SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
Exchange Act of 1934 (Amendment No. )
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McLeodUSA Incorporated
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SEC 1913 (3-99)
MCLEODUSA INCORPORATED
MCLEODUSA TECHNOLOGY PARK
6400 C STREET SW, P.O. BOX 3177
CEDAR RAPIDS, IOWA 52406-3177
(319) 790-7800
[LOGO OF MCLEODUSA APPEARS HERE]
April 16, 2001
Dear Stockholder:
On behalf of the Board of Directors of McLeodUSA Incorporated, it is my
pleasure to invite you to the 2001 Annual Meeting of Stockholders. The Annual
Meeting will be held on Wednesday, May 30, 2001 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:
o To elect five directors to serve on the Board of Directors;
o To ratify the Board of Directors' appointment of Arthur Andersen LLP
as our independent public accountants for the 2001 fiscal year; and
o To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof, all as more fully described in the
accompanying Proxy Statement.
The Board of Directors has approved the matters being submitted by
McLeodUSA for stockholder approval at the Annual Meeting and recommends that
stockholders vote "FOR" each of the proposals as set forth in the attached Proxy
Statement. It is important that your views be represented at the Annual Meeting.
Whether or not you plan to attend the Annual Meeting, please complete and mail
the enclosed proxy card or vote by telephone or through the Internet as
instructed on the proxy card.
Sincerely,
/s/ Clark E. McLeod
Clark E. McLeod
Chairman and Co-Chief Executive Officer
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
(319) 790-7800
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 30, 2001
NOTICE IS HEREBY GIVEN that the 2001 Annual Meeting of Stockholders of
McLeodUSA Incorporated, a Delaware corporation, will be held on Wednesday, May
30, 2001 at 10:00 a.m., local time, at the Collins Plaza Hotel, 1200 Collins
Road NE, Cedar Rapids, Iowa, for the following purposes:
1. To elect five directors to serve on the Board of Directors to serve in
the class of directors whose term expires in 2004;
2. To ratify the Board of Directors' appointment of Arthur Andersen LLP
as our independent public accountants for the 2001 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 foregoing items of business are more fully described in the Proxy
Statement accompanying this notice.
Pursuant to our Bylaws, the Board of Directors has fixed April 3, 2001 as
the record date for the determination of stockholders entitled to notice of and
to vote at the Annual Meeting and at all adjournments thereof. Only stockholders
of record at the close of business on that date and eligible to vote will be
entitled to vote at the Annual Meeting and any adjournment thereof. A list of
all stockholders entitled to vote at the Annual Meeting will be open for
examination by any stockholder for any purpose germane to the Annual Meeting
during ordinary business hours for a period of ten (10) days before the Annual
Meeting at our offices located at 6400 C Street SW, Cedar Rapids, Iowa 52406.
By Order of the Board of Directors
/s/ Clark E. McLeod
Clark E. McLeod
Chairman and Co-Chief Executive Officer
Cedar Rapids, Iowa
April 16, 2001
Whether or not you plan to attend the Annual Meeting, please complete and
return the enclosed proxy card or vote by telephone or through the Internet as
instructed on the proxy card. If you sign and return your proxy card without
specifying a choice, your shares will be voted in accordance with the
recommendations of the Board of Directors. You may, if you wish, revoke your
proxy at any time before it is voted by filing with the Secretary of McLeodUSA a
written revocation or a duly executed proxy bearing a later date, or by
attending the Annual Meeting and voting in person. If you submitted your proxy
by telephone or through the Internet, you may also revoke it by submitting a new
proxy using the same procedures at a later date.
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
(319) 790-7800
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PROXY STATEMENT
2001 ANNUAL MEETING OF STOCKHOLDERS
MAY 30, 2001
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SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
This Proxy Statement and the accompanying proxy card are furnished to
stockholders of McLeodUSA Incorporated entitled to vote in connection with the
solicitation by the Board of Directors of McLeodUSA (the "Board of Directors")
of proxies to be used at the 2001 Annual Meeting of Stockholders to be held on
Wednesday, May 30, 2001 at 10:00 a.m., local time, at the Collins Plaza Hotel,
1200 Collins Road NE, Cedar Rapids, Iowa, and at any adjournment thereof.
If the enclosed proxy card is properly executed by a holder of shares of
Class A common stock and returned to McLeodUSA in time to be voted at the Annual
Meeting, the shares represented thereby will be voted in accordance with
instructions marked thereon. EXECUTED BUT UNMARKED PROXIES WILL BE VOTED:
o "FOR" PROPOSAL 1 TO ELECT THE NOMINEES FOR DIRECTOR
o "FOR" PROPOSAL 2 TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS
OUR INDEPENDENT PUBLIC ACCOUNTANTS FOR THE 2001 FISCAL YEAR
If any other matters properly come before the Annual Meeting, the persons
named in the accompanying proxy will vote the shares represented by such proxies
on such matters in accordance with their best judgment.
Instead of submitting a signed proxy card, stockholders may submit their
proxies by telephone or through the Internet using the control number and
instructions on the proxy card. Telephone and Internet proxies must be used in
conjunction with, and will be subject to, the information and terms contained on
the proxy card. These procedures may not be available to stockholders who hold
their shares through a broker, nominee, fiduciary or other custodian.
The presence of a stockholder at the Annual Meeting will not automatically
revoke such stockholder's proxy. Stockholders may, however, revoke a proxy at
any time before its exercise by filing with the Secretary of McLeodUSA a written
revocation or a duly executed proxy bearing a later date, or by attending the
Annual Meeting and voting in person. A stockholder who submits a proxy by
telephone or through the Internet may also revoke it by submitting a new proxy
using the same procedures at a later date.
The cost of solicitation of proxies will be borne by us. In addition to the
solicitation of proxies by mail, our officers, directors or employees also may
solicit proxies personally or by telephone or other means. These persons will
not be specifically compensated for the solicitation activities. Arrangements
also will be made with brokerage houses and other custodians, nominees and
fiduciaries for forwarding solicitation materials to the beneficial owners of
shares held of record by these persons, and we will reimburse these persons for
their reasonable expenses.
The close of business on April 3, 2001 has been fixed by the Board of
Directors as the Record Date for determination of stockholders entitled to vote
at the Annual Meeting. As of the Record Date, our outstanding capital stock
consisted of 612,000,479 shares of Class A common stock, par value $0.01 per
share (the "Class A common stock"), 1,149,398 shares of Series A preferred
stock, 275,000 shares of Series B preferred stock and 125,000 shares of Series C
preferred stock. Each holder of Class A common stock is entitled to one vote per
share with respect to all matters as to which a vote is taken at the Annual
Meeting. Holders of our preferred stock are not entitled to vote at the Annual
Meeting.
Our Bylaws provide that the holders of a majority of the voting rights of
the shares of common stock issued and outstanding and entitled to vote shall
constitute a quorum at the Annual Meeting. Stockholders' votes will be tabulated
by persons appointed by the Board of Directors to act as inspectors of election
for the Annual Meeting.
Assuming the presence of a quorum at the Annual Meeting:
o a plurality of the votes cast at the Annual Meeting by the holders of
Class A common stock is required for election of directors; and
o a majority of the voting rights present and entitled to vote at the
Annual Meeting by the holders of Class A common stock is required to
ratify the appointment of Arthur Andersen LLP as our independent
public accountants.
Unless otherwise required by applicable law or our Certificate of
Incorporation or Bylaws, the affirmative vote of a majority of the voting rights
present and entitled to vote at the Annual Meeting by the holders of Class A
common stock is required to decide any other matter submitted to a stockholder
vote. Our Certificate of Incorporation does not provide for cumulative voting in
the election of directors.
Abstentions and broker non-votes will be treated as shares that are
present, in person or by proxy, and entitled to vote for purposes of determining
the presence of a quorum at the Annual Meeting. Broker non-votes will not be
counted as present or entitled to vote on any matter presented at the Annual
Meeting. As a result, broker non-votes will not have any effect on Proposals 1
or 2. Abstentions will be counted as shares that are present and entitled to
vote on matters presented at the Annual Meeting. As a result, abstentions will
not have any effect on Proposal 1 but will have the same effect as a vote
against Proposal 2.
As of the Record Date, Clark E. and Mary E. McLeod beneficially owned
54,468,311 shares of Class A common stock, Alliant Energy Corporation
(collectively with its subsidiaries and Alliant Energy Foundation, Inc.,
"Alliant Energy") beneficially owned 56,201,576 shares of Class A common stock,
Richard A. Lumpkin beneficially owned 11,178,836 shares of Class A common stock,
and Media/Communications Partners III Limited Partnership and M/C Investors
L.L.C. (together, "M/C") beneficially owned 23,483,154 shares of Class A common
stock, representing approximately 8.9%, 9.1%, 1.8% and 3.8%, respectively, or
approximately 23.5% in the aggregate, of the voting rights of the shares of
Class A common stock entitled to vote at the Annual Meeting. Mr. and Mrs.
McLeod, Alliant Energy, Mr. Lumpkin and M/C have advised us that they intend to
vote in favor of approval of all matters described in this Proxy Statement.
Consequently, the likelihood of the approval of all the proposals set forth in
this Proxy Statement is substantially enhanced. Mr. and Mrs. McLeod, Alliant
Energy, Mr. Lumpkin, M/C and several other stockholders also have entered into
one or more voting agreements with respect to the election of directors. See
"--Principal Holders of Voting Securities--Stockholders' Agreements."
This Proxy Statement, the Notice of Annual Meeting of Stockholders and the
proxy card were first mailed to stockholders entitled to vote on or about April
20, 2001.
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)
Our Bylaws provide that the Board of Directors shall consist of not fewer
than three directors nor more than fifteen directors and that the number of
directors, within such limits, shall be determined by resolution of the Board of
Directors. The Board of Directors currently consists of thirteen directors,
divided into three classes of directors serving staggered three-year terms.
At the Annual Meeting, five directors will be elected to serve in the class
of directors whose term expires in 2004.
The Board of Directors has nominated the following for director:
o Anne K. Bingaman, Peter H.O. Claudy, Thomas M. Collins, Daniel R.
Hesse and Richard A. Lumpkin, each for a three-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 Ms. Bingaman, and Messrs.
Claudy, Collins, Hesse and Lumpkin. The Board of Directors believes that such
nominees will stand for election and will serve if elected. If any person
nominated by the Board of Directors fails to stand for election or is unable to
accept election, the proxies will be voted for the election of such other person
or persons as the persons named in the accompanying proxy shall determine in
accordance with their best judgment. Pursuant to the Bylaws, directors are
elected by plurality vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE
NOMINEES FOR DIRECTORS.
3
Information as to Nominees and Continuing Directors
The following table sets forth information regarding the Board of
Director's five nominees for election as directors and those directors who will
continue to serve as such after the Annual Meeting.
Age at
March 31, Director Term
Nominees: 2001 Since Expiring Position(s) Held with the Company
-------- ---- ----- -------- ---------------------------------
Anne K. Bingaman............ 57 1999 2004 Director
Peter H.O. Claudy(1)........ 39 1999 2004 Director
Thomas M. Collins(1)(2)..... 73 1993 2004 Director
Daniel R. Hesse(3).......... 47 2000 2004 Director
Richard A. Lumpkin.......... 66 1997 2004 Vice Chairman and Director
Continuing Directors:
Clark E. McLeod(3).......... 54 1991 2003 Chairman, Co-Chief Executive Officer and Director
Stephen C. Gray(3).......... 42 1992 2002 President, Co-Chief Executive Officer and Director
Roy A. Wilkens.............. 58 1999 2002 President and Chief Executive Officer -
Network Services and Director
Erskine B. Bowles (2)....... 55 1999 2003 Director
Robert J. Currey............ 55 1997 2002 Director
Theodore J. Forstmann(3).... 61 1999 2003 Director
James E. Hoffman............ 48 2000 2003 Director
Paul D. Rhines (1)(2)....... 57 1993 2002 Director
-------------------------------------------
(1) Currently a member of the Audit Committee.
(2) Currently a member of the Compensation Committee.
(3) Currently a member of the Executive Committee.
The principal occupations for the past five years of each of the five
nominees for director and the eight directors whose terms of office will
continue after the Annual Meeting are set forth below.
Anne K. Bingaman. Ms. Bingaman has served as a director of McLeodUSA since July
1999. Since September 1999, Ms. Bingaman has served as Chairman and Chief
Executive Officer of Valor Telecom, LLC, a closely held telecommunications
company, headquartered in Dallas, Texas. Prior to founding Valor, Ms. Bingaman
was an independent consultant in Washington, D.C. where she focused on antitrust
issues related to the telecommunications industry. She served as Senior
Corporate Vice President and founding President for the Local Services Division
of LCI International Telecom, Inc. from January 1997 until the company's
acquisition by Qwest in July 1998. She served as Assistant Attorney General in
charge of the Antitrust Division of the U.S. Department of Justice, from June
1993 to October 1996. Before her nomination to the Justice Department, Ms.
Bingaman was a partner at a number of law firms, as well as an associate
professor of law.
Peter H.O. Claudy. Mr. Claudy has served as a director of McLeodUSA since April
1999, during which time he has been the designee of M/C to the Board of
Directors. Mr. Claudy is a general partner of M/C Partners and M/C Venture
Partners, affiliates of Media/Communications Partners III Limited Partnership
and M/C Investors, L.L.C., and has specialized in investing in
telecommunications companies since 1991. He originated and held primary
responsibility for the M/C equity investment in Ovation Communications, Inc.,
which was acquired by McLeodUSA in 1999. Mr. Claudy performs the same role for
M/C Venture Partners' investment in, and serves on the board of, Florida Digital
Network, a competitive local exchange carrier. He also serves as a director of
Cavalier Telephone, a competitive local exchange carrier serving the state of
Virginia, and Triad Cellular, a wireless telecommunications company. See
"--Principal Holders of Voting Securities - Stockholders' Agreements."
Thomas M. Collins. Mr. Collins has served as a director of McLeodUSA since April
1993. Mr. Collins is of counsel at Shuttleworth & Ingersoll, P.C., a law firm in
Cedar Rapids, Iowa, where he has practiced law since 1952. Mr. Collins was a
director of Teleconnect and its successor, Telecom*USA, from 1985 to August
1990. He is also a director of APAC Customer Services, Inc., a provider of
customer relationship management services.
4
Daniel R. Hesse. Mr. Hesse has served as a director of McLeodUSA since June
2000. Mr. Hesse has served as Chairman of Terabeam Corporation, a Seattle-based
provider of proprietary fiber-less optic services, since September 2000 and
President and Chief Executive Officer thereof since March 2000. He previously
held numerous domestic and international positions at AT&T, including from May
1997 to March 2000 President and Chief Executive Officer of AT&T Wireless
Services and Executive Vice President of AT&T. Prior thereto he served as
General Manager for the AT&T Online Services Group. Mr. Hesse also previously
served as President and Chief Executive Officer of AT&T Network Systems
International, where he was responsible for all AT&T Network Systems activities
(now Lucent Technologies) in Europe, the Middle East and Africa.
Richard A. Lumpkin. Mr. Lumpkin has served as Vice Chairman and a director since
September 1997. Mr. Lumpkin was elected as an officer and a director pursuant to
the requirements of the merger agreement between McLeodUSA and Consolidated
Communications Inc. ("CCI"). He has continued to serve as a director and is a
nominee pursuant to the requirements of certain stockholder agreements. Mr.
Lumpkin served as Chairman and Chief Executive Officer of CCI from 1990 to
September 24, 1997, the date CCI was acquired by McLeodUSA. He continues to
serve as Chairman, Chief Executive Officer and President of Illinois
Consolidated Telephone Company ("ICTC"), a wholly-owned subsidiary. From its
formation in 1984 to 1990, Mr. Lumpkin served as President of CCI. From 1968 to
1990, Mr. Lumpkin held various executive positions at ICTC, including Vice
President of Operations and Treasurer. He is a director of Ameren Corporation,
an electric utility holding company, First Mid-Illinois Bancshares, Inc., a bank
holding company, and its wholly-owned subsidiary First Mid-Illinois Bank &
Trust, a bank. Mr. Lumpkin is Chairman of the Board of Illuminet Holdings, Inc.,
a telecommunications company. He is also a former director and past president of
the Illinois Telephone Association and the United States Telephone Association.
See "--Principal Holders of Voting Securities - Stockholders' Agreement."
Clark E. McLeod. Mr. McLeod founded McLeodUSA and serves as Chairman and
Co-Chief Executive Officer. He has served as Chairman, Chief Executive Officer
and a director since its inception in June 1991. His previous business venture,
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, 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 purchased
Telecom*USA in August 1990 for $1.25 billion. Mr. McLeod serves on the
board of directors of APAC Customer Services, Inc., a provider of customer
relationship management services. Mr. McLeod is one of his designees to the
Board of Directors. See "--Principal Holders of Voting Securities -
Stockholders' Agreements."
Stephen C. Gray. Mr. Gray serves as President and Co-Chief Executive Officer of
McLeodUSA since January 2001. He has served as Chief Operating Officer since
September 1992, President since October 1994 and a director since April 1993.
Prior to joining McLeodUSA in 1992, Mr. Gray served from August 1990 to
September 1992 as Vice President of Business Services at MCI, where he was
responsible for MCI's local access strategy and for marketing and sales support
of the Business Markets division. From February 1988 to August 1990, he served
as Senior Vice President of National Accounts and Carrier Services for
Telecom*USA, where his responsibilities included sales, marketing, key
contract negotiations and strategic acquisitions and combinations. Before
joining Telecom*USA, Mr. Gray held a variety of management positions with
Williams Telecommunications Company, a long distance telephone company. Mr. Gray
is one of Mr. McLeod's designees to the Board of Directors. See "--Principal
Holders of Voting Securities - Stockholders Agreements."
Roy A. Wilkens. Mr. Wilkens serves as President and Chief Executive Officer -
Network Services, having joined McLeodUSA in January 2000. Mr. Wilkens has
served as a director since June 1999. Mr. Wilkens was President of the Williams
Pipeline Company when he founded WilTel Network Services as an operating unit of
the Williams Companies, Inc., in 1985. He was founder and Chief Executive
Officer of WilTel Network Services from 1985 to 1997. In 1995, WilTel Network
Services was acquired by LDDS Communications, which now operates under the name
WorldCom. Mr. Wilkens served as Vice Chairman of WorldCom until his retirement
in 1997. In 1992, Mr. Wilkens was appointed by President George H.W. Bush to the
National Security Telecommunications Advisory Council. He also has served as
chairman of both the Competitive Telecommunications Association (CompTel) and
the National Telecommunications Network. Mr. Wilkens was a director of Splitrock
Services, Inc. before its acquisition by McLeodUSA. He was also a director of
Williams Communication Group, Inc., a provider of services and products to
communications companies, before he resigned his position in December 2000. Mr.
Wilkens is a director of The Management Network Group, Inc. (TMNG), a provider
of consulting services to the telecommunications industry. Mr. Wilkens is one of
Mr. McLeod's designees to the Board of Directors. See "--Principal Holders of
Voting Securities - Stockholders' Agreements."
5
Erskine B. Bowles. Mr. Bowles has served as a director of McLeodUSA since
September 1999. Mr. Bowles is a general partner of both Forstmann Little & Co.,
a major New York private equity firm that has made numerous acquisitions and
significant equity investments, and Carousel Capital, a Charlotte, N.C.-based
merchant bank he co-founded in 1996. Forstmann Little's best-known acquisitions
include Gulfstream Aerospace, General Instrument, Ziff-Davis Publishing,
Community Health Systems, Yankee Candle Company, Dr. Pepper and Topps. Mr.
Bowles served as Chief of Staff to President Clinton from November 1996 until
November 1998. He served as Assistant to the President and Deputy Chief of Staff
from October 1994 to December 1995. Mr. Bowles also was Administrator of the
U.S. Small Business Administration from May 1993 to September 1994. Mr. Bowles
is a director of First Union Corporation, a financial and bank holding company,
and V.F. Corporation, a holding company for apparel manufacturers. In April
2001, Mr. Bowles became a director of Merck and Company, Incorporated, a global
pharmaceutical company. Mr. Bowles is a designee to the Board of Directors of
the holders of the Series B preferred stock.
Robert J. Currey. Mr. Currey has served as a director of McLeodUSA since
September 1997. He was elected as a director of McLeodUSA pursuant to the
requirements of the CCI merger agreement. Mr. Currey also served as Group
President, Telecommunications Services of McLeodUSA between October 1997 and
March 1998. Thereafter, he served as President of 21st Century Telecom Group,
Inc., which was acquired by RCN Corporation in April 2000. Mr. Currey was named
Vice Chairman of RCN Corporation, a provider of communications services to
residential customers, in October of 2000. Mr. Currey served as President of CCI
from March 1990 until September 1997, when CCI was acquired by McLeodUSA. Mr.
Currey serves on the board of directors of AXXENT Inc., a Canadian competitive
local exchange carrier.
Theodore J. Forstmann. Mr. Forstmann has served as a director of McLeodUSA since
September 1999. Mr. Forstmann is co-founder and senior partner of Forstmann
Little & Co., a major New York private equity firm that has made numerous
acquisitions and significant equity investments, returning billions to its
investors. Forstmann Little's best-known acquisitions include Gulfstream
Aerospace, General Instrument, Ziff-Davis Publishing, Community Health Systems,
Yankee Candle Company, Dr. Pepper and Topps. Mr. Forstmann serves on the board
of directors of Community Health Systems and Yankee Candle Company. Mr.
Forstmann is a designee to the Board of Directors of the holders of the Series B
preferred stock.
James E. Hoffman. Mr. Hoffman has served as a director of McLeodUSA since May
2000. Since April 1998, he has been President of Alliant Energy Resources, Inc.,
a wholly owned subsidiary of Alliant Energy Corporation, of which he is
Executive Vice President-Business Development. Mr. Hoffman has responsibility
for oversight of the non-regulated businesses of Alliant Energy, including
energy, environment, transportation, trading and telecommunications. Mr. Hoffman
previously served in various executive positions at Alliant Energy, having
joined Alliant Energy in 1995. From 1990 to 1995, he was Chief Information
Officer for MCI Communications. Before that he served as Executive Vice
President of Telecom*USA. Mr. Hoffman is the designee of Alliant Energy to
the Board of Directors. See "--Principal Holders of Voting Securities -
Stockholders' Agreements."
Paul D. Rhines. Mr. Rhines has served as a director of McLeodUSA since April
1993. Since 1997, Mr. Rhines has been Executive Vice President and Managing
Member of Marshall Venture Capital, L.C., which is the General Partner of
Marshall Capital Fund, L.P., a venture capital limited partnership. He is a
founder and a general partner of R.W. Allsop & Associates, L.P. and R.W. Allsop
& Associates II L.P., two venture capital limited partnerships established in
Cedar Rapids, Iowa, in 1981 and 1983, respectively. He is also a founder and
general partner of MARK Venture Partners L.P., a limited partnership which is
the general partner of Allsop Venture Partners III, L.P., a venture capital
limited partnership established in Cedar Rapids, Iowa in 1987. He has also
served since 1980 as Executive Vice President and a director of RWA, Inc., a
venture capital management firm. Mr. Rhines was a director of Teleconnect and
its successor, Telecom*USA, from 1982 to 1990.
Corporate Governance and Related Matters
The Board of Directors conducts its business through meetings and through
its committees. The Board of Directors acts as a nominating committee for
selecting candidates to stand for election as directors. Pursuant to our Bylaws,
other candidates also may be nominated by any stockholder, provided such other
nomination(s), together with the identity of the nominator and the number of
shares of McLeodUSA stock owned, directly and indirectly, by the nominator, are
submitted in writing to the Secretary of McLeodUSA no later than 90 days prior
to the meeting of stockholders at which such directors are to be elected. No
such nominations have been received as of the date of this Proxy Statement in
connection with the Annual Meeting.
6
The Board of Directors has established an Executive Committee, an Audit
Committee and a Compensation Committee. The Executive Committee was established
in July 2000 and its current members are Messrs. McLeod, Gray, Forstmann and
Hesse. The Executive Committee performs duties and exercises powers delegated to
it by the Board of Directors, including authority to approve certain asset sales
and acquisitions.
The Audit Committee, among other things, recommends the firm to be
appointed as independent public accountants to audit our financial statements,
discusses the scope and results of the audit with the independent public
accountants, reviews with management and the independent public accountants our
interim and year-end operating results, considers the adequacy of our internal
accounting controls and audit procedures and reviews the non-audit services to
be performed by the independent public accountants. The current members of the
Audit Committee are Messrs. Collins, Claudy and Rhines. The Board of Directors
amended and restated in December 2000 the written charter for the Audit
Committee, a copy of which is attached hereto as Exhibit A. In addition, the
Board of Directors has determined that the members of the Audit Committee meet
the independence requirements of the National Association of Securities Dealers.
The Compensation Committee reviews and recommends the compensation
arrangements for management and administers the stock option plans and stock
purchase plan. The current members of the Compensation Committee are Messrs.
Collins, Rhines and Bowles.
During the fiscal year ended December 31, 2000, the Board of Directors met
or acted by unanimous consent eleven times. During the same period, the
Executive Committee met twice, the Audit Committee met four times and the
Compensation Committee met 12 times. During the fiscal year ended December 31,
2000, no director attended fewer than 75% of the total of all meetings of the
Board of Directors and any committee on which the director served.
Directors' Compensation
Our directors who are also employees receive no directors' fees.
Non-employee directors receive directors' fees of $1,000 for each Board and
committee meeting attended in person and $500 for each Board and committee
meeting attended by telephone. In addition, directors are reimbursed for
reasonable out-of-pocket travel expenditures incurred in connection with their
attendance at Board and committee meetings.
Directors are also eligible to receive grants of stock options under the
Directors Stock Option Plan. Under our plan, an aggregate of 6,600,000 shares of
Class A common stock are reserved for purchase pursuant to option grants to our
directors who are not officers or employees. Options for 3,880,000 shares of
Class A common stock had been granted under the Directors Stock Option Plan and
options to purchase 2,613,750 shares of Class A common stock had been exercised
as of February 28, 2001. Each eligible director who commences service as a
director is granted an initial option to purchase up to 120,000 shares of Class
A common stock. Each eligible director is also granted additional options to
purchase up to 60,000 shares of Class A common stock after each subsequent
annual meeting of stockholders. In addition, eligible directors may be granted
such discretionary options, in addition to the foregoing options, as may be
determined by the Board; provided that no more than an aggregate of 600,000
shares of Class A common stock may be granted as discretionary options to any
one person. The Directors Stock Option Plan will terminate automatically on
March 28, 2006, unless terminated earlier by the Board of Directors.
Other than the compensation described above, none of the directors received
any compensation from McLeodUSA in 2000 in connection with their service as
directors.
7
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary Compensation Table
The following table sets forth information concerning the cash and non-cash
compensation paid or accrued during the periods indicated to our Chief Executive
Officer and certain other highly compensated officers (the "Named Executive
Officers").
Long Term
Compensation
Awards
Securities
Annual Compensation Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation(1)
--------------------------- ---- ------ ----- ------- ---------------
Clark E. McLeod 2000 $397,692 $166,651 3,000,000 $1,883,400(2)
Chairman, Co-Chief Executive 1999 250,000 142,000 0 1,883,200(2)
Officer and Director 1998 228,077 122,732 600,000 1,883,200(2)
Stephen C. Gray 2000 397,692 166,651 6,000,000 3,400
President, Co-Chief Executive 1999 250,000 142,000 3,000,000 3,200
Officer and Director 1998 228,077 122,732 600,000 3,200
Roy A. Wilkens 2000 393,846 117,736 6,000,000 0
President and Chief Executive Officer 1999 0 0 180,000 0
- Network Services and Director 1998 0 0 72,249 0
Blake O. Fisher, Jr. 2000 179,999 236,288 120,000 3,400
Group Vice President - 1999 175,000 102,680 360,000 342,690(3)
Planning & Development 1998 176,193 92,607 210,000 3,200
J. Lyle Patrick 2000 200,000 190,351 390,000 3,400
Group Vice President - Finance 1999 149,231 115,640 450,000 3,200
& Accounting 1998 131,000 198,810 300,000 203,200(4)
Randall Rings 2000 160,000 209,634 300,000 3,217
Group Vice President - Law 1999 116,538 61,728 720,000 3,200
1998 81,231 12,160 138,000 2,576
----------------------------
(1) Unless otherwise indicated, all other compensation represents matching
contributions made by McLeodUSA to the McLeodUSA Incorporated 401(k) Plan
on behalf of the applicable individual.
(2) Includes $1,880,000 of premiums paid on split dollar life insurance
policies for the benefit of the McLeod Family 1998 Special Trust. For
additional information, see "-- Certain Transactions."
(3) Includes $339,490 paid by McLeodUSA to Blake O. Fisher, Jr. for
reimbursement of relocation expenses.
(4) Includes $200,000 paid by McLeodUSA to J. Lyle Patrick for reimbursement of
relocation expenses.
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, 2000.
Individual Grants Potential Realized
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of Stock
Underlying Granted to Price Appreciation for
Options Employees in Exercise Option Term
Name Granted Fiscal Year Price(1) Grant Date Expiration Date 5% 10%
------------------ ------- ----------- ---------- --------------- --------------- ----------- -------------
Clark E. McLeod 3,000,000(2) 5.74% $17.5208 January 7, 2000 January 7, 2010 $33,056,211 $83,770,929
Stephen C. Gray 6,000,000(2) 11.49% $17.5208 January 7, 2000 January 7, 2000 $66,112,422 $167,541,857
Roy A. Wilkens 6,000,000(3) 11.49% $17.5208 January 7, 2000 January 7, 2010 $66,112,422 $167,541,857
Blake O. Fisher, Jr. 120,000(4) 0.23% $17.5208 January 7, 2000 January 7, 2010 $1,322,248 $3,350,837
J. Lyle Patrick 180,000(4) 0.34% $17.5208 January 7, 2000 January 7, 2010 $1,983,373 $5,026,256
210,000(2) 0.40% $17.5208 January 7, 2000 January 7, 2010 $2,313,935 $5,863,965
Randall Rings 120,000(4) 0.23% $17.5208 January 7, 2000 January 7, 2010 $1,322,248 $3,350,837
180,000(2) 0.34% $17.5208 January 7, 2000 January 7, 2010 $1,983,373 $5,026,256
-----------------------
(1) The exercise price indicated was the fair market value of a share of our
Class A common stock on the date of grant, as adjusted to reflect the
three-for-one stock split effected in the form of a stock dividend
distributed to our stockholders on April 24, 2000.
(2) These options vest according to the following schedule: 100% at the end of
three years.
(3) These options vest according to the following schedule: 1/3 per year for
three years.
(4) These options vest according to the following schedule: 25% per year for
four years.
Aggregate Option Exercises and Fiscal Year-End Values
The following table sets forth information for each Named Executive
Officer concerning the exercise of options during fiscal year 2000, the number
of securities underlying unexercised options at the 2000 year-end and the
year-end value of all unexercised in-the-money options held by such individuals.
Value of Unexercised
Shares Number of Unexercised In-the-Money Options
Acquired on Value Options at Fiscal Year-End at Fiscal Year-End(2)
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- -------- ----------- ----------- ------------- ----------- -------------
Clark E. McLeod 1,502,000 $24,821,322 595,000 3,693,000 $5,416,042 $6,909,128
Stephen C. Gray 915,000 $23,115,371 1,860,390 9,710,796 $21,126,886 $31,138,940
Roy A. Wilkens 0 0 117,249 6,135,000 $1,183,001 $750,938
Blake O. Fisher, Jr. 620,320 $12,148,103 752,552 916,500 $7,992,797 $7,173,313
J. Lyle Patrick 120,000 $2,363,792 208,500 1,144,500 $1,918,688 $6,129,563
Randall Rings 20,304 $360,533 65,946 1,104,750 $554,454 $6,245,031
----------------------
(1) Represents the difference between the exercise price and the closing price
of our Class A common stock on The Nasdaq Stock Market on the day prior to
the date of exercise.
(2) Represents the difference between the exercise price and the closing price
of our Class A common stock on The Nasdaq Stock Market on December 31,
2000.
9
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is composed entirely of outside directors.
During 2000, the Compensation Committee consisted of Paul D. Rhines, Thomas M.
Collins, Lee Liu (January 1 through May 31) and Erskine Bowles (May 31 through
December 31). Mr. Liu retired from the Board of Directors on May 31, 2000.
During 2000, we paid 2060 Partnership, L.P. $243,900 for the rental of
office and parking spaces in Cedar Rapids, Iowa. 2001 Development Company, an
Iowa corporation, is the general partner and 80% owner of 2060 Partnership, L.P.
Alliant Energy and McLeodUSA own 54.56% and 3.03%, respectively of the
outstanding stock of 2001 Development Company. The directors and officers of
2001 include Mr. Collins and James E. Hoffman, directors of McLeodUSA, and Clark
E. McLeod, a director and executive officer of McLeodUSA. Mr. Lee Liu, a former
Compensation Committee member, was Chairman of Alliant Energy until April 2000.
Mr. Hoffman, a director of McLeodUSA, is Executive Vice President of Alliant
Energy.
Mr. Collins is also a director of APAC Customer Services, Inc. ("APAC"). In
March 2000, McLeodUSA entered into an agreement with APAC under which APAC
provides sales, marketing and customer care services to McLeodUSA. McLeodUSA
paid $30,722 in 2000 to APAC under this agreement. APAC paid McLeodUSA $502,508
in 2000 for telecommunications services. Clark E. McLeod, an executive officer
and director of McLeodUSA, is also a director of APAC.
During 2000, we paid $622,096 to Shuttleworth & Ingersoll, P.C., a law firm
in Cedar Rapids, Iowa, for legal services rendered. We plan to retain the firm
in 2001. McLeodUSA provides local and long distance telephone service for
Shuttleworth & Ingersoll, P.C., for which we were paid $54,134 in 2000. Thomas
M. Collins is of counsel at Shuttleworth & Ingersoll, P.C.
For a description of certain other transactions, see "--Certain
Transactions."
Employment, Confidentiality and Non-Competition Agreements
On January 7, 2000, we entered into executive employment agreements with
Clark E. McLeod, Stephen C. Gray and Roy A. Wilkens (collectively, the
"Executives"). These agreements set forth the terms and conditions for the
respective employment of the Executives. The significant terms of the agreements
are as follows:
o Term. The term of each agreement runs until January 7, 2003.
o Salary and Bonus Compensation. Each of the Executives receives an
initial base annual salary of $400,000, subject to a potential
increase each year based on competitive survey data. In addition, each
Executive is entitled to bonus opportunities set at not less than 50%
of the base annual salary.
o Equity Compensation. In connection with the agreements, Mr. McLeod was
granted an option to purchase 3,000,000 shares of Class A common stock
and each of Messrs. Gray and Wilkens was granted an option to purchase
6,000,000 shares of Class A common stock. Each option has an option
exercise price equal to the fair market value of the Class A common
stock which, in accordance with our 1996 Employee Stock Option Plan,
is the closing price of the Class A Common Stock on January 6, 2000.
o Split Dollar Life Insurance. Pursuant to Mr. McLeod's agreement,
McLeodUSA pays a portion of the premiums on split dollar life
insurance premiums for the benefit of the McLeod Family 1998 Special
Trust. See "--Certain Transactions."
o Other Benefits. Each Executive is eligible to participate in all of
our standard benefit plans.
o Noncompetition and Nonsolicitation. The Executives are bound by
noncompetition and nonsolicitation covenants for the term of the
agreements, and for an additional year in certain circumstances.
o Severance Benefits. If an Executive terminates his employment for good
reason or if we terminate his employment in breach of the agreement,
the Executive is entitled to: (a) his full salary through the date of
termination and amounts due under any applicable compensation plan;
(b) a liquidated damages payment approximately equal to the number of
years (including partial years) remaining in the term of the
agreement, multiplied by the Executive's salary and bonus on the date
of termination; (c) full vesting of stock options granted during the
term of the agreement, with such options to remain exercisable for
four years; (d) continued health and related benefits for the
remainder of the term of the agreement; and (e) a gross-up payment to
cover excise tax payments due on the Executive's severance benefits.
10
We have agreements with most members of senior management, including the
remaining Named Executive Officers, which govern matters of employment,
nonsolicitation and noncompetition. These agreements typically provide that the
applicable senior management employee may not compete with us during the term of
his or her employment and for either a one or a two-year period following a
termination for cause, a resignation or a voluntary termination of employment.
The agreements also provide that employees subject to the agreements may not
disclose any of our confidential information while employed by us or thereafter.
Certain agreements provide that the employee may not solicit our customers or
employees after leaving our employment. The agreements have an indefinite term
and may be terminated upon advance written notice by either party; provided,
however, that the confidentiality and non-competition obligations will survive
any such termination. As partial consideration for the execution of the
employment, confidentiality, and non-competition agreements, we grant 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 are granted pursuant to our 1996
Employee Stock Option Plan.
Change-of-Control Agreements
We have entered into change-of-control agreements with our executive
officers, including the Named Executive Officers, which provide for payments and
benefits in connection with specified terminations of employment after a change
of control of McLeodUSA. The change-of-control agreements terminate on December
31, 2006, unless a change of control has occurred during the six months
preceding December 31, 2006, in which case the agreements terminate on December
31, 2007. If an executive who is a party to a change-of-control agreement
terminates employment within six months after a change of control or, if within
24 months after a change of control, the executive's employment is terminated by
McLeodUSA (other than for disability, cause, death or retirement) or by the
executive following a material reduction in responsibilities or compensation:
o the executive will be entitled to a lump sum payment equal to 24 times
the executive's average monthly compensation during the 12 months
immediately preceding the change of control or the date of
termination, whichever average monthly compensation is higher;
o all of the executive's outstanding options to purchase stock of
McLeodUSA will become immediately exercisable in full; and
o if the executive elects to continue coverage under the group health
plan, McLeodUSA will continue to pay the employer portion of the
premiums for such coverage for the longer of 24 months or the period
of coverage provided by Section 4980B of the Internal Revenue Code of
1986 (the "Code").
An executive who is entitled to payment(s) pursuant to a change-of-control
agreement is subject to a non-compete provision generally restricting the
executive from competing with us for a two-year period after the termination of
employment.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors has prepared the
following report on policies with respect to the compensation of executive
officers for 2000.
Decisions on compensation of executive officers are made by the
Compensation Committee. The Compensation Committee also administers our stock
option plans and stock purchase plan. No member of the Compensation Committee is
an employee of McLeodUSA. The Compensation Committee consisted of Paul D.
Rhines, Thomas M. Collins and Lee Liu from January 1, 2000 until May 31, 2000
and Paul D. Rhines, Thomas M. Collins and Erskine B. Bowles from May 31, 2000 to
December 31, 2000.
Compensation Policies Toward Executive Officers
The compensation policies are designed to:
o attract, motivate and retain experienced and qualified executives;
o increase the overall performance of McLeodUSA;
o increase stockholder value; and
o increase the performance of individual executives.
11
The Compensation Committee seeks to provide competitive salaries based upon
individual performance together with annual cash bonuses awarded based on our
overall performance relative to corporate objectives, taking into account
individual contributions, teamwork and performance levels. The Compensation
Committee believes that the level of base salaries plus bonuses of executives
should generally be managed to be below the midpoint of the competitive market.
In addition, it is our policy to grant stock options to executives upon their
commencement of employment and annually thereafter in order to strengthen the
alliance of interest between such executives and stockholders and to give
executives the opportunity to reach the top compensation levels of the
competitive market depending on our performance (as reflected in the market
price of the Class A common stock).
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 2000:
Base Salaries. Base salaries of executives are initially determined by
evaluating the responsibilities of the position, the experience and knowledge of
the individual, and the competitive marketplace for executive talent, including
a comparison to base salaries for comparable positions at peer public companies
in the same geographic region. Base salaries for executive officers are reviewed
annually by the Compensation Committee based upon, among other things,
individual performance and responsibilities.
Annual salary adjustments for executive officers are recommended by the
Chairman and President by evaluating the performance of each executive officer
after considering new responsibilities and the previous year's performance. The
Compensation Committee performs the same evaluation of the performance of
Messrs. McLeod, Gray and Wilkens (the "Executives"). The Executives' employment
agreements entered into on January 7, 2000 are discussed in more detail below.
In addition, see "--Employment, Confidentiality and Non-Competition Agreements."
Individual performance ratings take into account such factors as achievement of
specific goals that are driven by the strategic plan and attainment of specific
individual objectives. The factors impacting base salary levels are not assigned
specific weights but are subject to adjustments by the Compensation Committee.
Bonuses. Annual bonuses to executive officers are based on both corporate
and individual performance, as measured by reference to factors which reflect
objective performance criteria over which management generally has the ability
to exert some degree of control. These corporate performance factors consist of
revenue and earnings targets established in the annual budget. Bonuses for 2000
were based upon the achievement of such financial and operating factors.
Additional discretionary bonuses are occasionally awarded for exceptional
performance.
Stock Options. A third component of executive officers' compensation
involves the grant of options to purchase shares of Class A common stock. The
Compensation Committee grants stock options to executives in order to align
their interests with the interests of the stockholders. Stock options are
considered by the Compensation Committee to be an effective long-term incentive
because the executives' gains are linked to increases in the stock value which
in turn provides stockholder gains.
The Compensation Committee generally grants options to new executive
officers and other key employees upon their commencement of employment with us
and on an annual basis. The options generally are granted at an exercise price
equal to the higher of market price of the Class A common stock at the date of
the grant or the average market price over the preceding 30 days. Options
granted to executive officers typically vest over a period of one to seven years
following the date of grant. The maximum option term is ten years (or five years
in the case of an incentive stock option (as defined in the Code) granted to an
optionee beneficially owning more than 10% of the outstanding Class A common
stock). The full benefit of the options is realized upon appreciation of the
stock price in future periods, thus providing an incentive to create value for
our stockholders through appreciation of stock price. We believe that stock
options have been helpful in attracting and retaining skilled executive
personnel.
Stock option grants made to executive officers in 2000 reflect significant
individual contributions relating to operations and implementation of
development and growth programs. Certain newly hired executive officers also
received stock option grants at the time of the commencement of their
employment. During 2000, we granted stock options covering a total of
approximately 52.2 million shares of Class A common stock to approximately 9,000
employees, including options covering an aggregate of 16,155,000 shares of Class
A common stock to seven executive officers. The per share option exercise price
of such options was $17.5208 for the seven executive officers and from $0.16 to
$124.48 for non-executive officer employees, which generally equaled the fair
market value of a share of Class A common stock on the respective dates of
grant. These options include options granted or assumed in the conversion of
options previously granted by companies acquired by McLeodUSA.
12
Other. We have a contributory retirement plan (the "401(k) Plan") for our
employees (including executive officers) age 21 and over with at least three
months of service with us. The 401(k) Plan provides that each participant may
contribute up to 15% of his or her salary (not to exceed the annual statutory
limit). We generally make matching contributions to each participant's account
equal to 50% of the participant's contribution up to 2% of the participant's
annual compensation. In addition we consider making a discretionary annual match
of up to another 50% of the participant's contribution up to 2% of the
participant's annual compensation. Thus, the total matching contribution can be
up to 4% of the participant's annual compensation.
Executive Employment Agreements
At the end of 1999, in conjunction with efforts to hire Mr. Wilkens, the
Compensation Committee undertook a review and analysis of the existing
employment and compensation arrangements with Messrs. McLeod and Gray. The
Compensation Committee considered information or advice received from Towers
Perrin, Salomon Smith Barney, Arthur Andersen, Williams & Connolly and Cravath,
Swain & Moore. The Compensation Committee also investigated and considered
compensation, employment and stock ownership information of other
telecommunications executives. As a result, the Compensation Committee approved
employment agreements with Messrs. McLeod, Gray and Wilkens, see "--Employment,
Confidentiality and Non-Competition Agreements." The Compensation Committee
manages these employment agreements and sets compensation for the Executives
pursuant to these agreements.
Chief Executive Officer Compensation
In January 2000, an employment agreement with Mr. McLeod, as Chief
Executive Officer, was approved by the Compensation Committee. See
"--Employment, Confidentiality and Non-Competition Agreements." The executive
compensation policy described in the preceding paragraph was applied in
developing the agreement and setting Mr. McLeod's 2000 compensation.
Mr. McLeod's compensation during the year ended December 31, 2000 included
$397,692 in base salary and $166,651 in cash bonus. Mr. McLeod was also granted
in 2000 stock options to purchase 3,000,000 shares of Class A common stock. The
number of options granted to Mr. McLeod was only 50% of the number granted to
each of the other two members of the Office of the Chief Executive. In addition,
we paid $1,880,000 of premiums on split dollar life insurance policies for the
benefit of the McLeod Family 1998 Special Trust in 2000. For additional
information on this arrangement, see "--Certain Transactions." Mr. McLeod's
salary, bonus payments and stock option grants for 2000 were consistent with the
terms of his employment agreement and in recognition of the achievement of
corporate performance in 2000.
Compensation Deductibility Policy
Section 162(m) of the Code generally disallows a tax deduction to public
corporations for compensation over $1,000,000 paid for any fiscal year to the
corporation's chief executive officer and four other most highly compensated
executive officers as of the end of any fiscal year. However, the statute
exempts qualifying performance-based compensation from the deduction limit if
specified requirements are met. The Compensation Committee intends to structure
stock option grants to executive officers who may be subject to Section 162(m)
in a manner that satisfies those requirements.
The Board of Directors and the Compensation Committee reserve the authority
to award non-deductible compensation in other circumstances as they deem
appropriate. Further, because of ambiguities and uncertainties as to the
application and interpretation of Section 162(m) and the regulations issued
thereunder, no assurance can be given, notwithstanding our efforts, that
compensation intended by McLeodUSA to satisfy the requirements for deductibility
under Section 162(m) does in fact do so.
Respectfully submitted,
Compensation Committee
Erskine B. Bowles, Chairman
Paul D. Rhines
Thomas M. Collins
13
Comparative Stock Performance
The following chart sets forth comparative information regarding cumulative
stockholder return on Class A common stock since the initial public offering was
completed in June 1996. Total stockholder return is measured by dividing total
dividends (assuming dividend reinvestment) plus share price change for a period
by the share price at the beginning of the measurement period. We have never
paid a cash dividend on our Class A common stock. Our cumulative stockholder
return based on an investment of $100 at June 11, 1996, when the Class A common
stock was first traded on The Nasdaq Stock Market, at its split-adjusted closing
price of $4.1875, is compared to the cumulative total return of the Standard &
Poor's 500 Stock Index and The Nasdaq Telecommunications Stocks Index, comprised
of publicly traded companies which are principally in the telecommunications
business, during that same period.
Comparison of Cumulative Total Returns
Comparison of Fifty-Four Month Cumulative Total Return*
Among McLeodUSA Incorporated, The S&P 500 Stock Index
and The Nasdaq Telecommunications Stocks Index
[CHART APPEARS HERE]
Nasdaq
McLeodUSA S&P 500 Telecommunications
Incorporated Stock Index Stocks Index
------------ ----------- ------------------
6/11/96 100 100 100
6/30/96 95.5224 99.9493 97.4060
9/30/96 131.3433 102.4353 93.6688
12/31/96 101.4925 110.3984 93.4999
3/31/97 70.6468 112.8396 87.3982
6/30/97 134.3284 131.9195 107.6996
9/30/97 156.9652 141.1807 125.3594
12/31/97 127.3632 144.6309 132.7733
3/31/98 168.1592 164.2006 168.1491
6/30/98 154.7264 169.6082 178.8108
9/30/98 87.0647 152.8310 157.4268
12/31/98 124.3781 185.0560 216.9193
3/31/99 167.1642 193.5720 267.7551
6/30/99 218.9055 207.0376 283.6913
9/30/99 338.8060 194.2874 270.5656
12/31/99 468.6567 222.6925 439.7194
3/31/00 675.1244 227.6719 477.2259
6/30/00 494.0298 221.7312 377.0570
9/30/00 341.7910 219.6447 316.1008
12/31/00 337.3134 202.9152 200.6929
--------
* $100 invested on June 11, 1996, including reinvestment of dividends, if any.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act"),
requires the directors, officers and greater than ten percent beneficial owners
of our Class A common stock to file with the Securities and Exchange Commission
(the "SEC") initial reports of ownership of our equity securities and to file
subsequent reports when there are changes in such ownership. Directors, officers
and greater than ten percent beneficial owners are required by SEC regulations
to furnish us with copies of all Section 16(a) reports they file.
Based on our review of these reports and on written representations from
the reporting persons that no other reports were required, we believe that
during the fiscal year ended December 31, 2000 our directors, officers and
greater than ten percent beneficial owners complied with all applicable Section
16(a) filing requirements.
Certain Transactions
McLeodUSA has entered into various agreements with Orillion USA, Inc.
(formerly InvenSys USA, Inc.) and several of its affiliates (collectively
"Orillion") pursuant to which Orillion provides information technology
development, programming and consulting services, and investment management
services to McLeodUSA. Pursuant to these agreements, McLeodUSA paid Orillion
approximately $2,349,356 in 2000. The payments in 2000 were
14
principally related to a $4,000,000 license fee under a license and joint
development agreement entered into in March 2000 by McLeodUSA and Orillion.
Clark E. McLeod, an executive officer and director of McLeodUSA, was a director
of Orillion USA, Inc. until his resignation in December 2000 and Roy A. Wilkens,
an executive officer and director of McLeodUSA is currently a director of
Orillion USA, Inc.
McLeodUSA provides paging services, customer premise equipment ("CPE"),
labor and services for CPE, long distance service, 800 service and private lines
to First Mid-Illinois Bancshares. First Mid-Illinois Bancshares paid McLeodUSA
$425,017 for these services in 2000. In April 2000, McLeodUSA disposed of shares
that it held in First Mid-Illinois Bancshares valued at approximately
$1,168,000. Of the shares disposed, First Mid-Illinois paid $152,000 to
McLeodUSA to redeem shares; the Lumpkin Foundation, Inc., a nonprofit
corporation, paid $638,400 to McLeodUSA to purchase shares; shares valued at
approximately $125,000 were gifted by McLeodUSA to the Lumpkin Foundation,
consistent with historical charitable giving practices of McLeodUSA; and the
balance of the shares were sold to a third party. The disposition of the shares
was approved by the Board of Directors of McLeodUSA which determined that the
transfer price was at fair market value. Richard A. Lumpkin, Margaret Lumpkin
Keon and Mary Lumpkin Sparks own approximately 14.0%, 6.4% and 6.4% of the
capital stock of First Mid-Illinois Bancshares, respectively. Richard A.
Lumpkin, an executive officer and director of McLeodUSA is also a director of
First Mid-Illinois Bancshares.
McLeodUSA paid $1,136,235 in 2000 to lease office space from various
entities in which Richard A. Lumpkin, Margaret Lumpkin Keon and Mary Lumpkin
Sparks have ownership interests. Their financial interest in these transactions
totaled $565,506. Mr. Lumpkin is a director, executive officer and significant
stockholder of McLeodUSA and Mrs. Keon and Mrs. Sparks are stockholders of
McLeodUSA.
Illuminet Holdings, Inc. paid McLeodUSA $1,922,766 in 2000 for the rental
of building space and for DS-1 usage and transmission facilities in the form of
private leased lines. McLeodUSA paid Illuminet $5,199,457 in 2000 for database
verification services and SS7 link services. Richard A. Lumpkin is the Chairman
of the Board of Directors of Illuminet.
Ameren Corporation and Central Illinois Public Service Company collectively
paid McLeodUSA $1,782,432 in 2000 for private line services and long distance
services. McLeodUSA paid Ameren and Central Illinois Public Service Company,
collectively, $1,147,633 for electric utility services in 2000. Richard A.
Lumpkin is a director of Ameren Corporation, the parent company of Central
Illinois Public Service Company.
McLeodUSA is a party to an agreement with Alliant Energy pursuant to which
Alliant Energy grants McLeodUSA access to certain of Alliant Energy's towers,
rights-of-way, conduits and poles in exchange for capacity on the McLeodUSA
communications network. James Hoffman is, and Mr. Lee Liu (a former director of
McLeodUSA and former Chairman of Alliant Energy) was from 1993 to 2000, the
designee of Alliant Energy to the McLeodUSA Board of Directors. See "--Principal
Holders of Voting Securities - Stockholders' Agreements."
During 2000, McLeodUSA paid City Signal Communications $863,081 for network
construction services. Peter H.O. Claudy, a director of McLeodUSA, is a director
for City Signal Communications.
In 2000, McLeodUSA paid $1,274,954 to The Management Network Group, Inc.
("TMNG") for telecommunications consulting services with TMNG. Roy A. Wilkens is
a director of TMNG.
McLeodUSA paid Tachion Networks, Inc., a network equipment maker,
$3,260,300 in 2000. Roy A. Wilkens is a director of Tachion Networks, Inc.
McLeodUSA paid Williams Communication Group, a provider of services and
products to communications companies, $661,969 in 2000. Roy A. Wilkens was a
director of Williams Communication Group before he resigned his position in
December 2000.
McLeodUSA paid Image Media Group, Inc., a promotional products supplier,
$65,127 in 2000. Arthur L. Christoffersen, a McLeodUSA executive officer, is a
director for Image Media Group.
The ownership of a jet aircraft worth approximately $2 million is held 72%
by McLeodUSA, 12% by Mr. McLeod and 8% each by Messrs. Gray and Lumpkin.
McLeodUSA and Messrs. McLeod, Gray and Lumpkin are parties to a Joint Ownership
Agreement by which they have agreed to share the operational expenses of the
15
aircraft in proportion to their respective ownership interest in the aircraft.
Messrs. McLeod, Gray and Lumpkin are directors and executive officers of
McLeodUSA.
In February 2000, McLeodUSA and C&M Consulting, L.L.C. ("C&M") jointly
purchased a jet aircraft for a total price of approximately $39.5 million.
McLeodUSA and C&M are parties to a Joint Ownership Agreement in which they have
agreed to share the operational expenses of the aircraft in proportion to their
ownership interests (25% by McLeodUSA and 75% by C&M). Clark E. McLeod and his
wife, Mary E. McLeod, are the members of C&M.
In December 1998, McLeodUSA entered into a split dollar arrangement for
life insurance policies on the joint lives of Clark and Mary McLeod. The McLeod
Family 1998 Special Trust is sole owner and beneficiary of each policy. The
McLeod Family 1998 Special Trust agreed to assign the policies to McLeodUSA as
collateral for the payment by McLeodUSA of the premiums for these policies. No
loans have been taken against these policies. In 2000, the premium payments paid
by McLeodUSA on these policies totaled $1,880,000. The aggregate face amount of
the policies is $113,000,000. McLeodUSA has agreed with Clark and Mary McLeod
that one of the principal reasons for entering into this arrangement is to avoid
any need for their heirs to liquidate their holdings of Class A common stock at
or soon after the death of one or both of them. Clark and Mary McLeod have
agreed to restrictions on their ability to sell or otherwise dispose of their
shares of Class A common stock. See "--Principal Holders of Voting
Securities--Stockholders' Agreements." McLeodUSA also paid premiums of $138,257
and $71,000 in 2000, respectively, for a universal life policy on Clark and Mary
McLeod with a face value of $13,500,000. McLeodUSA is the beneficiary of this
policy.
In March 1996, the Board of Directors adopted a policy requiring that any
material transactions between McLeodUSA and persons or entities affiliated with
officers, directors or principal stockholders of McLeodUSA be on terms no less
favorable to McLeodUSA than reasonably could have been obtained in arms' length
transactions with independent third parties or be approved by a majority of
disinterested directors.
For a description of certain other transactions, see "--Compensation
Committee Interlocks and Insider Participation."
16
RATIFICATION OF THE APPOINTMENT
OF THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS
FOR THE 2001 FISCAL YEAR
(Proposal 2)
At the recommendation of the Audit Committee of the Board of Directors, the
Board of Directors has appointed the firm of Arthur Andersen LLP as our
independent public accountants for the fiscal year ending December 31, 2001.
Arthur Andersen LLP has been our principal independent public accountants for
the past four years.
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
McLeodUSA and its stockholders.
It is expected that representatives of Arthur Andersen LLP will be present
at the Annual Meeting and will have the opportunity to make a statement if they
so desire and will be available to respond to appropriate questions.
During 2000, we paid the following fees to Arthur Andersen LLP:
1) Audit Fees: annual audit and quarterly reviews, $720,500;
2) Financial Information Systems Design and Implementation Fees:
$5,086,000 (including fees through August 7, 2000 to Accenture, an
affiliate of Arthur Andersen LLP through that date); and
3) All Other Fees: $1,221,630. All other Fees principally included SEC
filings, tax compliance and consulting, and internal audit services.
The Audit Committee considered whether the provision of services covered by
Financial Information Systems Design and Implementation Fees and All Other Fees
is compatible with maintaining the independence of Arthur Andersen LLP.
The affirmative vote of a majority of the voting rights present at the
Annual Meeting is required to approve Proposal 2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2.
Report of the Audit Committee
The Audit Committee of the Board of Directors has prepared the following
report for 2000.
To the Board of Directors of McLeodUSA Incorporated:
We have reviewed and discussed with management the Company's Audited
financial statements as of and for the year ended December 31, 2000.
We have discussed with the independent auditors 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
the independent auditors 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 audited financial statements referred to above be
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000 for filing with the Securities and Exchange Commission.
Peter H.O. Claudy, Chairman Thomas M. Collins Paul D. Rhines
17
STOCK OWNED BY MANAGEMENT
The following beneficial ownership table sets forth information regarding
beneficial ownership of Class A common stock as of the Record Date by:
o each director and director nominee;
o each Named Executive Officer; and
o all executive officers and directors as a group.
Under the Exchange Act, a person is deemed to be a "beneficial owner" of a
security if he or she has or shares the power to vote or direct the voting of
such security or the power to dispose or direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities of
which that person has the right to acquire beneficial ownership within 60 days.
More than one person may be deemed to be a beneficial owner of the same
securities. The percentage ownership of each stockholder is calculated based on
the total number of outstanding shares of Class A common stock as of the Record
Date plus those shares of Class A common stock that such stockholder has the
right to acquire within 60 days. Consequently, the denominator for calculating
such percentage may be different for each stockholder.
The table is based upon information supplied by the directors and executive
officers. Unless otherwise indicated in the footnotes to the table, each of the
stockholders listed has sole voting and dispositive power with respect to the
shares shown as beneficially owned.
The number of option shares includes shares of Class A common stock that
the individuals named in the table have the right to acquire within 60 days from
the Record Date upon exercise of options.
Beneficial Ownership
--------------------------------------------------
Number of Number of
Option Shares and
Name of Beneficial Owner Shares Option Shares Percent
------------------------ ------ ------------- -------
Clark E. McLeod (1) (2) 685,000 54,468,311 8.9
Richard A. Lumpkin (1) (3) 51,060 11,178,836 1.8
Stephen C. Gray (4) 2,100,387 3,793,502 *
Roy A. Wilkens 2,117,249 3,299,367 *
Blake O. Fisher 880,997 1,511,928 *
J. Lyle Patrick 253,500 260,263 *
Randall Rings 140,947 150,972 *
Anne K. Bingaman 22,500 22,500 *
Erskine B. Bowles (5) 7,500 7,500 *
Peter H.O. Claudy 15,000 15,000 *
Thomas M. Collins 60,000 913,644 *
Robert J. Currey 255,000 255,000 *
Theodore J. Forstmann (5) 7,500 7,500 *
Daniel R. Hesse 0 0 *
James E. Hoffman 0 3,300 *
Paul D. Rhines 60,000 486,211 *
Directors and executive officers as a group (16 persons) 5,926,995 75,013,258 12.1
-------------------------------------------------------
* Less than one percent
(1) Richard A. Lumpkin and certain of his family members, Alliant Energy, M/C
and Clark E. and Mary E. McLeod are parties to one or more stockholders'
agreements, and accordingly, may constitute a group within the meaning of
Section 13(d)(3) of the Exchange Act. As of the Record Date, these stockholders
beneficially owned an aggregate of 145,331,877 shares of Class A common stock,
representing an ownership interest of 23.5%, including 4,687,500 shares that
Alliant Energy has the right to acquire upon exercise of options, and 685,000
and 51,060 shares that Messrs. McLeod and Lumpkin, respectively, have the right
to acquire upon exercise of options, within 60 days from the Record Date. See
"--Principal Holders of Voting Securities - Stockholders' Agreements."
18
(2) Includes 23,308,355 shares of Class A common stock held of record by Mary E.
McLeod, Mr. McLeod's wife, over which Mr. McLeod has shared voting power and
1,555,295 shares of Class A common stock held by the McLeod Charitable
Foundation for which both Mr. and Mrs. McLeod are directors and over which both
have shared voting and dispositive power. Also includes 750,000 shares of Class
A common stock held by the Clark E. McLeod Charitable Remainder Unitrust and
750,000 shares of Class A common stock held by the Mary E. McLeod Charitable
Remainder Unitrust for which Mr. McLeod is a trustee and over which Mr. McLeod
has shared voting and investment power. Mr. McLeod's address is c/o McLeodUSA
Incorporated, McLeodUSA Technology Park, 6400 C Street SW, P.O. Box 3177, Cedar
Rapids, IA 52406-3177.
(3) Includes 4,434,898 shares of Class A common stock held by various trusts for
the benefit of the family of Mr. Lumpkin over which he has shared voting and
investment power. Includes 4,568,606 shares of Class A common stock held by
various trusts for the benefit of the family of Mr. Lumpkin over which he has
shared investment power.
(4) Includes 67,500 shares of Class A common stock held by various trusts for
the benefit of the family of Mr. Gray over which he has shared voting and
investment power. (5) As of the Record Date, 275,000 shares of McLeodUSA Series
B preferred stock and 125,000 shares of McLeodUSA Series C preferred stock were
issued and outstanding. Three limited partnerships affiliated with Forstmann
Little & Co. are the beneficial owners of all of the outstanding shares of each
of these series of preferred stock. Based on the conversion ratio as of the
Record Date, these preferred shares are convertible on or after September 15,
2004, or earlier under certain limited circumstances, into approximately 82.2
million Class A common shares. Messrs. Forstmann and Bowles are general partners
of Forstmann Little & Co. The address of Forstmann Little & Co is 767 Fifth
Avenue, New York, NY 10153. The amount of beneficial ownership was disclosed on
a Schedule 13D filed by the limited partnerships on September 22, 1999.
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth information as of the Record Date with
respect to the ownership of shares of Class A common stock by each person
believed by management to be the beneficial owner of more than five percent of
the outstanding Class A common stock. The information is based on the most
recent Schedule 13D or 13G filed with the SEC on behalf of such persons or other
information made available to us. Except as otherwise indicated, the reporting
persons have stated that they possess sole voting and sole dispositive power
over the entire number of shares reported.
As of the Record Date, 275,000 shares of McLeodUSA Series B preferred stock
and 125,000 shares of McLeodUSA Series C preferred stock were issued and
outstanding. Three limited partnerships affiliated with Forstmann Little & Co.
beneficially owned all of the outstanding shares of the Series B preferred stock
and the Series C preferred stock. See "--Stock Owned by Management."
Beneficial Ownership
-------------------------------
Name of Beneficial Owner Number of Shares Percent
------------------------ ---------------- -------
Alliant Energy Investments, Inc. (1) 56,201,576 9.1
Clark E. McLeod (2) ................ 54,468,311 8.9
Putnam Investments, Inc. (3) ....... 51,806,321 8.5
Janus Capital Corporation (4) ...... 45,017,780 7.4
----------------------------
(1) Includes 4,687,500 shares of McLeodUSA Class A common stock that Alliant
Energy Investments, Inc., a wholly owned subsidiary of Alliant Energy
Corporation, has the right to acquire upon exercise of options and
32,521,806 shares of Class A common stock of which Alliant Energy
Investments, Inc. is the holder of record. Heartland Properties, Inc., a
wholly owned subsidiary of Alliant Energy Investments, Inc., is the holder
of record of 1,324,706 shares of Class A common stock. LNT Communications
L.L.C., a limited liability company wholly owned by Alliant Energy
Resources, Inc., a wholly owned subsidiary of Alliant Energy Corporation,
is the record holder of 1,883,334 shares. 15,634,230 shares are held of
record by MARIL & Co as nominee for Alliant Energy Resources, Inc. Alliant
Energy Foundation, Inc., an independently chartered foundation which is
affiliated with Alliant Energy Corporation, is the record holder of 150,000
shares of McLeodUSA Class A common stock. The address of Alliant Energy
Corporation is 222 West Washington Avenue, P.O. Box 192, Madison, WI 53701.
(2) See "--Stock Owned by Management."
(3) The address of Putnam Investments, Inc. is One Post Office Square, Boston,
MA 02109. The amount of the beneficial ownership was disclosed on a
Schedule 13G filed by Putnam Investments, Inc. on February 13, 2001.
19
(4) The address of Janus Capital Corporation is 100 Fillmore Street, Suite 400,
Denver, CO 80206-4923. The amount of beneficial ownership was disclosed on
a Schedule 13G filed by Janus Capital Corporation on February 15, 2001.
Stockholders' Agreements
On March 10, 2000, we entered into a further amendment and restatement of a
stockholders' agreement originally entered into on November 18, 1998 with
several of our significant stockholders consisting of Alliant Energy Corporation
and various of its affiliates, Clark and Mary McLeod, and Richard Lumpkin and
various other parties related to Mr. Lumpkin.
The further amended and restated November 1998 stockholders' agreement
provides, among other things, that:
o until December 31, 2001, the parties will not sell any of our equity
securities, or any other securities convertible into or exchangeable
for our equity securities, without receiving the prior written consent
of our Board of Directors, except for transfers of the restricted
securities specifically permitted by the agreement;
o to the extent our Board of Directors approves a transfer of our equity
securities by a party, the other parties are automatically granted
transfer rights;
o our Board of Directors will determine on a quarterly basis the
aggregate number, if any, of shares of Class A common stock, not to
exceed in the aggregate 900,000 shares per quarter, that the parties
may sell during designated trading periods following the release of
our quarterly financial results;
o to the extent our Board of Directors grants registration rights to a
party in connection with a sale of our securities by that party, it
will grant similar registration rights to the other parties;
o our Board of Directors will determine for 2001 the aggregate number,
if any, of shares of Class A common stock, not to exceed in the
aggregate on a per year basis a number of shares equal to 15% of the
total number of shares of Class A common stock beneficially owned by
the parties as of December 31, 1998, to be registered by us under the
Securities Act for sale by the parties;
o in any underwritten offering of shares of Class A common stock, other
than an offering on a registration statement on Form S-4 or Form S-8
or any other form which would not permit the inclusion of shares of
Class A common stock owned by the parties, our Board of Directors will
determine the aggregate number, if any, of shares of Class A common
stock, not to exceed on a per year basis a number of shares equal to
15% of the total number of shares of Class A common stock beneficially
owned by the parties as of December 31, 1998, to be registered by us
for sale by the parties in the offering;
o we may subsequently determine not to register any shares of the
parties under the Securities Act and may either not file a
registration statement or otherwise withdraw or abandon a registration
statement previously filed.
Under the further amended and restated November 1998 stockholders'
agreement, as amended, each party also agreed, until it owns less than 7,500,000
shares of Class A common stock, to vote its shares and take all action within
its power to:
o establish the size of our Board of Directors at up to 14 directors;
o cause to be elected to our Board of Directors one director designated
by Alliant Energy for so long as it owns at least 7,500,000 shares of
Class A common stock;
o cause to be elected to our Board of Directors three directors who are
executive officers of McLeodUSA designated by Clark McLeod for so long
as Clark and Mary McLeod collectively own at least 7,500,000 shares of
Class A common stock;
o cause Richard Lumpkin to be elected to our Board of Directors for so
long as Richard Lumpkin and various other parties related to Mr.
Lumpkin collectively own at least 7,500,000 shares of Class A common
stock;
o cause to be elected to our Board of Directors up to nine non-employee
directors nominated by the Board.
The further amended and restated November 1998 stockholders' agreement
terminates on December 31, 2001.
20
On March 10, 2000, we also entered into a further amendment and restatement
of a stockholders' agreement originally entered into on January 7, 1999 with the
parties to the stockholders' agreement described above and M/C Investors L.L.C.
and Media/Communications Partners III Limited Partnership in connection with the
acquisition by us of Ovation Communications, Inc.
The further amended and restated January 1999 stockholders' agreement
provides that, until December 31, 2001, the M/C entities will not sell any
equity securities, or any other securities convertible into or exchangeable for
our equity securities, received pursuant to our acquisition of Ovation
Communications, without receiving the prior written consent of our Board of
Directors, except for transfers of the restricted securities specifically
permitted by the agreement. The further amended and restated January 1999
stockholders' agreement also contains various provisions intended to insure that
the M/C entities and the parties to the further amended and restated November
1998 stockholders' agreement are treated on a basis generally similar to one
another in connection with permitted sales and registration of our securities
under such agreements. In addition, for so long as the M/C entities own at least
7,500,000 shares of Class A common stock, the M/C entities have agreed to vote
their shares in accordance with the voting agreement contained in the further
amended and restated November 1998 stockholders' agreement, as amended, and the
other parties have agreed to vote their shares to cause to be elected to our
Board of Directors one director designated by the M/C entities.
The further amended and restated January 1999 stockholders' agreement
terminates on December 31, 2001.
SUBMISSION OF STOCKHOLDER PROPOSALS
FOR INCLUSION IN NEXT YEAR'S PROXY STATEMENT
Any proposal or proposals by a stockholder intended to be included in the
proxy statement and form of proxy relating to the 2002 annual meeting of
stockholders must be received by us no later than December 21, 2001 pursuant to
the proxy solicitation rules of the SEC. Nothing in this paragraph shall be
deemed to require us to include in our proxy statement and proxy relating to the
2002 annual meeting of stockholders any stockholder proposal which may be
omitted from the proxy materials pursuant to applicable regulations of the SEC
in effect at the time such proposal is received.
OTHER STOCKHOLDER PROPOSALS
FOR PRESENTATION AT NEXT YEAR'S ANNUAL MEETING
For any proposal that is not submitted for inclusion in next year's proxy
statement but is instead presented directly at the 2002 annual meeting of
stockholders, management will be able to vote proxies in its discretion if we:
o receive notice of the proposal before the close of business on March
6, 2002, and advise stockholders in the 2002 proxy statement about the
nature of the matter and how management intends to vote on such
matter, or
o do not receive notice of the proposal prior to the close of business
on March 6, 2002
Notices of intention to present proposals at the 2002 annual meeting should
be addressed to Corporate Secretary, McLeodUSA Incorporated, 6400 C Street SW,
P.O. Box 3177, Cedar Rapids, Iowa 52406-3177.
21
OTHER MATTERS THAT MAY COME BEFORE THIS YEAR'S ANNUAL MEETING
Our Board of Directors does not know of any other matters to be presented
for a vote at the Annual Meeting. If, however, any other matter should properly
come before the Annual Meeting or any adjournment thereof, the persons named in
the accompanying proxy will vote such proxy in accordance with their best
judgment.
By Order of the Board of Directors
/s/ Clark E. McLeod
Clark E. McLeod
Chairman and Co-Chief Executive Officer
Cedar Rapids, Iowa
April 16, 2001
A copy of the Annual Report to Stockholders for the fiscal year ended
December 31, 2000 accompanies this Proxy Statement and it includes an Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 that we filed
with the SEC. Stockholders may obtain, free of charge, an additional copy of the
Annual Report on Form 10-K by writing to McLeodUSA Incorporated, 6400 C Street
SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, Attention: Corporate
Secretary. McLeodUSA will provide copies of the exhibits to the Form 10-K upon
payment of a reasonable fee.
22
Exhibit A
MCLEODUSA INCORPORATED
Amended and Restated Charter of the Audit Committee of the Board of Directors
December 15, 2000
I. AUDIT COMMITTEE PURPOSE
The Audit Committee is appointed by the Board of Directors to assist the
Board in fulfilling its oversight responsibilities. The Audit Committee's
primary duties and responsibilities are to:
o Monitor the integrity of the Company's financial reporting process and
systems of internal controls regarding finance, accounting and legal
compliance.
o Monitor the independence and performance of the Company's independent
auditors and internal auditing department.
o Provide an avenue of communication among the independent auditors,
management, the internal auditing department, and the Board of
Directors.
The Audit Committee has the authority to conduct any investigation
appropriate to fulfilling its responsibilities, and it has direct access to
the independent auditors as well as anyone in the organization. The Audit
Committee has the ability to retain, at the Company's expense, special
legal, accounting, or other consultants or experts it deems necessary in
the performance of its duties.
II. AUDIT COMMITTEE COMPOSITION AND MEETINGS
Audit Committee members shall meet the requirements of the National
Association of Securities Dealers (NASD). The Audit Committee shall be
comprised of three or more directors as determined by the Board, each of
whom shall be independent directors within the meaning of NASD Rule
4200(a)(14), free from any relationship that would interfere with the
exercise of his or her independent judgment. All members of the Committee
shall have a basic understanding of finance and accounting and be able to
read and understand fundamental financial statements, and at least one
member of the Committee shall have accounting or related financial
management expertise.
Audit Committee members shall be appointed by the Board on recommendation
of the Nominating Committee. If an Audit Committee Chair is not designated
or present, the members of the Committee may designate a Chair by majority
vote of the Committee membership.
The Committee shall meet at least four times annually, or more frequently
as circumstances dictate. The Audit Committee Chair shall prepare and/or
approve an agenda in advance of each meeting. The Committee should meet
privately in executive session at least annually with each of the
following: management, the director of internal auditing department and the
independent auditors to discuss any matters that the Committee or each of
these groups believe should be discussed. In addition, the Committee, or at
least its Chair, should communicate with management and the independent
auditors quarterly to review the Company's financial statements and
significant findings based upon the auditors limited review procedures.
A-1
III. AUDIT COMMITTEE RESPONSIBILITIES AND DUTIES
Review Procedures
1. Review and reassess the adequacy of this Charter at least annually.
Submit the charter to the Board of Directors for approval and have the
document published in connection with the Company's annual proxy
statement at least every three years in accordance with SEC
regulations.
2. Review the Company's annual audited financial statements prior to
filing or distribution. Review should include discussion with
management and independent auditors of significant issues regarding
accounting principles, practices, and judgments. The results of these
reviews, and the recommendation of the Committee, will be reported to
the Board of Directors for consideration by the Board.
3. In consultation with the management, the independent auditors, and the
internal auditors, consider the integrity of the Company's financial
reporting processes and controls. Discuss significant financial risk
exposures and the steps management has taken to monitor, control, and
report such exposures. Review significant findings prepared by the
independent auditors and the internal audit department together with
management's responses.
4. Review with financial management and the independent auditors the
Company's quarterly financial results prior to the release of earnings
and/or the Company's quarterly financial statements prior to filing or
distribution. Discuss any significant changes to the Company's
accounting principles and any items required to be communicated by the
independent auditors in accordance with SAS 61 (see item 9). The Chair
of the Committee may represent the entire Audit Committee for purposes
of this review.
Independent Auditors
5. The independent auditors are ultimately accountable to the Audit
Committee and the Board of Directors. The Audit Committee shall review
the independence and performance of the auditors and annually
recommend to the Board of Directors the appointment of the independent
auditors or approve any discharge of auditors when circumstances
warrant.
6. Approve the fees and other significant compensation to be paid to the
independent auditors.
7. On an annual basis, the Committee should review and discuss with the
independent auditors all significant relationships they have with the
Company that could impair the auditor's independence, receive from the
independent auditors a formal written statement delineating all
relationships between the auditors and the Company, consistent with
Independence Standards Board Standard No. 1, actively engage in a
dialogue with the independent auditors with respect to any disclosed
relationships or services that may impact the objectivity and
independence of the auditors, and take, or recommend that the full
Board take, appropriate action to oversee the independence of the
independent auditors.
8. Review the independent auditors' audit plan and discuss the scope,
staffing, locations, reliance upon management, and internal audit and
general audit approach.
9. Prior to releasing the year-end earnings, discuss the results of the
audit with the independent auditors. Discuss certain matters required
to be communicated to audit committees in accordance with AICPA SAS
61.
10. Consider the independent auditors' judgments about the quality and
appropriateness of the Company's accounting principles as applied in
its financial reporting.
Internal Audit Department and Legal Compliance
11. Review the budget plan, changes in plan, activities, organizational
structure, and qualifications of the internal audit department, as
needed.
12. Review the appointment, performance, and replacement of the senior
internal audit executive.
A-2
13. Review significant findings from reports prepared by the internal
audit department together with management's response and follow-up to
these reports.
14. On at least an annual basis, review with the Company's counsel, any
legal matters that could have significant impact on the organization's
financial statements, the Company's compliance with applicable laws
and regulations, and inquiries received from regulators or
governmental agencies.
15. Establish, review, and update periodically a Code of Ethical Conduct
and ensure that management has established a system to enforce this
Code.
Other Audit Committee Responsibilities
16. Annually prepare a report to shareholders as required by the
Securities and Exchange Commission. The report should be included in
the Company's annual proxy statement.
17. Perform any other activities consistent with this Charter, the
Company's by-laws, and governing law, as the Committee of the Board
deems necessary or appropriate.
18. Maintain minutes of meetings and periodically report to the Board of
Directors on significant results of the foregoing activities.
19. Periodically perform self-assessment of Audit Committee performance.
20. Review financial and accounting personnel succession planning within
the Company.
A-3
[Form of Proxy Card for Holders of Class A Common Stock]
McLEODUSA INCORPORATED
ANNUAL MEETING OF STOCKHOLDERS
May 30, 2001
10:00 A.M.
COLLINS PLAZA HOTEL
1200 Collins Road NE
Cedar Rapids, Iowa
[McLeodUSA logo]
--------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR USE AT THE ANNUAL MEETING ON MAY 30, 2001.
The herein-named stockholder of McLeodUSA Incorporated ("McLeodUSA") appoints
J. Lyle Patrick and Randall Rings or either one of them, with full power of
substitution, as proxies to cast all votes, as designated below, which the
stockholder is entitled to cast at the 2001 Annual Meeting of stockholders to be
held on Wednesday, May 30, 2001, at 10:00 a.m., local time, at the Collins Plaza
Hotel, 1200 Collins Road NE, Cedar Rapids, Iowa, and at any adjournment thereof,
upon the following matters and any other matter as may properly come before the
Annual Meeting or any adjournment thereof.
This proxy, when properly submitted, will be voted as directed by the
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, and "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.
The stockholder named herein acknowledges receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement relating to the Annual Meeting and
revokes any proxy or proxies heretofore given. The stockholder may revoke this
proxy at any time before it is voted by filing with the Secretary of McLeodUSA a
written notice of revocation or a duly executed proxy bearing a later date, or
by attending the Annual Meeting and voting in person. A stockholder who submits
a proxy by telephone or through the Internet may also revoke it by submitting a
new proxy using the same procedures at a later date.
PLEASE COMPLETE, SIGN, DATE AND RETURN THIS PROXY PROMPTLY
USING THE ENCLOSED POSTAGE PREPAID ENVELOPE. OR YOU CAN
GIVE YOUR PROXY BY CALLING THE TOLL-FREE TELEPHONE
NUMBER OR BY USING THE INTERNET,
EACH AS DESCRIBED IN THE INSTRUCTIONS ON THE
REVERSE OF THIS PROXY CARD.
See reverse for voting instructions.
There are three ways to vote your Proxy
Your telephone or Internet vote authorizes the named proxies to vote your shares
in the same manner as if you marked, signed and returned your proxy card. Voting
by telephone or through the Internet saves McLeodUSA postage and other expenses.
The deadline for telephone or Internet voting is 12:00 noon ET, May 29, 2001.
VOTE BY PHONE -- TOLL FREE -- 1-800-240-6326 -- QUICK***EASY***IMMEDIATE
Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a week
until 12:00 noon ET on May 29, 2001. Have your proxy card in hand when you call.
. You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number, which are located above.
. Follow the simple instructions the voice message provides you.
VOTE VIA INTERNET - http://www.eproxy.com/mcld/-- QUICK***EASY***IMMEDIATE
Use the Internet to vote your proxy 24 hours a day, 7 days a week, until 12:00
noon ET on May 29, 2001. Have your proxy card in hand when you access the Web
site.
. You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number, which are located above to obtain your records and create an
electronic ballot.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to McLeodUSA Incorporated, c/o Shareowner
Services/SM/, P.O. Box 64873, St. Paul, MN 55164-0873.
If you vote by phone or the Internet, please do not mail your proxy card.
Please detach here
The Board of Directors Recommends a Vote FOR Items 1, and 2.
1. Election of directors: 01 Anne K. Bingaman 04 Daniel R. Hesse / / Vote FOR / / Vote WITHHELD
02 Peter H.O. Claudy 05 Richard A. Lumpkin all nominees from all nominees
03 Thomas M. Collins
(Instructions: To withhold authority to vote for any indicated -------------------------------------------------------
nominee, write the number(s) of the nominee(s) in the box provided | |
to the right.) -------------------------------------------------------
2. To ratify the Board of Directors' appointment
of Arthur Andersen LLP as the Company's
independent public accountants for the 2001
fiscal year. / / For / / Against / / Abstain
If you receive more than one proxy card, please date, sign and return all cards
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in the accompanying envelope; if you choose to vote by phone or Internet, you
will need to enter the Company Number and Control Number from all cards you
receive.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL
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Address Change? Mark Box / / Date
Indicate changes below: --------------------------------
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Signature(s) in Box
(Please date and sign here exactly as name appears at
left. When signing as attorney, executor,
administrator, trustee, guardian or other fiduciary,
give full title as such; and when stock has been issued
in the name of two or more persons, all should sign.)