SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934.
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Level 3 Communications, Inc.
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[Logo]
LEVEL 3 COMMUNICATIONS, INC.
1025 Eldorado Boulevard
Broomfield, CO 80021
June 20, 2002
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Level 3 Communications, Inc. ("Level 3") to be held at 9:00 a.m. on July 24,
2002, at The Omaha Civic Auditorium Music Hall, 1804 Capitol Avenue, Omaha,
Nebraska 68101.
At the Annual Meeting you will be asked to consider and act upon the
following matters:
o the election to the Level 3 Board of Directors of four directors as
Class II Directors for a three-year term until the 2005 Annual Meeting
of Stockholders;
o the adoption of an amendment to Level 3's 1995 Stock Plan to increase
the number of shares of Level 3 common stock reserved for issuance
under the 1995 Stock Plan by 50,000,000 shares; and
o the transaction of such other business as may properly come before the
Annual Meeting.
The Level 3 Board of Directors recommends that its stockholders reelect
four Class II directors for a three-year term until the 2005 Annual Meeting of
Stockholders and approve the proposed amendment to the 1995 Stock Plan. See
"REELECTION OF CLASS II DIRECTORS PROPOSAL" and "1995 STOCK PLAN PROPOSAL."
Information concerning the matters to be considered and voted upon at the
Annual Meeting is set forth in the attached Notice of Annual Meeting and Proxy
Statement. It is important that your shares be represented at the Annual
Meeting, regardless of the number you hold. To ensure your representation at the
Annual Meeting, you are urged to complete, date, sign and return the enclosed
proxy as promptly as possible. A postage-prepaid envelope is enclosed for that
purpose. In addition, to ensure your representation at the Annual Meeting, you
may vote your shares by (a) calling the toll free telephone number indicated on
the proxy card or (b) accessing the special web site indicated on the proxy
card, each as more fully explained in the telephone and internet voting
instructions. If you attend the Annual Meeting you may vote in person even if
you have previously returned a proxy card. Please note that if you hold your
shares of Level 3 through your broker, you will not be able to vote in person at
the meeting.
Sincerely,
/s/ Walter Scott, Jr.
Walter Scott, Jr.
Chairman of the Board
Please disregard the Annual Meeting information contained in the
accompanying Annual Report to Stockholders. As a result of scheduling and
logistical issues, the Annual Meeting was changed to July 24, 2002, as
indicated above and in the attached Notice of Annual Meeting.
[Logo]
LEVEL 3 COMMUNICATIONS, INC.
1025 Eldorado Boulevard
Broomfield, CO 80021
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held July 24, 2002
To the Stockholders of Level 3 Communications, Inc.:
The Annual Meeting of Stockholders of Level 3 Communications, Inc., a
Delaware corporation ("Level 3"), will be held at The Omaha Civic Auditorium
Music Hall, 1804 Capitol Avenue, Omaha, Nebraska 68101at 9:00 a.m. on July 24,
2002 for the following purposes:
1. To elect four Class II Directors to the Board of Directors of Level 3
for a three-year term until the 2005 Annual Meeting of Stockholders;
2. To adopt an amendment to Level 3's 1995 Stock Plan (the "Stock Plan")
to increase the number of shares of common stock, par value $.01 per
share of Level 3 (the "Level 3 Common Stock") reserved for issuance
under the Stock Plan by 50,000,000 shares of Level 3 Common Stock; and
3. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on May 31, 2002 as
the record date for the determination of the holders of the Level 3 Common
Stock, entitled to notice of, and to vote at, the meeting. Accordingly, only
holders of record of Level 3 Common Stock at the close of business on that date
will be entitled to notice of and to vote at the Annual Meeting and any
adjournment or postponement thereof. As of July 13, 2002, ten days prior to the
Annual Meeting, a list of stockholders' entitled to notice of the Annual Meeting
that have the right to vote at the Annual Meeting will be available for
inspection at the offices of Fraser Stryker Law Firm, 500 Energy Plaza, 409 17th
Street, Omaha, Nebraska, 68102
The four Class II Directors will be elected by a plurality of the votes
cast by holders of Level 3 Common Stock present in person or by proxy and
entitled to vote at the Annual Meeting. The proposal to adopt an amendment to
the Stock Plan to increase the number of shares of Level 3 Common Stock reserved
for issuance under the Stock Plan by 50,000,000 shares of Level 3 Common Stock
requires the affirmative vote of a majority of the votes cast by holders of
Level 3 Common Stock present in person or by proxy at the Annual Meeting.
The matters to be considered at the Annual Meeting are more fully described
in the accompanying Proxy Statement, which forms a part of this Notice.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, HOWEVER, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A
POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. IN ADDITION, TO ENSURE
YOUR REPRESENTATION AT THE ANNUAL MEETING, YOU MAY VOTE YOUR SHARES BY A)
CALLING THE TOLL FREE TELEPHONE NUMBER OR B) ACCESSING THE INTERNET AS MORE
FULLY EXPLAINED IN THE TELEPHONE AND INTERNET VOTING INSTRUCTIONS. ANY
STOCKHOLDER ATTENDING THE ANNUAL MEETING MAY VOTE IN PERSON EVEN IF THAT
STOCKHOLDER HAS RETURNED A PROXY.
PLEASE NOTE THAT IF YOU HOLD YOUR SHARES OF LEVEL 3 COMMON STOCK THROUGH
YOUR BROKER AND NOT DIRECTLY IN YOUR NAME, YOU WILL NOT BE ABLE TO VOTE IN
PERSON AT THE ANNUAL MEETING.
By Order of the Board of Directors
/s/ Walter Scott, Jr.
Walter Scott, Jr.
Dated: June 20, 2002 Chairman of the Board
[Logo]
LEVEL 3 COMMUNICATIONS, INC.
1025 Eldorado Boulevard
Broomfield, CO 80021
Proxy Statement
June 20, 2002
ANNUAL MEETING OF STOCKHOLDERS
July 24, 2002
SOLICITATION AND VOTING
This Proxy Statement ("Proxy Statement") is furnished in connection with
the solicitation of proxies on behalf of the Board of Directors (the "Board") of
Level 3 Communications, Inc. ("Level 3" or the "Company") to be voted at the
Annual Meeting of Stockholders to be held on Wednesday, July 24, 2002, or any
adjournment thereof (the "Annual Meeting"). This Proxy Statement, the Notice of
Annual Meeting and the accompanying Proxy are being mailed to Stockholders on or
about June 20, 2002.
As of May 31, 2002, the record date for the determination of persons
entitled to vote at the Annual Meeting, there were 399,907,858 shares of the
Company's Common Stock, par value $.01 per share (the "Level 3 Common Stock"),
outstanding. Each share of Level 3 Common Stock is entitled to one vote on each
matter to be voted upon by the Stockholders at the Annual Meeting.
The four Class II Directors will be elected by a plurality of the votes
cast by holders of Level 3 Common Stock present in person or by proxy and
entitled to vote at the Annual Meeting. The proposal to adopt an amendment to
the Stock Plan to increase the number of shares of Level 3 Common Stock reserved
for issuance under the Stock Plan by 50,000,000 shares of Level 3 Common Stock
requires the affirmative vote of a majority of the votes cast by holders of
Level 3 Common Stock present in person or by proxy at the Annual Meeting.
The presence, in person or by proxy, of the holders of a majority of the
issued and outstanding shares of Level 3 Common Stock entitled to vote as of the
Record Date is required to constitute a quorum at the Annual Meeting. Under
applicable Delaware law, abstentions and "broker non-votes" (that is, proxies
from brokers or nominees indicating that such persons have not received
instructions from the beneficial owner or other persons entitled to vote shares
as to a matter with respect to which the brokers or nominees do not have
discretionary power to vote) will be treated as present for purposes of
determining the presence of a quorum at the Annual Meeting. If such a quorum
should not be present, the Annual Meeting may be adjourned from time to time
until the necessary quorum is obtained.
All shares of Level 3 Common Stock represented by properly executed proxies
which are returned and not revoked will be voted in accordance with the
instructions, if any, given therein. If no instructions are provided in a proxy,
it will be voted FOR the Board's nominees for Director, FOR the approval of the
1995 Stock Plan Proposal and in accordance with the proxy-holders' best judgment
as to any other business raised at the Annual Meeting. If you elect to deliver
your proxy by telephone or the Internet as described in the enclosed telephone
and Internet voting instructions, your shares will be voted as you direct. Your
telephone or Internet delivery authorizes the named proxies to vote your shares
in the same manner as if you marked, signed and returned your proxy card.
Any Stockholder who delivers, whether by telephone, Internet or through the
mail, a proxy may revoke it at any time before it is voted by delivering to the
Secretary of the Company a written statement revoking the proxy, by executing
and delivering a later dated proxy, by using the telephone voting procedures,
the Internet voting procedures or by voting in person at the Annual Meeting.
Level 3 will bear its own cost of solicitation of proxies. In addition to
the use of the mail, proxies may be solicited by the directors and officers of
Level 3 by personal interview, telephone, telegram or e-mail. Such directors and
officers will not receive additional compensation for such solicitation but may
be reimbursed for out-of-pocket expenses incurred in connection therewith. In
addition, the Company has engaged the services of Georgeson Shareholder
Communications Inc. to aid in the solicitation of proxies, at an estimated cost
of $20,000 plus reimbursement of reasonable out-of-pocket expenses. In addition,
the Company may seek the assistance of employees of Peter Kiewit Sons', Inc. to
aid in the solicitation of proxies. It is not anticipated that any fees or
expense reimbursement will be paid for this assistance. Arrangements may also be
made with brokerage firms and other custodians, nominees and fiduciaries to
forward solicitation materials to the beneficial owners of shares of Level 3
Common Stock held of record by such persons, in which case Level 3 will
reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection therewith.
REELECTION OF CLASS II DIRECTORS PROPOSAL
Effective after the Annual Meeting, the Level 3 Board of Directors will
consist of 12 directors, divided into three classes, designated Class I, Class
II and Class III. Each of the Classes consists of four directors. Three of the
current Class II directors are standing for reelection, and, as a result of a
re-apportionment of the directors among the classes, one Class I director,
Mogens C. Bay, is standing for reelection as a Class II director. At the Annual
Meeting, these directors will be reelected to hold office for a three-year term
until the 2005 Annual Meeting, or until their successors have been elected and
qualified. If any nominee shall, prior to the Annual Meeting, become unavailable
for election as a Director, the persons named in the accompanying form of proxy
will, in their discretion, vote for that nominee, if any as may be recommended
by the Level 3 Board of Directors, or the Level 3 Board of Directors may reduce
the number of Directors to eliminate the vacancy.
Information as to Nominees for Election as Class II Directors
The respective ages, positions with Level 3, business experience,
directorships in other companies and Level 3 Board of Directors committee
memberships, of the nominees for election are set forth below. None of the
candidates for Class II Director are employees of the Company.
Mogens C. Bay, 53, has been a director of the Company since November 2000.
Since January 1997, Mr. Bay has been the Chairman and Chief Executive Officer of
Valmont Industries, Inc., a company engaged in the infrastructure and irrigation
businesses. Prior to that, Mr. Bay was President and Chief Executive Officer of
Valmont Industries from August 1993 to December 1996 as well as a director of
Valmont since October 1993. Mr. Bay is also a director of Peter Kiewit Sons',
Inc. and ConAgra Foods, Inc. Mr. Bay is a member of the Compensation Committee
of the Level 3 Board of Directors, and after the Annual Meeting will become a
member of the Audit Committee.
Richard R. Jaros, 50, has been a director of the Company since June 1993
and served as President of the Company from 1996 to 1997. Mr. Jaros served as
Executive Vice President of the Company from 1993 to 1996 and Chief Financial
Officer of the Company from 1995 to 1996. He also served as President and Chief
Operating Officer of CalEnergy Company (now a subsidiary of MidAmerican Energy
Holding Company) from 1992 to 1993, and is presently a director of MidAmerican
Energy Holding Company, Commonwealth Telephone Enterprises, Inc. ("Commonwealth
Telephone"), RCN Corporation ("RCN") and Homeservices.com, Inc. Mr. Jaros is a
member of the Compensation Committee of the Level 3 Board of Directors.
Robert E. Julian, 62, has been a director of the Company since March 31,
1998. Mr. Julian was also Chairman of the Board of (i)Structure from 1995 until
2000. From 1992 to 1995 Mr. Julian served as Executive Vice President and Chief
Financial Officer of the Company. Mr. Julian is the Chairman of the Audit
Committee of the Level 3 Board of Directors.
David C. McCourt, 45, has been a director of the Company since March 31,
1998. Mr. McCourt has also served as Chairman of Commonwealth Telephone and RCN
since October 1997. In addition, Mr. McCourt has been the Chief Executive
Officer of RCN since 1997 and Chief Executive Officer of Commonwealth Telephone
from October 1997 until November 1998. From 1993 to 1997 Mr. McCourt served as
Chairman of the Board and Chief
Executive Officer of C-TEC Corporation. Mr. McCourt is a member of the
Compensation and Audit Committees of the Level 3 Board of Directors.
The Board of Directors unanimously recommends a vote FOR the nominees named
above.
William L. Grewcock, 75, who has been a member of the Level 3 Board of
Directors since 1968 and is currently a Class II director, has informed the
Level 3 Board of Directors that he is retiring from service as a member of the
Level 3 Board of Directors effective at the Annual Meeting. As a result Mr.
Grewcock will not stand for reelection at the Annual Meeting.
Explanatory Note
On March 31, 1998, the Company separated the operations of its construction
business from the diversified or non-construction related portion of its
business into a new corporation (the "Split-off"). In connection with the
Split-off, the Company was renamed "Level 3 Communications, Inc." and the
construction business was renamed "Peter Kiewit Sons', Inc." Information
presented in this Proxy Statement relating to periods prior to March 31, 1998,
relates to information for the members of the Company's Board of Directors and
executive officers during those periods.
Board of Directors' Meetings
The Level 3 Board of Directors had 11 formal meetings in 2001 and acted by
unanimous written consent action on 10 occasions. In 2001, no director attended
less than 75% of the meetings of the Board of Directors and the committees of
which he was a member.
Executive Committee
The Executive Committee exercises, to the maximum extent permitted by law,
all powers of the Board of Directors between board meetings, except those
functions assigned to specific committees.
Audit Committee
The Audit Committee reviews the services provided by Level 3's independent
auditors, consults with the independent auditors and reviews the need for
internal auditing procedures and the adequacy of internal controls. Until the
Annual Meeting, the members of the audit committee are Robert E. Julian
(Chairman), William L. Grewcock and David C. McCourt. Effective after the Annual
Meeting, the members of the audit committee will be Robert E. Julian (Chairman),
Mogens C. Bay and David C. McCourt. Level 3 believes that the members of the
Audit Committee are independent within the meaning of the listing standards of
the National Association of Securities Dealers, the operators of The Nasdaq
Stock Market. In light of the recent highly publicized events involving Arthur
Andersen, LLP, the Company's independent accountants for 2001, the Level 3 Board
of Directors and Audit Committee have chosen to select KPMG, LLP as the
Company's independent accountants for 2002. Currently, the only services that
will be performed by KPMG, LLP to the Company are external audit services. The
written charter of the Audit Committee is attached to this proxy statement as
Annex I.
Audit Committee Report
The following Report of the Audit Committee was delivered to the Board by
the Audit Committee on March 15, 2002. The following Report of the Audit
Committee shall not be deemed to be incorporated by reference in any previous or
future documents filed by the Company with the Securities and Exchange
Commission under the Securities Act of 1933 or the Securities Exchange Act of
1934, except to the extent that the Company specifically incorporates the Report
by reference in any such document.
To the Board of Directors
The Audit Committee reviews the Company's financial reporting process on behalf
of the Board of Directors. Management has the primary responsibility for the
financial statements and the reporting process. The Company's
independent auditors are responsible for expressing an opinion on the conformity
of our audited financial statements to generally accepted accounting principles.
We have reviewed and discussed with management the Company's audited financial
statements as of and for the year ended December 31, 2001.
We have discussed with Arthur Andersen LLP ("Arthur Andersen") the matters
required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit committees, as amended, by the Auditing Standards Board
of the American Institute of Certified Public Accountants. We have received and
reviewed the written disclosures and the letter from Arthur Andersen required by
Independence Standard No. 1, Independence Discussions with Audit Committees, as
amended, by the Independence Standards Board, and have discussed with the
auditors the auditors' independence.
Based on the reviews and discussions referred to above, we recommend to the
Board of Directors that the financial statements referred to above be included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2001.
We have also considered whether the provision of services by Arthur Andersen not
related to the audit of the financial statements referred to above and to the
reviews of the interim financial statements included in the Company's Forms 10-Q
for the quarters ended March 31, 2001, June 30, 2001 and September 30, 2001 is
compatible with maintaining Arthur Andersen's independence.
The aggregate fees billed by the principal independent public accountants
(Arthur Andersen LLP) to the Company for the year ended December 31, 2001 are as
follows:
Audit Fees..................................$ 623,000
All Other Fees
Non-Audit Related.......................$ 737,000(1)
Audit Related...........................$1,349,000(2)
Total All Other Fees...............$2,086,000
Total Fees:.................................$2,709,000
(1) Consists primarily of fees related to corporate and expatriate tax
compliance and planning.
(2) Consists primarily of fees related to outsourced internal audit work,
statutory audits of subsidiaries, benefit plan audits, registration
statements and related consents.
The Audit Committee:
William L. Grewcock
David C. McCourt
Robert E. Julian, Chairman
For the year ended December 31, 2001
Compensation Committee
The Compensation Committee determines the compensation of the Chief
Executive Officer and reviews the compensation and stock option awards of
certain other senior executives.
Compensation Committee Interlocks and Insider Participations
The Compensation Committee of the Company consists of Michael B. Yanney,
David C. McCourt, Mogens C. Bay and Richard R. Jaros, none of whom is an officer
or employee of the Company.
Compensation Committee Report
The Compensation Committee (the "Committee") is responsible for determining the
cash and equity compensation of James Q. Crowe, Chief Executive Officer. The
Committee reviews and approves the cash compensation of certain of Level 3's
other senior executives based upon the recommendations of Mr. Crowe.
Level 3 believes that the compensation levels of its executive officers, who
provide leadership and strategic direction, should consist of: (i) slightly
below-market base salaries; (ii) significant cash bonus opportunities based on
achievement of objectives established by Level 3; and (iii) ownership of Level 3
Common Stock and stock options to align management's interests with
stockholders' interests, targeted to provide opportunities that are comparable
to other similarly situated telecommunications and high growth technology
companies.
Level 3 considers the following factors (ranked in order of importance) when
determining compensation of executive officers: (i) Level 3's performance
measured by attainment of specific objectives; (ii) the individual performance
of each executive officer; (iii) Level 3's stock price performance; (iv)
comparative industry compensation levels; and (v) historical cash and
compensation levels. The comparable industry compensation data is based in part
on public telecommunications companies that are included in the Nasdaq
Telecommunications Stock Index, which was chosen as the peer group for the
Performance Graph, and on other publicly traded telecommunications and high
growth technology companies with comparable market capitalization.
Determination of the Chief Executive Officer's Compensation
Beginning in the late part of 2000, as Level 3 was transitioning from a network
construction and development enterprise to a network services company, it became
clear that the communications and information technology industries were
experiencing historic challenges and changes. As a result of those challenges
and changes, the senior management of Level 3 led by Mr. Crowe embarked on a
program to develop strategies and tactics to enable Level 3 to continue to
execute on the company's business plan in the context of the changing
environment for telecommunications companies and to position the Company to be
able to capitalize on the opportunities that management believes will emerge
from the industry's move toward consolidation and the inevitable economic
recovery (the "Program").
The Program, completion of which is not expected until sometime in the second
half of 2002, and with respect to certain efforts, beyond year-end 2002,
contains several objectives, which include:
|_| Restructuring of the Level 3 sales strategy to shift the emphasis to
the world's top consumers of bandwidth and away from early stage, less
financially stable companies;
|_| Reducing network, operating and capital expenditures as necessary to
align these costs with the Company's expectations of Level 3's
business prospects as well as adjusting Level 3's overall cost
structure to ensure that the Company can rapidly accommodate future
changes to its business prospects;
|_| Approval by the Board of Directors, including a majority of the
non-employee Directors, of a revised strategic plan that demonstrates
the Company's long-term viability under any reasonably anticipated
economic and business downside scenarios (the "Strategic Plan");
|_| Approval by the Board of Directors, including a majority of the
non-employee Directors, of a 2002 operating budget that is consistent
with the Strategic Plan;
|_| Completion of Level 3's plans to adjust its capital structure to
appropriately align that structure with management's expectations of
the Company's business prospects and in accordance with guidelines
approved by the Board of Directors from time to time; and
|_| Completion of the disposition of certain non-core assets identified by
senior management and approved by the Board of Directors.
Since the completion of the Program is not anticipated until sometime in the
second half of 2002, and with respect to certain efforts, beyond year-end 2002,
the Committee determined to defer the decision regarding the payment of a cash
bonus for 2001 for each of Messrs. Crowe, O'Hara, Bradbury and Miller until such
time as the Committee is in a position to judge senior managements' success in
implementing the objectives of the Program. It is anticipated that at sometime
during the second half of 2002, the Committee will assess management's progress
in achieving the objectives of the Program and will determine whether to pay a
cash bonus to each of Messrs. Crowe, O'Hara, Bradbury and Miller with respect to
performance during 2001. The Committee has reserved the right to make one or
more interim assessments as to whether the objectives of the Program have been
achieved in whole or in part.
During 2001, Level 3 did achieve a variety of business objectives, including
substantial progress toward achieving the Program's objectives. These 2001
achievements include the following.
|_| The Company has redefined its sales and marketing efforts to
concentrate on the world's top consumers of bandwidth, with the
Company now focusing on major local telephone companies, international
communications carriers, cable television providers, long distance
carriers, established competitive local exchange carriers and major
Internet service providers.
|_| In October 2001, the Company announced that its first tier, wholly
owned subsidiary, Level 3 Finance, LLC had completed a "Modified Dutch
Auction" tender offer for a portion of the Company's senior notes and
convertible subordinate notes. Level 3 Finance repurchased debt with a
face value of approximately $1.7 billion, plus accrued interest, for a
total purchase price of approximately $731 million and in non-cash
transactions, exchanged approximately $194 million aggregate principal
amount of subordinated debt for approximately $74 million of Level 3
Common Stock. In addition, from January 1, 2002 through March 2002,
Level 3 had retired an additional $195 million face amount of debt
securities, by issuing 7.4 million shares of its common stock, par
value $.01 per share, valued at $32 million, and using approximately
$34 million of cash.
|_| During 2001, the Company embarked on a series of initiatives to reduce
costs by approximately 40%. Through a combination of reductions in
workforce and other cost management programs, the Company reduced
selling, general and administrative costs by approximately $350
million. These reductions were coupled with a $900 million reduction
in planned capital expenditures in 2001 to $2.5 billion.
|_| During 2001, Level 3 also achieved significant operational
improvements. During the year, the Company launched ONTAPSM, an
automated process to significantly shorten the time period between
receipt of a customer's order and the installation of that order.
Through the use of ONTAPSM, Level 3 is able to provision or install a
customer's capacity order in a matter of days rather than the industry
standard of weeks or even months.
Based on the achievement of these objectives and for aggressively pursuing the
implementation of Level 3's business plan to expand its information services
business to provide a broad range of communications services over a new
end-to-end network based on Internet Protocol technology, Mr. Crowe was awarded
an aggregate of 1,698,754 Outperform Stock Options in 2001. Of these 1,698,754
Outperform Stock Options, 597,372 Outperform Stock Options were granted in
December 2001 pursuant to a modified vesting schedule (the "December OSOs"). The
December OSOs will vest 100% at the end of three years from the date of grant;
provided, however, that the vesting schedule will be modified retroactive to the
date of grant to vesting in equal quarterly installments over a two year period
if the Committee determines that the objectives of the Program have been
achieved. Since the Committee has retained the discretion to make a partial or
interim assessment relating to the achievement of the Program's objectives, a
pro rata portion of the December OSOs may have their vesting schedule modified.
In other words, if the Committee determines that 50 percent of the Program's
objectives have been achieved, the vesting on 50 percent of the December OSOs
will be modified.
Equity Compensation
The Committee approves, either directly or through delegated authority to Level
3's senior management, all awards made under the Level 3 1995 Stock Plan.
Periodically the Committee approves grants to existing employees and also
approves awards to new employees as an incentive to join Level 3. Awards made to
the Company's named executive officers and certain other key employees are
approved by a subcommittee of the Compensation Committee comprised of Messrs.
Bay and Yanney.
The Compensation Committee:
Mogens C. Bay
Richard R. Jaros
David C. McCourt
Michael B. Yanney, Chairman
For the year ended December 31, 2001
Executive Compensation
The table below shows the annual compensation of the chief executive
officer and the next four most highly compensated executive officers of the
Company for the 2001 fiscal year (the "Named Executive Officers"). As a result
of the Compensation Committee's decision to defer the determination of any cash
bonus payment for 2001 for Messrs. Crowe, O'Hara, Bradbury and Miller, Messrs.
Bradbury and Miller were not among the next four most highly compensated
executive officers during 2001.
Summary Compensation Table
Annual Compensation Long Term Compensation
Name and Principal
Position Other Securities
Annual Restricted underlying All Other
Compensation Stock Options/SARs Compensation
Year Salary ($) Bonus ($) ($) award(s) (#)(4) (#)(5)
(#)
James Q. Crowe 2001 364,423 (1) 7,960 - - 8,500
CEO 2000 350,000 1,000,000 - - - 136,925
1999 350,000 1,000,000(2) 1,500,000(3) - - 76,416
Sureel A. Choksi 2001 282,885 793,593 - - - 163,201
Group Vice President and CFO 2000 206,677 260,000 - - - 42,440
1999 128,846 120,000 - - - 46,999
John F. Waters, Jr. 2001 271,731 192,731 - - - 59,882
Group Vice President and CTO 2000 198,470 220,000 - - - 18,241
1999 153,664 150,000 - - - 56,075
Thomas C. Stortz 2001 268,731 169,300 - - - 55,741
Group Vice President, 2000 241,346 215,000 - - - 42,833
General Counsel and Secretary 1999 225,000 135,000 131,214(3) - - 66,325
Kevin J. O'Hara 2001 357,692 (1) 23,967 - - 34,234
President and COO 2000 272,307 700,000 - - - 99,678
1999 259,615 400,000 - - - 149,646
Charles C. Miller, III 2001 300,000 (1) - - - 38,566
Vice Chairman and Executive
Vice President(6)
R. Douglas Bradbury 2001 298,461 (1) - - - 38,531
Vice Chairman and Executive 2000 260,000 400,000 - - - 65,574
Vice President 1999 259,615 350,000 - - - 142,646
(1) As a result of the Compensation Committee's decision to defer the
determination of the principal cash bonus payment for 2001 for Messrs.
Crowe, O'Hara, Bradbury and Miller, Messrs. Bradbury and Miller were not
among the next four most highly compensated executive officers during 2001.
See "Compensation Committee Report." Each of Messrs. Crowe, O'Hara,
Bradbury and Miller received a bonus during 2001 in connection with the
Company's Financial Target Achievement Bonus program in the amount of
$10,494, $10,350, $8,625 and $8,625, respectively. The Financial Target
Achievement Bonus program was implemented as a one time incremental cash
bonus program to reward the Company's employees for the achievement of
certain financial targets.
(2) Approximate value at December 17, 1999. This bonus was paid to Mr.
Crowe in the form of a grant of 13,594 fully vested Outperform Stock
Options, which will expire on the fourth anniversary of the grant.
(3) Other Annual Compensation includes perquisites and other personal
benefits received by each of the Named Executive Officers, if over $50,000.
The only reportable amounts are amounts that represent relocation
allowances in accordance with the Company's relocation policies and the
payment of closing costs relating to the purchase of a new residence in the
Broomfield, Colorado area.
(4) See discussion below regarding Outperform Stock Option grants.
(5) The amounts in this column represent (i) amounts of salary and bonus
forgone by the Named Executive Officers pursuant to the Level 3
Communications, Inc. 1998 Deferred Stock Purchase Plan (the "ShareWorks
Match Plan"), (ii) Level 3 matching contributions to the ShareWorks Match
Plan on behalf of the Named Executive Officers, and (iii) year-end
contributions to the accounts of the Named Executive Officers pursuant to
the Level 3 Communications, Inc. Employee Stock Bonus Plan (the "ShareWorks
Grant Plan"). These amounts are held in accounts for the Named Executive
Officers as shares or units of Level 3 Common Stock. These amounts
represent the year-end value of such accounts based on the last reported
sale price of the Level 3 Common Stock on December 31, 2001, 2000 and 1999,
respectively.
(6) Mr. Miller joined the Company as Vice Chairman and Executive Vice
President in February 2001.
No Named Executive Officer received any stock options (see below for a
description of the grants of Outperform Stock Options to the Named Executive
Officers), stock appreciation rights ("SARs") or long-term incentive performance
("LTIP") payouts for the fiscal year ended December 31, 2001.
Aggregate Options/SAR Exercises and Fiscal Year End Option/SAR Value Table
Shares Number of Securities Value of Unexercised
Acquired on Value Underlying Unexercised In-the-money Options/SARs at
Name Exercise Realized ($) Options/SARs at FY-End (#) FY-End ($)(1)
Exercisable Unexercisable Exercisable Unexercisable
James Q. Crowe - - - - - -
Sureel A. Choksi - - 75,000 25,000 - -
John F. Waters, Jr. - - 375,000 55,000 - -
Thomas C. Stortz - - 150,000 - - -
Kevin J. O'Hara - - 425,000 75,000 - -
Charles C. Miller, III - - - - - -
R. Douglas Bradbury - - 805,000 150,000 - -
(1) On December 31, 2001 (the last trading day of 2001), the last reported sale
price for the Level 3 Common Stock as reported by The Nasdaq Stock Market
was $5.00.
Outperform Stock Option Grants
The Company's Outperform Stock Option program is the primary component of
Level 3's long term incentive, stock-based compensation programs. The OSO
program was designed by the Company so that the Level 3 Common Stock price must
increase relative to the performance of a broad-based, market stock index before
OSO holders receive any return on their options. In other words, the Level 3
Common Stock price must pass a "hurdle" of a stock index growth prior to the OSO
having any value upon exercise. Currently, the broad-based, market stock index
used in the OSO program is the Standard & Poor's 500 Index, although the
Compensation Committee reserves the right to select another broad-based, market
stock index for use in this program. In July 2000, the Company adopted a
convertible outperform stock option program, ("C-OSO") as an extension of the
existing OSO plan. The program is a component of the Company's ongoing employee
retention efforts and offers similar features to those of an OSO, but provides
an employee with the greater of the value of a single share of the Company's
common stock at exercise, or the calculated OSO value of a single OSO at the
time of exercise.
The following table summarizes OSO program grants to the Named Executive
Officers and Messrs. Bradbury and Miller during 2001. For more information
regarding the Company's long term incentive compensation programs, including the
OSO program, please see the "1995 STOCK PLAN PROPOSAL" below.
OSO Program Grants In Last Fiscal Year(+)
Value of Total Unexercised
Total Number of Awards at In-the Money Awards at
Individual Grants FY-End(#)(1) FY-End($)(2)
Number of Expiration Exercisable Unexercisable Exercisable Unexercisable
Name Awards Granted Date
James Q. Crowe
OSO Awards 141,559 03/01/05 935,958 1,497,140 - 2,110,808
319,941 06/01/05
319,941 09/01/05
319,941 12/01/05
Year-end OSO(3) 597,372 12/01/05
Sureel A. Choksi
OSO Awards 32,921 03/01/05 109,984 535,564 - 490,884
74,405 06/01/05
74,405 09/01/05
74,405 12/01/05
C-OSO Awards(4) 200,000 09/01/05 - - - 1,604,096
John F. Waters, Jr.
OSO Awards 19,753 03/01/05 98,103 403,808 - 450,236
44,643 06/01/05
68,244 09/01/05
68,244 12/01/05
C-OSO Awards(4) 100,000 09/01/05 - - - 1,152,443
Thomas C. Stortz
OSO Awards 25,020 03/01/05 164,478 399,367 - 373,072
56,548 06/01/05
56,548 09/01/05
56,548 12/01/05
C-OSO Awards(4) 100,000 12/01/05 - - - 878,432
Kevin J. O'Hara
OSO Awards 72,426 03/01/05 364,798 700,925 - 1,079,947
163,691 06/01/05
163,691 09/01/05
163,691 12/01/05
Year-end OSO(3) 290,022 12/01/05
Charles C. Miller, III
OSO Awards 52,673 03/01/05 64,398 744,202 - 785,419
119,048 06/01/05
119,048 09/01/05
119,048 12/01/05
Year-end OSO(3) 195,765 12/01/05
R. Douglas Bradbury
OSO Awards 46,089 03/01/05 328,849 822,028 - 687,241
104,167 06/01/05
104,167 09/01/05
104,167 12/01/05
Year-end OSO(3) 195,765 12/01/05
(+) In response to the possibility of the need to use available cash to
settle OSO exercises in the case of relatively strong common stock price
appreciation, James Q. Crowe, CEO, R. Douglas Bradbury, Executive Vice
President and Vice
Chairman and all other non-employee members of the Board of Directors have
agreed to irrevocably waive the right to exercise any OSOs or C-OSOs
granted to them during 2001 and the first quarter of 2002. In addition,
Kevin J. O'Hara, President and COO and Charles C. Miller, III, Executive
Vice President and Vice Chairman and each of the 11 Group Vice Presidents
of the Company, have agreed to irrevocably waive the right to exercise any
OSOs or C-OSOs granted to them during 2001 and the first quarter of 2002 to
the extent that the aggregate number of shares of Level 3 Common Stock that
could be issued upon exercise of any of those OSOs or C-OSOs would exceed
an aggregate of 275,000 shares of Level 3 Common Stock per individual.
Although these waivers have been granted without any conditions, the Board
has the right to modify or terminate these waivers, in whole or in part, in
its sole discretion. The Board may consider the approval of the 1995 Stock
Plan Proposal, or the performance of the Level 3 Common Stock over time, or
the rate at which employees exercise awards issued under the 1995 Stock
Plan or the rates of employee attrition, or a combination of these factors
or other relevant factors, in determining whether to modify or terminate,
in whole or in part, these waivers over time.
(1) An OSO award vests in equal quarterly installments over two years. No
OSO award, including a vested OSO award, granted prior to March 1, 2001 can
be exercised until the second anniversary of the date of its grant. OSO
awarded after the March 1, 2001 awards can be exercised upon vesting. The
OSO awards provide for acceleration of vesting and the lifting of the two
year prohibition on exercise (with respect to OSO awards granted prior to
March 1, 2001) in the event of a change of control, as defined in the Level
3 1995 Stock Plan (as amended on April 1, 1998).
(2) OSO value at December 31, 2001 has been computed based upon the OSO
formula and multiplier as of that date. The value of an OSO is subject to
change based upon the performance of the Level 3 Common Stock relative to
the performance of the Standard & Poor's 500 Index from the time of the
grant of the OSO award until the award has been exercised.
(3) A Special OSO grant was awarded in December 2001. These OSOs will vest
100% at the end of three years from the date of grant; provided, however,
that the vesting schedule will be modified retroactive to the date of grant
to vesting in equal quarterly installments over a two-year period if the
Compensation Committee determines that the objectives of the Program
described in the Compensation Committee Report have been achieved. In
addition, these awards provide for acceleration of vesting in the event of
a change of control, as defined in the Level 3 1995 Stock Plan (as amended
on April 1, 1998). Since the Compensation Committee has retained the
discretion to make a partial or interim assessment, a pro rata portion of
these OSOs may have the vesting schedule modified. In addition, Mr. Walter
Scott, Chairman of the Level 3 Board of Directors, received a grant of
145,011 OSOs in December 2001 subject to the same vesting provisions. See
"Compensation Committee Report."
(4) Messrs. Choksi, Waters and Stortz each also received a grant of
Convertible Outperform Stock Options (C-OSOs) of 200,000, 100,000 and
100,000, respectively on September 1, 2001. These C-OSOs will vest in equal
quarterly installments over a period of three years at the rate of 1/12 of
the total for each quarter. The C-OSO awards provide for acceleration of
vesting in the event of a change of control, as defined in the Level 3 1995
Stock Plan (as amended on April 1, 1998). At December 31, 2001, of these
C-OSOs, 16,667, 8,334 and 8,334 were exercisable for Messrs. Choksi, Waters
and Stortz, respectively.
Section 16(a) Beneficial Ownership Reporting Compliance
To Level 3's knowledge, no person that was a director, executive officer or
beneficial owner of more than 10% of the outstanding shares of Level 3 Common
Stock failed to timely file all reports required under Section 16(a) of the
Securities Exchange Act of 1934.
Directors' Compensation
During 2001, each of the directors of the Company who were not employed by
the Company during 2001 received fees consisting of an annual retainer that was
paid in the form of quarterly grants of OSOs in the aggregate amount of 10,245
awards. Messrs. Yanney and Julian each received an additional aggregate grant of
513 OSOs as additional compensation for serving as chairman of the Compensation
Committee and Audit Committee, respectively. In addition, each member of the
Board of Directors other than Walter Scott, Jr., Chairman of the Board, received
a special grant of OSOs on December 1, 2001 in the amount of 13,200 OSOs. These
special grant OSOs will vest 100% at the end of three years from the date of
grant; provided, however, that the vesting schedule will be modified retroactive
to the date of grant to vesting in equal quarterly installments over a two year
period if the Compensation Committee determines that the objectives of the
Program described in the Compensation Committee Report have been achieved. Since
the Compensation Committee has retained the discretion to make a partial or
interim assessment, a pro rata portion of these OSOs may have its vesting
schedule modified. Mr. Walter Scott, Jr. received a grant of 145,011 OSOs in
December 2001 subject to the same vesting provisions. As of December 31, 2001,
all OSOs granted to directors as payment of directors fees had a value of
$231,453 and $235,936 for directors that chair committees of the Board of
Directors.
Equity Compensation Plan Information
Level 3 has only one equity compensation plan - The 1995 Stock Plan
(Amended and Restated as of April 1, 1998) - under which Level 3 may issue
shares of Common Stock to employees, officers, directors and consultants. This
plan has been approved by the Company's stockholders. The following table
provides information about the shares of Level 3's common stock that may be
issued upon exercise of awards under the 1995 Stock Plan as of December 31,
2001.
Number of securities
to be issued upon Weighted-average Number of securities
exercise of exercise price of remaining available for
outstanding options, outstanding options, future issuance under equity
Plan Category warrants and rights(+) warrants and rights(+)(++) compensation plans
- ---------------------------- ------------------------ ------------------------- ------------------------------
Equity compensation plans
approved by stockholders 63,084,399 $17.61 6,915,601
Equity compensation plans
not approved by
stockholders............ - - -
(+) Includes awards of Outperform Stock Options ("OSOs"), Convertible Outperform
Stock Options ("C-OSOs") and Special Recognition Outperform Stock Options
("SR-OSOs"). For purposes of this table, these securities are considered to use
a single share of Level 3 Common Stock from the total number of shares reserved
for issuance under the 1995 Stock Plan. See "1995 STOCK PLAN PROPOSAL" below for
additional information regarding the 1995 Stock Plan.
(++) Includes weighted-average exercise price of outstanding OSOs, C-OSOs and
SR-OSOs at the date of grant. The exercise price of an OSO, C-OSO and SR-OSO is
subject to change based upon the performance of the Level 3 Common Stock
relative to the performance of the Standard & Poor's 500 Index from the time of
the grant of the award until the award has been exercised.
Certain Relationships and Related Transactions
The Company permits the personal use of its aircraft by certain members of
senior management of the Company. This personal use of the Company's aircraft is
done pursuant to an Aircraft Time-Share Agreement, which provides that the
Company will charge the individual the cost to operate the aircraft as allowed
by Part 91 of the U.S. Federal Aviation Administration regulations for personal
use of corporate aircraft. The Company received a total payment in the amount of
$108,087 from Mr. Crowe under his agreement for the period November 2000 through
November 2001 and a total payment in the amount of $74,691 from Mr. Kevin J.
O'Hara, President, Chief Operating Officer and Director under his agreement for
the same period.
During 2001 the Company made loans to certain executive officers and
employees of the Company pursuant to parameters adopted and administered by the
Compensation Committee of the Board of Directors. The parameters are: (i) any
loan greater than $250,000 must be collateralized with personal or real property
acceptable to the Company; (ii) any loan up to $500,000 must be approved by the
Chief Executive Officer; (iii) any loan greater than $500,000 must be approved
by the Chairman of the Compensation Committee of the Board of Directors;
(iv) the loan shall bear interest at the prime rate; and (v) at any one time,
the total loans outstanding shall not exceed $15 million unless this maximum
amount is modified by the Compensation Committee of the Board of Directors. At
the present time, the total loans outstanding to employees, including executive
officers, is approximately $7.25 million.
In June 2001, the Company lent $6,000,000 to Mr. O'Hara. This loan bears
interest at the prime rate of interest in effect at the time the loan was made.
The principal amount of this loan as well as all interest payments are payable
on June 30, 2002 or at any time prior to that date without penalty. In addition,
the loan is secured by certain of Mr. O'Hara's personal and real property
assets. On March 25, 2002, Mr. O'Hara repaid $3,709,873 of the principal amount
of this loan and interest of approximately $290,100. After taking these payments
into account, the outstanding balance of this loan is $2,290,126. The interest
rate on this loan was adjusted on January 1, 2002, to the
prime rate of interest as of January 1, 2002. Effective June 1, 2002, the
maturity date of Mr. O'Hara's loan was amended to be extended to June 30, 2003.
In July 2001, the Company lent to Mr. Thomas C. Stortz, Group Vice
President, General Counsel and Secretary of the Company, $1,000,000. This loan
bears interest at the prime rate of interest in effect at the time the loan was
made. The principal amount of this loan as well as all interest payments are
payable on June 30, 2002 or at any time prior to that date without penalty. In
addition, the loan is secured by certain of Mr. Stortz's personal and real
property assets. On March 14, 2002, Mr. Stortz repaid $300,000 of the principal
amount of this loan and interest of approximately $74,600. After taking these
payments into account, the outstanding balance of this loan is $700,000. The
interest rate on this loan was adjusted on January 1, 2002, to the prime rate of
interest as January 1, 2002. Effective June 1, 2002, the maturity date of Mr.
Stortz's loan was amended to be extended to June 30, 2003.
In October 2001, the Company lent to Mr. John F. Waters, Jr., Group Vice
President, Chief Technology Officer of the Company, $100,000. This loan bears
interest at the prime rate of interest at the time the loan was made. The
principal amount of this loan as well as all interest payments are payable on
June 1, 2002 or at any time prior to that date without penalty. The interest
rate on this loan was adjusted on January 1, 2002, to the prime rate of interest
as of January 1, 2002. Effective June 1, 2002, the maturity date of Mr. Water's
loan was amended to be extended to June 1, 2003.
On February 21, 2002, Level 3 Holdings, Inc., a wholly owned subsidiary of
the Company, agreed to acquire from Mr. McCourt, a director of the Company, his
entire interest in Level 3 Telecom Holdings, Inc., the Company's subsidiary that
indirectly holds the Company's ownership interests in RCN Corporation and
Commonwealth Telephone Enterprises, Inc. The total consideration paid to Mr.
McCourt in this transaction was $15,000,000 and was paid in cash. As a result of
this transaction, Level 3 Telecom Holdings, Inc. is now an indirect, wholly
owned subsidiary of the Company.
Messers. Scott, Crowe, Bay, Grewcock and Stinson are members of the Board
of Directors of Peter Kiewit Sons', Inc. ("PKS") as well as members of the Board
of Directors of the Company. Mr. Stinson is also the chief executive officer of
PKS.
On June 18, 1998, Level 3 entered into a contract with PKS for the
construction of Level 3's nearly 16,000 mile North American intercity network.
Construction of the North America intercity network was completed during 2001.
Level 3 has also entered into various other agreements with PKS including
agreements for construction activities relating to its local networks, gateway
facilities and its Broomfield, Colorado, headquarters facilities. For the year
ended December 31, 2001, the Company incurred $693 million in aggregate costs
under these agreements to PKS, of which approximately $638 million related to
network construction activities and approximately $55 million related to the
construction of corporate facilities. Through December 31, 2001, PKS had the
opportunity to earn an award fee with respect to the construction of the
intercity network, the amount of which was based on cost and speed of
construction, quality, safety and program management. The award fee was
determined by Level 3's assessment of PKS' performance in each of these areas.
In 2001, the Company's final accrual for the award fee was approximately $10
million, which is included in the $693 million indicated above.
The Company issued approximately 9.8 million warrants to PKS as payment for
certain construction services rendered in 2001. PKS subsequently sold equal
parts of a total of 3,029,680 warrants to each of Messrs. Scott and Grewcock,
directors of the Company. The warrants, which allow PKS to purchase Common Stock
at $8 per share, were fully vested at issuance and will expire on June 30, 2009.
The fair value of the warrants granted in 2001 was $32 million, calculated using
the Black-Scholes valuation model with a risk free interest rate of 4.8% and an
expiration date of June 30, 2009. The Company used an expected volatility rate
of 70% to value the warrants. The warrants also contain customary anti-dilution
protections and registration rights including a single demand registration right
that can only be exercised after December 31, 2003 and unlimited co-registration
or piggyback registration rights. PKS has pledged its remaining warrants as
collateral to Level 3 while the two parties resolve outstanding claims with
regard to the North American intercity network. If it is determined through the
dispute resolution process, that PKS is liable for certain claims, these claims
may be settled, at Level 3's option, by payment of cash by PKS, or by PKS
returning all or part of the outstanding warrants having equivalent value.
On March 11, 2002, the Company executed a Warrant Agreement with Mr.
Grewcock relating to the issuance of warrants to purchase an aggregate of
1,514,840 shares of Common Stock of the Company. These warrants were originally
issued to PKS and were subsequently purchased by Mr. Grewcock from PKS. The
warrants have an exercise price of $8.00, are fully vested and expire on June
30, 2009. The warrants also contain the same terms, conditions and rights as the
warrants issued to PKS and described above.
In addition, on April 15, 2002, the Company executed a Warrant Agreement
with Mr. Scott relating to the issuance of warrants to purchase an aggregate of
1,514,840 shares of Common Stock of the Company. These warrants were originally
issued to PKS and were subsequently purchased by Mr. Scott from PKS. The
warrants have an exercise price of $8.00, are fully vested and expire on June
30, 2009. The warrants also contain the same terms, conditions and rights as the
warrants issued to PKS and described above.
Level 3 and PKS are parties to various aircraft operating agreements
pursuant to which PKS provides Level 3 with aircraft maintenance, operations and
related services. During 2001, Level 3 incurred costs to PKS of less than
$100,000 pursuant to these agreements.
In connection with the Split-off, Level 3 and PKS entered into various
agreements intended to implement the Split-off, including a separation agreement
and a tax-sharing agreement.
Separation Agreement. Level 3 and PKS entered into a separation agreement
(the "Separation Agreement") relating to the allocation of certain risks and
responsibilities between PKS and Level 3 after the Split-off and certain other
matters. The Separation Agreement provides that each of PKS and Level 3 will
indemnify the other with respect to the activities of its subsidiary business
groups, except as specifically provided under other agreements between the
companies. The cross-indemnities are intended to allocate financial
responsibility to PKS for liabilities arising out of the construction businesses
formerly conducted by Level 3, and to allocate to Level 3 financial
responsibility for liabilities arising out of the non-construction businesses
conducted by Level 3. The Separation Agreement also allocates between PKS and
Level 3 certain corporate-level risk exposures not readily allocable to either
the construction businesses or the non-construction businesses.
The Separation Agreement provides that each of Level 3 and PKS will be
granted access to certain records and information in the possession of the other
company, and requires that each of Level 3 and PKS retain all such information
in its possession for a period of ten years following the Split- off. Under the
Separation Agreement, each company is required to give the other company prior
notice of any intention to dispose of any such information.
The Separation Agreement provides that, except as otherwise set forth
therein or in any related agreement, costs and expenses in connection with the
Split-off will be paid 82.5% by Level 3 and 17.5% by PKS. On March 18, 1998,
Level 3 and PKS entered into an amendment to the Separation Agreement that
provides that PKS will bear substantially all of those expenses if the Level 3
Board determined to force conversion of all outstanding Class R Stock of Level 3
on or before July 15, 1998 (a "Forced Conversion Determination").
The Level 3 Board made such a determination and, accordingly, substantially
all of those expenses will be borne by PKS.
Tax Sharing Agreement. Level 3 and PKS have entered into a tax sharing
agreement (the "Tax Sharing Agreement") that defines each company's rights and
obligations with respect to deficiencies and refunds of federal, state and other
taxes relating to operations for tax years (or portions thereof) ending prior to
the Split-off and with respect to certain tax attributes of Level 3 and PKS
after the Split-off. Under the Tax Sharing Agreement, with respect to periods
(or portions thereof) ending on or before the Split-off, Level 3 and PKS
generally will be responsible for paying the taxes relating to such returns
(including any subsequent adjustments resulting from the redetermination of such
tax liabilities by the applicable taxing authorities) that are allocable to the
non-construction business and the construction business, respectively.
The Tax Sharing Agreement also provides that Level 3 and PKS will indemnify
the other from certain taxes and expenses that would be assessed on PKS and
Level 3, respectively, if the Split-off were determined to be taxable, but
solely to the extent that such determination arose out of the breach by Level 3
or PKS, respectively, of certain representations made to the Internal Revenue
Service in connection with the private letter ruling issued with
respect to the Split-off. Under the Tax Sharing Agreement, if the Split-off were
determined to be taxable for any other reason, those taxes and certain other
taxes associated with the Split-off (together, "Split-off Taxes") would be
allocated 82.5% to Level 3 and 17.5% to PKS. The Tax Sharing Agreement, however,
provides that Split-off Taxes will be allocated one-half to each of Level 3 and
PKS if a Forced Conversion Determination is made. As a result of the Forced
Conversion Determination, the Split-off Taxes would be so allocated. Finally,
the Tax Sharing Agreement provides, under certain circumstances, for certain
liquidated damage payments from Level 3 to PKS if the Split-off were determined
to be taxable, which are intended to compensate stockholders of PKS indirectly
for taxes assessed upon them in that event. Those liquidated damage payments,
however, are reduced because of the Forced Conversion Determination.
Mine Management Agreement. In 1992, PKS and Level 3 entered into a mine
management agreement (the "Mine Management Agreement") pursuant to which a
subsidiary of PKS, Kiewit Mining Group Inc. ("KMG"), provides mine management
and related services for Level 3's coal mining properties. In consideration of
the provision of such services, KMG receives a fee equal to 30% of the adjusted
operating income of the coal mining properties. Level 3 incurred expenses for
services provided by KMG under the Mine Management Agreement of $5 million for
the year ended December 31, 2001. The term of the Mine Management Agreement
expires on January 1, 2016.
In connection with the Split-off, the Mine Management Agreement was amended
to provide KMG with a right of offer in the event that Level 3 were to determine
to sell any or all of its coal mining properties. Under the right of offer,
Level 3 would be required to offer to sell those properties to KMG at the price
that Level 3 would seek to sell the properties to a third party. If KMG were to
decline to purchase the properties at that price, Level 3 would be free to sell
them to a third party for an amount greater than or equal to that price. If
Level 3 were to sell the properties to a third party, thus terminating the Mine
Management Agreement, it would be required to pay KMG an amount equal to the
discounted present value to KMG of the Mine Management Agreement, determined, if
necessary, by an appraisal process.
THE 1995 STOCK PLAN PROPOSAL
Subject to the requisite affirmative stockholder vote at the Annual
Meeting, the Board has adopted an amendment to the Company's 1995 Stock Plan
(Amended and Restated as of April 1, 1998) (the "Plan") increasing the aggregate
number of shares of common stock (the "Shares") for issuance thereunder by
50,000,000 shares to a total of 100,728,914 shares at May 31, 2002. The Company
is seeking stockholder approval of the Plan in order to comply with the
requirements of The Nasdaq National Market as well as Sections 162(m) and 422 of
the Internal Revenue Code of 1986, as amended (the "Code"). The following
summary of the Plan is qualified in its entirety by express reference to the
text of the Plan, a copy of which is on file with the Securities and Exchange
Commission.
Purpose
Since the Plan was first enacted in 1995 and as amended in April 1998, the
primary purpose of the Plan has been to increase the value of Shares and the
profitability of the Company and its subsidiaries (i) by enabling the Company to
attract, retain, motivate and reward certain employees, directors and service
providers and (ii) by aligning the interests of those employees, directors and
service providers with the interests of the Company and the holders of Shares.
In order to attract and retain highly qualified employees, the Company
believes that it is important to provide a work environment that encourages each
individual to perform to his or her potential and facilitates cooperation
towards shared goals and a compensation program designed to attract the kinds of
individuals the Company needs and to align employees' interests with the
Company's stockholders.
Background on Compensation Programs. With respect to compensation programs,
the Company believes that short-term financial rewards alone are not sufficient
to attract and retain qualified employees, and a properly designed long-term
compensation program is a necessary component of employee recruitment and
retention. In this regard the Company's philosophy is to pay annual cash salary
compensation that is moderately less than the annual cash salary compensation
paid by competitors and an annual performance-based cash bonus, which, if the
Company's annual goals are met, when added to the annual cash salary cash
compensation results in a total that is
moderately greater than the total annual cash compensation paid on average by
competitors. The Company's non-cash benefit programs (including medical and
health insurance, life insurance, disability insurance, etc.) are designed to be
comparable to those offered by its competitors.
The Company continues to believe that the qualified candidates it seeks, as
well as the current employees it wants to retain and motivate, place particular
emphasis on equity-based long term incentive ("LTI") programs. The Company
currently has two complementary programs, both of which are offered pursuant to
the Plan: (i) the equity-based "Shareworks" program, which helps ensure that
employees have an ownership interest in the Company and are encouraged to invest
in the Company's common stock; and (ii) an innovative stock-indexed program
referred to as the Outperform Stock Option ("OSO") program. The Shareworks
program currently enables employees to contribute up to 7% of their compensation
toward the purchase of restricted common stock, which purchases are matched one
for one by the Company. If an employee remains employed by the Company for three
years from the date of purchase, the shares that are contributed by the Company
vest. The shares that are purchased by the employee are vested at the time of
purchase. The Shareworks program also provides that, subject to satisfactory
Company performance, the Company's employees will be eligible annually for
grants by the Company of Level 3 Common Stock of up to a set percentage of the
employees' compensation determined by the Compensation Committee of the Board of
Directors, all of which shares will vest three years from the employee's first
grant date. For the year ended December 31, 2001, the Company granted a 5% grant
to eligible employees.
The Company has adopted the OSO program, which differs from LTI programs
generally adopted by many public companies in which employees are typically
eligible for conventional non-qualified stock options ("NQSOs"). NQSO programs
generally award the recipient the right to purchase stock at a fixed price,
typically at the price on the date the NQSO was granted. While widely adopted,
the Company believes such NQSO programs sometimes reward employees even if
company stock price performance is inferior to investments of similar risks,
dilute public stockholders in a manner not directly proportional to performance
and fail to provide a preferred return on stockholders' invested capital over
the return to option holders. The Company believes that the OSO program is
superior to an NQSO-based program with respect to these issues while, at the
same time, providing employees a success-based reward balancing the associated
risk.
The Company's OSO program has been the primary component of Level 3's stock
based LTI compensation programs. The Company designed the OSO program so that
the Level 3 Common Stock price performance must exceed a broad-based, market
stock index before OSO holders receive any return on their options. In other
words, the Level 3 Common Stock price must pass a "hurdle" of a stock index
growth prior to the OSO having any value upon exercise. Currently, the
broad-based, market stock index used in the OSO program is the Standard & Poor's
500 Index, although the Compensation Committee reserves the right to select
another broad-based, market stock index for use in this program.
The Company believes that an OSO-style program better aligns employees' and
stockholders' interests by basing stock option value on the Company's ability to
outperform the market in general, as measured by the relative performance of the
Company's common stock to the Standard & Poor's 500 Index. The value received
for options under the OSO plan is based on a formula involving a multiplier
related to how much the Company's common stock outperforms the Standard & Poor's
500 Index. Participants in the OSO program do not realize any value from options
unless the Level 3 Common Stock price outperforms the Standard & Poor's 500
Index. To the extent that the Level 3 Common Stock outperforms the Standard &
Poor's 500, the value of OSOs to an option holder may exceed the value of NQSOs
issued to comparable employees at other companies. For a more detailed
description of the mechanics of the OSO program, see "Awards - Options - Indexed
Stock Options (Outperform Stock Options), below.
In July 2000, the Company adopted a convertible outperform stock option
program, ("C-OSO") as an extension of the existing OSO program. The program is a
component of the Company's ongoing employee retention efforts and offers similar
features to those of an OSO, but provides an employee with the greater of the
value of a single share of the Company's common stock at exercise, or the
calculated OSO value of a single OSO at the time of exercise.
As of May 31, 2002, the number of awards under the Plan that were vested
and exercisable, including, OSOs, NQSOs, Shareworks and restricted stock, would
require the issuance of 7,959,063 Shares if all of those
awards had been exercised on that date (assuming a Level 3 Common Stock price of
$4.50 on May 31, 2002 and an OSO, C-OSO and SR-OSO value based on a $4.50 Level
3 Common Stock price). In addition, as of May 31, 2002, the Company has issued
19,271,086 Shares in connection with the exercise of awards under the Plan.
Compensation Philosophy. As stated above, since late 1997 the Company
adhered to a compensation philosophy that includes the payment of annual cash
compensation, which, if the Company's annual goals are met, is moderately
greater than the cash compensation paid on average by competitors, and the
delivery of equity based, LTI compensation that is based on the performance of
the Level 3 Common Stock. In determining the levels of grants of LTI
compensation, the Company has strived to deliver approximately 25 percent of the
"outperformance" value of the Level 3 Common Stock to employees. The
Compensation Committee defines "outperformance" as the increase in the price of
a share of Level 3 Common Stock from the date of grant until the date of
exercise, relative to the increase in a broad-based, market stock index such as
the Standard & Poor's 500 Index.
As a result of the recent levels of common stock price performance and
certain economic conditions, the Company has re-evaluated its compensation
philosophy for determining future grants of LTI compensation awards. The
Compensation Committee of the Board has determined that LTI compensation grants
by the Company are to be set at levels necessary to control the overall amount
of dilution to public stockholders, even in the situation of extreme common
stock price appreciation, while maintaining the goal of delivering on average no
more than approximately 25 percent of the outperformance to employees. The
Company believes that if modifications to the LTI compensation grants are not
made, in situations of relatively strong Level 3 Common Stock price performance
(that is, stock price appreciation that is in excess of at least 100% per year
from current price levels), LTI compensation grants could lead to unacceptable
levels of dilution to public stockholders and the delivery of an unacceptable
percentage of outperformance to employees.
Rationale for Increase in Number of Reserved Shares. In December 1997, the
Company's stockholders approved the reservation of 35,000,000 million shares of
Common Stock for purposes of the Plan, which amount was automatically increased
to 70,000,000 as a result of the Company's dividend of a single share of Common
Stock for each outstanding share of Common Stock in August 1998. The OSO program
was first introduced in April 1998. Although the Company has used shares
reserved under the Plan for the issuance of NQSOs, Restricted Stock and
Shareworks, the primary use of shares reserved under the Plan has been in
connection with the grant of LTI compensation awards (that is, OSOs and C-OSOs).
As of May 31, 2002, the Company has issued 19,271,086 shares of Level 3 Common
Stock in connection with the exercise of awards issued under the Plan.
The grant of traditional NQSOs requires the use of one share of common
stock reserved under the plan for each share to be issued upon exercise of the
NQSO. Only a single share is required to be used from the share reservation
because the maximum number of shares that can be issued upon exercise can not
exceed the number of shares specified in the grant of the NQSO. This maximum
number is known at the time of grant. The likelihood of all of those shares
being exercised prior to expiration of the NQSO may be greater than with a Level
3 OSO, because an NQSO is likely to be exercised at even a modest gain in stock
price rather than being allowed to expire without exercise.
In contrast to an NQSO, the granting of a Level 3 OSO in situations of
relatively strong Level 3 Common Stock price performance (that is, stock price
appreciation that is in excess of at least 100% per year from current price
levels) could require the use of up to approximately eight Shares from the share
reserve for each award granted to fully stock settle an OSO exercise. In
contrast to an NQSO, eight Shares from the share reserve is needed to allow the
Company to settle the exercise of an OSO in stock when the relative performance
of the Level 3 Common Stock price between the time of the grant of the OSO and
exercise has exceeded the performance of the Standard & Poor's 500 Index by 11
percent or more. If the Level 3 Common Stock price between the time of grant
through the time of exercise either has not outperformed the change in the
Standard & Poor's 500 Index during that same period, or if the appreciation is
not at very high levels, fewer than the full eight shares, even as few as zero
shares, will be needed at the time of exercise. In the event that the Company
does not or can not settle OSO exercises with the issuance of Shares either
because insufficient shares are available or because it elects not to do so, the
Company is required to settle the exercise of OSOs with available cash on hand,
which could, in the circumstance of extreme Level 3 Common Stock performance,
require the use of a significant amount of cash.
In early 2001, Level 3 continued to issue grants of LTI compensation awards
based on the objective to deliver LTI compensation in order to attract, retain
and motivate employees, while striving to deliver approximately 25 percent of
the outperformance to the employee. During the course of the year, the
Compensation Committee also considered other factors in setting levels of grants
of LTI compensation awards, including controlling the overall amount of dilution
to public stockholders.
From 1998 until the early portion of 2001, the determination of the amount
of LTI compensation that an employee was targeted to receive along with the
value of the award resulted in the number of awards that an employee was to
receive. As a result of the level of the Level 3 Common Stock price, the number
of awards that were required to be made in order to continue to deliver the
desired amount of LTI compensation to the Company's employees resulted in the
grant of awards at levels that under situations of relatively strong Level 3
Common Stock price performance would exhaust the Shares reserved under the Plan.
As a result, in order to continue to attract, retain and motivate the employees
that are necessary to execute the Company's business plan and to continue the
Company's LTI compensation programs for the next 12 months, the Board believes
that the number of Shares to be reserved for issuance under the Plan should be
increased.
Although the Company believes that the existing grants of LTI compensation
awards were necessary to attract, retain, motivate and reward the people
necessary to implement the Company's business plan, the Board believes that
these levels of LTI compensation awards could, in the case of relatively strong
common stock price growth (that is, stock price appreciation that is in excess
of at least 100% per year from current price levels), lead to the need to use a
significant amount of the Company's available cash for the settlement of OSO
exercises. In response to the possibility of the need to use available cash to
settle OSO exercises, James Q. Crowe, CEO and R. Douglas Bradbury, Executive
Vice President and Vice Chairman and all other non-employee members of the Board
of Directors have agreed to irrevocably waive the right to exercise any OSOs or
C-OSOs granted to them during 2001 and the first quarter of 2002. In addition,
Kevin J. O'Hara, President and COO and Charles C. Miller, III, Executive Vice
President and Vice Chairman and each of the 11 Group Vice Presidents of the
Company, have agreed to irrevocably waive the right to exercise any OSOs or
C-OSOs granted to them during 2001 and the first quarter of 2002 to the extent
that the aggregate number of shares of Level 3 Common Stock that could be issued
upon exercise of any of those OSOs or C-OSOs would exceed an aggregate of
275,000 shares of Level 3 Common Stock per individual. The Company believes that
taking into account these voluntary restrictions, there are sufficient shares
available under the Plan to settle exercises of previously granted OSOs.
Although these waivers have been granted without any conditions, the Board has
the right to modify or terminate these waivers, in whole or in part, in its sole
discretion. The Board may consider the approval of the 1995 Stock Plan Proposal,
or the performance of the Level 3 Common Stock over time, or the rate at which
employees exercise awards issued under the 1995 Stock Plan or the rates of
employee attrition, or a combination of these factors or other relevant factors,
in determining whether to modify or terminate, in whole or in part, these
waivers over time.
Ramifications of Failure to Receive Approval. The Board believes that the
stockholders' failure to approve the proposal to increase the number of shares
reserved for issuance under the Plan would require the redesign of the Company's
compensation programs the result of which would be for the Company to use a
significantly greater portion of the Company's cash on hand and cash generated
by operations to compensate its employees. In addition, in the event that the
Company continues to issue OSOs and it is unable to settle OSO exercises with
the issuance of Shares, the Company would be required to settle the exercise of
OSOs with available cash on hand, which could, in the circumstance of extreme
Level 3 Common Stock performance, require the use of a significant amount of
cash. Finally, since the Company continues to believe that the qualified
candidates it seeks, as well as the current employees that it seeks to retain
and motivate, place particular emphasis on equity-based LTI programs, it is
possible that a compensation program that emphasizes cash payments and
de-emphasizes equity based programs would not allow the Company to adequately
attract, retain and motivate these employees.
Administration
The Plan is administered by the Compensation Committee (the "Committee") of
the Board. The Committee, in its sole discretion, determines which individuals
may participate in the Plan and the type, extent and terms of the Awards to be
granted. In addition, the Committee interprets the Plan and makes all other
determinations with respect to the administration of the Plan.
Awards
The Plan allows for the grant of options ("Options"), restricted Shares
("Restricted Shares") and other Share-based awards (Options, Restricted Shares
and other Share-based awards are referred to herein as "Awards") to employees
and non-employee directors of, and persons or entities which provide significant
services to, the Company and its affiliates who are selected by the Committee
for participation. As of May 31, 2002, the approximate number of persons
eligible to participate in the Plan was 3,488. The Board has determined that the
additional 50,000,000 Shares reserved for issuance under the Plan will be used
only in connection with the granting of, or settlement of exercise of, indexed
stock options or OSOs.
In order to qualify as a "performance based compensation plan" as defined
under Internal Revenue Code Section 162(m), the Plan is required to indicate the
maximum number of awards an individual may be granted during any calendar year
as well as the maximum number of awards that can be granted to an individual
during the life of the plan. Therefore, for purposes of Section 162(m), the
maximum number of awards that any individual can receive under the Plan in any
single calendar year is 3,000,000. In addition, for purposes of Section 162(m),
no more than 15 million awards may be granted to any one individual during the
life of the Plan. Each of these limitations will be determined prior to the
application of the indexed stock option or OSO performance multiplier (the
"Multiplier") of no greater than eight (8), where the Multiplier is based on the
comparative performance of the Level 3 Common Stock price to the Standard &
Poor's 500 Index.
Options. Options granted under the Plan may be "incentive stock options"
("ISOs"), within the meaning of Section 422 of the Code, or nonqualified stock
options ("NQSOs"); provided, however, that ISOs may only be granted to
participants who are also employees of the Company or a subsidiary corporation
within the meaning of Section 424 of the Code. The terms of Options granted
under the Plan will be set out in option agreements between the Company and
participants which will contain such provisions as the Committee from time to
time deems appropriate, including the exercise price and expiration date of such
Options. The exercise price of the Options is determined by the Committee at the
time of grant, provided that in the case of ISOs, the exercise price must be at
least the fair market value of the Shares on the date of grant. Upon the
exercise of an Option, the amount due the Company may be paid by the holder of
the Option (a) in cash; (b) by the surrender of all or part of an Option; (c) by
the tender to the Company of Shares acquired by the holder on the open market or
owned by the holder for at least six months and registered in his or her name
having a fair market value equal to the amount due to the Company; (d) by
delivering to the Committee a copy of irrevocable instructions to a stockbroker
to deliver promptly to the Company an amount of sale or loan proceeds sufficient
to pay the exercise price, in the case of an Option; (e) in other property,
rights and credits deemed acceptable by the Committee, including a promissory
note; or (f) by any combination of the payment methods specified in (a) through
(e). Notwithstanding the foregoing, any method of payment other than in cash may
be used only with the consent of the Committee or if and to the extent so
provided in the related option agreement.
Indexed Stock Options (Outperform Stock Options). Certain awards may be
designated by the Committee as indexed stock options or outperform stock options
("OSOs"). OSOs are currently designed to provide management with the incentive
to maximize stockholder value and to reward the members of management only when
the Share price outperforms the Standard & Poor's 500 Index. The term of an OSO
shall be four (4) years from the date of grant (subject to a shorter period upon
termination of employment with the Company) after which the OSO shall expire.
OSOs are granted with an initial exercise price equal to the fair market
value on the date of grant (the "Initial Price"). The Initial Price is adjusted
upward or downward as of the date of exercise of the OSOs (the "Adjusted Price")
by a percentage equal to the aggregate increase or decrease (expressed as a
whole percentage point followed by three decimal places) in the Standard and
Poor's 500 Index over the period beginning on the date of grant and ending on
the trading day immediately preceding the date of exercise of the OSOs.
Upon exercise of an OSO, the Committee, in its sole discretion, will
deliver to the holder with respect to and in cancellation of each Share as to
which the OSO is exercised, either (a) a number of whole Shares with a fair
market value on the trading day immediately preceding the date of exercise
(rounded up to the nearest whole share) equal to the product of (A) the fair
market value of a Share on the trading day immediately preceding the date of
exercise, less the Adjusted Price, multiplied by (B) the Multiplier, (b) cash
equal to the aggregate value of the Shares
determined pursuant to clause (a) above, or (c) a combination of Shares and
cash, in any proportion the Committee may determine, having the same aggregate
value as the Shares determined pursuant to clause (a) above, in each case
subject to withholding by the Company.
In response to changing economic and competitive conditions, the Committee
may modify the terms of indexed stock option that are issued in the future, but
the terms of such a grant must require the Level 3 Common Stock to have
outperformed a broad-based, market stock index before the award has any exercise
value.
Restricted Shares. Restricted Shares may be granted by the Committee in its
sole discretion, and such Shares will become unrestricted in accordance with a
schedule established by the Committee. Except as set forth in an agreement
relating to Restricted Shares, each person who is awarded Restricted Shares will
have the entire beneficial ownership of, and all rights and privileges of a
stockholder with respect to, the Restricted Shares awarded to him or her, except
that Restricted Shares may not be sold, transferred, pledged or otherwise
encumbered during the restricted period set by the Committee.
Other Share-based Awards. The Committee may grant any other Share or
Share-related awards to an eligible person under the Plan that the Committee
deems appropriate, including, but not limited to, stock appreciation rights,
bargain purchases of Shares, bonuses of Shares and the grant of Shares based on
performance or upon the satisfaction of other conditions.
Adjustments for Recapitalization, Merger, etc. of the Company
The aggregate number of Shares available under the Plan, Awards granted
under the Plan and any agreements evidencing such Awards, the maximum number of
Shares subject to all Awards and the maximum number of shares with respect to
which any one person may be granted Awards shall be subject to adjustment or
substitution, as determined by the Committee in its sole discretion, as to the
number, price or kind of a Share or other consideration subject to such Awards
or as otherwise determined by the Committee to be equitable (i) in the event of
changes in the outstanding Shares or in the capital structure of the Company by
reason of stock dividends, stock splits, reverse stock splits,
recapitalizations, reorganizations, mergers, consolidations, combinations,
exchanges, or other relevant changes in capitalization occurring after the date
of grant of any such Award or (ii) in the event of any change in applicable laws
or any change in circumstances which results in or would result in any
substantial dilution or enlargement of the rights granted to, or available for,
participants in the Plan, or which otherwise warrants equitable adjustment
because it interferes with the intended operation of the Plan.
Notwithstanding the above, in the event that (i) the Company is merged or
consolidated with another corporation or entity and, in connection therewith,
consideration is received by shareholders of the Company in a form other than
stock or other equity interests of the surviving entity; (ii) all or
substantially all of the assets of the Company are acquired by another person;
(iii) the reorganization or liquidation of the Company; or (iv) the Company
shall enter into a written agreement to undergo an event described in clauses
(i), (ii) or (iii) above, then the Committee may, in its discretion and upon at
least 10 days advance notice to the affected persons, cancel any outstanding
Awards and pay to the holders thereof, in cash or stock, or any combination
thereof, the value of such Awards based upon the price per Share received or to
be received by other shareholders of the Company in the event.
Change of Control
The Committee, in its sole discretion, may (but need not) provide in any
Award agreement that, in the event of a Change in Control (as defined in the
Plan), notwithstanding any vesting schedule otherwise effective with respect to
the Award, (i) in the case of Options or stock appreciation rights, the Award
shall become immediately exercisable with respect to 100 percent of the Shares
subject thereto, (ii) in the case of Restricted Shares, any restrictions shall
expire immediately with respect to 100 percent of such Restricted Shares and
(iii) in the case of any other Award, any other vesting or restricted period to
which such Award is subject shall expire as to 100 percent of such Award.
Shares Subject to the Plan
Subject to the requisite affirmative shareholder vote at the Annual
Meeting, the total number of Shares reserved for issuance under the Plan is
100,728,914 as of May 31, 2002. The Board has determined that the additional
50,000,000 Shares reserved for issuance under the Plan will be used only in
connection with the granting of, or settlement of exercise of, indexed stock
options or OSOs.
Market Value
The closing price of the Shares on the Nasdaq National Market on June 17,
2002 was $4.03 per share.
Amendment and Termination
The Committee may amend the Plan from time to time, as it deems
appropriate. The Committee, however, may not amend any provision relating to
ISOs, the Plan's share reserve or the provision relating to Plan amendment
without the approval of the Board. No amendment to this Plan may deprive a
participant of any Award or rights with respect to an Award without the
participant's consent.
Tax Gross-Up
The Committee, in its sole discretion, may (but need not) provide in any
Award agreement for the payment of additional amounts in respect of the Award in
order to make a Participant whole for some or all of the excise taxes imposed on
a participant pursuant to Section 4999 of the Code in the event that the grant,
exercise, vesting or payment of such Award is deemed to be an "excess parachute
payment" for purposes of Section 280G of the Code.
Federal Tax Consequences
The following is a brief discussion of the Federal income tax consequences
of transactions with respect to Options, Restricted Shares and OSOs under the
Plan based on the Code, as in effect as of the date of this summary. This
discussion is not intended to be exhaustive and does not describe any state or
local tax consequences. Holders of awards under the Plan should consult with
their own tax advisors.
ISOs. No taxable income is realized by the optionee upon the grant or
exercise of an ISO. If Shares are issued to an optionee pursuant to the exercise
of an ISO, and if no disqualifying disposition of such shares is made by such
optionee within two years after the date of grant or within one year after the
transfer of such shares to such optionee, then (i) upon the sale of such shares,
any amount realized in excess of the Option price will be taxed to such optionee
as a long-term capital gain and any loss sustained will be a long-term capital
loss, and (ii) no deduction will be allowed to the Company for Federal income
tax purposes.
If the Shares acquired upon the exercise of an ISO are disposed of prior to
the expiration of either holding period described above, generally, (i) the
optionee will realize ordinary income in the year of disposition in an amount
equal to the excess (if any) of the fair market value of such Shares at exercise
(or, if less, the amount realized on the disposition of such Shares) over the
exercise price paid for such Shares and (ii) the Company will be entitled to
deduct such amount for Federal income tax purposes if the amount represents an
ordinary and necessary business expense. Any further gain (or loss) realized by
the optionee upon the sale of the Shares will be taxed as short-term or
long-term capital gain (or loss), depending on how long the Shares have been
held, and will not result in any deduction by the Company.
If an ISO is exercised more than three months following termination of
employment (subject to certain exceptions for disability or death), the exercise
of the Option will generally be taxed as the exercise of a NQSO, as described
below.
For purposes of determining whether an optionee is subject to alternative
minimum tax liability, an optionee who exercises an ISO generally would be
required to increase his or her alternative minimum taxable income, and compute
the tax basis in the Shares so acquired, in the same manner as if the optionee
had exercised a NQSO. Each optionee is potentially subject to the alternative
minimum tax. In substance, a taxpayer is required to
pay the higher of his/her alternative minimum tax liability or his/her "regular"
income tax liability. As a result, a taxpayer has to determine his/her potential
liability under the alternative minimum tax.
NQSOs. With respect to NQSOs: (i) no income is realized by the optionee at
the time the Option is granted; (ii) generally, at exercise, ordinary income is
realized by the optionee in an amount equal to the excess, if any, of the Fair
Market Value of the shares on such date over the exercise price, and the Company
is generally entitled to a tax deduction in the same amount, subject to
applicable tax withholding requirements; and (iii) at sale, appreciation (or
depreciation) after the date of exercise is treated as either short-term or
long-term capital gain (or loss) depending on how long the shares have been
held.
Restricted Shares. Participants who receive grants of Restricted Shares
generally will be required to include as taxable ordinary income the fair market
value of the Restricted Shares at the time they are no longer subject to
forfeiture or restrictions on transfer for purposes of Section 83 of the Code
(the "Restrictions"), less any purchase price paid by the participant for the
Restricted Shares. Thus, taxable income generally will be realized by the
participant at the end of the restricted period. However, a participant who so
elects under Section 83(b) of the Code (an "83(b) Election") within thirty days
of the date of grant of the Restricted Shares will incur taxable ordinary income
on the date of grant equal to the excess of the fair market value of such shares
of Restricted Shares (determined without regard to the Restrictions) over the
purchase price paid by the participant for the Restricted Shares. If the shares
subject to an 83(b) Election are forfeited, the participant will be entitled
only to a capital loss for tax purposes equal to the purchase price, if any, of
the forfeited shares. With respect to the sale of the shares after the
restricted period has expired, the holding period to determine whether the
participant has long-term or short-term capital gain or loss generally begins
when the restrictions expire and the tax basis for such shares generally will be
based on the fair market value of the shares on that date. However, if the
participant makes an 83(b) Election, the holding period commences on the date of
such election and the tax basis will be equal to the fair market value of the
shares on the date of the election (determined without regard to the
Restrictions). The Company generally will be entitled to a deduction equal to
the amount that is taxable as ordinary income to the participant, subject to
applicable withholding requirements.
OSOs. Participants who receive OSOs will be taxed at ordinary income rates,
at the time an OSO is exercised, on the fair market value of the Shares and cash
received in connection with such exercise, and the Company generally will be
entitled to a deduction equal to the amount of ordinary income so recognized.
Special Rules Applicable to Corporate Insiders
As a result of the rules under Section 16(b) of the Exchange Act ("Section
16(b)"), and depending upon the particular exemption from the provisions of
Section 16(b) utilized, officers and directors of the Company and persons owning
more than 10 percent of the outstanding shares of stock of the Company
("Insiders") may not receive the same tax treatment as set forth above with
respect to the Options, Restricted Shares and other Share-based awards.
Generally, Insiders will not be subject to taxation until the expiration of any
period during which they are subject to the liability provisions of Section
16(b) with respect to the sale of such Shares. Insiders should check with their
own tax advisers to ascertain the appropriate tax treatment for any particular
Award.
New Plan Benefits
The grant of Options, Restricted Shares and other Share-based awards under
the Plan is entirely within the discretion of the Committee. As of the date of
the mailing of this proxy statement, the Company cannot determine the number of
Option, Restricted Share and other Share-based awards that will be granted in
the future. Therefore, we have omitted the tabular disclosure of the benefits or
amounts allocated under the Plan.
The Board unanimously recommends a vote FOR the approval of the 1995 Stock
Plan proposal.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Level 3 Common Stock, as of May 31, 2002, by Level 3's
directors, the Named Executive Officers, and directors and executive officers as
a group, and each person known by the Company to beneficially own more than 5%
of the outstanding Level 3 Common Stock.
Number of Shares of Percent of Common Stock
Name Common Stock(+)(++) Beneficially Owned(++)
Walter Scott, Jr.(1) .................................. 37,298,798 8.5%
James Q. Crowe(2) ..................................... 6,396,612 1.6
R. Douglas Bradbury(3) ................................ 3,165,190 *
Kevin J. O'Hara(4) .................................... 2,043,799 *
Sureel A. Choksi(5).................................... 202,414 *
John F. Waters, Jr.(6) ................................ 475,232 *
Thomas C. Stortz(7).................................... 602,266 *
Mogens C. Bay(8)....................................... 35,000 *
William L. Grewcock(9)................................. 13,040,268 3.2
Richard R. Jaros(10) .................................. 3,518,898 *
Robert E. Julian(11) .................................. 3,993,580 1.0
Charles C. Miller, III(12)............................. 214,287 *
David C. McCourt(13)................................... 115,000 *
Kenneth E. Stinson(14)................................. 924,493 *
Colin V.K. Williams(15) ............................... 323,344 *
Michael B. Yanney (16)................................. 86,460 *
Directors and Executive Officers
as a Group (17 persons)(17) ........................ 70,677,813 15.0
Legg Mason, Inc.(18)................................... 34,322,622 8.7%
* Less than 1%.
(+) It is the Company's practice to include in this table the number of
shares of Level 3 Common Stock issuable upon exercise of Outperform Stock
Options, if any, which are exercisable within 60 days. The value of the
Outperform Stock Options is dependent upon the extent to which the Level 3
Common Stock has outperformed the results of the Standard & Poor's 500
Index. The number of shares of Level 3 Common Stock issuable upon exercise
of an Outperform Stock Option has been calculated based upon the closing
price of the Level 3 Common Stock on May 31, 2002. The number of shares
issuable upon exercise of an Outperform Stock Option is therefore subject
to change to the extent that the relationship between the price of the
Level 3 Common Stock and the results of the Standard & Poor's 500 Index
change.
(++) In response to the possibility of the need to use available cash to
settle OSO exercises in the case of relatively strong Level 3 Common Stock
price growth, James Q. Crowe, CEO, R. Douglas Bradbury, Executive Vice
President and Vice Chairman and all other non-employee members of the Board
of Directors have agreed to irrevocably waive the right to exercise any
OSOs or C-OSOs granted to them during 2001 and the first quarter of 2002.
In addition, Kevin J. O'Hara, President and COO and Charles C. Miller, III,
Executive Vice President and Vice Chairman and each of the 11 Group Vice
Presidents of the Company, have agreed to irrevocably waive the right to
exercise any OSOs or C-OSOs granted to them during 2001 and the first
quarter of 2002 to the extent that the aggregate number of shares of Level
3 Common Stock that could be issued upon exercise of any of those OSOs or
C-OSOs would exceed an aggregate of 275,000 shares of Level 3 Common Stock
per individual. Although these waivers have been granted without any
conditions, the Board has the right to modify or terminate these waivers,
in whole or in part, in its sole discretion. The Board may consider the
approval of the 1995 Stock Plan Proposal, or the performance of the Level 3
Common Stock over time, or the rate at which employees exercise awards
issued under the 1995 Stock Plan or the rates of employee attrition, or a
combination of these factors or other relevant factors, in determining
whether to modify or terminate, in whole or in part, these waivers over
time.
(1) Includes 99,700 shares of Level 3 Common Stock held by the Suzanne Scott
Irrevocable Trust as to which Mr. Scott shares voting and investment powers
and 383,502 shares of Level 3 Common Stock issuable upon conversion of $25
million in principal amount of our 6% convertible subordinated notes that
Mr. Scott holds. In addition, includes 1,514,840 shares of
Level 3 Common Stock issuable upon the exercise of warrants held by Mr.
Scott. Excludes 21,109 shares of Level 3 Common Stock issuable upon the
exercise of vested OSOs.
(2) Includes 520,000 shares of Level 3 Common Stock held by The Cherry Creek
Trust, of which Mr. Crowe is the sole beneficiary. This number excludes
264,621 shares of Level 3 Common Stock issuable upon the exercise of vested
OSOs.
(3) Includes 905,000 shares of Level 3 Common Stock subject to vested
non-qualified stock options. This number excludes 86,156 shares of Level 3
Common Stock issuable upon the exercise of vested OSOs.
(4) Includes 46,000 shares of Level 3 Common Stock held by Kevin J. O'Hara
Family LTD Partnership. Includes 450,000 shares of Level 3 Common Stock
subject to vested non-qualified stock options. Also includes 135,389 shares
of Level 3 Common Stock issuable upon the exercise of vested OSOs.
(5) Includes 90,000 shares of Level 3 Common Stock subject to vested
non-qualified stock options. Also includes 70,414 shares of Level 3 Common
Stock issuable upon the exercise of vested OSOs and C-OSOs.
(6) Includes 402,500 shares of Level 3 Common Stock subject to vested
non-qualified stock options. Also includes 71,232 shares of Level 3 Common
Stock issuable upon the exercise of vested OSOs and C-OSOs.
(7) Includes 150,000 shares of Level 3 Common Stock subject to vested
non-qualified stock options. Also includes 54,266 shares of Level 3 Common
Stock issuable upon the exercise of vested OSOs and C-OSOs.
(8) Excludes 2,586 shares of Level 3 Common Stock issuable upon the exercise of
vested OSOs.
(9) Includes 1,154,640 shares of Level 3 Common Stock held by Grewcock Family
Limited Partnership. Includes 351,230 shares of Level 3 Common Stock held
by the Bill & Berniece Grewcock Foundation as to which Mr. Grewcock shares
voting and investment powers. At May 31, 2002, includes 1,100,000 shares of
Level 3 Common Stock held by a grantor trust, of which Mr. Grewcock is the
residual beneficiary. In addition, includes 1,514,840 shares of Level 3
Common Stock issuable upon the exercise of warrants held by Mr. Grewcock.
Excludes 2,461 shares of Level 3 Common Stock issuable upon the exercise of
vested OSOs.
(10) Includes 370,000 shares of Level 3 Common Stock held by the Jaros Family
Limited Partnership. Includes 2,000,000 shares of Level 3 Common Stock
subject to options held by Mr. Jaros. Excludes 2,461 shares of Level 3
Common Stock issuable upon the exercise of vested OSOs.
(11) Includes 1,000,000 shares held by a Julian Properties, LP, of which Mr.
Julian is the sole general partner. Excludes 2,586 shares of Level 3 Common
Stock issuable upon the exercise of vested OSOs.
(12) Includes 98,463 shares of Level 3 Common Stock issuable upon the exercise
of vested OSOs.
(13) Excludes 2,461 shares of Level 3 Common Stock issuable upon the exercise of
vested OSOs.
(14) Excludes 2,461 shares of Level 3 Common Stock issuable upon the exercise of
vested OSOs.
(15) Includes 7,000 shares held by The Lanhydrock Limited Partnership, of which
Mr. Williams is the sole general partner and 14,000 shares held by Dreason
(Bermuda) Limited of which Mr. Williams is the 70% stockholder. Also
excludes 30,414 shares of Level 3 Common Stock issuable upon the exercise
of vested OSOs.
(16) Excludes 2,586 shares of Level 3 Common Stock issuable upon the exercise of
vested OSOs.
(17) Includes 4,257,500 shares of Level 3 Common Stock subject to vested
non-qualified stock options, 435,686 shares of Level 3 Common Stock
issuable upon exercise of vested OSOs and C-OSOs and 3,029,680 shares of
Level 3 Common Stock issuable upon the exercise of warrants. Excludes
419,902 shares of Level 3 Common Stock issuable upon exercise of vested
OSOs.
(18) Legg Mason, Inc.'s address is 100 Light Street, Baltimore, Maryland 21202.
The following information is based solely on Legg Mason, Inc.'s ("Legg
Mason") Schedule 13G dated February 8, 2002.
Various accounts managed by Legg Mason Funds Management, Inc., LMM LLC,
Legg Mason Capital Management, Inc., Legg Mason Wood Walker, Inc. and
Perigee Investment Counsel, Inc. have the right to receive or the power to
direct the receipt of dividends from, or the proceeds from the sale of
shares of Level 3. No such account owns more than 5% of the outstanding
shares of Level 3 Common Stock. Legg Mason has report that these accounts
share the power to vote and/or dispose of the shares of Level 3 Common
Stock reported in the Schedule 13G.
PERFORMANCE GRAPH
The following performance graph shall not be deemed to be incorporated by
reference by means of any general statement incorporating by reference this
Proxy Statement into any filing under the Securities Act of 1933, as amended or
the Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates such information by reference, and shall not otherwise
be deemed filed under such acts.
The graph below compares the cumulative total return (stock appreciation
plus reinvested dividends) of the Company's common stock with two indexes of
publicly traded stocks. Prior to the Split-off, the Company had two classes of
common stock, Class C Construction & Mining Group Restricted Convertible
Exchangeable Common Stock, par value $.0625 per share (the "Class C Stock") and
Class D Stock. For substantially all of the periods presented the Company's
stock was not publicly traded. Beginning in the fourth quarter 1997, the
Company's Class D Stock commenced trading on the over-the-counter market of the
National Association of Securities Dealers, Inc. During the fourth quarter, the
only quarter during which trading occurred, the range of the high and low bid
information for the Class D Stock was $20.41 to $29.00. The Level 3 Common Stock
now trades on The Nasdaq National Market under the symbol "LVLT." Because the
Split-off occurred during 1998, no performance graph information is presented
for the Class C Stock. For performance graph information regarding the Class C
Stock, please see the proxy materials of Peter Kiewit Sons', Inc.
Pursuant to the terms of the Company's Restated Certificate of
Incorporation for all periods presented, other than for the last three quarters
of 1998, the Company's stock was valued by a formula contained in the Restated
Certificate of Incorporation. Company stock was valued at the end of the
Company's fiscal year and the formula value was reduced as dividends are
declared during the following year. For purposes of the graphs, it has been
assumed that dividends were immediately reinvested in additional shares of Level
3 Common Stock, although such reinvestment was not permitted in actual practice.
Although for fiscal years prior to 1998, the Company's fiscal year ended on the
last Saturday in December, its stock is compared against indexes which assume a
fiscal year ending December 31.
The formula value of the Class D Stock was linked to the performance of the
Company's Diversified Group (which are the operations that remained in the
Company after the Split-off), which is primarily engaged in communications,
information services and coal mining businesses.
The graph compares the cumulative total return of the Level 3 Common Stock
(formerly Class D Stock) for the five year period 1997 - 2001 with the S&P 500
Index and the Nasdaq Telecommunications Index. The graph assumes that the value
of the investment was $100 on December 31, 1996, and that all dividends and
other distributions were reinvested. In addition, all stock prices and dividends
reflect a dividend of four shares of Class D Stock for each outstanding share of
Class D Stock that was effective December 1997 and a dividend of one share of
Level 3 Common Stock (formerly Class D Stock) for each outstanding share of
Level 3 Common Stock effective August 1998.
Comparison of 5 Year Cumulative Total Return
Among the Level 3 Common Stock, the Standard & Poor's 500 Index and
the Nasdaq Telecommunications Index
[Graphic: Performance Graph]
1996 1997 1998 1999 2000 2001
Common Stock 100.00 107.37 794.93 1,509.21 593.22 92.17
Standard &Poor's 500 Index1 100.00 133.36 171.47 207.56 188.66 166.24
Nasdaq Telecommunications Index 100.00 145.97 241.58 431.01 183.57 122.90
1 Copyright (c) 2002 Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. All rights reserved.
OTHER MATTERS
It is not anticipated that any matters other than those described in this
Proxy Statement will be brought before the Annual Meeting. If any other matters
are presented, however, it is the intention of the persons named in the proxy to
vote the proxy in accordance with the discretion of the persons named in the
proxy.
STOCKHOLDER PROPOSALS
Any proposal which a stockholder intends to present at the 2003 Annual
Meeting must be received by Level 3 on or before May 24, 2003, but no earlier
than April 24, 2003 to be included in the proxy material of Level 3 relating to
such meeting. In addition, such proposal must also include a brief description
of the business to be brought before the annual meeting, the stockholder's name
and record address, the number of shares of Level 3 Common Stock which are owned
beneficially or of record by such stockholder, a description of any arrangements
or understandings between the stockholder and any other person in connection
with such proposal and any material interest of such stockholder in such
proposal and a representation that the stockholder intends to appear in person
or by proxy at the Annual Meeting. If the stockholder wishes to nominate one or
more persons for election as a director, such stockholder's notice must comply
with additional provisions as set forth in the Level 3 By-laws, including
certain information with respect to the persons nominated for election as
directors and any information relating to the stockholder that would be required
to be disclosed in a Proxy Filing. Any such proposals should be directed to the
Secretary, Level 3 Communications, Inc., 1025 Eldorado Boulevard, Broomfield,
Colorado, 80021.
Annex I
AUDIT COMMITTEE CHARTER
Organization
The Audit Committee of the Board of Directors shall be comprised of at
least three directors who are independent of management and Level 3
Communications, Inc. (the "Company"). Members of the Audit Committee shall be
considered "independent" as defined from time to time by the listing
requirements of the national securities exchange or over the counter market upon
which the Company's common stock is then listed. All Audit Committee members
will be financially literate, and at least one member will have past employment
experience in finance or accounting or related financial management expertise.
Statement of Policy
The Audit Committee shall provide assistance to the members of the board of
directors in fulfilling their responsibility to the stockholders, potential
stockholders and investment community relating to corporate accounting,
reporting practices of the Company and the quality and integrity of financial
reports of the Company. In so doing, it is the responsibility of the Audit
Committee to maintain free and open communications between the directors, the
independent auditors, the Company's internal audit department and the financial
management of the Company. It is the expectation of the Audit Committee that the
financial management will fulfill its responsibility of bringing any significant
items to the attention of the Audit Committee.
Responsibilities
In carrying out its responsibilities, the Audit Committee believes its
policies and procedures should remain flexible, in order to best react to
changing conditions and to ensure to the directors and stockholders that the
corporate accounting and reporting practices of the Company are in accordance
with pertinent requirements.
In carrying out these responsibilities, the Audit Committee will:
o Obtain annually the full Board of Directors' approval of this Charter
and review and reassess this Charter as conditions dictate.
o Review and recommend to the directors the independent auditors to be
selected to audit the financial statements of the Company and its
divisions and subsidiaries.
o Have a clear understanding with the independent auditors that the
independent auditors are ultimately accountable to the Board of
Directors and the Audit Committee, as the stockholders'
representatives, and that it is the Board of Directors and the Audit
Committee, as the stockholders' representatives, that have the
ultimate authority in deciding to engage, evaluate and, if
appropriate, terminate their services.
o Meet with the independent auditors and financial management of the
Company to review the scope of the proposed audit and quarterly
reviews for the current year and the procedures to be utilized, the
adequacy of the independent auditors' compensation and at the
conclusion thereof review such audit or reviews, including any
comments or recommendations of the independent auditors.
o Review with the independent auditors, the Company's internal auditor
and financial and accounting personnel, the adequacy and effectiveness
of the accounting and financial controls of the Company, and elicit
any recommendations for the improvement of such internal controls or
particular areas where new or more detailed controls or procedures are
desirable.
o Review the financial statements contained in the annual report to
stockholders with management and the independent auditors to determine
that the independent auditors are satisfied with the disclosure and
content of the financial statements to be presented to the
stockholders. Review with financial management and the independent
auditors the results of their timely analysis of significant financial
reporting issues and
practices, including changes in, or adoptions of, accounting
principles and disclosure practices, and discuss any other matters
required to be communicated to the Committee by the auditors.
o Provide sufficient opportunity for the internal and independent
auditors to meet with the members of the Audit Committee without
members of the Company's management present.
o Report the results of the annual audit to the Board of Directors.
o On an annual basis, obtain from the independent auditors a written
communication delineating all their relationships and professional
services as required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees.
o Include a report of the Audit Committee in the proxy statement.
o Submit the minutes of all meetings of the Audit Committee to, or
alternatively, discuss the matters discussed at each Committee meeting
with, the Board of Directors.
o Investigate any matter brought to its attention within the scope of
its duties, with the power to retain outside counsel for this purpose
if, in its judgment, that is appropriate.
[Logo]
ANNUAL MEETING OF STOCKHOLDERS
Wednesday, July 24, 2002
9:00 AM
Civic Auditorium Music Hall
1804 Capitol Avenue
Omaha, NE 68102
[Logo] Level 3 Communications, Inc.
1025 Eldorado Boulevard
Broomfield, CO 80021
revocable proxy
- --------------------------------------------------------------------------------
This proxy is solicited by the Board of Directors for use at the Annual Meeting
on July 24, 2002.
The shares of stock you hold in your account or in a dividend reinvestment
account will be voted as you specify on the reverse side.
If no choice is specified, the proxy will be voted "FOR" Items 1, 2 and 3.
By signing the proxy, you revoke all prior proxies and appoint Thomas C. Stortz
and Neil J. Eckstein, and each of them, with full power of Substitution, to vote
your shares on the matters shown on the reverse side and any other matters which
may come before the Annual Meeting and all adjournments as described in the
Notice of Annual Meeting and Proxy Statement dated June 20, 2002, receipt of
which is hereby acknowledged.
Address Changes:
(If you noted any address changes above, please mark corresponding box on
other side.)
See reverse side for voting instructions.
To be signed and dated on reverse side.
[Logo]
C/O PROXY SERVICES
P.O. BOX 9142
FARMINGDALE, NY 11735
VOTE BY INTERNET - www.proxyvote.com Use the Internet to
transmit your voting instructions and for electronic
delivery of information up until 11:59 P.M. Eastern Time the
day before the cut-off date or meeting date. Have your proxy
card in hand when you access the web site. You will be
prompted to enter your 12-digit Control Number which is
located below to obtain your records and to create an
electronic voting instruction form.
VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone
to transmit your voting instructions up until 11:59 P.M.
Eastern Time the day before the cut-off date or meeting
date. Have your proxy card in hand when you call. You will
be prompted to enter your 12-digit Control Number which is
located below and then follow the simple instructions the
Vote Voice provides you.
VOTE BY MAIL Mark, sign, and date your proxy card and return
it in the postage paid envelope we have provided or return
it to Level 3 Communications, Inc. c/o ADP, 51 Mercedes Way,
Edgewood, NY 11717.
O VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOOLOWS: LVL301 KEEP THIS PORTION FOR YOUR RECORDS
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. DEATACH AND RETURN THIS PORTION ONLY
LEVEL 3 COMMUNICATIONS, INC.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE
VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN,
WILL BE VOTED FOR EACH PROPOSAL.
The Board of Directors Recommends a Vote Far Withholld For All To withhold authority to vote, mark "For All Except" and
FOR Items 1, 2 and 3. All All Except write the nominee's number on the line below.
1. To elect tour Class II Directors to the Board of
Directors of Level 3 Communications, Inc. for a
three-year term until 2005 Annual Meeting of
Stockholders. nominees are: 01) Mogens C. Bay, 02)
Richard R. Jaros, 03) Robert E. Julian, 04) David C.
McCourt.
For Against Abstain
2. To adopt an amendment to Level 3's 1995 Stock Plan O O O
(the "Stock Plan") to increase the number of shares of
common stock, par value $.01 per share of Level 3
(the "Level 3 Common Stock") reserved for issuance under
the Stock Plan by 50,000,000
3. To transact such other business as may properly come before the meeting or
any adjournments or postponements thereof. O O O
For address changes, please check this box and write them on the back
where indicated.
Please sign exactly as your names) appears on Proxy. If held in joint tenancy,
all persons must sign. Trustees, administrators, etc., should include title and
authority. Corporations should provide full name of corporation and title of
authorized officer signing the proxy.
- ---------------------------------------- --------------------------------
Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date