Exhibit
10.5


 


MCLEODUSA
INCORPORATED


STOCK OPTION
AGREEMENT


 


STOCK OPTION AGREEMENT (the “Agreement”)
by and between McLeod USA Incorporated (the “Company”) and Royce J.
Holland (the “Optionee”), dated as of January 1, 2006 under the McLeodUSA
Incorporated 2006 Omnibus Equity Plan (the “Plan”).


 


1.                                       Definitions.
Capitalized terms which are not defined herein shall have the meaning set forth
in the Plan.


 


2.                                       Number of
Shares and Exercise Price. The Company hereby grants to the Optionee an
option (the “Option”), subject to the terms and conditions set forth herein and
in the Plan, to purchase 750,000 shares of Company Stock (“Shares”), subject to
adjustment in accordance with Section 3 of the Plan, at a price (the “Exercise
Price”) of $8.33 per Share (subject to adjustment in accordance with Section 3
of the Plan). The Option is a nonqualified stock option. The grant of the
Option is in full satisfaction of the obligations set forth in Section 3(c) of
the Employment Agreement between the Participant and the Company, dated as of
January 1, 2006 (the “Employment Agreement”) and the parties hereby acknowledge
that the share amount, exercise price and vesting provisions set forth in this
Agreement shall govern the Option in lieu of the share amount, exercise price
and vesting provisions set forth in Section 3(c) of the Employment Agreement.


 


3.                                       Term of
Option and Conditions of Exercise.


 


(a)                                  Term of Option.
Unless the Option is earlier terminated pursuant to this Agreement, the term of
the Option shall commence on the Date of Grant and terminate upon the tenth
anniversary of the Date of Grant, provided, however, that if on or after the
sixth anniversary of the Date of Grant the Shares are or become listed on a
national securities exchange, the term of the Option will expire on the 90th
day following such sixth anniversary or, if later, the date upon which the
Shares become so listed. For purposes of this Agreement, the Date of Grant
shall be deemed to be January 1, 2006.


 


(b)                                 Option Vesting.
Subject to the provisions of this Agreement and the Plan and the Optionee’s
continued employment with the Company on the applicable vesting dates, the
Option will become exercisable with respect to 225,000 Shares subject thereto
immediately on the Date of Grant and with respect to an additional 225,000 such
shares on each of the first two anniversaries of the Date of Grant with respect
to 75,000 such shares on the third anniversary of the Date of Grant.


 


(c)                                  Vesting Upon
Change in Control. Notwithstanding the foregoing, any outstanding and
unvested portion of the Option shall become fully vested and exercisable upon
the occurrence of a Change in Control, as such term is defined in the
Employment Agreement between the Optionee and the Company, dated as of January
1, 2006 (the “Employment Agreement”).


 

















 


(d)                                 Condition to
Acceptance; Exercise. If, at the time of exercise of all or any portion of
the Option, the Board or Committee determines that it is desirable to require
the Optionee to enter into the Company’s Stockholders Agreement, it shall be a
condition to the exercise of the Option that the Optionee join such
Stockholders Agreement by executing a joinder agreement in the form provided by
the Company.


 


4.                                       Rights and
Obligations Upon Termination of Employment or Service.


 


(a)                                  If the Optionee’s
employment terminates due to the Optionee’s death or Disability, the Option
will become fully vested immediately prior to such termination. For purposes of
this Agreement, “Disability” shall have the meaning set forth in the Company’s
long-term disability in which the Optionee participates, or, if there is no
such Plan, shall be determined by the Committee in good faith


 


(b)                                 Except as set forth
below, if the Optionee’s employment with the Company terminates for any reason,
the vested portion of the Option (giving effect to Section 4(a)) shall remain
exercisable until the later of (i) ninety (90) days following the date of such
termination and (ii) the date which is three months following the date the
Shares become listed on a national securities exchange (but in any event
subject to the maximum term of the Option set forth in Section 3(a)), and at
the end of such period the vested portion of the Option shall terminate. Notwithstanding
the foregoing, if such termination of employment occurs prior to the first
anniversary of the Date of Grant and it is by the Company for Cause or by the
Executive without Good Reason (in each case as defined in the Employment
Agreement) the (i) both the vested and unvested portion of the Option shall
terminate immediately upon such termination of employment and (ii) the Optionee
shall return to the Company any and all Shares acquired pursuant to the
exercise of the Option. The unvested portion of the Option shall terminate and
may not be exercised following the termination of the Optionee’s employment
with the Company.


 


5.                                       Nontransferability
of Option; Conditions to Transfer of Option Shares. The Option shall not be
assignable or transferable otherwise than by a duly executed and attested will
or by the laws of descent and distribution; and the Option may be exercised,
during the lifetime of the Optionee, only by the Optionee or the Optionee’s
legal representative.


 


6.                                       Exercise of
Option. The Option shall be exercised by a written notice delivered to the
Secretary of the Company at the Company’s principal executive offices in
accordance with Section 8, specifying the portion of the Option to be exercised
and accompanied by payment therefor. The exercise price for any Shares
purchased pursuant to the exercise of the Option shall be paid in full upon
such exercise in cash, by wire transfer or certified check or by such other
method as may be approved by the Committee.


 


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7.                                       Rights as a
Shareholder.


 


(a)                                  By accepting the
Option, the Optionee acknowledges that the Optionee is and will be subject to
the applicable provisions of the Plan with respect to Shares acquired pursuant
to such exercise, including, without limitation, the provisions of Section 9 of
the Plan, and that the Optionee has read and understood such provisions and the
provisions referenced therein.


 


(b)                                 Other Restrictions.
Notwithstanding anything to the contrary contained herein, all repurchases of
and payments for the Shares by the Company shall be subject to applicable legal
restrictions and any restrictions in the Company’s and its Affiliates’ debt and
equity financing agreements. If any such restrictions prohibit the repurchase
of or payment for the Shares hereunder, the Company shall make such repurchases
or payments as soon as it is permitted to do so under such restrictions.


 


8.                                       Notices. All
notices and other communications under this Agreement shall be in writing and
shall be given by hand delivery to the other party, by confirmed facsimile
transmission or by registered or certified mail, return receipt requested,
postage prepaid, addressed as follows:


 


	
  If to the Optionee:

  	
  Royce J. Holland

  	
   

  
	
   

  	
  17415 Pauma Valley Circle

  	
   

  
	
   

  	
  Dallas, TX 75287

  	
   

  
	
   

  	
   

  	
   

  
	
  If to the Company:

  	
  6400 C Street, SW

  	
   

  
	
   

  	
  Cedar Rapids, IA 52406-3177

  	
   

  
	
   

  	
  Attention: Optim Plan Administrator-HR

  	
   

  



 


Either party may furnish to the other in writing a substitute address
and phone and fax numbers for delivery of notice in accordance with Section 8. Notices
and communications shall be effective when actually received by the addressee.


 


9.                                       Incorporation
of Plan; Acknowledgement. The Plan is hereby incorporated herein by
reference and made a part hereof, and the Option and this Agreement are subject
to all terms and conditions of the Plan. In the event of any inconsistency
between the Plan and this Agreement, the provisions of the Plan shall govern. By
signing this Agreement, the Optionee acknowledges having received and read a
copy of the Plan. In the event of any inconsistency between the Plan, this
Agreement, and the Employment Agreement on matters regarding the rights and
obligations of the Company and the Optionee upon termination of employment or
service, the provisions of the Employment Agreement shall govern.


 


10.                                 Adjustment of
Option. The Option shall be subject to the adjustment provisions set forth
in Section 3 of the Plan.


 


11.                                 Governing Law. This
Agreement shall be governed by and construed according to the laws of the State
of Delaware, without regard to the conflicts of law rules thereof.


 


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12.                                 Amendment and
Termination. Rights and obligations under this Agreement shall not be
adversely altered or impaired by termination or amendment of the Plan, except
with the consent of the Optionee.


 


13.                                 Representations.


 


(a)                                  The Optionee hereby
represents and warrants that, upon exercise of the Option, the Optionee will be
acquiring Shares for investment solely for his own account and not with a view
to, or for resale in connection with, the distribution or other disposition
thereof. The Optionee agrees and acknowledges that he will not, directly or
indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise
dispose of any Shares, or solicit any offers to purchase or otherwise acquire
or take a pledge of any Shares, unless such offer, transfer, sale, assignment,
pledge, hypothecation or other disposition complies with (A) the provisions of
the Plan and this Agreement and (B) the Securities Act or an exemption
therefrom.


 


(b)                                 The Optionee
acknowledges and represents that he has been advised by the Company that (i)
the offer and sale of the Shares have not been registered under the Securities
Act; (ii) if acquired, the Shares must be held indefinitely and Optionee must
continue to bear the economic risk of the investment in the Shares; (iii) a
restrictive legend with respect to the foregoing shall be placed on the
certificates representing the Shares; and (iv) a notation shall be made in the
appropriate records of the Company indicating that the Shares are subject to
restrictions on transfer and, if the Company should at some time in the future
engage the services of a securities transfer agent, appropriate stop-transfer
instructions will be issued to such transfer agent with respect to the Shares.


 


14.                                 Counterparts. This
Agreement may be executed in several counterparts, each of which shall be
deemed an original and said counterparts shall constitute but one and the same
instrument.


 


IN WITNESS WHEREOF, the
parties hereto have executed this Agreement as of the date and year set forth
above.


 


 


	
   

  	
  MCLEODUSA INCORPORATED

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Bernard L. Zuroff

  	
   

  
	
   

  	
  By: Bernard L. Zuroff

  
	
   

  	
  Title: General Counsel, GVP and Secretary

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Royce J. Holland

  	
   

  



 


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[McLeodUSA letterhead]


 


February 27, 2007


 


Royce J. Holland


17415 Pauma Valley Circle


Dallas, TX  75287


 


Re:          Amendment of
Option Agreement


 


Dear Royce,


 


McLeodUSA Incorporated and you hereby agree to amend your Stock Option
Agreement, dated as of January 1, 2006, covering the grant of a nonqualified
stock option for 750,000 shares of Common Stock, to increase the exercise price
from $8.33 per share to $8.43 per share (subject to adjustment in accordance
with Section 3 of the 2006 Omnibus Equity Plan).


 


McLeodUSA Incorporated hereby agrees to pay you a cash bonus of
$75,000, less applicable withholding, on January 2, 2008 or as soon thereafter
as practicable.


 


Please sign below to indicate your agreement to the foregoing.


 


 


	
   

  	
  McLeodUSA Incorporated

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Bernard L. Zuroff

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
  General Counsel

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Agreed:

  	
   

  
	
   

  	
   

  
	
  /s/ Royce J. Holland

  	
   

  	
   

  
	
  Royce J. Holland