<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): January 7, 2000
McLEODUSA INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 0-20763 42-1407240
(State or Other (Commission (IRS Employer
Jurisdiction of Incorporation) File Number) Identification Number)
McLeodUSA Technology Park
6400 C Street S.W., P.O. Box 3177
Cedar Rapids, IA 52406-3177
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (319) 364-0000
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
Item 5. Other Events
Fourth Quarter and Fiscal Year Results for 1999
-----------------------------------------------
On January 26, 2000, McLeodUSA Incorporated (the "Company") issued a press
release reporting results for its fourth quarter and fiscal year 1999. The
Company reported that revenues were $908.8 million for the year ended December
31, 1999, compared to $604.1 million for 1998. Competitive telecommunications
revenues, which includes local and long distance and private line and data, grew
72% for the year. Earnings per share for the year was a negative $1.61,
compared to a negative $0.99 for 1998. EBITDA (earnings before interest, taxes,
depreciation and amortization) for the year was a positive $59.0 million,
compared to $20.0 million for 1998.
The Company reported fourth quarter revenues of $263.9 million, compared to
revenues of $165.5 million for the same quarter of 1998. Competitive
telecommunications revenues grew 94% over the total for the fourth quarter of
1998. Earnings per share for the quarter was a negative $0.43, compared to a
negative $0.25 for the same quarter in 1998. EBITDA was a positive $24.0 million
in the fourth quarter, compared to $15.1 million in third quarter 1999 and $10.1
million for fourth quarter 1998.
Attached as Exhibit 99.1 to this Current Report on Form 8-K, and
incorporated by reference herein, is the text of the press release issued by the
Company on January 26, 2000.
Executive Employment Contracts
------------------------------
On January 7, 2000, the Company 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 of the Company, Mr. Gray as President and Chief Executive
Officer for Local Services, and Mr. Wilkens as President and Chief Executive
Officer for Data Services. A summary of significant terms of the agreements are
as follows:
. Term. The term of the agreements will run until January 7, 2003.
. Salary and Bonus Compensation. Each of the Executives will receive an
initial base annual salary of $400,000, subject to a potential
increase each year based on competitive survey data. In addition, each
Executive will be 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 the Company's Class
A common stock and each of Messrs. Gray and Wilkens were granted an
option to purchase 2,000,000 shares of the Company's Class A common
stock. Each option has an option price
2
<PAGE>
equal to the fair market value of the Company's Class A common stock
which, in accordance with the Company's 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
the Company's standard benefit plans.
. Noncompetition and Nonsolicitation. The Executives are bound by
noncompetition and nonsolication covenants for the term of the
agreements, and for an additional year in certain circumstances.
. Severance Benefits. If an Executive's employment is terminated prior
to expiration of the applicable employment agreement for any reason
other than for cause or by the Executive for good reason, the Company
will be obligated to pay to such Executive certain customary severance
benefits.
The foregoing summary is not a comprehensive explanation of all of the
terms and provisions set forth in the Company's agreements with Messrs. McLeod,
Gray and Wilkens. Specific reference should be made to the actual agreements,
which are attached in Exhibits 99.2 99.3 and 99.4 to this Current Report on Form
8-K and incorporated herein by reference.
* * * *
Some of the statements contained in this Current Report on Form 8-K discuss
future expectations, contain projections of results of operations or financial
condition or state other forward-looking information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The "forward-looking" information is based on various factors and
was derived using numerous assumptions. In some cases, these so-called forward-
looking statements can be identified by words like "may," "will," "should,"
"expects," "plans," "anticipates," "believes," estimates," "predicts,"
"potential," or "continue" or the negative of those words and other comparable
words. These statements only reflect the prediction of the Company. Actual
events or results may differ substantially. Important factors that could cause
actual results of the Company to be materially different from the forward-
looking statements include availability of financing and regulatory approvals,
the number of potential customers in a target market, the existence of strategic
alliances or relationships, technological, regulatory or other developments in
the industry, changes in the competitive climate in which the Company operates
and the emergence of future opportunities, all of which could cause actual
results and experience of the Company to differ materially from anticipated
results and expectations expressed in the forward-looking statements contained
herein. These and other applicable risks are summarized under the caption "Risk
Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, which is filed with the Securities and Exchange Commission.
3
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
Description.
------------
(c) Exhibits.
99.1 Press Release, dated January 26, 2000, announcing the Company's
results for the fourth quarter and for fiscal year 2000.
99.2 Employment Agreement dated January 7, 2000, between the Company
and Clark E. McLeod.
99.3 Employment Agreement dated January 7, 2000, between the Company
and Stephen C. Gray.
99.4 Employment Agreement dated January 7, 2000, between the Company
and Roy A Wilkens.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: February 2, 2000 McLEODUSA INCORPORATED
By: /s/ Randall Rings
----------------------
Randall Rings
Vice President, Secretary and
General Counsel
<PAGE>
EXHIBIT INDEX
99.1 Press Release, dated January 26, 2000, announcing the Company's results
for the fourth quarter and for fiscal year 2000.
99.2 Employment Agreement dated January 7, 2000, between the Company and Clark
E. McLeod.
99.3 Employment Agreement dated January 7, 2000, between the Company and
Stephen C. Gray.
99.4 Employment Agreement dated January 7, 2000, between the Company and Roy A
Wilkens.
<PAGE>
Exhibit 99.1
Press Release issued January 26, 2000 ********************
LOGO of McLeodUSA appears here
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, PO Box 3177
Cedar Rapids, IA 52406-3177
Press and Investor Contact: Bryce E. Nemitz
[email protected]
Phone: (319) 790-7800
FAX: (319) 790-7767
FOR IMMEDIATE RELEASE
---------------------
McLeodUSA Reports Record Results
for Fourth Quarter and 1999
For the year:
. Total revenues increase from $604 million to $909 million
. EBITDA exceeds $59 million, an increase of $39 million or 195 percent
. Total route miles of fiber surpasses 10,000; 2,900 added during year
. 35 percent of total lines now on-switch / on-net
. Sales headcount increases from 350 to 900
Cedar Rapids, Iowa -- January 26, 2000 -- McLeodUSA Incorporated (Nasdaq:
MCLD) today reported results for fourth quarter and fiscal year 1999. Revenues
were a record $908.8 million for the year ended December 31, 1999, compared to
$604.1 million for 1998, an increase of 50 percent. Competitive
telecommunications revenues, which includes local and long distance, and private
line and data, grew 72 percent for the year. EBITDA (earnings before interest,
taxes, depreciation and amortization) for the year was a positive $59.0 million,
compared with $20.0 million for 1998.
Commenting on 1999 results, Clark McLeod, chairman and CEO stated, "It was
a significant year for McLeodUSA customers, shareholders and employees." He
continued, "Our employee base grew to over 8,100 as a result of strong organic
growth and the successful integration of several strategic and sizable
acquisitions. In addition, we added 10 states to our market area creating a 21-
state target footprint for our local services and increasing our ten-year market
opportunity four-fold. We strengthened our Board of Directors significantly by
adding Peter Claudy, Roy Wilkens, Anne Bingaman, Ted
<PAGE>
Forstmann and Erskine Bowles. In addition, the Forstmann Little investment of $1
billion allows us to concentrate less on financing and more on execution as we
look toward the new year."
Steve Gray, president and CEO of Local Services added, "Our operational
statistics highlight our progress for the year:
. local lines in service grew 71 percent from 398,000 to 679,000;
. fiber route miles increased 41 percent from 7,120 to 10,036;
. white and yellow page directory distribution grew 46 percent, printing
nearly 20 million books reaching 39 million people; and
. new lines sold during the final quarter of the year increased 141
percent over the same period one year ago."
Fourth Quarter Results
- ----------------------
The Company reported fourth quarter revenues of $263.9 million
compared to revenues of $165.5 million for the same quarter of 1998.
Competitive telecommunications revenues grew 94 percent over the prior year
fourth quarter total. EBITDA was a positive $24.0 million in fourth quarter,
compared to $15.1 million in third quarter 1999 and $10.1 million for fourth
quarter 1998.
Commenting on fourth quarter results, Gray stated, "Our fourth quarter
performance capped a year packed with both operational and strategic
accomplishments." He continued, "I am particularly pleased with the remarkable
increase in our on-switch/on-net traffic for CLEC business customers, up 29
percent for the quarter and more than 20x for the year. In addition, the impact
of our expanded sales force resulted in the sale of nearly 30 percent more local
lines in successive quarters."
Recent Announcements
- --------------------
On January 7, McLeodUSA announced a planned acquisition of Splitrock
Services Inc. (Nasdaq: SPLT) of Houston, Texas. Upon closing, McLeodUSA will
have an advanced fiber optic network spanning 26,000 miles, 27 voice switches,
679,000 local lines, and ATM switches at all 350 installed points-of-presence
across the country.
In the same announcement, McLeodUSA announced the creation of two
operational units: Data Services and Local Services. Roy A. Wilkens has joined
the Company as president and CEO of the newly created Data Services operation,
which will function under the Splitrock name and address the national data
market. Steve Gray will lead the Local Services operation as president and CEO,
focusing on the Company's 21-state CLEC region. Following regulatory and
shareholder approval, the merger is expected to close within the next few
months.
Concluding, Mr. McLeod stated, "Our 1999 accomplishments, as well as our
announced Splitrock addition, have heightened our expectations for 2000. We
will focus on our 21-state geography for integrated communications services,
opening new markets and deepening our penetration in existing markets. And,
once the Splitrock deal is done, we will enter the national stage as a data
connections company in 50 states, able to reach 90 percent of the U.S.
population with advanced Internet access services."
<PAGE>
McLeodUSA, founded in June of 1991, is a provider of integrated
telecommunications services to business and residential customers. The
Company's telecommunications customers are located in 12 Midwest and Rocky
Mountain states, with 9 additional expansion states to be added. McLeodUSA is a
facilities-based telecommunications provider with 27 switches, 679,000 local
lines, 8,100 employees, and over 10,000 route miles of fiber optic network. In
the next 12 months, the Company's publishing subsidiaries plan to distribute 24
million copies of competitive directories in 22 states, expected to reach nearly
41 million people.
Some of the statements contained in this press release discuss future
expectations, contain projections of results of operations or financial
condition or state other forward-looking information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The "forward-looking" information is based on various factors and
was derived using numerous assumptions. In some cases, you can identify these
so-called forward-looking statements by words like "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"projects," "potential," or "continue" or the negative of those words and other
comparable words. You should be aware that those statements only reflect the
predictions of McLeodUSA. Actual events or results may differ substantially.
Important factors that could cause actual results of McLeodUSA to be materially
different from the forward-looking statements include availability of financing
and regulatory approvals, the number of potential customers in a target market,
the existence of strategic alliances or relationships, technological, regulatory
or other developments in the industry, changes in the competitive climate in
which McLeodUSA operates and the emergence of future opportunities. These and
other applicable risks are summarized under the caption "Risk Factors" in the
McLeodUSA Annual Report on Form 10-K for the fiscal year ended December 31,
1998, which is filed with the Securities and Exchange Commission.
# # #
<PAGE>
McLeodUSA Incorporated and Subsidiaries
---------------------------------------
Consolidated Statement of Operations
(In thousands except for per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
-------------------------------- ---------------------------------
December 31 December 31
-------------------------------- ---------------------------------
1999 1998 1999 1998
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications:
Local and long distance $144,551 $ 74,522 $ 456,030 $ 271,217
Local exchange services 20,596 18,441 78,380 67,785
Private line and data 22,244 11,527 80,089 40,110
Network maintenance and equipment 10,383 8,836 36,263 32,885
Other telecommunications 8,225 6,919 30,106 27,794
------------ ------------ ------------- ------------
Total telecommunications revenue 205,999 120,245 680,868 439,791
Directory 53,015 40,785 209,186 144,876
Telemarketing 4,903 4,474 18,738 19,479
------------ ------------ ------------- ------------
Total revenues 263,917 165,504 908,792 604,146
Operating expenses:
Cost of service 129,647 84,013 457,085 323,208
Selling, general and administrative 110,302 71,352 392,687 260,931
Depreciation and amortization 60,112 25,444 190,695 89,107
Other ---- ---- ---- 5,575
------------ ------------ ------------- ------------
Total operating expenses 300,061 180,809 1,040,467 678,821
------------ ------------ ------------- ------------
Operating loss (36,144) (15,305) (131,675) (74,675)
Non-operating income (expense):
Interest income 19,471 6,926 42,624 26,000
Interest (expense) (34,389) (23,641) (136,868) (78,234)
Other (1,918) 208 5,637 1,997
------------ ------------ ------------- ------------
Total non-operating income (expense) (16,836) (16,507) (88,607) (50,237)
------------ ------------ ------------- ------------
Loss before income taxes (52,980) (31,812) (220,282) (124,912)
Income taxes ---- ---- ---- ----
------------ ------------ ------------- ------------
Net loss (52,980) (31,812) (220,282) (124,912)
Preferred stock dividend (13,602) ---- (17,727) ----
------------ ------------ ------------- ------------
Net loss applicable to common shares $(66,582) $(31,812) $ (238,009) $(124,912)
============ ============ ============= ============
Net loss per common share (/1/) $(0.43) $(0.25) $(1.61) $(0.99)
============ ============ ============= ============
Weighted average common shares outstanding 155,805 126,778 147,710 125,614
(/1/) ============ ============ ============= ============
EBITDA $ 23,968 $ 10,139 $ 59,020 $ 20,007
============ ============ ============= ============
</TABLE>
(/1/) As adjusted for the two-for-one stock split announced June 30, 1999
effected in the form of a dividend.
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Consolidated Statement of Operations
(In thousands except for per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
3/31/99 6/30/99 9/30/99 12/31/99
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications:
Local and long distance $ 81,072 $105,527 $124,880 $ 144,551
Local exchange services 17,632 19,787 20,365 20,596
Private line and data 15,321 20,625 21,899 22,244
Network maintenance and equipment 8,120 8,355 9,405 10,383
Other telecommunications 5,814 8,346 7,721 8,225
---------- ---------- ---------- -----------
Total telecommunications revenue 127,959 162,640 184,270 205,999
Directory 49,424 55,203 51,544 53,015
Telemarketing 3,726 4,819 5,290 4,903
---------- ---------- ---------- -----------
Total revenues 181,109 222,662 241,104 263,917
Operating expenses:
Cost of service 92,459 113,048 121,931 129,647
Selling, general and administrative 79,811 98,528 104,046 110,302
Depreciation and amortization 35,110 43,598 51,875 60,112
Other --- --- --- ---
---------- ---------- ---------- -----------
Total operating expenses 207,380 255,174 277,852 300,061
---------- ---------- ---------- -----------
Operating loss (26,271) (32,512) (36,748) (36,144)
Non-operating income (expense):
Interest income 8,260 6,754 8,139 19,471
Interest (expense) (29,464) (36,216) (36,799) (34,389)
Other (1) 563 6,993 (1,918)
---------- ---------- ---------- -----------
Total non-operating income (expense) (21,205) (28,899) (21,667) (16,836)
---------- ---------- ---------- -----------
Loss before income taxes (47,476) (61,411) (58,415) (52,980)
Income taxes --- --- --- ---
---------- ---------- ---------- -----------
Net loss (47,476) (61,411) (58,415) (52,980)
Preferred stock dividend --- --- (4,125) (13,602)
---------- ---------- ---------- -----------
Net loss applicable to common shares $(47,476) $(61,411) $(62,540) $ (66,582)
========== ========== ========== ===========
Net loss per common share /(1)/ $ (0.36) $ (0.41) $ (0.41) $ (0.43)
========== ========== ========== ===========
Weighted average common shares outstanding /(1)/ 132,242 149,802 152,677 155,805
========== ========== ========== ===========
EBITDA $ 8,839 $ 11,086 $ 15,127 $ 23,968
========== ========== ========== ===========
</TABLE>
/(1)/ As adjusted for the two-for-one stock split announced June 30, 1999
effected in the form of dividend.
<PAGE>
McLeodUSA Selected Statistical Data:
<TABLE>
<CAPTION>
4Q99 vs. 4Q98 4Q99 vs. 3Q99
12/31/99 12/31/98 % Change 9/30/99 % Change
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Sales cities 110 68 62% 110 0%
Central offices leased 393 321 22% 366 7%
Collocations 158 40 295% 143 10%
Switches owned
CO / LD 27 9 200% 27 0%
ATM / Frame Relay 13 --- --- 13 0%
Cities served 592 269 120% 538 10%
Route miles 10,036 7,120 41% 9,412 7%
Total
Local lines in service 678,900 397,600 71% 616,400 10%
Business 472,000 252,700 87% 420,800 12%
On-switch / net 134,400 30,100 347% 110,700 21%
Residential 206,900 144,900 43% 195,600 6%
On-switch / net 103,800 69,500 49% 99,600 4%
Local customers 279,600 186,200 50% 260,500 7%
Business 88,200 49,600 78% 78,900 12%
Residential 191,400 136,600 40% 181,600 5%
Competitive
Local lines in service 579,000 306,200 89% 516,200 12%
Business 442,700 227,100 95% 391,400 13%
On-switch / net 105,100 4,500 2,236% 81,300 29%
Residential 136,300 79,100 72% 124,800 9%
On-switch / net 33,200 3,700 797% 28,800 15%
Local line customers 202,800 114,600 77% 183,300 11%
Business 79,700 42,300 88% 70,300 13%
Residential 123,100 72,300 70% 113,000 9%
Local lines per business customer 5.6 5.4 5.6
Local lines sold during quarter 104,300 43,300 141% 80,900 29%
Business 84,600 34,700 144% 59,000 43%
Residential 19,700 8,600 129% 21,900 (10)%
New local lines in service during quarter 62,800 31,100 102% 60,600 4%
Business 51,300 29,400 74% 50,400 2%
On-switch / net 23,800 --- --- 21,300 12%
Residential 11,500 1,700 576% 10,200 12%
On-switch / net 4,400 500 780% 2,500 76%
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
ILEC
Local lines in service 99,900 91,400 9% 100,200 0%
Business 29,300 25,600 14% 29,400 0%
Residential 70,600 65,800 7% 70,800 0%
Local line customers 76,800 71,600 7% 77,200 (1)%
Business 8,500 7,300 16% 8,600 (1)%
Residential 68,300 64,300 6% 68,600 0%
</TABLE>
<PAGE>
Exhibit 99.2 Employment Agreement dated January 7, 2000, between the Company
and Clark E. McLeod.
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made this 7th day of January, 2000, between McLeodUSA
Incorporated, a Delaware corporation, (the "Company"), and Clark E. McLeod (the
"Executive").
The Board of Directors of the Company (the "Board") recognizes that
the Executive's contribution to the growth and success of the Company has been
and is expected to continue to be substantial. The Board desires to provide for
the employment of the Executive on a basis which the Board has determined will
reinforce and encourage the attention and dedication to the Company of the
Executive, as a member of the Company's management, in the best interest of the
Company and its shareholders. The Executive is willing to commit himself to
serve the Company, on the terms and conditions herein provided.
In order to effect the foregoing, the Company and the Executive wish
to enter into an employment agreement on the terms and conditions set forth
below. Accordingly, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:
SECTION 1. Employment. The Company hereby agrees to employ the
-----------
Executive, and the Executive hereby agrees to serve the Company, on the terms
and conditions set forth herein.
SECTION 2. Term. The employment of the Executive by the Company as
-----
provided in Section 1 will commence on January 7, 2000 (the "Commencement Date")
and end on the third anniversary of the Commencement Date, unless sooner
terminated as hereinafter provided (as may be sooner terminated, the "Term").
SECTION 3. Position and Duties. The Executive shall serve as
--------------------
Chairman of the Board of Directors and Chief Executive Officer of the Company
and shall have such responsibilities, duties and authority as may from time to
time be assigned to the Executive by the Board that are consistent with such
positions. The Executive shall devote substantially all of his working time and
efforts to the business and affairs of the Company; provided, however, that he
-------- -------
may serve on boards of directors of civic and charitable organizations and other
corporations as long as such board participation does not interfere in any
significant respect with his obligations under this Agreement.
SECTION 4. Place of Performance. In connection with the Executive's
---------------------
employment by the Company, the Executive shall be based at the principal
executive offices of the Company which shall be maintained in Cedar Rapids,
Iowa, except for reasonably required travel on the Company's business.
<PAGE>
SECTION 5. Compensation and Related Matters. (a) Salary. During
--------------------------------- -------
the period of the Executive's employment hereunder, the Company shall pay to the
Executive an annual base salary at a rate of $400,000, such salary to be paid in
substantially equal installments in accordance with the Company's payroll
practices for its other executives. This salary shall be subject to annual
increase, as determined by the Compensation Committee of the Board (the
"Compensation Committee") in its sole discretion, in order to provide the
Executive with annual base salary comparable to the annual base salary of
similarly situated executives at companies in similar industries having similar
revenues and compound annual growth rates. Compensation of the Executive by
salary payments shall not be deemed exclusive and shall not prevent the
Executive from participating in any other compensation or benefit plan of the
Company. The salary payments (including any increased salary payments)
hereunder shall not in any way limit or reduce any other obligation of the
Company hereunder, and no other compensation, benefit or payment hereunder shall
in any way limit or reduce the obligation of the Company to pay the Executive's
salary hereunder.
(b) Bonus Compensation. The Executive shall be entitled to receive
-------------------
annual bonus compensation based upon a target bonus opportunity of not less than
50% of the Executive's then current annual base salary in effect for such year.
Unless otherwise established for any given year by the Compensation Committee,
the target bonus opportunity shall be 50% as described above in this paragraph
and the applicable performance criteria (which may be based on individual or
corporate performance, or a combination thereof) to be achieved for such year to
earn the bonus shall be in accordance with the Company's bonus policy and
practices generally applicable to its other executives for each given year.
(c) Equity Compensation. On the Commencement Date, the Executive
-------------------
shall receive a grant of options to purchase 1,000,000 shares of Class A common
stock, par value $.01 per share, of the Company ("Common Stock") at an exercise
price (or option price as it is called in the Company's 1996 Employee Stock
Option Plan) per share equal to the fair market value per share of Common Stock
which shall be the closing price of the shares of Common Stock on the trading
day immediately preceding the Commencement Date (determined in accordance with
the Company's 1996 Employee Stock Option Plan) and shall contain such other
terms and conditions as are provided under such plan except as otherwise
specifically provided hereunder. The Executive shall also be eligible for
additional option grants during the Term on or about each anniversary of the
Commencement Date as the Compensation Committee, in its sole discretion, shall
determine. The initial grant of 1,000,000 options shall become fully
exercisable on the third anniversary of the Commencement Date (provided that the
Executive is then still in employment with the Company) or as provided in
Section 8(d)(iii). Upon a Change of Control (as defined herein) all outstanding
options to purchase Common Stock of the Company which have been granted to the
Executive during the Executive's employment with the Company shall become
immediately vested and exercisable in full, irrespective of whether such options
were vested and exercisable on such date.
(d) Expenses. During the term of the Executive's employment
---------
hereunder, the Executive shall be entitled to receive prompt reimbursement for
all reasonable and customary expenses incurred by the Executive in performing
services hereunder, including all expenses of travel and living expenses while
away from home on business or at the request of and in the
<PAGE>
service of the Company, provided that such expenses are incurred and accounted
for in accordance with the policies and procedures established by the Company.
(e) Life Insurance Premium Payments. During the Term, the Company
--------------------------------
shall continue to pay all premiums on #7076120 issued by The Lincoln National
Life Insurance Company dated November 28, 1998, in accordance with past Company
practice.
(f) Other Benefits. The Executive shall be entitled to participate
---------------
in or receive benefits under any employee benefit plan or arrangement made
available by the Company in the future to its executives and key management
employees, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Nothing paid to the
Executive under any plan or arrangement presently in effect or made available in
the future shall be deemed to be in lieu of the salary payable to the Executive
pursuant to Section 5(a). Any payments or benefits payable to the Executive
under this Section 5(f) in respect of any calendar year during which the
Executive is employed by the Company for less than the entire such year shall,
unless otherwise provided in the applicable plan or arrangement, be prorated in
accordance with the number of days in such calendar year during which he is so
employed.
(g) Vacations. The Executive shall be entitled to no less than the
----------
number of vacation days in each calendar year, determined in accordance with the
Company's vacation policy in effect from time to time for its other executives.
The Executive shall also be entitled to all paid holidays and personal days
given by the Company to its other executives.
(h) Registration Rights. The Company shall file a Form S-8 or other
-------------------
applicable registration statement with the Securities and Exchange Commission,
to the extent such a registration statement is not otherwise already on file and
effective, in order to enable the Executive to sell or otherwise dispose of 15%
of his aggregate common equity ownership in the Company each year during the
Term. For purposes hereof, the Executive's annual 15% registration rights shall
be cumulative and determined on a fully diluted basis, including in such
determination all then outstanding unexercised options to acquire Common Stock
(whether or not vested) which the Executive has been granted by the Company.
SECTION 6. Offices. Subject to Sections 3 and 4, the Executive shall
--------
serve without additional compensation, if elected or appointed thereto, as a
director of the Company and any of its subsidiaries and in one or more executive
offices of any of the Company's subsidiaries.
SECTION 7. Termination. The Executive's employment hereunder may be
------------
terminated without any breach of this Agreement only under the following
circumstances:
(a) Death. The Executive's employment hereunder shall terminate upon
------
his death.
(b) Disability. If, as a result of the Executive's incapacity due to
-----------
physical or mental illness, the Executive shall have been absent from his
duties hereunder on a full-time basis for the entire period of six
consecutive months, and within thirty (30) days
<PAGE>
after written notice of termination is given (which may occur before or
after the end of such six month period) shall not have returned to the
performance of his duties hereunder on a full-time basis, the Company may
terminate the Executive's employment hereunder.
(c) Cause. The Company may terminate the Executive's employment
------
hereunder for Cause. For purposes of this Agreement, the Company shall
have "Cause" to terminate the Executive's employment hereunder upon (i) the
willful and continued failure by the Executive to substantially perform his
duties hereunder (other than any such failure resulting from the
Executive's incapacity due to physical or mental illness or any such actual
or anticipated failure after the issuance of a Notice of Termination, as
defined in Section 7(e), by the Executive for Good Reason, as defined in
Section 7(d)(ii)), after demand for substantial performance is delivered by
the Company that specifically identifies the manner in which the Company
believes the Executive has not substantially performed his duties, (ii) the
willful engaging by the Executive in misconduct which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct that constitutes Competitive Activity, as defined in
Section 10), or (iii) the Executive's conviction of a felony or the
entering of a plea of no lo contendere to a felony charge. For purposes of
this Section 7(c), no act, or failure to act, on the Executive's part shall
be considered "willful" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission was in
the best interest of the Company. Notwithstanding the foregoing, the
Executive may not be terminated for Cause pursuant to clause (i) or (ii)
above without (1) reasonable notice from the Board to the Executive setting
forth the reasons for the Company's intention to terminate for Cause, (2)
an opportunity for the Executive, together with his counsel, to be heard
before the Board, and (3) delivery to the Executive of a Notice of
Termination from the Board finding that, in the good faith opinion of
three-quarters (3/4) of the Board, the Executive was guilty of conduct set
forth above in clause (i) or (ii) above, as applicable, and specifying the
particulars thereof in detail. No such notice or meeting before the Board
shall be required if the termination for Cause is due to conduct described
in clause (iii) of the second sentence of this Section 7(c).
(d) Termination by the Executive. (i) The Executive may terminate
-----------------------------
his employment hereunder (A) for Good Reason, (B) if his health should
become impaired to an extent that makes his continued performance of his
duties hereunder hazardous to his physical or mental health or his life,
provided that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) for any other
reason.
(ii) For purposes of this Agreement, "Good Reason" shall mean
the occurrence (without the Executive's express written consent) of any one
of the following acts by the Company, or failures by the Company to act,
unless, in the case of any act or failure to act described in paragraphs
(A), (B), (D), (E) or (F) below, such act or failure to act is corrected
prior to the Date of Termination given in respect thereof:
<PAGE>
(A) the assignment to the Executive of any duties materially
inconsistent with the Executive's status as a senior executive officer
of the Company or a material diminution in the nature or status of the
Executive's responsibilities from those in effect as of the
Commencement Date;
(B) a reduction by the Company in the Executive's annual base
salary or target bonus opportunity as in effect on the date hereof or
as the same may be increased from time to time;
(C) the relocation of the Company's principal executive offices
to a location outside the Cedar Rapids, Iowa Metropolitan Area (or, if
different, the metropolitan area in which such offices are located
immediately prior to a Change in Control);
(D) the failure of the Company to obtain the written assumption
of its obligation to perform this Agreement by a successor to all or
substantially all of the assets of the Company within 15 days after a
merger, consolidation, sale or similar transaction;
(E) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 7(e); for purposes of this Agreement, no
such purported termination shall be effective;
(F) the failure by the Company to comply with any material
provision of this Agreement; or
(G) a Change in Control.
The Executive's right to terminate the Executive's employment for
Good Reason shall not be affected by the Executive's incapacity due to
physical or mental illness. The Executive's continued employment shall not
constitute consent to, or a waiver of rights with respect to, any act or
failure to act constituting Good Reason hereunder.
(iii) For purposes of this Agreement, a "Change in Control"
shall be deemed to have occurred if the conditions set forth in any one of
the following paragraphs shall have been satisfied:
(A) any "person" (within the meaning of Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) is
or becomes the "beneficial owner" (within the meaning of Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company (not including in the securities beneficially owned by such
person any securities acquired directly from the Company or its
affiliates) representing 25% or more of the combined voting power of
the Company's then outstanding securities; excluding, however, the
<PAGE>
following: (1) any acquisition directly from the Company, other than
an acquisition by virtue of the exercise of a conversion privilege
unless the security being so converted was itself acquired directly
from the Company, (2) any acquisition by the Company, or (3) any
acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the
Company; or
(B) during any period of two consecutive years (not including
any period prior to the execution of this Agreement), individuals who
at the beginning of such period constitute the Board and any new
director (other than a director designated by a Person who has entered
into an agreement with the Company to effect a transaction described
in clause (A), (C) or (D) of this paragraph whose election by the
Board or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof; or
(C) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
(i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity), in
combination with the ownership of any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, at
least 75% of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such
merger or consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction)
in which no person acquires more than 50% of the combined voting power
of the Company's then outstanding securities; or
(D) the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets.
(e) Notice of Termination. Any termination of the Executive's
----------------------
employment by the Company or by the Executive (other than termination
pursuant to Section 7(a)) shall be communicated by written Notice of
Termination to the other party hereto in accordance with Section 13. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
(f) Date of Termination. "Date of Termination" shall mean (i) if the
--------------------
Executive's employment is terminated by his death, the date of his death,
(ii) if the Executive's
<PAGE>
employment is terminated pursuant to Section 7(b), thirty (30) days after
Notice of Termination is given (provided that the Executive shall not have
returned to the performance of his duties on a full-time basis during such
thirty (30)-day period), (iii) if the Executive's employment is terminated
pursuant to Section 7(c) above, the date specified in the Notice of
Termination, and (iv) if the Executive's employment is terminated for any
other reason, the date on which a Notice of Termination is given.
SECTION 8. Compensation Upon Termination or During Disability. (a)
---------------------------------------------------
During any period that the Executive fails to perform his duties hereunder as a
result of incapacity due to physical or mental illness ("disability period"),
the Executive shall continue to receive his full salary at the rate then in
effect for such period until his employment is terminated pursuant to Section
7(b), provided that payments so made to the Executive during the first 180 days
of the disability period shall be reduced by the sum of the amounts, if any,
payable to the Executive at or prior to the time of any such payment under
disability benefit plans of the Company or under the Social Security disability
insurance program, and which amounts were not previously applied to reduce any
such payment. If the Executive's employment is terminated by reason of his
disability pursuant to Section 7(b), all of his then outstanding options to
purchase common stock of the Company shall become immediately vested and
exercisable in full upon the giving of Notice of Termination, irrespective of
whether such options were vested and exercisable on such date, and all such
options shall remain exercisable for one year following the Date of Termination
(but not beyond their original expiration dates).
(b) If the Executive's employment is terminated by his death, the
Company shall pay any amounts due to the Executive under Section 5 through the
date of his death. If the Executive's employment is terminated by reason of his
death, all of his then outstanding options to purchase common stock of the
Company shall become immediately vested and exercisable in full upon the date of
his death, irrespective of whether such options were vested and exercisable on
such date, and all such options shall remain exercisable for one year following
such date (but not beyond their original expiration dates).
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay the
Executive his full salary through the Date of Termination at the rate in effect
at the time Notice of Termination is given and the Company shall have no further
obligations to the Executive under this Agreement.
(d) If (A) in breach of this Agreement, the Company terminates the
Executive's employment (it being understood that a purported termination for
disability pursuant to Section 7(b) or for Cause which is disputed and finally
determined not to have been proper shall be a termination by the Company in
breach of this Agreement), or (B) the Executive terminates his employment for
Good Reason, then
(i) the Company shall pay the Executive his full salary through the
Date of Termination at the rate in effect at the time Notice of Termination
is given and all other unpaid amounts, if any, to which the Executive is
entitled as of the Date of Termination under any compensation plan or
program of the Company, at the time such payments are due; and
<PAGE>
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay as
liquidated damages to the Executive an amount equal to the number of years
(including partial years) remaining in the Term had the Executive's
employment not been terminated, times the sum of (1) the Executive's annual
salary rate in effect as of the Date of Termination and (2) the higher of
the annual bonus amount, if any, paid or awarded by the Company to the
Executive in respect of the calendar year prior to the year in which such
Date of Termination occurs or the Executive's target bonus opportunity for
the year in which Date of Termination occurs; such payment to be made in a
lump sum on or before the fifth day following the Date of Termination;
(iii) all outstanding options to purchase common stock of the Company
granted to the Executive during the Term shall become immediately vested
and exercisable in full upon the giving of the Notice of Termination,
irrespective of whether such options were vested and exercisable on such
date, and all options granted on or after the Commencement Date shall
remain exercisable for four years after the Date of Termination (but not
beyond their original expiration dates); and
(iv) the Company shall maintain in full force and effect, for the
continued benefit of the Executive for the number of years (including
partial years) remaining in the original three-year Term had the
Executive's employment not been terminated, all medical, dental and life
insurance plans and programs in which the Executive was entitled to
participate immediately prior to the Date of Termination on the same basis
(including costs) then available to active employees provided that the
Executive's continued participation is possible under the general terms and
provisions of such plans and programs; provided, however, that in the event
-------- -------
that the Executive's participation in any such plan or program is barred,
the Company shall arrange to provide the Executive with benefits
substantially similar to those which the Executive would otherwise have
been entitled to receive under such plans and programs from which his
continued participation is barred; and, further provided, that if (i) the
------- --------
Executive becomes reemployed after his Date of Termination and (ii) his new
employer offers medical and dental insurance plans or programs under which
he will be eligible to participate, any such continuing medical and dental
coverage shall be secondary to such new employer's coverage.
(e) If the Executive terminates his employment under Section
7(d)(i)(B), the Company shall pay the Executive his full salary through the Date
of Termination at the rate in effect at the time Notice of Termination is given.
(g) In the event that the Executive becomes entitled to the payments
provided in clauses (i)-(iii) of Section 8(d) (the "Severance Payments"), if any
of the Severance Payments will be subject to the excise tax imposed under
section 4999 of the Code (the "Excise Tax"), the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Severance
Payments and any Federal, state and local income and employment tax and Excise
Tax upon the payment provided for by this Section 8(g), shall be equal to the
Severance Payments. For
<PAGE>
purposes of determining whether any of the Severance Payments will be subject to
the Excise Tax and the amount of such Excise Tax, (i) any other payments or
benefits received or to be received by the Executive in connection with a change
in ownership or control (within the meaning of section 280G of the Code and the
regulations promulgated thereunder) of the Company or the Executive's
termination of employment (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Company, any person whose
actions result in a change in control or any Person affiliated with the Company
or such Person) shall be treated as "parachute payments" within the meaning of
section 280G(b)(2) of the Code, and all "excess parachute payment" within the
meaning of section 280G(b)(1) of the Code shall be treated as subject to the
Excise Tax, unless in the opinion of tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Executive such other
payments or benefits (in whole or in part) do not constitute parachute payments,
including by reason of Section 280G(b)(4)(A) of the Code, or such excess
parachute payments (in whole or in part) represent reasonable compensation for
services actually rendered, within the meaning of section 280G(b)(4)(B) of the
Code, in excess of the "base amount" allocable to such reasonable compensation,
or are otherwise not subject to the Excise Tax, (ii) the amount of the Severance
Payments which shall be treated as subject to the Excise Tax shall be equal to
the lesser of (A) the total amount of the Severance Payments or (B) the amount
of excess parachute payments within the meaning of section 280(G)(b)(1) of the
Code (after applying clause (i), above), and (iii) the value of any non-cash
benefits or any deferred payment or benefit shall be determined by the Company's
independent auditors in accordance with the principles of sections 280G(d)(3)
and (4) of the Code. For purposes of determining the amount of the Gross-Up
Payment, the Executive shall be deemed to pay Federal income taxes at the
highest marginal rate of Federal income taxation in the calendar year in which
the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence on the Date of Termination, net of the maximum reduction in Federal
income taxes which could be obtained from deduction of such state and local
taxes.
(h) The compensation and benefits, if any, payable under this Section
8 shall be in addition to any vested accrued compensation or benefits to which
the Executive may be entitled under the Company's (or any of its Subsidiaries')
employee benefit plans and arrangements; provided, however, that the Executive
-------- -------
shall not be entitled to any compensation or benefits under any severance plan
or arrangement of the Company or any of its subsidiaries to which he would
otherwise be entitled under the terms thereof.
SECTION 9. No Mitigation; No Right of Offset. The Executive shall
----------------------------------
have no duty to mitigate damages by seeking other employment. The Company shall
have no right of offset hereunder with respect to any compensation or benefits
received by the Executive from or in connection with any employment subsequent
to his employment termination with the Company.
SECTION 10. Noncompetition/Nonsolicitation. During the three-year
-------------------------------
period commencing on the Commencement Date (without regard to any termination of
the Executive's employment occurring prior thereto), and, through the fourth
anniversary of the Commencement Date if the Executive voluntary terminates
employment without Good Reason on or prior to the expiration of the Term, the
Executive shall not (i) directly or indirectly, own, manage, operate,
<PAGE>
join or control, be employed by or participate in the ownership, management,
operation or control of, or be a consultant to or connected in any other manner
with, any business, firm or corporation which is similar to or competes with a
principal business of the Company or its subsidiaries anywhere within the United
States (a "Competitive Activity") or (ii) hire or solicit, or cause others to
hire or solicit, for employment by any person other than the Company or its
affiliates or any successor thereof, any employee of or person employed by, or
who had within six (6) months been an employee of or employed by, the Company or
its affiliates, or otherwise encourage such persons to leave employment with the
Company or its affiliates. For these purposes, the Executive's ownership of
securities or a public company not in excess of three percent of any class of
such securities shall not be considered to be competition with the Company or
its subsidiaries. Notwithstanding the foregoing, in the event of (i) a Change in
Control, (ii) the involuntary termination of the Executive's employment by the
Company without Cause or (iii) the termination by the Executive of his
employment for Good Reason, the provisions of this first sentence of this
Section 10 extending the noncompetition and nonsolicitation restrictive
covenants for an additional year through the fourth anniversary of the
Commencement Date shall be null and void and of no further force or effect.
SECTION 11. Confidential Information; Personal Relationships. The
------------------------------------------------
Executive acknowledges that the Company has a legitimate and continuing
proprietary interest in the protection of its confidential information and has
invested substantial sums and will continue to invest substantial sums to
develop, maintain and protect confidential information. The Executive agrees
that, during the Term and thereafter, without the prior written consent of the
Board of Directors of the Company, the Executive shall keep secret and retain in
strictest confidence, and shall not knowingly use for the benefit of himself or
others all confidential matters relating to the Company's business including,
without limitation, operational methods, marketing or development plans or
strategies, business acquisition plans, joint venture proposals or plans, and
new personnel acquisition plans, learned by the Executive heretofore or
hereafter (such information shall be referred to herein collectively as
"Confidential Information"); provided, however, that nothing in this Agreement
-------- -------
shall prohibit the Executive from disclosing or using any Confidential
Information (A) in the performance of his duties hereunder, (B) as required by
applicable law, regulatory authority, recognized subpoena power or any court of
competent jurisdiction, (C) in connection with the enforcement of his rights
under this Agreement or any other agreement with the Company, or (D) in
connection with the defense or settlement of any claim, suit or action brought
or threatened against the Executive by or in the right of the Company.
Notwithstanding any provision contained herein to the contrary, the term
"Confidential Information" shall not be deemed to include any general knowledge,
skills or experience acquired by the Executive or any knowledge or information
known or available to the public in general (other than as a result of a breach
of this provision by the Executive).
SECTION 12. Successors; Binding Agreement. (a) The Company will
------------------------------
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement
<PAGE>
and shall entitle the Executive to compensation from the Company in the same
amount and on the same terms as he would be entitled to hereunder if he
terminated his employment for Good Reason, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used in this Agreement,
"Company" shall mean the Company as herein before defined and any successor to
its business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 12 or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(b) This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amounts would
still be payable to him hereunder if he had continued to live, all such amounts
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee, or other designee or, if
there be no such designee, to the Executive's estate.
SECTION 13. Notice. For the purposes of this Agreement, notices,
-------
demands and all other communications provided for in this Agreement shall be in
writing and shall be deemed to have been duly given when delivered or (unless
otherwise specified) mailed by United States certified or registered mail,
return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
232 Rosedale Road, SE
Cedar Rapids, IA 52403
If to the Company:
McLeodUSA Incorporated
6400 C Street SW
P. O. Box 3177
Cedar Rapids, IA 52406-3177
Attn: General Counsel
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
SECTION 14. Miscellaneous. No provisions of this Agreement may be
--------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and such officer of the Company as
may be specifically designated by the Board. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral
<PAGE>
or otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
SECTION 15. Governing Law. The validity, interpretation,
--------------
construction and performance of this Agreement shall be governed by the laws of
the State of Iowa without regard to its conflicts of law principles.
SECTION 16. Validity/Pooling Condition. The invalidity or
---------------------------
unenforceability of any provision or provisions of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
which shall remain in full force and effect. If (a) the Board approves a merger
or consolidation of the Company which is intended by the Board to satisfy the
accounting rules related to the pooling of interest method of accounting (the
"Pooling Rules") and (b) any provision of this Agreement would violate the
Pooling Rules, then such provision shall be deemed null and void ab initio. In
such event, the Company and the Executive shall negotiate, in good faith, a
replacement provision of equivalent value which does not cause such a violation,
provided, and to the extent, that the Company's outside auditors determine that
any such replacement provision is permissible without violating the Pooling
Rules.
SECTION 17. Counterparts. This Agreement may be executed in one or
-------------
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
SECTION 18. Entire Agreement. This Agreement sets forth the entire
-----------------
agreement of the parties hereto in respect of the subject matter contained
herein and supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto; and any prior agreement
of the parties hereto in respect of the subject matter contained herein is
hereby terminated and canceled.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
and year first above written.
MCLEODUSA INCORPORATED
- ----------------------
By: /s/ J. Lyle Patrick
-------------------
Name: J. Lyle Patrick
Title: Executive Vice President and Chief Financial Officer
EXECUTIVE
/s/ Clark E. McLeod
- -------------------
Clark E. McLeod
Attest:
By: /s/ Randall E. Rings
--------------------
<PAGE>
Exhibit 99.3 Employment Agreement dated January 7, 2000, between the Company
and Stephen C. Gray.
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made this 7th day of January, 2000, between McLeodUSA
Incorporated, a Delaware corporation, (the "Company"), and Stephen C. Gray (the
"Executive").
The Board of Directors of the Company (the "Board") recognizes that
the Executive's contribution to the growth and success of the Company has been
and is expected to continue to be substantial. The Board desires to provide for
the employment of the Executive on a basis which the Board has determined will
reinforce and encourage the attention and dedication to the Company of the
Executive, as a member of the Company's management, in the best interest of the
Company and its shareholders. The Executive is willing to commit himself to
serve the Company, on the terms and conditions herein provided.
In order to effect the foregoing, the Company and the Executive wish
to enter into an employment agreement on the terms and conditions set forth
below. Accordingly, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:
SECTION 1. Employment. The Company hereby agrees to employ the
-----------
Executive, and the Executive hereby agrees to serve the Company, on the terms
and conditions set forth herein.
SECTION 2. Term. The employment of the Executive by the Company as
-----
provided in Section 1 will commence on January 7, 2000 (the "Commencement Date")
and end on the third anniversary of the Commencement Date, unless sooner
terminated as hereinafter provided (as may be sooner terminated, the "Term").
SECTION 3. Position and Duties. The Executive shall serve as Chief
--------------------
Operating Officer and President of the Company and shall have such
responsibilities, duties and authority and, upon the consummation by the Company
of the acquisition of SplitRock Services Inc., the Executive shall also serve as
President and Chief Executive Officer of the telecommunications subsidiary of
the Company identified by the Board in connection therewith (the "Subsidiary")
as may from time to time be assigned to the Executive by the Board that are
consistent with such positions. The Executive shall devote substantially all of
his working time and efforts to the business and affairs of the Company;
provided, however, that he may serve on boards of directors of civic and
- -------- -------
charitable organizations and other corporations as long as such board
participation does not interfere in any significant respect with his obligations
under this Agreement.
SECTION 4. Place of Performance. In connection with the Executive's
---------------------
employment by the Company, the Executive shall be based at the principal
executive offices of
<PAGE>
the Company and the Subsidiary which shall be maintained in Cedar Rapids, Iowa,
except for reasonably required travel on the Company's or the Subsidiary's
business.
SECTION 5. Compensation and Related Matters. (a) Salary. During
--------------------------------- -------
the period of the Executive's employment hereunder, the Company shall pay to the
Executive an annual base salary at a rate of $400,000, such salary to be paid in
substantially equal installments in accordance with the Company's payroll
practices for its other executives. This salary shall be subject to annual
increase, as determined by the Compensation Committee of the Board (the
"Compensation Committee") in its sole discretion, in order to provide the
Executive with annual base salary comparable to the annual base salary of
similarly situated executives at companies in similar industries having similar
revenues and compound annual growth rates. Compensation of the Executive by
salary payments shall not be deemed exclusive and shall not prevent the
Executive from participating in any other compensation or benefit plan of the
Company. The salary payments (including any increased salary payments)
hereunder shall not in any way limit or reduce any other obligation of the
Company hereunder, and no other compensation, benefit or payment hereunder shall
in any way limit or reduce the obligation of the Company to pay the Executive's
salary hereunder.
(b) Bonus Compensation. The Executive shall be entitled to receive
-------------------
annual bonus compensation based upon a target bonus opportunity of not less than
50% of the Executive's then current annual base salary in effect for such year.
Unless otherwise established for any given year by the Compensation Committee,
the target bonus opportunity shall be 50% as described above in this paragraph
and the applicable performance criteria (which may be based on individual or
corporate performance, or a combination thereof) to be achieved for such year to
earn the bonus shall be in accordance with the Company's bonus policy and
practices generally applicable to its other executives for each given year.
(c) Equity Compensation. On the Commencement Date, the Executive
-------------------
shall receive a grant of options to purchase 2,000,000 shares of Class A common
stock, par value $.01 per share, of the Company ("Common Stock") at an exercise
price (or option price as it is called in the Company's 1996 Employee Stock
Option Plan) per share equal to the fair market value per share of Common Stock
which shall be the closing price of the shares of Common Stock on the trading
day immediately preceding the Commencement Date (determined in accordance with
the Company's 1996 Employee Stock Option Plan) and shall contain such other
terms and conditions as are provided under such plan except as otherwise
specifically provided hereunder. The Executive shall also be eligible for
additional option grants during the Term on or about each anniversary of the
Commencement Date as the Compensation Committee, in its sole discretion, shall
determine. The initial grant of 2,000,000 options shall be fully exercisable no
later than the third anniversary of the Commencement Date (provided that the
Executive is then still in employment with the Company) or as provided in
Section 8(d)(iii). Upon a Change of Control (as defined herein) all outstanding
options to purchase Common Stock of the Company which have been granted to the
Executive during the Executive's employment with the Company shall become
immediately vested and exercisable in full, irrespective of whether such options
were vested and exercisable on such date.
<PAGE>
(d) Expenses. During the term of the Executive's employment
---------
hereunder, the Executive shall be entitled to receive prompt reimbursement for
all reasonable and customary expenses incurred by the Executive in performing
services hereunder, including all expenses of travel and living expenses while
away from home on business or at the request of and in the service of the
Company, provided that such expenses are incurred and accounted for in
accordance with the policies and procedures established by the Company.
(e) Other Benefits. The Executive shall be entitled to participate
---------------
in or receive benefits under any employee benefit plan or arrangement made
available by the Company in the future to its executives and key management
employees, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Nothing paid to the
Executive under any plan or arrangement presently in effect or made available in
the future shall be deemed to be in lieu of the salary payable to the Executive
pursuant to Section 5(a). Any payments or benefits payable to the Executive
under this Section 5(e) in respect of any calendar year during which the
Executive is employed by the Company for less than the entire such year shall,
unless otherwise provided in the applicable plan or arrangement, be prorated in
accordance with the number of days in such calendar year during which he is so
employed.
(f) Vacations. The Executive shall be entitled to no less than the
----------
number of vacation days in each calendar year, determined in accordance with the
Company's vacation policy in effect from time to time for its other executives.
The Executive shall also be entitled to all paid holidays and personal days
given by the Company to its other executives.
(g) Registration Rights. The Company shall file a Form S-8 or other
-------------------
applicable registration statement with the Securities and Exchange Commission,
to the extent such a registration statement is not otherwise already on file and
effective, in order to enable the Executive to sell or otherwise dispose of 15%
of his aggregate common equity ownership in the Company each year during the
Term. For purposes hereof, the Executive's annual 15% registration rights shall
be cumulative and determined on a fully diluted basis, including in such
determination all then outstanding unexercised options to acquire Common Stock
(whether or not vested) which the Executive has been granted by the Company.
SECTION 6. Offices. Subject to Sections 3 and 4, the Executive shall
--------
serve without additional compensation, if elected or appointed thereto, as a
director of the Company and any of its subsidiaries and in one or more executive
offices of any of the Company's subsidiaries.
SECTION 7. Termination. The Executive's employment hereunder may be
------------
terminated without any breach of this Agreement only under the following
circumstances:
(a) Death. The Executive's employment hereunder shall terminate upon
------
his death.
(b) Disability. If, as a result of the Executive's incapacity due to
-----------
physical or mental illness, the Executive shall have been absent from his
duties hereunder on a full-
<PAGE>
time basis for the entire period of six consecutive months, and within
thirty (30) days after written notice of termination is given (which may
occur before or after the end of such six month period) shall not have
returned to the performance of his duties hereunder on a full-time basis,
the Company may terminate the Executive's employment hereunder.
(c) Cause. The Company may terminate the Executive's employment
------
hereunder for Cause. For purposes of this Agreement, the Company shall
have "Cause" to terminate the Executive's employment hereunder upon (i) the
willful and continued failure by the Executive to substantially perform his
duties hereunder (other than any such failure resulting from the
Executive's incapacity due to physical or mental illness or any such actual
or anticipated failure after the issuance of a Notice of Termination, as
defined in Section 7(e), by the Executive for Good Reason, as defined in
Section 7(d)(ii)), after demand for substantial performance is delivered by
the Company that specifically identifies the manner in which the Company
believes the Executive has not substantially performed his duties, (ii) the
willful engaging by the Executive in misconduct which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct that constitutes Competitive Activity, as defined in
Section 10), or (iii) the Executive's conviction of a felony or the
entering of a plea of no lo contendere to a felony charge. For purposes of
this Section 7(c), no act, or failure to act, on the Executive's part shall
be considered "willful" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission was in
the best interest of the Company. Notwithstanding the foregoing, the
Executive may not be terminated for Cause pursuant to clause (i) or (ii)
above without (1) reasonable notice from the Board to the Executive setting
forth the reasons for the Company's intention to terminate for Cause, (2)
an opportunity for the Executive, together with his counsel, to be heard
before the Board, and (3) delivery to the Executive of a Notice of
Termination from the Board finding that, in the good faith opinion of
three-quarters (3/4) of the Board, the Executive was guilty of conduct set
forth above in clause (i) or (ii) above, as applicable, and specifying the
particulars thereof in detail. No such notice or meeting before the Board
shall be required if the termination for Cause is due to conduct described
in clause (iii) of the second sentence of this Section 7(c).
(d) Termination by the Executive. (i) The Executive may terminate
-----------------------------
his employment hereunder (A) for Good Reason, (B) if his health should
become impaired to an extent that makes his continued performance of his
duties hereunder hazardous to his physical or mental health or his life,
provided that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) for any other
reason.
(ii) For purposes of this Agreement, "Good Reason" shall mean
the occurrence (without the Executive's express written consent) of any one
of the following acts by the Company, or failures by the Company to act,
unless, in the case of any act or failure to act described in paragraphs
(A), (B), (D), (E) or (F) below, such act or failure to act is corrected
prior to the Date of Termination given in respect thereof:
<PAGE>
(A) the assignment to the Executive of any duties materially
inconsistent with the Executive's status as a senior executive officer
of the Company or a material diminution in the nature or status of the
Executive's responsibilities from those in effect as of the
Commencement Date;
(B) a reduction by the Company in the Executive's annual base
salary or target bonus opportunity as in effect on the date hereof or
as the same may be increased from time to time;
(C) the relocation of the Company's principal executive offices
to a location outside the Cedar Rapids, Iowa Metropolitan Area (or, if
different, the metropolitan area in which such offices are located
immediately prior to a Change in Control);
(D) the failure of the Company to obtain the written assumption
of its obligation to perform this Agreement by a successor to all or
substantially all of the assets of the Company within 15 days after a
merger, consolidation, sale or similar transaction;
(E) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 7(e); for purposes of this Agreement, no
such purported termination shall be effective;
(F) the failure by the Company to comply with any material
provision of this Agreement; or
(G) a Change in Control.
The Executive's right to terminate the Executive's employment for
Good Reason shall not be affected by the Executive's incapacity due to
physical or mental illness. The Executive's continued employment shall not
constitute consent to, or a waiver of rights with respect to, any act or
failure to act constituting Good Reason hereunder.
(iii) For purposes of this Agreement, a "Change in Control"
shall be deemed to have occurred if the conditions set forth in any one of
the following paragraphs shall have been satisfied:
(A) any "person" (within the meaning of Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) is
or becomes the "beneficial owner" (within the meaning of Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company (not including in the securities beneficially owned by such
person any securities acquired directly from the Company or its
affiliates) representing 25% or more of the combined voting
<PAGE>
power of the Company's then outstanding securities; excluding,
however, the following: (1) any acquisition directly from the Company,
other than an acquisition by virtue of the exercise of a conversion
privilege unless the security being so converted was itself acquired
directly from the Company, (2) any acquisition by the Company, or (3)
any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled
by the Company; or
(B) during any period of two consecutive years (not including
any period prior to the execution of this Agreement), individuals who
at the beginning of such period constitute the Board and any new
director (other than a director designated by a Person who has entered
into an agreement with the Company to effect a transaction described
in clause (A), (C) or (D) of this paragraph whose election by the
Board or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof; or
(C) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
(i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity), in
combination with the ownership of any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, at
least 75% of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such
merger or consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction)
in which no person acquires more than 50% of the combined voting power
of the Company's then outstanding securities; or
(D) the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets.
(e) Notice of Termination. Any termination of the Executive's
----------------------
employment by the Company or by the Executive (other than termination
pursuant to Section 7(a)) shall be communicated by written Notice of
Termination to the other party hereto in accordance with Section 13. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
<PAGE>
(f) Date of Termination. "Date of Termination" shall mean (i) if the
--------------------
Executive's employment is terminated by his death, the date of his death,
(ii) if the Executive's employment is terminated pursuant to Section 7(b),
thirty (30) days after Notice of Termination is given (provided that the
Executive shall not have returned to the performance of his duties on a
full-time basis during such thirty (30)-day period), (iii) if the
Executive's employment is terminated pursuant to Section 7(c) above, the
date specified in the Notice of Termination, and (iv) if the Executive's
employment is terminated for any other reason, the date on which a Notice
of Termination is given.
SECTION 8. Compensation Upon Termination or During Disability. (a)
---------------------------------------------------
During any period that the Executive fails to perform his duties hereunder as a
result of incapacity due to physical or mental illness ("disability period"),
the Executive shall continue to receive his full salary at the rate then in
effect for such period until his employment is terminated pursuant to Section
7(b), provided that payments so made to the Executive during the first 180 days
of the disability period shall be reduced by the sum of the amounts, if any,
payable to the Executive at or prior to the time of any such payment under
disability benefit plans of the Company or under the Social Security disability
insurance program, and which amounts were not previously applied to reduce any
such payment. If the Executive's employment is terminated by reason of his
disability pursuant to Section 7(b), all of his then outstanding options to
purchase common stock of the Company shall become immediately vested and
exercisable in full upon the giving of Notice of Termination, irrespective of
whether such options were vested and exercisable on such date, and all such
options shall remain exercisable for one year following the Date of Termination
(but not beyond their original expiration dates).
(b) If the Executive's employment is terminated by his death, the
Company shall pay any amounts due to the Executive under Section 5 through the
date of his death. If the Executive's employment is terminated by reason of his
death, all of his then outstanding options to purchase common stock of the
Company shall become immediately vested and exercisable in full upon the date of
his death, irrespective of whether such options were vested and exercisable on
such date, and all such options shall remain exercisable for one year following
such date (but not beyond their original expiration dates).
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay the
Executive his full salary through the Date of Termination at the rate in effect
at the time Notice of Termination is given and the Company shall have no further
obligations to the Executive under this Agreement.
(d) If (A) in breach of this Agreement, the Company terminates the
Executive's employment (it being understood that a purported termination for
disability pursuant to Section 7(b) or for Cause which is disputed and finally
determined not to have been proper shall be a termination by the Company in
breach of this Agreement), or (B) the Executive terminates his employment for
Good Reason, then
(i) the Company shall pay the Executive his full salary through the
Date of Termination at the rate in effect at the time Notice of Termination
is given and all other unpaid amounts, if any, to which the Executive is
entitled as of the Date of Termination
<PAGE>
under any compensation plan or program of the Company, at the time such
payments are due; and
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay as
liquidated damages to the Executive an amount equal to the number of years
(including partial years) remaining in the Term had the Executive's
employment not been terminated, times the sum of (1) the Executive's annual
salary rate in effect as of the Date of Termination and (2) the higher of
the annual bonus amount, if any, paid or awarded by the Company to the
Executive in respect of the calendar year prior to the year in which such
Date of Termination occurs or the Executive's target bonus opportunity for
the year in which Date of Termination occurs; such payment to be made in a
lump sum on or before the fifth day following the Date of Termination;
(iii) all outstanding options to purchase common stock of the Company
granted to the Executive during the Term shall become immediately vested
and exercisable in full upon the giving of the Notice of Termination,
irrespective of whether such options were vested and exercisable on such
date, and all options granted on or after the Commencement Date shall
remain exercisable for four years after the Date of Termination (but not
beyond their original expiration dates); and
(iv) the Company shall maintain in full force and effect, for the
continued benefit of the Executive for the number of years (including
partial years) remaining in the original three-year Term had the
Executive's employment not been terminated, all medical, dental and life
insurance plans and programs in which the Executive was entitled to
participate immediately prior to the Date of Termination on the same basis
(including costs) then available to active employees provided that the
Executive's continued participation is possible under the general terms and
provisions of such plans and programs; provided, however, that in the event
-------- -------
that the Executive's participation in any such plan or program is barred,
the Company shall arrange to provide the Executive with benefits
substantially similar to those which the Executive would otherwise have
been entitled to receive under such plans and programs from which his
continued participation is barred; and, further provided, that if (i) the
------- --------
Executive becomes reemployed after his Date of Termination and (ii) his new
employer offers medical and dental insurance plans or programs under which
he will be eligible to participate, any such continuing medical and dental
coverage shall be secondary to such new employer's coverage.
(e) If the Executive terminates his employment under Section
7(d)(i)(B), the Company shall pay the Executive his full salary through the Date
of Termination at the rate in effect at the time Notice of Termination is given.
(g) In the event that the Executive becomes entitled to the payments
provided in clauses (i)-(iii) of Section 8(d) (the "Severance Payments"), if any
of the Severance Payments will be subject to the excise tax imposed under
section 4999 of the Code (the "Excise Tax"), the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Severance
<PAGE>
Payments and any Federal, state and local income and employment tax and Excise
Tax upon the payment provided for by this Section 8(g), shall be equal to the
Severance Payments. For purposes of determining whether any of the Severance
Payments will be subject to the Excise Tax and the amount of such Excise Tax,
(i) any other payments or benefits received or to be received by the Executive
in connection with a change in ownership or control (within the meaning of
section 280G of the Code and the regulations promulgated thereunder) of the
Company or the Executive's termination of employment (whether pursuant to the
terms of this Agreement or any other plan, arrangement or agreement with the
Company, any person whose actions result in a change in control or any Person
affiliated with the Company or such Person) shall be treated as "parachute
payments" within the meaning of section 280G(b)(2) of the Code, and all "excess
parachute payment" within the meaning of section 280G(b)(1) of the Code shall be
treated as subject to the Excise Tax, unless in the opinion of tax counsel
selected by the Company's independent auditors and reasonably acceptable to the
Executive such other payments or benefits (in whole or in part) do not
constitute parachute payments, including by reason of Section 280G(b)(4)(A) of
the Code, or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered, within the meaning of
section 280G(b)(4)(B) of the Code, in excess of the "base amount" allocable to
such reasonable compensation, or are otherwise not subject to the Excise Tax,
(ii) the amount of the Severance Payments which shall be treated as subject to
the Excise Tax shall be equal to the lesser of (A) the total amount of the
Severance Payments or (B) the amount of excess parachute payments within the
meaning of section 280(G)(b)(1) of the Code (after applying clause (i), above),
and (iii) the value of any non-cash benefits or any deferred payment or benefit
shall be determined by the Company's independent auditors in accordance with the
principles of sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay Federal income taxes at the highest marginal rate of Federal income taxation
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the Date of Termination, net of the
maximum reduction in Federal income taxes which could be obtained from deduction
of such state and local taxes.
(h) The compensation and benefits, if any, payable under this Section
8 shall be in addition to any vested accrued compensation or benefits to which
the Executive may be entitled under the Company's (or any of its Subsidiaries')
employee benefit plans and arrangements; provided, however, that the Executive
-------- -------
shall not be entitled to any compensation or benefits under any severance plan
or arrangement of the Company or any of its subsidiaries to which he would
otherwise be entitled under the terms thereof.
SECTION 9. No Mitigation; No Right of Offset. The Executive shall
----------------------------------
have no duty to mitigate damages by seeking other employment. The Company shall
have no right of offset hereunder with respect to any compensation or benefits
received by the Executive from or in connection with any employment subsequent
to his employment termination with the Company.
SECTION 10. Noncompetition/Nonsolicitation. During the three-year
-------------------------------
period commencing on the Commencement Date (without regard to any termination of
the Executive's employment occurring prior thereto), and, through the fourth
anniversary of the Commencement
<PAGE>
Date if the Executive voluntary terminates employment without Good Reason on or
prior to the expiration of the Term, the Executive shall not (i) directly or
indirectly, own, manage, operate, join or control, be employed by or participate
in the ownership, management, operation or control of, or be a consultant to or
connected in any other manner with, any business, firm or corporation which is
similar to or competes with a principal business of the Company or its
subsidiaries anywhere within the United States (a "Competitive Activity") or
(ii) hire or solicit, or cause others to hire or solicit, for employment by any
person other than the Company or its affiliates or any successor thereof, any
employee of or person employed by, or who had within six (6) months been an
employee of or employed by, the Company or its affiliates, or otherwise
encourage such persons to leave employment with the Company or its affiliates.
For these purposes, the Executive's ownership of securities or a public company
not in excess of three percent of any class of such securities shall not be
considered to be competition with the Company or its subsidiaries.
Notwithstanding the foregoing, in the event of (i) a Change in Control, (ii) the
involuntary termination of the Executive's employment by the Company without
Cause or (iii) the termination by the Executive of his employment for Good
Reason, the provisions of this first sentence of this Section 10 extending the
noncompetition and nonsolicitation restrictive covenants for an additional year
through the fourth anniversary of the Commencement Date shall be null and void
and of no further force or effect.
SECTION 11. Confidential Information; Personal Relationships. The
------------------------------------------------
Executive acknowledges that the Company has a legitimate and continuing
proprietary interest in the protection of its confidential information and has
invested substantial sums and will continue to invest substantial sums to
develop, maintain and protect confidential information. The Executive agrees
that, during the Term and thereafter, without the prior written consent of the
Board of Directors of the Company, the Executive shall keep secret and retain in
strictest confidence, and shall not knowingly use for the benefit of himself or
others all confidential matters relating to the Company's business including,
without limitation, operational methods, marketing or development plans or
strategies, business acquisition plans, joint venture proposals or plans, and
new personnel acquisition plans, learned by the Executive heretofore or
hereafter (such information shall be referred to herein collectively as
"Confidential Information"); provided, however, that nothing in this Agreement
-------- -------
shall prohibit the Executive from disclosing or using any Confidential
Information (A) in the performance of his duties hereunder, (B) as required by
applicable law, regulatory authority, recognized subpoena power or any court of
competent jurisdiction, (C) in connection with the enforcement of his rights
under this Agreement or any other agreement with the Company, or (D) in
connection with the defense or settlement of any claim, suit or action brought
or threatened against the Executive by or in the right of the Company.
Notwithstanding any provision contained herein to the contrary, the term
"Confidential Information" shall not be deemed to include any general knowledge,
skills or experience acquired by the Executive or any knowledge or information
known or available to the public in general (other than as a result of a breach
of this provision by the Executive).
SECTION 12. Successors; Binding Agreement. (a) The Company will
------------------------------
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if
<PAGE>
no such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement and shall entitle the Executive to compensation
from the Company in the same amount and on the same terms as he would be
entitled to hereunder if he terminated his employment for Good Reason, except
that for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination. As used in
this Agreement, "Company" shall mean the Company as herein before defined and
any successor to its business and/or assets as aforesaid which executes and
delivers the agreement provided for in this Section 12 or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.
(b) This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amounts would
still be payable to him hereunder if he had continued to live, all such amounts
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee, or other designee or, if
there be no such designee, to the Executive's estate.
SECTION 13. Notice. For the purposes of this Agreement, notices,
-------
demands and all other communications provided for in this Agreement shall be in
writing and shall be deemed to have been duly given when delivered or (unless
otherwise specified) mailed by United States certified or registered mail,
return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
2649 Indian Hill Road, S.E.
Cedar Rapids, Iowa 52403
If to the Company:
McLeodUSA Incorporated
6400 C Street SW
P. O. Box 3177
Cedar Rapids, IA 52406-3177
Attn: General Counsel
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
SECTION 14. Miscellaneous. No provisions of this Agreement may be
--------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and such officer of the Company as
may be specifically designated by the Board. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be
<PAGE>
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement.
SECTION 15. Governing Law. The validity, interpretation,
--------------
construction and performance of this Agreement shall be governed by the laws of
the State of Iowa without regard to its conflicts of law principles.
SECTION 16. Validity/Pooling Condition. The invalidity or
---------------------------
unenforceability of any provision or provisions of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
which shall remain in full force and effect. If (a) the Board approves a merger
or consolidation of the Company which is intended by the Board to satisfy the
accounting rules related to the pooling of interest method of accounting (the
"Pooling Rules") and (b) any provision of this Agreement would violate the
Pooling Rules, then such provision shall be deemed null and void ab initio. In
such event, the Company and the Executive shall negotiate, in good faith, a
replacement provision of equivalent value which does not cause such a violation,
provided, and to the extent, that the Company's outside auditors determine that
any such replacement provision is permissible without violating the Pooling
Rules.
SECTION 17. Counterparts. This Agreement may be executed in one or
-------------
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
SECTION 18. Entire Agreement. This Agreement sets forth the entire
-----------------
agreement of the parties hereto in respect of the subject matter contained
herein and supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto; and any prior agreement
of the parties hereto in respect of the subject matter contained herein is
hereby terminated and canceled.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year first above written.
MCLEODUSA INCORPORATED
By: /s/ J. Lyle Patrick
----------------------------
Name: J. Lyle Patrick
Title: Executive Vice President and Chief Financial Officer
EXECUTIVE
/s/ Stephen C. Gray
- ----------------------------------
Stephen C. Gray
Attest:
By: /s/ Randall E. Rings
------------------------------
<PAGE>
Exhibit 99.4 Employment Agreement dated January 7, 2000, between the Company
and Roy A Wilkens.
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made this 7th day of January, 2000, between McLeodUSA
Incorporated, a Delaware corporation, (the "Company"), and Roy Wilkens (the
"Executive").
The Board of Directors of the Company (the "Board") recognizes that
the Executive's contribution to the growth and success of the Company has been
and is expected to continue to be substantial. The Board desires to provide for
the employment of the Executive on a basis which the Board has determined will
reinforce and encourage the attention and dedication to the Company of the
Executive, as a member of the Company's management, in the best interest of the
Company and its shareholders. The Executive is willing to commit himself to
serve the Company, on the terms and conditions herein provided.
In order to effect the foregoing, the Company and the Executive wish
to enter into an employment agreement on the terms and conditions set forth
below. Accordingly, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:
SECTION 1. Employment. The Company hereby agrees to employ the
----------
Executive, and the Executive hereby agrees to serve the Company, on the terms
and conditions set forth herein.
SECTION 2. Term. The employment of the Executive by the Company as
----
provided in Section 1 will commence on January 7, 2000 (the "Commencement Date")
and end on the third anniversary of the Commencement Date, unless sooner
terminated as hereinafter provided (as may be sooner terminated, the "Term").
SECTION 3. Position and Duties. The Executive shall serve as Chief
-------------------
Technology Officer of the Company and, upon consummation by the Company of the
acquisition of SplitRock Services Inc., the Executive shall also serve as
President and Chief Executive Officer of the data subsidiary of the Company
identified by the Board, in connection therewith (the "Subsidiary") and shall
have such responsibilities, duties and authority as may from time to time be
assigned to the Executive by the Board that are consistent with such positions.
The Executive shall devote substantially all of his working time and efforts to
the business and affairs of the Company; provided, however, that he may serve on
-------- -------
boards of directors of civic and charitable organizations and other corporations
as long as such board participation does not interfere in any significant
respect with his obligations under this Agreement.
SECTION 4. Place of Performance. In connection with the Executive's
--------------------
employment by the Company, the Executive shall be based at the executive office
of the
<PAGE>
Company the Subsidiary in Tulsa, Oklahoma, except for reasonably required travel
on the Company's and Subsidiary's business.
SECTION 5. Compensation and Related Matters. (a) Salary. During
-------------------------------- ------
the period of the Executive's employment hereunder, the Company shall pay to the
Executive an annual base salary at a rate of $400,000, such salary to be paid in
substantially equal installments in accordance with the Company's payroll
practices for its other executives. This salary shall be subject to annual
increase, as determined by the Compensation Committee of the Board (the
"Compensation Committee") in its sole discretion, in order to provide the
Executive with annual base salary comparable to the annual base salary of
similarly situated executives at companies in similar industries having similar
revenues and compound annual growth rates. Compensation of the Executive by
salary payments shall not be deemed exclusive and shall not prevent the
Executive from participating in any other compensation or benefit plan of the
Company. The salary payments (including any increased salary payments)
hereunder shall not in any way limit or reduce any other obligation of the
Company hereunder, and no other compensation, benefit or payment hereunder shall
in any way limit or reduce the obligation of the Company to pay the Executive's
salary hereunder.
(b) Bonus Compensation. The Executive shall be entitled to receive
------------------
annual bonus compensation based upon a target bonus opportunity of not less than
50% of the Executive's then current annual base salary in effect for such year.
Unless otherwise established for any given year by the Compensation Committee,
the target bonus opportunity shall be 50% as described above in this paragraph
and the applicable performance criteria (which may be based on individual or
corporate performance, or a combination thereof) to be achieved for such year to
earn the bonus shall be in accordance with the Company's bonus policy and
practices generally applicable to its other executives for each given year.
(c) Equity Compensation. On the Commencement Date, the Executive
-------------------
shall receive a grant of options to purchase 2,000,000 shares of Class A common
stock, par value $.01 per share, of the Company ("Common Stock") at an exercise
price (or option price as it is called in the Company's 1996 Employee Stock
Option Plan) per share equal to the fair market value per share of Common Stock
which shall be the closing price of the shares of Common Stock on the trading
day immediately preceding the Commencement Date (determined in accordance with
the Company's 1996 Employee Stock Option Plan) and shall contain such other
terms and conditions as are provided under such plan except as otherwise
specifically provided hereunder. The Executive shall also be eligible for
additional option grants during the Term on or about each anniversary of the
Commencement Date as the Compensation Committee, in its sole discretion, shall
determine. The initial grant of 2,000,000 options shall be fully exercisable no
later than the third anniversary of the Commencement Date (provided that the
Executive is then still in employment with the Company) or, if earlier, upon the
occurrence of a Change in Control (as defined herein) or as provided in Section
8(d)(iii).
(d) Expenses. During the term of the Executive's employment
--------
hereunder, the Executive shall be entitled to receive prompt reimbursement for
all reasonable and customary expenses incurred by the Executive in performing
services hereunder, including all expenses of travel and living expenses while
away from home on business or at the request of and in the
<PAGE>
service of the Company, provided that such expenses are incurred and accounted
for in accordance with the policies and procedures established by the Company.
(e) Other Benefits. The Executive shall be entitled to participate
--------------
in or receive benefits under any employee benefit plan or arrangement made
available by the Company in the future to its executives and key management
employees, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Nothing paid to the
Executive under any plan or arrangement presently in effect or made available in
the future shall be deemed to be in lieu of the salary payable to the Executive
pursuant to Section 5(a). Any payments or benefits payable to the Executive
under this Section 5(e) in respect of any calendar year during which the
Executive is employed by the Company for less than the entire such year shall,
unless otherwise provided in the applicable plan or arrangement, be prorated in
accordance with the number of days in such calendar year during which he is so
employed.
(f) Vacations. The Executive shall be entitled to no less than the
---------
number of vacation days in each calendar year, determined in accordance with the
Company's vacation policy in effect from time to time for its other executives.
The Executive shall also be entitled to all paid holidays and personal days
given by the Company to its other executives.
(g) Registration Rights. The Company shall file a Form S-8 or other
-------------------
applicable registration statement with the Securities and Exchange Commission,
to the extent such a registration statement is not otherwise already on file and
effective, in order to enable the Executive to sell or otherwise dispose of 15%
of his aggregate common equity ownership in the Company each year during the
Term. For purposes hereof, the Executive's annual 15% registration rights shall
be cumulative and determined on a fully diluted basis, including in such
determination all then outstanding unexercised options to acquire Common Stock
(whether or not vested) which the Executive has been granted by the Company.
SECTION 6. Offices. Subject to Sections 3 and 4, the Executive shall
-------
serve without additional compensation, if elected or appointed thereto, as a
director of the Company and any of its subsidiaries and in one or more executive
offices of any of the Company's subsidiaries.
SECTION 7. Termination. The Executive's employment hereunder may be
-----------
terminated without any breach of this Agreement only under the following
circumstances:
(a) Death. The Executive's employment hereunder shall terminate upon
-----
his death.
(b) Disability. If, as a result of the Executive's incapacity due to
----------
physical or mental illness, the Executive shall have been absent from his
duties hereunder on a full-time basis for the entire period of six
consecutive months, and within thirty (30) days after written notice of
termination is given (which may occur before or after the end of such six
month period) shall not have returned to the performance of his duties
hereunder on a full-time basis, the Company may terminate the Executive's
employment hereunder.
<PAGE>
(c) Cause. The Company may terminate the Executive's employment
-----
hereunder for Cause. For purposes of this Agreement, the Company shall
have "Cause" to terminate the Executive's employment hereunder upon (i) the
willful and continued failure by the Executive to substantially perform his
duties hereunder (other than any such failure resulting from the
Executive's incapacity due to physical or mental illness or any such actual
or anticipated failure after the issuance of a Notice of Termination, as
defined in Section 7(e), by the Executive for Good Reason, as defined in
Section 7(d)(ii)), after demand for substantial performance is delivered by
the Company that specifically identifies the manner in which the Company
believes the Executive has not substantially performed his duties, (ii) the
willful engaging by the Executive in misconduct which is materially
injurious to the Company, monetarily or otherwise (including, but not
limited to, conduct that constitutes Competitive Activity, as defined in
Section 10), or (iii) the Executive's conviction of a felony or the
entering of a plea of no lo contendere to a felony charge. For purposes of
this Section 7(c), no act, or failure to act, on the Executive's part shall
be considered "willful" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission was in
the best interest of the Company. Notwithstanding the foregoing, the
Executive may not be terminated for Cause pursuant to clause (i) or (ii)
above without (1) reasonable notice from the Board to the Executive setting
forth the reasons for the Company's intention to terminate for Cause, (2)
an opportunity for the Executive, together with his counsel, to be heard
before the Board, and (3) delivery to the Executive of a Notice of
Termination from the Board finding that, in the good faith opinion of
three-quarters (3/4) of the Board, the Executive was guilty of conduct set
forth above in clause (i) or (ii) above, as applicable, and specifying the
particulars thereof in detail. No such notice or meeting before the Board
shall be required if the termination for Cause is due to conduct described
in clause (iii) of the second sentence of this Section 7(c).
(d) Termination by the Executive. (i) The Executive may terminate
----------------------------
his employment hereunder (A) for Good Reason, (B) if his health should
become impaired to an extent that makes his continued performance of his
duties hereunder hazardous to his physical or mental health or his life,
provided that the Executive shall have furnished the Company with a written
statement from a qualified doctor to such effect and provided, further,
that, at the Company's request, the Executive shall submit to an
examination by a doctor selected by the Company and such doctor shall have
concurred in the conclusion of the Executive's doctor or (C) for any other
reason.
(ii) For purposes of this Agreement, "Good Reason" shall
mean the occurrence (without the Executive's express written consent) of
any one of the following acts by the Company, or failures by the Company to
act, unless, in the case of any act or failure to act described in
paragraphs (A), (B), (D), (E) or (F) below, such act or failure to act is
corrected prior to the Date of Termination given in respect thereof:
(A) the assignment to the Executive of any duties
materially inconsistent with the Executive's status as a senior
executive officer of the Company or a material diminution in the
nature or status of the Executive's responsibilities from those in
effect as of the Commencement Date;
<PAGE>
(B) a reduction by the Company in the Executive's annual base
salary or target bonus opportunity as in effect on the date hereof or
as the same may be increased from time to time;
(C) the relocation of the Company and Subsidiary's executive
office where the Executive is based to a location outside the Tulsa,
Oklahoma Metropolitan Area (or, if different, the metropolitan area in
which such offices are located immediately prior to a Change in
Control);
(D) the failure of the Company to obtain the written assumption
of its obligation to perform this Agreement by a successor to all or
substantially all of the assets of the Company within 15 days after a
merger, consolidation, sale or similar transaction;
(E) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 7(e); for purposes of this Agreement, no
such purported termination shall be effective;
(F) the failure by the Company to comply with any material
provision of this Agreement; or
(G) a Change in Control.
The Executive's right to terminate the Executive's employment for
Good Reason shall not be affected by the Executive's incapacity due to
physical or mental illness. The Executive's continued employment shall not
constitute consent to, or a waiver of rights with respect to, any act or
failure to act constituting Good Reason hereunder.
(iii) For purposes of this Agreement, a "Change in Control"
shall be deemed to have occurred if the conditions set forth in any one of
the following paragraphs shall have been satisfied:
(A) any "person" (within the meaning of Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) is
or becomes the "beneficial owner" (within the meaning of Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company (not including in the securities beneficially owned by such
person any securities acquired directly from the Company or its
affiliates) representing 25% or more of the combined voting power of
the Company's then outstanding securities; excluding, however, the
following: (1) any acquisition directly from the Company, other than
an acquisition by virtue of the exercise of a conversion privilege
unless the security being so converted was itself acquired directly
from the Company, (2) any acquisition by the Company, or (3) any
acquisition by any employee benefit plan
<PAGE>
(or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company; or
(B) during any period of two consecutive years (not including
any period prior to the execution of this Agreement), individuals who
at the beginning of such period constitute the Board and any new
director (other than a director designated by a Person who has entered
into an agreement with the Company to effect a transaction described
in clause (A), (C) or (D) of this paragraph whose election by the
Board or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof; or
(C) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
(i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity), in
combination with the ownership of any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, at
least 75% of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such
merger or consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction)
in which no person acquires more than 50% of the combined voting power
of the Company's then outstanding securities; or
(D) the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets.
(e) Notice of Termination. Any termination of the Executive's
---------------------
employment by the Company or by the Executive (other than termination
pursuant to Section 7(a)) shall be communicated by written Notice of
Termination to the other party hereto in accordance with Section 13. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
(f) Date of Termination. "Date of Termination" shall mean (i) if the
-------------------
Executive's employment is terminated by his death, the date of his death,
(ii) if the Executive's employment is terminated pursuant to Section 7(b),
thirty (30) days after Notice of Termination is given (provided that the
Executive shall not have returned to the performance of his duties on a
full-time basis during such thirty (30)-day period), (iii) if the
<PAGE>
Executive's employment is terminated pursuant to Section 7(c) above, the
date specified in the Notice of Termination, and (iv) if the Executive's
employment is terminated for any other reason, the date on which a Notice
of Termination is given.
SECTION 8. Compensation Upon Termination or During Disability. (a)
--------------------------------------------------
During any period that the Executive fails to perform his duties hereunder as a
result of incapacity due to physical or mental illness ("disability period"),
the Executive shall continue to receive his full salary at the rate then in
effect for such period until his employment is terminated pursuant to Section
7(b), provided that payments so made to the Executive during the first 180 days
of the disability period shall be reduced by the sum of the amounts, if any,
payable to the Executive at or prior to the time of any such payment under
disability benefit plans of the Company or under the Social Security disability
insurance program, and which amounts were not previously applied to reduce any
such payment. If the Executive's employment is terminated by reason of his
disability pursuant to Section 7(b), all of his then outstanding options to
purchase common stock of the Company shall become immediately vested and
exercisable in full upon the giving of Notice of Termination, irrespective of
whether such options were vested and exercisable on such date, and all such
options shall remain exercisable for one year following the Date of Termination
(but not beyond their original expiration dates).
(b) If the Executive's employment is terminated by his death, the
Company shall pay any amounts due to the Executive under Section 5 through the
date of his death. If the Executive's employment is terminated by reason of his
death, all of his then outstanding options to purchase common stock of the
Company shall become immediately vested and exercisable in full upon the date of
his death, irrespective of whether such options were vested and exercisable on
such date, and all such options shall remain exercisable for one year following
such date (but not beyond their original expiration dates).
(c) If the Executive's employment is terminated by the Company for
Cause or by the Executive for other than Good Reason, the Company shall pay the
Executive his full salary through the Date of Termination at the rate in effect
at the time Notice of Termination is given and the Company shall have no further
obligations to the Executive under this Agreement.
(d) If (A) in breach of this Agreement, the Company terminates the
Executive's employment (it being understood that a purported termination for
disability pursuant to Section 7(b) or for Cause which is disputed and finally
determined not to have been proper shall be a termination by the Company in
breach of this Agreement), or (B) the Executive terminates his employment for
Good Reason, then
(i) the Company shall pay the Executive his full salary through the
Date of Termination at the rate in effect at the time Notice of Termination
is given and all other unpaid amounts, if any, to which the Executive is
entitled as of the Date of Termination under any compensation plan or
program of the Company, at the time such payments are due; and
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay as
liquidated damages to the Executive
<PAGE>
an amount equal to the number of years (including partial years) remaining
in the Term had the Executive's employment not been terminated, times the
sum of (1) the Executive's annual salary rate in effect as of the Date of
Termination and (2) the higher of the annual bonus amount, if any, paid or
awarded by the Company to the Executive in respect of the calendar year
prior to the year in which such Date of Termination occurs or the
Executive's target bonus opportunity for the year in which Date of
Termination occurs; such payment to be made in a lump sum on or before the
fifth day following the Date of Termination;
(iii) all outstanding options to purchase common stock of the Company
granted to the Executive during the Term shall become immediately vested
and exercisable in full upon the giving of the Notice of Termination,
irrespective of whether such options were vested and exercisable on such
date, and all options granted on or after the Commencement Date shall
remain exercisable for four years after the Date of Termination (but not
beyond their original expiration dates); and
(iv) the Company shall maintain in full force and effect, for the
continued benefit of the Executive for the number of years (including
partial years) remaining in the original three-year Term had the
Executive's employment not been terminated, all medical, dental and life
insurance plans and programs in which the Executive was entitled to
participate immediately prior to the Date of Termination on the same basis
(including costs) then available to active employees provided that the
Executive's continued participation is possible under the general terms and
provisions of such plans and programs; provided, however, that in the event
-------- -------
that the Executive's participation in any such plan or program is barred,
the Company shall arrange to provide the Executive with benefits
substantially similar to those which the Executive would otherwise have
been entitled to receive under such plans and programs from which his
continued participation is barred; and, further provided, that if (i) the
------- --------
Executive becomes reemployed after his Date of Termination and (ii) his new
employer offers medical and dental insurance plans or programs under which
he will be eligible to participate, any such continuing medical and dental
coverage shall be secondary to such new employer's coverage.
(e) If the Executive terminates his employment under Section
7(d)(i)(B), the Company shall pay the Executive his full salary through the Date
of Termination at the rate in effect at the time Notice of Termination is given.
(g) In the event that the Executive becomes entitled to the payments
provided in clauses (i)-(iii) of Section 8(d) (the "Severance Payments"), if any
of the Severance Payments will be subject to the excise tax imposed under
section 4999 of the Code (the "Excise Tax"), the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Executive, after deduction of any Excise Tax on the Severance
Payments and any Federal, state and local income and employment tax and Excise
Tax upon the payment provided for by this Section 8(g), shall be equal to the
Severance Payments. For purposes of determining whether any of the Severance
Payments will be subject to the Excise Tax and the amount of such Excise Tax,
(i) any other payments or benefits received or to be received by the Executive
in connection with a change in ownership or control (within the
<PAGE>
meaning of section 280G of the Code and the regulations promulgated thereunder)
of the Company or the Executive's termination of employment (whether pursuant to
the terms of this Agreement or any other plan, arrangement or agreement with the
Company, any person whose actions result in a change in control or any Person
affiliated with the Company or such Person) shall be treated as "parachute
payments" within the meaning of section 280G(b)(2) of the Code, and all "excess
parachute payment" within the meaning of section 280G(b)(1) of the Code shall be
treated as subject to the Excise Tax, unless in the opinion of tax counsel
selected by the Company's independent auditors and reasonably acceptable to the
Executive such other payments or benefits (in whole or in part) do not
constitute parachute payments, including by reason of Section 280G(b)(4)(A) of
the Code, or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered, within the meaning of
section 280G(b)(4)(B) of the Code, in excess of the "base amount" allocable to
such reasonable compensation, or are otherwise not subject to the Excise Tax,
(ii) the amount of the Severance Payments which shall be treated as subject to
the Excise Tax shall be equal to the lesser of (A) the total amount of the
Severance Payments or (B) the amount of excess parachute payments within the
meaning of section 280(G)(b)(1) of the Code (after applying clause (i), above),
and (iii) the value of any non-cash benefits or any deferred payment or benefit
shall be determined by the Company's independent auditors in accordance with the
principles of sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay Federal income taxes at the highest marginal rate of Federal income taxation
in the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the Date of Termination, net of the
maximum reduction in Federal income taxes which could be obtained from deduction
of such state and local taxes.
(h) The compensation and benefits, if any, payable under this Section
8 shall be in addition to any vested accrued compensation or benefits to which
the Executive may be entitled under the Company's (or any of its Subsidiaries')
employee benefit plans and arrangements; provided, however, that the Executive
-------- -------
shall not be entitled to any compensation or benefits under any severance plan
or arrangement of the Company or any of its subsidiaries to which he would
otherwise be entitled under the terms thereof.
SECTION 9. No Mitigation; No Right of Offset. The Executive shall
---------------------------------
have no duty to mitigate damages by seeking other employment. The Company shall
have no right of offset hereunder with respect to any compensation or benefits
received by the Executive from or in connection with any employment subsequent
to his employment termination with the Company.
SECTION 10. Noncompetition/Nonsolicitation. During the three-year
------------------------------
period commencing on the Commencement Date (without regard to any termination of
the Executive's employment occurring prior thereto), and, through the fourth
anniversary of the Commencement Date if the Executive voluntary terminates
employment without Good Reason on or prior to the expiration of the Term, the
Executive shall not (i) directly or indirectly, own, manage, operate, join or
control, be employed by or participate in the ownership, management, operation
or control of, or be a consultant to or connected in any other manner with, any
business, firm or corporation which is similar to or competes with a principal
business of the Company or its
<PAGE>
subsidiaries anywhere within the United States (a "Competitive Activity") or
(ii) hire or solicit, or cause others to hire or solicit, for employment by any
person other than the Company or its affiliates or any successor thereof, any
employee of or person employed by, or who had within six (6) months been an
employee of or employed by, the Company or its affiliates,or otherwise encourage
such persons to leave employment with the Company or its affiliates. For these
purposes, the Executive's ownership of securities or a public company not in
excess of three percent of any class of such securities shall not be considered
to be competition with the Company or its subsidiaries.
SECTION 11. Confidential Information; Personal Relationships. The
------------------------------------------------
Executive acknowledges that the Company has a legitimate and continuing
proprietary interest in the protection of its confidential information and has
invested substantial sums and will continue to invest substantial sums to
develop, maintain and protect confidential information. The Executive agrees
that, during the Term and thereafter, without the prior written consent of the
Board of Directors of the Company, the Executive shall keep secret and retain in
strictest confidence, and shall not knowingly use for the benefit of himself or
others all confidential matters relating to the Company's business including,
without limitation, operational methods, marketing or development plans or
strategies, business acquisition plans, joint venture proposals or plans, and
new personnel acquisition plans, learned by the Executive heretofore or
hereafter (such information shall be referred to herein collectively as
"Confidential Information"); provided, however, that nothing in this Agreement
-------- -------
shall prohibit the Executive from disclosing or using any Confidential
Information (A) in the performance of his duties hereunder, (B) as required by
applicable law, regulatory authority, recognized subpoena power or any court of
competent jurisdiction, (C) in connection with the enforcement of his rights
under this Agreement or any other agreement with the Company, or (D) in
connection with the defense or settlement of any claim, suit or action brought
or threatened against the Executive by or in the right of the Company.
Notwithstanding any provision contained herein to the contrary, the term
"Confidential Information" shall not be deemed to include any general knowledge,
skills or experience acquired by the Executive or any knowledge or information
known or available to the public in general (other than as a result of a breach
of this provision by the Executive). Notwithstanding the foregoing, in the
event of (i) a Change in Control, (ii) the involuntary termination of the
Executive's employment by the Company without Cause or (iii) the termination by
the Executive of his employment for Good Reason, the provisions of this first
sentence of this Section 10 extending the noncompetition and nonsolicitation
restrictive covenants for an additional year through the fourth anniversary of
the Commencement Date shall be null and void and of no further force or effect.
SECTION 12. Successors; Binding Agreement. (a) The Company will
-----------------------------
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement and shall entitle the Executive to compensation
from the Company in the same amount and on the same terms as he would be
entitled to hereunder if he terminated his employment for Good
<PAGE>
Reason, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement, "Company" shall mean the Company as
herein before defined and any successor to its business and/or assets as
aforesaid which executes and delivers the agreement provided for in this Section
12 or which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.
(b) This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amounts would
still be payable to him hereunder if he had continued to live, all such amounts
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee, or other designee or, if
there be no such designee, to the Executive's estate.
SECTION 13. Notice. For the purposes of this Agreement, notices,
------
demands and all other communications provided for in this Agreement shall be in
writing and shall be deemed to have been duly given when delivered or (unless
otherwise specified) mailed by United States certified or registered mail,
return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
3007 Rockford Road
Tulsa, OK 74114
If to the Company:
McLeodUSA Incorporated
6400 C Street SW
P. O. Box 3177
Cedar Rapids, IA 52406-3177
Attn: General Counsel
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
SECTION 14. Miscellaneous. No provisions of this Agreement may be
-------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and such officer of the Company as
may be specifically designated by the Board. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement.
<PAGE>
SECTION 15. Governing Law. The validity, interpretation,
-------------
construction and performance of this Agreement shall be governed by the laws of
the State of Iowa without regard to its conflicts of law principles.
SECTION 16. Validity/Pooling Condition. The invalidity or
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unenforceability of any provision or provisions of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
which shall remain in full force and effect. If (a) the Board approves a merger
or consolidation of the Company which is intended by the Board to satisfy the
accounting rules related to the pooling of interest method of accounting (the
"Pooling Rules") and (b) any provision of this Agreement would violate the
Pooling Rules, then such provision shall be deemed null and void ab initio. In
such event, the Company and the Executive shall negotiate, in good faith, a
replacement provision of equivalent value which does not cause such a violation,
provided, and to the extent, that the Company's outside auditors determine that
any such replacement provision is permissible without violating the Pooling
Rules.
SECTION 17. Counterparts. This Agreement may be executed in one or
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more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
SECTION 18. Entire Agreement. This Agreement sets forth the entire
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agreement of the parties hereto in respect of the subject matter contained
herein and supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto; and any prior agreement
of the parties hereto in respect of the subject matter contained herein is
hereby terminated and canceled.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year first above written.
MCLEODUSA INCORPORATED
By: _____________________
Name:
Title:
EXECUTIVE
_________________________
Roy A. Wilkens
Attest:
By: _____________________
