<PAGE> 1
April 7, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: American Communications Services, Inc.
Revised Preliminary Schedule 14A
Enclosed for filing please find the revised Preliminary Proxy Statement
of American Communications Services, Inc. ("ACSI"). With respect to the
increase in shares authorized by the 1994 Stock Option Plan, as amended,
annexed to the Preliminary Proxy Statement, ACSI intends to file a Form S-8 to
register the issuance of such shares prior to the exercise of any options
relating to such additional shares.
Also enclosed as correspondence is a letter written in response to your
comment letter of March 27, 1998 relating to ACSI's filing of its Preliminary
Schedule 14A on March 25, 1998.
Please call the undersigned at (301)361-4215 with any questions you may
have.
Very truly yours,
/s/ Riley M. Murphy
----------------------------------
Executive Vice President/Secretary
<PAGE> 2
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
</TABLE>
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
AMERICAN COMMUNICATIONS SERVICES, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
- -------------------------------------------------------------------------------
(1) Title of each class of securities to which transaction
applies:
- -------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- -------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
- -------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- -------------------------------------------------------------------------------
<PAGE> 3
(5) Total fee paid:
- -------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or
schedule and the date of its filing.
(1) Amount previously paid:
- -------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- -------------------------------------------------------------------------------
(3) Filing party:
- -------------------------------------------------------------------------------
(4) Date filed:
<PAGE> 4
PRELIMINARY COPY
-----------------
AMERICAN COMMUNICATIONS SERVICES, INC.
133 National Business Parkway, Suite 200
Annapolis Junction, Maryland 20701
301-361-4200
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
May 13, 1998
To our Stockholders:
The annual meeting of stockholders (the "Annual Meeting") of American
Communications Services, Inc., a Delaware corporation ("ACSI" or the "Company")
will be held at The Waldorf-Astoria Hotel, 301 Park Avenue, New York, New York
10022-6897 on Wednesday May 13, 1998 at 10:00 A.M. local time, for the
following purposes:
1. To elect eight (8) directors ("Proposal No. 1");
2. To approve and ratify an amendment to the Company's Second
Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") to increase its authorized
shares of common stock from 75,000,000 to 125,000,000
("Proposal No. 2");
3. To approve and ratify amendments to the Company's
Certificate of Incorporation to increase its authorized shares
of preferred stock from 1,500,000 to 3,000,000 ("Proposal No
3");
4. To approve and ratify amendments to the Company's 1994 Stock
Option Plan, as amended (the "Stock Option Plan"), to increase
the number of shares of Common Stock reserved for issuance
upon exercise of options granted under the Stock Option Plan
from 5,000,000 shares to 11,000,000 shares, and to conform the
Stock Option Plan to the current provisions of Rule 16b-3 under
the Securities Exchange Act of 1934 ("Proposal No. 4");
5. To ratify the selection of KPMG Peat Marwick, LLP as the
independent auditors of the Company for the fiscal year ending
December 31, 1998 ("Proposal No. 5");
6. To transact such other matters as may properly come before the
meeting.
Accompanying this notice are a Proxy Card, a Proxy Statement and a copy of
the Company's Annual Report to Stockholders for the fiscal year ended December
31, 1997. WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE SIGN
AND DATE THE PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE PROVIDED FOR
THAT PURPOSE PRIOR TO THE DATE OF THE ANNUAL MEETING. The Proxy represented by
the Proxy Card may be revoked at any time prior to the time that it is voted at
the Annual Meeting. The Board of Directors has set March 23, 1998 as the
record date for determination of stockholders entitled to notice of and to vote
at the Annual Meeting or any adjournments thereof. Only stockholders of record
at the close of business on March 23, 1998 will be entitled to vote at the
Annual Meeting.
You are cordially invited to attend the Annual Meeting, and you may vote in
person even though you have returned your Proxy Card.
BY ORDER OF THE BOARD OF DIRECTORS
LOGO
RILEY M. MURPHY
Secretary
Annapolis Junction, Maryland
April __, 1998
3
<PAGE> 5
PRELIMINARY COPY
----------------
AMERICAN COMMUNICATIONS SERVICES, INC.
133 National Business Parkway, Suite 200
Annapolis Junction, Maryland 20701
(301) 361-4200
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies for use at the annual meeting of stockholders of American
Communications Services, Inc. ("ACSI" or the "Company") to be held at The
Waldorf-Astoria Hotel, 301 Park Avenue, New York, New York 10022-6897 on
Wednesday, May 13, 1998 at 10:00 a.m. local time and at any adjournments
thereof (the "Annual Meeting"). THE ACCOMPANYING PROXY IS SOLICITED BY THE
BOARD OF DIRECTORS OF THE COMPANY AND IS REVOCABLE BY THE STOCKHOLDER AT ANY
TIME BEFORE IT IS VOTED. FOR MORE INFORMATION CONCERNING THE PROCEDURE FOR
REVOKING THE PROXY SEE BELOW. This Proxy Statement was first mailed to
stockholders of the Company on or about April 23, 1998, accompanied by the
Company's Annual Report to Stockholders for the fiscal year ended December 31,
1997. The principal executive offices of the Company are located at 133
National Business Parkway, Suite 200, Annapolis Junction, Maryland 20701,
telephone (301) 361-4200.
OUTSTANDING SHARES AND VOTING RIGHTS
Only holders of record of the Company's Common Stock, $.01 par value (the
"Common Stock" or "Common Shares") outstanding at the close of business on
March 23, 1998 (the "Record Date") are entitled to receive notice of and vote
at the Annual Meeting.
As of the Record Date, 38,043,743 shares of Common Stock were outstanding and
will be entitled to vote at the Annual Meeting. Each Common Share is entitled
to one vote on all matters. There are no cumulative voting rights.
The presence, in person or by proxy, of the holders of a majority of the
shares of Common Stock issued and outstanding and entitled to vote at the
Annual Meeting is necessary to constitute a quorum at the Annual Meeting. In
the election of directors, each share of Common Stock may be voted for as many
individuals as there are directors to be elected. Those individuals receiving
the eight highest number of votes "for" election to the Board of Directors
shall be considered duly elected. The affirmative vote of a majority of the
shares of Common Stock outstanding as of the Record Date and entitled to vote
thereon is required for approval of Proposal No. 2 and Proposal No. 3. The
affirmative vote of a majority of the shares of Common Stock present in person
or represented by proxy at the Annual Meeting and entitled to vote thereon,
whether or not a quorum is present when a vote is taken, is required for
approval of Proposal No. 4 and Proposal No. 5. An automated system
administered by the Company's transfer agent will be used to tabulate the
votes. Abstentions, votes against or withholding approval and broker non-votes
will be counted to determine whether a quorum is present. Abstentions and votes
against or withholding approval will be counted as votes against any given
proposal, whereas broker non-votes will not be counted in determining whether a
particular proposal has been approved by the stockholders. However, with
respect to the votes on Proposal No. 2 and Proposal No. 3, which require the
affirmative vote of a majority of the outstanding shares for approval, since
such broker non-votes are not cast "for" the matter, they will have the same
effect as a negative vote or vote "against" such matter.
The cost of soliciting proxies will be borne by the Company. In addition to
the use of mailings, proxies may be solicited by personal interview, telephone
and telegraph, and by directors, officers and regular employees of the Company,
without special compensation therefor. The Company expects to reimburse banks,
brokers and other persons for their reasonable out-of-pocket expenses in
handling proxy materials for beneficial owners of the Common Stock.
4
<PAGE> 6
The Board of Directors has selected Jack E. Reich and Riley M. Murphy, and
each of them, to act as proxies with full power of substitution. With respect
to the proposal regarding election of directors, stockholders may (a) vote in
favor of all nominees, (b) withhold their votes as to all nominees, or (c)
withhold their votes as to specific nominees by so indicating in the
appropriate space on the enclosed proxy card. With respect to the proposals to
approve and ratify amendments of the Certificate of Incorporation and the Stock
Option Plan and the appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for fiscal year 1998, stockholders may (i) vote "for",
(ii) vote "against" or (iii) abstain from voting as to each such matter. All
properly executed proxy cards delivered by stockholders and not revoked will be
voted at the Annual Meeting in accordance with the directions given. IF NO
SPECIFIC INSTRUCTIONS ARE GIVEN WITH REGARD TO THE MATTERS TO BE VOTED UPON,
THE SHARES REPRESENTED BY A PROPERLY EXECUTED PROXY CARD WILL BE VOTED "FOR"
THE ELECTION OF ALL DIRECTOR NOMINEES, AND TO APPROVE AND RATIFY THE PROPOSED
AMENDMENTS OF THE CERTIFICATE OF INCORPORATION AND THE STOCK OPTION PLAN AND
THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT AUDITORS. Management
knows of no other matters that may come before the Annual Meeting for
consideration by the stockholders. However, if any other matter properly comes
before the Annual Meeting, the persons named in the enclosed proxy card as
proxies will vote upon such matters in accordance with their judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by filing with
the Secretary of the Company prior to the date of the Annual Meeting written
notice of revocation bearing a later date than the proxy, by duly executing and
delivering to the Secretary of the Company prior to the date of the Annual
Meeting a subsequent proxy relating to the same shares of Common Stock or by
attending the Annual Meeting and voting in person. Attendance at the Annual
Meeting will not in and of itself constitute revocation of a proxy unless the
stockholder votes his shares of Common Stock in person at the Annual Meeting.
Any notice revoking a proxy should be sent to the Secretary of the Company,
Riley M. Murphy, American Communications Services, Inc., 133 National Business
Parkway, Suite 200, Annapolis Junction, Maryland 20701 in a manner designed to
ensure that it is received by the Secretary prior to the date of the Annual
Meeting.
PROPOSAL NO. 1. ELECTION OF DIRECTORS
The Board is currently comprised of eight members. Other than as described
in this proxy statement, no arrangement or understanding exists between an
officer or director and any other person under which any officer or director
was or may be elected. All directors of the Company hold office until the next
annual meeting of stockholders and until their successors are duly elected and
qualified. No director or officer is related to any other director or officer
by blood, marriage, or adoption. Each of the director nominees is currently a
director of the Company.
Each of the nominees has consented to serve on the Board of Directors through
the next Annual Meeting of Stockholders or until his successor is duly elected
and qualified. If any of the nominees should be unable to serve for any reason
(which Management has no reason to anticipate at this time), the Board of
Directors may designate a substitute nominee or nominees (in which case the
persons named as proxies in the enclosed proxy card will vote all valid proxy
cards for the election of such substitute nominee or nominees), allow the
vacancy or vacancies to remain open until a suitable candidate or candidates
are located, or by resolution amending the By-laws of the Company, provide for
a lesser number of directors.
INFORMATION CONCERNING DIRECTOR NOMINEES
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
-------------------------- ------ ----------------------------- -----------
<S> <C> <C> <C>
Anthony J. Pompliano............ 59 Chairman of the Board of 1993
Directors
Jack E. Reich................... 47 President & Chief Executive 1997
Officer and Director
Benjamin P. Giess............... 35 Director 1995
Peter C. Bentz.................. 32 Director 1995
George M. Middlemas(1).......... 51 Director 1993
Christopher L. Rafferty(1)...... 49 Director 1994
Olivier L. Trouveroy(1)(2)..... 42 Director 1995
Edwin M. Banks(2).............. 35 Director 1994
</TABLE>
- ----------
(1) Member of Compensation Committee
(2) Member of Audit Committee
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THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR EACH OF THE
ABOVE-LISTED NOMINEES AS DIRECTORS. (PROPOSAL NO. 1 ON THE PROXY CARD).
BUSINESS EXPERIENCE OF DIRECTOR NOMINEES
Anthony J. Pompliano, Chairman of the Board of Directors, has more than 30
years of experience in the telecommunications industry. Mr. Pompliano was
elected a director of the Company in November 1993. He was co-founder and
President of Metropolitan Fiber Systems, the predecessor organization to MFS
Communications, a publicly-traded Competitive Local Exchange Carrier ("CLEC")
that was acquired by WorldCom, Inc. in December 1996. Mr. Pompliano served as
President, CEO and Vice Chairman of MFS Communications from April 1988 until
March 1991. He joined ACSI in August 1993 after the expiration of his
non-competition agreement with MFS Communications. Before his association with
MFS Communications and its predecessor, he was Vice President -- Operations and
Sales for MCI Telecommunications International from 1981 to 1987, and prior
thereto, was Vice President -- National Operations for Western Union
International, Inc. from 1960 to 1981.
Jack E. Reich, President and Chief Executive Officer and Director, had
22 years of telecommunications industry and management experience before
joining ACSI in December 1996. From December 1996 until September 1997, Mr.
Reich was President and Chief Executive Officer - Communications Services of
the Company. On September 22, 1997, Mr. Reich, was appointed President and
Chief Executive Officer of the Company. Mr. Reich was elected to the Board of
Directors in October 1997. For two and one-half years prior to joining ACSI,
Mr. Reich was employed by Ameritech, Inc. as President of its Custom Business
Service Organization, responsible for marketing of telecommunications
services, advanced data services, electronic commerce and managed
services/outsource initiatives to Ameritech's largest customers. Prior to
that, for eight years, he held positions with MCI, most recently as President
of MCI's Multinational Accounts organization and as MCI's Vice President of
Product Marketing. Mr. Reich has also held sales and marketing positions at
AT&T and ROLM Corp. Mr. Reich has a B.S. degree from St. Louis University and
an MBA from the University of Chicago.
Edwin M. Banks, Director, was elected a director of the Company in October
1994. Since 1988, Mr. Banks has been employed by W. R. Huff Asset Management
Co., L.L.C., an affiliate of The Huff Alternative Income Fund, L.P. ("Huff"), a
principal stockholder of the Company, and currently serves as a portfolio
manager concentrating in the healthcare, communications, food and food services
industries. See "Stock Ownership of Certain Beneficial Owners, Directors and
Management." From 1985 until he joined W. R. Huff Asset Management Co.,
L.L.C., Mr. Banks was employed by Merrill Lynch & Company. Mr. Banks received
his B.A. degree from Rutgers College and his MBA degree from Rutgers
University. Mr. Banks also serves as a director of Magellan Health Services.
Peter C. Bentz, Director, was elected a director of the Company in June 1995.
Since 1992, Mr. Bentz has been employed by W. R. Huff Asset Management Co.,
L.L.C., an affiliate of Huff, a principal stockholder of the Company, as a
research analyst specializing in telecommunications, media and healthcare. Mr.
Bentz received his Bachelor of Science degree from Boston College in 1987 and
his MBA from the Wharton School of the University of Pennsylvania in 1992.
Benjamin P. Giess, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Giess has been employed by ING Equity Partners, L.P. I
("ING"), a principal stockholder of the Company, and ING's predecessors and
affiliates and currently serves as a Partner responsible for originating,
structuring and managing equity and debt investments. See "Stock Ownership of
Certain Beneficial Owners, Directors and Management." From 1991 to 1992, Mr.
Giess worked in the Corporate Finance Group of ING Capital. From 1990 to 1991,
Mr. Giess was employed by the Corporate Finance Group of General Electric
Capital Corporation where he worked in the media and entertainment group. Prior
to attending business school, from 1986 to 1988, Mr. Giess was the Credit
Department Manager of the Boston Branch of ABN Amro North America, Inc. From
1984 to 1986, Mr. Giess was employed at the Shawmut Bank of Boston. Mr. Giess
also serves as a director of Matthews Studio Equipment Group and CMI Holding
Corp. Mr. Giess received his undergraduate degree from Dartmouth College and
his MBA from the Wharton School of the University of Pennsylvania.
George M. Middlemas, Director, was elected a director of the Company in
December 1993. Since _____ Mr. Middlemas has been a general partner of Apex
Management Partnership, which is the general partner of Apex Investment Fund I,
L.P. ("Apex I") and Apex Investment Fund II, L.P. ("Apex II"), both of which
are venture capital funds, and affiliates of First Analysis Corporation, a
principal stockholder of the Company. See "Stock Ownership of Certain
Beneficial Owners, Directors and Management." From March 1991 to December 1991,
Mr. Middlemas acted as an independent consultant providing fund raising and
other advisory services. From 1985 until March 1991, Mr. Middlemas was a
Senior Vice President and Principal of Inco Venture Capital Management, a
venture capital firm. He also serves on the Board of Directors of PureCycle
Corporation, Security Dynamics Technologies, Inc. and several privately held
companies.
6
<PAGE> 8
Christopher L. Rafferty, Director, was elected a director of the Company in
October 1994. Mr. Rafferty has been employed by WRH Partners, L.L.C., the
general partner of Huff since June 1994. From January 1993 to February 1994,
Mr. Rafferty was Vice President -- Acquisitions for Windsor Pet Care, Inc., a
venture capital-backed firm focusing on consolidating the pet care services
industry. From October 1990 to January 1993, Mr. Rafferty was a consultant
specializing in merchant banking, leveraged acquisitions and venture capital
transactions. From June 1987 to the time he started his consulting business,
Mr. Rafferty was a Managing Director of Chase Manhattan Capital Corporation,
the merchant banking and private equity investment affiliate of Chase Manhattan
Corporation. Mr. Rafferty received his undergraduate degree from Stanford
University and his law degree from Georgetown University.
Olivier L. Trouveroy, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Trouveroy has been employed by ING and its predecessors
and affiliates and currently serves as a Managing Partner responsible for
originating, structuring and managing equity and debt investments. From 1990 to
1992, Mr. Trouveroy was a Managing Director in the Corporate Finance Group
("CFG") of General Electric Capital Corporation in charge of CFG's office in
Paris, France. From 1984 to 1990, Mr. Trouveroy held various positions in the
Mergers and Acquisitions department of Drexel Burnham Lambert in New York, most
recently as a First Vice President. Mr. Trouveroy also serves as a director of
AccessLine Technologies, Inc., Cost Plus, Inc., Kasper A.S.L., Ltd, and
TransCare Corporation. Mr. Trouveroy holds B.S. and Masters degrees in
Economics from the University of Louvain in Belgium, as well as an MBA from the
University of Chicago.
INFORMATION CONCERNING BOARD MEETINGS
Seven meetings of the Company's Board of Directors were held during
the fiscal year ended December 31, 1997. Each incumbent director attended at
least 75% of the total number of meetings of the Board and any Committees of
the Board of which he was a member.
INFORMATION CONCERNING COMMITTEES OF THE BOARD
The only Committees of the Company's Board are the Audit Committee and the
Compensation Committee.
The Audit Committee is currently comprised of two directors, Olivier L.
Trouveroy and Edwin M. Banks. The Audit Committee is responsible for selecting
the Company's independent auditors and reviewing their audit, as well as
reviewing and approving the Company's internal controls and accounting systems.
The Audit Committee may be granted additional powers and duties as the Board
may from time to time determine. The Audit Committee held two meetings during
the fiscal year ended December 31, 1997.
The Compensation Committee is currently comprised of three directors, Olivier
L. Trouveroy, Christopher L. Rafferty and George M. Middlemas. The
Compensation Committee is responsible for recommending to the full Board all
stock option grants, bonuses and other compensation arrangements for executives
and key employees and loans and other nonsalary payments and other benefits and
arrangements with employees, affiliates and associates of the Company. The
Compensation Committee may be granted additional powers and duties as the Board
may from time to time determine. The Compensation Committee did not hold any
formal meetings during the fiscal year ended December 31, 1997, although it
held extensive discussions regarding compensation matters regularly and
memorialized its compensation decisions through the use of unanimous
written consents in lieu of meetings.
BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS
The following is a description of the background of the executive officers of
the Company who are not directors:
Ronald E. Spears, Chief Operating Officer, joined the Company on February 2,
1998. Mr. Spears has over 20 years of experience in the telecommunications
industry. Mr. Spears served as Corporate Vice President - Telecommunications
for Citizens Utilities from 1995 until joining the Company. Prior thereto he
served as Chairman and Chief Executive Officer of Videocort Inc. for two years
and President of MCI Communications Corporation's Midwest operating division
for six years. He also served on the Board of Directors of Hungarian Telephone
Cable Corp. Mr. Spears received his B.S. in Electrical Engineering from the
U.S. Military Academy at West Point in 1970 and his masters in Public Service
from Western Kentucky University in 1975.
David L. Piazza, Chief Financial Officer, joined the Company on March 24,
1997. For ten years prior to joining the Company, Mr. Piazza was employed by
MFS Communications in a variety of finance and senior management positions,
most recently as the Senior Vice President and Chief Financial Officer of MFS
Telecom, Inc., a subsidiary of MFS Communications. Prior to his employment with
MFS Communications, Mr. Piazza was employed by AT&T for four years in its
finance and regulatory support divisions. Mr. Piazza began his career at Arthur
Andersen & Co., spending five years in its regulated industries practice. Mr.
Piazza received his B.S. degree in Accountancy from the University of Illinois
and holds a CPA.
Riley M. Murphy, Executive Vice President -- Legal and Regulatory Affairs and
Secretary, had twelve years of experience in the private practice of
telecommunications regulatory law for inter-exchange, cellular, paging and
other competitive telecommunication services prior to joining the Company. From
February 1995 through 1997, she served as an officer and director of The
Association for Local Telecommunications Services. Ms. Murphy joined ACSI on a
full-time basis in April 1994 and was senior counsel to Locke Purnell Rain
Harrell, a Dallas-based law firm from August 1993 through December 1994. From
1987 to 1992, Ms. Murphy was a partner of Wirpel and Murphy, a
telecommunications law firm she co-founded, and from 1992 to 1993 she was a
sole practitioner. She holds a B.A. degree from the University of Colorado and
a J.D. from the Catholic University of America and is admitted to practice law
in the District of Columbia and Louisiana.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and directors, and any persons who
own more than ten percent of the outstanding shares of the Company's Common
Stock, to file with the Securities and Exchange Commission ("SEC") reports of
ownership and changes in ownership of the Company's Common Stock. Officers,
directors and greater than ten-percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons, the Company believes
that, except as described below, there was compliance for the period from
January 1, 1997 to December 31, 1997 with all Section 16(a) filing requirements
applicable to its officers, directors and greater than ten-percent beneficial
owners. Huff and ING each submitted one late filed Form 4 reporting three
transactions in April 1997 -- the acquisition of Common Stock through the
conversion of preferred stock, the issuance of Common Stock in payment of
dividends on the preferred stock in connection with the Company's public
equity offering in April, 1997 and the purchase of Common Stock in connection
with such public equity offering. In addition, ING submitted one late filed
Form 5 reporting the same transactions. Mr. Rafferty submitted one late filed
Form 5 reporting one transaction -- the acquisition of Common Stock through
the conversion of preferred stock.
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COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Summary Compensation Table
The following table provides a summary of compensation for the fiscal year
ended December 31, 1997, the six-month fiscal period ended December 31, 1996
and for each of the two fiscal years ended June 30, 1996 and 1995, with respect
to the Company's Chief Executive Officer, and the other five most highly
compensated officers of the Company during the fiscal year ended December 31,
1997 whose annual salary and bonus during such fiscal year exceeded $100,000
(collectively, the "Named Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------
----------------------------------------- NUMBER OF
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(2) COMPENSATION
---------------------------------- ------- ----------- ------------ ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Pompliano.............. 1997 $275,000 $275,000(4) $0 -- $ 0
Chairman of the 1996* 124,167 75,000(4) 0 -- 2,574(3)
Board of Directors 1996 239,583 175,000(4) 0 -- 6,187(3)
1995 219,500 175,000(4) 0 500,000 6,977(3)
Jack E. Reich(6).................. 1997 250,000 350,000(5) 0 0 2,375(3)
President and Chief 1996* 20,883 0 0 1,200,000 0
Executive Officer
David L. Piazza (7)............... 1997 139,038 130,000(5) 97,482(8) 250,000 0
Chief Financial Officer
Riley M. Murphy................... 1997 193,750 101,500(5) 0 50,000 2,375(3)
Executive Vice 1996* 91,250 0 0 0 0
President -- 1996 162,499 81,500(11) 37,004(8) 50,000 3,536(3)
Legal and Regulatory 1995 150,000 81,500(11) 0 250,001(10) 9,783(3)
Affairs, General Counsel
and Secretary
George M. Tronsrue, III (15)....... 1997 161,940 0 0 100,000 3,200(3)
Former President and Chief 1996 * 100,000 0 0 0 2,400(3)
Operating Officer - Strategy and 1996 191,128 54,116(9) 0 50,000 4,800(3)
Technology Development 1995 150,000 135,417(9) 68,800(8) 350,001(10) 0
Richard A. Kozak(12).............. 1997 23,974 0 0 0 300,000(14)
Former President and Chief 1996* 129,167 137,500 0 83,334(13) 2,700(3)
Executive Officer 1996 232,885 200,000 0 0 5,400(3)
-- Corporate Services 1995 184,378 175,000 0 399,999(13) 3,750(3)
and Acting Chief Financial
Officer
</TABLE>
____________
* Subsequent to June 30, 1996, the Company changed its fiscal year-end
to December 31. Information is for the six months ended December 31,
1996.
(1) Excludes perquisites and other personal benefits that in the aggregate
do not exceed 10% of Named Officer's total annual salary and bonus.
(2) See information provided in "Option Grants in Fiscal Year Ended
December 31, 1997."
(3) Represents payments received for medical or disability insurance in
excess of that provided to other employees and/or car allowances.
In 1995, for Ms. Murphy, also includes payments of $6,423 of premiums
in connection with professional liability insurance for the period
prior to her employment with the Company. For each of Mr. Reich and Ms.
Murphy, includes $2,375 which represents the Company's 401K match for
1997.
(4) Represents cash bonuses received for attainment of certain performance
goals.
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(5) Represents bonuses awarded in common stock of the Company pursuant to
the Annual Performance Plan, with the price based on the average
closing prices as quoted on The Nasdaq Stock Market for the 20 days
preceding March 11, 1998, the date of the award. Also includes
cash bonuses of $100,000 and $30,000, paid to Messrs. Reich and Piazza
respectively, pursuant to their employment agreements.
(6) Mr. Reich commenced employment with the Company in December 1996 as
President and Chief Executive Officer-Communications Services and
became President and Chief Executive Officer of the Company on
September 22, 1997.
(7) Mr. Piazza commenced employment with the Company in March 1997.
(8) Includes $65,000 and $37,004 paid to Mr. Tronsrue and Ms. Murphy,
respectively, as relocation and moving expenses in connection with the
relocation of the Company's headquarters to Annapolis Junction,
Maryland and $97,482 paid to Mr. Piazza in connection with his
relocation to the Annapolis Junction, Maryland area.
(9) Represents installments of a $244,500 bonus granted pursuant to Mr.
Tronsrue's employment agreement with the Company.
(10) 150,000 of these options were originally granted in the fiscal year
ended June 30, 1994 at an exercise price of $2.50 per share and such
exercise price was subsequently reduced to $2.25 per share in
connection with the Company's October 1994 private placement.
(11) Represents installment of a $244,500 bonus granted pursuant to Ms.
Murphy's employment agreement with the Company.
(12) Mr. Kozak served as the Company's President and Chief Executive
Officer during fiscal year 1996. He became Acting Chief Financial
Officer in December 1996 upon the resignation of the Company's
previous Chief Financial Officer. In connection with the Company's
December 1996 management reorganization, Mr. Kozak became President
and Chief Executive Officer - Corporate Services. Mr. Kozak's
employment with the Company was terminated in the first quarter of
1997.
(13) In connection with the settlement of the dispute relating to the
termination of Mr. Kozak's employment, all of the options granted in
the fiscal period ended December 31, 1996 and options to purchase
83,333 shares granted in the fiscal year ended June 30, 1995 were
canceled. See "Employment and Termination Agreements."
(14) In connection with the settlement of the termination of Mr. Kozak's
employment, severance of $300,000 was paid.
(15) Mr. Tronsrue's employment with the Company was terminated effective
September 3, 1997. Pursuant to his separation agreement with the
Company, Mr. Tronsrue forfeited 200,000 options. See "Employment and
Termination Agreements."
10
<PAGE> 12
Option Grants in Fiscal Year Ended December 31, 1997
The following table contains information concerning the grant of stock options
to the Named Officers during the fiscal year ended December 31, 1997.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS MARKET PRICE
UNDERLYING GRANTED TO EXERCISE OR OF UNDERLYING
OPTIONS EMPLOYEES BASE PRICE SECURITIES ON EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR ($/SHARE) DATE OF GRANT DATE
---- ----------- -------------- --------- ------------- ----
<S> <C> <C> <C> <C> <C>
Anthony J. Pompliano........ 0 ---- ---- ---- ----
Jack E. Reich............... 0 ---- ---- ---- ----
Riley M. Murphy............. 12,500 0.6% 7.330 8.625 2/26/03
12,500 0.6% 7.330 8.625 2/26/04
12,500 0.6% 7.330 8.625 2/26/05
12,500 0.6% 7.330 8.625 2/26/06
David L. Piazza............. 50,000 2.3% 7.330 8.625 3/23/03
50,000 2.3% 7.330 8.625 3/23/04
50,000 2.3% 7.330 8.625 3/23/05
50,000 2.3% 7.330 8.625 3/23/06
George M. Tronsrue, III .... 25,000(2) 1.2% 7.330 8.625 2/26/03
25,000(2) 1.2% 7.330 8.625 2/26/04
25,000(2) 1.2% 7.330 8.625 2/26/05
25,000(2) 1.2% 7.330 8.625 2/26/06
Richard A. Kozak............ 0 ---- ---- ---- ----
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
APPRECIATION FOR
OPTION TERM (1)
NAME 0% 5% 10%
---- -------- ---------- ----------
<S> <C> <C> <C>
Anthony J. Pompliano........ ---- ---- ----
Jack E. Reich............... ---- ---- ----
Riley M. Murphy............. $16,187 $45,974 $82,008
16,187 52,854 99,371
16,187 60,078 118,471
16,189 67,663 139,481
David L. Piazza............. 64,750 183,896 328,032
64,750 211,416 397,486
64,750 240,312 473,884
64,750 270,653 557,923
64,750 335,961 752,051
. . .
George M. Tronsrue, III 32,375 91,948 164,016
32,375 105,708 198,743
32,375 120,156 236,942
32,375 135,326 278,961
Richard A. Kozak............ ---- ---- ----
</TABLE>
- ------------
(1) The amounts set forth in the three columns represents hypothetical gains
that might be achieved by the optionee if the respective options are
exercised at the end of the term. These gains are based on assumed rates
of stock price appreciation of 0%, 5% and 10%. The exercise price of the
options was equal to 85% of the market price of the Common Stock on the
date of grant.
(2) These options were terminated in connection with Mr. Tronsrue's separation
agreement. See "Employment and Termination Agreements."
11
<PAGE> 13
Option Exercises and Fiscal Year End Values
The following table sets forth information with respect to the Named Officers
concerning the exercise of options during the fiscal year ended December 31,
1997 and the value of unexercised options held by the Named Officers as of
December 31, 1997.
<TABLE>
<CAPTION>
SHARES
ACQUIRED ON VALUE VALUE OF UNEXERCISED IN-THE-MONEY
EXERCISE (#) RECEIVED (1) NUMBER OF SECURITIES UNDERLYING OPTIONS AT DECEMBER 31, 1997(2)
------------ -------- UNEXERCISED -------------------------------
OPTIONS AT DECEMBER 31, 1997
----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Pompliano..... 0 0 1,662,399 187,500 $ 19,381,657 $1,877,438
Jack E. Reich (4) ....... 0 0 200,000 1,000,000 687,600 3,438,000
Riley M. Murphy ......... 0 0 193,752 156,250 2,046,602 1,338,969
David L. Piazza (4) ..... 0 0 0 250,000 0 1,370,750
George M. Tronsrue, III.. 300,000 $ 2,512,500 0 0 0 0
Richard A. Kozak ....... 280,000 1,266,825 936,598 (3) 0 10,695,275 0
</TABLE>
- ------------
(1) Based upon the last sale price on the option exercise date, as reported
by Nasdaq Stock Market, less the exercise price paid for the shares.
(2) Represents the difference between the per share exercise price of the
unexercised options and $12.8125, the last sale price on December 31,
1997, as reported by the Nasdaq Stock Market.
(3) Of these options, the vesting of options to purchase an additional 83,333
shares was accelerated in connection with the settlement of the dispute
relating to the termination of Mr. Kozak's employment. See "--Employment
and Termination Agreements."
(4) In addition, Mssrs. Reich and Piazza vested in performance stock options
for 100,000 shares and 50,000 shares, respectively, on January 2, 1998 due
to the attainment of certain performance goals in 1997.
DIRECTORS' COMPENSATION
Members of the Board do not receive cash compensation for acting as members
of the Board or Committees of the Board, other than reimbursement for
reasonable out-of-pocket expenses incurred in connection with their attendance
at meetings of the Board and its committees. Until the Series A-1 Preferred
Stock and Series B Preferred Stock were converted into Common Stock in April
1997, the Company was obligated to pay the reasonable fees and expenses of two
counsel selected by the directors elected by the holders of such Preferred
Stock from time to time to represent them in their capacity as directors.
During the fiscal year ended December 31, 1997, the Company paid an aggregate
of approximately $4,000 in such counsel fees. Directors who also serve as
executive officers receive compensation for acting in their capacity as
executive officers. See "-- Summary Compensation Table." From time to time the
Board has granted options to purchase shares of Common Stock to members of the
Board who are not also officers of the Company in consideration for their
service as directors. However, other than "formula grants" to outside directors
under the Company's 1994 Stock Option Plan, no formal arrangement exists. For
fiscal year ended December 31, 1997, no directors were granted options in their
capacity as such.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Only Messrs. Trouveroy, Rafferty and Middlemas served on the Compensation
Committee during the fiscal year ended December 31, 1997. None of these
directors has ever been an employee of the Company or any of its subsidiaries.
During the fiscal year ended December 31, 1997, no executive officer of the
Company served on the compensation committee or board of directors of any other
entity which had any executive officer who also served on the Compensation
Committee or Board of Directors of the Company.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION.
The Compensation Committee of the Board of Directors (the
"Compensation Committee") is responsible for setting corporate policy for
executive and other employee compensation and benefit plans. George M.
Middlemas, Christopher L. Rafferty and Olivier L. Trouveroy served on the
Compensation Committee for all of the fiscal year ended December 31, 1997. None
of the present Compensation Committee members is an employee of the Company.
The Compensation Committee's responsibilities included the recommendation for
approval of executive pay structure (i.e. salary bands, guidelines for annual
merit increases and incentives and aggregate amounts and guideline levels of
participation in executive stock plans), as well as the recommendation for
approval of all compensation matters for the Named Officers. In this
connection, the Compensation Committee has retained and relied upon the advice
of an independent compensation consultant who has conducted market surveys and
made recommendations to the Compensation Committee consistent with the adopted
compensation philosophy.
Compensation Philosophy
The Company's approach to executive compensation, as implemented by
the Compensation Committee, has been designed to provide a competitive program
that will enable the Company to attract, motivate, reward and retain
individuals who possess the skills, experience and talents necessary to advance
the growth and financial performance of the Company. The Company's
compensation policies are designed to encourage shareholder value creation,
corporate teamwork, equity ownership in the Company and long term loyalty to
the Company. The Company's executive compensation has two key elements: (1)
an annual component, i.e., base salary and an annual discretionary bonus based
upon achievement of corporate and personal objectives, and (2) a long-term
component consisting of stock options and awards.
The Company strives to provide compensation opportunities which
emphasize effectively rewarding management for the achievement of critical
corporate and personal performance objectives. In addition, the program
provides stock opportunities designed to align the interest of executives and
other key employees with other stockholders through the ownership of Common
Stock. The following is a discussion of each of the elements of the Company's
executive compensation program including a description of the decisions and
actions taken by the Compensation Committee with respect to the 1997
compensation for the Chief Executive Officer and all executive officers as a
group.
12
<PAGE> 14
Executive Compensation Policy
Compensation paid to the Company's executive officers for the fiscal
year ended December 31, 1997 (as reflected in the Summary Compensation Table
set forth above with respect to the Named Officers) consisted of the following
elements: base salary, annual bonuses, stock options under the Company's
Amended 1994 Stock Option Plan, participation in the Company's 1996 Employee
Stock Purchase Plan and contributions under the Company's 401(K) Plan.
In determining the base salary of executive officers, the Compensation
Committee establishes broad salary bands as flexible guidelines for future
salary administration which take into consideration a variety of factors,
including the executive's levels of responsibility and individual experience
and performance, and the salaries of similar positions in the Company and in
comparable companies in the Competitive Local Exchange Carrier ("CLEC")
industry. The Compensation Committee believes that its process for determining
and adjusting the base salary of executive officers is fully consistent with
sound personnel practices. Based on the Compensation Committee's consideration
of the aforementioned factors, Mr. Pompliano and Ms. Murphy were paid salaries
in 1997 which exceeded the minimum salaries required by their employment
agreements. The salaries paid to Messrs. Reich and Piazza in 1997 were the
minimum salaries required under their employment agreements, which were signed
on November 26, 1996 and February 28, 1997, respectively. The salaries paid to
Messrs. Reich and Piazza under their employment agreements were based upon the
Compensation Committee's consideration of the aforementioned factors and
arms-length negotiations between the Compensation Committee and Messrs. Reich
and Piazza.
Annual adjustments in base salaries typically are made effective at
the beginning of the calendar year for which they are intended to apply for the
Chairman and the President and Chief Executive Officer, and on the anniversary
of employment for the other Named Officers and therefore reflect in large part
achievement of the prior year's corporate and individual performance
objectives.
Annual Bonus
For fiscal year 1997, the Compensation Committee established a range
of targets and critical strategy/operating objectives for each of the Named
Officers which were reviewed and evaluated at year-end in connection with its
approval of the discretionary bonuses paid for that year. Individual bonus
awards for 1997 were determined by the Compensation Committee based on the its
determination regarding the extent to which each of the Named Officers achieved
his/her objectives. The Compensation Committee recommended to the Board of
Directors that the 1997 bonuses for all of the employees, including the Named
Officers other than Mr. Pompliano, be awarded in stock in lieu of cash.
Messrs. Reich and Piazza also received other bonuses in cash as required by
their employment agreements. In February 1998, the Board of Directors approved
adoption of the Annual Performance Plan pursuant to which it granted bonuses
for fiscal 1997 on March 11, 1998.
Stock Incentives
The long term incentive element of the Company's management
compensation program has historically been primarily in the form of stock
option grants. The employment agreements for the Named Officers typically
specify initial stock options which vest over a three year period and
performance stock options which vest upon achievement of certain criteria .
Other key employees may be granted initial and/or performance options when they
join the company. In addition, the Named Officers and other employees are
eligible for annual option grants based on guidelines expressed as percentages
of their salaries with variations which recognize individual performance,
leadership potential and past grant history. For 1997, these discretionary
stock options have been granted and administered by the Compensation Committee
under the Amended 1994 Stock Option Plan, which was designed to create an
opportunity for employees of the Company to acquire a proprietary interest in
the Company and thereby enhance their efforts in the service of the Company and
its stockholders. The compensatory and administrative features of the Amended
1994 Stock Option Plan conform in all material respects to the design of
standard comparable plans in the industry and are, in the Compensation
Committee's estimation, fair and reasonable.
13
<PAGE> 15
During 1997, the Compensation Committee approved grants of stock
options to employees and executive officers (including certain of those Named
Officers reflected in the foregoing tables) for an aggregate of 2,141,208
shares at exercise prices ranging from $4.15 to $11.64 per share, which options
were granted with exercise prices equal to 85% of the fair market value of the
Common Stock on the dates of grants. In most cases, options were granted under
agreements which provide that one-quarter of the options become exercisable on
each succeeding anniversary of the respective grant dates to further the
executive retention goal of the Amended 1994 Stock Option Plan.
Chief Executive Officer Compensation
Anthony J. Pompliano acted as Executive Chairman of the Company from
January 1, 1997 until September 22, 1997, at which time Jack E. Reich became
President and Chief Executive Officer of the Company. Mr. Pompliano's salary
in 1997 was $25,000 higher than the minimum salary required under his
employment agreement and he received a bonus of $275,000, which exceeded the
$200,000 bonus called for by his employment agreement. Among the factors
considered by the Compensation Committee in its consideration of Mr.
Pompliano's performance and his compensation in 1997 were achievement of
revenue growth and EBITDA improvement, attraction of telecommunications
executives to enable the Company to implement its strategy and acquisition of
capital to fund the Company's growth. Mr. Reich's compensation during 1997 was
in accordance with the terms of his November 26, 1996 employment agreement,
including the vesting on January 2, 1998 of 100,000 stock options based on
performance in 1997, which was negotiated at arm's length with the Company.
The foregoing report is provided by the following directors, who are
members of the Compensation Committee at the end of 1997.
George M. Middlemas
Christopher L. Rafferty
Olivier L. Trouveroy
14
<PAGE> 16
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative stockholder return on the
Common Stock since March 3, 1995, the time the Company began trading on the
Nasdaq SmallCap Market, with the cumulative total return on the Nasdaq Stock
Market Index and Nasdaq Telecommunications Industry Index over the same period
(assuming an investment of $100 in the Common Stock, the Nasdaq Stock Market
and Nasdaq Telecommunications Stocks on March 3, 1995.) The stock price
performance shown on the graph below is not necessarily indicative of future
price performance.
[GRAPHIC]
<TABLE>
<CAPTION>
3/3/95 12/31/95 12/31/96 12/31/97
------ -------- -------- --------
<S> <C> <C> <C> <C>
American Communications Services, Inc. $100 $113 $226 $270
NASDAQ Composite Index $100 $134 $164 $202
NASDAQ Telecommunications Index $100 $125 $128 $190
</TABLE>
15
<PAGE> 17
EMPLOYMENT AND TERMINATION AGREEMENTS
Anthony J. Pompliano. The Company is party to an employment agreement with
Anthony J. Pompliano, its Chairman, which terminates on August 23, 1998. Under
the terms of the agreement, as amended, Mr. Pompliano is entitled to a minimum
annual base salary of $250,000 and a cash bonus of up to $200,000 for each of
the 1997 and 1998 fiscal years based upon the Company's achievement of certain
performance goals for the relevant fiscal year. Under this employment
agreement, Mr. Pompliano has been granted options to purchase an aggregate of
1,849,899 shares of the Company's Common Stock at exercise prices ranging from
$.875 per share to $2.80 per share. Mr. Pompliano has the right to obtain a
30-day loan from the Company for the purpose of paying the aggregate exercise
price of the options granted to him. Mr. Pompliano has the right, for 90 days
after termination of his employment (unless he is terminated by the Company
"for cause" or he voluntarily resigns), to sell to the Company up to $1.0
million in then market value of shares of Common Stock issued or issuable
pursuant to the options granted to Mr. Pompliano under his employment
agreement, at a price equal to the publicly-traded price of the Common Stock,
less the exercise price of the options with respect to unexercised options;
provided, however, this right cannot be exercised unless at least 5,000,000
shares of Common Stock are owned by non-affiliates of the Company at the time
of his request and the market value of the outstanding Common Stock is at least
$300 million. Mr. Pompliano's employment agreement also contains non-compete,
non-solicitation and confidentiality provisions.
Jack E. Reich. The Company is party to an employment agreement with Jack E.
Reich, its President and Chief Executive Officer, which terminates on December
31, 2000, extendable for one year by mutual agreement. Under the terms of this
agreement, Mr. Reich is entitled to a minimum annual base salary of $250,000, a
cash bonus of $100,000 in 1997 and annual bonuses of between $150,000 and
$350,000 based on the Company's achievement of certain performance goals. Under
this employment agreement, Mr. Reich was granted an option to purchase
1,200,000 shares of Common Stock at an exercise price $9.375 per share. These
options vest in installments between December 1997 and December 2001, subject
to Mr. Reich's continued employment. Mr. Reich's employment agreement also
contains a two year non-compete/non-solicit provision.
Ronald E. Spears. The Company is a party to an employment agreement
with Ronald E. Spears, its Chief Operating Officer, which terminates February
1, 2002. This agreement is extendable by mutual agreement. Mr. Spears is
entitled to a salary of $250,000, a signing bonus of $100,000 and a 1998 bonus
of up to $150,000 based on achievement of certain performance goals with future
bonus opportunities for each successive year, based on achievement of certain
performance goals for that year. Under this employment agreement, Mr. Spears
was granted options to purchase 400,000 shares at an exercise price of $12.49
per share. These options vest in installments between February 1999 and
February 2002, subject to Mr. Spears' continued employment. Mr. Spears'
employment agreement also contains non-compete, non-solicitation and
confidentiality provisions.
David L. Piazza. The Company is party to an employment agreement with
David L. Piazza, its Chief Financial Officer, which terminates on March 23,
2001, extendable by mutual agreement. Mr. Piazza is entitled to a salary of
$175,000, a signing bonus of $30,000 and annual bonuses of up to 30% based on
his salary based upon the achievement of certain performance goals for the
relevant fiscal year. Under this employment agreement, Mr. Piazza was granted
an option to purchase 250,000 shares at an exercise price of $7.33 per share.
These options vest in installments between March 1998 and March 2003, subject
to Mr. Piazza's continued employment. Mr. Piazza's employment agreement also
contains non-compete, non-solicitation and confidentiality provisions.
Riley M. Murphy. The Company is party to an employment agreement with Riley
M. Murphy, its Executive Vice President for Legal and Regulatory Affairs, which
terminates on March 31, 1999. This agreement, as amended, calls for a minimum
annual salary of $175,000 and a guaranteed bonus of $244,500, payable in annual
installments through January 1997. Under this employment agreement, Ms. Murphy
was granted options to purchase an aggregate of 300,002 shares of Common Stock
at prices ranging from $2.25 per share to $3.40 per share. Ms. Murphy's
employment agreement also contains a two year non-compete/non-solicit
provision.
Richard A. Kozak. The Company was party to an employment agreement with
Richard A. Kozak, which was terminated effective February 2, 1997. Each of the
parties initially claimed the termination was the result of a breach of the
employment agreement by the other party. In settlement of their dispute and
related litigation concerning Mr. Kozak's termination, the parties agreed,
among other things, that Mr. Kozak was to (i) receive $300,000 in cash, payable
by the Company in three equal installments on April 1, July 1 and October 1,
1997, (ii) forfeit 166,667 of his unvested options, and (iii) execute a 180-day
Lock-Up Agreement with the underwriters of the Company's April 1997 public
offering for all but 150,000 of the shares underlying his vested options and
80,000 other shares he held. The Company also accelerated the vesting of Mr.
Kozak's remaining 83,333 options which had not vested at the time of his
termination. Mr. Kozak also agreed to certain non-compete, non-solicitation and
confidentiality provisions expiring on December 31, 1997. Under his employment
agreement, Mr. Kozak had been granted stock options to purchase an aggregate of
1,383,265 shares of the Company's Common Stock at exercise prices ranging from
$0.875 per share to $15.00 per share, of which options to purchase 1,133,265
shares had vested as of his termination.
16
<PAGE> 18
George M. Tronsrue, III. The Company was party to an employment agreement
with George M. Tronsrue, III which was terminated effective September 3, 1997,
when Mr. Tronsrue voluntarily resigned from his position as Chief Operating
Officer-Strategy and Technology Development. Pursuant to the separation
agreement dated September 30, 1997, the parties agreed, among other things,
that Mr. Tronsrue was to (i) retain 300,000 vested options at an exercise price
of $2.25; (ii) forfeit 200,000 of his unvested options; and (iii) repay the
Company no later than October 12, 1997 the outstanding principal and accrued
interest, at the interest rate of 8% per year, of the $195,000 loan previously
provided to him by the Company in accordance with his employment agreement.
Mr. Tronsrue also waived all rights under a registration rights agreement, and
agreed to certain non-solicitation and confidentiality provisions expiring on
September 30, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Huff and certain of its affiliates purchased an aggregate of 10,000 units
(consisting of 14 3/4% Redeemable Preferred Stock due 2008 (the "14 3/4%
Preferred Stock") and warrants (the "Unit Warrants") to purchase Common Stock)
in the Company's July 1997 offering of such units, acquiring thereby 10,000
shares of 14 3/4% Preferred Stock and 10,000 Unit Warrants. ING Baring (U.S.)
Securities, Inc. which may be deemed to be an affiliate of ING purchased 7,500
of such units, acquiring thereby 7,500 shares of 14 3/4% Preferred Stock and
7,500 Unit Warrants.
The initial purchasers of the Company's 13 3/4% Senior Notes due 2007 (the
"2007 Notes") have informed the Company that W.R. Huff Asset Management Co.
LLC ("W.R. Huff") (an affiliate of Huff) on behalf of investment management
accounts for which W.R. Huff acts as investment advisor and over which it has
dispositive power, purchased $50 million of the 2007 Notes in the private
placement of such Notes, for which the Company paid W.R. Huff, on behalf of
such accounts, a fee of $750,000 with respect to such purchase.
In connection with, and as a condition precedent to the consummation of the
April 1997 public offering, the Company sold 2,099,125, 1,364,432 and 136,443
shares of Common Stock to Huff, ING and affiliates of First Analysis
Corporation, respectively. The per share price for the shares sold to these
principal stockholders was $4.70 (the same price paid to the Company by the
Underwriters for the 4,400,000 shares sold in the Public Offering) for
aggregate proceeds to the Company equal to $16,920,000. Additionally, these
stockholders elected to receive an aggregate of 1,603,241 shares of Common
Stock in lieu of approximately $7.6 million of accrued dividends payable upon
conversion of the Preferred Stock they held.
The Company has in place policies and procedures that enable it to comply
with the covenants in its existing indentures regarding transactions with
affiliates.
17
<PAGE> 19
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT
The following table sets forth as of December 31, 1997, certain information
regarding the beneficial ownership of the Company's Common Stock outstanding
(assuming the exercise of options and warrants exercisable on or within 60 days
after such date) by (i) each person who is known to the Company to own 5% or
more of the Common Stock, (ii) each director of the Company, (iii) each of the
Named Officers and (iv) all executive officers and directors of the Company as
a group.
Unless otherwise indicated, the named persons exercise sole voting and
investment power over the shares that are shown as beneficially owned by them.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE OF
NAME OF BENEFICIAL OWNER(1) OF SHARES TOTAL(2)
--------------------------- --------- ------------
<S> <C> <C>
Anthony J. Pompliano ........................... 1,724,999 (3) 4.4
Jack E. Reich ................................... 301,330 (4) *
Ronald E. Spears................................. 20,000 (5) *
Riley M. Murphy ................................. 208,942 (6) *
David L. Piazza.................................. 50,000 (7) *
George M. Middlemas ............................. 1,699,499 (8) 4.6
Christopher Rafferty ........................... 8,000 (9) *
Edwin M. Banks ................................. --- (9) ---
Peter C. Bentz ................................. --- (9) ---
Olivier L. Trouveroy ........................... ---(10) ---
Benjamin P. Giess ............................... ---(10) ---
The Huff Alternative Income Fund, L.P.. ......... 15,090,140 (11) 39.5
ING Equity Partners, L.P..I ..................... 7,946,828 (12) 21.3
First Analysis Corporation ..................... 3,202,237 (13) 8.6
West Highland Capital, Inc....................... 2,000,000 (14) 5.4
All executive officers and directors as a group
(11 persons)............................... 4,012,770 10.0
</TABLE>
- -----------
* Less than one percent.
(1) The address of all officers and directors listed above is in the care of
the Company.
(2) The percentage of total outstanding for each stockholder is calculated by
dividing (i) the number of shares of Common Stock deemed to be beneficially
owned by such stockholder as of December 31, 1997 by (ii) the sum of (A)
the number of shares of Common Stock outstanding as of December 31, 1997
plus (B) the number of shares of Common Stock issuable upon the exercise of
options or warrants held by such stockholder which were exercisable as of
December 31, 1997 or will become exercisable within 60 days after December
31, 1997 ("currently exercisable").
(3) Includes currently exercisable options to purchase 1,724,899 shares.
(4) Includes currently exercisable options to purchase 300,000 shares and 1,330
shares of Common Stock purchased through the 1996 Employee Stock Purchase
Plan.
(5) Mr. Spears joined the Company in February 1998. See "Employment and
Termination Agreements." Mr. Spears also vested in 20,000 options in
February 1998 which were previously granted to him in connection with
consulting services rendered to the Company.
(6) Includes currently exercisable options to purchase 206,252 shares and 2,690
shares of Common Stock purchased through the 1996 Employee Stock Purchase
Plan.
(7) Includes currently exercisable options to purchase 50,000 shares of Common
Stock.
(8) Includes 20,000 shares owned directly, 8,000 shares owned through an
individual retirement account and currently exercisable options to purchase
30,000 shares. Also includes 1,222,702 shares of Common Stock owned by Apex
II and 418,797 shares of Common Stock owned by Apex I. Mr. Middlemas is a
general partner of Apex Management Partnership which is the general partner
of Apex I and Apex II. Mr. Middlemas disclaims beneficial ownership of the
shares owned by Apex I and Apex II, except to the extent of his ownership
in the general partner of Apex I and in the general partner of Apex II.
(9) Messrs. Banks and Bentz are employees of W.R. Huff, an affiliate of Huff.
Mr. Rafferty is an employee of WRH Partners, L.L.C., the general partner of
Huff. Messrs. Rafferty, Bentz and Banks disclaim beneficial ownership of
all shares held by Huff.
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(10) Mr. Trouveroy is a Managing Partner of ING and Mr. Giess is a Partner of
ING. Messrs. Trouveroy and Giess disclaim beneficial ownership of all
shares held by ING.
(11) Includes currently exercisable warrants to purchase 200,000 shares. The
address for Huff is 1776 On the Green, 67 Park Place, Morristown, NJ
07960.
(12) Includes currently exercisable warrants to purchase 100,000 shares.
The address for ING is 135 East 57th Street, 16th Floor, New York, NY
10022.
(13) Includes 1,222,702 shares of Common Stock owned by Apex II. Includes
418,797 shares of Common Stock owned by Apex I. Includes 780,883
shares of Common Stock owned by The Productivity Fund II, L.P.
("Productivity"). Includes 779,855 shares of Common Stock owned by
Environmental Private Equity Fund II, L.P. ("EPEF"). First Analysis
Corporation ("FAC") is an ultimate general partner of Apex I, Apex II,
Productivity and EPEF and may be deemed to be the beneficial owner of
the shares owned by them. FAC disclaims beneficial ownership of these
shares. This information was obtained from a Schedule 13D filed with
the Securities and Exchange Commission on May 6, 1997, as amended from
time to time. The address for First Analysis Corporation is 233 South
Wacker Drive, Suite 9600, Chicago, IL 60093.
(14) This information was obtained from a Schedule 13D filed with the
Securities and Exchange Commission on December 31, 1997, as amended
from time to time. The address for West Highland Capital, Inc. is 300
Drakes Landing Road, Suite 290, Greenbrae, CA 94904.
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PROPOSAL NO. 2. APPROVAL AND RATIFICATION OF AMENDMENT TO THE COMPANY'S SECOND
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO INCREASE
THE AUTHORIZED COMMON STOCK FROM 75,000,000 TO 125,000,000
SHARES.
At present, the Company is authorized to issue 75,000,000 shares of Common
Stock, $.01 value per share. As of December 31, 1997, there were 37,219,419
shares of Common Stock outstanding and 19,094,683 shares reserved for issuance
pursuant to various outstanding options and warrants to purchase Common
Stock, 2,327,169 shares reserved for additional options which may be granted
under the Amended 1994 Stock Option Plan and 396,157 shares reserved for
issuance under the 1996 Employee Stock Purchase Plan. Thus, as of December 31,
1997, 15,962,572 shares of Common Stock would be available for issuance. In
April 1998, the Company completed a public offering of 7,502,418 shares of
Common Stock utilizing the currently authorized Common Stock.
The Board of Directors believes that it is in the best interest of the
Company to increase the authorized number of shares of Common Stock from
75,000,000 to 125,000,000. The Company will likely need to issue additional
Common Stock to obtain additional financing, implement additional management or
employee incentive programs or consummate strategic acquisitions. On March
19, 1998, the Board of Directors consented unanimously to submit to a vote of
stockholders an amendment to the Certificate of Incorporation increasing the
authorized Common Stock. The Company has no present agreement, commitment
plan or proposal to issue any of the additional shares of Common Stock
provided for in the proposal.
If this Proposal is approved, the additional authorized Common Stock as well
as the currently authorized but unissued Common Stock, would be available for
issuance in the future for such corporate purposes as the Board of Directors
deems advisable from time to time without further action by the stockholders,
unless such action is required by applicable law or by the rules of The NASDAQ
Stock Market or any stock exchange on which the Company's shares may then be
listed.
The Company's Common Stock is currently quoted on The NASDAQ Stock Market.
One of the non-quantitative maintenance criteria for The Nasdaq Stock Market
securities requires stockholder approval for the establishment of certain plans
or arrangements by the Company or the issuance of designated securities by the
Company. This criteria provides that, for so long as the Company's Common
Stock is included in The NASDAQ Stock Market, stockholder approval will be
required for (i) the establishment of a stock option or purchase plan or other
arrangement made pursuant to which stock may be acquired by officers or
directors, except for warrants or rights issued generally to security holders
of the Company or broadly based plans or arrangements including other
employees, and certain de minimus issuances thereunder or issuances to induce
individuals to enter employment contracts; (ii) the issuance of securities
which will result in a change of control of the issuer; (iii) the issuance of
securities in connection with the acquisition of the stock or assets of another
company (a) if any director, officer or substantial stockholder of the Company
has a 5% or greater interest (or such persons collectively have a 10% or
greater interest), directly or indirectly, in the company or assets to be
acquired or in the consideration to be paid in the transaction or series of
related transactions and the present or potential issuance of Common Stock or
securities convertible into or exercisable for Common Stock, could result in an
increase in outstanding Common Shares or voting power of 5% or more, or (b)
where the present or potential issuance of Common Stock, or securities
convertible into or exercisable for Common Stock, other than a public offering
for cash, if the Common Stock has, or will have upon issuance voting power
equal to or in excess of 20% of the voting power outstanding before the
issuance of stock or securities convertible into or exercisable for Common
Stock, or the number of shares of Common Stock to be issued is or will be equal
to or in excess of 20% of the number of shares of Common Stock outstanding
before the issuance of stock or securities; or (iv) in connection with a
transaction, other than a public offering, involving (x) the sale or issuance
of Common Stock, or securities convertible into or exercisable for Common
Stock, at a price less that the greater of book or market value, which together
with sales by officers, directors or substantial stockholders of the Company
equals 20% or more of the voting power outstanding before the issuance.
The additional authorized shares of Common Stock resulting from this Proposal
would be the same as the existing shares of Common Stock. All outstanding
Common Stock would continue to have one vote per share. Stockholders of the
Company do not presently have preemptive rights nor will they as a result of
the Proposal.
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Authorized shares of Common Stock in excess of those shares outstanding
(including, if authorized, the additional Common Stock provided for in this
Proposal) will remain available for general corporate purposes, may be
privately placed and can be used to make a change in control of the Company
more difficult. Under certain circumstances, the Board of Directors could
create impediments to, or frustrate persons seeking to effect a takeover or
transfer in control of the Company by causing such shares to be issued to a
holder or holders who might side with the Board of Directors in opposing a
takeover bid that the Board of Directors determines is not in the best
interests of the Company and its stockholders, but in which unaffiliated
stockholders may wish to participate. The existence of such shares might have
the effect of discouraging any attempt by a person, through the acquisition of
a substantial number of shares of Common Stock, to acquire control of the
Company, since the issuance of such shares could dilute the Company's book
value per share and the Common Stock ownership of such person. One of the
effects of the Proposal, if approved, might be to render the accomplishment of
a tender offer more difficult. This may be beneficial to management in a
hostile tender offer, thus having an adverse impact on stockholders who may
want to participate in such tender offer.
It should be noted that subject to the limitations discussed above, all of
the types of Board action described in the preceding paragraph can currently be
taken and that the power of the Board of Directors to take such actions would
not be enhanced by the Proposal, although the Proposal would increase the
number of shares of Common Stock that are subject to such action.
This proposal and the Company's authorized but unissued Preferred Stock may
generally be classified as "anti-takeover" measures and may each, or in
conjunction with each other, discourage attempted takeovers of the Company
which are not approved by the Board of Directors. The Company does not believe
that any other provision of its current Certificate of Incorporation or By-Laws
are intended or would have the effect of discouraging or making more difficult
the acquisition of control of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF AN AMENDMENT TO THE
COMPANY'S CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED SHARES OF
COMMON STOCK FROM 75,000,000 TO 125,000,000. (PROPOSAL NO. 2 ON THE PROXY CARD)
PROPOSAL NO. 3. APPROVAL AND RATIFICATION OF AMENDMENT TO THE COMPANY'S SECOND
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO INCREASE
THE AUTHORIZED PREFERRED STOCK FROM 1,500,000 TO 3,000,000
SHARES.
At present the Company is authorized to issue 1,500,000 shares of
Preferred Stock, $1.00 per share. As of March 17, 1998 there were outstanding
1,300,000 shares of Preferred Stock, of which 400,000 shares are designated as
14-3/4% Redeemable Preferred Stock due 2008, 200,000 shares are designated as
Series A 12-3/4% Junior Redeemable Preferred Stock due 2009 and 700,000 shares
are designated as Series B 12 3/4% Junior Redeemable Preferred Stock due 2009.
All of the currently authorized but unissued shares of preferred stock may be
designated by the board of directors without further stockholder approval with
such designations, preferences, and relative, participating, optimal or other
special rights and qualifications, limitations or restrictions thereof as the
board may determine. Such power is permissible under Delaware General
Corporate Law (the "DGCL") and is commonly referred to as the board's "blank
check" authority.
The board believes it is in the best interests of the Company to
increase the authorized number of shares of preferred stock subject to the
board's blank check authority from 1,500,000 to 3,000,000 and on March 19,
1998 the Board consented unanimously to submit to a vote of stockholders an
amendment to the Certificate of Incorporation so increasing the preferred
stock. The board believes such an increase in the authorized preferred stock
is advisable since it is likely that the Company will need to obtain additional
equity financing for the expansion and operation of its business in the future
and it is possible that the Company may be required to issue additional shares
of preferred stock in order to obtain such financing. The Company may also be
required to issue preferred stock in order to consummate acquisitions. The
Company has no present agreement, commitment, plan or proposal to issue any of
the additional shares of preferred stock provided for in this proposal. If,
however, the need arises in the future to issue additional shares it is
anticipated that the terms of any preferred stock to be issued will be the
subject of negotiations with any potential investors and, therefore, the board
believes that it is advisable to allow the board to set such terms in its
discretion. The board believes that this flexibility is necessary to enable
the Company's executive officers to negotiate terms which are the most
advantageous to the Company while still complying with requirements that may be
specified by potential investors. In the event any preferred stock is issued
in the future the board will authorize such issuance and no further
authorization for the issuance of the preferred stock by a vote of the
Company's security holders will be solicited prior to such issuance except as
required by the Certificates of Designation for the outstanding classes of
preferred stock.
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The 1,500,000 additional authorized shares of preferred stock
resulting from this Proposal would have the same $1.00 par value as the
existing authorized shares of preferred stock. Such preferred stock would have
such voting rights and other rights as the Board shall determine in accordance
with the DGCL, subject to the provisions of the certificates of designation for
the outstanding classes of preferred stock.
In the event this Proposal is approved, authorized shares of preferred
stock in excess of those shares outstanding will remain available for general
corporate purposes, may be privately placed and can be used to make a change in
control of the Company more difficult. Any preferred stock which is issued in
the future will, in all likelihood, have terms and preferences, including
without limitation dividend, voting and liquidation rights, which are senior
and superior to those of the Common Stock. The preferred stock may be issued
with such other terms and preferences so as to discourage any tender offer for
the Company's stock or other takeover bids, which in the opinion of the board
might not be in the best interests of the Company and its stockholders, but in
which unaffiliated stockholders may wish to participate.
It should be noted that the board currently has the power to take such
actions described in the preceding paragraph with regard to the currently
authorized but unissued shares of preferred stock and that the power of the
board actions will not be enhanced by this Proposal, except in respect of the
increased number of authorized shares of preferred stock which will then be
available for issuance.
If Proposal No. 2 and Proposal No. 3 are approved and the amendments
become effective, the first three sentences of Article IV of the Company's
Certificate of Incorporation, which sets forth the Company's presently
authorized capital stock, will be amended to read in their entirety as follows:
"4. The total number of shares of capital stock which the
Corporation shall have authority to issue is 128,000,000"
"4.1. Of the authorized shares, 125,000,000 shares shall
be common stock (the "Common Stock") with a par value of $0.01 per share."
"4.2. Of the authorized shares, 3,000,000 shares shall be
shares of preferred stock (the "Preferred Stock" or "Preferred Shares") with a
par value of $1.00 per share."
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF AN AMENDMENT TO THE
COMPANY'S CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF PREFERRED STOCK FROM 1,500,000 TO 3,000,000. (PROPOSAL NO. 3 ON THE
PROXY CARD). _
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PROPOSAL NO. 4. APPROVAL AND RATIFICATION OF AN AMENDMENT TO THE STOCK OPTION
PLAN TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED
FOR ISSUANCE UPON THE EXERCISE OF OPTIONS GRANTED THEREUNDER
FROM 5,000,000 TO 11,000,000 SHARES AND TO COMFORM SUCH PLAN
TO THE CURRENT PROVISIONS OF RULE 16b-3 UNDER THE SECURITIES
EXCHANGE ACT OF 1934.
The Board of Directors, pursuant to the recommendation of its Compensation
Committee, amended the Stock Option Plan on March 19, 1998 to increase the
number of shares of Common Stock available for issuance upon exercise of
options granted thereunder by 6,000,000 shares, subject to stockholder approval.
Before this amendment, the total number of shares for award thereunder
authorized under the Stock Option Plan was 5,000,000 and now is 11,000,000
shares. The Compensation Committee recommended the increases for the primary
purpose of rewarding key employees for past performances and giving key
employees, including those joining the Company as new hires, incentive to
perform at a high standard in the future.
1994 STOCK OPTION PLAN
On November 15, 1994, the Board adopted and on December 16, 1994,
stockholders approved the Stock Option Plan. On January 26, 1996, November 15,
1996 and June 25, 1997, the Company's stockholders approved amendments to the
Stock Option Plan. The Stock Option Plan will terminate no later than November
15, 2004, ten years after adoption by the Board of Directors and after such
termination no additional options may be granted. The Stock Option Plan is
administered by the Compensation Committee which makes discretionary grants
("discretionary grants") of options to employees (including employees who are
officers and directors of the Company), directors who are not employees of the
Company ("Outside Directors") and consultants. The Stock Option Plan also
provides for formula grants of options to Outside Directors ("formula grants").
Under the Stock Option Plan, 4,790,000 shares of Common Stock have been
reserved for discretionary grants and 210,000 shares of Common Stock have been
reserved for formula grants. As of December 31, 1997, 2,422,612 discretionary
and 20,000 formula options had been granted under the Stock Option Plan.
Options granted pursuant to discretionary grants may be nonqualified options
or incentive options within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended. The selection of participants, allotment of shares,
determination of price and other conditions of purchase of such options will be
determined by the Compensation Committee, in its sole discretion. Options
granted pursuant to discretionary grants are exercisable for a period of up to
ten years, except that incentive options granted to optionees who, at the time
the option is granted, own stock representing greater than 10% of the voting
power of all classes of stock of the Company or any parent or subsidiary, are
exercisable for a period of up to five years. The per-share exercise price of
incentive options granted pursuant to discretionary grants must be no less than
100% of the fair market value of the Common Stock on the date of grant, except
that the per share exercise price of incentive options granted to optionees
who, at the time the option is granted, own stock representing greater than 10%
of the voting power of all classes of stock of the Company or any parent or
subsidiary, must be no less than 110% of the fair market value of the Common
Stock. The per share exercise price of nonqualified stock options granted
pursuant to discretionary grants must be no less than 85% of the fair market
value of the Common Stock on the date of grant. To the extent options are
granted at less than fair market value, the Company incurs a non-cash cost for
financial reporting purposes.
Under the formula grants, each Outside Director will be granted automatically
a nonqualified option to purchase 50,000 shares (subject to adjustment as
provided in the 1994 Plan). Each such director may decline such grant. Each
option granted pursuant to a formula grant will vest and become exercisable as
to 10,000 shares on the date such option is granted (the "Grant Date"), as to
10,000 shares on the date of the first annual meeting of stockholders held at
least eight months after the Grant Date (the "First Annual Meeting") and as to
10,000 shares on the date of each of the next three annual meetings of
stockholders held after the First Annual Meeting, provided that the option will
only vest on the relevant annual meeting of stockholders date if the Outside
Director is re-elected to the Board at such meeting. Each such option shall
have a term of five years from the relevant vesting date. The exercise price
per share of Common Stock for options granted pursuant to a formula grant shall
be 100% of the fair market value as determined under the terms of the 1994
Plan.
As of December 31, 1997, there were 803 employees eligible to
participate and approximately 248 actual participants in the 1994 Plan. During
the fiscal year ended December 31, 1997 there were no grants of options
pursuant to the 1994 Plan to any director. There were grants of options
pursuant to the 1994 Plan to all other employees as a group to acquire an
aggregate of 2,141,208 shares of Common Stock, at an exercise prices ranging
from $4.15 to $11.64 per share, during the fiscal year ended December 31, 1997
Currently the Stock Option Plan contains provisions which were designed
to comply with the requirements of Rule 16b-3 under the Exchange Act prior to
the amendments to Rule 16b-3 adopted by the SEC in May 1996 ("Old Rule 16b-3").
The amendments to the Stock Option PLan proposed herein are designed to reflect
the current provisions of Rule 16b-3 ("Current Rule 16b-3").
The Stock Option Plan provides that it is to be administered by a
committee appointed by the board which shall consist solely of "disinterested
persons," as that term was defined in Old Rule 16b-3. The Stock Option Plan as
amended would provide that it will be administered by the Compensation
Committee which shall be comprised solely of two or more "nonemployee
directors" as such term is defined in Current Rule 16b-3. The concept of a
"disinterested person" will be eliminated from the Stock Option Plan.
The Stock Option Plan current provides that no amendment to the Plan
may be made without stockholder approval to the extent necessary to comply with
Rule 16b-3. This provision was consistent with Old Rule 16b-3. The Stock Option
Plan as amended would provide that the Plan could be amended by the board
without stockholder approval unless stockholder approval was required by
applicable law, rules (including those of The Nasdaq Stock Market) or
regulations. Specific reference to Rule 16b-3 in this context will be
eliminated since stokholder approval of an option plan is no longer required
for Rule 16b-3 qualification."
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For a description of certain of the federal income tax consequences
associated with the grant and exercise of options and the Stock Option Plan,
see "Stock Option Plan - Federal Income Tax Consequences."
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE APPROVAL
AND RATIFICATION OF THE AMENDMENTS TO THE STOCK OPTION PLAN TO INCREASE THE
NUMBER OF SHARES RESERVED FOR ISSUANCE UNDER THE STOCK OPTION PLAN FROM
5,000,000 SHARES TO 11,000,000 SHARES AND TO CONFORM THE STOCK OPTION PLAN TO
THE CURRENT PROVISIONS OF RULE 16b-3 UNDER THE EXCHANGE ACT. (PROPOSAL NO.
4 ON THE PROXY CARD).
STOCK OPTION PLAN - FEDERAL INCOME TAX CONSEQUENCES
The following general summary is based upon the Internal Revenue Code of
1986, as amended (the "Code") and does not include a discussion of any state or
local tax consequences.
STOCK OPTION PLAN - NONQUALIFIED STOCK OPTIONS
An optionee will not generally recognize any taxable income upon the grant of
a nonqualified option because, under current Treasury regulations pursuant to
Section 83 of the Code, the fair market value of an option at the time it is
granted is ordinarily not considered to be "readily ascertainable". However,
upon exercise of a nonqualified option, an optionee must recognize ordinary
income in an amount equal to the excess of the fair market value of the Common
Stock at the time of exercise over the exercise price. Upon the subsequent
disposition of the Common Stock, the optionee will realize a capital gain or
loss, depending on whether the selling price exceeds the fair market value of
the Common Stock on the date of exercise.
An optionee's tax basis in the shares received on exercise of a nonqualified
option will be equal to the amount of consideration paid by the optionee on
exercise, plus the amount of ordinary income recognized as a result of the
receipt of such shares, which together equals the fair market value of the
Common Stock on the date of exercise. The optionee's holding period in the
Common Stock, for capital gains and losses purposes, begins on the date of
exercise. Optionees who are required to report their holdings and transfers of
the Common Stock under Section 16(a) of the Exchange Act ("Section 16 Persons")
are subject to the trading restrictions of Section 16(b) of the Exchange Act
and unless the election described below is made will not recognize ordinary
compensation income until the date such trading restrictions terminate (the
"Deferred Date"), rather than the exercise date. If the election is not made,
the amount of such taxable income will equal the excess of the fair market
value on the Deferred Date of the Common Stock received over the exercise price
for such Common Stock and the holding period for long-term capital gain would
not begin until the Deferred Date.
Section 16 Persons may elect to recognize compensation income on the date of
exercise of the non-qualified option. In such event, the amount of taxable
income to be recognized would equal the excess of the fair market value of the
Common Stock on such exercise date, over the exercise price for such Common
Stock. The election to recognize income on the date of exercise of the
non-qualified option, may be made by the timely filing of an appropriate
statement with the Internal Revenue Service.
The Company will be entitled to a deduction for federal income tax purposes
at the same time and in the same amount as the optionee recognizes compensation
income, provided the Company satisfies any applicable withholding tax
obligation with respect to such income.
STOCK OPTION PLAN - INCENTIVE STOCK OPTIONS
Under Section 422 of the Code, no taxable income is realized by the optionee
upon the grant or exercise of an incentive stock option, provided that the
optionee is continuously employed by the Company during the period beginning on
the date of grant and ending on the date three months before the date of
exercise (or, in the case of disability, one year before the date of exercise).
However, the exercise of an incentive stock option may result in alternative
minimum tax liability for the optionee. If no disposition of shares issued to
an optionee pursuant to the exercise of an incentive stock option is made by
the optionee within two years from the date of grant or within one year after
the transfer of such shares to the optionee, then upon sale of such shares, any
amount realized in excess of the exercise price will be taxed to the optionee
as long-term capital gain (and any loss sustained will be long-term loss) and
no deduction will be allowed to the Company for federal income tax purposes.
The grant of an incentive stock option and the optionee's exercise of the
incentive stock option will result in no federal income tax consequences to the
Company.
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If the shares of Common Stock acquired upon the exercise of an incentive
stock option are disposed of prior to the expiration of the two-year and
one-year holding periods described above (a "Disqualifying Disposition"),
generally the optionee will realize ordinary income in the year of disposition
in an amount equal to the excess (if any) of the fair market value of the
shares on the date of exercise (or, if less, the amount realized on an
arms-length sale of such shares) over the exercise price thereof, and the
Company will be entitled to deduct such amount as compensation expenses.
CLOSING PRICE OF COMMON STOCK
The last reported sales price of a share of the Company's Common Stock on
March 24, 1998 on The NASDAQ Stock Market was $18.56.
PROPOSAL NO. 5. RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors, pursuant to the recommendation of its Audit
Committee, has selected KPMG Peat Marwick LLP, independent auditors, to
audit the financial statements of the Company for the fiscal year ending
December 31, 1998. KPMG Peat Marwick LLP has served as independent auditors of
the Company since 1995. A partner of the firm will be present at the Annual
Meeting, available to respond to appropriate questions, and will have an
opportunity to make a statement if he desires to do so.
In 1997, KPMG Peat Marwick LLP performed various professional services for
the Company. They included completion of the audit of financial statements of
the Company for fiscal year ended December 31, 1997, other review work of
required filings with the SEC, preparation of corporate tax returns and other
consultation with Company personnel on accounting and related matters.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
RATIFICATION OF THE SELECTION OF KPMG PEAT MARWICK LLP AS THE COMPANY'S
INDEPENDENT AUDITORS. (PROPOSAL NO. 5 ON THE PROXY CARD).
VII. OTHER MATTERS
The Board of Directors knows of no other matters to be brought before the
Annual Meeting. If matters other than the foregoing should properly come before
the Annual Meeting, it is intended that the shares represented by proxies will
be voted in accordance with the judgment of the persons named in the proxy as
to the best interests of the Company.
ANNUAL REPORT TO STOCKHOLDERS
The Company's Annual Report to Stockholders for the fiscal year ended
December 31, 1997 accompanies this Proxy Statement.
STOCKHOLDERS' PROPOSALS
The Company's next Annual Meeting of Stockholders will be held in or around
May, 1999. Such Annual Meeting of Stockholders will present information
relating to the Company's fiscal year ending December 31, 1998. Any proposal by
stockholders intended to be presented at the next Annual Meeting of
Stockholders must be received by the Company at the above address for inclusion
in its Proxy Statement and form of proxy relating to that meeting by January
13, 1999.
BY ORDER OF THE BOARD OF DIRECTORS
LOGO
RILEY M. MURPHY
Secretary
Dated: April ____, 1998
25
