SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
McLeodUSA Incorporated
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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Notes:
MCLEODUSA INCORPORATED
MCLEODUSA TECHNOLOGY PARK
6400 C STREET SW, P.O. BOX 3177
CEDAR RAPIDS, IOWA 52406-3177
LOGO (319) 364-0000
April 15, 1998
Dear Stockholder:
On behalf of the Board of Directors of McLeodUSA Incorporated, it is my
pleasure to invite you to the 1998 Annual Meeting of Stockholders (the "Annual
Meeting"). The Annual Meeting will be held on Wednesday, May 27, 1998 at 10:00
a.m., local time, at the Collins Plaza Hotel, 1200 Collins Road NE,
Cedar Rapids, Iowa.
The Annual Meeting has been called for the following purposes: (1) to elect
three directors to serve on the Board of Directors in the class of directors
whose term expires in 2001, and to elect one director to serve on the Board of
Directors in the class of directors whose term expires in 1999; (2) to ratify
the Board of Directors' appointment of Arthur Andersen LLP as the Company's
independent public accountants for the 1998 fiscal year; and (3) to transact
such other business as may properly come before the Annual Meeting or any
adjournment thereof, all as more fully described in the accompanying Proxy
Statement.
The Board of Directors has approved the matters being submitted by the
Company for stockholder approval at the Annual Meeting and recommends that
stockholders vote "FOR" such proposals. It is important that your views be
represented at the Annual Meeting. Whether or not you plan to attend the
Annual Meeting, please complete, sign and date the enclosed Proxy Card and
promptly return it in the postage prepaid envelope.
Sincerely,
/s/ Clark E. McLeod
Clark E. McLeod
Chairman and Chief Executive Officer
MCLEODUSA INCORPORATED
MCLEODUSA TECHNOLOGY PARK
6400 C STREET SW, P.O. BOX 3177
CEDAR RAPIDS, IOWA 52406-3177
(319) 364-0000
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 27, 1998
NOTICE IS HEREBY GIVEN that the 1998 annual meeting of stockholders (the
"Annual Meeting") of McLeodUSA Incorporated, a Delaware corporation (the
"Company"), will be held on Wednesday, May 27, 1998 at 10:00 a.m., local time,
at the Collins Plaza Hotel, 1200 Collins Road NE, Cedar Rapids, Iowa, for the
purpose of considering and voting upon the following matters:
1. To elect three directors to serve on the Board of Directors in the
class of directors whose term expires in 2001, and to elect one director to
serve on the Board of Directors in the class of directors whose term
expires in 1999;
2. To ratify the Board of Directors' appointment of Arthur Andersen LLP
as the Company's independent public accountants for the 1998 fiscal year;
and
3. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this notice.
Pursuant to the Company's Amended and Restated Bylaws, the Board of
Directors has fixed April 8, 1998 as the record date for the determination of
stockholders entitled to notice of and to vote at the Annual Meeting and at
all adjournments thereof. Only stockholders of record at the close of business
on that date will be entitled to vote at the Annual Meeting and any
adjournment thereof. A list of all stockholders entitled to vote at the Annual
Meeting will be open for examination by any stockholder for any purpose
germane to the Annual Meeting during ordinary business hours for a period of
ten (10) days before the Annual Meeting at the offices of the Company located
at 6400 C Street SW, Cedar Rapids, Iowa 52406.
By Order of the Board of Directors
/s/ Clark E. McLeod
Clark E. McLeod
Chairman and Chief Executive Officer
Cedar Rapids, Iowa
April 15, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE PREPAID ENVELOPE. IF YOU SIGN AND RETURN YOUR PROXY CARD WITHOUT
SPECIFYING A CHOICE, YOUR SHARES WILL BE VOTED IN ACCORDANCE WITH THE
RECOMMENDATIONS OF THE BOARD OF DIRECTORS. YOU MAY, IF YOU WISH, REVOKE YOUR
PROXY AT ANY TIME PRIOR TO THE TIME IT IS VOTED BY FILING WITH THE SECRETARY
OF THE COMPANY A WRITTEN REVOCATION OR A DULY EXECUTED PROXY BEARING A LATER
DATE, OR BY ATTENDING THE ANNUAL MEETING AND VOTING IN PERSON.
MCLEODUSA INCORPORATED
MCLEODUSA TECHNOLOGY PARK
6400 C STREET SW, P.O. BOX 3177
CEDAR RAPIDS, IOWA 52406-3177
(319) 364-0000
----------------
PROXY STATEMENT
1998 ANNUAL MEETING OF STOCKHOLDERS
MAY 27, 1998
----------------
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
This Proxy Statement and the accompanying Proxy Card are furnished to
stockholders of McLeodUSA Incorporated (the "Company") in connection with the
solicitation by the Company's Board of Directors (the "Board of Directors" or
the "Board") of proxies to be used at the 1998 annual meeting of stockholders
(the "Annual Meeting") to be held on Wednesday, May 27, 1998 at 10:00 a.m.,
local time, at the Collins Plaza Hotel, 1200 Collins Road NE, Cedar Rapids,
Iowa, and at any adjournment thereof.
If the enclosed Proxy Card is properly executed and returned to the Company
in time to be voted at the Annual Meeting, the shares represented thereby will
be voted in accordance with instructions marked thereon. EXECUTED BUT UNMARKED
PROXIES WILL BE VOTED: "FOR" PROPOSAL 1 TO ELECT THE BOARD OF DIRECTORS' FOUR
NOMINEES FOR DIRECTOR AND "FOR" PROPOSAL 2 TO RATIFY THE APPOINTMENT OF ARTHUR
ANDERSEN LLP AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS FOR THE 1998
FISCAL YEAR. If any other matters properly come before the Annual Meeting, the
persons named in the accompanying proxy will vote the shares represented by
such proxies on such matters in accordance with their best judgment.
The presence of a stockholder at the Annual Meeting will not automatically
revoke such stockholder's proxy. Stockholders may, however, revoke a proxy at
any time prior to its exercise by filing with the Secretary of the Company a
written revocation or a duly executed proxy bearing a later date, or by
attending the Annual Meeting and voting in person.
The cost of solicitation of proxies will be borne by the Company. In
addition to the solicitation of proxies by mail, the Company, through its
officers, directors or employees, also may solicit proxies personally or by
telephone or other means. Such persons will not be specifically compensated
for such solicitation activities. Arrangements also will be made with
brokerage houses and other custodians, nominees and fiduciaries for forwarding
solicitation materials to the beneficial owners of shares held of record by
such persons, and the Company will reimburse such persons for their reasonable
expenses incurred in that connection.
The close of business on April 8, 1998 has been fixed by the Board of
Directors as the record date (the "Record Date") for determination of
stockholders entitled to vote at the Annual Meeting. As of the Record Date,
the outstanding voting stock of the Company consisted of 62,534,955 shares of
the Company's Class A Common Stock, par value $.01 per share (the "Class A
Common Stock"). Each holder of Class A Common Stock is entitled to one vote
per share with respect to all matters as to which a vote is taken at the
Annual Meeting.
The Amended and Restated Bylaws of the Company (the "Bylaws") provide that
the holders of a majority of the voting rights of the shares of Common Stock
present in person or represented by proxy and entitled to vote shall
constitute a quorum at the Annual Meeting. Stockholders' votes will be
tabulated by persons appointed by the Board of Directors to act as inspectors
of election for the Annual Meeting.
Assuming the presence of a quorum at the Annual Meeting, a plurality of the
votes cast at the Annual Meeting is required for election of directors and a
majority of the votes cast at the Annual Meeting is required to ratify the
appointment of Arthur Andersen LLP as the Company's independent public
accountants. Unless otherwise required by applicable law or the Certificate of
Incorporation or Bylaws, the affirmative vote of a majority of the votes cast
at the Annual Meeting is required to decide any other matter submitted to a
stockholder vote. The Certificate of Incorporation does not provide for
cumulative voting in the election of directors.
Abstentions and broker non-votes will be treated as shares that are present,
in person or by proxy, and entitled to vote for purposes of determining the
presence of a quorum at the Annual Meeting. Broker non-votes will not be
counted as a vote cast on any matter presented at the Annual Meeting. As a
result, abstentions and broker non-votes will not have any effect on Proposals
1 and 2.
As of the Record Date, Clark E. and Mary E. McLeod owned or controlled the
voting of 9,057,920 shares of Class A Common Stock, IES Industries Inc.
(collectively with its subsidiaries, "IES"), through its wholly owned indirect
subsidiary IES Investments Inc., owned 8,977,600 shares of Class A Common
Stock, MidAmerican Energy Holdings Company (collectively with its predecessors
and subsidiaries, "MidAmerican"), through its wholly owned subsidiary MHC
Investment Company Inc., owned 8,059,491 shares of Class A Common Stock and
Richard A. Lumpkin beneficially owned 4,730,017 shares of Class A Common
Stock, representing approximately 14.5%, 14.4%, 12.9% and 7.6%, respectively,
or approximately 49% in the aggregate, of the voting rights of the shares of
Common Stock entitled to vote at the Annual Meeting. Mr. and Mrs. McLeod, IES,
MidAmerican and Mr. Lumpkin have advised the Company that they intend to vote
in favor of approval of all matters described in this Proxy Statement.
Consequently, approval of all the Proposals set forth in this Proxy Statement
is virtually assured. Mr. and Mrs. McLeod, IES, MidAmerican, Mr. Lumpkin and
certain other stockholders also have entered into a voting agreement with
respect to the election of directors. See "Principal Holders of Voting
Securities--Investor Agreement and Stockholders' Agreement."
This Proxy Statement, the Notice of Annual Meeting of Stockholders, the
Proxy Card and the Company's Annual Report to Stockholders were first mailed
to stockholders on or about April 20, 1998.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF
THE PROPOSALS SET FORTH IN THIS PROXY STATEMENT.
2
ELECTION OF DIRECTORS
(PROPOSAL 1)
The Bylaws provide that the Board of Directors shall consist of not fewer
than three directors nor more than fifteen directors and that the number of
directors, within such limits, shall be determined by resolution of the Board
of Directors. The Board of Directors currently consists of nine directors,
divided into three classes of directors serving staggered three-year terms. At
the Annual Meeting, four directors will be elected, three in the class of
directors whose term expires in 2001 and one in the class of directors whose
term expires in 1999. The Board of Directors has nominated for
director Richard A. Lumpkin, Thomas M. Collins and Ronald W. Stepien to be
elected at the Annual Meeting, each for a three-year term, and Robert J.
Currey to be elected at the Annual Meeting, for a one-year term.
Unless otherwise specified on the Proxy Card, it is the intention of the
persons named in the proxy to vote the shares represented by each properly
executed proxy for the election as directors of Messrs. Lumpkin, Collins,
Stepien and Currey. The Board of Directors believes that such nominees will
stand for election and will serve if elected. However, if any person nominated
by the Board of Directors fails to stand for election or is unable to accept
election, the proxies will be voted for the election of such other person or
persons as the persons named in the accompanying proxy shall determine in
accordance with their best judgment. Pursuant to the Bylaws, directors are
elected by plurality vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ITS NOMINEES
FOR DIRECTORS.
3
INFORMATION AS TO NOMINEES AND CONTINUING DIRECTORS
The following table sets forth certain information regarding the Board of
Directors' four nominees for election as directors and those directors who
will continue to serve as such after the Annual Meeting.
AGE AT FOR TERM
MARCH 31, DIRECTOR TO
NOMINEES: 1998 SINCE EXPIRE POSITION(S) HELD WITH THE COMPANY
--------- --------- -------- -------- ---------------------------------
Richard A. Lumpkin...... 63 1997 2001 Vice Chairman and Director
Thomas M. Collins(1)(2). 70 1993 2001 Director
Ronald W. Stepien(1).... 51 1997 2001 Director
Robert J. Currey(3)..... 52 1997 1999 Director
CONTINUING DIRECTORS:
---------------------
Clark E. McLeod......... 51 1991 2000 Chairman, Chief Executive Officer and Director
Blake O. Fisher, Jr. ... 54 1996 2000 Chief Financial and Administrative Officer,
Treasurer and Director
Lee Liu(2).............. 65 1993 2000 Director
Stephen C. Gray......... 39 1992 1999 President, Chief Operating Officer and Director
Paul D. Rhines(2)....... 54 1993 1999 Director
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Mr. Currey resigned his position as an executive officer of the Company
effective March 6, 1998.
The principal occupations for the past five years of each of the four
nominees for director and the five directors whose terms of office will
continue after the Annual Meeting are set forth below.
Clark E. McLeod. Mr. McLeod founded the Company and has served as Chairman,
Chief Executive Officer and a director of the Company since its inception in
June 1991. His previous business venture, Teleconnect Company ("Teleconnect"),
an Iowa-based long distance telecommunications company, was founded in January
1980. Mr. McLeod served as Chairman and Chief Executive Officer of Teleconnect
from January 1980 to December 1988, and from December 1988 to August 1990, he
served as President of Telecom*USA, Inc. ("Telecom*USA"), the successor to
Teleconnect following its merger with SouthernNet, Inc. in December 1988. By
1990, Telecom*USA had become America's fourth largest long distance
telecommunications company with nearly 6,000 employees. MCI Communications
Corporation ("MCI") purchased Telecom*USA in August 1990 for $1.25 billion.
See "Principal Holders of Voting Securities--Investor Agreement and
Stockholders' Agreement."
Richard A. Lumpkin. Mr. Lumpkin has served as Vice Chairman and a director
of the Company since September 1997. Mr. Lumpkin was elected as an officer and
a director of the Company pursuant to the requirements of the Merger Agreement
and the Stockholders' Agreement (both as defined herein). Mr. Lumpkin served
as Chairman and Chief Executive Officer of Consolidated Communications Inc.
("CCI") from 1990 to September 24, 1997, the date CCI was acquired by the
Company. From its formation in 1984 to 1990, Mr. Lumpkin served as President
of CCI. He also has served as Chairman and Chief Executive Officer of Illinois
Consolidated Telephone Company ("ICTC"), an independent local exchange company
and wholly owned subsidiary of CCI, since January 1990. From 1968 to 1990, Mr.
Lumpkin held various executive positions at ICTC, including Vice President of
Operations and Treasurer. He is a director of Ameren Corporation, an electric
utility holding company, its wholly owned subsidiary Central Illinois Public
Service Company, an electric utility, First Mid-Illinois Bancshares, Inc., a
bank holding company ("First Mid-Illinois Bancshares"), its wholly owned
subsidiary First Mid-Illinois Bank & Trust, a bank, and International Teldata
Corporation, an information technology company. Mr. Lumpkin is Chairman of the
Board of Illuminet Holdings, Inc. ("Illuminet"), formerly USTN Holdings, a
telecommunications company. See "Principal Holders of Voting Securities--
Investor Agreement and Stockholders' Agreement."
4
Stephen C. Gray. Mr. Gray has been Chief Operating Officer of the Company
since September 1992, President since October 1994 and a director since April
1993. Prior to joining the Company, Mr. Gray served from August 1990 to
September 1992 as Vice President of Business Services at MCI, where he was
responsible for MCI's local access strategy and for marketing and sales
support of the Business Markets division. From February 1988 to August 1990,
he served as Senior Vice President of National Accounts and Carrier Services
for Telecom*USA where his responsibilities included sales, marketing, key
contract negotiations and strategic acquisitions and combinations. Prior to
joining Telecom*USA, from September 1986 to February 1988, Mr. Gray held a
variety of management positions with Williams Telecommunications Company, a
long distance telephone company. From August 1983 to September 1986, Mr. Gray
held a variety of management positions with Clay Desta Communications, Inc., a
long distance company. Mr. Gray is one of Mr. McLeod's nominees to the Board
of Directors. See "Principal Holders of Voting Securities--Investor Agreement
and Stockholders' Agreement."
Blake O. Fisher, Jr. Mr. Fisher has served as a director of the Company
since October 1996, as Executive Vice President, Corporate Administration and
Chief Financial Officer from September 1996 through October 1997, as Chief
Financial and Administrative Officer since October 1997 and as Treasurer since
February 1996. Mr. Fisher also served as one of IES' nominees to the Board of
Directors from April 1993 to February 1996. He served as Executive Vice
President and Chief Financial Officer of IES, a diversified electric utility
holding company, from January 1991 to February 1996. Mr. Fisher also served as
President of IES Utilities Inc. from February 1995 to February 1996. Prior to
joining IES, Mr. Fisher held a variety of management positions with Consumers
Power Company, an electric utility, including Vice President of Finance and
Treasurer. Mr. Fisher is one of Mr. McLeod's nominees to the Board of
Directors. See "Principal Holders of Voting Securities--Investor Agreement and
Stockholders' Agreement."
Ronald W. Stepien. Mr. Stepien has been a director of the Company since
December 1997, during which time he has been the nominee of MidAmerican to the
Board. He previously served as one of MidAmerican's nominees to the Board of
Directors from July 1995 to February 1996. He has been Executive Vice
President--Marketing and Delivery for MidAmerican since November 1996 and he
was Senior Vice President--Strategy and Corporate Development from June 1995
through November 1996. He previously served as an officer of Iowa-Illinois Gas
and Electric Company from 1990 through 1995. See "Principal Holders of Voting
Securities--Investor Agreement and Stockholders' Agreement."
Thomas M. Collins. Mr. Collins has been a director of the Company since
April 1993. Mr. Collins is Chairman of Shuttleworth & Ingersoll, P.C., a law
firm in Cedar Rapids, Iowa, where he has practiced law since 1952. Mr. Collins
was a director of Teleconnect and its successor, Telecom*USA, from 1985 to
August 1990. He is also a director of APAC TeleServices, Inc., a telemarketing
company. See "Compensation Committee Interlocks and Insider Participation."
Paul D. Rhines. Mr. Rhines has been a director of the Company since April
1993. He is a founder and a general partner of R.W. Allsop & Associates, L.P.
and R.W. Allsop & Associates II L.P., two venture capital limited partnerships
established in Cedar Rapids, Iowa, in 1981 and 1983, respectively. He is also
a founder and general partner of MARK Venture Partners L.P., a limited
partnership which is the general partner of Allsop Venture Partners III, L.P.,
a venture capital limited partnership established in Cedar Rapids, Iowa in
1987. He has also served since 1980 as Executive Vice President and a director
of RWA, Inc., a venture capital management firm. Mr. Rhines was a director of
Teleconnect and its successor, Telecom*USA, from 1982 to 1990. He is also a
director of American Safety Razor Company, a consumer product manufacturing
company.
Robert J. Currey. Mr. Currey has served as a director of the Company since
September 1997. Mr. Currey was elected as a director of the Company pursuant
to the requirements of the Merger Agreement. Mr. Currey also served as Group
President, Telecommunications Services between October 1997 and March 6, 1998;
he resigned his position as an executive officer of the Company effective
March 6, 1998. Mr. Currey is currently serving as President of 21st Century
Telecom Group Inc., a cable and internet services company. Mr. Currey
5
served as President of CCI from March 1990 to September 24, 1997, the date CCI
was acquired by the Company. From June 1988 to March 1990, Mr. Currey served
as Senior Vice President, Operations and Engineering of Citizens Utility Co.,
a diversified utility company. From 1987 to 1988, he served as Executive Vice
President of US SPRINT, an interexchange carrier, and from 1984 to 1987, he
served as Senior Vice President, Operations for United Telecommunications,
Inc., a telecommunications company. Prior to 1984, Mr. Currey served as an
Assistant Vice President with Ameritech Corporation, the regional holding
company for Bell Companies in five Midwestern states and also held a
succession of management positions in operations, personnel, labor relations
and marketing. See "Principal Holders of Voting Securities--Investor Agreement
and Stockholders' Agreement."
Lee Liu. Mr. Liu has been a director of the Company since April 1993, during
which time he has been the nominee of IES to the Board. Mr. Liu has served
since July 1993 as Chairman of IES. He has also served as Chief Executive
Officer of IES since July 1991 and as President from July 1991 to November
1996. From May 1986 to July 1991, Mr. Liu was Chairman, Chief Executive
Officer and President of the predecessor to IES. Mr. Liu has worked for IES
since 1957. Mr. Liu is also a director of Hon Industries, an office furniture
manufacturing company, Eastman Chemical Company, a chemical company, and the
Principal Financial Group, a financial services company. See "Principal
Holders of Voting Securities--Investor Agreement and Stockholders' Agreement."
CORPORATE GOVERNANCE AND RELATED MATTERS
The Board of Directors conducts its business through meetings and through
its committees. The Board of Directors acts as a nominating committee for
selecting candidates to stand for election as directors. Pursuant to the
Bylaws, other candidates also may be nominated by any stockholder, provided
such other nomination(s) are submitted in writing to the Secretary of the
Company no later than 90 days prior to the meeting of stockholders at which
such directors are to be elected, together with the identity of the nominator
and the number of shares of the Company's stock owned, directly and
indirectly, by the nominator. No such nominations have been received as of the
date hereof in connection with the Annual Meeting.
The Board of Directors has established an Audit Committee and a Compensation
Committee, each of which was appointed in March 1996. Prior to March 1996,
there were no Board of Directors committees. The Audit Committee, among other
things, recommends the firm to be appointed as independent accountants to
audit the Company's financial statements, discusses the scope and results of
the audit with the independent accountants, reviews with management and the
independent accountants the Company's interim and year-end operating results,
considers the adequacy of the internal accounting controls and audit
procedures of the Company and reviews the non-audit services to be performed
by the independent accountants. The current members of the Audit Committee are
Messrs. Collins and Stepien. The Compensation Committee reviews and recommends
the compensation arrangements for the Company's management and administers the
Company's stock option plans and stock purchase plan. The current members of
the Compensation Committee are Messrs. Collins, Rhines and Liu.
During the fiscal year ended December 31, 1997, the Board of Directors met
thirteen (13) times. During the same period, the Audit Committee met four (4)
times and the Compensation Committee met ten (10) times. During the fiscal
year ended December 31, 1997, no director attended fewer than 75% of the total
of all meetings of the Board of Directors and any committee on which he
served.
DIRECTORS COMPENSATION
Directors of the Company who are also employees of the Company receive no
directors fees. Non-employee directors receive directors fees of $1,000 for
each Board and committee meeting attended in person and $500 for each Board
and committee meeting attended by telephone. In addition, directors are
reimbursed for their reasonable out-of-pocket travel expenditures incurred.
Directors of the Company are also eligible to receive grants of stock options
under the Company's Directors Stock Option Plan (the "Directors Plan").
6
The Directors Plan was adopted by the Board of Directors and approved by the
stockholders in 1993. On March 28, 1996, the Directors Plan was amended and
restated to be a "formula" plan providing for an automatic grant of stock
options to eligible non-employee directors. Under the Directors Plan, as
amended, the number of shares reserved for purchase pursuant to options was
increased to an aggregate of 550,000 shares of Class A Common Stock (subject
to adjustment for certain events, such as recapitalizations or stock splits,
effected without consideration) for grants to directors of the Company who are
not officers or employees of the Company (each an "Eligible Director").
Options for 450,000 shares of Class A Common Stock had been granted under the
Directors Plan and options to purchase 142,314 shares of Class A Common Stock
had been exercised as of the Record Date. Under the Directors Plan, each
Eligible Director who commences service as a director is granted an initial
option to purchase 10,000 shares of Class A Common Stock. Each such Eligible
Director is also granted an additional option to purchase 5,000 shares of
Class A Common Stock immediately after each of the subsequent two annual
meetings of the Company's stockholders if the Eligible Director continues to
be an Eligible Director. The Directors Plan will terminate automatically on
March 28, 2006, unless terminated earlier by the Board of Directors.
Other than the compensation described above, none of the directors received
any other compensation from the Company in 1997 in connection with their
service as directors.
7
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the cash and
non-cash compensation paid or accrued during the periods indicated to the
Chief Executive Officer and the four other most highly compensated officers of
the Company whose combined salary and bonus exceeded $100,000 during the
fiscal year ended December 31, 1997 (the "Named Executive Officers").
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL
COMPENSATION SECURITIES
NAME AND PRINCIPAL ----------------- UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
- ------------------ ---- -------- -------- ------------ ---------------
Clark E. McLeod........... 1997 $185,262 $ 79,216 223,000 $ 3,000
Chairman and Chief 1996 156,269 72,422 135,500 48,200
Executive Officer 1995 142,803 74,902 75,000 1,500
Stephen C. Gray........... 1997 184,728 199,216 253,000 3,000
President and Chief 1996 156,269 72,422 105,500 3,200
Operating Officer 1995 142,807 74,902 131,250 1,500
Blake O. Fisher, Jr....... 1997 143,484 131,048 168,000 --
Chief Financial and 1996 97,654 28,392 238,625 --
Administrative Officer
and Treasurer
Kirk E. Kaalberg.......... 1997 143,102 82,262 113,000 3,000
Executive Vice President,
Network 1996 107,567 55,923 79,250 3,200
Services 1995 101,528 56,177 75,000 1,463
Casey D. Mahon............ 1997 126,654 91,253 85,000 3,000
Senior Vice President,
General 1996 113,327 40,724 88,625 1,331
Counsel and Secretary(2) 1995 97,750 35,381 65,625 416
- --------
(1) All other compensation represents matching contributions made by the
Company to the McLeodUSA Incorporated 401(k) Plan on behalf of the Named
Executive Officers, and, in the case of Clark E. McLeod, payment by the
Company of the $45,000 filing fee to the Federal Trade Commission (the
"FTC") for a notification pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), filed by Mr. and
Mrs. McLeod in connection with their November 1996 purchase of Class A
Common Stock.
(2) Ms. Mahon retired as an executive officer of the Company effective January
31, 1998.
8
OPTION GRANTS
The following table sets forth information with respect to grants of stock
options to each of the Named Executive Officers during the year ended December
31, 1997. This table should be read in conjunction with the "Ten Year Option
Repricing Table" and the "Compensation Committee Report on Executive
Compensation."
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
--------------------------------------------------------------------------- ---------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE
NAME GRANTED FISCAL YEAR PRICE GRANT DATE EXPIRATION DATE 5% 10%
---- ---------- ------------- -------- ------------------ ------------------ ---------- ----------
Clark E. McLeod 75,000(1)(2) 1.1% $27.50 January 16, 1997 January 16, 2007 $1,297,095 $3,287,094
11,266(3)(4) 0.2% 19.525 March 27, 1997 March 27, 2002 60,773 134,293
11,734(3)(5) 0.2% 17.75 March 27, 1997 March 27, 2007 130,985 331,942
75,000(3)(2) 1.1% 17.75 March 27, 1997 March 27, 2007 837,216 2,121,670
50,000(6) 0.7% 34.50 December 22, 1997 December 22, 2007 1,084,843 2,749,206
Stephen C. Gray 75,000(1)(2) 1.1% 27.50 January 16, 1997 January 16, 2007 1,297,095 3,287,094
23,000(3)(7) 0.3% 17.75 March 27, 1997 March 27, 2007 256,746 650,645
75,000(3)(2) 1.1% 17.75 March 27, 1997 March 27, 2007 837,216 2,121,670
30,000(6) 0.4% 34.75 September 19, 1997 September 19, 2007 655,623 1,661,477
50,000(6) 0.7% 34.50 December 22, 1997 December 22, 2007 1,084,843 2,749,206
Blake O. Fisher, Jr. 40,000(1) 0.6% 27.50 January 16, 1997 January 16, 2007 691,784 1,753,117
23,000(3)(7) 0.3% 17.75 March 27, 1997 March 27, 2007 256,746 650,645
40,000(3)(2) 0.6% 17.75 March 27, 1997 March 27, 2007 446,515 1,131,557
20,000(6) 0.3% 34.75 September 19, 1997 September 19, 2007 437,082 1,107,651
45,000(6) 0.7% 34.50 December 22, 1997 December 22, 2007 976,389 2,474,285
Kirk E. Kaalberg 35,000(1) 0.5% 27.50 January 16, 1997 January 16, 2007 605,311 1,533,977
23,000(3)(7) 0.3% 17.75 March 27, 1997 March 27, 2007 256,746 650,645
35,000(3)(2) 0.5% 17.75 March 27, 1997 March 27, 2007 390,701 990,113
20,000(6) 0.3% 34.50 December 22, 1997 December 22, 2007 433,937 1,099,682
Casey D. Mahon 20,000(1) 0.3% 27.50 January 16, 1997 January 16, 2007 345,892 876,558
23,000(3)(7) 0.3% 17.75 March 27, 1997 March 27, 2007 256,746 650,645
20,000(3)(2) 0.3% 17.75 March 27, 1997 March 27, 2007 223,258 565,779
10,000(6) 0.1% 34.75 September 19, 1997 September 19, 2007 218,541 553,826
12,000(6) 0.2% 34.50 December 22, 1997 December 22, 2007 260,362 659,809
- --------
(1) These options were cancelled and replaced with options granted on March
27, 1997.
(2) These options vest according to the following schedule: 40% after 24
months with an additional 20% on each of the third, fourth and fifth
anniversaries of the option grant.
(3) These options were granted pursuant to a cancellation and reissuance of
options.
(4) These options vest according to the following schedule: 50% at 52 months
and 50% at 59 months.
(5) These options vest according to the following schedule: 2,034 at 57
months, 2,034 at 64 months, and 7,666 at 71 months.
(6) These options vest according to the following schedule: 25% per year for
four years.
(7) These options vest according to the following schedule: 1/3 at 57 months
with an additional 1/3 at each of 64 and 71 months.
9
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to the Named
Executive Officers concerning the exercise of options during fiscal year 1997,
the number of securities underlying unexercised options at the 1997 year-end
and the year-end value of all unexercised in-the-money options held by such
individuals.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
SHARES END AT FISCAL YEAR-END(2)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Clark E. McLeod......... -- $ -- 240,001 275,499 $ 7,369,699 $5,109,007
Stephen C. Gray......... -- -- 617,524 333,625 19,375,584 6,018,997
Blake O. Fisher, Jr..... 3,000 89,500 79,033 303,779 2,359,550 6,064,553
Kirk E. Kaalberg........ 20,000 679,000 220,248 195,186 6,848,614 4,306,452
Casey D. Mahon.......... -- -- 196,245 175,155 6,087,842 3,870,835
- --------
(1) Represents the difference between the exercise price and the closing price
of the Class A Common Stock on the NASDAQ Stock Market upon the date of
exercise.
(2) Represents the difference between the exercise price and the closing price
of the Class A Common Stock on the NASDAQ Stock Market at December 31,
1997.
10
TEN YEAR OPTION REPRICING TABLE
The following table provides information concerning all repricing or
cancellation and reissuance of options to purchase the Company's Class A
Common Stock held by any executive officer of the Company since June 10, 1996,
the date of the Company's initial public offering.
NUMBER OF LENGTH OF
SECURITIES MARKET PRICE EXERCISE NEW ORIGINAL OPTION
UNDERLYING OF STOCK PRICE AT EXERCISE TERM REMAINING
OPTIONS AT TIME OF TIME OF PRICE AT DATE OF
NAME DATE REPRICED(1) REPRICING(1) REPRICING(1) (1) REPRICING(1)
---- ---------------- ----------- ------------ ------------ -------- ---------------
Clark E. McLeod........ March 27, 1997 23,000 $17.75 (2) (3) (2)
Chairman and Chief March 27, 1997 75,000 17.75 $27.50 $17.75 118 months
Executive Officer
Stephen C. Gray........ March 27, 1997 23,000 17.75 20.00 17.75 111 months
President and Chief March 27, 1997 75,000 17.75 27.50 17.75 118 months
Operating Officer
Blake O. Fisher, Jr. .. March 27, 1997 23,000 17.75 20.00 17.75 111 months
Chief Financial and March 27, 1997 40,000 17.75 27.50 17.75 118 months
Administrative Officer
and Treasurer
Arthur L.
Christoffersen........ December 5, 1996 125,000(4) 28.50 33.375 28.50 118 months
Group President, March 27, 1997 125,000 17.75 28.50 17.75 114 months
Publishing Services March 27, 1997 12,000 17.75 27.50 17.75 118 months
Kirk E. Kaalberg....... March 27, 1997 23,000 17.75 20.00 17.75 111 months
Executive Vice March 27, 1997 35,000 17.75 27.50 17.75 118 months
President,
Network Services
Stephen K. Brandenburg. March 27, 1997 23,000 17.75 20.00 17.75 111 months
Executive Vice March 27, 1997 35,000 17.75 27.50 17.75 118 months
President
and Chief Information
Officer
David M. Boatner....... March 27, 1997 23,000 17.75 20.00 17.75 111 months
Executive Vice March 27, 1997 20,000 17.75 27.50 17.75 118 months
President,
Business Services
Albert P. Ruffalo...... March 27, 1997 35,000 17.75 25.25 17.75 112 months
Executive Vice March 27, 1997 40,000 17.75 27.50 17.75 118 months
President, Consumer
Services
Casey D. Mahon......... March 27, 1997 23,000 17.75 20.00 17.75 111 months
Senior Vice President, March 27, 1997 20,000 17.75 27.50 17.75 118 months
General Counsel and
Secretary
- --------
(1) Under regulations adopted by the SEC (as defined herein), repriced options
are defined as any option for which the exercise price has been adjusted
or amended through amendment, cancellation or replacement grants, or any
other means. Except where otherwise noted, all options listed in this
table were granted pursuant to a cancellation and reissuance of options on
March 27, 1997 and will vest from that date.
(2) 5,000 options at $22.00 exercise price and 60 month original term (51
months remaining) and 18,000 options at $20.00 exercise price and 120
month original term (111 months remaining).
(3) 11,266 replacement options at $19.525 exercise price and 11,734
replacement options at $17.75 exercise price.
(4) These options were originally granted on September 20, 1996 and were
repriced on December 5, 1996. The options continued to vest in accordance
with the vesting schedule of the original options. These options were
subsequently cancelled and reissued on March 27, 1997.
11
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to March 1996, there was no Compensation Committee and the entire
Board of Directors participated in deliberations regarding executive officer
compensation. During such period, Messrs. McLeod and Gray were directors and
executive officers of the Company. During the fiscal year ended December 31,
1997, no member of the Board of Directors served as a director or a member of
the compensation committee of any other Company of which any executive officer
served as a member of the Board of Directors.
In 1997, the Company paid 2060 Partnership, L.P. $1,652,189 for the rental
of office and parking spaces in Cedar Rapids, Iowa. 2001 Development Company
("2001"), an Iowa corporation, is the general partner and 80% owner of 2060
Partnership, L.P. IES and the Company own 54.55% and 3.03%, respectively, of
the outstanding stock of 2001. The directors and officers of 2001 included Lee
Liu and Thomas M. Collins, directors of the Company, and Clark E. McLeod, a
director and executive officer of the Company.
During 1997 the Company paid $80,183 to Shuttleworth & Ingersoll, P.C., a
law firm in Cedar Rapids, Iowa, for legal services rendered. The Company plans
to retain the firm in 1998. Thomas M. Collins is Chairman and a stockholder of
Shuttleworth & Ingersoll, P.C.
For a description of certain other transactions, see "--Certain
Transactions."
EMPLOYMENT, CONFIDENTIALITY AND NON-COMPETITION AGREEMENTS
The Company has employment, confidentiality and non-competition agreements
with certain members of senior management, including the Named Executive
Officers, pursuant to which the senior management employees have agreed that
during the term of employment and for a one or two-year period following a
termination for cause, resignation or voluntary termination of employment
(other than on account of the Company's discontinuance of activities), the
employee will not compete with the Company. The agreements also provide that
employees subject to the agreements may not disclose any Company confidential
information while employed by the Company or thereafter. The agreements have
an indefinite term but may be terminated on 30 days' written notice by either
party, provided, however, that the confidentiality and non-competition
obligations will survive any such termination. As partial consideration for
the execution of the employment, confidentiality and non-competition
agreements, the Company has granted to the employees signing such agreements
options to purchase shares of Class A Common Stock at exercise prices which
are based on the fair market value of the Class A Common Stock on the date of
grant. Such options were granted pursuant to the 1996 Plan (as defined
herein).
CHANGE-OF-CONTROL AGREEMENTS
The Company has entered into change-of-control agreements with certain
executive employees, including the Named Executive Officers, which provide for
certain payments and benefits in connection with certain terminations of
employment after a change of control of the Company. The change-of-control
agreements terminate on December 31, 2006, unless a change of control has
occurred during the six months preceding December 31, 2006, in which case the
agreements terminate on December 31, 2007. If an executive who is a party to a
change-of-control agreement terminates employment within six months after a
"change of control" or, if within 24 months after a "change of control," the
executive's employment is terminated by the Company (other than for
"disability," "cause," death or "retirement") or by the executive following a
"material reduction" in responsibilities or compensation (as such terms are
defined in the change-of-control agreements), (i) the executive will be
entitled to a lump sum payment equal to 24 times the executive's "average
monthly compensation" (as defined in the change-of-control agreements) during
the 12 months immediately preceding the change of control or the date of
termination, whichever average monthly compensation is higher, (ii) all of the
executive's outstanding options to purchase stock of the Company will become
immediately exercisable in full and (iii) if the executive elects to continue
coverage under the Company's group health plan pursuant to Section 4980B of
the Internal Revenue Code of 1986, as amended (the "Code"), the Company will
continue to
12
pay the employer portion of the premiums for such coverage for the longer of
24 months or the period of coverage provided pursuant to Section 4980B. An
executive who is entitled to payment(s) pursuant to a change-of-control
agreement is subject to a non-compete provision generally restricting the
executive from competing with the Company for a two-year period after the
termination of employment.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors has prepared the
following report on the Company's policies with respect to the compensation of
executive officers for 1997.
The Board of Directors appointed the Compensation Committee in March 1996.
Since that time, decisions on compensation of the Company's executive officers
have been made by the Compensation Committee. The Compensation Committee also
administers the Company's stock option plans and stock purchase plan. No
member of the Compensation Committee is an employee of the Company. Prior to
March 1996, there were no Board committees and the full Board of Directors
determined all executive compensation matters. During 1997, the Compensation
Committee consisted of Paul D. Rhines, Thomas M. Collins and Lee Liu.
Compensation Policies Toward Executive Officers
The compensation policies of the Company are designed to (i) attract,
motivate and retain experienced and qualified executives, (ii) increase the
overall performance of the Company, (iii) increase stockholder value, and (iv)
increase the performance of individual executives. The Compensation Committee
seeks to provide competitive salaries based upon individual performance
together with annual cash bonuses awarded based on the Company's overall
performance relative to corporate objectives, taking into account individual
contributions, teamwork and performance levels. The Compensation Committee
believes that the level of base salaries plus bonuses of executives should
generally be managed to approximate the 25th percentile of the competitive
market. In addition, it is the policy of the Company to grant stock options to
executives upon their commencement of employment with the Company and annually
thereafter in order to strengthen the alliance of interest between such
executives and the Company's stockholders and to give executives the
opportunity to reach the top compensation levels of the competitive market
depending on the Company's performance (as reflected in the market price of
the Class A Common Stock).
The following describes in more specific terms the elements of compensation
that implement the Compensation Committee's compensation policies, with
specific reference to compensation reported for 1997:
Base Salaries. Base salaries of executives are initially determined by
evaluating the responsibilities of the position, the experience and knowledge
of the individual, and the competitive marketplace for executive talent,
including a comparison to base salaries for comparable positions at peer
public companies in the Company's geographic region. Base salaries for
executive officers are reviewed annually by the Compensation Committee based
upon, among other things, individual performance and responsibilities.
Annual salary adjustments are recommended by the Chief Executive Officer and
Chief Operating Officer by evaluating the performance of each executive
officer after considering new responsibilities and the previous year's
performance. The Compensation Committee performs the same review of the Chief
Executive Officer's and Chief Operating Officer's performance. Individual
performance ratings take into account such factors as achievement of specific
goals that are driven by the Company's strategic plan and attainment of
specific individual objectives. The factors impacting base salary levels are
not assigned specific weights but are subject to adjustments by the
Compensation Committee.
Bonuses. The Company's annual bonuses to its executive officers are based on
both corporate and individual performance, as measured by reference to factors
which reflect objective performance criteria over which management generally
has the ability to exert some degree of control. These corporate performance
factors consist of revenue and earnings targets established in the Company's
annual budget. Bonuses for 1997 were based upon the achievement of such
financial and operating factors.
13
Stock Options. A third component of executive officers' compensation is the
1996 Employee Stock Option Plan (the "1996 Plan") pursuant to which the
Company grants executive officers and certain other employees options to
purchase shares of Class A Common Stock.
The Compensation Committee grants stock options to the Company's executives
in order to align their interests with the interests of the stockholders.
Stock options are considered by the Compensation Committee to be an effective
long-term incentive because the executives' gains are linked to increases in
the stock value which in turn provides stockholder gains. The Compensation
Committee generally grants options to new executive officers and other key
employees upon their commencement of employment with the Company and annually
thereafter. The options generally are granted at an exercise price equal to
the market price of the Class A Common Stock at the date of the grant. Options
granted to executive officers typically vest over a period of one to six years
following the date of grant. The maximum option term is ten years (or five
years in the case of an incentive stock option (as defined in the Code)
granted to an optionee beneficially owning more than 10% of the outstanding
Class A Common Stock). The full benefit of the options is realized upon
appreciation of the stock price in future periods, thus providing an incentive
to create value for the Company's stockholders through appreciation of stock
price. Management of the Company believes that stock options have been helpful
in attracting and retaining skilled executive personnel.
Stock option grants made to executive officers in 1997 reflect significant
individual contributions relating to the Company's operations and
implementation of the Company's development and growth programs. Certain newly
hired executive officers also received stock option grants at the time of
their employment with the Company. During 1997, the Company granted stock
options covering a total of 6,674,201 shares of Class A Common Stock to 2,809
employees, including options covering an aggregate of 1,817,000 shares of
Class A Common Stock to eleven of the Company's executive officers. The per
share option exercise prices of such options ranged from $17.75 to $35.25,
which generally equaled the fair market value of a share of Class A Common
Stock on the respective dates of grant. In March 1997, the Compensation
Committee determined to offer to cancel each option granted between June 10,
1996 and January 31, 1997 in exchange for the grant of a new option (a
"Replacement Option") to purchase the same number of shares of Class A Common
Stock at an exercise price equal to the fair market value of the Class A
Common Stock on the date of grant of the Replacement Option. The Replacement
Option's vesting schedule commences on the date of grant of the Replacement
Option. See "--Report on Cancellation and Reissuance of Options."
Other. The Company has adopted a contributory retirement plan (the "401(k)
Plan") for all of its employees (including executive officers) age 21 and over
with at least three months of service to the Company. The 401(k) Plan provides
that each participant may contribute up to 15% of his or her salary (not to
exceed the annual statutory limit). The Company generally makes matching
contributions to each participant's account equal to 50% of such participant's
contribution up to 2% of such participant's annual compensation.
Chief Executive Officer Compensation
The executive compensation policy described above is applied in setting Mr.
McLeod's compensation. Mr. McLeod generally participates in the same executive
compensation plans and arrangements available to the other senior executives.
Accordingly, his compensation consists of annual base salary, annual bonus,
and long-term equity-linked compensation. The Compensation Committee's general
approach in establishing Mr. McLeod's compensation is to be competitive with
peer companies, but to have a large percentage of his target compensation
based upon the long-term performance of the Company, as reflected in the
market price of the Class A Common Stock.
Mr. McLeod's compensation during the year ended December 31, 1997 included
$185,262 in base salary and $79,216 in a cash bonus. Mr. McLeod's salary and
bonus payments for 1997 were based on, among other matters, the Company's
performance and the 1996 compensation of chief executive officers of peer
companies, although his compensation was not targeted to any particular group
of these companies.
14
Report on Cancellation and Reissuance of Options
On March 27, 1997, the Compensation Committee approved resolutions
authorizing the exchange of certain outstanding stock options held by certain
employees, including officers of the Company, on the terms described below.
The overall purpose of the Company's stock option plan has been to attract and
retain the services of the Company's employees and to provide incentives to
such persons to exert exceptional efforts for the Company's success. The
Compensation Committee concluded that the decline in the market value of the
Company's Common Stock had diminished the value of the Company's stock option
program as an element of the Company's compensation arrangements. Accordingly,
the Compensation Committee approved the exchange program described below.
Other than Clark E. McLeod, all employees of the Company, including
officers, were given the opportunity to exchange for Replacement Options on a
one-for-one basis any unexercised options granted during the period from June
10, 1996 through January 31, 1997 pursuant to the 1996 Plan. The exercise
price of the Replacement Options was $17.75 per share, with a new grant date
of March 27, 1997.
Clark E. McLeod was given the opportunity to exchange for replacement
options ("McLeod Replacement Options") on a one-for-one basis any unexercised
options ("Old McLeod Options") granted during the period from June 10, 1996
through January 31, 1997 pursuant to the 1996 Plan. Specifically, Mr. McLeod
was offered the opportunity to exchange Old McLeod Options for 11,266 shares
of Class A Common Stock for McLeod Replacement Options at an exercise price of
$19.525 per share and to exchange Old McLeod Options for 86,734 shares of
Class A Common Stock for McLeod Replacement Options at an exercise price of
$17.75.
Compensation Deductibility Policy
Under Section 162(m) of the Code, and applicable Treasury regulations, no
tax deduction is allowed for annual compensation in excess of $1 million paid
to any of the Company's five most highly compensated executive officers.
However, performance-based compensation that has been approved by stockholders
is excluded from the $1 million limit if, among other requirements, the
compensation is payable only upon attainment of pre-established, objective
performance goals and the board committee that establishes such goals consists
only of "outside directors" as defined for purposes of Section 162(m). All of
the members of the Compensation Committee qualify as "outside directors." The
Compensation Committee intends to maximize the extent of tax deductibility of
executive compensation under the provisions of Section 162(m) so long as doing
so is compatible with its determinations as to the most appropriate methods
and approaches for the design and delivery of compensation to the Company's
executive officers.
Respectfully submitted,
Compensation Committee
Paul D. Rhines, Chairman
Thomas M. Collins
Lee Liu
15
COMPARATIVE STOCK PERFORMANCE
The following chart sets forth comparative information regarding the
Company's cumulative stockholder return on its Class A Common Stock since its
initial public offering completed in June 1996. Total stockholder return is
measured by dividing total dividends (assuming dividend reinvestment) plus
share price change for a period by the share price at the beginning of the
measurement period. The Company's cumulative stockholder return based on an
investment of $100 at June 11, 1996, when the Class A Common Stock was first
traded on the NASDAQ Stock Market, at its closing price of $25.125, is
compared to the cumulative total return of the Standard & Poor's 500 Stock
Index and the NASDAQ Telecommunications Index, comprised of publicly traded
companies which are principally in the telecommunications business, during
that same period.
COMPARISON OF CUMULATIVE TOTAL RETURNS
Comparison of Eighteen Month Cumulative Total Return*
Among McLeodUSA Incorporated, The S&P 500 Stock Index
and The NASDAQ Telecommunications Index
NASDAQ
S&P 500 TELECOMMUN-
Measurement Period MCLEOD USA STOCK ICATIONS
(Quarter Covered) INCORPORATED INDEX STOCKS INDEX
- --------------------- ------------- --------- ------------
Pt-06/11/1996 $100.00 $100.00 $100.00
QTR 06/30/1996 $ 96.00 $100.00 $ 97.00
QTR 09/30/1996 $131.00 $102.00 $ 97.00
QTR 12/31/1996 $101.00 $110.00 $ 93.00
QTR 03/31/1997 $ 71.00 $113.00 $ 87.00
QTR 06/30/1997 $134.00 $132.00 $108.00
QTR 09/30/1997 $157.00 $141.00 $125.00
QTR 12/31/1997 $127.00 $145.00 $133.00
- --------
* $100 invested on June 11, 1996, including reinvestment of dividends. Fiscal
year ending December 31, 1997.
16
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, officers and beneficial
owners of more than 10% of the Class A Common Stock to file with the
Securities and Exchange Commission (the "SEC") initial reports of ownership of
the Company's equity securities and to file subsequent reports when there are
changes in such ownership. Officers, directors and beneficial owners of more
than 10% of the Class A Common Stock are required by SEC regulations to
furnish the Company with copies of all Section 16(a) reports they file.
Based on its review of these reports and on written representations from the
reporting persons that no other reports were required, the Company believes
that during the fiscal year ended December 31, 1997 all Section 16(a) filing
requirements applicable to the Company's officers, directors and greater than
ten percent beneficial owners were complied with, except that one Form 4 for
each of MidAmerican and Russell E. Christiansen were filed late.
CERTAIN TRANSACTIONS
On September 24, 1997, the Company acquired CCI (the "CCI Acquisition")
pursuant to an Agreement and Plan of Reorganization dated as of June 14, 1997
(the "Merger Agreement"). CCI offers a variety of communications products and
services, including local exchange and long distance services and "white page"
and "yellow page" telephone directory publishing. Under the terms of the
Merger Agreement, the Company issued an aggregate of 8,488,596 shares of Class
A Common Stock and paid approximately $155 million in cash to the shareholders
of CCI. On September 25, 1997, and pursuant to the terms of the Merger
Agreement, Richard A. Lumpkin, the Chairman and Chief Executive Officer of CCI
and Robert J. Currey, the President and Chief Operating Officer of CCI, were
elected directors of the Company and joined the Company's executive management
team. Mr. Lumpkin, certain members of his family and trusts for the benefit
thereof owned approximately 13.6% of the shares of Class A Common Stock
outstanding as of the Record Date.
CCI provides paging services, customer premise equipment ("CPE"), labor and
services for CPE, long distance service, 800 service and private lines to
First Mid-Illinois Bancshares. First Mid-Illinois Bancshares paid the Company
$278,145 for these services in 1997. Richard A. Lumpkin, Margaret Lumpkin Keon
and Mary Lumpkin Sparks own approximately 6.8%, 6.8% and 13.2% of the capital
stock of First Mid-Illinois Bancshares, respectively. Richard A. Lumpkin is
also a director of First Mid-Illinois Bancshares. Mr. Lumpkin is also a
director, executive officer and significant stockholder of the Company and
Mrs. Keon and Mrs. Sparks are significant stockholders of the Company.
Illuminet paid the Company $1,573,910 in 1997 for the rental of building
space and for DS-1 usage and transmission facilities in the form of private
leased lines. The Company paid Illuminet $955,909 in 1997 for database
verification services and SS7 link services. Richard A. Lumpkin is the
Chairman of the Board of Directors of Illuminet.
Ameren Corporation and Central Illinois Public Service Company collectively
paid the Company $1,154,148 in 1997 for private line services and long
distance services. Richard A. Lumpkin is a director of Ameren Corporation and
Central Illinois Public Service Company.
The Sarah Bush Lincoln Health Center paid approximately $590,000 to the
Company in 1997 for private line services, paging services, CPE, long distance
service, 800 service, private lines and a wiring project. Richard A. Lumpkin
was a director of Sarah Bush Lincoln Health Center until October 1997.
On July 23, 1997 the Company acquired certain real property consisting of
two condominiums, from Thomas M. Collins, for a total purchase price of
$171,000. The purchase price was determined by independent appraisal. Mr.
Collins is a director of the Company.
In June 1997, the Company acquired certain real property, including an
approximately 15,000 square foot building, located at 5617 West Locust Street,
Davenport, Scott County, Iowa, from MidAmerican. The Company intends to use
this property as a point of presence to support its fiber optic network
primarily in eastern and
17
southeastern Iowa, Wisconsin and Illinois. The facility will house certain
equipment, including fiber optic transmission and network monitoring
equipment, a power backup generator and battery plant and related network
equipment. The Company paid MidAmerican an aggregate cash purchase price of
$500,000 for the property. The purchase price was determined by independent
appraisal.
In April 1997, the Company, Clark E. McLeod, Stephen C. Gray and Blake O.
Fisher, Jr. jointly purchased a jet aircraft for an aggregate of approximately
$2.25 million. Subsequently, the ownership was reallocated and Arthur L.
Christoffersen and Richard A. Lumpkin each purchased an interest. In
connection with the ownership reallocation, the Company paid approximately
$1.35 million for a 60% ownership percentage and Messrs. McLeod, Gray, Fisher,
Christoffersen and Lumpkin each paid approximately $180,000 for an ownership
percentage of 8% each. The Company and Messrs. McLeod, Gray, Fisher,
Christoffersen and Lumpkin, have entered into a Joint Ownership Agreement
pursuant to which the parties have agreed to share the operational expenses of
the aircraft in proportion to their respective ownership interest in the
aircraft (60% by the Company, 8% each by Messrs. McLeod, Gray, Fisher,
Christoffersen and Lumpkin). Messrs. McLeod and Lumpkin are directors,
executive officers and significant stockholders of the Company. Messrs. Gray
and Fisher are directors and executive officers of the Company and Mr.
Christoffersen is an executive officer of the Company.
On January 30, 1997, the Company acquired Digital Communications of Iowa,
Inc. ("Digital Communications") in a stock transaction valued at approximately
$2.3 million, based on the average price of the Class A Common Stock on the
NASDAQ National Market at the time of the transaction. Clark E. McLeod, a
director and executive officer of the Company, and Mary E. McLeod, a
significant stockholder of the Company, owned 280,000 shares (representing
approximately 58%) of Digital Communications' common stock, which were
exchanged for 49,250 shares of Class A Common Stock. Mr. McLeod served as a
director of Digital Communications. A Special Committee of the Board of
Directors, consisting of disinterested directors, approved the acquisition of
Digital Communications as fair to, and in the best interests of, the
stockholders of the Company.
The Company and McLeodUSA Network Services, Inc., a wholly owned subsidiary
of the Company ("McLeodUSA Network Services"), have entered into two
agreements with IES pursuant to which IES has agreed to grant the Company
access to certain of IES' towers, rights-of-way, conduits and poles in
exchange for capacity on the Company's network.
In February 1996, the Company entered into two agreements with MidAmerican,
pursuant to which MidAmerican has agreed to grant the Company access to
certain of MidAmerican's towers, rights-of-way, conduits and poles in exchange
for capacity on the Company's network.
On July 18, 1995 and March 29, 1996, respectively, the Company loaned
$75,000 to each of Kirk E. Kaalberg and Stephen K. Brandenburg in exchange for
unsecured notes executed by Mr. Kaalberg and Mr. Brandenburg, respectively.
Interest accrues on both loan amounts at the applicable rate as determined in
accordance with Internal Revenue Service regulations. Pursuant to the terms of
the notes executed by Mr. Kaalberg and Mr. Brandenburg, respectively, one
annual interest-only payment was made in 1997. Mr. Brandenburg will make
another annual interest-only payment in 1998 and then will make annual
payments of $25,000 plus accrued interest in each of the three years
thereafter. Mr. Kaalberg will make an annual payment of $25,000 plus accrued
interest in 1998 and in each of the two years thereafter. Messrs. Kaalberg and
Brandenburg are executive officers of the Company.
In March 1996, the Board of Directors adopted a policy requiring that any
material transactions between the Company and persons or entities affiliated
with officers, directors or principal stockholders of the Company be on terms
no less favorable to the Company than reasonably could have been obtained in
arms' length transactions with independent third parties or be approved by a
majority of disinterested directors.
For a description of certain other transactions, see "--Compensation
Committee Interlocks and Insider Participation."
18
RATIFICATION OF THE APPOINTMENT
OF THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS
FOR THE 1998 FISCAL YEAR
(PROPOSAL 2)
On March 27, 1997, the Company engaged the accounting firm of Arthur
Andersen LLP as the Company's principal independent accountants, to replace
McGladrey & Pullen, LLP, the Company's former independent accountants,
effective with such engagement. The decision to change independent accountants
was made following a review of competitive proposals submitted by Arthur
Andersen LLP and two other major public accounting firms, and was recommended
by the Audit Committee of the Board of Directors and approved by the Board.
McGladrey & Pullen, LLP did not resign and did not decline to stand for re-
election.
During the two fiscal years ended December 31, 1996 and 1995, and the
interim period subsequent to December 31, 1996, there have been no
disagreements with McGladrey & Pullen, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which would have caused McGladrey & Pullen, LLP to make reference in
their report to such disagreements if not resolved to their satisfaction.
McGladrey & Pullen, LLP's reports on the financial statements of the Company
for the fiscal years ended December 31, 1996 and 1995 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
The Company has provided McGladrey & Pullen, LLP with a copy of this
disclosure and requested that McGladrey & Pullen, LLP furnish it with a letter
addressed to the SEC stating whether it agrees with the above statements. A
copy of the McGladrey & Pullen, LLP letter addressed to the SEC is filed as an
exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
Stockholder ratification of Proposal 2 is not required by the Bylaws or
otherwise. However, the Board of Directors is submitting Proposal 2 to the
stockholders for ratification as a matter of good corporate practice. If the
stockholders fail to ratify Proposal 2, the Board of Directors will reconsider
whether or not to retain Arthur Andersen LLP. Even if Proposal 2 is ratified,
the Board of Directors in its discretion may direct the appointment of a
different independent accountant at any time during the year if the Board of
Directors determines that such a change would be in the best interests of the
Company and its stockholders.
Representatives of Arthur Andersen LLP will be present at the Annual Meeting
and will have the opportunity to make a statement if they so desire and will
be available to respond to appropriate questions.
The affirmative vote of a majority of the votes cast at the Annual Meeting
is required to approve Proposal 2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2.
19
STOCK OWNED BY MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Class A Common Stock as of the Record Date by (i) each
director and nominee for director of the Company, (ii) each Named Executive
Officer and (iii) all executive officers and directors as a group.
BENEFICIAL
OWNERSHIP(1)(2)
------------------
NUMBER
NAME OF BENEFICIAL OWNER OF SHARES PERCENT
------------------------ ---------- -------
Clark E. McLeod(3)(4).................................... 9,330,734 14.9%
Richard A. Lumpkin(3)(5)................................. 4,730,017 7.6
Blake O. Fisher, Jr...................................... 128,141 *
Robert J. Currey(3)(6)................................... 2,552,120 4.1
Ronald W. Stepien........................................ 28,125 *
Thomas M. Collins........................................ 257,901 *
Paul D. Rhines........................................... 391,801 *
Lee Liu.................................................. 37,827 *
Stephen C. Gray(7)....................................... 682,049 1.1
Kirk E. Kaalberg......................................... 228,651 *
Casey D. Mahon(8)........................................ 224,137 *
Directors and executive officers as a group (16
persons)(9)............................................. 17,351,304 29.4
- --------
* Less than one percent.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be a "beneficial owner" of a security if he or she has or shares the power
to vote or direct the voting of such security or the power to dispose or
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days. More than one person may be
deemed to be a beneficial owner of the same securities. The percentage
ownership of each stockholder is calculated based on the total number of
outstanding shares of Class A Common Stock as of the Record Date and those
shares of Class A Common Stock that may be acquired by such stockholder
within 60 days. Consequently, the denominator for calculating such
percentage may be different for each stockholder.
(2) This table is based upon information supplied by directors and executive
officers of the Company. Unless otherwise indicated in the footnotes to
this table, each of the stockholders named in this table has sole voting
and investment power with respect to the shares shown as beneficially
owned. Also, except as noted below, this table includes the following
shares that the individuals named below have the right to purchase within
60 days from the Record Date pursuant to options:
Clark E. McLeod.............................. 272,814
Blake O. Fisher, Jr.......................... 105,626
Ronald W. Stepien............................ 4,687
Thomas M. Collins............................ 65,627
Paul D. Rhines............................... 65,627
Lee Liu...................................... 25,627
Stephen C. Gray.............................. 569,697
Kirk E. Kaalberg............................. 182,748
Casey D. Mahon(8)............................ 2,344
---------
Total..................................... 1,294,797
=========
Directors and executive officers as a group
(16 persons)(9)............................. 1,495,315
=========
(3) Richard Anthony Lumpkin, Margaret L. Keon, Mary Lee Sparks and all of their
children, along with Robert J. Currey, David R. Hodgman and BankOne, Texas,
N.A., individually, or as trustees or settlors for trusts for the benefit
of members of the family of Richard Adamson Lumpkin, MidAmerican, IES,
Clark E. McLeod and Mary McLeod are parties to the Stockholders' Agreement
and, accordingly, constitute a group
20
within the meaning of Section 13(d)(3) of the Exchange Act. As of the
Record Date, the members of this group beneficially owned an aggregate of
36,166,483 shares of Class A Common Stock, representing an ownership
interest of 56.4%. Includes 1,300,688 shares of Class B Common Stock that
IES has the right to purchase pursuant to options and 272,814 shares of
Class A Common Stock that Mr. McLeod has the right to purchase within 60
days from the Record Date pursuant to options.
(4) Includes 4,319,975 shares of Class A Common Stock held of record by Mary
A. McLeod, Mr. McLeod's wife, over which Mr. McLeod has shared voting
power. Also includes 125,000 shares of Class A Common Stock held by the
Clark E. McLeod Unitary Trust and 125,000 shares of Class A Common Stock
held by the Mary E. McLeod Unitary Trust for which Mr. McLeod is a trustee
and over which Mr. McLeod has shared voting and investment power. Mr.
McLeod's address is c/o McLeodUSA Incorporated, McLeodUSA Technology Park,
6400 C Street, SW, P.O. Box 3177, Cedar Rapids, IA 54206-3177.
(5) Includes 4,730,017 shares of Class A Common Stock held by Richard A.
Lumpkin as trustee or settlor for various trusts for the benefit of the
family of Richard A. Lumpkin. Includes 311,127 shares of Class A Common
Stock over which Mr. Lumpkin has sole voting power and 4,418,890 shares of
Class A Common Stock over which Mr. Lumpkin has shared voting power. Mr.
Lumpkin's address is c/o McLeodUSA Incorporated, McLeodUSA Technology
Park, 6400 C Street, SW, P.O. Box 3177, Cedar Rapids, IA 54206-3177.
(6) Includes 2,552,120 shares of Class A Common Stock held by Robert J. Currey
and David R. Hodgman as trustees for various trusts for the benefit of
members of the family of Richard A. Lumpkin. Robert J. Currey and David R.
Hodgman have shared voting power over all such shares of Class A Common
Stock.
(7) Includes 3,750 shares of Class A Common Stock held of record by the
Stephen Samuel Gray Irrevocable Trust, and 3,750 shares of Class A Common
Stock held of record by the Elizabeth Mary Fletcher Gray Education Trust,
of which Mr. Gray is the trustee. Includes 26,250 shares of Class A Common
Stock held of record by Mernat & Co. for the benefit of Mr. Gray.
(8) Ms. Mahon retired as an executive officer of the Company effective January
31, 1998. Her beneficial ownership is calculated as of that date pursuant
to a Form 4 filed with the SEC on February 8, 1998.
(9) Includes Ms. Mahon's beneficial ownership as of January 31, 1998
(including 2,344 shares of Class A Common Stock which Ms. Mahon had the
right to purchase within 60 days from such date).
21
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth information as of the Record Date, with
respect to the ownership of shares of Class A Common Stock by each person
believed by management to be the beneficial owner of more than five percent of
the Company's outstanding Class A Common Stock. The information is based on
the most recent Schedule 13D or 13G filed with the SEC on behalf of such
persons or other information made available to the Company. Except as
otherwise indicated, the reporting persons have stated that they possess sole
voting and sole dispositive power over the entire number of shares reported.
AMOUNT AND PERCENT OF
NATURE OF COMMON
BENEFICIAL STOCK
NAME OF BENEFICIAL OWNER OWNERSHIP OUTSTANDING
------------------------ ---------- -----------
IES Investments Inc.(1)............................. 10,278,288 16.1%
Clark E. McLeod(2).................................. 9,330,734 14.9
MHC Investment Company(3)........................... 8,068,865 12.9
Richard A. Lumpkin(4)............................... 4,730,017 7.6
Mary E. McLeod(4)................................... 4,569,975 7.3
FMR Corp.(5)........................................ 3,533,039 5.6
- --------
(1) Includes 1,300,688 shares of Class B Common Stock that IES has the right
to purchase pursuant to options. IES Investments Inc. is a wholly owned
indirect subsidiary of IES. The address of IES is 200 First St., SE, Cedar
Rapids, IA 52406. IES has entered into a definitive agreement of merger
with WPL Holdings, Inc., the parent of Wisconsin Power Light Company, and
with Interstate Power Company, which merger is subject to certain
regulatory and other approvals.
(2) See "Stock Owned by Management."
(3) MHC Investment Company is a wholly owned indirect subsidiary of
MidAmerican. The address of MHC Investment Company is c/o MidAmerican
Energy Holdings Company, 500 E. Court Ave., Des Moines, IA 50309. Includes
23,438 shares held of record by Ronald W. Stepien. Includes 4,687 shares
of Class A Common Stock that Ronald W. Stepien has the right to purchase
within 60 days from the Record Date pursuant to options. MHC Investment
Company has the power to direct the disposition of such shares.
(4) Includes 125,000 shares of Class A Common Stock held by the Mary E. McLeod
Unitary Trust and 125,000 shares of Class A Common Stock held by the Clark
E. McLeod Unitary Trust for which Mrs. McLeod is a trustee and over which
Mrs. McLeod has shared voting and investment power. Mrs. McLeod's address
is c/o McLeodUSA Incorporated, McLeodUSA Technology Park, 6400 C Street,
SW, P.O. Box 3177, Cedar Rapids, IA 54206-3177.
(5) Fidelity Management & Research Company, 82 Devonshire Street, Boston,
Massachusetts 02109, a wholly-owned subsidiary of FMR Corp. and an
investment advisor registered under Section 203 of the Investment Advisors
Act of 1940, is the beneficial owner as a result of acting as investment
advisor to various investment companies registered under Section 8 of the
Investment Company Act of 1940. The amount of the beneficial ownership was
disclosed on a Schedule 13G filed by FMR Corp. with the SEC on
February 14, 1998.
INVESTOR AGREEMENT AND STOCKHOLDERS' AGREEMENT
The Company has entered into an agreement (as amended, the "Investor
Agreement") with IES, MidAmerican and Clark E. and Mary E. McLeod
(collectively, the "Investor Stockholders") and certain other stockholders.
The Investor Agreement provides that each Investor Stockholder, for so long as
such Investor Stockholder owns at least 10% of the outstanding capital stock
of the Company, shall vote such Investor
22
Stockholder's stock and take all action within its power to (i) establish the
size of the Board of Directors at nine directors; (ii) cause to be elected to
the Board of Directors one director designated by IES (for so long as IES owns
at least 10% of the outstanding capital stock of the Company); (iii) cause to
be elected to the Board of Directors one director designated by MidAmerican
(for so long as MidAmerican owns at least 10% of the outstanding capital stock
of the Company); (iv) cause to be elected to the Board of Directors three
directors who are executive officers of the Company designated by Clark E.
McLeod (for so long as Clark E. and Mary E. McLeod collectively own at least
10% of the outstanding capital stock of the Company); and (v) cause to be
elected to the Board of Directors four independent directors nominated by the
Board of Directors. The Investor Agreement also provides that, for a period
ending in March 1999 and subject to certain exceptions, each of IES and
MidAmerican will refrain from acquiring, or agreeing or seeking to acquire,
beneficial ownership of any securities issued by the Company. In addition, the
Investor Agreement provides that, for a two-year period commencing on June 10,
1996 and subject to certain exceptions, no Investor Stockholder will sell or
otherwise dispose of any equity securities of the Company without the consent
of the Board of Directors. In December 1996, the Board of Directors consented
to (i) the transfer by Clark and Mary McLeod of (A) an aggregate of 160,000
shares of Class A Common Stock as a gift to the McLeod Charitable Foundation,
Inc., an Iowa non-profit Company controlled by Mr. and Mrs. McLeod, and (B) an
aggregate of 6,250 shares of Class A Common Stock as gifts to certain
individuals, and (ii) any future pledge of all or a portion of the Class A
Common Stock held by Mr. and Mrs. McLeod as collateral for one or more
personal loan transactions.
In the event that either IES or MidAmerican becomes the beneficial owner of
50% or more of the shares of capital stock of the Company beneficially owned
by the other (the "Acquired Investor Stockholder"), the Investor Agreement
provides that (i) the Acquired Investor Stockholder will lose the right to
nominate a director to the Board of Directors, (ii) until October 23, 1999,
the acquiring party (the "Acquiring Investor Stockholder") will vote all
shares beneficially owned by such party in excess of 25% of the voting power
of the outstanding capital stock of the Company either (A) in accordance with
the recommendations of the Board of Directors or (B) for or against or
abstaining in the same proportion as the shares owned by all other
stockholders, (iii) the Acquiring Investor Stockholder will cause, or use its
best efforts to cause, all shares of capital stock of the Company beneficially
owned by it to be represented in person or by proxy at all stockholder
meetings through October 23, 1999, and (iv) the Acquiring Investor Stockholder
will not, and will use its best efforts to cause its affiliates and associates
not to, deposit any such shares of capital stock of the Company in a voting
trust or enter into a voting agreement or other agreement of similar effect
with any other person prior to October 23, 1999.
In the event a third party becomes the beneficial owner of 50% or more of
the shares of capital stock of the Company beneficially owned by MidAmerican
and 50% or more of the shares of capital stock of the Company beneficially
owned by IES, the Investor Agreement provides that IES and MidAmerican (i)
will lose the right to nominate any directors to the Board of Directors, (ii)
until October 23, 1999, will vote, or use their respective best efforts to
direct the voting of, all shares beneficially owned by such third party in
excess of 25% of the voting power of the outstanding capital stock of the
Company either (A) in accordance with the recommendations of the Board of
Directors of the Company or (B) for or against or abstaining in the same
proportion as the shares owned by all other stockholders, (iii) will cause, or
use their best efforts to cause, all shares of capital stock of the Company
beneficially owned by them to be represented in person or by proxy at all
meetings of the Company's stockholders through October 23, 1999, and (iv) will
not, and will use their respective best efforts to cause their affiliates and
associates not to, deposit any such shares of capital stock of the Company in
a voting trust or enter into a voting agreement or other agreement of similar
effect with any other person prior to October 23, 1999.
On June 14, 1997, certain shareholders of CCI (collectively, the "CCI
Shareholders"), the Company and the Investor Stockholders entered into a
Stockholders' Agreement (as amended, the "Stockholders' Agreement"), which
became effective on September 24, 1997. Pursuant to the Stockholders'
Agreement, which amends and restates the Investor Agreement among the parties
thereto, each Investor Stockholder and the CCI Shareholders, for so long as
each such party owns at least 10% of the outstanding Class A Common Stock,
shall, for a period of three years after the effective date of the
Stockholders' Agreement, vote such party's shares and
23
take all action within its power to (i) establish the size of the Board at up
to eleven directors; (ii) cause to be elected to the Board one director
designated by IES (for so long as IES owns at least 10% of the outstanding
Class A Common Stock); (iii) cause to be elected to the Board one director
designated by MidAmerican (for so long as MidAmerican owns at least 10% of the
outstanding Class A Common Stock); (iv) cause to be elected to the Board three
directors who are executive officers of the Company designated by Clark E.
McLeod (for so long as Clark and Mary McLeod collectively own at least 10% of
the Class A Common Stock); (v) cause Richard A. Lumpkin to be elected to the
Board (for so long as the CCI Shareholders collectively own at least 10% of
the Class A Common Stock); and (vi) cause to be elected to the Board four non-
employees directors nominated by the Board. The Stockholders' Agreement also
provides that, until the earlier of the first anniversary of the effective
date of the Stockholders' Agreement or March 31, 1999, and subject to certain
exceptions, no Investor Stockholder or CCI Shareholder will sell or otherwise
dispose of any equity securities of the Company without the consent of the
Board. In addition, the Stockholders' Agreement provides that if the Company
grants any Investor Stockholder or CCI Shareholder the opportunity to register
equity securities of the Company under the Securities Act, the Company will
grant all other Investor Stockholders and CCI Shareholders the same
opportunity to register their pro rata portion of the Company equity
securities owned by them. The other operative provisions of the Investor
Agreement remain unchanged in the Stockholders' Agreement.
SUBMISSION OF STOCKHOLDER PROPOSALS FOR ANNUAL MEETING
Any proposal or proposals by a stockholder intended to be included in the
Company's proxy statement and form of proxy relating to the 1999 annual
meeting of stockholders must be received by the Company no later than December
21, 1998 pursuant to the proxy solicitation rules of the SEC. Nothing in this
paragraph shall be deemed to require the Company to include in its proxy
statement and proxy relating to the 1999 annual meeting of stockholders any
stockholder proposal which may be omitted from the Company's proxy materials
pursuant to applicable regulations of the SEC in effect at the time such
proposal is received.
OTHER MATTERS THAT MAY COME BEFORE THE ANNUAL MEETING
The Board of Directors of the Company does not know of any other matters to
be presented for a vote at the Annual Meeting. If, however, any other matter
should properly come before the Annual Meeting or any adjournment thereof, the
persons named in the accompanying proxy will vote such proxy in accordance
with their best judgment.
By Order of the Board of Directors
/s/ Clark E. McLeod
Clark E. McLeod
Chairman and Chief Executive Officer
Cedar Rapids, Iowa
April 15, 1998
A COPY OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997 ACCOMPANIES THIS PROXY STATEMENT. THE COMPANY IS REQUIRED TO
FILE AN ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
WITH THE SEC. STOCKHOLDERS MAY OBTAIN, FREE OF CHARGE, A COPY OF THE COMPANY'S
ANNUAL REPORT ON FORM 10-K BY WRITING TO MCLEODUSA INCORPORATED 6400 C STREET
SW, P.O. BOX 3177, CEDAR RAPIDS, IOWA 52406-3177, ATTENTION: CORPORATE
SECRETARY. THE COMPANY WILL PROVIDE COPIES OF THE EXHIBITS TO THE FORM 10-K
UPON PAYMENT OF A REASONABLE FEE.
24
MCLEODUSA INCORPORATED
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
MAY 27, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of McLeodUSA Incorporated (the "Company") hereby
appoints Clark E. McLeod, Blake O. Fisher, Jr., Randall Rings, or any one of
them, with full power of substitution, as proxies to cast all votes, as
designated below, which the undersigned stockholder is entitled to cast at the
1998 annual meeting of stockholders (the "Annual Meeting") to be held on
Wednesday, May 27, 1998, at 10:00 a.m., local time, at the Collins Plaza Hotel,
1200 Collins Road NE, Cedar Rapids, Iowa, and at any adjournment thereof, upon
the following matters and any other matter as may properly come before the
Annual Meeting or any adjournment thereof.
PROPOSAL 1: TO ELECT THREE DIRECTORS (MESSRS. COLLINS, LUMPKIN AND STEPIEN) TO
SERVE ON THE BOARD OF DIRECTORS IN THE CLASS OF DIRECTORS WHOSE TERM EXPIRES IN
2001 AND TO ELECT ONE DIRECTOR (MR. CURREY) TO SERVE IN THE CLASS OF DIRECTORS
WHOSE TERM EXPIRES IN 1999 AND UNTIL THEIR RESPECTIVE SUCCESSORS ARE ELECTED
AND QUALIFIED.
[_] FOR all nominees listed [_] WITHHOLD AUTHORITY to vote
(except as marked to the for all nominees listed
contrary below)
Nominees: Thomas M. Collins, Richard A. Lumpkin, Ronald W. Stepien, Robert J.
Currey
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE
THAT NOMINEE'S NAME ON THE SPACE PROVIDED BELOW.)
- --------------------------------------------------------------------------------
PROPOSAL 2: TO RATIFY THE BOARD OF DIRECTORS' APPOINTMENT OF ARTHUR ANDERSEN
LLP AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS FOR THE 1998 FISCAL YEAR.
[_] FOR [_] AGAINST [_] ABSTAIN
This proxy, when properly executed, will be voted as directed by the
undersigned stockholder and in accordance with the best judgment of the proxies
as to other matters. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED "FOR"
THE NOMINEES LISTED IN PROPOSAL 1, "FOR" PROPOSAL 2, AND IN ACCORDANCE WITH THE
BEST JUDGMENT OF THE PROXIES AS TO OTHER MATTERS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED IN
PROPOSAL 1, AND "FOR" PROPOSAL 2.
LOGO
The undersigned stockholder hereby acknowledges receipt of the Notice of
Annual Meeting of Stockholders and Proxy Statement relating to the Annual
Meeting and hereby revokes any proxy or proxies heretofore given. The
undersigned stockholder may revoke this proxy at any time before it is voted by
filing with the Secretary of the Company a written notice of revocation or a
duly executed proxy bearing a later date, or by attending the Annual Meeting
and voting in person.
If you receive more than one proxy card, please date, sign and return all
cards in the accompanying envelope.
Dated: ____________________
___________________________
___________________________
(PLEASE DATE AND SIGN HERE
EXACTLY AS NAME APPEARS AT
LEFT. WHEN SIGNING AS
ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE,
GUARDIAN OR OTHER
FIDUCIARY, GIVE FULL TITLE
AS SUCH; AND WHEN STOCK
HAS BEEN ISSUED IN THE
NAME OF TWO OR MORE
PERSONS, ALL SHOULD SIGN.)
PLEASE COMPLETE, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING
THE ENCLOSED POSTAGE PREPAID ENVELOPE.