrs. McLeod has
shared voting and investment power. Mrs. McLeod's address is c/o McLeodUSA
Incorporated, McLeodUSA Technology Park, 6400 C Street SW, P.O. Box 3177,
Cedar Rapids, IA 52406-3177.
25
<PAGE>
(7) Excludes shares owned by M/C Investors L.L.C. M/C III L.L.C. is the
general partner of Media/Communications Partners III Limited Partnership
and controls the voting and dispositive power of the shares of Class A
common stock held by it. Pursuant to the limited liability company
agreement of M/C III L.L.C., David D. Croll, James F. Wade, Stephen
Gormley, John Hayes and Christopher Gaffney together share the voting and
dispositive power of the shares of Class A common stock held by
Media/Communications Partners III Limited Partnership. The address of
Media/Communications Partners III Limited Partnership, M/C III L.L.C. and
each of the Messrs. Croll, Wade, Gormley, Hayes and Gaffney is 75 State
Street, Boston, MA 02109.
Stockholders' Agreements
On November 18, 1998, McLeodUSA entered into a stockholders' agreement (the
"Stockholders' Agreement") with several of its significant stockholders
consisting of IES Investments Inc. (a subsidiary of Interstate Energy), Clark
E. and Mary E. McLeod, and Richard A. and Gail G. Lumpkin and several other
parties related to the Lumpkins.
The Stockholders' Agreement provides, among other things, that:
. until December 31, 2001, the parties will not sell any McLeodUSA equity
securities without receiving the prior written consent of the Board of
Directors, except for transfers specifically permitted by the
Stockholders' Agreement
. the Board of Directors will determine on a quarterly basis starting with
the quarter ending December 31, 1998 and ending on December 31, 2001, the
aggregate number, if any, of shares of Class A common stock, not to
exceed in the aggregate 150,000 shares per quarter, that the parties may
sell during designated trading periods following the release of the
quarterly or annual financial results of McLeodUSA
. to the extent the Board of Directors grants registration rights to a
party to the agreement in connection with a sale of McLeodUSA securities
by such party, it will grant similar registration rights to the other
parties
. the Board of Directors will determine on an annual basis commencing with
the year ending December 31, 1999 and ending on December 31, 2001 (each
such year, an "Annual Period"), the aggregate number, if any, of shares
of Class A common stock, not to exceed in the aggregate on an annual
basis a number of shares equal to 15% of the total number of shares of
Class A common stock beneficially owned by the parties as of December 31,
1998 (the "Registrable Amount"), to be registered by McLeodUSA under the
Securities Act of 1933 for sale by the parties
. in any underwritten offering of shares of Class A common stock by
McLeodUSA, other than an offering on a registration statement on Form S-4
or Form S-8 or any other form which would not permit the inclusion of
shares of Class A common stock owned by the parties, McLeodUSA will
undertake to register the shares of Class A common stock of such parties
up to the Registrable Amount, if any, as determined by the Board of
Directors
. McLeodUSA may subsequently determine not to register any shares of the
parties under the Securities Act and may either not file a registration
statement or otherwise withdraw or abandon a registration statement
previously filed
The Stockholders' Agreement terminates on December 31, 2001. If during any
Annual Period McLeodUSA has not provided a party a reasonable opportunity to
sell an aggregate number of shares of Class A common stock equal to not less
than 15% of the total number of shares of Class A common stock beneficially
owned by such party as of December 31, 1998, then such party may terminate the
Stockholders' Agreement as it applies to such party.
Under the Stockholders' Agreement, each party also agreed, until such party
owns less than 4 million shares of Class A common stock or until December 31,
2001, whichever occurs first, to vote such party's shares and take all action
within its power to:
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. establish the size of the Board of Directors at up to 11 directors
. cause to be elected to the Board of Directors one director designated by
IES Investments Inc. for so long as Interstate Energy owns at least 4
million shares of Class A common stock
. cause to be elected to the Board of Directors three directors who are
executive officers of McLeodUSA designated by Clark McLeod for so long as
Clark and Mary McLeod collectively own at least 4 million shares of Class
A common stock
. cause Richard Lumpkin to be elected to the Board of Directors for so long
as the former stockholders of CCI who are a party to the agreement
collectively own at least 4 million shares of Class A common stock
. cause to be elected to the Board of Directors up to six non-employee
directors nominated by the Board
On January 7, 1999, in connection with the acquisition of Ovation
Communications, Inc., M/C Investors L.L.C. and Media/Communications Partners
III Limited Partnership entered into a separate stockholders' agreement (the
"Ovation Stockholders' Agreement") with the parties to the Stockholders'
Agreement.
The Ovation Stockholders' Agreement provides that, until December 31, 2001,
M/C will not sell any equity securities of McLeodUSA without receiving the
prior written consent of the Board of Directors. The Ovation Stockholders'
Agreement also contains various provisions intended to insure that M/C is
treated on a basis similar to the parties to the Stockholders' Agreement in
connection with permitted sales of securities of McLeodUSA under the
Stockholders' Agreement generally starting December 31, 1999. In addition, for
so long as M/C owns at least 2.5 million shares of Class A common stock, M/C
has agreed to vote its shares in accordance with the voting agreement
contained in the Stockholders' Agreement and the other partries have agreed to
vote their shares to cause to be elected to the Board of Directors one
director designated by M/C.
The Ovation Stockholders' Agreement terminates on December 31, 2001. In
addition, if (1) during each of the years ending December 31, 2000 and
December 31, 2001, McLeodUSA has not provided M/C a reasonable opportunity to
register under the Securities Act for sale an aggregate number of shares of
Class A common stock equal to not less than 15% of the total number of shares
of Class A common stock beneficially owned by M/C as of March 31, 1999, or (2)
after January 1, 2000, the Stockholders' Agreement has been terminated by all
parties to such agreement, then M/C may terminate the Ovation Stockholders'
Agreement. The Ovation Stockholders' Agreement will be terminated with respect
to all parties other than M/C and McLeodUSA at such time as the Stockholders'
Agreement is terminated.
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<PAGE>
SUBMISSION OF STOCKHOLDER PROPOSALS FOR INCLUSION IN NEXT YEAR'S PROXY
STATEMENT
Any proposal or proposals by a stockholder intended to be included in the
proxy statement and form of proxy relating to the 2000 annual meeting of
stockholders must be received by McLeodUSA no later than January 12, 2000
pursuant to the proxy solicitation rules of the SEC. Nothing in this paragraph
shall be deemed to require McLeodUSA to include in its proxy statement and
proxy relating to the 2000 annual meeting of stockholders any stockholder
proposal which may be omitted from the proxy materials pursuant to applicable
regulations of the SEC in effect at the time such proposal is received.
OTHER STOCKHOLDER PROPOSALS FOR PRESENTATION AT NEXT YEAR'S ANNUAL MEETING
For any proposal that is not submitted for inclusion in next year's proxy
statement but is instead presented directly at the 2000 annual meeting of
stockholders, management will be able to vote proxies in its discretion if
McLeodUSA:
. receives notice of the proposal before the close of business on March
27, 2000, and advises stockholders in the 2000 proxy statement about the
nature of the matter and how management intends to vote on such matter,
or
. does not receive notice of the proposal prior to the close of business
on March 27, 2000
Notices of intention to present proposals at the 2000 annual meeting should
be addressed to Corporate Secretary, McLeodUSA Incorporated, 6400 C Street SW,
P.O. Box 3177, Cedar Rapids, Iowa 52406-3177.
OTHER MATTERS THAT MAY COME BEFORE THIS YEAR'S ANNUAL MEETING
The Board of Directors of McLeodUSA does not know of any other matters to be
presented for a vote at the Annual Meeting. If, however, any other matter
should properly come before the Annual Meeting or any adjournment thereof, the
persons named in the accompanying proxy will vote such proxy in accordance
with their best judgment.
By Order of the Board of Directors
/s/ Clark E. McLeod
Clark E. McLeod
Chairman and Chief Executive Officer
Cedar Rapids, Iowa
May 7, 1999
A copy of the Annual Report to Stockholders for the fiscal year ended
December 31, 1998 accompanies this Proxy Statement. McLeodUSA is required to
file an Annual Report on Form 10-K for the fiscal year ended December 31, 1998
with the SEC. Stockholders may obtain, free of charge, a copy of the Annual
Report on Form 10-K by writing to McLeodUSA Incorporated, 6400 C Street SW,
P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, Attention: Corporate Secretary.
McLeodUSA will provide copies of the exhibits to the Form 10-K upon payment of
a reasonable fee.
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APPENDIX A
McLEODUSA INCORPORATED
SECOND AMENDED AND RESTATED
DIRECTORS STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. PURPOSE................................................................ A-1
2. DEFINITIONS............................................................ A-1
3. ADMINISTRATION......................................................... A-2
4. STOCK SUBJECT TO THE PLAN.............................................. A-2
5. ELIGIBILITY............................................................ A-3
6. OPTION PRICE........................................................... A-3
7. NUMBER OF SHARES AND GRANT DATES....................................... A-3
8. VESTING OF OPTIONS..................................................... A-4
9. OPTION PERIOD.......................................................... A-4
10. TIMING AND METHOD OF EXERCISE.......................................... A-4
11. SERVICE TERMINATION.................................................... A-5
12. RIGHTS IN THE EVENT OF DEATH, DISABILITY OR RETIREMENT................. A-5
13. NO STOCKHOLDER RIGHTS UNDER OPTION..................................... A-6
14. CONTINUATION OF SERVICE................................................ A-6
15. STOCK OPTION AGREEMENT................................................. A-6
16. WITHHOLDING............................................................ A-6
17. NON-TRANSFERABILITY OF OPTIONS......................................... A-6
18. USE OF PROCEEDS........................................................ A-6
19. ADOPTION, AMENDMENT, SUSPENSION AND TERMINATION........................ A-6
20. SECURITIES LAWS........................................................ A-7
21. INDEMNIFICATION........................................................ A-7
22. GOVERNING LAW.......................................................... A-8
</TABLE>
<PAGE>
McLEODUSA INCORPORATED
SECOND AMENDED AND RESTATED
DIRECTORS STOCK OPTION PLAN
McLEODUSA INCORPORATED, a Delaware corporation (the "Corporation"), sets
forth herein the terms of the Second Amended and Restated Directors Stock
Option Plan (the "Plan") as follows:
1. PURPOSE
The Plan is a further amendment and restatement of the McLeodUSA
Incorporated Amended and Restated Directors Stock Option Plan and is intended
to attract and retain the best possible members of the Board and to provide
additional incentives to those directors to promote the success of the
Corporation. The Plan provides Eligible Directors an opportunity to purchase
shares of the Stock pursuant to Options. Options granted under the Plan shall
not constitute "incentive stock options" within the meaning of Section 422 of
the Code.
2. DEFINITIONS
For purposes of interpreting the Plan and related documents (including Stock
Option Agreements), the following definitions shall apply:
2.1. "Additional Option" means any Option other than an Initial Option.
2.2. "Board" means the board of directors of the Corporation.
2.3. "Code" means the Internal Revenue Code of 1986, as amended.
2.4. "Commencement of Service" means the date of election of the Eligible
Director to his or her first term as a Director.
2.5. "Corporation" means McLeodUSA Incorporated, a Delaware corporation.
2.6. "Effective Date" means the date of adoption of the second amendment
and restatement of the Plan by the Board.
2.7. "Eligible Director" means a member of the Board who is not an
officer or employee of the Corporation or any of its subsidiaries and is
not Robert J. Currey.
2.8. "Exchange Act" means the Securities Exchange Act of 1934, as now in
effect or hereafter amended.
2.9. "Exercise Price" means the Option Price multiplied by the number of
shares of Stock purchased pursuant to exercise of an Option.
2.10. "Expiration Date" means the tenth anniversary of the Grant Date or,
if earlier, the termination of the Option pursuant to Section 4.2(c)
hereof.
2.11. "Fair Market Value" means the value of each share of Stock subject
to the Plan determined as follows: If on the Grant Date or other
determination date the Stock is listed on an established national or
regional stock exchange, is admitted to quotation on the National
Association of Securities Dealers Automated Quotation System, or otherwise
is publicly traded on an established securities market, the Fair Market
Value of the Stock shall be the closing price of the Stock on such exchange
or in such market (the highest such closing price if there is more than one
such exchange or market) on the trading day immediately preceding the Grant
Date or other determination date (or, if there is no such reported closing
price, the Fair Market Value shall be the mean between the highest bid and
lowest asked prices or between the high and low sale prices on such trading
day), or, if no sale of the Stock is reported for such trading day, on the
next preceding day on which any sale shall have been reported. If the Stock
is not listed on such an exchange, quoted on such system or traded on such
a market, Fair Market Value shall be determined by the Board in good faith.
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2.12. "Grant Date" means the date on which an Option grant takes effect
pursuant to Section 7 hereof.
2.13. "Initial Option" means an Option received by an Eligible Director
as of such Eligible Director's Commencement of Service.
2.14. "Option" means any option to purchase one or more shares of Stock
pursuant to the Plan, including both Initial Options and Additional
Options.
2.15. "Optionee" means an Eligible Director who holds an Option.
2.16. "Option Period" means the period during which Options may be
exercised as defined in Section 9 hereof.
2.17. "Option Price" means the purchase price for each share of Stock
subject to an Option.
2.18. "Retirement" means a Service Termination (as defined in Section 11)
on or after age 62 if the Optionee has at least three years of service as
an Eligible Director.
2.19. "Securities Act" means the Securities Act of 1933, as now in effect
or as hereafter amended.
2.20. "Stock" means the Class A common stock, par value $0.01 per share,
of the Corporation.
2.21. "Stock Option Agreement" means the written agreement evidencing the
grant of an Option hereunder.
3. ADMINISTRATION
3.1. The Plan shall be administered by the Board which shall have the full
power and authority to take all actions and to make all determinations
required or provided for under the Plan or any Option granted or Option
Agreement entered into hereunder and all such other actions and determinations
not inconsistent with the specific terms and provisions of the Plan deemed by
the Board to be necessary or appropriate to the administration of the Plan or
any Option granted or Option Agreement entered into hereunder. The
interpretation and construction by the Board of any provision of the Plan or
of any Option granted or Option Agreement entered into hereunder shall be
final and conclusive.
3.2. No member of the Board shall be liable for any action or determination
made, or any failure to take or make an action or determination, in good faith
with respect to the Plan or any Option granted or Option Agreement entered
into hereunder.
4. STOCK SUBJECT TO THE PLAN
4.1. Options to purchase not more than 1,100,000 shares of the Stock may be
granted under the Plan. If any Option expires, terminates or is terminated or
canceled for any reason before it is exercised in full, the shares of Stock
that were subject to the unexercised portion of the Option shall be available
for future Options granted under the Plan.
4.2(a). If the outstanding shares of Stock are increased or decreased or
changed into or exchanged for a different number or kind of shares or other
securities of the Corporation by reason of any recapitalization,
reclassification, stock split-up, combination of shares, exchange of shares,
stock dividend or other distribution payable on capital stock, or other
increase or decrease in such shares effected without receipt of consideration
by the Corporation, occurring after the Effective Date, the number and kinds
of shares for the purchase of which Options may be granted under the Plan
shall be adjusted proportionately and accordingly by the Corporation. In
addition, the number and kind of shares for which Options are outstanding
shall be adjusted proportionately and accordingly so that the proportionate
interest of the holder of the Option immediately following such event shall,
to the extent practicable, be the same as immediately prior to such event. Any
such adjustment in outstanding Options shall not change the aggregate Option
Price payable with respect to shares subject to the unexercised portion of the
Option outstanding but shall include a corresponding proportionate adjustment
in the Option Price per share.
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<PAGE>
4.2(b). Subject to Section 4.2(c) hereof, if the Corporation shall be the
surviving corporation in any reorganization, merger or consolidation of the
Corporation with one or more other corporations, any Option theretofore
granted pursuant to the Plan shall pertain to and apply to the securities to
which a holder of the number of shares of Stock subject to such Option would
have been entitled immediately following such reorganization, merger or
consolidation, with a corresponding proportionate adjustment of the Option
Price per share so that the aggregate Option Price thereafter shall be the
same as the aggregate Option Price of the shares remaining subject to the
Option immediately prior to such reorganization, merger or consolidation.
4.2(c). Upon the dissolution or liquidation of the Corporation, or upon a
merger, consolidation or reorganization of the Corporation with one or more
other corporations in which the Corporation is not the surviving corporation,
or upon a sale of substantially all of the assets of the Corporation to
another corporation, or upon any transaction (including, without limitation, a
merger or reorganization in which the Corporation is the surviving
corporation) approved by the Board which results in any person or entity
owning 80 percent or more of the combined voting power of all classes of stock
of the Corporation, the Plan and all Options outstanding hereunder shall
terminate, except to the extent provision is made in writing in connection
with such transaction for the continuation of the Plan, the assumption of the
Options theretofore granted, or for the substitution for such Options of new
options covering the stock of a successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kinds of
shares and exercise prices, in which event the Plan (if applicable) and
Options theretofore granted shall continue in the manner and under the terms
so provided; except that all such Options shall be fully vested and
exercisable. In the event of any such termination of the Plan and Options,
each individual holding an Option shall have the right immediately prior to
the occurrence of such termination and during such period occurring prior to
such termination as the Board in its sole discretion shall determine and
designate, to exercise such Option whether or not such Option was otherwise
exercisable at the time such termination occurs. The Corporation shall send
written notice of an event that will result in such a termination to all
individuals who hold Options not later than the time at which the Corporation
gives notice thereof to its stockholders.
4.2(d). Adjustments under this Section 4.2 related to stock or securities of
the Corporation shall be made by the Board, whose determination in that
respect shall be final and conclusive. No fractional shares of Stock or units
of other securities shall be issued pursuant to any such adjustment, and any
fractions resulting from any such adjustment shall be eliminated in each case
by rounding downward to the nearest whole share or unit.
4.2(e). The grant of an Option pursuant to the Plan shall not affect or
limit in any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, consolidate, dissolve or liquidate, or to sell or
transfer all or any part of its business or assets.
5. ELIGIBILITY
Eligibility under the Plan is limited to Eligible Directors.
6. OPTION PRICE
The Option Price of the Stock covered by each Option granted under the Plan
shall be not less than the Fair Market Value of such Stock on the Grant Date.
The Option Price shall be subject to adjustment as provided in Section 4.2
hereof.
7. NUMBER OF SHARES AND GRANT DATES
7.1. Each Eligible Director whose Commencement of Service is on or after the
Effective Date shall be granted an Initial Option to purchase from 10,000 to
20,000 shares of Stock as of the date of the Eligible Director's Commencement
of Service, such amount to be determined by the Board in its discretion.
7.2. Each Eligible Director also shall be granted an Additional Option to
purchase up to 10,000 shares of Stock after each subsequent annual meeting of
the Corporation's stockholders if the Eligible Director continues to be an
Eligible Director at such time, such amount to be determined by the Board in
its discretion.
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<PAGE>
7.3. In addition, the Board may make discretionary grants of Options to
Eligible Directors to the extent such grants are determined to be in the best
interests of the Corporation by the Board. The maximum number of shares of
Stock subject to Options that can be awarded under the Plan, other than
pursuant to Sections 7.1 and 7.2 above, is 100,000.
8. VESTING OF OPTIONS
8.1 The Optionee may exercise the Option (subject to the limitations on
exercise set forth in this Plan or in the Option Agreement relating to such
Option), in installments as follows: on the first anniversary of the Grant
Date of the Option, as set forth in Section 7 above, the Option shall be
exercisable in respect of 25 percent of the number of shares specified in
Section 7 above, and the Option shall be exercisable in respect of an
additional 25 percent of the number of shares specified in Section 7 above on
each of the next three anniversaries of the Grant Date, as set forth in
Section 7 above. The foregoing installments, to the extent not exercised,
shall accumulate and be exercisable, in whole or in part, at any time and from
time to time, after becoming exercisable and prior to the termination of the
Option; provided, that no single exercise of the Option shall be for less than
100 shares, unless the number of shares purchased is the total number at the
time available for purchase under this Option.
8.2 In the event of a "Change of Control", all non-vested Options
outstanding under the Plan shall become immediately exercisable. For purposes
of this Plan, "Change of Control" means:
(a) execution by the Corporation of an agreement for the merger of the
Corporation into or with another corporation, the result of which would be
that the stockholders of the Corporation at the time of execution of such
agreement would own less than 50% of the total equity of the corporation
surviving the merger; or
(b) the sale of assets of the Corporation having an aggregate book value
of 40% or more of the total book value of all assets of the Corporation as
shown on the then most recent annual audited financial statement of the
Corporation; or
(c) a change of control of a nature that would be required to be reported
in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated
under the Exchange Act, provided that, without limitation, such a change of
control shall be deemed to have occurred if any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Corporation representing 50%
of the Corporation's then outstanding securities; and provided further that
no such change of control shall be deemed to have occurred as a result of
the execution in (i) March 1996 of an Investor Agreement, among the
Corporation, IES Investments Inc., Midwest Capital Group, Inc., MWR
Investments, Inc., Clark and Mary McLeod, and certain other stockholders,
(ii) June 1997 of a Stockholders' Agreement, as amended, among the
Corporation, IES Investments Inc., Midwest Capital Group, Inc., MWR
Investments, Inc., Clark and Mary McLeod, and certain former stockholders
of Consolidated Communications Inc., (iii) November 1998 of a Stockholders'
Agreement, among the Corporation, IES Investments Inc., Clark and Mary
McLeod, and certain former stockholders of Consolidated Communications Inc.
and certain permitted transferees thereof, or (iv) January 1999 of a
Stockholders' Agreement, among the Corporation, IES Investments Inc., Clark
and Mary McLeod, certain former stockholders of Consolidated Communications
Inc. and certain permitted transferees thereof, M/C Investors L.L.C. and
Media/Communications Partners III Limited Partnership.
9. OPTION PERIOD
An Option shall be exercisable only during the Option Period. The Option
Period shall commence twelve months after the Grant Date, or earlier, if
subject to Sections 4.2(c), 8.2 or 12, and shall end at the close of business
on the Expiration Date.
10. TIMING AND METHOD OF EXERCISE
Subject to Sections 8 and 9 hereof, an Option that is exercisable hereunder
may be exercised by delivery to the Corporation on any business day, at its
principal office addressed to the attention of the Chief Financial Officer, of
written notice of exercise, which notice shall specify the number of shares
for which the Option is
A-4
<PAGE>
being exercised, and shall be accompanied by payment in full of the Option
Price of the shares for which the Option is being exercised. Payment of the
Option Price for the shares of Stock purchased pursuant to the exercise of an
Option shall be made (a) in cash or by certified check payable to the order of
the Corporation; (b) through the tender to the Corporation of shares of Stock,
which shares shall be valued, for purposes of determining the extent to which
the Option Price has been paid thereby, at their Fair Market Value on the date
of exercise; or (c) by a combination of the methods described in (a) and (b)
hereof. Payment in full of the Option Price need not accompany the written
notice of exercise provided the notice directs that the Stock certificate or
certificates for the shares for which the Option is exercised be delivered to
a licensed broker acceptable to the Corporation as the agent for the
individual exercising the Option and, at the time such Stock certificate or
certificates are delivered, the broker tenders to the Corporation cash (or
cash equivalents acceptable to the Corporation) equal to the Option Price plus
the amount (if any) of federal and/or other taxes which the Corporation may,
in its judgment, be required to withhold with respect to the exercise of the
Option. An attempt to exercise any Option granted hereunder other than as set
forth above shall be invalid and of no force and effect. Promptly after the
exercise of an Option and the payment in full of the Option Price of the
shares of Stock covered thereby, the individual exercising the Option shall be
entitled to the issuance of a Stock certificate or certificates evidencing
such individual's ownership of such shares.
11. SERVICE TERMINATION
Upon the termination of service (a "Service Termination") of the Optionee in
all capacities as an employee and/or director of the Corporation and all of
its affiliated companies, other than by reason of the death, permanent and
total disability or Retirement of such Optionee, any unvested Option granted
to an Optionee pursuant to the Plan shall terminate, and such Optionee shall
have no further right to purchase shares of Stock pursuant to such Option. The
Optionee may exercise the Optionee's outstanding vested Options at any time
until the date on which such outstanding Options expire according to their
terms.
12. RIGHTS IN THE EVENT OF DEATH, DISABILITY OR RETIREMENT
12.1. If an Optionee dies while in service as a director of the Corporation,
the executors or administrators or legatees or distributees of such Optionee's
estate shall have the right (subject to the general limitations on exercise
set forth in Section 9 above), at any time within 180 days after the date of
such Optionee's death and prior to termination of the Option pursuant to
Section 9 above, to exercise any Option held by such Optionee at the date of
such Optionee's death, whether or not such Option was exercisable immediately
prior to such Optionee's death; provided, however, that the Board may provide
by inclusion of appropriate language in any Option Agreement that, in the
event of the death of an Optionee, the executors, administrators, legatees or
distributees of such Optionee's estate may exercise an Option (subject to the
general limitations on exercise set forth in Section 9 hereof), in whole or in
part, at any time subsequent to such Optionee's death and prior to termination
of the Option pursuant to Section 9 hereof.
12.2. If there is a Service Termination by reason of the permanent and total
disability of the Optionee, then such Optionee shall have the right (subject
to the general limitations on exercise set forth in Section 9 above), at any
time within 180 days after such Service Termination and prior to termination
of the Option pursuant to Section 9 above, to exercise, in whole or in part,
any Option held by such Optionee at the date of such Service Termination,
whether or not such Option was exercisable immediately prior to such Service
Termination; provided, however, that the Board may provide, by inclusion of
appropriate language in any Option Agreement, that an Optionee may (subject to
the general limitations on exercise set forth in Section 9 hereof), in the
event of the termination of service of the Optionee with the Corporation or a
Subsidiary by reason of the "permanent and total disability" (within the
meaning of Section 22(e)(3) of the Code) of such Optionee, exercise an Option,
in whole or in part, at any time subsequent to such termination of service and
prior to termination of the Option pursuant to Section 9 hereof. Whether a
Service Termination is to be considered by reason of permanent and total
disability for purposes of this Plan shall be determined by the Board, which
determination shall be final and conclusive.
12.3 If there is a Service Termination by reason of the Retirement of the
Optionee, then such Optionee shall continue to vest in any outstanding Options
for two years and any Options which will not vest in such two year period
shall terminate. The Optionee shall have the right (subject to the general
limitations on exercise set
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<PAGE>
forth in Section 9 above) to exercise the Optionee's outstanding vested
Options at any time until the date on which such outstanding Options expire
according to their terms.
13. NO STOCKHOLDER RIGHTS UNDER OPTION
Neither an Optionee nor any person entitled to exercise an Optionee's rights
in the event of an Optionee's death shall have any of the rights of a
stockholder with respect to the shares of Stock subject to an Option except to
the extent the certificates for such shares shall have been issued upon the
exercise of the Option.
14. CONTINUATION OF SERVICE
Nothing in the Plan shall confer upon any person any right to continue as a
member of the Board or interfere in any way with the right of the Corporation
to terminate such relationship.
15. STOCK OPTION AGREEMENT
Each Option granted pursuant to the Plan shall be evidenced by a written
Stock Option Agreement, or by a written Notice of Option Grant given by the
Corporation to the Optionee (which need not be signed by either the
Corporation or the Optionee), notifying the Optionee of the grant and
incorporating the terms of the Plan. The Stock Option Agreement shall be
executed by the Corporation and the Optionee.
16. WITHHOLDING
The Corporation shall have the right to withhold, or require an Optionee to
remit to the Corporation, an amount sufficient to satisfy any applicable
federal, state or local withholding tax requirements imposed with respect to
exercise of Options. To the extent permissible under applicable tax,
securities and other laws, the Optionee may satisfy a tax withholding
requirement by directing the Corporation to apply shares of Stock to which the
Optionee is entitled as a result of the exercise of an Option to satisfy
withholding requirements under this Section 16.
17. NON-TRANSFERABILITY OF OPTIONS
Each Option granted pursuant to the Plan shall, during Optionee's lifetime,
be exercisable only by Optionee, and neither the Option nor any right
thereunder shall be transferable by the Optionee by operation of law or
otherwise other than by will or the laws of descent and distribution, and
shall not be pledged or hypothecated (by operation of law or otherwise) or
subject to execution, attachment or similar processes.
18. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of Stock pursuant to
Options granted under the Plan shall constitute general funds of the
Corporation.
19. ADOPTION, AMENDMENT, SUSPENSION AND TERMINATION
19.1. The Plan, as amended and restated, shall be effective as of the date
of adoption by the Board, subject to stockholder approval of the Plan within
one year of the Effective Date by a majority of the votes cast at a duly held
meeting of the stockholders of the Corporation at which a quorum representing
a majority of all outstanding stock is present, either in person or by proxy,
and voting on the matter, or by written consent in accordance with applicable
state law and the Certificate of Incorporation and Bylaws of the Corporation;
provided, however, that upon approval of the Plan by the stockholders of the
Corporation, all Options granted under the Plan on or after the Effective Date
shall be fully effective as if the stockholders of the Corporation had
approved the Plan on the Effective Date. If the stockholders fail to approve
the Plan within one year of the Effective Date, any Options granted hereunder
on or after the Effective Date shall be null, void and of no effect.
A-6
<PAGE>
19.2. Subject to the limitation of Section 19.4 hereof, the Board may at any
time suspend or terminate the Plan, and may amend it from time to time in such
respects as the Board may deem advisable, which approval may be made subject
to approval by the Corporation's stockholders.
19.3. No Option may be granted during any suspension or after the
termination of the Plan, and no amendment, suspension or termination of the
Plan shall, without the Optionee's consent, adversely alter or otherwise
impair any rights or obligations under any Stock Option Agreement previously
entered into under the Plan. The Plan shall terminate ten years after the
Effective Date unless previously terminated pursuant to Section 4.2 hereof or
by the Board pursuant to this Section 19.
19.4. Notwithstanding the provisions of Section 19.2 hereof, the Plan shall
not be amended more than once in any six-month period other than to comport
with changes in the Code, the Employee Retirement Income Security Act of 1974,
or the rules promulgated thereunder.
20. SECURITIES LAWS
20.1. The Corporation shall not be required to sell or issue any shares of
Stock under any Option if the sale or issuance of such shares would constitute
a violation by the individual exercising the Option or the Corporation of any
provisions of any law or regulation of any governmental authority, including
without limitation any federal or state securities laws or regulations.
Specifically in connection with the Securities Act, upon exercise of any
Option, unless a registration statement under the Securities Act is in effect
with respect to the shares of Stock covered by such Option, the Corporation
shall not be required to sell or issue such shares unless the Corporation has
received evidence satisfactory to the Corporation that the holder of such
Option may acquire such shares pursuant to an exemption from registration
under the Securities Act. Any determination in this connection by the Board
shall be final and conclusive. The Corporation may, but shall in no event be
obligated to, register any securities covered hereby pursuant to the
Securities Act. The Corporation shall not be obligated to take any affirmative
action in order to cause the exercise of an Option or the issuance of shares
pursuant thereto to comply with any law or regulation of any governmental
authority. As to any jurisdiction that expressly imposes the requirement that
an Option shall not be exercisable unless and until the shares of Stock
covered by such Option are registered or are subject to an available exemption
from registration, the exercise of such Option (under circumstances in which
the laws of such jurisdiction apply) shall be deemed conditioned upon the
effectiveness of such registration or the availability of such an exemption.
20.2. The intent of the Plan is to qualify for the exemption provided by
Rule 16b-3 under the Exchange Act. To the extent any provision of the Plan
does not comply with the requirements of Rule 16b-3, it shall be deemed
inoperative and shall not affect the validity of the Plan. In the event Rule
16b-3 is revised or replaced, the Board of Directors may exercise discretion
to modify the Plan in any respect necessary to satisfy the requirements of the
revised exemption or its replacement.
21. INDEMNIFICATION
21.1. To the extent permitted by applicable law, each member of the Board
shall be indemnified and held harmless by the Corporation against and from any
and all loss, cost, liability or expense that may be imposed upon or
reasonably incurred by the member in connection with or resulting from any
claim, action, suit or proceeding to which the member of the Board may be a
party or in which the member of the Board may be involved by reason of any
action taken or failure to act under the Plan, and against and from any and
all amounts paid by the member of the Board (with the Corporation's written
approval) in the settlement thereof, or paid by the member of the Board in
satisfaction of a judgment in any such action, suit or proceeding except a
judgment in favor of the Corporation; subject, however, to the condition that
upon the institution of any claim, action, suit or proceeding against the
member of the Board, the member shall give the Corporation an opportunity in
writing, at its own expense, to handle and defend the same before the member
of the Board undertakes to handle and defend it on the member's own behalf.
The foregoing right of indemnification shall not be exclusive of any other
right to which such person may be entitled as a matter of law or otherwise, or
any power the Corporation may have to indemnify the member of the Board or
hold the member of the Board harmless.
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<PAGE>
21.2. The members of the Board and each officer and employee of the
Corporation shall be fully justified in reasonably relying or acting upon any
information furnished in connection with the administration of the Plan by the
Corporation or any employee of the Corporation. In no event shall any person
who is or shall have been a member of the Board, or an officer or employee of
the Corporation, be liable for any determination made or other action taken or
any omission to act in reliance upon any such information, or for any action
(including furnishing of information) taken or any failure to act, if in good
faith.
22. GOVERNING LAW
The validity, interpretation and effect of the Plan, and the rights of all
persons hereunder, shall be governed by and determined in accordance with the
laws of Delaware, other than the choice of law rules thereof.
The first amendment and restatement of the Plan was duly adopted and
approved by the Board on March 28, 1996 and was duly approved by the
stockholders of the Corporation on April 30, 1996 and was further amended by
the Board on December 19, 1997. The second amendment and restatement of the
Plan was duly adopted and approved by the Board on March 25, 1999.
* * * *
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<PAGE>
[Form of Proxy Card]
McLEODUSA INCORPORATED
ANNUAL MEETING OF STOCKHOLDERS
JUNE 2, 1999
10:00 A.M.
COLLINS PLAZA HOTEL
1200 Collins Road NE
Cedar Rapids, Iowa
[McLEODUSA LOGO] proxy
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR USE AT THE ANNUAL MEETING ON JUNE 2, 1999.
The undersigned stockholder of McLeodUSA Incorporated (the "Company") hereby
appoints J. Lyle Patrick or Randall Rings or either one of them, with full power
of substitution, as proxies to cast all votes, as designated below, which the
undersigned stockholder is entitled to cast at the 1999 annual meeting of
stockholders (the "Annual Meeting") to be held on Wednesday, June 2, 1999, at
10:00 a.m., local time, at the Collins Plaza Hotel, 1200 Collins Road NE, Cedar
Rapids, Iowa, and at any adjournment thereof, upon the following matters and any
other matter as may properly come before the Annual Meeting or any adjournment
thereof.
This proxy, when properly executed, will be voted as directed by the stockholder
named herein and in accordance with the best judgment of the proxies as to other
matters. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED "FOR" THE NOMINEES
LISTED IN PROPOSAL 1, "FOR" PROPOSAL 2, "FOR" PROPOSAL 3, AND IN ACCORDANCE WITH
THE BEST JUDGMENT OF THE PROXIES AS TO OTHER MATTERS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED IN
PROPOSAL 1, "FOR" PROPOSAL 2, AND "FOR" PROPOSAL 3.
The stockholder named herein hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement relating to the Annual Meeting and
hereby revokes any proxy or proxies heretofore given. The stockholder named
herein may revoke this proxy at any time before it is voted by filing with the
Secretary of the Company a written notice of revocation or a duly executed proxy
bearing a later date, or by attending the Annual Meeting and voting in person.
PLEASE COMPLETE, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
POSTAGE PREPAID ENVELOPE OR GIVE YOUR PROXY BY CALLING THE TOLL-FREE TELEPHONE
NUMBER AS DESCRIBED IN THE INSTRUCTIONS ON THE REVERSE OF THIS PROXY CARD.
See reverse for voting instructions.
<PAGE>
There are two ways to vote your Proxy
Your telephone vote authorizes the Named Proxies to vote your share in the same
manner as if you marked, signed and returned your proxy card.
VOTE BY PHONE -- TOLL FREE -- 1-800-240-6326 -- QUICK *** EASY *** IMMEDIATE
. Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a
week.
. You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number which are located above.
. Follow the simple instructions the voice message provides you.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to McLeodUSA Incorporated, c/o Shareowner
Services/SM/, P.O. Box 64873, St. Paul, MN 55164-0873.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
If you vote by Phone, Please do not mail your Proxy Card.
Please detach here
- -------- --------
The Board of Directors Recommends a Vote FOR Items 1 and 2.
1. Election of directors: 01 Robert J. Currey 04 Peter H.O. Claudy [ ] Vote FOR [ ] Vote WITHHELD
02 Stephen C. Gray 05 Roy A. Wilkens all nominees from all nominees
03 Paul D. Rhines
(Instructions: To withhold authority to vote for any ---------------------------------------------------------------
indicated nominee, write the number(s) of the nominee(s)
in the box provided to the right.) ---------------------------------------------------------------
2. To approve the Second Amended and Restated
Directors Stock Option Plan. [ ] For [ ] Against [ ] Abstain
3. To ratify the Board of Directors' appointment
of Arthur Andersen LLP as the Company's
independent public accountants for the 1999
fiscal year. [ ] For [ ] Against [ ] Abstain
If you receive more than one proxy card, please date, sign and return all cards in the accompanying envelope.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL
---
Address Change? Mark Box [ ]
Indicate changes below: Date __________________________________
---------------------------------------------------------------
---------------------------------------------------------------
Signature(s) in Box
(Please date and sign here exactly as name appears at left.
When signing as attorney, executor, administrator, trustee,
guardian or other fiduciary, give full title as such; and
when stock has been issued in the name of two or more
persons, all should sign.)
</TABLE>
