<PAGE> 1
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
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy
Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the
Commission Only
(as permitted by Rule 14a-6(e)(2))
e.spire Communications, 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> 2
(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> 3
[e.spire LOGO]
E.SPIRE COMMUNICATIONS, INC.
12975 WORLDGATE DRIVE
HERNDON, VIRGINIA 20701
(703) 639-6000
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 30, 2000
To our Stockholders:
The annual meeting of stockholders (the "Annual Meeting") of e.spire
Communications, Inc., a Delaware corporation ("e.spire" or the "Company") will
be held at the Hyatt Regency, Reston Town Center, 1800 Presidents Street,
Reston, Virginia 20190 on Tuesday, May 30, 2000, at 3:00 P.M. Eastern Daylight
time, for the following purposes:
1. To elect seven (7) directors ("Proposal No. 1");
2. To approve and ratify amendments to the 1996 Employee Stock Purchase
Plan (the "1996 Stock Plan" or the "Plan") to increase the number of
shares of Common Stock reserved for issuance upon exercise of options
granted under the Plan from 1,000,000 to 2,000,000 shares. ("Proposal
No. 2");
3. To approve and ratify amendments to the 1994 Stock Option Plan ("Stock
Option Plan" or "1994 Plan") to increase the number of shares of Common
Stock reserved for issuance upon exercise of options granted under the
Stock Option Plan from 11,000,000 to 13,500,000 shares. (Proposal No.
3);
4. To approve and ratify amendments to the 1998 Restricted Stock Plan (the
"Restricted Stock Plan") to increase the number of shares of Common
Stock reserved for issuance from 20,000 to 1,000,000. ("Proposal No.
4");
5. To ratify the selection of KPMG LLP as the independent auditors of
e.spire for the fiscal year ending December 31, 2000 ("Proposal No. 5");
and
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
e.spire's Annual Report to Stockholders for the fiscal year ended December 31,
1999. WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE SIGN AND
ATE 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 31, 2000, 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 31, 2000, 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
/s/ JULIETTE PRYOR
JULIETTE WILLIAMS PRYOR
Secretary
Herndon, Virginia
May 3, 2000
<PAGE> 4
[e.spire LOGO]
E.SPIRE COMMUNICATIONS, INC.
12975 WORLDGATE DRIVE
HERNDON, VIRGINIA
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies for use at the Annual Meeting of stockholders of e.spire Communications,
Inc. ("e.spire" or the "Company") to be held at the Hyatt Regency, Reston Town
Center, 1800 Presidents Street, Reston, Virginia 20190 on Wednesday, May 30,
2000 at 3:00 p.m. Eastern Daylight Time and at any adjournments thereof. THE
ACCOMPANYING PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF e.spire 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 e.spire on or about May 4,
2000, accompanied by e.spire's Annual Report to Stockholders for the fiscal year
ended December 31, 1999. The principal executive offices of e.spire are located
at 12975 Worldgate Drive, Herndon Virginia, 20701, telephone (703) 639-6000.
OUTSTANDING SHARES AND VOTING RIGHTS
Only holders of record of e.spire's Common Stock, $.01 par value (the
"Common Stock" or "Common Shares") outstanding at the close of business on March
31, 2000 (the "Record Date") are entitled to receive notice of and vote at the
Annual Meeting.
As of the Record Date, 52,303,071 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 seven 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 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. 2, Proposal No. 3, Proposal No.
4 and Proposal No. 5. An automated system administered by e.spire'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.
The cost of soliciting proxies will be borne by e.spire. In addition to the
use of mailings, directors, officers and regular employees of e.spire, without
special compensation may solicit proxies by personal interview, telephone and
telegraph. e.spire has retained Corporate Investor Communications, Inc. ("CIC")
to assist it in its solicitation of proxies for which CIC will receive a fee of
approximately $10,000, plus all reasonable expenses. In addition, e.spire
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.
<PAGE> 5
The Board of Directors has selected George F. Schmitt and Juliette Williams
Pryor, 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 to the 1996 Stock Plan, to approve and ratify
amendments to the Stock Option Plan, approve and ratify amendments to Restricted
Stock Plan and the appointment of KPMG LLP as e.spire's independent auditors for
fiscal year 2000, 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 AMENDMENT TO THE 1996 STOCK PLAN AND
APPROVE AND RATIFY THE PROPOSED AMENDMENT TO THE STOCK OPTION PLAN AND THE
APPOINTMENT OF KPMG 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 e.spire 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 e.spire 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 e.spire, Juliette Williams Pryor,
e.spire Communications, Inc., 12975 Worldgate Drive, Herndon, Virginia, 20170 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 seven members and one vacancy. On March
31, 1999, George M. Middlemas resigned as a director of e.spire. On October 29,
1999, Olivier L. Trouveroy and Benjamin P. Giess resigned as directors of
e.spire. On January 21, 2000, Anthony J. Pompliano resigned as Chairman of the
Board and Chief Executive Officer. On April 1, 1999, the Board of Directors, in
accordance with e.spire's By-laws, resolved to reduce the number of
directorships from seven to six. On October 29, 1999, the Board resolved to
increase the number of directorships from six to seven. And on January 18, 2000,
the Board of Directors, in accordance with e.spire's By-laws, resolved to
increase the number of directorships from seven to eight. 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 e.spire 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 e.spire.
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 e.spire, provide for a lesser
number of directors.
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<PAGE> 6
INFORMATION CONCERNING DIRECTOR NOMINEES
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
- ---- --- -------------------------------------------- --------
<S> <C> <C> <C>
George F. Schmitt(1)(2)(4)........... 56 Chairman of the Board of Directors and 2000
Acting Chief Executive Officer
William R. Huff(3)(4)................ 50 Vice-Chairman of the Board of Directors 1999
Edwin M. Banks(1)(2)(3)(4)........... 36 Director 1994
Peter C. Bentz....................... 34 Director 1995
Frederick Galland(2)(3)(4)........... 55 Director 1999
Christopher L. Rafferty(1)........... 50 Director 1994
Joseph R. Thornton(3)................ 38 Director 2000
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Finance Committee
(4) Member of Executive Committee
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
George Schmitt, Chairman of the Board and Acting Chief Executive Officer,
was elected a director of e.spire in January 2000 and was elected Chairman of
the Board and Acting Chief Executive Officer in March 2000. Mr. Schmitt has more
than 35 years of industry experience in telecommunications. Prior to joining
e.spire, he served as President of Omnipoint Communications Services, LLC and
Executive Vice President of Omnipoint Corporation from 1996 until February 2000,
when VoiceStream Wireless acquired Omnipoint. Prior to joining Omnipoint in
1996, he was President and Chief Executive Officer of PCS PrimeCo L.P., (now
known as PrimeCo Personal Communications), a national PCS (personal
communications services) partnership owned by AirTouch Communications and Bell
Atlantic. From 1993 to 1994, Mr. Schmitt served as Chairman of the GSM (Global
System for Mobile) MoU Association, now called the GSM Association, the
international organization that oversees the worldwide implementation of GSM
wireless technology. He continues to hold a seat on the organization's Executive
Committee. From January 1990 until 1993, Mr. Schmitt served as a member and head
of the technical department of the Board of Management at Mannesmann Mobilfunk
D2 in Germany. In 1993, Mr. Schmitt began employment with AirTouch
Communications, where he was Executive Vice President of International
Operations, leading the Company's ventures in Belgium, France, Germany, Italy,
Japan, Korea, Portugal, Spain, Sweden and Thailand. He began his career in 1965
when he joined Pacific Telephone, now Pacific Bell, a division of SBC Corp. He
held various positions there in business, marketing, technical and operations
departments, eventually serving as Vice President of Operations, Vice President
of Financial Management and Vice President of Regulatory Affairs. He received
his Bachelor of Arts from St. Mary's College in Moraga, CA and his master's
degree from Stanford University School of Business, where he was a Sloan fellow.
Mr. Schmitt is also actively involved in many industry organizations. In
addition to his participation in the GSM Association, he is currently Chairman
of the Personal Communications Industry Association. He serves on the Boards of
LHS Group, Objective System Integrators, PCSONE (a joint venture with
Omnipoint), Telesoft Partners and Telstreet.com.
William R. Huff, Vice-Chairman of the Board of Directors, was elected a
director of e.spire in November 1999. Mr. Huff is a founder of W.R. Huff Asset
Management Co., L.L.C., and The Huff Alternative Income Fund, L.P. ("Huff"), a
principal stockholder of e.spire. Mr. Huff has been affiliated with Huff since
its inception in 1994. Mr. Huff currently serves as a director of Texas
Petrochemicals Corporation.
3
<PAGE> 7
Edwin M. Banks was elected a director of e.spire in October 1994. Since
1988, Mr. Banks has been employed by W. R. Huff Asset Management Co., L.L.C., an
affiliate of Huff, and currently serves as a portfolio manager concentrating in
the healthcare, communications, food and food services industries. From 1985
until he joined W. R. Huff Asset Management Co., L.L.C., Merrill Lynch & Company
employed Mr. Banks. 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
Arch Communications Group and Rymer Foods.
Peter C. Bentz was elected a director of e.spire in June 1995. Since 1992,
Mr. Bentz has been employed by W. R. Huff Asset Management Co., L.L.C., 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.
Frederick Galland was elected a director of e.spire in November 1999. Mr.
Galland previously served on the Board from November 1995 until February 1996.
Mr. Galland was Chief Executive Officer and sole stockholder of the In-Health
Group, Inc. a/k/a The Pro Care Group from 1990 to present. From 1981 to 1988,
Mr. Galland served as Chief Executive Officer and Chairman of Fundsnet, Inc., a
publicly traded provider of electronic funds transfer. He also served on the
boards of Graphic Scanning Corp. from 1975 to 1984; Digital Paging Systems, Inc.
from 1973 to 1980; Graphnet Systems, Inc. from 1978 to 1981 and Cellular
Systems, Inc. from 1982 to 1984.
Christopher L. Rafferty was elected a director of e.spire in October 1994.
The general partner of Huff has employed Mr. Rafferty 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 The Chase Manhattan Corporation. Mr. Rafferty received
his undergraduate degree from Stanford University and his law degree from
Georgetown University.
Joseph R. Thornton was elected a director of e.spire in January 2000. Mr.
Thornton is counsel to W.R. Huff Asset Management Co. L.L.C. and has worked with
the firm since 1990. Mr. Thornton received his undergraduate, MBA and JD degrees
from the University of North Carolina at Chapel Hill. He also serves as a
director of Rymer Foods.
INFORMATION CONCERNING BOARD MEETINGS
Eight meetings of e.spire's Board of Directors were held during the fiscal
year ended December 31, 1999. Each director who served during 1999 attended at
least 75% (except George M. Middlemas, who attended 66% and Edwin M. Banks who
attended 64%) 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
e.spire's Board has an Audit Committee, Compensation Committee, Finance
Committee and Executive Committee.
The Audit Committee is currently comprised of three directors, Edwin M.
Banks, Frederick Galland and George F. Schmitt. Olivier L. Trouveroy also served
on the Audit Committee until his resignation on October 29, 1999. The Audit
Committee is responsible for selecting e.spire's independent auditors and
reviewing their audit, as well as reviewing and approving e.spire'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 one meeting during the fiscal year ended December 31, 1999.
The Compensation Committee is comprised of three directors, Edwin M. Banks,
Christopher L. Rafferty and George F. Schmitt. Christopher L. Rafferty served on
the Compensation Committee for all of the fiscal year ended December 31, 1999.
Edwin M. Banks served as a member of the Compensation Committee from
4
<PAGE> 8
April 13, 1999 through December 31, 1999. George M. Middlemas also served on the
Compensation Committee until his resignation on March 31, 1999. Olivier L.
Trouveroy also served on the Compensation Committee from January 1, 1999 until
he resigned effective October 29, 1999. Benjamin Giess served on the
Compensation Committee from April 13, 1999 until he resigned effective October
29, 1999. Peter C. Bentz served as member of the Compensation Committee from
April 13, 1999 until his appointment ended on January 18, 2000. George F.
Schmitt was appointed to the Compensation Committee on January 18, 2000. On
April 13, 1999, the Board of Directors, in accordance with e.spire's By-laws,
resolved to increase the number of directorships from three to five. And on
January 18, 2000, the Board resolved to decrease the number of directorships
from five to three. 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 non salary
payments and other benefits and arrangements with employees, affiliates and
associates of e.spire. The Compensation Committee may be granted additional
powers and duties as the Board may from time to time determine. The Compensation
Committee held one meeting during the fiscal year ended December 31, 1999. In
addition, the Compensation Committee regularly held extensive discussions
regarding compensation matters and memorialized its compensation decisions
through the use of unanimous written consents in lieu of meetings.
The Finance Committee was established by the Board of Directors in January
2000, and is currently comprised of four directors, William R. Huff, Edwin M.
Banks, Frederick Galland and Joseph R. Thornton. The Finance Committee is
responsible for the oversight of financial plans and policies of e.spire to
ensure conformance with e.spire's requirements for fiscally sound operation,
including but not limited to: (i) reviewing annual business plans, financial
arrangements, methods of external financing, and financial audits of capital
expenditures and (ii) advising the Board about sources and uses of e.spire's
funds.
The Executive Committee was established by the Board of Directors in
January 2000, and is currently comprised of four directors, George F. Schmitt,
William R. Huff, Edwin M. Banks, and Frederick Galland. The Executive Committee
is responsible, between meetings of the Board, all powers and authority of the
Board in the direction and management of e.spire, except as prohibited by
applicable law, e.spire's Certificate of Incorporation, or By-laws and except to
the extent another committee shall have been accorded authority over the matter.
DIRECTORS' COMPENSATION
Beginning with the third quarter of 1998, members of the Board receive cash
compensation for acting as members of the Board or Committees of the Board, in
addition to reimbursement for reasonable out-of-pocket expenses incurred in
connection with their attendance at meetings of the Board and its committees.
e.spire's policy for compensation of non-employee directors is: (i) an annual
retainer in the amount of $12,000 for each year such director serves on the
Board, payable in quarterly installments of $3,000, prorated if necessary, and
(ii) payment for each quarterly meeting of the Board attended by such
non-employee -- $1,000 for in person meetings or $500 for telephonic meetings.
During fiscal year 1999 compensation to non-employee directors was paid as
follows: Messrs. Banks, Giess and Rafferty $12,000 each, Messrs. Bentz and
Trouveroy $11,500 each and Mr. Middlemas $3,500. Directors who serve as
executive officers receive compensation for acting in their capacity as
executive officers. See " Summary Compensation Table." From time to time prior
to 1998, the Board has granted options to purchase shares of Common Stock to
members of the Board who are not also officers of e.spire in consideration for
their service as directors. In 1998, the Board adopted a policy to award
"formula grants" to outside directors under e.spire's 1994 Stock Option Plan, as
amended (the "Stock Option Plan"), of 10,000 for each year. Initial options
granted to new outside directors vest in full twelve months after the date of
grant. Options granted upon reelection of an outside director vest immediately.
For fiscal year ended December 31, 1999, with the exception of Frederick
Galland, each outside director was granted 10,000 options in his capacity as
such.
5
<PAGE> 9
INFORMATION CONCERNING CURRENT EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
OFFICER
NAME AGE POSITION SINCE
- ---- --- ------------------------------------------------ -------
<S> <C> <C> <C>
George F. Schmitt.................... 56 Chairman of the Board of Directors and Acting 2000
Chief Executive Officer
Juliette Williams Pryor.............. 35 Senior Vice President, General Counsel and 2000
Secretary
Christopher J. Resavy................ 39 Chief Operating Officer 2000
Bradley E. Sparks.................... 52 Interim Chief Financial Officer 2000
</TABLE>
BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS
The following is a description of the background of the executive officers
of e.spire who are not directors:
Juliette Williams Pryor, Senior Vice President, General Counsel and
Secretary, joined e.spire in February 1997 as its first Associate General
Counsel. During her first three years with e.spire, Ms. Pryor created e.spire's
first round of standard customer and vendor agreements, was chief negotiator for
its acquisition of small Internet service providers, as well as the agreements
governing e.spire's divestiture of its resale customer base. Ms. Pryor was
promoted to the General Counsel post in March 2000, and now serves as e.spire's
chief legal officer, responsible for determining corporate legal policy,
ensuring all SEC compliance, managing all corporate governance issues, directing
all litigation involving e.spire, and protecting the legal interests of the
corporation. Ms. Pryor has nine years of legal experience. Before joining
e.spire, she served as counsel to the Vice Chairman of the U.S. International
Trade Commission and as an Attorney with IBM Corporation. Ms. Pryor received her
law degree as well as a Master of Science in Foreign Service from Georgetown
University. She also graduated with honors from Fisk University in Nashville,
TN, where she received a B.A. degree in Political Science and Spanish. Ms. Pryor
is admitted to practice law in the District of Columbia and New York.
Christopher J. Resavy, Chief Operating Officer, has 19 years of industry
experience in telecommunications. He joined e.spire as Chief Operating Officer
in March 2000. He most recently served as Senior Director of Engineering and
Information Services for Omnipoint Communications Inc. Mr. Resavy joined
Omnipoint in 1994 as Chief Engineer and then became Chief Technology Officer.
For 14 months he was responsible for organizing the engineering, operations and
information systems/information technology organizations. Before joining
Omnipoint, he was Engineering Manager for New Technologies at Cellular One of
New York. He began at Cellular One in 1987 as an RF engineer and held various
technical and administrative positions before managing the New Technologies
department. Prior to joining Cellular One, Mr. Resavy was an RF engineer for GTE
Mobilnet in Houston. He worked at NYNEX Mobile Communications in engineering
before moving to GTE. He began his career in wireless telecommunications as a
temporary employee for AT&T's Advanced Mobil Phone System division, while still
an engineering student at Rutgers University.
Bradley E. Sparks, Interim Chief Financial Officer, has more than 20 years
of experience in finance. He joined e.spire as Interim Chief Financial Officer
in April 2000. Most recently he served as Chief Financial Officer at Digex,
Inc., a leading Web and application hosting service provider for businesses
worldwide. He led Digex's successful initial public offering (IPO) in July 1999.
From September 1998 to July 1999, he served as Executive Vice President and
Chief Financial Officer of WAM!NET, a global provider of digital network
services. From 1995 to September 1998, he served as Chief Financial Officer of
OmniPoint Corporation. From 1993 to 1995, Mr. Sparks served as Vice President
and Controller of MCI Communications Corporation, which is now MCI WorldCom. Mr.
Sparks earned his B.S. from West Point, and his M.S. in management from the
Sloan School at Massachusetts Institute of Technology. Mr. Sparks is also a
certified public accountant.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires e.spire's executive officers and directors, and any persons who own
more than ten percent of the outstanding shares of e.spire's
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<PAGE> 10
Common Stock, to file with the Securities and Exchange Commission ("SEC")
reports of ownership and changes in ownership of e.spire's Common Stock.
Officers, directors and greater than ten-percent stockholders are required by
SEC regulation to furnish e.spire 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, e.spire believes that,
except as described below, there was compliance for the period from January 1,
1999 to December 31, 1999 with all Section 16(a) filing requirements applicable
to its officers, directors and greater than ten-percent beneficial owners. ING
failed to file one Form 4 reporting six (6) transactions, which occurred in June
1999 and submitted one late-filed Form 5 reporting the same transactions. Mr.
Bentz failed to file one Form 5 reporting one transaction that occurred in May
1999, in connection with the granting of stock options under the e.spire's Stock
Option Plan that are qualified under Rule 16b-3. Mr. Rafferty submitted one
late-filed Form 5 reporting one transaction that occurred in May 1999, in
connection with the granting of stock options under e.spire's Stock Option Plan
that are qualified under Rule 16b-3. Mr. Hudson filed a late-filed Form 3 and
submitted two late-filed Form 4s in May 1999 reporting two transactions that
occurred in February 1999 and two transactions that occurred in March 1999,
respectively. Ronald E. Spears submitted one late-filed Form 4 in April 1999
reporting two transactions that occurred in March 1999. e.spire did not receive
a copy of a Form 4 or Form 5 from Mr. Spears in connection with the sale of
approximately 6,000 shares.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table provides a summary of compensation for the fiscal years
ended December 31, 1997, 1998 and 1999, with respect to e.spire's Chief
Executive Officer, the other four most highly compensated executive officers of
e.spire who were serving as executive officers at the end of the fiscal year
ended December 31, 1999 and whose annual salary and bonus during such fiscal
year exceeded $100,000 and e.spire's Chief Financial Officer (collectively, the
"Named Officers"):
<TABLE>
<CAPTION>
ANNUAL COMPENSATION NUMBER OF
------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL ON DECEMBER 31, 1999 YEAR SALARY BONUS COMPENSATION OPTIONS (2) COMPENSATION
--------------------------------------- ---- -------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Pompliano (3)................... 1999 $330,000 $ 0 $2,085,390 $160,000 $3,931(6)
Chairman of the Board of Directors and 1998 302,500 100,000(4) 0 0 0
Chief Executive Officer 1997 275,000 275,000(5) 0 0 0
Dennis J. Kern (7)......................... 1999 219,952 0 0 100,000 924(6)
Chief Operating Officer
Riley M. Murphy (8)........................ 1999 233,125 0 0 40,000 0
Executive Vice President -- Legal 1998 215,000 50,000(9) 0 40,000 2,400(11)
and Regulatory Affairs, General 1997 193,750 101,500(10) 0 50,000 2,375(11)
Counsel and Secretary
Douglas R. Hudson (12)..................... 1999 228,799 0 228,679 40,000 0
President of ACSI Network Technologies 1998 186,875 50,002(9) 0 65,000 0
1997 171,458 100,020(9) 0 60,000
Richard Putt (13).......................... 1999 242,700 75,000(9) 9,387(14) 200,000 0
Executive Vice President of Sales and 1998 209,103 125,000(10) 0 0 2,250(11)
Marketing
David L. Piazza (15)....................... 1999 216,235 0 0 40,000 324(6)
Chief Financial Officer 1998 194,750 50,000(9) 20,090(14) 0 0
1997 139,038 130,000(10) 97,482(14) 250,000 0
</TABLE>
- ---------------
(1) Excludes perquisites and other personal benefits that in the aggregate do
not exceed $50,000 or 10% of Named Officer's total annual salary and bonus.
(2) See information provided in "Option Grants in Fiscal Year Ended December
31, 1999."
(3) Mr. Pompliano voluntarily resigned as Chairman of the Board and Chief
Executive Officer effective January 21, 2000.
7
<PAGE> 11
(4) Pursuant to his employment agreement, as amended, Mr. Pompliano is entitled
to a bonus of $200,000, $100,000 of which was paid in March 1999, with the
additional $100,000 payable upon the achievement of certain revenue and
EBITDA objectives for the first and second quarters of 1999, only if Mr.
Pompliano continued as an employee of e.spire as of September 30, 2000. Mr.
Pompliano is not entitled to the remaining $100,000 of his bonus because of
his resignation.
(5) Represents cash bonuses received for attainment of certain performance
goals.
(6) Represents payments received for medical or disability insurance in excess
of that provided to other employees.
(7) Mr. Kern commenced his employment with the Company in January 1999. In
March 2000, Mr. Kern voluntarily resigned from the Company.
(8) Ms. Murphy commenced her employment with the Company in April 1994. Ms.
Murphy voluntarily resigned from the Company in March 2000.
(9) Represents 50% of targeted bonuses awarded in Common Stock of the Company
pursuant to the Annual Performance Plan, with the price based on the
average closing prices quoted on The Nasdaq Stock Market for the 20 days
preceding March 15, 1999, the date of the award. The balance is to be paid
in the third quarter of 2000, conditioned upon continued employment with
the Company, which will be paid in cash or stock, in the Company's
discretion.
(10) Represents bonuses awarded in Common Stock of the Company pursuant to the
Annual Performance Plan, with the price based on the average closing prices
quoted on The Nasdaq Stock Market for the 20 days preceding March 11, 1998,
the date of the award. Also includes a cash bonuses of $30,000 and $125,000
paid to Mr. Piazza and Mr. Putt, respectively, pursuant to their employment
agreement.
(11) Represents the Company's 401(K) match.
(12) Mr. Hudson commenced his employment with the Company in May 1994. Mr.
Hudson voluntarily resigned from the Company in February 2000.
(13) Mr. Putt commenced employment with the Company in December 1997. In January
2000, Mr. Putt voluntarily resigned from the Company.
(14) Represents expenses in connection with Mr. Piazza's and Mr. Putt's
relocation to the Annapolis Junction, Maryland and Northern Virginia areas
respectively.
(15) Mr. Piazza commenced employment with the Company in March 1997. In October
1999, Mr. Piazza voluntarily resigned from the Company.
8
<PAGE> 12
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1999
The following table contains information concerning the grant of stock
options to Named Officers during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------
MARKET PRICE
NUMBER OF % OF TOTAL OF UNDERLYING
SECURITIES OPTIONS GRANTED EXERCISE OR SECURITIES ON
UNDERLYING TO EMPLOYEES BASE PRICE DATE OF EXPIRATION
OPTIONS GRANTED IN PERIOD (PER/SHARE) GRANT DATE
--------------- --------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Anthony J. Pompliano........ 106,666 2.86% $9.120 $10.563 4/6/04
53,334 1.43% $9.120 $10.563 12/30/04
Dennis J. Kern.............. 25,000 0.67% $5.380 $ 5.380 2/12/05
25,000(2) 0.67% $5.380 $ 5.380 2/12/06
25,000(2) 0.67% $5.380 $ 5.380 2/12/07
25,000(2) 0.67% $5.380 $ 5.380 2/12/08
Riley M. Murphy............. 10,000(2) 0.27% $9.120 $10.563 4/6/05
10,000(2) 0.27% $9.120 $10.563 4/6/06
10,000(2) 0.27% $9.120 $10.563 4/6/07
10,000(2) 0.27% $9.120 $10.563 4/6/08
Douglas Hudson.............. 3,334 0.09% $9.120 $10.563 1/31/05
3,334(2) 0.09% $9.120 $10.563 2/28/05
3,334(2) 0.09% $9.120 $10.563 3/31/05
3,334(2) 0.09% $9.120 $10.563 4/30/05
3,333 0.09% $9.120 $10.563 5/31/04
3,333 0.09% $9.120 $10.563 6/30/04
3,333 0.09% $9.120 $10.563 7/31/04
3,333 0.09% $9.120 $10.563 8/31/04
3,333 0.09% $9.120 $10.563 9/30/04
3,333 0.09% $9.120 $10.563 10/31/04
3,333 0.09% $9.120 $10.563 11/30/04
3,333 0.09% $9.120 $10.563 12/31/04
Richard Putt................ 40,625 1.09% $9.120 $10.563 4/6/04
40,625(2) 1.09% $9.120 $10.563 4/6/05
40,625(2) 1.09% $9.120 $10.563 4/6/06
78,125(2) 2.10% $9.120 $10.563 4/6/07
David Piazza................ 10,000 0.27% $9.120 $10.563 10/27/04
10,000 0.27% $9.120 $10.563 10/27/04
10,000(2) 0.27% $9.120 $10.563 4/06/07
10,000(2) 0.27% $9.120 $10.563 4/06/08
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
TERM(1)
----------------------------------
0% 5% 10%
-------- -------- ----------
<S> <C> <C> <C>
Anthony J. Pompliano........ $153,919 $465,209 $ 841,789
$ 76,961 $232,609 $ 420,902
Dennis J. Kern.............. -- $ 45,743 $ 103,775
-- $ 54,755 $ 127,602
-- $ 64,218 $ 153,813
-- $ 74,154 $ 182,644
Riley M. Murphy............. $ 14,430 $ 50,354 $ 95,930
$ 14,430 $ 57,432 $ 114,643
$ 14,430 $ 64,864 $ 135,227
$ 14,430 $ 72,667 $ 157,870
Douglas Hudson.............. $ 4,811 $ 16,788 $ 31,983
$ 4,811 $ 19,148 $ 38,222
$ 4,811 $ 21,626 $ 45,085
$ 4,811 $ 24,227 $ 52,634
$ 4,810 $ 14,536 $ 26,303
$ 4,810 $ 14,536 $ 26,303
$ 4,810 $ 14,536 $ 26,303
$ 4,810 $ 14,536 $ 26,303
$ 4,810 $ 14,536 $ 26,303
$ 4,810 $ 14,536 $ 26,303
$ 4,810 $ 14,536 $ 26,303
$ 4,810 $ 14,536 $ 26,303
Richard Putt................ $ 58,622 $177,180 $ 320,605
$ 58,622 $204,564 $ 389,716
$ 58,622 $233,318 $ 465,737
$112,734 $506,747 $1,056,463
David Piazza................ $ 14,430 $ 43,614 $ 78,918
$ 14,430 $ 43,614 $ 78,918
$ 14,430 $ 64,864 $ 135,227
$ 14,430 $ 72,667 $ 157,870
</TABLE>
- ---------------
(1) The amounts set forth in the three columns represent 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
April 6, 2000, the date of grant.
(2) These options were cancelled in connection with the executives' separation
from e.spire.
9
<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, 1999 and the value of unexercised options held by the Named
Officers as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS
1999 AT DECEMBER 31, 1999(2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE RECEIVED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Pompliano... 299,966 $2,085,390 1,509,933 -- $5,909,719 $ --
Dennis J. Kern......... -- $ -- 56,250 268,750 $ 72,731 $261,494
Riley M. Murphy........ -- $ -- 287,502 92,500 $ 833,257 $ --
Douglas Hudson......... 25,000 $ 228,679 347,083 92,919 $ 922,332 $ --
Richard Putt........... -- $ -- 165,625 234,375 $ -- $ --
David Piazza (3)....... -- $ -- 270,000 -- $ -- $ --
</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 $5.813, the last sale price on December 31, 1999, as
reported by the Nasdaq Stock Market.
(3) In connection with Mr. Piazza's separation from e.spire, vesting of 120,000
options was accelerated pursuant to his separation agreement dated October
28, 1999.
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
e.spire currently has an insurance policy insuring the directors and
officers of e.spire and its subsidiaries against any liability incurred by them
while acting within the scope of their duties as a director or officer. The
policy is for a maximum amount of $20 million and has a deductible of $250,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Only Messrs. Banks, Bentz, Giess, Rafferty, Trouveroy, and Middlemas served
on the Compensation Committee of the Board of Directors (the "Compensation
Committee") during the fiscal year ended December 31, 1999. None of these
directors has ever been an employee of e.spire or any of its subsidiaries.
During the fiscal year ended December 31, 1999 no executive officer of e.spire
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 e.spire.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for setting corporate policy for
executive and other employee compensation and benefit plans. Christopher L.
Rafferty served on the Compensation Committee for all of the fiscal year ended
December 31, 1999. Edwin M. Banks served as a member of the Compensation
Committee from April 13, 1999 through December 31, 1999. George M. Middlemas
also served on the Compensation Committee until his resignation on March 31,
1999. Olivier L. Trouveroy also served on the Compensation Committee from
January 1, 1999 until he resigned effective October 29, 1999. Benjamin Giess
served on the Compensation Committee from April 13, 1999 until he resigned
effective October 29, 1999. Peter C. Bentz served as member of the Compensation
Committee from April 13, 1999 until his appointment ended on January 18, 2000.
George F. Schmitt was appointed to the Compensation Committee on January 18,
2000. None of the Compensation Committee members was an employee of e.spire
during 1999. 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
10
<PAGE> 14
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
e.spire's approach to executive compensation, as implemented by the
Compensation Committee, has been designed to provide a competitive program that
will enable e.spire to attract, motivate, reward and retain individuals who
possess the skills, experience and talents necessary to advance the growth and
financial performance of e.spire. e.spire's compensation policies are designed
to encourage shareholder value creation, corporate teamwork, equity ownership in
e.spire and long term loyalty to e.spire. e.spire'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.
e.spire strives to provide compensation opportunities that 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 e.spire's executive
compensation program including a description of the decisions and actions taken
by the Compensation Committee with respect to the 1999 compensation for the
Chief Executive Officer and all executive officers as a group.
EXECUTIVE COMPENSATION POLICY
Compensation paid to e.spire's executive officers for the fiscal year ended
December 31, 1999 (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 Stock Option Plan,
participation in the 1996 Stock Plan and contributions under e.spire'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 e.spire and in comparable
companies in the 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. Hudson and Ms.
Murphy were paid salaries in 1999 which exceeded the minimum salaries required
by their employment agreements, but reflected salary increases contemplated by
their agreements. The salary paid to Mr. Putt exceeded the minimum salary
required under the terms of his employment agreement by $42,700. Compensation
for Mr. Piazza, who served as Chief Financial Officer, until his resignation on
October 28, 1999, was based on the terms of his March 24, 1997 employment
agreement and his separation agreement.
Annual adjustments to base salaries typically are made effective at the
beginning of the calendar year for which they are intended to apply for the
Chairman 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 the fiscal year 1998, discretionary bonuses representing 50% of the
targeted bonuses were awarded in stock by the Board on March 15, 1999, to the
named executives (other than the Chairman and Chief Executive Officer, as
described below) and other e.spire employees. The remaining 50% of the targeted
bonuses are expected to be paid in the third quarter of 2000, conditioned upon
continued employment with e.spire, which will be paid in cash or stock at
e.spire's discretion.
11
<PAGE> 15
For the fiscal year 1999, discretionary bonuses representing 25% of the
targeted bonuses awarded in stock by the Board, to the named executives and
e.spire's employees is expected to be paid in the second quarter of 2000. The
remaining 75% of the targeted bonuses are expected to paid in the fourth quarter
of 2000, conditioned upon continued employment with e.spire, which will be paid
in cash or stock at e.spire's discretion. In April 2000, discretionary bonuses
representing 33% of the targeted bonuses was awarded in cash by the Board to
employees of ACSI Network Technologies -- e.spire's wholly owned subsidiary. The
balance is expected to be paid 33% during each of the second and third quarters
of 2000, respectively, which will be paid in cash or stock at e.spire's
discretion. In addition, discretionary bonuses are expected to be awarded by the
Board to employees of CyberGate, Inc. -- a wholly owned e.spire subsidiary,
which will be paid in cash or stock at e.spire's discretion.
STOCK INCENTIVES
The long term incentive element of e.spire'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 that vest over a three or four 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 e.spire. 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 1999, these discretionary stock options have been granted and
administered by the Compensation Committee under the Stock Option Plan, which
was designed to create an opportunity for employees of e.spire to acquire a
proprietary interest in e.spire and thereby enhance their efforts in the service
of e.spire and its stockholders. The compensatory and administrative features of
the 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.
During 1999, 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 1,971,587 shares at
exercise prices ranging from $5.00 to $14.00 per share, which options were
generally granted with exercise prices equal to 100% of the fair market value of
the Common Stock on the dates of grants. Effective January 1999, the
Compensation Committee adopted a policy of generally granting options under the
Stock Option Plan equal to the fair market value of the Common Stock on the
dates of grant. In most cases, one-quarter of the options become exercisable on
each succeeding anniversary of the respective grant dates to further the
executive retention goal of the Stock Option Plan.
CHIEF EXECUTIVE OFFICER COMPENSATION
Anthony J. Pompliano assumed the role of Chief Executive Officer, in
addition to his position as Chairman of the Board, on November 22, 1998. Mr.
Pompliano voluntarily resigned as Chairman of the Board and Chief Executive
Officer effective January 21, 2000. Pursuant to his employment agreement, as
amended, Mr. Pompliano is entitled to a bonus of $200,000, $100,000 of which was
paid in March 1999, with the additional $100,000 payable upon achievement of
certain revenue and EBITDA objectives for the first and second quarters of 1999
and only if Mr. Pompliano continued as an employee of e.spire as of September
30, 2000. Mr. Pompliano is not entitled to the remaining $100,000 of his bonus
because of his resignation.
The following directors, are members of the Compensation Committee as of
May 1, 2000, and provide the foregoing report.
George F. Schmitt
Edwin M. Banks
Christopher L. Rafferty
12
<PAGE> 16
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative stockholder return on the Common
Stock since March 3, 1995, the time e.spire began trading on the Nasdaq SmallCap
Market, with the cumulative total return on the Nasdaq Composite Index and
Nasdaq Telecommunications Industry Index over the same period (assuming an
investment of $100 in the Common Stock, the Nasdaq Composite Index and Nasdaq
Telecommunications Industry Index on March 3, 1995). The stock price performance
shown on the graph below is not necessarily indicative of future price
performance.
[COMMPARATIVE STOCK PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
NASDAQ
E.SPIRE COMMUNICATIONS NASDAQ COMPOSITE INDEX TELECOMMUNICATIONS INDEX
---------------------- ---------------------- ------------------------
<S> <C> <C> <C>
12/31/95 $ 100 $ 100 $ 100
12/31/96 200 123 102
12/31/97 238 151 149
12/31/98 119 213 247
12/31/99 108 395 438
</TABLE>
EMPLOYMENT AND TERMINATION AGREEMENTS
Anthony J. Pompliano. e.spire was party to an employment agreement with
Anthony J. Pompliano, its former Chairman and Chief Executive Officer, which
terminated on December 31, 1999. Under the terms of the agreement, as amended,
Mr. Pompliano was entitled to an annual base salary of $330,000 commencing
January 1, 1999. Mr. Pompliano was entitled to a cash bonus of up to $250,000
for fiscal year 1999, based upon e.spire'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 e.spire's Common Stock at exercise prices ranging from $.875 per share to
$2.80 per share. Mr. Pompliano's employment agreement also contains non-compete,
non-solicitation and confidentiality provisions that expire on December 31, 1999
and December 31, 2000 respectively.
Riley M. Murphy. e.spire was a party to an employment agreement with Riley
M. Murphy, its former Executive Vice President for Legal and Regulatory Affairs,
which terminated on March 31, 1999. Ms. Murphy voluntarily resigned from e.spire
effective March 14, 2000. Under this employment agreement, as amended, 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. Under this
employment agreement, e.spire may extend loans to Ms. Murphy. Ms. Murphy's
employment agreement also contains a two-year non-compete/non-solicitation
provision that expires on April 1, 2001.
Douglas R. Hudson. e.spire was a party to an employment agreement with
Douglas R. Hudson, former President of ACSI Network Technologies, Inc., a
wholly-owned subsidiary of e.spire, which expired May 30, 1999. Mr. Hudson
voluntarily resigned from e.spire effective February 4, 2000. This agreement, as
amended,
13
<PAGE> 17
calls for a minimum annual salary of $135,000 and a bonus of $243,750, payable
in annual installments through January 1997. Mr. Hudson 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. Under this employment agreement, e.spire may
extend loans to Mr. Hudson. Mr. Hudson's employment agreement also contains a
two-year non-compete/non-solicitation provision that remains in effect until May
31, 2001.
David L. Piazza. e.spire was a party to an employment agreement with David
L. Piazza, which was terminated effective October 28, 1999, when Mr. Piazza
voluntarily resigned from his position as Chief Financial Officer. Under the
terms of the employment agreement Mr. Piazza was entitled to a salary of
$175,000, a signing bonus of $30,000 and annual bonuses up to 30% of his salary
based upon achievement of certain performance goals for the relevant fiscal
year. Under this employment agreement, Mr. Piazza was granted options 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.
Pursuant to a separation agreement dated October 28, 1999, Mr. Piazza and
e.spire agreed, among other things, that Mr. Piazza will receive (i) $209,000 in
severance pay beginning October 28, 1999, which shall be paid over the course of
one year in semi-monthly installments, however, in the event that e.spire closes
issuance of Capital Stock or Additional Notes (as defined in the Credit
Facilities dated August 11, 1999) with gross proceeds of at least $100 million,
all unpaid amounts will be accelerated and pre-paid in a lump sum, on the later
of January 3, 2000, or one day following such closing date. Pre-paid amounts may
be discounted over the then-determined acceleration period at a rate of six
percent per annum; and (ii) a lump sum of $7,234.40 for unused vacation time.
Mr. Piazza agreed to certain non-compete and non-solicitation provisions
expiring on October 28, 2000. e.spire accelerated the vesting of 120,000 of Mr.
Piazza's options that had not vested as of October 28, 1999, and cancelled
20,000 of Mr. Piazza's options.
Richard Putt. e.spire was a party to an employment agreement with Richard
Putt, former Executive Vice President of Sales and Marketing, which expired on
December 15, 1999. Mr. Putt voluntarily resigned from his position effective
January 15, 2000. This agreement, as amended, calls for a minimum annual salary
of $200,000, a signing bonus of $125,000 and an annual performance bonus of up
to $100,000 based upon the achievement of certain performance goals, payable in
annual installments through December 1999. Mr. Putt was granted options to
purchase an aggregate of 200,000 shares of Common Stock at an exercise price of
$10.09 per share. In the event that Mr. Putt's employment is terminated without
cause, he will receive his then current base salary and health and medical
benefits coverage at e.spire's expense for a period of one year from the date of
termination. Under this employment agreement, e.spire may extend loans to Mr.
Putt. Mr. Putt's employment agreement also contained a one-year non-compete and
non-solicitation provisions that remain in effect through January 15, 2001 and
December 15, 2000, respectively.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS OF DIRECTORS AND OFFICERS
Pursuant to the employment agreement by and between e.spire and Douglas R.
Hudson, as amended, e.spire extended two loans to Mr. Hudson. The first loan is
dated January 7, 1999, for a principal amount of $66,779.96, at an interest rate
of 8% per year, with payment of principal and accrued interest due July 1, 1999.
The principal amount of this loan represents the consolidation of principal of
and accrued interest on several previous loans extended to Mr. Hudson during
1998. The second loan, dated January 26, 1999, is for a principal amount of
$16,106.07, at an interest rate of 8% per year, with payment of principal and
accrued interest due July 1, 1999. e.spire forgave the aggregate principal and
interest in the amount of $84,563.99 for both of the aforementioned loans on
April 13, 1999. The loans were secured by shares of Common Stock of e.spire
owned by Mr. Hudson or issuable to Mr. Hudson upon exercise of the options to
purchase e.spire's Common Stock currently owned or obtained in the future by Mr.
Hudson.
14
<PAGE> 18
Pursuant to the employment agreement by and between e.spire and Riley M.
Murphy, as amended, e.spire has extended three loans to Ms. Murphy. The loans
are as follows: i) a loan dated December 28, 1998 for a principal amount of
$32,088, at an interest rate of 8% per year, with payment of principal and
accrued interest due December 28, 1999; ii) a loan dated January 26, 1999 for a
principal amount of $16,148.80, at an interest rate of 8% per year, with payment
of principal and accrued interest due December 28, 1999; and iii) a loan dated
January 29, 1999, for a principal amount of $57,000, at an interest rate of 8%
per year, with payment of principal and accrued interest due December 28, 1999.
As of March 31, 2000, the total aggregate amount of principal and accrued
interest outstanding for all three of the loans was $115,321.49 The loans are
secured by shares of Common Stock of e.spire issuable to Ms. Murphy upon
exercise of the options to purchase e.spire's Common Stock currently owned or
obtained in the future by Ms. Murphy. Due to Ms. Murphy's resignation, the loans
are currently due and payable.
Pursuant to the employment agreement by and between e.spire and Richard
Putt, as amended e.spire extended a loan to Mr. Putt for a principal amount of
$100,000, at an interest of 8% per year, with payment of principal and accrued
interest due. As of March 31, 1999, the total aggregate amount of principal and
accrued interest outstanding was $106,794.52. The loans are secured by shares of
Common Stock of e.spire issuable to Mr. Putt upon exercise of the options to
purchase e.spire's Common Stock currently owned or obtained in the future by Mr.
Putt. Due to Mr. Putt's resignation, the loans are currently due and payable.
On March 3, 2000, e.spire completed a private offering of securities and
received $100.7 million from a group of investors, including Huff. In connection
with the private offering, e.spire issued 81,777 shares of Series A Convertible
Preferred Stock and 175,000 warrants. Each share of Series A Convertible
Preferred Stock is initially convertible into 126.4 shares of Common Stock (an
effective conversion price of $7.91 per share), and each warrant is initially
exercisable for 44.1 shares of Common Stock (at an initial exercise price of
$9.89 per share).
e.spire has in place policies and procedures that enable it to comply with
the covenants in its existing indentures regarding transactions with affiliates.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT
The following table sets forth as of December 31, 1999, certain information
regarding the beneficial ownership of e.spire'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 e.spire to own 5% or more of
the Common Stock, (ii) each director of e.spire, (iii) each of the Named
Officers and (iv) all executive officers and directors of e.spire 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 OF PERCENTAGE
NAME OF BENEFICIAL OWNER(1) SHARES OF TOTAL(2)
--------------------------- ---------- -----------
<S> <C> <C>
The Huff Alternative Income Fund, L.P....................... 15,160,137(3) 29%
ING Equity Partners, L.P., I................................ 40,000(4) *
ING Equity Holdings, Inc.................................... 4,693,036(5) 9.2%
Anthony J. Pompliano........................................ 1,553,665(6) 3.0%
Riley M. Murphy............................................. 364,319(7) *
Douglas R. Hudson........................................... 372,801(8) *
Dennis J. Kern.............................................. 96,250(9) *
John R. Polchin............................................. 32,375(10) *
Richard Putt................................................ 177,269(11) *
Edwin M. Banks.............................................. 6,500(12) *
Peter C. Bentz.............................................. 16,000(12) *
Frederick Galland........................................... 31,000(13) *
William R. Huff............................................. 118,999(14) *
Christopher L. Rafferty..................................... 12,000(15) *
All executive officers and directors as a group (11
persons).................................................. 2,773,178 5.2%
</TABLE>
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<PAGE> 19
- ---------------
* Less than one percent
(1) The address of all officers and directors listed above is in the care of
e.spire.
(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, 1998 by (ii) the sum of (A)
the number of shares of Common Stock outstanding as of December 31, 1998
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
the Record Date or will become exercisable within 60 days after December
31, 1998 ("currently exercisable").
(3) Includes currently exercisable warrants to purchase 200,000 shares and
currently exercisable Outside Directors Options to purchase an aggregate of
70,000 shares awarded pursuant to the 1994 Employee Stock Option Plan
awarded as follows to each of Messrs. Banks, Bentz, Huff and Rafferty
respectively: 20,000, 20,000, 10,000 and 20,000. The address for Huff is
1776 On the Green, 67 Park Place, Morristown, NJ 07960.
(4) Represents currently exercisable options to purchase 40,000 shares. The
address for ING Equity Holdings Inc. is 230 Madison Avenue, New York, NY
10022.
(5) The address for ING Equity Partners, L.P. I is 520 Madison Avenue, New
York, NY 10022.
(6) Includes currently exercisable option to purchase 1,406,599 shares and
97,066 shares owned.
(7) Includes currently exercisable options to purchase 300,002 shares, 50,000
shares owned, 5,655 shares purchased through the 1996 Employee Stock
Purchase Plan and 8,662 of common stock awarded for her 1997 and 1998
bonuses pursuant to the Annual Performance Plan.
(8) Includes currently exercisable to purchase 362,083 shares, 10,650 shares
owned and remaining balance of 68 shares of common stock awarded for his
1997 and 1998 bonuses pursuant to the Annual Performance Plan.
(9) Includes currently exercisable options to purchase 81,250 shares and 15,000
shares owned.
(10) Includes currently exercisable options to purchase 32,375 shares.
(11) Includes currently exercisable options to purchase 165,625 shares, 4,354
shares owned, and 7,290 shares of common stock purchased through the 1996
Employee Stock Purchase Plan.
(12) Messrs. Banks and Bentz are employees of W.R. Huff Asset Management Co.,
L.L.C., an affiliate of Huff. Messrs. Banks and Bentz disclaim beneficial
ownership of all shares held by Huff.
(13) Represents 31,000 shares owned.
(14) Represents 118,999 shares owned. Mr. Huff is a founder of W.R. Huff Asset
Management Co., L.P. and the Huff Alternative Income Fund, L.P. Mr. Huff
disclaims beneficial ownership of all shares held by Huff.
(15) Represents 4,000 shares owned. Mr. Rafferty is an employee of WRH Partners,
LLC, the general partner of Huff. Mr. Rafferty disclaims beneficial
ownership of all shares held by Huff.
PROPOSAL NO. 2 -- AMENDMENT TO E.SPIRE'S 1996 EMPLOYEE STOCK PURCHASE PLAN TO
INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON
EXERCISE FROM 1,000,000 TO 2,000,000 SHARES.
Based on the Compensation Committee's recognition that e.spire's success is
dependent upon its ability to attract and retain talented employees and that one
of the best ways to compete for such personnel is to offer significant potential
rewards which are tied to e.spire's success, the Board adopted the 1996 Stock
Plan in October 1996 and on November 15, 1996 the stockholders approved and
ratified the adoption of the 1996 Stock Plan. The Board believes that all
employees of e.spire and its subsidiaries should be provided the opportunity to
acquire or increase their holdings of e.spire's Common Stock. When adopted,
500,000 shares of Common Stock were reserved for issuance upon the exercise of
options granted under the 1996 Stock Plan. On May 12, 1999, the stockholders
approved and ratified an amendment to increase the number of shares of
16
<PAGE> 20
Common Stock reserved for issuance from 500,000 to 1,000,000 shares. As of April
21, 2000, 544,781 options had been granted and exercised under the 1996 Stock
Plan.
Generally under the 1996 Stock Plan, only employees working more than 20
hours a week and who have been employed three months or more by e.spire or any
subsidiary of e.spire prior to the commencement of an offering period under the
Plan are eligible to participate in the 1996 Stock Plan. The first offer period
commenced on December 2, 1996 and ended on June 30, 1997 with subsequent Offer
Periods commencing on the first day of July and January each year (or at such
other date as the Compensation Committee shall determine). The Compensation
Committee has the power to change the duration and/or the frequency of Offer
Periods with respect to future Offers without stockholder approval if such
change is announced at least 10 days prior to the scheduled Offer Period to be
affected.
The Compensation Committee administers the 1996 Stock Plan. The option
price at which shares of Common Stock may be purchased under any option granted
under the 1996 Stock Plan is 85% of the fair market value of a share of Common
Stock on the date Common Stock is purchased pursuant to an offering under the
Plan. The Compensation Committee has the power to change the price under which
an option may be exercised with respect to future Offer Periods without
stockholder approval if (i) the new exercise price is within the minimum pricing
requirements of Section 423(b)(6) of the Internal Revenue Code of 1986, as
amended (the "Code"); and (ii) such change is announced at least 10 days prior
to the scheduled beginning of the first Offer Period to be affected. The
reported last sale price of e.spire's Common Stock on May 4, 2000, on The NASDAQ
Stock Market was $5.063. The stock subject to options granted under the 1996
Stock Plan may be treasury shares or authorized and unissued shares of Common
Stock as the Compensation Committee may determine in its discretion. If the
proposed amendment is approved, the aggregate number of shares which may be
issued pursuant to options exercised under the 1996 Stock Plan may not exceed
2,000,000 and the number of shares subject to options outstanding at any time
may not exceed the number of shares remaining available for issuance thereunder.
An eligible employee may elect to participate in the 1996 Stock Plan by
authorizing regular payroll deductions, which may not exceed the maximum
percentage of the employee's eligible compensation per pay period, to be applied
toward the purchase of Common Stock pursuant to the Offer. The "maximum
percentage" means percent of eligible compensation available for payroll
deductions, specified by the Committee at the beginning of the term of each
Offer, not exceeding 10%. An employee's "eligible compensation" for payroll
deductions under the 1996 Stock Plan includes only base salary and commissions
(if any) paid in each payroll period. On the effective date of an Offer, subject
to certain limitations, each then eligible employee will be granted an option to
purchase, through payroll deductions, as many full shares of Common Stock as he
or she may choose up to the maximum percentage of eligible compensation to be
received by such employee during the term of the Offer. On the last trading day
of each month during the term of an Offer, a participating employee will be
deemed to have exercised his or her option to purchase, at the applicable option
price, that number of full shares of Common Stock which may be purchased with
the amount deducted from such employee's compensation during that month and
excess funds from the preceding month if any.
In no event will an employee be permitted to purchase any shares under the
1996 Stock Plan if the employee, immediately after the purchase, owns or would
own shares (including all shares which may be purchased under outstanding
options) representing 5% or more of the total combined voting power or value of
all classes of shares of capital stock of e.spire or its subsidiaries. In
addition, in no event may shares be purchased under the 1996 Stock Plan with a
value in excess of $25,000 in any calendar year. Once enrolled in the Plan, an
eligible employee shall be a participant in all Offers under the Plan until he
or she withdraws from further participation in the Plan. A participant may
withdraw from participation in the Plan at any time; provided, however, that no
withdrawn participant may enroll in the Plan until the first anniversary of the
date of such participant's withdrawal. However, if the Compensation Committee
amends the Plan with respect to future Offers to change the Offer Period or
change the price under which shares of Common Stock may be purchased pursuant to
an Offer, the withdrawn participant may again become a participant as of the
commencement date of the Offer Period to which such change or changes apply.
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<PAGE> 21
The right to participate in the 1996 Stock Plan and the interest of an
employee in the shares of Common Stock or excess funds accumulated on his or her
behalf, is nontransferable, other than transfer by will or under the laws of
descent and distribution or as otherwise provided by law. A participant may not
sell or otherwise dispose of shares of Common Stock acquired pursuant to the
Plan for a period of 120 days from the purchase date of such shares. In the
event that an employee's employment with e.spire is terminated for any reason,
including upon the retirement or death of an employee, no payroll deductions
will be made from any compensation then due and owing to such employee at such
time, and a certificate representing the number of full shares of Common Stock
then credited to the participant's account, and a check for any amount of excess
funds contributed as of that date (and not eligible for the purchase of shares)
will be issued and delivered to the employee (or the representative of such
employee, if applicable).
The number of shares authorized to be issued under the Plan and the
exercise prices may be increased or decreased in an indeterminate amount as a
result of any stock split, stock dividend, combination of eligible shares,
reorganization or other similar event.
The 1996 Stock Plan and all rights of participants will terminate upon the
earlier of (i) the date as of which participants have exercised options to
purchase a number of shares of Common Stock equal to or greater than the number
of shares then subject to the 1996 Stock Plan or (ii) the date as of which the
Compensation Committee or the Board terminates the 1996 Stock Plan.
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
"1996 Stock Plan, Stock Option Plan and Restricted Stock Plan -- Federal Income
Tax Consequences."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF AN AMENDMENT TO
E.SPIRE'S 1996 EMPLOYEE STOCK PURCHASE PLAN TO INCREASE THE NUMBER OF SHARES OF
COMMON STOCK RESERVED FOR ISSUANCE FROM 1,000,000 TO 2,000,000 SHARES (PROPOSAL
NO. 2 ON THE PROXY CARD).
PROPOSAL NO. 3 -- AMENDMENT TO E.SPIRE'S 1994 STOCK OPTION PLAN TO INCREASE THE
NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON EXERCISE FROM
11,000,000 TO 13,500,000.
STOCK OPTION PLAN
CURRENT PROVISIONS
On November 15, 1994, the Board adopted and on December 16, 1994,
stockholders approved the Stock Option Plan. Which was subsequently amended on
January 26, 1996, November 15, 1996, June 25, 1997, May 13, 1998 and September
14, 1998, the Board approved amendments to the Stock Option Plan. The Stock
Option Plan will terminate no later than November 15, 2004, after which 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
e.spire), directors who are not employees of e.spire and consultants. The Stock
Option Plan also provides for formula grants of options to non-employee
directors ("Outside Directors"), as defined in the Stock Option Plan ("formula
grants"). The Stock Option Plan can be amended by the board without stockholder
approval unless stockholder approval is required by applicable law, rules
(including those of The Nasdaq Stock Market) or regulations. Under the Stock
Option Plan 10,500,000 shares of Common Stock have been reserved for
discretionary grants and 500,000 shares of Common Stock have been reserved for
formula grants. As of December 31, 1999, 6,830,605 discretionary and 140,000
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
18
<PAGE> 22
e.spire 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 e.spire 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, e.spire incurs
a non-cash cost for financial reporting purposes.
Each Outside Director shall be granted automatically (i) on the date of the
initial election of such Outside Director to the Board (whether by the
stockholders or by the Board) an Option to purchase Ten Thousand (10,000) Shares
(subject to adjustment as provided in the Stock Option Plan) (an "Initial
Grant") and (ii) on the date of each annual meeting of stockholders at which
such Outside Director is re-elected to the Board (except that for those Outside
Directors elected at the annual meeting on May 13, 1998, such Options will be
granted on July 1, 1998), provided such Outside Director shall have Continuous
Status as an Outside Director during the year preceding such annual meeting
date, an Option to purchase Ten Thousand (10,000) Shares (subject to adjustment
as provided in the 1994 Plan) (a "Renewal Grant"). The Initial Grant of an
Option to an Outside Director shall vest and become exercisable as to each of
the 10,000 Shares twelve (12) months after the date such Option is granted (the
"Vesting Date"), provided that such Outside Director remains a member of the
Board on the Vesting Date, unless the termination of such Outside Director's
directorship is due to death or disability, in which case all such Options will
vest on the Vesting Date. Any Renewal Grant of an Option shall vest and become
exercisable on the date of grant of the Option. 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, 1999, there were approximately 1,418 employees eligible
to participate and approximately 595 actual participants in the Stock Option
Plan. During the fiscal year ended December 31, 1999, there were grants of
60,000 options pursuant to the Stock Option Plan to Outside Directors, with
exercise prices ranging from $7.18 to $14.00. There were grants of options
pursuant to the Stock Option Plan to all other employees as a group to acquire a
net aggregate amount of 1,971,587 shares of Common Stock, at exercise prices
ranging from $5.00 to $13.44 per share, during the fiscal year ended December
31, 1999. For information concerning options granted to executive officers in
1999 see "Option Grants in Fiscal Year Ended December 31, 1999."
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
"1996 Stock Plan, Stock Option Plan and Restricted Stock Plan -- Federal Income
Tax Consequences."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF AN AMENDMENT TO
E.SPIRE'S 1994 STOCK OPTION PLAN TO INCREASE THE NUMBER OF SHARES OF COMMON
STOCK RESERVED FOR ISSUANCE FROM 11,000,000 TO 13,500,000 SHARES (PROPOSAL NO. 3
ON THE PROXY CARD).
PROPOSAL NO. 4 -- AMENDMENT TO E.SPIRE'S 1998 RESTRICTED STOCK PLAN TO
INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE
FROM 20,000 TO 1,000,0000.
Based on the Board's recognition that e.spire's success is dependent upon
its ability to attract and retain talented employees, the Board of Directors
adopted the Restricted Stock Plan in December 1998 and on May 12, 1999 the
shareholders approved and ratified the adoption of the Restricted Stock Plan.
The Restricted Stock Plan is intended to aid e.spire and its subsidiaries in
securing and retaining key employees of outstanding ability and to motivate such
employees to exert their best efforts on behalf of e.spire and its subsidiaries
by providing incentive through the grant of restricted stock awards ("Awards").
e.spire expects that it will benefit from the added interest that such key
employees will have in the welfare of e.spire as a
19
<PAGE> 23
result of their proprietary interest in e.spire's success. As of December 31,
1999, 20,000 shares had been awarded under the Restricted Stock Plan. As of
December 31, 1999, the two ACSI Network Technologies employees eligible were
participating in the Restricted Stock Plan.
The Restricted Stock Plan, currently reserves 20,000 shares of Common
Stock, which may consist, in whole or in part, of unissued or treasury shares of
e.spire's Common Stock, for granting awards of Common Stock to eligible
employees of e.spire and its subsidiaries. Key management and other employees of
e.spire and its subsidiaries, who are from time to time responsible for the
management, growth or protection of the business of e.spire and its
subsidiaries, are eligible to be granted Awards under the Restricted Stock Plan.
The Compensation Committee administers the Restricted Stock Plan. Establishment,
amendment, interpretation, rescission of any rules and regulations relating to
the Restricted Stock Plan, and administration of the Restricted Stock Plan lies
within the authority and sole discretion of the Compensation Committee. However,
in its discretion, the Board of Directors may take any action permitted to be
taken by the Compensation Committee. No Award may be granted under the
Restricted Stock Plan after the tenth anniversary of the Effective Date, but
Awards theretofore granted may extend beyond that date.
Awards granted under the Restricted Stock Plan are subject to the following
terms and conditions: (a) the prospective recipient of an Award shall execute a
Restricted Stock Agreement that sets forth the terms and conditions of the plan
before she or he shall be deemed to have become a participant or to have any
rights with respect to such Award; (b) each participant shall be issued a
certificate in respect of shares of restricted stock awarded under the
Restricted Stock Plan. Such certificate shall be registered in the name of the
participant, and shall bear an appropriate legend referring to the terms,
conditions and restrictions applicable to such Award; (c) all certificates for
restricted stock delivered under this Plan shall be subject to such stock
transfer orders and other restrictions as the Compensation Committee may deem
advisable under the rules, regulations and other requirements of the Securities
and Exchange Commission, any stock exchange upon which e.spire's shares are then
listed and any applicable federal or state securities law, and the Compensation
Committee may cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions; (d) the Compensation Committee
may adopt rules which provide that the stock certificates evidencing such shares
may be held in custody by a bank or other institution, or that e.spire may
itself hold such shares in custody until the restrictions thereon shall have
lapsed, and may require as a condition of any Award that the participant shall
have delivered a stock power endorsed in blank relating to the stock covered by
such Award; and (e) recipients of Awards under the Plan are not required to make
any payment or provide consideration other than the rendering of services.
The Compensation Committee will set a period of no less than one year nor
more than ten years commencing with the date of an Award (the "Restriction
Period"), during which the participant will not be permitted to sell, transfer,
pledge, assign or otherwise dispose of restricted stock awarded pursuant to said
Award. If a participant's employment with e.spire terminates for any reason
during the Restricted Period, the participant shall forfeit the restricted stock
and return it in full to e.spire, unless otherwise provided by the Compensation
Committee. During the Restriction Period, with respect to the restricted shares,
the participant shall have all rights of a stockholder of e.spire (including but
not limited to the right to vote and the right to receive dividends and other
distributions). In the event of a change in control as defined in the Restricted
Stock Plan, the restrictions on the Awards shall lapse. The Compensation
Committee may impose conditions on an award that it deems necessary to ensure
the participant's payment to e.spire of any federal, state or local taxes
required to be withheld with respect to such Award.
The Compensation Committee in its sole discretion may make adjustments or
substitutions for Awards if any of the following events occur: share dividend or
split, reorganization, recapitalization, merger, consolidation, spin-off,
combination or exchange of shares or other corporate exchange, or any
distribution to stockholders of shares other than regular cash dividends. All
other increases in the number of shares reserved for purposes of the Restricted
Stock Plan require stockholder approval. Any amendments that may impair any
rights or obligations under any previously granted Award require consent of the
participant; however, if it is deemed necessary by the Compensation Committee to
permit the granting of Awards, the Compensation Committee may make amendments
that are required by the Code or other applicable laws.
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<PAGE> 24
The granting of an Award under the Plan shall impose no obligation on
e.spire or any subsidiary to continue the employment of a participant and shall
not lessen or affect e.spire's or any subsidiary's right to terminate the
employment of such participant.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR APPROVAL
AND RATIFICATION OF THE AMENDMENTS TO THE 1998 RESTRICTED STOCK PLAN TO INCREASE
THE NUMBER OF SHARES RESERVED FOR ISSUANCE FROM 20,000 TO 1,000,000 SHARES.
(PROPOSAL NO. 4 ON THE PROXY CARD).
1996 STOCK PLAN, STOCK OPTION PLAN AND RESTRICTED STOCK 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.
1996 STOCK PLAN -- EMPLOYEE STOCK PURCHASE OPTIONS
The 1996 Stock Plan is intended to qualify as an "employee stock purchase
plan" under Section 423 of the Code. Under the Code, no taxable income is
generally recognized by a participant either as of the grant date or as of the
purchase date. Depending upon the length of time the acquired shares are held by
the participant, the federal income tax consequences will vary. If the shares
are held for a period of two years or more from the grant date and for at least
one year from the purchase date (the "Required Period"), and are sold at a price
in excess of the purchase price paid by the participant for the shares, the gain
on the sale of the shares will be taxed as ordinary income to the participant to
the extent of the lesser of (i) the amount by which the fair market value of the
shares on the grant date exceeded the purchase price or (ii) the amount by which
the fair market value of the shares at the time of their sale exceeded the
purchase price. Any portion of the gain not taxed as ordinary income will be
treated as long-term capital gain. If the shares are held for the Required
Period and are sold at a price less than the purchase price paid by the
participant for the shares, the loss on the sale will be treated as a long-term
capital loss to the participant. e.spire will not be entitled to any deduction
for federal income tax purposes for shares held for the Required Period that are
subsequently sold by the participant, whether at a gain or loss.
If a participant disposes of shares within the Required Period (a
"Disqualifying Disposition"), the participant will recognize ordinary income in
an amount equal to the excess of the fair market value of the shares on the
purchase date over the purchase price paid by the participant for the shares,
and e.spire will be entitled to a corresponding deduction for federal income tax
purposes. In addition, if a participant makes a Disqualifying Disposition at a
price in excess of the purchase price paid by the participant for the shares,
the participant will recognize a capital gain in an amount equal to the
difference between the selling price of the shares and the fair market value of
the shares on the purchase date. Alternatively, if a participant makes a
Disqualifying Disposition at a price less than the fair market value of the
shares on the purchase date, the participant will recognize a capital loss in an
amount equal to the difference between the fair market value of the shares on
the purchase date and the selling price of the shares. E.spire will not receive
a deduction for federal income tax purposes with respect to any capital gain
recognized by a participant who makes a Disqualifying Disposition.
STOCK OPTION PLAN -- NONQUALIFIED STOCK OPTIONS
An optionee will not generally recognize any taxable income upon the grant
of a nonqualified option. 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.
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<PAGE> 25
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.
e.spire 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 e.spire satisfies any applicable withholding tax obligation
with respect to such income.
RESTRICTED STOCK PLAN -- STOCK BONUS
A Participant will not realize taxable income upon the grant of shares of
Restricted Stock, and the Company will not receive an income tax deduction at
such time. The Participant will not be taxed on such shares until the
restrictions on such shares have lapsed or until the Participant has made an
election pursuant to Section 83(b) of the Code. At such time, the Participant
will realize ordinary income in an amount equal to the aggregate fair market
value (as of the date on which the restrictions lapse or the election is made,
as applicable) of such shares. The Company is generally allowed an income tax
deduction equal to the amount realized as ordinary income by the Participant at
the time such amount is taxed to the Participant.
CLOSING PRICE OF COMMON STOCK
The last reported sales price of a share of e.spire's Common Stock on May
4, 2000 on The NASDAQ Stock Market was $5.063.
PROPOSAL NO. 5 -- RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors, pursuant to the recommendation of its Audit
Committee, has selected KPMG LLP, independent auditors, to audit the
consolidated financial statements of e.spire for the fiscal year ending December
31, 2000. If the appointment of KPMG LLP as independent auditors is not
ratified, then the Audit Committee will select other independent auditors. If
the appointment of KMPG LLP as independent auditors is ratified, then the Audit
Committee reserves the right to appoint other independent auditors. KPMG LLP has
served as independent auditors of e.spire 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 1999, KPMG LLP performed various professional services for e.spire. They
included completion of the audit of the consolidated financial statements of
e.spire for fiscal year ended December 31, 1999, 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 LLP AS THE INDEPENDENT AUDITORS OF E.SPIRE
FOR THE FISCAL YEAR ENDING DECEMBER 31, 2000 (PROPOSAL NO. 5 ON THE PROXY CARD).
22
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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 e.spire.
ANNUAL REPORT TO STOCKHOLDERS
Certain other information with respect to e.spire's fiscal year ended
December 31, 1999, accompanies this Proxy Statement.
STOCKHOLDERS' PROPOSALS
e.spire's next Annual Meeting of Stockholders will be held on or around May
12, 2001. Such Annual Meeting of Stockholders will present information relating
to e.spire's fiscal year ending December 31, 2000. Any proposal by stockholders
intended to be presented at the next Annual Meeting of Stockholders must be
received by e.spire at the above address for inclusion in its Proxy Statement
and form of proxy relating to that meeting by January 12, 2001.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ JULIETTE PRYOR
JULIETTE WILLIAMS PRYOR
Secretary
Dated: May 3, 2000
23
<PAGE> 27
E.SPIRE COMMUNICATIONS, INC.
PROXY
COMMON STOCK
ANNUAL MEETING: MAY 30, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
George F. Schmitt and Juliet Williams Pryor, and each of them, to act as
proxies with full power of substitution in each of them, are hereby authorized
to represent and to vote, as designated below and on the reverse side, upon the
following proposals and in the discretion of the proxies on such other matters
as may properly come before the Annual Meeting of Stockholders of e.spire
Communications, Inc. to be held at The Hyatt Regency, Reston Town Center, 1800
Presidents Street, Reston, Virginia 20190 on Tuesday, May 30, 2000, at 3:00 P.M.
E.D.T.or any adjournment(s), postponement(s), or other delay(s) thereof (the
"Annual Meeting"), all shares of Common Stock of e.spire Communications, Inc. to
which the undersigned is entitled to vote at the Annual Meeting. The following
proposals are more fully described in the Notice of Annual Meeting of
Stockholders and Proxy Statement (receipt of which is hereby acknowledged).
UNLESS OTHERWISE DIRECTED, THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1, 2,
3, 4, AND 5 AND WILL BE VOTED IN THE DISCRETION OF THE PROXIES ON SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING. THE BOARD OF DIRECTORS
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" PROPOSALS 1, 2, 3, 4, AND 5.
(Continued and to be dated and signed on the reverse side.)
e.spire Communications, Inc.
P.O. BOX 11144
NEW YORK, N. Y. 10203-0144
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1. To elect seven(7) directors. FOR ALL nominees [X} WITHHOLD AUTHORITY for [X] *EXCEPTIONS [X]
listed below all nominees listed
below
Nominees: George F. Schmitt, William R. Huff, Edwin M. Banks, Peter C.
Bentz, Frederick Galland, Christopher L. Rafferty and Joseph R. Thornton
INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK THE
"EXCEPTIONS" BOX AND WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED
BELOW.)
*Exceptions
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2. To approve and ratify amendment to the 1996 3. To approve and ratify amendments to the 1994
Employee Stock Purchase Plan (the "1996 Plan") Stock Option ("Stock Option Plan" or "1994 Plan")
to increase the number of shares of Common Stock to increase the number of shares of Common Stock
reserved for issuance upon exercise of options reserved for issuance upon exercise of options
granted under the 1996 Plan from 1,000,000 to granted under the Stock Option Plan from 11,000,000
2,000,000 shares. (Proposal No. 2). to 13,500,000 shares. (Proposal No. 3).
FOR [X] AGAINST [X] ABSTAIN [X] FOR [X] AGAINST [X] ABSTAIN [X]
4. To approve and ratify amendments to the 1998 5. To ratify the selection of KPMG LLP as the independent
Restricted Stock Plan (the "Restricted Stock Plan") auditors of the Company for the fiscal year ending
to increase the number of shares of Common Stock December 31, 2000
reserved for issuance from 20,000 to 1,000,000
("Proposal No. 4").
FOR [X] AGAINST [X] ABSTAIN [X] FOR [X] AGAINST [X] ABSTAIN [X]
PLEASE CHECK THIS BOX IF YOU EXPECT TO
ATTEND THE ANNUAL MEETING IN PERSON. [X]
(Please sign exactly as name appears to the left,
date and return. If shares and held by joint tenants,
both should sign. When signing as an attorney, executor,
administrator, trustee or guardian, give full title as such.
If a corporation, please sign in full corporate name by,
president or other authorized officer. If a partnership.
please sign in partnership name by authorized person.)
Please Date:
-----------------------------------
Sign Here:
--------------------------------------
------------------------------------------------
Signature (if held jointly)
------------------------------------------------
[ ] Capacity (Title or Authority, i.e. President,
Partner, Executor, Trustee)
PLEASE SIGN AND DATE AND RETURN YOUR PROXY TODAY. VOTE MUST BE INDICATED (X) IN BLACK OR INK.
</TABLE>
