<PAGE>
SCHEDULE 14A INFORMATION
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:
[X] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14a-6(e)(2))
[_] Definitive Proxy Statement
[_] 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)(4) 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:
<PAGE>
LOGO
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
(319) 364-0000
April __, 2000
Dear Stockholder:
On behalf of the Board of Directors of McLeodUSA Incorporated, it is my
pleasure to invite you to the 2000 Annual Meeting of Stockholders. The Annual
Meeting will be held on Wednesday, May 31, 2000 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:
. To elect seven directors to serve on the Board of Directors;
. To consider and vote on a proposal to approve our 1996 Employee Stock
Option Plan, as amended;
. To consider and vote on three proposals to amend our Certificate of
Incorporation: (a) to increase the number of authorized shares of Class A
common stock to 2,000,000,000 from 1,000,000,000; (b) to authorize a new
class of preferred stock in the amount of 10,000,000 shares; and (c) to
require the unanimous written consent of the stockholders to take corporate
action of stockholders without a meeting;
. To ratify the Board of Directors' appointment of Arthur Andersen LLP as our
independent public accountants for the 2000 fiscal year; and
. 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" each of the proposals as set forth in the attached Proxy Statement.
It is important that your views be represented at the Annual Meeting. Whether or
not you plan to attend the Annual Meeting, please complete and mail the enclosed
proxy card or vote by telephone or through the Internet as instructed on the
proxy card.
Sincerely,
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 MAY 31, 2000
NOTICE IS HEREBY GIVEN that the 2000 Annual Meeting of Stockholders of
McLeodUSA Incorporated, a Delaware corporation, will be held on Wednesday, May
31, 2000 at 10:00 a.m., local time, at the Collins Plaza Hotel, 1200 Collins
Road NE, Cedar Rapids, Iowa, for the following purposes:
1. To elect seven directors to serve on the Board of Directors, four to
serve in the class of directors whose term expires in 2003, two to
serve in the class of directors whose term expires in 2002, and one to
serve in the class of directors whose term expires in 2001;
2. To consider and vote on a proposal to approve our 1996 Employee Stock
Option Plan, as amended;
3. To consider and vote on a proposal to amend our Certificate of
Incorporation to increase the number of authorized shares of Class A
common stock to 2,000,000,000 from 1,000,000,000;
4. To consider and vote on a proposal to amend our Certificate of
Incorporation to authorize a new class of preferred stock in the
amount of 10,000,000 shares;
5. To consider and vote on a proposal to amend our Certificate of
Incorporation to require the unanimous written consent of the
stockholders to take corporate action of stockholders without a
meeting;
6. To ratify the Board of Directors' appointment of Arthur Andersen LLP
as our independent public accountants for the 2000 fiscal year; and
7. 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 foregoing items of business are more fully described in the Proxy
Statement accompanying this notice.
Pursuant to our Bylaws, the Board of Directors has fixed April 11, 2000 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 and eligible to vote 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 our offices located at 6400 C Street SW, Cedar Rapids, Iowa 52406.
By Order of the Board of Directors
Clark E. McLeod
Chairman and Chief Executive Officer
Cedar Rapids, Iowa
April ___, 2000
Whether or not you plan to attend the Annual Meeting, please complete and
return the enclosed proxy card or vote by telephone or through the Internet as
instructed 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 or through the Internet, you may also revoke it by submitting a new
proxy using the same procedures at a later date.
<PAGE>
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
(319) 364-0000
__________________
PROXY STATEMENT
2000 ANNUAL MEETING OF STOCKHOLDERS
MAY 31, 2000
___________________
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
This Proxy Statement and the accompanying proxy card are furnished to
stockholders of McLeodUSA Incorporated entitled to vote in connection with the
solicitation by the Board of Directors of McLeodUSA (the "Board of Directors")
of proxies to be used at the 2000 Annual Meeting of Stockholders to be held on
Wednesday, May 31, 2000 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 by a holder of shares of
Class A common stock 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 NOMINEES FOR DIRECTOR
. "FOR" PROPOSAL 2 TO APPROVE OUR 1996 EMPLOYEE STOCK OPTION PLAN, AS
AMENDED
. "FOR" PROPOSAL 3 TO AMEND OUR CERTIFICATE OF INCORPORATION TO INCREASE
THE NUMBER OF AUTHORIZED SHARES OF CLASS A COMMON STOCK
. "FOR" PROPOSAL 4 TO AMEND OUR CERTIFICATE OF INCORPORATION TO AUTHORIZE
A NEW CLASS OF PREFERRED STOCK
. "FOR" PROPOSAL 5 TO AMEND OUR CERTIFICATE OF INCORPORATION TO REQUIRE
THE UNANIMOUS WRITTEN CONSENT OF THE STOCKHOLDERS TO TAKE CORPORATE
ACTION OF STOCKHOLDERS WITHOUT A MEETING
. "FOR" PROPOSAL 6 TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS OUR
INDEPENDENT PUBLIC ACCOUNTANTS FOR THE 2000 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 or through the Internet using the control number and
instructions on the proxy card. Telephone and Internet 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 or through the Internet may also revoke it by submitting a new proxy
using the same procedures at a later date.
<PAGE>
The cost of solicitation of proxies will be borne by us. In addition to the
solicitation of proxies by mail, our officers, directors or employees also may
solicit proxies personally or by telephone or other means. These persons will
not be specifically compensated for the 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 these persons, and we will reimburse these persons for
their reasonable expenses.
Share amounts in this Proxy Statement do not reflect the three-for-one
stock split to be effected in the form of a stock dividend of our Class A common
stock announced on February 29, 2000 and to be distributed to our stockholders
on April 24, 2000.
The close of business on April 11, 2000 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, our outstanding capital stock
consisted of ___________ shares of Class A common stock, par value $0.01 per
share (the "Class A common stock"), ______________ shares of Series A
preferred stock, 275,000 shares of Series B preferred stock and 125,000 shares
of Series C preferred 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, other than the election of two nominees for director who are
to be elected solely by the holders of our Series B preferred stock. Holders of
our preferred stock are not entitled to vote at the Annual Meeting, except in
the case of the election of two nominees for director designated by the holders
of the Series B preferred stock, who are entitled to the exclusive right to vote
for the election of such designees pursuant to the terms of the Series B
preferred stock.
Our Bylaws 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 by the holders of
Class A common stock or Series B preferred stock, as the case may be, is
required for election of directors;
. a majority of the voting rights present and entitled to vote at the
Annual Meeting by the holders of Class A common stock is required to (i)
approve our 1996 Employee Stock Option Plan, as amended, and (ii) ratify
the appointment of Arthur Andersen LLP as our independent public
accountants; and
. a majority of the outstanding shares of Class A common stock entitled to
vote at the Annual Meeting is required to approve each of the three
proposed amendments to our Certificate of Incorporation.
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 by the holders
of Class A common stock is required to decide any other matter submitted to a
stockholder vote. Our 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 6 but will have the same effect as a vote against the remainder of the
Proposals. 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 the remainder of the Proposals.
As of the Record Date, Clark E. and Mary E. McLeod beneficially owned
____________ shares of Class A common stock, Alliant Energy Corporation
(collectively with its subsidiaries and Alliant Energy Foundation, Inc.,
"Alliant Energy") beneficially owned ______________ shares of Class A common
stock, Richard A. Lumpkin beneficially owned ________________ shares of Class A
common stock, and Media/Communications Partners III Limited Partnership and M/C
Investors L.L.C. (together, "M/C") beneficially owned ___________ shares of
Class A common stock, representing approximately ___%, ____%, ____% and ____%,
respectively, or approximately _____% 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, Alliant Energy, Mr. Lumpkin and M/C have advised us that they
intend to vote in favor of approval of all matters described in this Proxy
Statement. Consequently, the likelihood of the approval of all the proposals set
forth in this Proxy Statement is substantially enhanced. Mr. and Mrs. McLeod,
Alliant Energy,
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<PAGE>
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."
As of the Record Date, two partnerships affiliated with Forstmann Little &
Co. beneficially owned all the shares of Series B preferred stock. These holders
have advised us that they intend to vote in favor of the election of the two
director nominees who are to be elected solely by the holders of our Series B
preferred stock. Consequently, approval of these two director nominees, Theodore
J. Forstmann and Erskine B. Bowles, is assured.
This Proxy Statement, the Notice of Annual Meeting of Stockholders and the
proxy card were first mailed to stockholders entitled to vote on or about April
___, 2000.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL
OF THE PROPOSALS SET FORTH IN THIS PROXY STATEMENT.
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<PAGE>
ELECTION OF DIRECTORS
(Proposal 1)
Our Bylaws 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 thirteen directors,
divided into three classes of directors serving staggered three-year terms.
At the Annual Meeting, seven directors will be elected, four to serve in the
class of directors whose term expires in 2003, two to serve in the class of
directors whose term expires in 2002, and one to serve in the class of directors
whose term expires in 2001.
The Board of Directors has nominated for director:
. Clark E. McLeod and James E. Hoffman to be elected, each for a three-year
term;
. Blake O. Fisher, Jr. and Robert J. Currey to be elected, each for a two-
year term; and
. Anne K. Bingaman to be elected to complete the one-year remaining on the
term of the class in which she presently serves.
In addition, the holders of the Series B preferred stock have designated
Theodore J. Forstmann and Erskine B. Bowles to be elected, each for a three-year
term. The holders of the Series B preferred stock have the exclusive right to
vote for the election of Messrs. Forstmann and Bowles pursuant to the terms of
the Series B preferred stock.
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. McLeod, Hoffman, Fisher,
Currey, Ms. Bingaman, and Messrs. Forstmann and Bowles. 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 THE NOMINEES
FOR DIRECTORS.
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<PAGE>
Information as to Nominees and Continuing Directors
The following table sets forth information regarding the Board of
Director's five nominees for election as directors, the two persons designated
for election by the holders of the Series B preferred stock, and those directors
who will continue to serve as such after the Annual Meeting.
<TABLE>
<CAPTION>
Age at
March 31, Director Term
Nominees: 2000 Since Expiring Position(s) Held with the Company
- --------- ---- -------- -------- ---------------------------------
<S> <C> <C> <C> <C>
Clark E. McLeod............. 53 1991 2003 Chairman, Chief Executive Officer and Director
Blake O. Fisher, Jr......... 56 1996 2002 Group Vice President - Chief Planning & Development
Officer and Director
Robert J. Currey............ 54 1997 2002 Director
James E. Hoffman............ 47 -- 2003 Director
Theodore J. Forstmann....... 60 1999 2003 Director
Erskine B. Bowles........... 54 1999 2003 Director
Anne K. Bingaman............ 56 1999 2001 Director
Continuing Directors:
- ---------------------
Stephen C. Gray............. 41 1992 2002 President and Chief Operating Officer; President and
Chief Executive Officer - Local Services and Director
Paul D. Rhines(2)........... 56 1993 2002 Director
Roy A. Wilkens.............. 57 1999 2002 Chief Technology Officer; President and Chief Executive
Officer - Data Network and Director
Richard A. Lumpkin.......... 65 1997 2001 Vice Chairman and Director
Thomas M. Collins(1)(2)..... 72 1993 2001 Director
Peter H.O. Claudy(1)........ 38 1999 2001 Director
</TABLE>
_________________________________________
(1) Currently a member of the Audit Committee.
(2) Currently a member of the Compensation Committee.
The principal occupations for the past five years of each of the seven
nominees for director and the six 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, 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., the successor to Teleconnect following its merger with
SouthernNet, Inc. in December 1988. By 1990, TelecomUSA had become America's
fourth largest long distance telecommunications company, with nearly 6,000
employees. MCI Communications Corporation purchased Telecom * USA in August 1990
for $1.25 billion. Mr. McLeod serves on the board of directors of APAC Customer
Services, Inc., a provider of customer relationship management services. See
"Principal Holders of Voting Securities--Stockholders' Agreements."
Blake O. Fisher, Jr. Mr. Fisher serves as Group Vice President - Chief Planning
& Development Officer and has served as a director of McLeodUSA since October
1996. Mr. Fisher previously served in various executive positions at McLeodUSA
including Regional President - Western Region, Executive Vice President -
Corporate Administration and Chief Financial Officer and as Treasurer, having
joined McLeodUSA in February 1996. He served as Executive Vice President and
Chief Financial Officer of IES Industries Inc., a diversified electric utility
holding company, from 1991 to 1996. Mr. Fisher also served as President of IES
Utilities Inc. from February 1995 to February 1996. Prior to joining IES, Mr.
Fisher held a variety of management positions with Consumers Power Company, an
electric utility, including Vice President of Finance and Treasurer. Mr. Fisher
is one of Mr. McLeod's designees to the Board of Directors. See "Principal
Holders of Voting Securities--Stockholders' Agreements."
Robert J. Currey. Mr. Currey has served as a director of McLeodUSA since
September 1997. He was elected as a director of McLeodUSA based on the
requirements of the merger agreement between McLeodUSA and
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<PAGE>
Consolidated Communications Inc. ("CCI"). Mr. Currey also served as Group
President, Telecommunications Services of McLeodUSA between October 1997 and
March 1998. Since then he has served as President of 21st Century Telecom Group,
Inc., a cable and Internet services company. Mr. Currey served as President of
CCI from March 1990 to September 1997, when 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 positions in operations,
personnel, labor relations and marketing. Mr. Currey is also a director of
Brenton Banks Inc., a bank holding company.
James E. Hoffman. Mr. Hoffman has served as President of Alliant Energy
Resources, Inc., a wholly owned subsidiary of Alliant Energy Corporation, of
which he is Executive Vice President - Business Development, since April 1998.
Mr. Hoffman has responsibility for oversight of the non-regulated businesses of
Alliant Energy, including energy, environment, transportation, trading and
telecommunications. Mr. Hoffman previously served in various executive
positions at Alliant Energy, having joined Alliant Energy in 1995. From 1990 to
1995, he was Chief Information Officer for MCI Communications. Before that he
served as Executive Vice President of TelecomUSA. Mr. Hoffman is the nominee of
Alliant Energy to the Board of Directors. See "Principal Holders of Voting
Securities--Stockholders' Agreements."
Theodore J. Forstmann. Mr. Forstmann has served as a director of McLeodUSA
since September 1999. Mr. Forstmann is co-founder and senior partner of
Forstmann Little & Co., a major New York private equity firm that has made 27
acquisitions and significant equity investments, returning billions to its
investors. Forstmann Little's best-known acquisitions include Gulfstream
Aerospace, General Instrument, Ziff-Davis Publishing, Community Health Systems,
Yankee Candle, Dr. Pepper and Topps. Mr. Forstmann serves as chairman and
director of Gulfstream Aerospace and serves on the board of directors of Yankee
Candle Company.
Erskine B. Bowles. Mr. Bowles has served as a director of McLeodUSA since
September 1999. Mr. Bowles is a general partner of both Forstmann Little & Co.
and Carousel Capital, a Charlotte, N.C.-based merchant bank he co-founded in
1996. Mr. Bowles served as Chief of Staff to President Clinton from November
1996 until November 1998. He served as Assistant to the President and Deputy
Chief of Staff from October 1994 to December 1995. Mr. Bowles also was
Administrator of the U.S. Small Business Administration from May 1993 to
September 1994. Mr. Bowles is a director of First Union Corporation, a
financial and bank holding company, and V.F. Corporation, a holding company for
apparel manufacturers.
Anne K. Bingaman. Ms. Bingaman has served as a director of McLeodUSA since July
1999. Since September 1999, Ms. Bingaman has served as Chairman and Chief
Executive Officer of Valor Telecom, LLC, a closely held new entrant in the
telecommunications industry, headquartered in Dallas, Texas. Prior to founding
Valor, Ms. Bingaman was an independent consultant in Washington, D.C. where she
focused on antitrust issues related to the telecommunications industry. She
served as Senior Corporate Vice President and founding President for the Local
Services Division of LCI International Telecom, Inc. from January 1997 until the
company's acquisition by Qwest in July 1998. Ms. Bingaman was nominated by
President Clinton and confirmed by the U.S. Senate to the post of Assistant
Attorney General in charge of the Antitrust Division of the U.S. Department of
Justice, where she served from June 1993 to October 1996. Before her nomination
to the Justice Department, Ms. Bingaman was a partner at a number of law firms,
as well as an associate professor of law.
Stephen C. Gray. Mr. Gray serves as President and Chief Operating Officer of
McLeodUSA and as President and Chief Executive Officer - Local Services. He has
been a director of McLeodUSA since April 1993. Prior to joining McLeodUSA in
1992, 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 TelecomUSA, Mr. Gray
held a variety of management positions with Williams Telecommunications Company,
a long distance telephone company. Mr. Gray is one of Mr. McLeod's designees to
the Board of Directors. See "Principal Holders of Voting Securities--
Stockholders' Agreements."
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
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<PAGE>
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.
Roy A. Wilkens. Mr. Wilkens serves as Chief Technology Officer of McLeodUSA and
as President and Chief Executive Officer - Data Network, having joined McLeodUSA
in January 2000. Mr. Wilkens has served as a director of McLeodUSA since June
1999. 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 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 was a director of Splitrock Services, Inc. before its
acquisition by McLeodUSA. He is also a director of Williams Communications
Group, Inc., a provider of services and products to communications companies,
and The Management Network Group Inc., a provider of consulting services to the
telecommunications industry.
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 pursuant to the requirements of the merger agreement between McLeodUSA
and CCI. He has continued to serve as a director pursuant to the requirements
of certain stockholders' agreements. Mr. Lumpkin served as Chairman and Chief
Executive Officer of CCI from 1990 to September 1997, when CCI was acquired by
McLeodUSA. He continues to serve as Chairman, Chief Executive Officer and
President of Illinois Consolidated Telephone Company ("ICTC"), a wholly-owned
subsidiary of McLeodUSA. 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, and its wholly-owned
subsidiary First Mid-Illinois Bank & Trust. Mr. Lumpkin is Chairman of the
Board of Illuminet Holdings, Inc., formerly USTN Holdings, Inc., a
telecommunications company. He is also a former director and past president of
the Illinois Telephone Association and the United States Telephone Association.
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, TelecomUSA, from 1985 to August
1990. He is also a director of APAC Customer Services, Inc., a provider of
customer relationship management services.
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 Partners and M/C Venture
Partners, affiliates of Media/Communications Partners III Limited Partnership
and M/C Investors, L.L.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 and New York City regions,
Cavalier Telephone, a competitive local exchange carrier serving the state of
Virginia and Triad Cellular, a wireless telecommunications company. See
"Principal Holders of Voting Securities--Stockholders' Agreements."
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 our Bylaws, other
candidates also may be nominated by any stockholder, provided such other
nomination(s), together with the identity of the nominator and the number of
shares of McLeodUSA stock owned, directly and indirectly, by the nominator, are
submitted in writing to the Secretary of McLeodUSA no later than 90 days prior
to the meeting of
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<PAGE>
stockholders at which such directors are to be elected. 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 public accountants to audit our financial
statements, discusses the scope and results of the audit with the independent
public accountants, reviews with management and the independent public
accountants our interim and year-end operating results, considers the adequacy
of our internal accounting controls and audit procedures and reviews the non-
audit services to be performed by the independent public 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. Mr. Liu is retiring from the Board of Directors effective at this year's
Annual Meeting.
During the fiscal year ended December 31, 1999, the Board of Directors met
nine times. During the same period, the Audit Committee met two times and the
Compensation Committee met ten times. During the fiscal year ended December 31,
1999, no director attended fewer than 75% of the total of all meetings of the
Board of Directors and any committee on which the director served, except Mr.
Forstmann who attended two of the four meetings of the Board of Directors held
during the period he has been a director.
Directors' Compensation
Our directors 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
reasonable out-of-pocket travel expenditures incurred in connection with their
attendance at Board and committee meetings. Directors are also eligible to
receive grants of stock options under the Directors Stock Option Plan.
Under our Directors Stock Option Plan, an aggregate of 2,200,000 shares of
Class A common stock are reserved for purchase pursuant to option grants to our
directors who are not officers or employees. Options for ________ shares of
Class A common stock had been granted under the Directors Stock Option Plan and
options to purchase _______ shares of Class A common stock had been exercised as
of the Record Date. Each eligible director who commences service as a director
is granted an initial option to purchase 20,000 to 40,000 shares of Class A
common stock. Each eligible director also is granted additional options to
purchase up to 20,000 shares of Class A common stock after each subsequent
annual meeting of stockholders. In addition, eligible directors may be granted
such discretionary options, in addition to the foregoing options, as may be
determined by the Board; provided that no more than an aggregate of 200,000
shares of Class A common stock may be granted as discretionary options to any
one person. The Directors Stock Option Plan will terminate automatically on
March 28, 2006, unless terminated earlier by the Board of Directors.
Other than the compensation described above, none of the directors received
any other compensation from McLeodUSA in 1999 in connection with their service
as directors.
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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 our Chief Executive
Officer and four other most highly compensated executive officers whose combined
salary and bonus exceeded $100,000 during the fiscal year ended December 31,
1999 (the "Named Executive Officers").
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
----------------
Annual Compensation Securities
------------------------- Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation(1)
- --------------------------------------- ------------ ------------ ---------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
Clark E. McLeod 1999 $250,000 $142,000 -- $ 1,883,200(2)
Chairman and Chief 1998 228,077 122,732 200,000 1,883,200(2)
Executive Officer 1997 185,262 72,422 446,000 3,000
Stephen C. Gray 1999 250,000 142,000 1,000,000 3,200
President and Chief Operating Officer 1998 228,077 122,732 200,000 3,200
1997 184,728 199,216 506,000 3,000
Blake O. Fisher, Jr. 1999 175,000 102,680 120,000 342,690(3)
Group Vice President - 1998 176,193 92,607 70,000 3,200
Planning & Development 1997 143,484 131,048 336,000 --
Arthur L. Christoffersen 1999 180,000 126,135 150,000 7,100(4)
Group Vice President - Publishing 1998 176,538 68,000 126,000 3,200
Services 1997 154,524 -- 394,000 3,000
J. Lyle Patrick 1999 149,231 115,640 150,000 3,200
Group Vice President - Finance 1998 131,000 198,810 100,000 203,200(5)
& Accounting 1997 149,167 96,650 146,000 46,718(6)
</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 applicable individual.
(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 $339,490 paid by McLeodUSA to Blake O. Fisher, Jr. for
reimbursement of relocation expenses.
(4) Includes $3,900 paid by McLeodUSA to Arthur L. Christoffersen for an auto
allowance.
(5) Includes $200,000 paid by McLeodUSA to J. Lyle Patrick for reimbursement of
relocation expenses.
(6) Represents the payment of accumulated vested vacation at the time McLeodUSA
acquired CCI.
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<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, 1999.
<TABLE>
<CAPTION>
Individual Grants Potential Realized
---------------------------------------------------------------------------
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of Stock
Underlying Granted to Price Appreciation for
Options Employees in Exercise Option Term
------------
Name Granted Fiscal Year Price(1) Grant Date Expiration Date 5% 10%
- -------------- ---------- ------------- -------- -------------- --------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Clark E. McLeod - - - - - - -
Stephen C. Gray 200,000(2) 1.4% $19.1875 March 25, 1999 March 25, 2009 $2,413,383 $ 6,115,987
800,000(3) 5.5% 19.1875 March 25, 1999 March 25, 2009 9,653,533 24,463,947
Arthur L. Christoffersen 150,000(3) 1.0% 19.1875 March 25, 1999 March 25, 2009 1,810,037 4,586,990
Blake O. Fisher, Jr. 120,000(3) 0.8% 19.1875 March 25, 1999 March 25, 2009 1,448,030 3,669,592
J. Lyle Patrick 150,000(3) 1.0% 19.1875 March 25, 1999 March 25, 2009 1,810,037 4,586,990
</TABLE>
_______________________
(1) The exercise price indicated was the fair market value of a share of
our Class A common stock on the date of grant, as adjusted to reflect
the two-for-one stock split effected in the form of a stock dividend
distributed to our stockholders on July 26, 1999.
(2) These options vest according to the following schedule: 25% per year
for four years.
(3) These options vest according to the following schedule: 25% at 48
months with an additional 25% at each of 60, 72 and 84 months.
Aggregate Option Exercises and Fiscal Year-End Values
The following table sets forth information for each Named Executive Officer
concerning the exercise of options during fiscal year 1999, the number of
securities underlying unexercised options at the 1999 year-end and the year-end
value of all unexercised in-the-money options held by such individuals.
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Unexercised In-the-Money Options
Acquired on Value Options at Fiscal Year-End at Fiscal Year-End(2)
-------------------------- ---------------------
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Clark E. McLeod 53,500 $ 3,187,438 515,246 414,754 $27,813,224 $20,007,387
Stephen C. Gray 462,390 13,863,483 685,754 1,519,750 37,848,772 65,283,279
Arthur L. Christoffersen 120,000 3,911,786 52,934 497,066 2,250,886 21,894,800
Blake O. Fisher, Jr. 150,000 4,631,723 283,312 439,312 14,815,617 20,679,305
J. Lyle Patrick 35,000 1,091,753 55,500 305,500 2,426,750 12,693,625
</TABLE>
________________
(1) Represents the difference between the exercise price and the closing
price of our 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 our Class A common stock on The Nasdaq Stock Market on
December 31, 1999.
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<PAGE>
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1999, 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 1999 we paid 2060 Partnership, L.P. $1,979,127 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 Energy and McLeodUSA own 54.55% and 3.03%,
respectively, of the outstanding stock of 2001. The directors and officers of
2001 include Thomas M. Collins, a director of McLeodUSA, Clark E. McLeod, a
director and executive officer of McLeodUSA, and James E. Hoffman, a nominee to
the Board of Directors.
During 1999 we paid $93,034 to Shuttleworth & Ingersoll, P.C., a law firm
in Cedar Rapids, Iowa, for legal services rendered. We plan to retain the firm
in 2000. McLeodUSA provides local and long distance telephone service for
Shuttleworth & Ingersoll, P.C. Shuttleworth & Ingersoll, P.C. paid McLeodUSA
$65,748 for these services in 1999. 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
We have 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 us 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 of our confidential information while
employed by us 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, we 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 our 1996
Employee Stock Option Plan.
On January 7, 2000, we entered into executive employment agreements with
Clark E. McLeod, Stephen C. Gray and Roy A. Wilkens (collectively, the
"Executives"). These agreements set forth the terms and conditions for the
respective employment of Mr. McLeod as Chairman and Chief Executive Officer, Mr.
Gray as President and Chief Executive Officer - Local Services, and Mr. Wilkens
as President and Chief Executive Officer - Data Network. The significant terms
of the agreements are as follows:
. Term. The term of each agreement runs until January 7, 2003.
. Salary and Bonus Compensation. Each of the Executives receives an
initial base annual salary of $400,000, subject to a potential
increase each year based on competitive survey data. In addition, each
Executive is entitled to bonus opportunities set at not less than 50%
of the base annual salary.
. Equity Compensation. In connection with the agreements, Mr. McLeod was
granted an option to purchase 1,000,000 shares of Class A common stock
and each of Messrs. Gray and Wilkens was granted an option to purchase
2,000,000 shares of Class A common stock. Each option has an option
exercise price equal to the fair market value of the Class A common
stock which, in accordance with our 1996 Employee Stock Option Plan,
is the closing price of the Class A Common Stock on January 6, 2000.
. Other Benefits. Each Executive is eligible to participate in all of
our standard benefit plans.
. Noncompetition and Nonsolicitation. The Executives are bound by
noncompetition and nonsolicitation covenants for the term of the
agreements, and for an additional year in certain circumstances.
. Severance Benefits. If an Executive terminates his employment for good
reason or if we terminate his employment in breach of the agreement,
the Executive is entitled to: (a) his full salary through the date of
termination and amounts due under any applicable compensation plan;
(b) a liquidated damages payment approximately equal to the number of
years (including partial years) remaining in the term of the
agreement, multiplied by the Executive's salary and bonus on the date
of
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<PAGE>
termination; (c) full vesting of stock options granted during the term
of the agreement, with such options to remain exercisable for four
years; (d) continued health and related benefits for the remainder of
the term of the agreement; and (e) a gross-up payment to cover excise
tax payments due on the Executive's severance benefits.
Change-of-Control Agreements
We have entered into change-of-control agreements with our 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:
. the executive will be entitled to a lump sum payment equal to 24 times
the executive's average monthly compensation during the 12 months
immediately preceding the change of control or the date of
termination, whichever average monthly compensation is higher;
. all of the executive's outstanding options to purchase stock of
McLeodUSA will become immediately exercisable in full; and
. 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").
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 us 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 1999.
Decisions on compensation of executive officers are made by the
Compensation Committee. The Compensation Committee also administers our stock
option plans and stock purchase plan. No member of the Compensation Committee is
an employee of McLeodUSA. During 1999, 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; and
. 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 our
overall performance 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 our policy 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 our performance (as
reflected in the market price of the Class A common stock).
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<PAGE>
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 1999:
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.
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 1999
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, pursuant to which we grant 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 us 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 seven 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 our stockholders
through appreciation of stock price. We believe that stock options have been
helpful in attracting and retaining skilled executive personnel.
Stock option grants made to executive officers in 1999 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 1999, we granted stock options covering a total of 14,539,119
shares of Class A common stock to 6,012 employees, including options covering an
aggregate of __________ shares of Class A common stock to eight executive
officers. The per share option exercise prices of such options ranged from $____
to $43.125 for the eight executive officers and from $0.40 to $43.125 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. These options
include options granted in connection with acquisitions or assumed in the
conversion of options previously granted by companies acquired by McLeodUSA.
Other. We have a contributory retirement plan (the "401(k) Plan") for our
employees (including executive officers) age 21 and over with at least three
months of service with us. 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). We generally make matching contributions to each participant's account
equal to 50% of the participant's contribution up to 2% of the participant's
annual compensation, plus a discretionary annual match of up to another 50% of
the participant's contribution up to 2% of the participant's annual
compensation. Thus, the total matching contribution can be up to 4% of the
participant's annual compensation.
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<PAGE>
Chief Executive Officer Compensation
The executive compensation policy described above has been applied in
setting Mr. McLeod's 1999 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 our long-term performance, as reflected in the market price of the
Class A common stock.
Mr. McLeod's compensation during the year ended December 31, 1999 included
$250,000 in base salary and $142,000 in a cash bonus. Mr. McLeod's salary and
bonus payments for 1999 were consistent with the Compensation Committee's policy
of being at approximately the 25/th/ percentile of the compensation of chief
executive officers of peer companies. In addition, we paid $1,880,000 of
premiums on split dollar life insurance policies for the benefit of the McLeod
Family 1998 Special Trust. For additional information on this arrangement, see
"--Certain Transactions."
Compensation Deductibility Policy
Section 162(m) of the Code generally disallows a tax deduction to public
corporations for compensation over $1,000,000 paid for any fiscal year to the
corporation's chief executive officer and four other most highly compensated
executive officers as of the end of any fiscal year. However, the statute
exempts qualifying performance-based compensation from the deduction limit if
specified requirements are met. The Compensation Committee intends to structure
stock option grants to executive officers who may be subject to Section 162(m)
in a manner that satisfies those requirements.
The Board of Directors and the Compensation Committee reserve the authority
to award non-deductible compensation in other circumstances as they deem
appropriate. Further, because of ambiguities and uncertainties as to the
application and interpretation of Section 162(m) and the regulations issued
thereunder, no assurance can be given, notwithstanding our efforts, that
compensation intended by McLeodUSA to satisfy the requirements for deductibility
under Section 162(m) does in fact do so.
Respectfully submitted,
Compensation Committee
Paul D. Rhines, Chairman
Thomas M. Collins
Lee Liu
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<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. We have never
paid a cash dividend on our Class A common stock. Our cumulative stockholder
return 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
$12.5625, 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 Forty-Two Month Cumulative Total Return*
Among McLeodUSA Incorporated, The S&P 500 Stock Index
and The Nasdaq Telecommunications Stocks Index
[Insert Graph here]
* $100 invested on June 11, 1996, including reinvestment of dividends, if any.
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<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 greater than ten percent beneficial owners
of our Class A common stock to file with the Securities and Exchange Commission
(the "SEC") initial reports of ownership of our equity securities and to file
subsequent reports when there are changes in such ownership. Directors, officers
and greater than ten percent beneficial owners are required by SEC regulations
to furnish us with copies of all Section 16(a) reports they file.
Based on our review of these reports and on written representations from
the reporting persons that no other reports were required, we believe that
during the fiscal year ended December 31, 1999 all Section 16(a) filing
requirements applicable to the directors, officers and greater than ten percent
beneficial owners were complied with, except that one Form 3 for each of Peter
H.O. Claudy and Timothy T. Devine, one Form 4 for Albert P. Ruffalo and two Form
4s for Stephen C. Gray were filed late. In addition, in connection with the
cancellation and reissuance in fiscal year 1997 of two option grants to each of
Messrs. Christoffersen, Gray and Ruffalo and three option grants to Mr. McLeod,
one late Section 16(a) form was recently filed for each individual to update
their previously filed reports to reflect these transactions.
Certain Transactions
McLeodUSA has entered into various agreements with Orillion USA, Inc.
(formerly InvenSys USA, Inc.) and several of its affiliates (collectively
"Orillion") pursuant to which Orillion provides information technology
development, programming and consulting services, and investment management
services to McLeodUSA. Pursuant to these agreements, McLeodUSA paid Orillion
approximately $280,784 in 1999 and $1,301,806 thus far in 2000. The payments in
2000 are principally related to a $4,000,000 license fee under a license and
joint development agreement entered into in March 2000 by McLeodUSA and
Orillion. In addition, Orillion will bill McLeodUSA for work performed under the
agreement. Clark E. McLeod and Roy A. Wilkens are directors of Orillion USA,
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
$503,000 for these services in 1999. In April 2000, McLeodUSA disposed of shares
which it held in First Mid-Illinois Bancshares valued at approximately
$1,168,000. Of the shares disposed of, First Mid-Illinois paid $152,000 to
McLeodUSA to redeem shares; the Lumpkin Foundation, Inc., a nonprofit
corporation, paid $638,400 to McLeodUSA to purchase shares; and shares valued at
approximately $125,000 were gifted by McLeodUSA to the Lumpkin Foundation,
consistent with historical charitable giving practices of McLeodUSA. The
disposition of the shares was approved by the Board of Directors of McLeodUSA
which determined that the transfer price was at fair market value. Richard A.
Lumpkin, Margaret Lumpkin Keon and Mary Lumpkin Sparks own approximately 10.5%,
6.1% and 6.2% of the capital stock of First Mid-Illinois Bancshares,
respectively. Richard A. Lumpkin is also a director of First Mid-Illinois
Bancshares. McLeodUSA paid $803,000 in 1999 to lease office space from various
entities in which Richard A. Lumpkin, Margaret Lumpkin Keon and Mary Lumpkin
Sparks have ownership interests. Their financial interest in these transactions
totaled $428,000. Mr. Lumpkin is a director, executive officer and significant
stockholder of McLeodUSA and Mrs. Keon and Mrs. Sparks are stockholders of
McLeodUSA.
Illuminet Holdings, Inc. paid McLeodUSA $1,973,000 in 1999 for the rental
of building space and for DS-1 usage and transmission facilities in the form of
private leased lines. McLeodUSA paid Illuminet $2,152,000 in 1999 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 $1,665,000 in 1999 for private line services and long distance
services. McLeodUSA paid Ameren and Central Illinois Public Service Company,
collectively, $794,000 for electric utility services in 1999. Richard A. Lumpkin
is a director of Ameren Corporation, the parent company of Central Illinois
Public Service Company.
In 1997 McLeodUSA and several of its officers and directors acquired a jet
aircraft for a total price of $2.25 million. Subsequently, ownership was
reallocated. Currently the ownership of the aircraft is held 72% by McLeodUSA,
12% by Mr. McLeod and 8% each by Messrs. Gray and Lumpkin. McLeodUSA and
Messrs. McLeod, Gray and Lumpkin are parties to a Joint Ownership Agreement by
which they have agreed to share the
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<PAGE>
operational expenses of the aircraft in proportion to their respective ownership
interest in the aircraft. Messrs. McLeod, Gray and Lumpkin are directors and
executive officers of McLeodUSA.
In February 2000, McLeodUSA and C&M Consulting, L.L.C. ("C&M") jointly
purchased a jet aircraft for a total price of approximately $39.5 million.
McLeodUSA and C&M are parties to a Joint Ownership Agreement in which they have
agreed to share the operational expenses of the aircraft in proportion to their
ownership interests (25% by McLeodUSA and 75% by C&M). Clark E. McLeod and Mary
E. McLeod are the members of C&M. Mr. McLeod is a director and executive officer
of McLeodUSA.
McLeodUSA has entered into an agreement with Alliant Energy pursuant to
which Alliant Energy has agreed to grant McLeodUSA access to certain of Alliant
Energy's towers, rights-of-way, conduits and poles in exchange for capacity on
the McLeodUSA communications network.
In September 1999, McLeodUSA entered into a IRU Exchange Agreement with
21/st/ Century Telecom Services, Inc. Under the terms of that agreement,
McLeodUSA paid $107,845 to 21/st/ Century in 1999. Robert J. Currey, a director
of McLeodUSA, is President and CEO of 21/st/ Century.
On July 28, 1999, McLeodUSA advanced $65,000 on an unsecured basis to
Randall Rings, an executive officer, in connection with his purchase of a home.
Mr. Rings repaid this non-interest bearing advance in full on December 14, 1999.
In March 2000, McLeodUSA entered into an agreement with APAC Customer
Services, Inc. under which APAC may provide sales, marketing and customer care
services to McLeodUSA. McLeodUSA has thus far made no payments to APAC under
this agreement. APAC paid to McLeodUSA $108,102 in 1998 and $275,344 in 1999 for
telecommunications services. Thomas M. Collins, a director of McLeodUSA, and
Clark E. McLeod, an executive officer and director of McLeodUSA, are both
directors of APAC.
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 1999, 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 and $71,000 in 1998 and
1999, respectively, 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."
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<PAGE>
APPROVAL OF THE 1996 EMPLOYEE STOCK OPTION PLAN, AS AMENDED
(Proposal 2)
On April 12, 2000, subject to stockholder approval, the Board of Directors
adopted an amendment to our 1996 Employee Stock Option Plan and directed that
this plan, as amended, be submitted to our stockholders for their approval.
At the Annual Meeting, stockholders will be asked to consider and vote to
approve the 1996 Employee Stock Option Plan, as amended (the "Plan"),
substantially in the form included in Exhibit A. If Proposal 2 is approved by
the stockholders, the amendment to the Plan will become effective as of April
12, 2000.
The Board of Directors recommends that the stockholders adopt the proposal.
The affirmative vote of a majority of the voting rights present at the
Annual Meeting is required to approve Proposal 2.
The amendment changes the plan to:
. give the Board of Directors the authority to administer the plan so
long as the Board's actions are approved by a majority of the non-
employee director members of the Board;
. modify the limitation on option grants to an individual optionee from
4,000,000 shares over the term of the plan to a calendar year limit of
five percent of the total number of shares reserved for issuance under
the plan;
. permit non-employee directors to receive grants under the plan;
. allow the Compensation Committee to permit limited family transfers of
non-qualified options;
. provide that an optionee (or the optionee's estate) has one year to
exercise an option following termination of the optionee's employment
due to death or disability; and
. provide that a change in status by the optionee from employee to
consultant does not constitute a termination of employment for
purposes of an option granted under the plan.
The Board of Directors is asking our stockholders to approve the Plan
because the Board believes that approval is in the best interests of McLeodUSA,
our stockholders and our employees. The purpose of the Plan is to advance the
interests of McLeodUSA by providing participants in the Plan with an opportunity
to acquire or increase a proprietary interest in McLeodUSA, which thereby will
create a stronger incentive for these individuals to expend maximum effort for
the growth and success of McLeodUSA and will encourage such eligible individuals
to continue to advance our interests. In the judgment of the Board of Directors,
an initial or increased grant under the Plan will be a valuable incentive and
will inure to the ultimate benefit of stockholders by aligning more closely the
interests of Plan participants with those of our stockholders.
As of the Record Date, _______ shares were subject to options currently
outstanding under the Plan and __________ shares remain available for new
options. On the Record Date, the closing price of our Class A common stock was
$________ per share.
Description of the Plan
A description of the provisions of the Plan is set forth below. This
summary is qualified in its entirety by the detailed provisions of the Plan, a
copy of which is attached as Exhibit A to this proxy statement.
Administration. The Plan is administered by the Compensation Committee.
Subject to the terms of the Plan, the Compensation Committee may select
participants to receive awards, determine the types of awards and terms and
conditions of awards, and interpret provisions of the Plan. As amended, the Plan
provides that the Board of Directors' authority is coextensive with the
Compensation Committee's authority except that the Board of Directors' actions
under the Plan must be approved by a majority of the non-employee director
members of the Board of Directors.
The Class A common stock issued or to be issued under the Plan consists of
authorized but unissued shares. If any option expires, terminates or is
terminated for any reason prior to exercise in full, the shares of stock that
were subject to the unexercised portion of such option will be available for
future options granted under the Plan.
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<PAGE>
Eligibility. Awards may be made under the Plan to officers and key
employees of McLeodUSA or any of our affiliates, including any such person who
is an officer or director of McLeodUSA, to non-employee directors, and to any
other individual whose participation in the Plan is determined to be in the best
interests of McLeodUSA by the Compensation Committee. As of March 31, 2000,
there were eight executive officers, eight non-employee directors and over 8,000
employees of McLeodUSA and its subsidiaries who were eligible to participate in
the Plan.
Amendment or Termination of the Plan. The Board of Directors may terminate
or amend the Plan at any time and for any reason. Unless extended, the Plan will
terminate on March 28, 2006. However, amendments will be submitted for
stockholder approval to the extent required by the Code or other applicable
laws.
Options. The Plan permits the granting of both (i) options to purchase
shares of Class A common stock intended to qualify as incentive stock options
under the Code and (ii) options to purchase shares of Class A common stock that
do not qualify as incentive stock options under the Code. A total of 75,000,000
shares of Class A common stock are reserved for issuance under the Plan.
The Plan provides that the exercise price of each stock option may not be
less than 100% of the fair market value of our Class A common stock on the date
of grant in the case of incentive stock options and may not be less than 50% of
the fair market value of our Class A common stock on the date of grant in the
case of non-qualified stock options. In the case of certain 10% stockholders who
receive incentive stock options, the exercise price may not be less than 110% of
the fair market value of our Class A common stock on the date of grant. An
exception to these requirements is made for options that McLeodUSA substitutes
for options held by employees of companies that McLeodUSA acquires. In such a
case, the exercise price is adjusted to preserve the economic value of the
employee's stock option from his or her former employer.
The term of each stock option is fixed by the Compensation Committee and
may not exceed 10 years from the date of grant. The Compensation Committee
determines at what time or times each option may be exercised. Options may be
exercised for a period of one year following termination of employment due to an
optionee's death or disability. Options may be made exercisable in installments.
The exercisability of options may be accelerated by the Compensation Committee.
In general, an optionee may pay the exercise price of an option by cash,
certified check, by tendering shares of Class A common stock or by means of a
broker-assisted cashless exercise.
Transferability. In general, options granted under the Plan may not be
sold, transferred, pledged or assigned other than by will or under applicable
laws of descent and distribution. As amended, the Plan provides that McLeodUSA
may permit limited transfers of non-qualified options for the benefit of
immediate family members to help with estate planning concerns.
Effect of Certain Corporate Transactions. Certain change of control
transactions involving us may cause options granted under the Plan to terminate,
unless the options are continued or substituted for in connection with the
change of control transaction. The Compensation Committee also has authority to
accelerate the exercisability of options in connection with a change of control.
These change of control transactions include, among other things:
. a dissolution;
. a merger, consolidation or reorganization in which we are not the
surviving entity;
. a sale of substantially all of our assets to another entity; or
. the closing of any transaction which results in any person or entity
owning more than 80% of the combined voting power of all of our
classes of stock.
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<PAGE>
Adjustments for Stock Dividends and Similar Events. The Compensation
Committee will make appropriate adjustments in outstanding options and the
number of shares available for issuance under the Plan, including the individual
limitations on awards, to reflect stock dividends, stock splits and other
similar events.
Section 162(m) of the Code. Section 162(m) of the Code limits publicly-
held companies such as McLeodUSA to an annual deduction for federal income tax
purposes of $1,000,000 for compensation paid to their chief executive officer
and the four highest compensated executive officers (other than the chief
executive officer) determined at the end of each year (the "covered employees").
However, performance-based compensation is excluded from this limitation. The
Plan is designed to permit the Compensation Committee to grant options that
qualify as performance-based for purposes of satisfying the conditions of
Section 162(m).
In the case of compensation attributable to stock options, the options
will qualify as performance-based compensation if:
. the grant is made by the Compensation Committee;
. the plan under which the option is granted states the maximum number
of shares with respect to which options may be granted during a
specified period to an employee; and
. under the terms of the option, the amount of compensation is based
solely on an increase in the value of the stock after the date of
grant.
The maximum number of shares of Class A common stock subject to options that can
be awarded under the Plan to any person in a calendar year is five percent of
the number of shares reserved for issuance under the Plan.
Plan Benefits
The table below provides information regarding stock options granted under
the Plan as of the Record Date to:
. the Named Executive Officers;
. the nominees for election as directors;
. all executive officers of McLeodUSA as a group;
. all non-executive officer directors as a group;
. all non-executive officer employees as a group
(including all officers who are not executive officers); and
. associates of any director, executive officer or nominee as a group.
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<PAGE>
<TABLE>
<CAPTION>
Options Granted Range of
Name and Principal Position (Number of Shares) Exercise Prices
- --------------------------- ---------------- ---------------
<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.........................
Arthur L. Christoffersen
Group Vice President - Publishing Services..............................
Blake O. Fisher, Jr.
Group Vice President - Planning & Development and Director..............
J. Lyle Patrick
Group Vice President - Finance & Accounting.............................
Thomas M. Collins
Director................................................................
Paul D. Rhines
Director................................................................
Lee Liu
Director................................................................
Robert J. Currey
Director................................................................
Peter H.O. Claudy
Director................................................................
Roy A. Wilkens
Chief Technology Officer and Director...................................
Anne K. Bingaman
Director................................................................
Theodore J. Forstmann
Director................................................................
Erskine B. Bowles
Director................................................................
James E. Hoffman
Director Nominee........................................................
Executive Officer Group
(8 persons).............................................................
Non-Executive Officer Director Group
(8 persons).............................................................
Non-Executive Officer Employee Group
(_ persons).............................................................
Associates of any Director, Executive Officer or Nominee as a Group..........
</TABLE>
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<PAGE>
Because participation in and the types of options awarded under the Plan
are subject to the discretion of the Compensation Committee, the benefits or
amounts that will be received by any participant or groups of participants if
the Plan is approved, other than as set forth above, are not currently
determinable.
Federal Income Tax Consequences
Incentive Stock Options. The grant of an option will not be a taxable event
for the optionee or for us. An optionee will not recognize taxable income upon
exercise of an incentive stock option (except that the alternative minimum tax
may apply), and any gain realized upon a disposition of our Class A common stock
received pursuant to the exercise of an incentive stock option will be taxed as
long-term capital gain if the optionee holds the shares for at least two years
after the date of grant and for one year after the date of exercise (the
"holding period requirement"). We will not be entitled to any business expense
deduction with respect to the exercise of an incentive stock option, except as
discussed below.
For the exercise of an option to qualify for the foregoing tax treatment,
the optionee generally must be our employee or an employee of our subsidiary
from the date the option is granted through a date within three months before
the date of exercise of the option.
If all of the foregoing requirements are met except the holding period
requirement mentioned above, the optionee will recognize ordinary income upon
the disposition of Class A common stock in an amount generally equal to the
excess of the fair market value of our Class A common stock at the time the
option was exercised over the option exercise price (but not in excess of the
gain realized on the sale). The balance of the realized gain, if any, will be
capital gain. We will be allowed a business expense deduction to the extent the
optionee recognizes ordinary income, subject to our compliance with Section
162(m) of the Code and to certain reporting requirements.
Non-Qualified Options. The grant of an option will not be a taxable event
for the optionee or us. Upon exercising a non-qualified option, an optionee
will recognize ordinary income in an amount equal to the difference between the
exercise price and the fair market value of our Class A common stock on the date
of exercise. Upon a subsequent sale or exchange of shares acquired pursuant to
the exercise of a non-qualified option, the optionee 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 we comply with applicable reporting requirements and with the
restrictions of Section 162(m) of the Code, we will be entitled to a business
expense deduction in the same amount and generally at the same time as the
optionee recognizes ordinary income.
An optionee who has transferred a non-qualified stock option to a spouse,
child, grandchild, parent or sibling by gift will realize taxable income at the
time the option is exercised by the family member. The optionee will be subject
to withholding of income and employment taxes at that time. The family member's
tax basis in the shares will be the fair market value of the shares on the date
the option is exercised. The transfer of vested non-qualified stock options
will be treated as a completed gift for gift and estate tax purposes. Once the
gift is completed, neither the transferred options nor the shares acquired on
exercise of the transferred options will be includable in the optionee's estate
for estate tax purposes.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2.
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<PAGE>
APPROVAL OF AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
CLASS A COMMON STOCK TO 2,000,000,000 FROM 1,000,000,000
(Proposal 3)
On April 3, 2000, subject to stockholder approval, the Board of Directors
adopted an amendment to Section 4.1 of our Certificate of Incorporation to
increase the number of authorized shares of Class A common stock from one
billion (1,000,000,000) to two billion (2,000,000,000) and, as a result, to
increase our total authorized shares of capital stock from 1,024,000,000 to
2,034,000,000 (assuming approval of Proposal 4 to authorize a new class of
preferred stock in the amount of 10,000,000 shares).
At the Annual Meeting, stockholders will be asked to consider and vote on
the proposed amendment to Section 4.1 of our Certificate of Incorporation,
substantially in the form included in Exhibit B. If Proposal 3 is approved by
the stockholders, the amendment to our Certificate of Incorporation to increase
the authorized shares of Class A common stock will become effective upon the
filing of a Certificate of Amendment to our Certificate of Incorporation with
the Secretary of State of the State of Delaware, which filing is likely to be
made promptly after the Annual Meeting.
The Board of Directors recommends that the stockholders adopt the proposal.
The affirmative vote of a majority of the outstanding shares of Class A
common stock entitled to vote at the Annual Meeting is required to approve
Proposal 3.
In addition to the Class A common stock issued and outstanding, as of the
Record Date, we also have reserved for issuance the following number of shares
of Class A common stock:
<TABLE>
<CAPTION>
Number of
--------------
Reserved for Shares
------------ --------------
<S> <C>
Outstanding options to purchase McLeodUSA Class A common stock............................ [____]
Issuance pursuant to employee benefit plans............................................... [____]
Conversion of outstanding shares of McLeodUSA Series A, Series B and Series C
preferred stock......................................................................... [____]
Outstanding options to purchase shares of McLeodUSA Class B common stock
convertible to Class A common stock..................................................... [____]
Issuance and additional reserves in connection with the two hundred percent (200%) stock
dividend scheduled to be distributed on April 24, 2000.................................. [____]
Total.................................................................................. [____]
</TABLE>
As a result, after including both the shares of Class A common stock issued
and outstanding and the shares of Class A common stock reserved for issuance, we
have utilized approximately [____] shares of the 1,000,000,000 authorized. Thus,
we currently have available for future issuance less than [____] shares of Class
A common stock.
The Board of Directors believes that the proposed increase in the
authorized shares of Class A common stock is desirable to enhance our
flexibility with possible future actions, including stock splits, stock
dividends, acquisitions, financing transactions, employee benefit plan
issuances, and other corporate purposes as may arise. Having this authorized
stock available for issuance in the future will give us greater flexibility and
will allow additional shares of stock to be issued without the expense and delay
of a stockholders' meeting. This kind of delay might deny us the flexibility the
Board views as important in facilitating the effective use of our securities.
However, our ability to issue large blocks of securities is not unlimited. For
example, the rules of The National Association of Securities Dealers, Inc.
("NASD") currently require stockholder approval by issuers of securities
quoted on The Nasdaq National Market, on which our Class A common stock is
currently quoted, as to the issuance of shares of common stock or securities
convertible into common stock in various instances, including:
. actions resulting in a change of control of the company;
. acquisition transactions involving directors, officers or substantial
security holders where the present or potential issuance of these
securities could result in an increase in outstanding common shares or
voting power of 5% or more;
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<PAGE>
. acquisition transactions generally where the present or potential
issuance of securities could result in an increase in the voting power
of outstanding common shares of 20% or more; or
. other sales or issuances of common stock, or securities convertible
into or exercisable for common stock, in a non-public offering equal
to 20% or more of the voting power outstanding before the issuance for
less than the greater of book or market value of stock.
Exceptions to these rules may be made upon application to the NASD. In
other instances, the issuance of additional shares remains within the discretion
of the Board of Directors without the requirement of further action by
stockholders except as otherwise required by applicable law or any stock
exchange on which our securities may then be listed.
Except as described above in this Proposal 3, we do not have any current
commitments, arrangements, understandings or plans with respect to the issuance
of the additional shares of our Class A common stock. We are not submitting this
proposal to enable us to frustrate any efforts by another party either to
acquire a controlling interest in our shares or to seek representation on our
Board of Directors.
If this proposal to increase the number of authorized shares of Class A
common stock is approved, the additional authorized shares will be part of the
existing class and will increase the number of shares available for issuance by
us, but will have no effect upon the terms of the class of our Class A common
stock or the rights of the holders thereof. If and when issued, the proposed
additional authorized shares will have the same rights and privileges as the
shares currently outstanding. Holders of our capital stock do not have
preemptive rights to purchase these additional shares of Class A common stock.
The future issuance of additional shares of authorized but unissued stock
on other than a pro rata basis will dilute the ownership of current
stockholders.
We presently have in place certain provisions which have an anti-takeover
effect. Our Board of Directors is divided into three classes as nearly as equal
as possible and the directors are elected for three-year terms. As mandated by
the Delaware General Corporation Law (the "DGCL") for companies with a staggered
board of directors, no director may be removed by the stockholders except for
cause.
We also have elected to be subject to the provisions of Section 203 of the
DGCL. In general, this statute prohibits a publicly held Delaware corporation
from engaging in a business combination with an interested stockholder for a
period of three years after the date the person became an interested
stockholder, unless certain requirements are met.
In addition to these provisions and to this Proposal 3, we are also
presenting to stockholders for their consideration and vote at this Annual
Meeting Proposals 4 and 5, which may have an anti-takeover effect.
The additional shares of Class A common stock that are the subject of this
Proposal 3 also could be used to block an unsolicited acquisition through the
issuance of large blocks of stock to persons or entities considered by our
officers and directors to be opposed to the acquisition, which might be deemed
to have an anti-takeover effect, (i.e., might impede the completion of a merger,
tender offer or other takeover attempt). In fact, the mere existence of a block
of authorized but unissued shares, and the ability of our Board of Directors to
issue these shares without stockholder approval, might deter a bidder from
seeking to acquire our shares on an unfriendly basis. However, our Board of
Directors does not intend or view the proposed increase in authorized stock as
an anti-takeover measure, nor are we aware of any proposed transactions of this
type.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 3.
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<PAGE>
APPROVAL OF AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO AUTHORIZE A NEW CLASS OF PREFERRED STOCK
IN THE AMOUNT OF 10,000,000 SHARES
(Proposal 4)
On April 3, 2000, subject to stockholder approval, the Board of Directors
adopted an amendment to Article 4 of our Certificate of Incorporation to
authorize a new class of preferred stock (the "Class II preferred stock") in the
amount of ten million (10,000,000) shares and, as a result, to increase our
total authorized shares of capital stock from 1,024,000,000 to 2,034,000,000
(assuming approval of Proposal 3 to increase the number of authorized shares of
Class A common stock from one billion (1,000,000,000) to two billion
(2,000,000,000)).
At the Annual Meeting, stockholders will be asked to consider and vote on
the proposed amendment to Article 4 of our Certificate of Incorporation,
substantially in the form included in Exhibit B. If Proposal 4 is approved by
the stockholders an amendment to our Certificate of Incorporation to authorize
the new class of preferred stock will become effective upon the filing of a
Certificate of Amendment to our Certificate of Incorporation with the Secretary
of State of the State of Delaware, which filing is likely to be made promptly
after the Annual Meeting.
The Board of Directors recommends that the stockholders adopt the proposal.
The affirmative vote of a majority of the outstanding shares of our Class A
common stock entitled to vote at the Annual Meeting is required to approve
Proposal 4.
In connection with various financing transactions, we have issued 1,550,000
of the 2,000,000 authorized shares of the existing class of preferred stock.
Thus, only 450,000 shares of preferred stock remain available for future
issuance.
The Board of Directors believes that the proposed authorization of a new
class of preferred stock is desirable to enhance our flexibility with possible
future actions, including acquisitions, financing transactions and other
corporate purposes as may arise. Having this authorized stock available for
issuance in the future will give us greater flexibility and will allow
additional shares of stock to be issued without the expense and delay of a
stockholders' meeting. This kind of delay might deny us the flexibility the
Board views as important in facilitating the effective use of our securities.
The Class II preferred stock will have such designations, preferences,
conversion rights, cumulative, relative, participating, optional or other
rights, including voting rights, qualifications, limitations or restrictions
thereof as are determined by the Board of Directors. Thus, if the Class II
preferred stock is approved, the Board of Directors would be entitled to
authorize the creation and issuance of up to 10,000,000 shares of Class II
preferred stock in one or more series with such limitations and restrictions as
may be determined in the Board's sole discretion, without further authorization
by the holders of our Class A common stock. Such stockholders will not have
preemptive rights to subscribe for shares of Class II preferred stock.
We do not have any current commitments, arrangements, understandings or
plans with respect to the issuance of shares of the proposed Class II preferred
stock. We are not submitting this Proposal 4 to enable us to frustrate any
efforts by another party to acquire a controlling interest in our shares or to
seek representation on our Board of Directors.
It is not possible to determine the actual effect of the Class II preferred
stock on the rights of our stockholders until the Board of Directors determines
the rights of the holders of a series of the Class II preferred stock. However,
such effects might include:
. restrictions on the payment of dividends to holders of the Class A
common stock;
. dilution of voting power to the extent that the holders of shares of
Class II preferred stock are given voting rights;
. dilution of the equity interests and voting power of the Class A
common stock if the Class II preferred stock is convertible into Class
A common stock; and
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<PAGE>
. restrictions upon any distribution of assets to the holders of Class A
common stock upon liquidation or dissolution and until the
satisfaction of any liquidation preferences granted to the holders of
the Class II preferred stock.
We presently have in place certain provisions which have an anti-takeover
effect, including a classified board of directors and the protections of the
provisions of Section 203 of the DGCL, as described in connection with Proposal
3. We are also presenting to stockholders for their consideration and vote at
this Annual Meeting Proposals 3 and 5, which may have an anti-takeover effect.
These additional shares of preferred stock also could be used in an attempt
to block an unsolicited acquisition through the issuance of large blocks of
stock to persons or entities considered by our officers and directors to be
opposed to the acquisition, which might be deemed to have an anti-takeover
effect, (i.e., might impede the completion of a merger, tender offer or other
takeover attempt). In fact, the mere existence of a block of authorized but
unissued shares, and the ability of our Board of Directors to issue these shares
without stockholder approval, might deter a bidder from seeking to acquire our
shares on an unfriendly basis. However, our Board of Directors does not intend
or view the new Class II preferred stock as an anti-takeover measure, nor are we
aware of any proposed transactions of this type.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 4.
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<PAGE>
APPROVAL OF AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO REQUIRE THE UNANIMOUS WRITTEN CONSENT OF THE STOCKHOLDERS
TO TAKE CORPORATE ACTION OF STOCKHOLDERS WITHOUT A MEETING
(Proposal 5)
On April 3, 2000, subject to stockholder approval, the Board of Directors
adopted an amendment to add a new Article 10 to our Certificate of Incorporation
to require the unanimous written consent of the stockholders to take corporate
action of stockholders without a meeting.
At the Annual Meeting, stockholders will be asked to consider and vote on
the proposed new Article 10 of our Certificate of Incorporation, substantially
in the form included in Exhibit C. If Proposal 5 is approved by the stockholders
an amendment to our Certificate of Incorporation to authorize the new Article 10
will become effective upon the filing of a Certificate of Amendment to our
Certificate of Incorporation with the Secretary of State of the State of
Delaware, which filing is likely to be made promptly after the Annual Meeting.
The Board of Directors recommends that the stockholders adopt the proposal.
The affirmative vote of a majority of the outstanding shares of our Class A
common stock entitled to vote at the Annual Meeting is required to approve
Proposal 5.
Under the provisions of Section 228 of the DGCL, corporate action of
stockholders without a meeting of stockholders may be taken by the written
consent of a majority of the stockholders of the corporation, unless otherwise
specified in the certificate of incorporation. Our current Certificate of
Incorporation is silent as to this matter. However, our existing Bylaws require
the unanimous written consent of our stockholders to the taking of action
without a stockholders' meeting. Accordingly, the adoption of Proposal 5 would
conform the applicable provisions of our Certificate of Incorporation to those
already contained in our Bylaws.
If adopted, the proposed new Article 10 of our Certificate of Incorporation
will require unanimous written consent of the stockholders to the taking of
corporate action of stockholders without a meeting of the stockholders. The
probable effect of this proposed amendment to our Certificate of Incorporation
will be to preclude stockholder action by written consent without a meeting. In
other words, it is likely that stockholders who wish to propose the taking of
corporate action will be required to submit such proposals for consideration at
the annual or special meeting of the stockholders held at the determination of
the Board of Directors.
The proposed amendment reflects the unanimous determination of the Board of
Directors, a majority of whom are independent outside directors, that we should
continue to be in a position to pursue our long-term goals and objectives
without distraction by the threat of a hostile takeover attempt or other abusive
tactics designed or intended to force a "restructuring" of our company or our
operations. The Board has concluded that the amendment to our Certificate of
Incorporation embodied in Proposal 5 is necessary to enable the Board and
management, in a manner consistent with the DGCL, to focus their efforts on the
long-term future of McleodUSA, and to be in a position to properly respond to an
unsolicited takeover bid for our company. The Board's intent in recommending
Proposal 5 is to afford itself a reasonable opportunity to determine whether
stockholder proposals are in the best interests of our company and our
stockholders.
We are not aware of any existing or planned effort on the part of any party
to accumulate material amounts of our Class A common stock, or to acquire
control of us by means of a merger, tender offer, solicitation in opposition to
management or otherwise, or to change our management. We are aware, however,
that an increased number of unsolicited acquisition proposals in connection with
takeover activities have employed, or have sought to employ, tactics which are
designed to force a response by the target company through threats or attempts
to secure action without a meeting and without affording a reasonable
opportunity for the board of directors of such companies to consider whether
such proposals are in the best interests of its stockholders.
We presently have in place certain provisions which have an anti-takeover
effect, including a classified board of directors and the protections of the
provisions of Section 203 of the DGCL, as described in connection with Proposal
3. We are also presenting to stockholders for their consideration and vote at
this Annual Meeting Proposals 3 and 4, which may have an anti-takeover effect.
This amendment has the effect of making more difficult action by the
stockholders which does not have the support of the Board of Directors and also
could have the effect of discouraging a third party from making a tender
-27-
<PAGE>
offer or otherwise attempting to gain control of us if that party were unwilling
to submit its proposals to a vote of the stockholders at a meeting (i.e., might
impede the completion of a merger, tender offer or other takeover attempt).
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 5.
-28-
<PAGE>
RATIFICATION OF THE APPOINTMENT
OF THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS
FOR THE 2000 FISCAL YEAR
(Proposal 6)
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 our
independent public accountants for the fiscal year ending December 31, 2000.
Arthur Andersen LLP has been our principal independent public accountants for
the past three years.
Stockholder ratification of Proposal 6 is not required by the Bylaws or
otherwise. However, the Board of Directors is submitting Proposal 6 to the
stockholders for ratification as a matter of good corporate practice. If the
stockholders fail to ratify Proposal 6, the Board of Directors will reconsider
whether or not to retain Arthur Andersen LLP. Even if Proposal 6 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.
It is expected that 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 6.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 6.
-29-
<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; and
. 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.
Share amounts in the table do not reflect the three-for-one stock split to
be effected in the form of a stock dividend of our Class A common stock
announced on February 29, 2000 and to be distributed to our stockholders on
April 24, 2000.
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)..........................................................
Richard A. Lumpkin(1)(3).......................................................
Stephen C. Gray................................................................
Arthur L. Christoffersen.......................................................
Blake O. Fisher, Jr............................................................
J. Lyle Patrick................................................................
Thomas M. Collins..............................................................
Paul D. Rhines.................................................................
Lee Liu........................................................................
Robert J. Currey...............................................................
Peter H.O. Claudy..............................................................
Roy A. Wilkens.................................................................
Anne K. Bingaman...............................................................
Theodore J. Forstmann..........................................................
Erskine B. Bowles..............................................................
James E. Hoffman...............................................................
Directors and executive officers as a group (16 persons).......................
</TABLE>
- -------------------------------
* Less than one percent.
-30-
<PAGE>
(1) Richard A. Lumpkin and certain of his family members, Alliant Energy, M/C
and Clark E. and Mary E. McLeod are parties to one or more stockholders'
agreements, 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 _____________________ shares of Class A
common stock, including 2,601,376 shares that Alliant Energy has the right to
acquire upon exercise of options, and 415,000 and 65,000 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 _____%. See "Principal Holders of Voting Securities - Stockholders'
Agreements."
(2) Includes 7,820,460 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
460,000 shares of Class A common stock held by the McLeod Charitable Foundation
for which both Mr. and Mrs. McLeod are directors and over which both have shared
voting and dispositive power. Also includes 250,000 shares of Class A common
stock held by the Clark E. McLeod Unitary Trust and 250,000 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 _______________ shares of Class A common stock held of record by
the late Gail G. Lumpkin, Mr. Lumpkin's recently deceased wife, over which Mr.
Lumpkin has shared voting power. Includes _________________ shares of Class A
common stock held by various trusts for the benefit of the family of Mr. Lumpkin
over which he has shared voting and investment power. Includes 65,000 shares of
Class A common stock that Mr. Lumpkin has the right to purchase within 60 days
from the Record Date pursuant to options.
-31-
<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 us. 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>
Putnam Investments, Inc. (1)..........................
Alliant Energy Corporation (2)........................
Clark E. McLeod (3)...................................
Fidelity Management & Research Company (4)............
Janus Capital Corporation (5).........................
Kwok Li...............................................
Linsang Partners, LLC.................................
</TABLE>
____________________________
(1) The address of Putnam Investments, Inc. is One Post Office Square, Boston,
MA 02109. The amount of the beneficial ownership was disclosed on a
Schedule 13G filed by Putnam Investments, Inc. on ___________________.
(2) Includes 2,601,376 shares of Class A common stock that Alliant Energy
Investments, Inc., a wholly owned subsidiary of Alliant Energy Corporation,
has the right to acquire upon exercise of options and ___________ shares of
Class A common stock of which Alliant Energy Investments, Inc. is the
holder of record. Heartland Properties, Inc., a wholly owned subsidiary of
Alliant Energy Investments, Inc., is the holder of record of
________________ shares of Class A common stock. LNT Communications L.L.C.,
a limited liability company wholly owned by Alliant Energy Resources, Inc.,
a wholly owned subsidiary of Alliant Energy Corporation, is the record
holder of ______ shares. Alliant Energy Foundation, Inc., an independently
chartered foundation which is affiliated with Alliant Energy Corporation,
is the record holder of ____________ shares of Class A common stock. The
address of Alliant Energy Corporation is 222 West Washington Avenue, P.O.
Box 192, Madison, WI 53701.
(3) See "Stock Owned by Management."
(4) Fidelity Management & Research Company is a wholly owned subsidiary of FMR
Corporation. The address of FMR Corporation is 82 Devonshire Street,
Boston, MA 02109. The amount of beneficial ownership was disclosed on a
Schedule 13G filed by FMR Corporation on _____________.
(5) The address of Janus Capital Corporation is 100 Fillmore Street, Suite 400,
Denver, CO 80206-4923. The amount of beneficial ownership was disclosed on
a Schedule 13G filed by Janus Capital Corporation on September 30, 1999.
-32-
<PAGE>
Stockholders' Agreements
On March 10, 2000, we entered into a further amendment and restatement of a
stockholders' agreement originally entered into on November 18, 1998 with
several of our significant stockholders consisting of Alliant Energy, Clark and
Mary McLeod, and Richard and Gail Lumpkin and various trusts for the benefit of
their family.
Such further amended and restated November 1998 stockholders' agreement
provides, among other things, that:
. until December 31, 2001, the parties will not sell any of our equity
securities, or any other securities convertible into or exchangeable for
our equity securities, without receiving the prior written consent of
our Board of Directors, except for transfers of the restricted
securities specifically permitted by the agreement;
. to the extent our Board of Directors approves a transfer of our equity
securities by a party, the other parties are automatically granted
transfer rights;
. our Board of Directors will determine on a quarterly basis the aggregate
number, if any, of shares of our Class A common stock, not to exceed in
the aggregate 300,000 shares per quarter, that the parties may sell
during designated trading periods following the release of our quarterly
financial results;
. to the extent our Board of Directors grants registration rights to a
party in connection with a sale of our securities by that party, it will
grant similar registration rights to the other parties;
. our Board of Directors will determine for each of 2000 and 2001 the
aggregate number, if any, of shares of our Class A common stock, not to
exceed in the aggregate on a per year basis a number of shares equal to
15% of the total number of shares of Class A common stock beneficially
owned by the parties as of December 31, 1998, to be registered by us
under the Securities Act for sale by the parties;
. in any underwritten offering of shares of our Class A common stock,
other than an offering on a registration statement on Form S-4 or
Form S-8 or any other form which would not permit the inclusion of
shares of Class A common stock owned by the parties, our Board of
Directors will determine the aggregate number, if any, of shares of our
Class A common stock, not to exceed on a per year basis a number of
shares equal to 15% of the total number of shares of Class A common
stock beneficially owned by the parties as of December 31, 1998, to be
registered by us for sale by the parties in the offering; and
. we may subsequently determine not to register any shares of the parties
under the Securities Act and may either not file a registration
statement or otherwise withdraw or abandon a registration statement
previously filed.
Under the further amended and restated November 1998 stockholders'
agreement, each party also agreed, until it owns less than 2,500,000 shares of
our Class A common stock, to vote its shares and take all action within its
power to:
. establish the size of our Board of Directors at up to 13 directors;
. cause to be elected to our Board of Directors one director designated by
Alliant Energy for so long as it owns at least 2,500,000 shares of our
Class A common stock;
. cause to be elected to our 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 2,500,000 shares of
our Class A common stock;
. cause Richard Lumpkin to be elected to our Board of Directors for so
long as Richard Lumpkin and various other parties related to Mr. Lumpkin
collectively own at least 2,500,000 shares of our Class A common stock;
and
. cause to be elected to our Board of Directors up to eight non-employee
directors nominated by the Board.
The further amended and restated November 1998 stockholders' agreement
terminates on December 31, 2001. In addition, if during each of 2000 and 2001 we
have not provided a party a reasonable opportunity to sell an aggregate number
of shares of our Class A common stock equal to not less than 15% of the total
number of shares of Class A common stock beneficially owned by a party as of
December 31, 1998, then that party may terminate the agreement as it applies to
that party.
On March 10, 2000, we also entered into a further amendment and restatement
of a stockholders' agreement originally entered into on January 7, 1999 with the
parties to the stockholders' agreement described above and M/C in connection
with the acquisition by us of Ovation Communications, Inc.
-33-
<PAGE>
The further amended and restated January 1999 stockholders' agreement
provides that, until December 31, 2001, M/C will not sell any of our equity
securities, or any other securities convertible into or exchangeable for our
equity securities, received pursuant to our acquisition of Ovation
Communications, without receiving the prior written consent of our Board of
Directors, except for transfers of the restricted securities specifically
permitted by the agreement. The further amended and restated January 1999
stockholders' agreement also contains various provisions intended to insure that
M/C and the parties to the further amended and restated November 1998
stockholders' agreement are treated on a basis generally similar to one another
in connection with permitted sales and registration of our securities under such
agreements. In addition, for so long as M/C owns at least 2,500,000 shares of
our Class A common stock, M/C has agreed to vote its shares in accordance with
the voting agreement contained in the further amended and restated November 1998
stockholders' agreement and the other parties have agreed to vote their shares
to cause to be elected to our Board of Directors one director designated by M/C.
The further amended and restated January 1999 stockholders' agreement
terminates on December 31, 2001. In addition, if (1) during each of 2000 and
2001, we have not provided M/C an opportunity to register under the Securities
Act for sale an aggregate number of shares of our 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 a result of the acquisition of Ovation
Communications, or (2) the further amended and restated November 1998
stockholders' agreement has been terminated by all parties to such agreement,
then M/C may terminate the further amended and restated January 1999
stockholders' agreement. The further amended and restated January 1999
stockholders' agreement will be terminated with respect to parties other than
M/C and us at the time as the further amended and restated November 1998
stockholders' agreement is terminated with respect to such other parties.
Kwok Li and Linsang Partners, LLC, a limited liability company controlled
by Mr. Li, are parties to a stockholders' agreement entered into with us on
March 30, 2000 in connection with our acquisition of Splitrock Services, Inc.
The stockholders' agreement provides, among other things, that:
. until December 31, 2002, Mr. Li and Linsang Partners will not sell
approximately 9.3 million shares of our Class A common stock, which were
received pursuant to our acquisition of Splitrock Services, without
receiving the prior written consent of our Board of Directors, except
for transfers of the restricted securities specifically permitted by the
stockholders' agreement;
. the shares of Class A common stock restricted by the stockholders'
agreement do not include approximately 2.2 million shares of our Class A
common stock which were also received by Mr. Li, his wife, Linsang
Partners and members of Linsang Partners in our acquisition of Splitrock
Services;
. for the period commencing for the quarter ending December 31, 2000 and
ending on the expiration date of the stockholders' agreement, our Board
of Directors will determine on a quarterly basis the aggregate number,
if any, of shares of our Class A common stock, not to exceed in the
aggregate 100,000 shares per quarter, that Mr. Li and Linsang Partners
may sell during designated trading periods following the release of our
quarterly financial results;
. our Board of Directors will determine for each of 2001 and 2002 the
aggregate number, if any, of shares of our Class A common stock, not to
exceed 1,394,480 shares of Class A common stock, to be registered by us
under the Securities Act for sale by Mr. Li and Linsang Partners;
. in any underwritten offering of shares of our Class A common stock
during 2001 and 2002, 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 Mr. Li and Linsang
Partners, our Board of Directors will determine the aggregate number, if
any, of shares of our Class A common stock, not to exceed in the
aggregate on a per year basis 1,394,480 shares, to be registered by us
for sale by Mr. Li and Linsang Partners in the offering;
. we may subsequently determine not to register any shares of Mr. Li and
Linsang Partners under the Securities Act and may either not file a
registration statement or otherwise withdraw or abandon a registration
statement previously filed;
. Mr. Li and Linsang Partners may pledge to a nationally recognized
financial institution certain shares of our Class A common stock to
permit certain financings by Mr. Li and Linsang Partners, provided the
pledgee of such shares takes the shares subject to the restrictions in
the stockholders' agreement; and
. the stockholders' agreement will terminate on December 31, 2002,
provided that Mr. Li and Linsang Partners will be permitted to terminate
the stockholders' agreement on an earlier date if during each of 2001
and 2002, we have not provided Mr. Li and Linsang Partners a reasonable
opportunity to sell 1,394,480 shares of our Class A common stock.
-34-
<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 2001 annual meeting of
stockholders must be received by us no later than January __, 2001 pursuant to
the proxy solicitation rules of the SEC. Nothing in this paragraph shall be
deemed to require us to include in our proxy statement and proxy relating to the
2001 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 2001 annual meeting of
stockholders, management will be able to vote proxies in its discretion if we:
. receive notice of the proposal before the close of business on March
___, 2001, and advise stockholders in the 2001 proxy statement about the
nature of the matter and how management intends to vote on such matter,
or
. do not receive notice of the proposal prior to the close of business on
March ___, 2001
Notices of intention to present proposals at the 2001 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
Our Board of Directors 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
Clark E. McLeod
Chairman and Chief Executive Officer
Cedar Rapids, Iowa
April __, 2000
A copy of the Annual Report to Stockholders for the fiscal year ended
December 31, 1999 accompanies this Proxy Statement and it includes an Annual
Report on Form 10-K for the fiscal year ended December 31, 1999 that we filed
with the SEC. Stockholders may obtain, free of charge, an additional 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.
-35-
<PAGE>
EXHIBIT A
---------
MCLEODUSA INCORPORATED
1996 EMPLOYEE STOCK OPTION PLAN
A-1
<PAGE>
McLEODUSA INCORPORATED
1996 STOCK OPTION PLAN
McLeodUSA Incorporated, a Delaware corporation (the "Corporation"), sets
forth herein the terms of the 1996 Employee Stock Option Plan (the "Plan") as
follows:
1. PURPOSE
The Plan is intended to advance the interests of the Corporation by
providing eligible individuals (as designated pursuant to Section 5 hereof) an
opportunity to acquire or increase a proprietary interest in the Corporation,
which thereby will create a stronger incentive to expend maximum effort for the
growth and success of the Corporation and its subsidiaries and will encourage
such eligible individuals to continue to service the Corporation. Each stock
option granted under the Plan is intended to be an Incentive Stock Option within
the meaning of Section 422 of the Code, except (a) to the extent that any such
Option would exceed the limitations set forth in Section 8 hereof and (b) for
Options specifically designated at the time of grant as not being Incentive
Stock Options.
2. DEFINITIONS
For purposes of interpreting the Plan and related documents (including
Option Agreements), the following definitions shall apply:
2.1. "Affiliate" means McLeodUSA Incorporated and any company or other
trade or business that is controlled by or under common control with the
Corporation, (determined in accordance with the principles of Section 414(b) and
414(c) of the Code and the regulations thereunder) or is an affiliate of the
Corporation within the meaning of Rule 405 of Regulation C under the 1933 Act.
2.2. "Board" means the Board of Directors of the Corporation.
2.3. "Code" means the Internal Revenue Code of 1986, as now in effect or
as hereafter amended.
2.4. "Committee" means the Compensation Committee of the Board which must
consist of no fewer than two members of the Board and shall be appointed by the
Board.
2.5. "Corporation" means McLeodUSA Incorporated.
2.6. "Effective Date" means the date of adoption of the Plan by the Board.
2.7. "Employer" means McLeodUSA Incorporated or other Affiliate which
employs the designated recipient of an Option.
2.8. "Exchange Act" means the Securities Exchange Act of 1934, as now in
effect or as hereafter amended.
2.9. "Fair Market Value" means the value of each share of Stock subject to
the Plan determined as follows: if on the Grant Date or other determination
date the shares of Stock are listed on an established national or regional stock
exchange, are admitted to quotation on the National Association of Securities
Dealers Automated Quotation System, or are publicly traded on an established
securities market, the Fair Market Value of the shares of Stock shall be the
closing price of the shares of Stock on such exchange or in such market (the
highest such closing price if there is more than one such exchange or market) on
the trading day immediately preceding the Grant Date or such other determination
date (or if there is no such reported closing price, the Fair Market Value shall
be the mean between the highest bid and lowest asked prices or between the high
and low sale prices on such trading day) or, if no sale of the shares of Stock
is reported for such trading day, on the next preceding day on which any sale
shall
A-2
<PAGE>
have been reported. If the shares of Stock are not listed on such an exchange,
quoted on such System or traded on such a market, Fair Market Value shall be
determined by the Board in good faith.
2.10 "Family Member" means a person who is a spouse, child, stepchild,
grandchild, parent, stepparent, grandparent, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother, sister, brother-in-law, or
sister-in-law, including adoptive relationships, of the Optionee, any person
sharing the Optionee's household (other than a tenant or employee), a trust in
which any one or more these persons have more than fifty percent of the
beneficial interest, a foundation in which any one or more of these persons (or
the Optionee) control the management of assets, and any other entity in which
one or more these persons (or the Optionee) own more than fifty percent of the
voting interests; provided, however, that to the extent required by applicable
law, the term Family Member shall be limited to a person who is a spouse, child,
stepchild, grandchild, parent, stepparent, grandparent, mother-in-law, father-
in-law, son-in-law, daughter-in-law, brother, sister, brother-in-law, or sister-
in-law, including adoptive relationships, of the Optionee or a trust or
foundation for the exclusive benefit of any one or more of these persons.
2.11. "Grant Date" means the later of (i) the date as of which the
Committee approves the grant and (ii) the date as of which the Optionee and the
Corporation or Affiliate enter the relationship resulting in the Optionee being
eligible for grants.
2.12. "Incentive Stock Option" means an "incentive stock option" within
the meaning of section 422 of the Code.
2.13. "Option" means an option to purchase one or more shares of Stock
pursuant to the Plan.
2.14. "Option Agreement" means a written agreement (to be executed by the
Corporation and the Optionee), or a written notice delivered by the Corporation
to the Optionee (which need not be signed by either the Corporation or the
Optionee), evidencing the grant of an Option hereunder.
2.15. "Optionee" means a person who holds an Option under the Plan.
2.16. "Option Period" means the period during which Options may be
exercised as defined in Section 11.
2.17. "Option Price" means the purchase price for each share of Stock
subject to an Option.
2.18. "Plan" means the McLeodUSA Incorporated 1996 Employee Stock Option
Plan.
2.19. "1933 Act" means the Securities Act of 1933, as now in effect or as
hereafter amended.
2.20. "Stock" mean the shares of Class A common stock, par value $.01 per
share, of the Corporation.
2.21. "Subsidiary" means any "subsidiary corporation" of the Corporation
within the meaning of Section 425(f) of the Code.
3. ADMINISTRATION
3.1. Committee
The Plan shall be administered by the Committee appointed by the
Board, which shall have the full power and authority to take all actions and to
make all determinations required or provided for under the Plan or any Option
granted or Option Agreement entered into hereunder and all such other actions
and determinations not inconsistent with the specific terms and provisions of
the Plan deemed by the Committee to be necessary or appropriate to the
administration of the Plan or any Option granted or Option Agreement entered
into hereunder. The interpretation and construction by the Committee of any
provision of the Plan or of any Option granted or Option Agreement entered into
hereunder shall be final and conclusive. As permitted by law, the Committee may
delegate its authority under the Plan to a member or members of the Board of
Directors or to an executive officer or officers of the Company.
A-3
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3.2 Board of Directors
The Board of Directors' authority under the Plan shall be coextensive
with the Committee's authority under the Plan; provided, that, any action taken
by the Board with respect to the Plan shall be approved by a majority of the
Corporation's non-employee directors.
3.3. No Liability
No member of the Board or of the Committee shall be liable for any
action or determination made, or any failure to take or make an action or
determination, in good faith with respect to the Plan or any Option granted or
Option Agreement entered into hereunder.
4. STOCK
The stock that may be issued pursuant to Options granted under the Plan
shall be Stock, which shares may be treasury shares or authorized but unissued
shares. The number of shares of Stock that may be issued pursuant to Options
granted under the Plan shall not exceed in the aggregate 75,000,000 shares of
Stock, which number of shares is subject to adjustment as provided in Section 19
hereof. If any Option expires, terminates or is terminated for any reason prior
to exercise in full, the shares of Stock that were subject to the unexercised
portion of such Option shall be available for future Options granted under the
Plan.
5. ELIGIBILITY
Options may be granted under the Plan to (i) any officer or key employee of
the Corporation or any Subsidiary (including any such officer or key employee
who is also a director of the Corporation or any Subsidiary), (ii) any director
of the Corporation or any Subsidiary who is not an employee of the Corporation
or any Subsidiary or (iii) any other individual whose participation in the Plan
is determined to be in the best interests of the Corporation by the Committee.
An individual may hold more than one Option, subject to such restrictions as are
provided herein.
6. EFFECTIVE DATE AND TERM
6.1. Effective Date
The Plan shall become effective as of the date of adoption by the
Board, subject to stockholders' approval of the Plan within one year of such
effective date by a majority of the votes cast at a duly held meeting of the
stockholders of the Corporation at which a quorum representing a majority of all
outstanding stock is present, either in person or by proxy, and voting on the
matter, or by written consent in accordance with applicable state law and the
Certificate of Incorporation and By-Laws of the Corporation and in a manner that
satisfies the requirements of Rule 16b-3(b) of the Exchange Act; provided,
however, that upon approval of the Plan by the stockholders of the Corporation,
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all Options granted under the Plan on or after the effective date shall be fully
effective as if the stockholders of the Corporation had approved the Plan on the
effective date. If the stockholders fail to approve the Plan within one year of
such effective date, any Options granted hereunder shall be null, void and of no
effect.
6.2. Term
The Plan shall terminate on the date 10 years after the effective
date.
7. GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Committee may, at any
time and from time to time prior to the date of termination of the Plan, grant
to such eligible individuals as the Committee may determine Options to purchase
such number of shares of Stock on such terms and conditions as the Committee may
determine, including any terms or conditions which may be necessary to qualify
such Options as Incentive Stock Options. Without limiting the foregoing, the
Committee may at any time, with the consent of the Optionee, amend the terms of
outstanding Options or issue new Options in exchange for the surrender and
cancellation of outstanding Options. The date on which the Committee approves
the grant of an Option (or such later date as is specified by the
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Committee) shall be considered the date on which such Option is granted. The
maximum number of shares of Stock subject to Options that can be awarded under
the Plan to any person in any one calendar year is five percent (5%) of the
total number of shares reserved for issuance under the Plan pursuant to Section
4.
8. LIMITATION ON INCENTIVE STOCK OPTIONS
An Option (other than an Option described in Section 1 hereof) shall
constitute an Incentive Stock Option only to the extent that the aggregate fair
market value (determined at the time the Option is granted) of the Stock with
respect to which Incentive Stock Options are exercisable for the first time by
any Optionee during any calendar year (under the Plan and all other plans of the
Optionee's employer corporation and its parent and subsidiary corporations
within the meaning of Section 422(d) of the Code) does not exceed $100,000.
This limitation shall be applied by taking Options into account in the order in
which such Options were granted.
9. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by written
Option Agreements delivered by the Corporation to the Optionee, in such form or
forms as the Committee shall from time to time determine. Option Agreements
covering options granted from time to time or at the same time need not contain
similar provisions; provided, however, that all such Option Agreements shall
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comply with all terms of the Plan.
10. OPTION PRICE
The purchase price of each share of Stock subject to an Option shall be
fixed by the Committee and stated in each Option Agreement. In the case of an
Option that is intended to constitute an Incentive Stock Option, the Option
Price shall be not less than the greater of par value or 100 percent of the Fair
Market Value of a share of the Stock covered by the Option on the date the
Option is granted (as determined in good faith by the Committee); provided,
--------
however, that in the event the Optionee would otherwise be ineligible to receive
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an Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and
424(d) of the Code (relating to stock ownership of more than 10 percent), the
Option Price of an Option which is intended to be an Incentive Stock Option
shall be not less than the greater of par value or 110 percent of the Fair
Market Value of a share of the Stock covered by the Option at the time such
Option is granted. In the case of an Option not intended to constitute an
Incentive Stock Option, the Option Price shall be not less than the greater of
par value or 50 percent of the Fair Market Value of a share of the Stock covered
by the Option on the date the Option is granted (as determined in good faith by
the Committee).
11. TERM AND EXERCISE OF OPTIONS
11.1. Term
Each Option granted under the Plan shall terminate and all rights to
purchase shares thereunder shall cease upon the expiration of 10 years from the
date such Option is granted, or on such date prior thereto as may be fixed by
the Committee and stated in the Option Agreement relating to such Option;
provided, however, that in the event the Optionee would otherwise be ineligible
- -------- -------
to receive an Incentive Stock Option by reason of the provisions of Sections
422(b)(6) and 424(d) of the Code (relating to stock ownership of more than 10
percent), an Option granted to such Optionee which is intended to be an
Incentive Stock Option shall in no event be exercisable after the expiration of
five years from the date it is granted.
11.2. Exercise by Optionee
Only the Optionee receiving an Option (or, in the event of the Optionee's
legal incapacity or incompetency, the Optionee's guardian or legal
representative, and in the case of the Optionee's death, the Optionee's estate)
may exercise the Option.
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11.3. Option Period and Limitations on Exercise
Each Option granted under the Plan shall be exercisable in whole or
in part at any time and from time to time over a period commencing on or after
the date of grant of the Option and ending upon the expiration or termination of
the Option, as the Committee shall determine and set forth in the Option
Agreement relating to such Option. Without limitation of the foregoing, the
Committee, subject to the terms and conditions of the Plan, may in its sole
discretion provide that an Option may not be exercised in whole or in part for
any period or periods of time during which such Option is outstanding as the
Committee shall determine and set forth in the Option Agreement relating to such
Option. Any such limitation on the exercise of an Option contained in any Option
Agreement may be rescinded, modified or waived by the Committee, in its sole
discretion, at any time and from time to time after the date of grant of such
Option. Notwithstanding any other provisions of the Plan, no Option shall be
exercisable in whole or in part prior to the date the Plan is approved by the
stockholders of the Corporation as provided in Section 6.1 hereof.
11.4. Method of Exercise
An Option that is exercisable hereunder may be exercised by delivery
to the Corporation on any business day, at its principal office addressed to the
attention of the Committee, of written notice of exercise, which notice shall
specify the number of shares for which the Option is being exercised, and shall
be accompanied by payment in full of the Option Price of the shares for which
the Option is being exercised. Payment of the Option Price for the shares of
Stock purchased pursuant to the exercise of an Option shall be made, as
determined by the Committee and set forth in the Option Agreement pertaining to
an Option, (a) in cash or by certified check payable to the order of the
Corporation; (b) through the tender to the Corporation of shares of Stock, which
shares shall be valued, for purposes of determining the extent to which the
Option Price has been paid thereby, at their Fair Market Value on the date of
exercise; or (c) by a combination of the methods described in Sections 11.4(a)
and 11.4(b) hereof; provided, however, that the Committee may in its discretion
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impose and set forth in the Option Agreement pertaining to an Option such
limitations or prohibitions on the use of shares of Stock to exercise Options as
it deems appropriate. Payment in full of the Option Price need not accompany the
written notice of exercise provided the notice directs that the Stock
certificate or certificates for the shares for which the Option is exercised be
delivered to a licensed broker acceptable to the Corporation as the agent for
the individual exercising the Option and, at the time such Stock certificate or
certificates are delivered, the broker tenders to the Corporation cash (or cash
equivalents acceptable to the Corporation) equal to the Option Price plus the
amount (if any) of federal and/or other taxes which the Corporation may, in its
judgment, be required to withhold with respect to the exercise of the Option. An
attempt to exercise any Option granted hereunder other than as set forth above
shall be invalid and of no force and effect. Promptly after the exercise of an
Option and the payment in full of the Option Price of the shares of Stock
covered thereby, the individual exercising the Option shall be entitled to the
issuance of a Stock certificate or certificates evidencing such individual's
ownership of such shares. A separate Stock certificate or certificates shall be
issued for any shares purchased pursuant to the exercise of an Option which is
an Incentive Stock Option, which certificate or certificates shall not include
any shares which were purchased pursuant to the exercise of an Option which is
not an Incentive Stock Option. An individual holding or exercising an Option
shall have none of the rights of a stockholder until the shares of Stock covered
thereby are fully paid and issued to such individual and, except as provided in
Section 19 hereof, no adjustment shall be made for dividends or other rights for
which the record date is prior to the date of such issuance.
12. TRANSFERABILITY OF OPTIONS
12.1 Transferability of Options.
Except as provided in Section 12.2, during the lifetime of an
Optionee, only the Optionee (or, in the event of legal incapacity or
incompetency, the Optionee's guardian or legal representative) may exercise an
Option. Except as provided in Section 12.2, no Option shall be assignable or
transferable by the Optionee to whom it is granted, other than by will or the
laws of descent and distribution.
12.2 Family Transfers.
If authorized in the applicable Option Agreement, an Optionee may
transfer, not for value, all or part of a vested Option that is not an Incentive
Stock Option to any Family Member. For the purpose of this Section 12.2, a "not
for value" transfer is a transfer which is (i) a gift, (ii) a transfer under a
domestic relations order
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in settlement of marital property rights; or (iii) unless applicable law does
not permit such transfers, a transfer to an entity in which more than fifty
percent of the voting interests are owned by Family Members (or the Optionee) in
exchange for an interest in that entity. Following a transfer under this Section
12.2, any such Option shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer. Subsequent
transfers of transferred Options are prohibited except to Family Members of the
original Optionee in accordance with this Section 12.2 or by will or the laws of
descent and distribution. The events of termination of Service under an Option
shall continue to be applied with respect to the original Optionee, following
which the Option shall be exercisable by the transferee only to the extent, and
for the periods specified in the applicable Option Agreement.
13. TERMINATION OF EMPLOYMENT
The Committee may provide, by inclusion of appropriate language in any
Option Agreement, that an Optionee may (subject to the general limitations on
exercise set forth in Section 11.3 hereof), in the event of termination of
employment of the Optionee with the Corporation or a Subsidiary, exercise an
Option, in whole or in part, at any time subsequent to such termination of
employment and prior to termination of the Option pursuant to Section 11.1
hereof, either subject to or without regard to any installment limitation on
exercise imposed pursuant to Section 11.3 hereof, as the Committee, in its sole
and absolute discretion, shall determine and set forth in the Option Agreement.
Whether a leave of absence or leave on military or government service shall
constitute a termination of employment for purposes of the Plan shall be
determined by the Committee, which determination shall be final and conclusive.
For purposes of the Plan, a termination of employment with the Corporation or a
Subsidiary shall not be deemed to occur if the Optionee is immediately
thereafter employed with the Corporation or any other Subsidiary, or if the
Optionee continues to provide services to the Corporation or any other
Subsidiary in another capacity, including as a consultant or an independent
contractor.
14. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
14.1. Death
If an Optionee dies while employed by the Corporation or a
Subsidiary or within the period following the termination of employment during
which the Option is exercisable under Section 13 or 14.2 hereof, the executors,
administrators, legatees or distributees of such Optionee's estate shall have
the right (subject to the general limitations on exercise set forth in Section
11.3 hereof), at any time within one year after the date of such Optionee's
death and prior to termination of the Option pursuant to Section 11.1 hereof, to
exercise any Option held by such Optionee at the date of such Optionee's death,
to the extent such Option was exercisable immediately prior to such Optionee's
death; provided, however, that the Committee may provide by inclusion of
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appropriate language in any Option Agreement that, in the event of the death of
an Optionee, the executors, administrators, legatees or distributees of such
Optionee's estate may exercise an Option (subject to the general limitations on
exercise set forth in Section 11.3 hereof), in whole or in part, at any time
subsequent to such Optionee's death and prior to termination of the Option
pursuant to Section 11.1 hereof, either subject to or without regard to any
installment limitation on exercise imposed pursuant to Section 11.3 hereof, as
the Committee, in its sole and absolute discretion, shall determine and set
forth in the Option Agreement.
14.2. Disability
If an Optionee terminates employment with the Corporation or a
Subsidiary by reason of the "permanent and total disability" (within the meaning
of Section 22(e) (3) of the Code) of such Optionee, then such Optionee shall
have the right (subject to the general limitations on exercise set forth in
Section 11.3 hereof), at any time within one year after such termination of
employment and prior to termination of the Option pursuant to Section 11.1
hereof, to exercise, in whole or in part, any Option held by such Optionee at
the date of such termination of employment, to the extent such Option was
exercisable immediately prior to such termination of employment; provided,
--------
however, that the Committee may provide, by inclusion of appropriate language in
- -------
any Option Agreement, that an Optionee may (subject to the general limitations
on exercise set forth in Section 11.3 hereof), in the event of the termination
of employment of the Optionee with the Corporation or a Subsidiary by reason of
the "permanent and total disability" (within the meaning of Section 22(e)(3) of
the Code) of such Optionee, exercise an Option, in whole or in part, at any time
subsequent to such termination of employment and prior to termination of the
Option pursuant to Section 11.1 hereof, either subject to or without regard to
any installment limitation on exercise imposed pursuant to Section 11.3 hereof,
as the Committee, in its sole and
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absolute discretion, shall determine and set forth in the Option Agreement.
Whether a termination of employment is to be considered by reason of "permanent
and total disability" for purposes of the Plan shall be determined by the
Committee, which determination shall be final and conclusive.
15. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of Stock pursuant to
Options granted under the Plan shall constitute general funds of the
Corporation.
16. SECURITIES LAWS
The Corporation shall not be required to sell or issue any shares of Stock
under any Option if the sale or issuance of such shares would constitute a
violation by the individual exercising the Option or by the Corporation of any
provisions of any law or regulation of any governmental authority, including,
without limitation, any federal or state securities laws or regulations. If at
any time the Corporation shall determine, in its discretion, that the listing,
registration or qualification of any shares subject to the Option upon any
securities exchange or under any state or federal law, or the consent of any
government regulatory body, is necessary or desirable as a condition of, or in
connection with, the issuance or purchase of shares, the Option may not be
exercised in whole or in part unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable to the Corporation, and any delay caused thereby shall in no way
affect the date of termination of the Option. Specifically in connection with
the Securities Act, upon exercise of any Option, unless a registration statement
under the Securities Act is in effect with respect to the shares of Stock
covered by such Option, the Corporation shall not be required to sell or issue
such shares unless the Corporation has received evidence satisfactory to the
Corporation that the Optionee may acquire such shares pursuant to an exemption
from registration under the Securities Act. Any determination in this
connection by the Corporation shall be final and conclusive. The Corporation
may, but shall in no event be obligated to, register any securities covered
hereby pursuant to the Securities Act. The Corporation shall not be obligated
to take any affirmative action in order to cause the exercise of an Option or
the issuance of shares pursuant thereto to comply with any law or regulation of
any governmental authority. As to any jurisdiction that expressly imposes the
requirement that an Option shall not be exercisable unless and until the shares
of Stock covered by such Option are registered or are subject to an available
exemption from registration, the exercise of such Option (under circumstances in
which the laws of such jurisdiction apply) shall be deemed conditioned upon the
effectiveness of such registration or the availability of such an exemption.
17. EXCHANGE ACT: RULE 16b-3
17.1. General
The Plan is intended to comply with Rule 16b-3 ("Rule 16b-3") (and
any successor thereto) under the Exchange Act. Any provision inconsistent with
Rule 16b-3 shall, to the extent permitted by law and determined to be advisable
by the Committee (constituted in accordance with Section 17.2 hereof), be
inoperative and void.
17.2. Compensation Committee
The Committee appointed in accordance with Section 3.1 hereof shall
consist of not fewer than two members of the Board each of whom shall qualify
(at the time of appointment to the Committee and during all periods of service
on the Committee) in all respects as a "disinterested person" as defined in Rule
16b-3.
17.3. Restriction on Transfer of Stock
No director, officer or other "insider" of the Corporation subject
to Section 16 of the Exchange Act shall be permitted to sell Stock (which such
"insider" had received upon exercise of an Option) during the six months
immediately following the grant of such Option.
17.4. Requirement of Stockholders' Approval
No amendment by the Board shall, without approval by a majority of
the votes cast at a duly held meeting of the stockholders of the Corporation at
which a quorum representing a majority of all outstanding stock is
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present, either in person or by proxy, and voting on the amendment, or by
written consent in accordance with applicable state law and the Certificate of
Incorporation and By-Laws of the Corporation, materially increase the benefits
accruing to Section 16 "insiders" under the Plan or take any other action that
would require the approval of such stockholders pursuant to Rule 16b-3.
18. AMENDMENT AND TERMINATION
The Board may, at any time and from time to time, amend, suspend or
terminate the Plan as to any shares of Stock as to which Options have not been
granted; provided, however, that no amendment by the Board shall, without
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approval by a majority of the votes cast at a duly held meeting of the
stockholders of the Corporation at which a quorum representing a majority of all
outstanding stock is present, either in person or by proxy, and voting on the
amendment, or by written consent in accordance with applicable state law and the
Certificate of Incorporation and By-Laws of the Corporation, materially change
the requirements as to eligibility to receive Options or increase the maximum
number of shares of Stock in the aggregate that may be sold pursuant to Options
granted under the Plan (except as permitted under Section 19 hereof). The
Corporation also may retain the right in an Option Agreement to cause a
forfeiture of the shares or gain realized by an Optionee on account of the
Optionee taking actions in "competition with the Corporation," as defined in the
applicable Option Agreement. Furthermore, the Corporation may, in the Option
Agreement, retain the right to annul the grant of an Option if the holder of
such grant was an employee of the Corporation or a Subsidiary and is terminated
"for cause," as defined in the applicable Option Agreement. Except as permitted
under Section 19 hereof, no amendment, suspension or termination of the Plan
shall, without the consent of the Optionee, alter or impair rights or
obligations under any Option theretofore granted under the Plan.
19. EFFECT OF CHANGES IN CAPITALIZATION
19.1. Changes in Stock
If the number of outstanding shares of Stock is increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Corporation by reason of any recapitalization,
reclassification, stock split-up, combination of shares, exchange of shares,
stock dividend or other distribution payable in capital stock, or other increase
or decrease in such shares effected without receipt of consideration by the
Corporation, occurring after the effective date of the Plan, a proportionate and
appropriate adjustment shall be made by the Corporation in the number and kind
of shares for which Options are outstanding, so that the proportionate interest
of the Optionee immediately following such event shall, to the extent
practicable, be the same as immediately prior to such event. Any such adjustment
in outstanding Options shall not change the aggregate Option Price payable with
respect to shares subject to the unexercised portion of the Option outstanding
but shall include a corresponding proportionate adjustment in the Option Price
per share. All numbers in this Plan reflect the stock split effected in the form
of a stock dividend distributed by the Corporation on July 26, 1999, but do not
yet reflect the stock split to be effected in the form of a stock dividend to be
distributed by the Corporation on April 24, 2000.
19.2. Reorganization With Corporation Surviving
Subject to Section 19.3 hereof, if the Corporation shall be the
surviving entity in any reorganization, merger or consolidation of the
Corporation with one or more other entities, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such reorganization, merger or consolidation,
with a corresponding proportionate adjustment of the Option Price per share so
that the aggregate Option Price thereafter shall be the same as the aggregate
Option Price of the shares remaining subject to the Option immediately prior to
such reorganization, merger or consolidation.
19.3. Other Reorganizations; Sale of Assets or Stock
Upon the dissolution or liquidation of the Corporation, or upon a
merger, consolidation or reorganization of the Corporation with one or more
other entities in which the Corporation is not the surviving entity, or upon a
sale of substantially all of the assets of the Corporation to another entity, or
upon any transaction
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(including, without limitation, a merger or reorganization in which the
Corporation is the surviving entity) approved by the Board that results in any
person or entity (other than persons who are holders of stock of the Corporation
at the time the Plan is approved by the Stockholders and other than an
Affiliate) owning 80 percent or more of the combined voting power of all classes
of stock of the Corporation, the Plan and all Options outstanding hereunder
shall terminate, except to the extent provision is made in connection with such
transaction for the continuation of the Plan and/or the assumption of the
Options theretofore granted, or for the substitution for such Options of new
options covering the stock of a successor entity, or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kinds of shares and
exercise prices, in which event the Plan and Options theretofore granted shall
continue in the manner and under the terms so provided. In the event of any such
termination of the Plan, each Optionee shall have the right (subject to the
general limitations on exercise set forth in Section 11.3 hereof and except as
otherwise specifically provided in the Option Agreement relating to such
Option), immediately prior to the occurrence of such termination and during such
period occurring prior to such termination as the Committee in its sole
discretion shall designate, to exercise such Option in whole or in part, to the
extent such Option was otherwise exercisable at the time such termination
occurs, but subject to any additional provisions that the Committee may, in its
sole discretion, include in any Option Agreement. The Committee shall send
written notice of an event that will result in such a termination to all
Optionees not later than the time at which the Corporation gives notice thereof
to its stockholders.
19.4. Adjustments
Adjustments under this Section 19 relating to stock or securities of
the Corporation shall be made by the Committee, whose determination in that
respect shall be final and conclusive. No fractional shares of Stock or units
of other securities shall be issued pursuant to any such adjustment, and any
fractions resulting from any such adjustment shall be eliminated in each case by
rounding downward to the nearest whole share or unit.
19.5. No Limitations on Corporation
The grant of an Option pursuant to the Plan shall not affect or limit in any way
the right or power of the Corporation to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge,
consolidate, dissolve or liquidate, or to sell or transfer all or any part of
its business or assets.
20. WITHHOLDING
The Corporation or a Subsidiary may be obligated to withhold federal and
local income taxes and Social Security taxes to the extent that an Optionee
realizes ordinary income in connection with the exercise of an Option. The
Corporation or a Subsidiary may withhold amounts needed to cover such taxes from
payments otherwise due and owing to an Optionee, and upon demand the Optionee
will promptly pay to the Corporation or a Subsidiary having such obligation any
additional amounts as may be necessary to satisfy such withholding tax
obligation. Such payment shall be made in cash or cash equivalents.
21. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option Agreement
entered into pursuant to the Plan shall be construed to confer upon any
individual the right to remain in the employ of the Corporation or any
Subsidiary, or to interfere in any way with the right and authority of the
Corporation or any Subsidiary either to increase or decrease the compensation of
any individual at any time, or to terminate any employment or other relationship
between any individual and the Corporation or any Subsidiary. The obligation of
the Corporation to pay any benefits pursuant to the Plan shall be interpreted as
a contractual obligation to pay only those amounts described herein, in the
manner and under the conditions prescribed herein. The Plan shall in no way be
interpreted to require the Corporation to transfer any amounts to a third party
trustee or otherwise hold any amounts in trust or escrow for payment to any
participant or beneficiary under the terms of the Plan.
22. NONEXCLUSIVITY
Neither the adoption of the Plan nor the submission of the Plan to the
stockholders of the Corporation for approval shall be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes
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of individuals or specifically to a particular individual or individuals) as the
Board in its discretion determines desirable, including, without limitation, the
granting of stock options otherwise than under the Plan.
23. GOVERNING LAW
This Plan and all Options to be granted hereunder shall be governed by the
laws of the State of Delaware (but not including the choice of law rules
thereof).
---------------------------------------
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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.
The Plan was duly amended by the Board on March 27, 1997 and the amendment
was duly approved by the Stockholders of the Corporation on May 29, 1997.
The Plan was duly amended by the Board on October 30, 1997.
The Plan was duly amended by the Board on December 19, 1997.
The Plan was duly amended by the Board on March 26, 1998.
The Plan was duly amended by the Board on September 24, 1998.
The Plan was duly amended by the Board on April 12, 2000 and the amendment
was duly approved by the Stockholders of the Corporation on _____ __, 2000.
___________________________
RANDALL RINGS
Vice President, General Counsel and Secretary
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EXHIBIT B
---------
McLeodUSA Incorporated
----------------------
Amendment to Amended and Restated
Certificate of Incorporation
Assuming approval by stockholders of both Proposal 3 and Proposal 4,
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Article 4 of the Amended and Restated Certificate of Incorporation of McLeodUSA
- -------------------------------------------------------------------------------
Incorporated (the "Certificate of Incorporation") will be amended and restated
- ------------------------------------------------------------------------------
as follows:
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"ARTICLE 4. CAPITAL STOCK
4.1. Authorized Shares
The total number of shares of stock that the Corporation shall be
authorized to issue is 2,034,000,000 shares, divided into four classes as
follows: (i) 2,000,000,000 shares of Class A common stock having a par
value of $.01 per share ("Class A Common Stock"); (ii) 22,000,000 shares of
Class B common stock having a par value of $.01 per share ("Class B Common
Stock"); (iii) 2,000,000 shares of serial preferred stock having a par
value of $.01 per share ("Preferred Stock"); and (iv) 10,000,000 shares of
serial preferred stock having a par value $.001 per share ("Class II
Preferred Stock").
4.2. Class A Common Stock
4.2.1. Relative Rights
The Class A Common Stock shall be subject to all of the rights,
privileges, preferences and priorities of the Preferred Stock and Class II
Preferred Stock, as set forth herein and in the certificate or certificates
of designations filed to establish the respective series of Preferred Stock
and Class II Preferred Stock. Each share of Class A Common Stock shall
have the same relative rights as and be identical in all respects to all
the other shares of Class A Common Stock.
4.2.2. Dividends
Whenever there shall have been paid, or declared and set aside
for payment, to the holders of shares of any class of stock having
preference over the Class A Common Stock and the Class B Common Stock as to
the payment of dividends, the full amount of dividends and of sinking fund
or retirement payments, if any, to which such holders are respectively
entitled in preference to the Class A Common Stock and the Class B Common
Stock, then dividends may be paid equally on each share of the Class A
Common Stock, the Class B Common Stock and any class or series of stock
entitled to participate therewith as to dividends, out of any assets
legally available for the payment of dividends thereon, but only when and
as declared by the Board of Directors of the Corporation.
4.2.3. Dissolution, Liquidation, Winding Up
In the event of any dissolution, liquidation, or winding up of
the Corporation, whether voluntary or involuntary, the holders of the Class
A Common Stock, the holders of the Class B Common Stock and holders of any
class or series of stock entitled to participate therewith, in whole or in
part, as to the distribution of assets in such event, shall become entitled
to participate in the distribution of any assets of the Corporation
remaining after the Corporation shall have paid, or provided for payment
of, all debts and liabilities of the Corporation and after the Corporation
shall have paid, or set aside for payment, to the holders of any class of
stock having preference over the Class A Common Stock and the Class B
Common Stock in the event of dissolution, liquidation or winding up the
full preferential amounts (if any) to which they are entitled.
B-1
<PAGE>
4.2.4. Voting Rights
Each holder of shares of Class A Common Stock shall be entitled
to attend all special and annual meetings of the stockholders of the
Corporation and, together with the holders of shares of Class B Common
Stock and the holders of all other classes of stock entitled to attend and
to vote at such meetings, to vote upon any matter or thing (including,
without limitation, the election of one or more directors) properly
considered and acted upon by the stockholders. Each holder of shares of
Class A Common Stock shall be entitled to cast one vote for each
outstanding share of Class A Common Stock so held.
4.3. Class B Common Stock
4.3.1. Relative Rights
The Class B Common Stock shall be subject to all of the rights,
privileges, preferences and priorities of the Preferred Stock and Class II
Preferred Stock, as set forth herein and in the certificate or certificates
of designations filed to establish the respective series of Preferred Stock
and Class II Preferred Stock. Each share of Class B Common Stock shall
have the same relative rights as and be identical in all respects to all
the other shares of Class B Common Stock.
4.3.2. Dividends
Whenever there shall have been paid, or declared and set aside
for payment, to the holders of shares of any class of stock having
preference over the Class B Common Stock and the Class A Common Stock as to
the payment of dividends, the full amount of dividends and of sinking fund
or retirement payments, if any, to which such holders are respectively
entitled in preference to the Class B Common Stock and the Class A Common
Stock, then dividends may be paid equally on each share of the Class B
Common Stock, the Class A Common Stock and any class or series of stock
entitled to participate therewith as to dividends, out of any assets
legally available for the payment of dividends thereon, but only when and
as declared by the Board of Directors of the Corporation.
4.3.3. Dissolution, Liquidation, Winding Up
In the event of any dissolution, liquidation, or winding up of
the Corporation, whether voluntary or involuntary, the holders of the Class
B Common Stock, the holders of the Class A Common Stock and holders of any
class or series of stock entitled to participate therewith, in whole or in
part, as to the distribution of assets in such event, shall become entitled
to participate in the distribution of any assets of the Corporation
remaining after the Corporation shall have paid, or provided for payment
of, all debts and liabilities of the Corporation and after the Corporation
shall have paid, or set aside for payment, to the holders of any class of
stock having preference over the Class B Common Stock and the Class A
Common Stock in the event of dissolution, liquidation or winding up the
full preferential amounts (if any) to which they are entitled.
4.3.4. Voting Rights
Each holder of shares of Class B Common Stock shall be entitled
to attend all special and annual meetings of the stockholders of the
Corporation and, together with the holders of shares of Class A Common
Stock and the holders of all other classes of stock entitled to attend and
to vote at such meetings, to vote upon any matter or thing (including,
without limitation, the election of one or more directors) properly
considered and acted upon by the stockholders. Each holder of shares of
Class B Common Stock shall be entitled to cast .40 vote for each
outstanding share of Class B Common Stock so held.
B-2
<PAGE>
4.3.5. Conversion Rights
The shares of Class B Common Stock may be converted into fully
paid and nonassessable shares of Class A Common Stock at any time at the
option of the holder thereof at the rate of one share of Class A Common
Stock for each share of Class B Common Stock, subject to adjustment as
provided below. If, at any time shares of Class B Common Stock are
outstanding, the Corporation shall issue Class A Common Stock in a Class A
Common Stock split without a corresponding Class B Common Stock split, the
conversion rate shall be adjusted so that each share of Class B Common
Stock shall be convertible into the number of shares of Class A Common
Stock representing the same proportion of the total number of shares of
Class A Common Stock outstanding after such stock split as the number of
shares of Class A Common Stock into which such share of Class B Common
Stock would have been convertible in the absence of such stock split bears
to the total number of shares of Class A Common Stock outstanding
immediately prior to such stock split.
Any holder of shares of Class B Common Stock desiring to convert
all or any part of such holder's shares of Class B Common Stock into shares
of Class A Common Stock shall give written notice thereof to the
Corporation, specifying the number of shares of Class B Common Stock such
holder desires to convert and the desired conversion date (the "Conversion
Date"), which shall be on a business day not less than five days after the
date of such notice. On and after the Conversion Date, such holder shall
be entitled to receive, upon surrender of a certificate or certificates
representing the shares of Class B Common Stock so converted, a certificate
for the corresponding number of shares of Class A Common Stock, determined
in accordance with the provisions hereof. All shares of Class B Common
Stock to be converted on the Conversion Date shall, whether or not the
certificates for such shares shall have been surrendered for cancellation,
be deemed to be no longer outstanding for any purpose and all rights with
respect to such shares (except the right of the holder of the certificates
for such shares to receive certificates for shares of Class A Common Stock)
shall thereupon cease and terminate. Shares of Class B Common Stock
converted pursuant to this paragraph shall be canceled and retired and
shall not be reissued. Upon conversion, no fractional shares shall be
issued and any fractions of a share shall be rounded up to the next highest
number.
4.4. Preferred Stock
The Board of Directors is authorized, subject to limitations
prescribed by the Delaware General Corporation Law and the provisions of
this Amended and Restated Certificate of Incorporation, to provide, by
resolution or resolutions from time to time and filing a certificate
pursuant to the applicable provision of the Delaware General Corporation
Law, for the issuance of the shares of Preferred Stock in series, to
establish from time to time the number of shares to be included in each
such series, to fix the powers, designation, preferences, relative,
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof.
4.5. Class II Preferred Stock
The Board of Directors is authorized, subject to limitations
prescribed by the Delaware General Corporation Law and the provisions of
this Amended and Restated Certificate of Incorporation, to provide, by
resolution or resolutions from time to time and filing a certificate
pursuant to the applicable provision of the Delaware General Corporation
Law, for the issuance of the shares of Class II Preferred Stock in series,
to establish from time to time the number of shares to be included in each
such series, to fix the powers, designation, preferences, relative,
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof. All
shares of the Class II Preferred Stock to be issued, from time to time, in
one or more series shall rank on a parity with the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock (the "Existing
Preferred Stock") with respect to dividend rights and rights on
liquidation, winding-up and dissolution of the Corporation, except that (i)
the terms of any such series of the Class II Preferred Stock may expressly
provide that such series shall be junior to the Existing Preferred Stock
with respect to dividend rights or rights on liquidation, winding-up and
dissolution of the Corporation, and (ii) subject to the receipt of any
required approval or consent of one or more series of the Existing
Preferred Stock, the terms of any such series of the Class II Preferred
Stock may expressly provide that such series shall be senior to the
Existing Preferred Stock with respect to dividend rights or rights on
liquidation, winding-up and dissolution of the Corporation. Irrespective of
the provisions of Section 242(b) of the Delaware General Corporation Law,
the number of authorized shares of Class II Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority in voting
power of the stock of the Corporation entitled to vote, without the
separate vote of the holders of the Class II Preferred Stock as a class.
B-3
<PAGE>
4.6. Redemption
Notwithstanding any other provision of this Amended and Restated
Certificate of Incorporation to the contrary, outstanding shares of stock
of the Corporation shall always be subject to redemption by the
Corporation, by action of the Board of Directors, if in the judgment of the
Board of Directors such action should be taken, pursuant to Section 151(b)
of the Delaware General Corporation Law or any other applicable provision
of law, to the extent necessary to prevent the loss or secure the
reinstatement of any license or franchise from any governmental agency held
by the Corporation or any of its subsidiaries to conduct any portion of the
business of the Corporation or any of its subsidiaries, which license or
franchise is conditioned upon some or all of the holders of the
Corporation's stock possessing prescribed qualifications. The terms and
conditions of such redemption shall be as follows:
(A) The redemption price of the shares to be redeemed pursuant to
this Section 4.6 shall be determined by the Board of Directors and shall be
equal to the Fair Market Value (as defined herein) of such shares or, if
such shares were purchased by a Disqualified Holder (as defined herein)
within one year of the Redemption Date (as defined herein), the lesser of
(i) the Fair Market Value of such shares and (ii) the purchase price paid
by such Disqualified Holder for such shares;
(B) At the election of the Corporation, the redemption price of such
shares may be paid in cash, Redemption Securities (as defined herein) or
any combination thereof;
(C) If fewer than all shares held by Disqualified Holders are to be
redeemed, the shares to be redeemed shall be selected in such manner as
shall be determined by the Board of Directors, which may include selection
first of the most recently purchased shares thereof, selection by lot or
selection in any other manner determined by the Board of Directors;
(D) At least 30 days' prior written notice of the Redemption Date
shall be given to any Disqualified Holder of shares selected to be redeemed
(unless waived in writing by any such holder), provided that the Redemption
Date may be the date on which written notice shall be given to such holder
if the cash or Redemption Securities necessary to effect the redemption
shall have been deposited in trust for the benefit of such holder and
subject to immediate withdrawal by it upon surrender of the stock
certificates for the shares to be redeemed;
(E) From and after the Redemption Date, any and all rights of
whatever nature that any Disqualified Holder may have with respect to any
shares selected for redemption (including without limitation any rights to
vote or participate in dividends declared on stock of the same class or
series as such shares) shall cease and terminate, and such Disqualified
Holder shall thenceforth be entitled only to receive, with respect to such
shares, the cash or Redemption Securities payable upon redemption; and
(F) Such additional terms and conditions as the Board of Directors
shall determine. For purposes of this Section 4.6:
(i) "Disqualified Holder" shall mean any holder of shares of stock of
the Corporation whose holding of such stock, either individually or when
taken together with the holding of shares of stock of the Corporation by
any other holders, may result, in the judgment of the Board of Directors,
in the loss of, or the failure to secure the reinstatement of, any license
or franchise from any governmental agency held by the Corporation or any of
its subsidiaries to conduct any portion of the business of the Corporation
or any of its subsidiaries.
(ii) "Fair Market Value" of a share of the Corporation's stock of any
class or series shall mean the average Closing Price (as defined herein)
for such a share for each of the 45 most recent days on which shares of
stock of such class or series shall have been traded preceding the day on
which notice of redemption shall be given pursuant to paragraph (D) of this
Section 4.6; provided, however, that if shares of stock of such class or
-------- -------
series are not traded on any securities exchange or in the over-the-counter
market, "Fair Market Value" shall be determined by the Board of Directors
in good faith. "Closing Price" on any day means the reported closing sales
price or,
B-4
<PAGE>
in case no such sale takes place, the average of the reported closing bid
and asked prices on the principal United States securities exchange
registered under the Securities Exchange Act of 1934 on which such stock is
listed, or, if such stock is not listed on any such exchange, the highest
closing sales price or bid quotation for such stock on the National
Association of Securities Dealers, Inc. Automated Quotations System or any
system then in use, or if no such prices or quotations are available, the
fair market value on the day in question as determined by the Board of
Directors in good faith.
(iii) "Redemption Date" shall mean the date fixed by the Board of
Directors for the redemption of any shares of stock of the Corporation
pursuant to this Section 4.6.
(iv) "Redemption Securities" shall mean any debt or equity
securities of the Corporation, any of its subsidiaries or any other
corporations, or any combination thereof, having such terms and conditions
as shall be approved by the Board of Directors and which, together with any
cash to be paid as part of the redemption price, in the opinion of any
investment banking firm selected by the Board of Directors (which may be a
firm which provides other investment banking, brokerage or other services
to the Corporation), has a value, at the time notice of redemption is given
pursuant to paragraph (D) of this Section 4.6, at least equal to the price
required to be paid pursuant to paragraph (A) of this Section 4.6 (assuming
for purposes of such valuation, in the case of Redemption Securities to be
publicly traded, such Redemption Securities were fully distributed and
trading under normal conditions)."
* * *
Assuming approval by stockholders of Proposal 3 but not Proposal 4, Section
---------------------------------------------------------------------------
4.1 of the Certificate of Incorporation will be amended and restated as follows:
- -------------------------------------------------------------------------------
"4.1. Authorized Shares
The total number of shares of stock that the Corporation shall be
authorized to issue is 2,024,000,000 shares, divided into three classes as
follows: (i) 2,000,000,000 shares of Class A common stock having a par
value of $.01 per share ("Class A Common Stock"); (ii) 22,000,000 shares of
Class B common stock having a par value of $.01 per share ("Class B Common
Stock"); and (iii) 2,000,000 shares of serial preferred stock having a par
value of $.01 per share ("Preferred Stock")."
* * *
Assuming approval by stockholders of Proposal 4 but not Proposal 3, Article
---------------------------------------------------------------------------
4 of the Certificate of Incorporation will be amended and restated as follows:
- -----------------------------------------------------------------------------
"ARTICLE 4. CAPITAL STOCK
4.1. Authorized Shares
The total number of shares of stock that the Corporation shall be
authorized to issue is 1,034,000,000 shares, divided into four classes as
follows: (i) 1,000,000,000 shares of Class A common stock having a par
value of $.01 per share ("Class A Common Stock"); (ii) 22,000,000 shares of
Class B common stock having a par value of $.01 per share ("Class B Common
Stock"); (iii) 2,000,000 shares of serial preferred stock having a par
value of $.01 per share ("Preferred Stock"); and (iv) 10,000,000 shares of
serial preferred stock having a par value $.001 per share ("Class II
Preferred Stock").
4.2. Class A Common Stock
B-5
<PAGE>
4.2.1. Relative Rights
The Class A Common Stock shall be subject to all of the rights,
privileges, preferences and priorities of the Preferred Stock and Class II
Preferred Stock, as set forth herein and in the certificate or certificates
of designations filed to establish the respective series of Preferred Stock
and Class II Preferred Stock. Each share of Class A Common Stock shall
have the same relative rights as and be identical in all respects to all
the other shares of Class A Common Stock.
4.2.2. Dividends
Whenever there shall have been paid, or declared and set aside
for payment, to the holders of shares of any class of stock having
preference over the Class A Common Stock and the Class B Common Stock as to
the payment of dividends, the full amount of dividends and of sinking fund
or retirement payments, if any, to which such holders are respectively
entitled in preference to the Class A Common Stock and the Class B Common
Stock, then dividends may be paid equally on each share of the Class A
Common Stock, the Class B Common Stock and any class or series of stock
entitled to participate therewith as to dividends, out of any assets
legally available for the payment of dividends thereon, but only when and
as declared by the Board of Directors of the Corporation.
4.2.3. Dissolution, Liquidation, Winding Up
In the event of any dissolution, liquidation, or winding up of
the Corporation, whether voluntary or involuntary, the holders of the Class
A Common Stock, the holders of the Class B Common Stock and holders of any
class or series of stock entitled to participate therewith, in whole or in
part, as to the distribution of assets in such event, shall become entitled
to participate in the distribution of any assets of the Corporation
remaining after the Corporation shall have paid, or provided for payment
of, all debts and liabilities of the Corporation and after the Corporation
shall have paid, or set aside for payment, to the holders of any class of
stock having preference over the Class A Common Stock and the Class B
Common Stock in the event of dissolution, liquidation or winding up the
full preferential amounts (if any) to which they are entitled.
4.2.4. Voting Rights
Each holder of shares of Class A Common Stock shall be entitled
to attend all special and annual meetings of the stockholders of the
Corporation and, together with the holders of shares of Class B Common
Stock and the holders of all other classes of stock entitled to attend and
to vote at such meetings, to vote upon any matter or thing (including,
without limitation, the election of one or more directors) properly
considered and acted upon by the stockholders. Each holder of shares of
Class A Common Stock shall be entitled to cast one vote for each
outstanding share of Class A Common Stock so held.
4.3. Class B Common Stock
4.3.1. Relative Rights
The Class B Common Stock shall be subject to all of the rights,
privileges, preferences and priorities of the Preferred Stock and Class II
Preferred Stock, as set forth herein and in the certificate or certificates
of designations filed to establish the respective series of Preferred Stock
and Class II Preferred Stock. Each share of Class B Common Stock shall
have the same relative rights as and be identical in all respects to all
the other shares of Class B Common Stock.
4.3.2. Dividends
B-6
<PAGE>
Whenever there shall have been paid, or declared and set aside
for payment, to the holders of shares of any class of stock having
preference over the Class B Common Stock and the Class A Common Stock as to
the payment of dividends, the full amount of dividends and of sinking fund
or retirement payments, if any, to which such holders are respectively
entitled in preference to the Class B Common Stock and the Class A Common
Stock, then dividends may be paid equally on each share of the Class B
Common Stock, the Class A Common Stock and any class or series of stock
entitled to participate therewith as to dividends, out of any assets
legally available for the payment of dividends thereon, but only when and
as declared by the Board of Directors of the Corporation.
4.3.3. Dissolution, Liquidation, Winding Up
In the event of any dissolution, liquidation, or winding up of
the Corporation, whether voluntary or involuntary, the holders of the Class
B Common Stock, the holders of the Class A Common Stock and holders of any
class or series of stock entitled to participate therewith, in whole or in
part, as to the distribution of assets in such event, shall become entitled
to participate in the distribution of any assets of the Corporation
remaining after the Corporation shall have paid, or provided for payment
of, all debts and liabilities of the Corporation and after the Corporation
shall have paid, or set aside for payment, to the holders of any class of
stock having preference over the Class B Common Stock and the Class A
Common Stock in the event of dissolution, liquidation or winding up the
full preferential amounts (if any) to which they are entitled.
4.3.4. Voting Rights
Each holder of shares of Class B Common Stock shall be entitled
to attend all special and annual meetings of the stockholders of the
Corporation and, together with the holders of shares of Class A Common
Stock and the holders of all other classes of stock entitled to attend and
to vote at such meetings, to vote upon any matter or thing (including,
without limitation, the election of one or more directors) properly
considered and acted upon by the stockholders. Each holder of shares of
Class B Common Stock shall be entitled to cast .40 vote for each
outstanding share of Class B Common Stock so held.
4.3.5. Conversion Rights
The shares of Class B Common Stock may be converted into fully
paid and nonassessable shares of Class A Common Stock at any time at the
option of the holder thereof at the rate of one share of Class A Common
Stock for each share of Class B Common Stock, subject to adjustment as
provided below. If, at any time shares of Class B Common Stock are
outstanding, the Corporation shall issue Class A Common Stock in a Class A
Common Stock split without a corresponding Class B Common Stock split, the
conversion rate shall be adjusted so that each share of Class B Common
Stock shall be convertible into the number of shares of Class A Common
Stock representing the same proportion of the total number of shares of
Class A Common Stock outstanding after such stock split as the number of
shares of Class A Common Stock into which such share of Class B Common
Stock would have been convertible in the absence of such stock split bears
to the total number of shares of Class A Common Stock outstanding
immediately prior to such stock split.
Any holder of shares of Class B Common Stock desiring to convert
all or any part of such holder's shares of Class B Common Stock into shares
of Class A Common Stock shall give written notice thereof to the
Corporation, specifying the number of shares of Class B Common Stock such
holder desires to convert and the desired conversion date (the "Conversion
Date"), which shall be on a business day not less than five days after the
date of such notice. On and after the Conversion Date, such holder shall
be entitled to receive, upon surrender of a certificate or certificates
representing the shares of Class B Common Stock so converted, a certificate
for the corresponding number of shares of Class A Common Stock, determined
in accordance with the provisions hereof. All shares of Class B Common
Stock to be converted on the Conversion Date shall, whether or not the
certificates for such shares shall have been surrendered for cancellation,
be deemed to be no longer outstanding for any purpose and all rights
B-7
<PAGE>
with respect to such shares (except the right of the holder of the
certificates for such shares to receive certificates for shares of Class A
Common Stock) shall thereupon cease and terminate. Shares of Class B Common
Stock converted pursuant to this paragraph shall be canceled and retired
and shall not be reissued. Upon conversion, no fractional shares shall be
issued and any fractions of a share shall be rounded up to the next highest
number.
4.4. Preferred Stock
The Board of Directors is authorized, subject to limitations
prescribed by the Delaware General Corporation Law and the provisions of
this Amended and Restated Certificate of Incorporation, to provide, by
resolution or resolutions from time to time and filing a certificate
pursuant to the applicable provision of the Delaware General Corporation
Law, for the issuance of the shares of Preferred Stock in series, to
establish from time to time the number of shares to be included in each
such series, to fix the powers, designation, preferences, relative,
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof.
4.5. Class II Preferred Stock
The Board of Directors is authorized, subject to limitations
prescribed by the Delaware General Corporation Law and the provisions of
this Amended and Restated Certificate of Incorporation, to provide, by
resolution or resolutions from time to time and filing a certificate
pursuant to the applicable provision of the Delaware General Corporation
Law, for the issuance of the shares of Class II Preferred Stock in series,
to establish from time to time the number of shares to be included in each
such series, to fix the powers, designation, preferences, relative,
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof. All
shares of the Class II Preferred Stock to be issued, from time to time, in
one or more series shall rank on a parity with the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock (the "Existing
Preferred Stock") with respect to dividend rights and rights on
liquidation, winding-up and dissolution of the Corporation, except that (i)
the terms of any such series of the Class II Preferred Stock may expressly
provide that such series shall be junior to the Existing Preferred Stock
with respect to dividend rights or rights on liquidation, winding-up and
dissolution of the Corporation, and (ii) subject to the receipt of any
required approval or consent of one or more series of the Existing
Preferred Stock, the terms of any such series of the Class II Preferred
Stock may expressly provide that such series shall be senior to the
Existing Preferred Stock with respect to dividend rights or rights on
liquidation, winding-up and dissolution of the Corporation. Irrespective of
the provisions of Section 242(b) of the Delaware General Corporation Law,
the number of authorized shares of Class II Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority in voting
power of the stock of the Corporation entitled to vote, without the
separate vote of the holders of the Class II Preferred Stock as a class.
4.6. Redemption
Notwithstanding any other provision of this Amended and Restated
Certificate of Incorporation to the contrary, outstanding shares of stock
of the Corporation shall always be subject to redemption by the
Corporation, by action of the Board of Directors, if in the judgment of the
Board of Directors such action should be taken, pursuant to Section 151(b)
of the Delaware General Corporation Law or any other applicable provision
of law, to the extent necessary to prevent the loss or secure the
reinstatement of any license or franchise from any governmental agency held
by the Corporation or any of its subsidiaries to conduct any portion of the
business of the Corporation or any of its subsidiaries, which license or
franchise is conditioned upon some or all of the holders of the
Corporation's stock possessing prescribed qualifications. The terms and
conditions of such redemption shall be as follows:
(A) The redemption price of the shares to be redeemed pursuant to
this Section 4.6 shall be determined by the Board of Directors and shall be
equal to the Fair Market Value (as defined herein) of such shares or, if
such shares were purchased by a Disqualified Holder (as defined herein)
within one year of the Redemption Date (as defined herein), the lesser of
(i) the Fair Market Value of such shares and (ii) the purchase price paid
by such Disqualified Holder for such shares;
(B) At the election of the Corporation, the redemption price of such
shares may be paid in cash, Redemption Securities (as defined herein) or
any combination thereof;
(C) If fewer than all shares held by Disqualified Holders are to be
redeemed, the shares to be redeemed shall be selected in such manner as
shall be determined by the Board of
B-8
<PAGE>
Directors, which may include selection first of the most recently purchased
shares thereof, selection by lot or selection in any other manner
determined by the Board of Directors;
(D) At least 30 days' prior written notice of the Redemption Date
shall be given to any Disqualified Holder of shares selected to be redeemed
(unless waived in writing by any such holder), provided that the Redemption
Date may be the date on which written notice shall be given to such holder
if the cash or Redemption Securities necessary to effect the redemption
shall have been deposited in trust for the benefit of such holder and
subject to immediate withdrawal by it upon surrender of the stock
certificates for the shares to be redeemed;
(E) From and after the Redemption Date, any and all rights of
whatever nature that any Disqualified Holder may have with respect to any
shares selected for redemption (including without limitation any rights to
vote or participate in dividends declared on stock of the same class or
series as such shares) shall cease and terminate, and such Disqualified
Holder shall thenceforth be entitled only to receive, with respect to such
shares, the cash or Redemption Securities payable upon redemption; and
(F) Such additional terms and conditions as the Board of Directors
shall determine. For purposes of this Section 4.6:
(i) "Disqualified Holder" shall mean any holder of shares of stock
of the Corporation whose holding of such stock, either individually or when
taken together with the holding of shares of stock of the Corporation by
any other holders, may result, in the judgment of the Board of Directors,
in the loss of, or the failure to secure the reinstatement of, any license
or franchise from any governmental agency held by the Corporation or any of
its subsidiaries to conduct any portion of the business of the Corporation
or any of its subsidiaries.
(ii) "Fair Market Value" of a share of the Corporation's stock of any
class or series shall mean the average Closing Price (as defined herein)
for such a share for each of the 45 most recent days on which shares of
stock of such class or series shall have been traded preceding the day on
which notice of redemption shall be given pursuant to paragraph (D) of this
Section 4.6; provided, however, that if shares of stock of such class or
-------- -------
series are not traded on any securities exchange or in the over-the-counter
market, "Fair Market Value" shall be determined by the Board of Directors
in good faith. "Closing Price" on any day means the reported closing sales
price or, in case no such sale takes place, the average of the reported
closing bid and asked prices on the principal United States securities
exchange registered under the Securities Exchange Act of 1934 on which such
stock is listed, or, if such stock is not listed on any such exchange, the
highest closing sales price or bid quotation for such stock on the National
Association of Securities Dealers, Inc. Automated Quotations System or any
system then in use, or if no such prices or quotations are available, the
fair market value on the day in question as determined by the Board of
Directors in good faith.
(iii) "Redemption Date" shall mean the date fixed by the Board of
Directors for the redemption of any shares of stock of the Corporation
pursuant to this Section 4.6.
(iv) "Redemption Securities" shall mean any debt or equity securities
of the Corporation, any of its subsidiaries or any other corporations, or
any combination thereof, having such terms and conditions as shall be
approved by the Board of Directors and which, together with any cash to be
paid as part of the redemption price, in the opinion of any investment
banking firm selected by the Board of Directors (which may be a firm which
provides other investment banking, brokerage or other services to the
Corporation), has a value, at the time notice of redemption is given
pursuant to paragraph (D) of this Section 4.6, at least equal to the price
required to be paid pursuant to paragraph (A) of this Section 4.6 (assuming
for purposes of such valuation, in the case of Redemption Securities to be
publicly traded, such Redemption Securities were fully distributed and
trading under normal conditions)."
* * *
B-9
<PAGE>
EXHIBIT C
---------
McLeodUSA Incorporated
----------------------
Amendment to Amended and Restated
Certificate of Incorporation
ARTICLE 10. UNANIMOUS WRITTEN CONSENT TO STOCKHOLDER ACTION WITHOUT A
MEETING
Notwithstanding the provisions of Section 228 of the Delaware General
Corporation Law, except to the extent otherwise provided pursuant to the terms
of any series of Preferred Stock or Class II Preferred Stock with respect to
such series, no corporate action of stockholders without a meeting of
stockholders shall be taken by less than unanimous written consent of the
stockholders of the Corporation.
C-1
<PAGE>
[Form of Proxy Card for Holders of Class A Common Stock]
McLEODUSA INCORPORATED
ANNUAL MEETING OF STOCKHOLDERS
May 31, 2000
10:00 A.M.
COLLINS PLAZA HOTEL
1200 Collins Road NE
Cedar Rapids, Iowa
[McLEODUSA LOGO]
- -------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR USE AT THE ANNUAL MEETING ON MAY 31, 2000.
The undersigned stockholder of McLeodUSA Incorporated (the "Company") hereby
appoints J. Lyle Patrick and 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 2000 annual meeting of
stockholders (the "Annual Meeting") to be held on Wednesday, May 31, 2000, 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" PROPOSALS 2, 3, 4, 5 AND 6, 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
AND "FOR" PROPOSALS 2, 3, 4, 5 AND 6.
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 YOU CAN
GIVE YOUR PROXY BY EITHER CALLING THE TOLL-FREE TELEPHONE
NUMBER OR USING THE INTERNET,
EACH AS DESCRIBED IN THE INSTRUCTIONS ON THE
REVERSE OF THIS PROXY CARD.
See reverse for voting instructions.
<PAGE>
There are three ways to vote your Proxy
Your telephone or Internet vote authorizes the named proxies to vote your shares
in the same manner as if you marked, signed and returned your proxy card. The
deadline for telephone or Internet voting is 12:00 noon EDT, May 30, 2000.
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.
Have your proxy card in hand when you call.
. 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 VIA INTERNET - http://www.eproxy.com/mcld/-- QUICK***EASY***IMMEDIATE
Use the Internet to vote your proxy 24 hours a day, 7 days a week. Have your
proxy card in hand when you access the Web site.
. 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 on the computer screen to create an
electronic ballot.
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.
If you vote by phone or the Internet, please do not mail your proxy card.
Please detach here
The Board of Directors Recommends a Vote FOR Items 1, 2, 3, 4, 5 and 6.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1. Election of directors: 01 Clark E. McLeod 04 Robert J. Currey [_] Vote FOR [_] Vote WITHHELD
02 James E. Hoffman 05 Anne K. Bingaman all nominees from all nominees
03 Blake O. Fisher, Jr.
(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 1996 Employee Stock Option
Plan, as amended. [_] For [_] Against [_] Abstain
3. To amend the Certificate of Incorporation
to increase the number of authorized shares
of Class A Common Stock to 2,000,000,000
from 1,000,000,000. [_] For [_] Against [_] Abstain
4. To amend the Certificate of Incorporation
to authorize a new class of preferred stock
in the amount of 10,000,000 shares. [_] For [_] Against [_] Abstain
5. To amend the Certificate of Incorporation
to require the unanimous written consent
of the stockholders to take corporate
action of stockholders without a meeting. [_] For [_] Against [_] Abstain
6. To ratify the Board of Directors' appointment
of Arthur Anderson LLP as the Company's
independent public accountants for the 2000
fiscal year. [_] For [_] Against [_] Abstain
</TABLE>
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.)
<PAGE>
[Form of Proxy Card for Holders of Series B Preferred Stock]
McLEODUSA INCORPORATED
ANNUAL MEETING OF STOCKHOLDERS
May 31, 2000
10:00 A.M.
COLLINS PLAZA HOTEL
1200 Collins Road NE
Cedar Rapids, Iowa
[McLEODUSA LOGO]
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR USE AT THE ANNUAL MEETING ON MAY 31, 2000.
The undersigned stockholder of McLeodUSA Incorporated (the "Company") hereby
appoints J. Lyle Patrick and 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 2000 annual meeting of
stockholders (the "Annual Meeting") to be held on Wednesday, May 31, 2000, 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. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED "FOR" THE
NOMINEES LISTED IN PROPOSAL 1.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED IN PROPOSAL
1.
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 YOU CAN
GIVE YOUR PROXY BY EITHER CALLING THE TOLL-FREE TELEPHONE
NUMBER OR USING THE INTERNET,
EACH AS DESCRIBED IN THE INSTRUCTIONS ON THE
REVERSE OF THIS PROXY CARD.
See reverse for voting instructions.
<PAGE>
There are three ways to vote your Proxy
Your telephone or Internet vote authorizes the named proxies to vote your shares
in the same manner as if you marked, signed and returned your proxy card. The
deadline for telephone or Internet voting is 12:00 noon EDT, May 30, 2000.
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.
Have your proxy card in hand when you call.
. 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 VIA INTERNET - http://www.eproxy.com/mcld/ -- QUICK***EASY***IMMEDIATE
Use the Internet to vote your proxy 24 hours a day, 7 days a week. Have your
proxy card in hand when you access the Web site.
. 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 on the screen to create an electronic
ballot.
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.
If you vote by phone or the Internet, please do not mail your proxy card.
Please detach here
The Board of Directors Recommends a Vote FOR Item 1.
<TABLE>
<S> <C> <C> <C> <C>
1. Election of directors: 01 Theodore J. Forstmann 02 Erskine B. Bowles [_] Vote FOR [_] Vote WITHHELD
all nominees from all nominees
(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.) ----------------------------------------------------------
</TABLE>
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 NOMINEE LISTED IN PROPOSAL 1.
---
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.)
