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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 18, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MIDCOM COMMUNICATIONS INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
WASHINGTON 4813 91-1438806
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
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1111 THIRD AVENUE
SEATTLE, WA 98101
(206) 628-8000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
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PAUL P. SENIO
VICE PRESIDENT AND GENERAL COUNSEL
MIDCOM COMMUNICATIONS INC.
1111 THIRD AVENUE
SEATTLE, WA 98101
(206) 628-4900
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
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Copies to:
THOMAS S. HODGE MICHAEL A. SKINNER JONATHAN K. WRIGHT
HELLER, EHRMAN, WHITE & MCAULIFFE
6100 COLUMBIA CENTER, 701 FIFTH AVENUE
SEATTLE, WASHINGTON 98104
(206) 447-0900
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM PROPOSED MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SECURITY(1) PRICE(1) FEE
<S> <C> <C> <C> <C>
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8 1/4% Convertible Subordinated Notes due 2003.......... $97,743,000 100% $97,743,000 $33,704.48
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Common Stock, par value $.0001 per share(2)............. (3) -- -- (3)
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Total.................................................................................................. $33,704.48
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457. The price shown for the Notes is based on the offering
price of the Notes on their initial issuance.
(2) Represents shares issuable upon conversion of the Notes.
(3) Such indeterminable number of shares of Common Stock as may be issuable upon
conversion of the Notes. Based on a conversion price $14.0875 per share,
6,938,279 shares of Common Stock are issuable upon conversion of the Notes,
not including an indeterminable number of shares of Common Stock that may
become issuable upon conversion of the Notes in connection with a stock
split, stock dividend, recapitalization or other similar event. No
additional consideration will be received by the Registrant for the shares
of Common Stock issued upon conversion of the Notes and therefore, pursuant
to Rule 457(i), no registration fee is required with respect to the
registration of Common Stock hereunder.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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MIDCOM COMMUNICATIONS INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
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FORM S-1 LOCATION OR HEADING
ITEM NUMBER AND CAPTION IN PROSPECTUS
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<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors....... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page; Plan of
Distribution
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Selling Security Holders
8. Plan of Distribution....................... Outside Front Cover Page; Plan of
Distribution
9. Description of Securities to Be
Registered............................... Outside Front Cover Page; Prospectus
Summary; Description of Notes;
Description of Capital Stocks; Certain
Federal Income Tax Consequences
10. Interests of Named Experts and Counsel..... Not Applicable
11. Information With Respect to the
Registrant............................... Outside Front Cover Page; Prospectus
Summary; Risk Factors; Capitalization;
Selected Financial and Operating Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Selling
Security Holders; Principal Shareholders;
Certain Transactions; Description of
Notes; Description of Capital Stock;
Description of Certain Indebtedness;
Shares Eligible for Future Sale;
Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
</TABLE>
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED OCTOBER 18, 1996
PROSPECTUS
$97,743,000
MIDCOM COMMUNICATIONS INC.
8 1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2003
(INTEREST PAYABLE FEBRUARY 15 AND AUGUST 15)
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE .
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
This Prospectus relates to the public offer and sale of up to $97,743,000
aggregate principal amount
of 8 1/4% Convertible Subordinated Notes due 2003 (the "Notes") of MIDCOM
Communications Inc. (the "Company" or "Midcom"), and an indeterminate number of
shares (the "Conversion Shares") of the Company's common stock, par value $.0001
per share (the "Common Stock"), as may be issued upon conversion of the Notes.
The Notes and the Conversion Shares (collectively referred to herein as the
"Securities") may be offered from time to time for the account of the holders
thereof named herein (the "Selling Securityholders"). See "Selling
Securityholders" and "Plan of Distribution." Information concerning the Selling
Securityholders may change from time to time which changes will be set forth in
an accompanying Prospectus Supplement.
The Notes were originally issued by the Company in a private placement. See
"Prospectus Summary -- The Private Placement." As of the date of this
Prospectus, the aggregate principal amount of Notes outstanding is $97,743,000
and no Notes have been converted into Conversion Shares. Prior to the date of
this Prospectus, there has been no public market for the Notes. Although the
Notes are eligible for trading in the Private Offerings, Resales and Trading
through Automated Linkages ("PORTAL") Market, there can be no assurance that an
active trading market for the Notes will develop.
The Notes are convertible into Common Stock at the option of the holder
thereof at any time prior to maturity, unless previously redeemed, at a
conversion price of $14.0875 per share, subject to adjustment in certain events.
The Common Stock is traded on the Nasdaq National Market ("Nasdaq") under the
symbol "MCCI." The closing sale price of the Common Stock reported on Nasdaq on
September 25, 1996 was $14.41 per share.
The Company has been advised by the Selling Securityholders that the
Selling Securityholders, acting as principals for their own account, directly or
through agents, dealers or underwriters to be designated from time to time, may
sell the Notes and the Conversion Shares from time to time on terms to be
determined at the time of the sale through customary brokerage channels or
private sales at market prices then prevailing or at negotiated prices then
obtainable. To the extent required, the aggregate principal amount of the
specific Notes or the number of Conversion Shares to be sold, the names of the
Selling Securityholders, the purchase price, the public offering price, the name
of any agent, dealer or underwriter, the amount of expenses of the offering and
any applicable commission or discount with respect to a particular offer will be
set forth in an accompanying Prospectus Supplement or, if appropriate, a post-
effective amendment to the Registration Statement of which this Prospectus is a
part. Each of the Selling Securityholders reserves the right to accept and,
together with its agents from time to time, to reject in whole or in part any
proposed purchase of the Notes or Conversion Shares to be made directly or
through agents. The aggregate proceeds to the Selling Securityholders from the
sale of the Notes and the Conversion Shares offered by the Selling
Securityholders hereby will be the purchase price of such Notes or Conversion
Shares less any discounts or commissions. For information concerning
indemnification arrangements between the Company and the Selling
Securityholders, see "Plan of Distribution."
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THE DATE OF THIS PROSPECTUS IS OCTOBER , 1996.
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PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless the
context indicates otherwise in this Prospectus (i) all references to "Midcom" or
the "Company" refer to MIDCOM Communications Inc. and its subsidiaries and (ii)
all references to Consolidated Financial Statements refer to the financial
statements of Midcom. This Prospectus contains certain forward-looking
statements which involve known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements of the
Company or industry trends to differ materially from those expressed or implied
by such forward-looking statements. Such factors include, among others, those
discussed in "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
MIDCOM Communications Inc. provides long distance voice and data
telecommunications services. As primarily a nonfacilities-based reseller, Midcom
principally utilizes the network switching and transport facilities of Tier I
long distance carriers, such as AT&T Corp. ("AT&T"), Sprint Corporation
("Sprint") and WorldCom, Inc. ("WorldCom"), to provide a broad array of
integrated long distance telecommunications services on a seamless and highly
reliable basis. Midcom's service offerings include basic "1 plus" and "800" long
distance, frame relay data transmission and wireless communications services, as
well as enhanced telecommunications services such as dedicated private lines
between customer locations, facsimile broadcast services, calling cards and
conference calling.
Midcom focuses on serving small to medium-sized businesses. The Company
estimates that during the second quarter of 1996 it invoiced approximately
125,000 customer locations per month, a significant majority of which were
located in the major metropolitan areas of California, Florida, Illinois, New
York, Ohio and Washington. The Company believes that the larger long distance
carriers, such as AT&T, Sprint, WorldCom and MCI Communications Corporation
("MCI"), tend to focus their sales and customer support efforts on residential
and large commercial customers and do not routinely provide significant pricing
discounts for small to medium-sized businesses. By purchasing large usage
volumes from the facilities-based carriers at wholesale prices, Midcom seeks to
offer its customers more favorable pricing than they could obtain from such
carriers directly. In addition, the Company believes that businesses in this
market segment do not typically have in-house telecommunications expertise and
therefore require more assistance with the assessment and management of their
telecommunications requirements. As a result, the Company believes that it is
able to differentiate its service offerings from the larger carriers in this
market segment on the basis of price, breadth of service offerings, customer
service and support and the ability to provide customized solutions to the
telecommunications requirements of its customers. See "Business -- Marketing and
Sales," "Business -- Competition" and "Business -- Customer Concentrations."
Midcom believes that the recently enacted Telecommunications Act of 1996
(the "Telecommunications Act") will substantially expand its market
opportunities. The Telecommunications Act removes substantial legal barriers to
competitive entry into the local telecommunications market and directs incumbent
local exchange carriers to allow competing telecommunications service providers
such as the Company to interconnect their facilities with the local exchange
networks, to lease network components on an unbundled basis and to resell local
telecommunications services. According to Federal Communications Commission
("FCC") and other industry estimates, in 1995 long distance providers reported
revenue of $72.4 billion while local telecommunications providers reported
revenue of $102.9 billion. See "Business -- Industry Background,"
"Business -- Regulation" and "Business -- Competition."
3
<PAGE> 5
Subsequent to its initial public offering in July 1995, Midcom completed
numerous acquisitions of businesses and customer bases. Although these
acquisitions contributed to substantial growth, they have also placed
significant demands on management resources and have disrupted Midcom's normal
business operations. In particular, the Company has been unable to fully
integrate the sales and marketing, customer support, billing and other functions
of certain acquired operations which has increased the Company's overall cost
structure and has resulted in lower profitability and cash flows. See
"Business -- Acquisitions." During this same period, the Company was in the
process of implementing a new management information system, including the
installation of a new billing system. Problems encountered in this
implementation process contributed to the Company's operational difficulties. In
addition, certain reports generated by the new management information system
that were used to estimate unbilled revenue for the third quarter of 1995 failed
to fully reflect all discounts that were properly included in the bills
subsequently sent to the Company's customers. See "Business -- Information
Systems." Primarily as a result of this failure, reported revenue was overstated
for the third quarter of 1995 and the Company's Quarterly Report on Form 10-Q
for that period had to be amended to restate reported results. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Restatement of Results for the Third Quarter of 1995." In
addition, the Company's profitability has been reduced as a result of the
Company's supply contract with AT&T which provides for higher rates than those
provided by competitive suppliers, although the Company and AT&T have entered
into a letter of intent contemplating substantial modifications to this contract
which will provide for more favorable rates in the future. See
"Business -- Suppliers." These factors contributed to defaults under the
Company's Revolving Credit Facility (as defined below) and caused the Company's
auditors to include a going concern qualification in their report on the
Company's consolidated financial statements for the year ended December 31,
1995. The Company's auditors also identified certain material weaknesses in the
Company's internal financial controls. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Material Weaknesses" and
"Description of Certain Indebtedness."
In response to these developments, during the second and third quarters of
1996 Midcom recruited a new executive management team with extensive experience
and expertise in the telecommunications industry. In May 1996, the Company hired
William H. Oberlin as its President and Chief Executive Officer, appointed Mr.
Oberlin, Marvin C. Moses and John M. Zrno to its Board of Directors and engaged
Mr. Moses and Mr. Zrno as consultants. These individuals formerly held senior
management positions at ALC Communications Corporation ("ALC"), a leading
provider of long distance and other services to small and medium-sized
businesses. During their tenure at ALC, ALC completed a successful turn-around
and experienced profitable growth. From the fiscal year ended December 31, 1991
through the 12 months ended June 30, 1995 (prior to ALC's merger into Frontier
Corporation), ALC's revenue increased from $346.9 million to $677.1 million and
net income increased from $5.3 million to $75.0 million. In addition, in July
1996 the Company appointed Daniel M. Dennis to the Company's Board of Directors.
Mr. Dennis has served in a number of management positions with MCI for over 23
years. See "Management."
The new executive management team has developed a restructuring, network
and marketing strategy which it plans to implement during 1996 and 1997 and
which is designed to address the operational challenges experienced by the
Company and increase internally generated sales and profitability. Principal
components of the Company's strategy include the following:
Continue to Build Management Team and Restructure Operations. Midcom
will continue to seek opportunities to augment management with individuals
who have telecommunications industry experience and expertise. From May to
September 1996, the Company appointed 10 individuals to key operational
management positions. These individuals have extensive experience in the
operation of a telecommunications company, including (i) network design,
implementation and operation, (ii) marketing and sales, (iii) management
information systems and (iv) bill processing and collection. Midcom
believes that the experience and depth of this
4
<PAGE> 6
management team will improve the Company's ability to address its current
operational challenges and to pursue its transition from primarily a
nonfacilities-based reseller of long distance and other telecommunications
services to a switch-based provider of integrated telecommunications
services. In addition, Midcom's management team intends to focus on
consolidating and integrating the Company's multiple information and
billing systems and other redundant functions of certain acquired
operations, enlarging and enhancing its information system, improving its
financial reporting and internal controls and renegotiating its existing
carrier supply agreements to obtain more favorable terms.
Deploy Switching Facilities. At the end of the second quarter of
1996, Midcom owned and operated limited capacity switches in nine
locations. The Company intends to use a portion of the proceeds of a
recently completed debt offering to acquire and install state-of-the-art
high capacity switches, with local and long distance functionality, in
areas of the country where it has a sufficient volume of long distance
traffic and where the regulatory environment and market conditions will
permit it to provide local service at acceptable margins. The Company
believes that, in the cities where it intends to deploy switches, there
will be significant local circuit capacity at attractive rates available
from incumbent local exchange carriers, competitive local exchange carriers
and 38GHz wireless providers. Using its own switches will enable the
Company to (i) direct customer call traffic over multiple networks which is
expected to minimize costs and improve gross margin, (ii) switch local
traffic, thereby increasing the economic viability of entering the market
for local telecommunications services, (iii) shield proprietary information
regarding its customers from the underlying carriers, thereby increasing
customer control, (iv) facilitate access to call data records and (v)
implement differentiating features and billing enhancements without
involving the underlying carrier. See "Business -- Switching Facilities."
Reorganize and Expand Sales Efforts. To take full advantage of its
planned network of switching facilities and expanded product offerings,
Midcom is in the process of reorganizing its direct sales force into (i) a
special accounts group consisting of highly experienced sales personnel
focused on larger customers with sophisticated telecommunications
requirements and (ii) a general accounts group focused on smaller
customers. Both groups will be located in major metropolitan areas where
the Company believes it has significant market opportunities and can
compete effectively on the basis of price. The Company intends to implement
training programs and financial incentives designed to increase the
cross-selling efforts of its direct sales force and further integrate the
Company's broad array of service offerings. In addition to reorganizing its
sales efforts, the Company intends to increase the number of sales
representatives during 1996 and 1997 from approximately 35 at the end of
July 1996 to approximately 200. The Company will continue to supplement its
direct sales force with its existing network of resellers and distributors.
In addition, the Company intends to develop a new tier of distributors who
will be offered long-term financial incentives and who will be required,
within selected territories, to market and sell the Company's service
offerings exclusively. The Company believes that these long-term financial
incentives and exclusive marketing arrangements will result in improved
performance and increased loyalty to the Company and its service offerings.
See "Business -- Marketing and Sales."
Expand and Enhance Customer Support Efforts. Midcom intends to
support its expanded sales efforts and reduce customer attrition by
building an enhanced customer service and support operation. The Company
intends to increase its customer service and support staff during 1996 and
1997 from approximately 45 at the end of July 1996 to approximately 60.
This expanded operation will include (i) a staff of trained customer
service representatives available during normal business hours at a number
of integrated customer service centers, (ii) trained account
representatives assigned and dedicated to individual customers with
sophisticated telecommunications requirements and (iii) teams of technical
specialists available to develop customized solutions for a customer's
unique telecommunication needs. See "Business -- Customer Service."
5
<PAGE> 7
Resell Local Services and Provide a Single-Source
Solution. Regulatory changes resulting from the Telecommunications Act
significantly expand the number and types of services Midcom is permitted
to offer. As a result, Midcom intends to offer its customers local dial
tone and a variety of other local telecommunications services primarily in
locations where it has a significant sales and marketing presence or where
it plans to deploy switching facilities. The Company believes that its
large and geographically concentrated customer base of small to
medium-sized businesses represents a significant potential market for these
additional services. These additional services will afford the Company the
opportunity to provide its customers with a single-source solution for
local, long distance, wireless and enhanced telecommunications services.
The Company believes that bundling these services will provide substantial
advantages to its customers, including lower overall costs and a higher
level of service due to a single source for ordering, installation,
customer service and account management. In addition, Midcom believes that
offering a single source for telecommunications services will permit the
Company to (i) increase sales by increasing its share of the
telecommunications expenditures of its customers and (ii) improve customer
control and retention by strengthening its relationships with its
customers. See "Business -- Industry Background," "Business -- Regulation"
and "Business -- Competition."
Midcom believes that its new management team has the skills and experience
necessary to implement the foregoing strategy. However, management's ability to
implement the Company's strategy and achieve the intended positive results is
subject to a number of risks and uncertainties, and there can be no assurance
that the strategy will be successfully implemented or that the intended positive
results will be achieved. See "Risk Factors."
Midcom was incorporated in the State of Washington in 1989. Its executive
offices are located at 1111 Third Avenue, Seattle, Washington 98101, and its
telephone number is (206) 628-8000.
RISK FACTORS
Prospective investors are strongly cautioned that an investment in the
Securities offered hereby involves a very high degree of risk. The ability of
the Company's new management to halt the deterioration of the Company's results
of operations and financial condition and successfully implement its new
operating strategy is subject to an unusual number of material risks and
uncertainties. Prospective investors should not dismiss the risk factors
contained herein as "boilerplate" or "customary" disclosure. The contingencies
and other risks discussed under the heading "Risk Factors" could affect the
Company in ways not presently anticipated by its management and thereby impair
its ability to continue as a going concern and materially affect the value of
its debt and equity securities, including the Securities offered hereby. A
careful review and understanding of each of the risk factors contained herein,
as well as the other information contained in this Prospectus, is essential for
an investor seeking to make an informed investment decision with respect to the
Securities.
THE PRIVATE PLACEMENT
In August and September of 1996, the Company completed a private placement
(the "Private Placement") of $97,743,000 in aggregate principal amount of the
Notes pursuant to a Purchase Agreement, dated as of August 15, 1996 (the
"Purchase Agreement"), among the Company, PaineWebber Incorporated
("PaineWebber") and Wheat, First Securities, Inc. ("Wheat, First," and together
with PaineWebber the "Initial Purchasers"). The Notes were sold to qualified
institutional buyers pursuant to Rule 144A of the Securities Act of 1933 (the
"Securities Act"), certain "accredited investors" pursuant to Regulation D under
the Securities Act, and certain non-U.S. persons pursuant to Regulation S under
the Securities Act.
6
<PAGE> 8
The net proceeds to Midcom from the Private Placement were approximately
$94.2 million, after deducting the discount to the Initial Purchasers and
expenses. The Company used the net proceeds as follows: (i) $15.0 million to
repay in full a bridge loan (the "Bridge Loan") made by Transamerica Business
Credit Corporation ("Transamerica"), (ii) $19.0 million to repay in full the
revolving loans (the "Revolving Loans") under the Company's secured revolving
credit facility with Transamerica and certain other lenders (the "Revolving
Credit Facility"), and (iii) $10.0 million to bring current a number of payment
obligations existing prior to the completion of the Private Placement. In
addition, the Company anticipates using (i) $5.0 million of the net proceeds to
pay the first installment of an $8.8 million payment in connection with the
satisfaction of past shortfalls and reduction of the minimum commitment under
the Company's carrier supply contract with AT&T and (ii) approximately $22.0
million of the net proceeds to acquire and install high capacity switches. The
balance of the net proceeds will be used for additional working capital,
additional capital expenditures and general corporate purposes.
Pursuant to a Registration Rights Agreement, dated as of August 22, 1996
(the "Registration Rights Agreement"), among the Company and the Initial
Purchasers, the Company has agreed to file a shelf registration statement under
the Securities Act (together with all exhibits, schedules and amendments
thereto, the "Registration Statement"), of which this Prospectus forms a part,
relating to resales of the Notes and the Conversion Shares. The Company is
required under the Registration Rights Agreement to maintain the effectiveness
of the Registration Statement for a period of three years from the completion of
the Private Placement or, if shorter, when (i) all the Securities have been sold
pursuant to the Registration Statement or (ii) the date on which there ceases to
be outstanding any Securities. See "Description of Notes -- Registration Rights;
Liquidated Damages."
TERMS OF THE NOTES
MATURITY DATE.............. August 15, 2003.
INTEREST PAYMENT DATES..... February 15 and August 15, commencing February 15,
1997.
CONVERSION RIGHTS.......... The Notes, unless previously redeemed, are
convertible at the option of the holder at any time
prior to maturity into shares of Common Stock at a
conversion price of $14.0875 per share, subject to
adjustment in certain events. See "Description of
Notes -- Conversion Rights."
OPTIONAL REDEMPTION........ The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or
after August 15, 2001 at the redemption prices set
forth herein plus accrued but unpaid interest, if
any, to the applicable date of redemption. See
"Description of Notes -- Optional Redemption by the
Company."
CHANGE OF CONTROL.......... In the event of a Change of Control (as defined
herein), each holder of Notes may require Midcom to
repurchase all of the Notes held by such holder at
a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest,
if any, to the date of repurchase. See "Description
of Notes -- Repurchase of Notes at the Option of
Holders Upon a Change of Control."
SUBORDINATION.............. The Notes are general unsecured obligations of
Midcom and are subordinated in right of payment to
all existing and future Senior Indebtedness (as
defined herein) of Midcom. As of August 31, 1996,
there were no borrowings under the Revolving Credit
Facility and, accordingly, Senior Indebtedness of
Midcom was approxi-
7
<PAGE> 9
mately $22,772,000. The Notes are also effectively
subordinated to all existing and future liabilities
(including trade payables) of the Company's
subsidiaries. As of August 31, 1996, Midcom's
subsidiaries had approximately $1,088,000 of total
liabilities (excluding intercompany indebtedness).
See "Description of Notes -- Subordination."
REGISTRATION RIGHTS AND
LIQUIDATED DAMAGES....... Pursuant to the Registration Rights Agreement, the
Company has agreed to file a shelf registration
statement under the Securities Act relating to
resales of the Notes and the Conversion Shares. If
such registration statement is not filed or
declared effective within, or maintained
continuously effective for, the time periods set
forth in the Registration Rights Agreement, the
interest rate on the Notes will be, in effect,
increased (the "Liquidated Damages") in the manner
set forth herein. See "Description of
Notes -- Registration Rights; Liquidated Damages."
FORM AND DENOMINATION...... The Notes initially sold by the Initial Purchasers
to qualified institutional buyers are represented
by a Rule 144A Global Note in fully registered form
deposited with a custodian for and registered in
the name of a nominee of The Depository Trust
Company ("DTC"). Beneficial interests in the Rule
144A Global Note will be shown on, and transfers
thereof will be effected through, records
maintained by DTC and its Participants (as defined
herein). Notes initially sold by the Initial
Purchasers within the United States to accredited
investors who are not qualified institutional
buyers are in certificated form, and cannot be
traded through the facilities of DTC except in
connection with a transfer to a qualified
institutional buyer or a transfer pursuant to
Regulation S. The Notes initially sold by the
Initial Purchasers to non-U.S. persons pursuant to
Regulation S under the Securities Act are
represented by a Regulation S Permanent Global Note
or are in certificated form. Beneficial interests
in the Regulation S Permanent Global Note may be
held only through Euroclear and Cedel Bank. The
Regulation S Permanent Global Note is expected to
be deposited with the Trustee as custodian for DTC,
and beneficial interests therein may be held
through Euroclear, Cedel Bank or any other
Participant.
ABSENCE OF PUBLIC MARKET
FOR THE NOTES............ Prior to the date of this Prospectus, there has
been no public market for the Notes and there can
be no assurance regarding the future development of
a market for the Notes. The Notes are eligible for
trading on the NASD's Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL")
Market; however, no assurance can be given as to
the liquidity of, or trading market for, the Notes.
The Company has been advised by the Initial
Purchasers that they intend to make a market in the
Notes. However, the Initial Purchasers are not
obligated to do so and any market-making activities
with respect to the Notes may be discontinued at
any time without notice. Accordingly, no assurance
can be given as to the liquidity of or the trading
market for the Notes. The Common Stock is traded on
the Nasdaq National Market under the symbol "MCCI."
See "Plan of Distribution."
8
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial and operating data presented below is
qualified in its entirety by, and should be read in conjunction with, the
Company's Consolidated Financial Statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The following information as previously
reported has been restated to include Adval, Inc. and ADNET Telemanagement, Inc.
which were acquired in pooling of interests transactions on September 29, 1995
and December 29, 1995, respectively.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- --------------------
1993 1994 1995 1995 1996
------- -------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue........................... $66,010 $111,699 $203,554 $97,380 $ 93,860
Gross profit...................... 20,647 32,655 64,008 32,098 26,324
Depreciation and amortization..... 1,881 4,134 13,790 4,898 19,210
Settlement of contract dispute.... -- -- -- -- 8,800
Restructuring charge(1)........... -- -- -- -- 2,220
Loss on impairment of assets(2)... -- -- 11,830 -- 18,765
Operating income (loss)........... 641 824 (23,673) (283) (54,985)
Net loss(3)....................... (529) (3,029) (33,418) (4,023) (59,161)
Net loss per share(4)............. $ (0.05) $ (0.31) $ (2.76) $ (0.39) $ (3.86)
Shares used in calculating per
share data(4)................... 9,930 9,930 12,101 10,246 15,321
SUPPLEMENTAL OPERATING DATA:
EBITDA(5)......................... $ 2,522 $ 4,958 $ 1,947 $ 4,615 $ (5,990)
Deficiency of earnings to fixed
charges(6)...................... $ (478) $ (3,012) $(29,351) $(4,023) $(59,161)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(7)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash............................................................... $ 1,434 $ 42,607
Total assets....................................................... 87,587 131,710
Short-term obligations, including current portion of long-term
obligations(8)................................................... 57,027 14,990
Long-term obligations, less current portion(8)..................... 6,876 93,036
Shareholders' equity............................................... $(32,236) $(32,236)
</TABLE>
- ---------------
(1) Consists primarily of severance and lease cancellation charges relating to
restructuring of operations in March and April 1996.
(2) Consists of the following: (i) a $6.8 million write-down of the Company's
interest in its joint venture in Russia, (ii) a $2.5 million write-off of
the Company's existing limited capacity switching equipment as a result of
its decision to deploy new, state-of-the-art high capacity switches and
(iii) a $2.5 million partial write-down of the Company's capitalized
software development costs for its management information system.
(3) Includes $2,992 of original issue discount and $1,075 of deferred financing
costs written off in the third and fourth quarters of 1995, respectively.
(4) Net loss per share is based on the number of shares as described in Note 1
of the Notes to Consolidated Financial Statements.
9
<PAGE> 11
(5) As used herein, "EBITDA" is defined as operating income plus depreciation,
amortization, loss on impairment of assets, restructuring charge and
settlement of contract dispute. EBITDA is commonly used to measure
performance of telecommunications companies because of (i) the importance of
maintaining cash flows in excess of debt-service obligations due to the
capital and acquisition-intensive nature of the telecommunications industry
and (ii) the non-cash effect on earnings of generally high levels of both
amortization and depreciation expenses associated with capital equipment and
acquisitions common in this industry. EBITDA does not purport to represent
cash provided by operating activities as reflected in the Company's
consolidated statements of cash flows, is not a measure of financial
performance under generally accepted accounting principles and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(6) For purposes of calculating the deficiency of earnings to fixed charges,
"earnings" consist of income before income taxes plus fixed charges, and
"fixed charges" consist of interest expense, including the amortization of
deferred financing fees, and that portion of rental expense deemed
representative of the interest factor (estimated to be one-third of rental
expense).
(7) Adjusted to give effect to the application of the net proceeds of the
Private Placement to the repayment in full of the Bridge Loan and the
Revolving Loans.
(8) As a result of defaults existing on June 30, 1996 under the Revolving Credit
Facility, and corresponding cross-defaults under certain of the Company's
capital leases, short-term obligations includes Revolving Loans of $25,877
and non-current capital lease obligations of $3,186. The "as adjusted" data
reflects the repayment in full of all outstanding Revolving Loans and the
reclassification of certain non-current capital lease obligations to
long-term obligations following the waiver of defaults under the Revolving
Credit Facility effective upon completion of the Private Placement. See
"Description of Certain Indebtedness." Both actual and as adjusted
short-term obligations include $9.0 million payable in connection with two
customer base acquisitions which may be paid in cash or by delivery of
shares of Common Stock, as the Company may elect; provided, however, that
the Company's Revolving Credit Facility prohibits payment of this obligation
in cash without the lenders' prior written consent. See "Business -- Legal
Proceedings."
10
<PAGE> 12
FORWARD-LOOKING STATEMENTS AND
THE PRIVATE SECURITIES LITIGATION REFORM ACT
Statements herein concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which might cause actual results to
differ materially from stated expectations. Forward-looking statements herein
include those concerning anticipated growth in sales, services-per-customer
ratio and profitability; deployment of a network of high capacity local and long
distance switching facilities; introduction of local and other additional
telecommunications services; geographic expansion; increases in sales, customer
service and other personnel; improvements in customer service; sales through new
sales channels; adequacy of available sources of working capital to implement
strategies; negotiation of more favorable carrier supply contacts; and
expectations for growth in the telecommunications industry. Relevant risks and
uncertainties include, but are not limited to, unanticipated actions by
competitors, regulatory or other obstacles which restrict the Company's ability
to implement local or other services, greater than expected costs to open new
offices, acquire switching equipment or execute other aspects of the Company's
growth strategy, greater than expected declines in sales, inability to hire and
retain key personnel, unfavorable determinations of pending lawsuits or other
disputes, inability to obtain more favorable pricing and other terms from
suppliers, inability to secure additional sources of working capital if and when
needed, inability to manage growth or integrate acquired operations and
regulatory changes. Additional risks and uncertainties include those described
in the Company's Interim Report on Form 8-K as filed with the Securities and
Exchange Commission (the "Commission") on August 2, 1996, the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 and those described
from time to time in the Company's other filings with the Commission, press
releases and other communications. Although the Company believes that all
forward-looking statements herein are reasonable, there can be no assurance that
actual results, achievements, performance or developments will not differ
materially from those expressed or implied by such forward-looking statements.
11
<PAGE> 13
RISK FACTORS
Prospective investors are strongly cautioned that an investment in the
Securities offered hereby involves a very high degree of risk. The ability of
the Company's new management to halt the deterioration of the Company's results
of operations and financial condition and successfully implement its new
operating strategy is subject to an unusual number of material risks and
uncertainties. Prospective investors should not dismiss the risk factors set
forth below as "boilerplate" or "customary" disclosure. The contingencies and
other risks discussed below could affect the Company in ways not presently
anticipated by its management and thereby impair its ability to continue as a
going concern and materially affect the value of its debt and equity securities,
including the Securities offered hereby. A careful review and understanding of
each of the risk factors set forth below, as well as the other information
contained in this Prospectus, is essential for an investor seeking to make an
informed investment decision with respect to the Securities.
ABILITY TO CONTINUE AS A GOING CONCERN; DEFAULTS UNDER CREDIT FACILITY;
NEED FOR ADDITIONAL WORKING CAPITAL
As a result of Midcom's rapid growth, substantial operating losses, billing
and collection cycle, acquisition strategy and other factors, the Company has
required substantial external working capital. The Company's available sources
of working capital consist of cash flows from operations, approximately $50.0
million at September 15, 1996 in cash and short-term, investment grade,
interest-bearing securities, which funds represent the remaining net proceeds
from the Private Placement, and expected available borrowings under the
Revolving Credit Facility. Prior to completion of the Private Placement, the
Company had for several months experienced a severe working capital short-fall
which required the Company to seek extended payment terms from certain of its
suppliers, delay payments to many of its suppliers and other vendors, delay or
cancel purchases and take other steps to conserve operating capital. As a
result, a number of suppliers placed the Company on credit hold and/or initiated
collection actions. See "-- Dependence Upon Facilities-Based Carriers." Also,
for several months prior to the completion of the Private Placement, the Company
was in default of certain financial and other covenants under its Revolving
Credit Facility, although the lenders continued to permit borrowings under that
facility. The existence of defaults under the Revolving Credit Facility also
constituted defaults under certain of the Company's capital leases. The report
of the Company's independent auditors with respect to the Company's Consolidated
Financial Statements for the year ended December 31, 1995 states that the
Company's recurring operating losses, working capital deficiency and credit
agreement defaults raise substantial doubt about the Company's ability to
continue as a going concern. In connection with the completion of the Private
Placement and the application of the net proceeds therefrom to the repayment in
full of the Bridge Loan and the Revolving Loans, the lenders under the Revolving
Credit Facility waived all existing defaults and amended the financial covenants
under the Revolving Credit Facility to be consistent with Midcom's revised
business plan. The Company's maximum borrowing availability under the Revolving
Credit Facility, as amended, is $43.0 million, subject to a borrowing base equal
to 85% of the Company's eligible accounts receivable less a minimum excess
availability requirement of $20.0 million for the months of August 1996 through
February 1997, declining in stages to $8.0 million for the months of September
through November 1997. As of August 31, 1996, after giving effect to the
amendment, the Company had a borrowing base of approximately $21.0 million and a
maximum borrowing availability, net of the minimum excess availability
requirement, of approximately $1.0 million.
In addition to funds required for day to day operations, the Company's
principal working capital requirements include capital expenditures (including
those associated with the proposed installation of new switching facilities),
interest and principal payable under the Notes and other contingencies and
obligations described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." The
Notes will mature on
12
<PAGE> 14
August 15, 2003. Interest on the Notes is payable semi-annually on February 15
and August 15 of each year, commencing February 15, 1997, in the aggregate
amount of $4,031,899.
The exact amount and timing of the Company's capital requirements will be
determined by numerous factors, including the level of, and gross margin on,
future sales, the outcome of outstanding contingencies and disputes such as
pending lawsuits, payment terms achieved by the Company and the timing of
capital expenditures. The Company's current plans assume that the Company will
be able to replace or extend the Revolving Credit Facility after its expiration
in November 1997. There can be no assurance that the Revolving Credit Facility
will continue to be available to the Company or that cash balances together with
funds available under the Revolving Credit Facility and cash flows from
operations will be sufficient to fully implement the Company's new operating
strategy or meet its other capital requirements. If (i) the Company experiences
greater than anticipated capital requirements, (ii) it is determined to be
liable for, or otherwise agrees to settle or compromise, any material claim
against it, (iii) it is unable to make future borrowings under the Revolving
Credit Facility for any reason or (iv) the implementation of the Company's new
operating strategy fails to produce the anticipated cash flows from operations,
the Company may be required to refinance all or a portion of its existing debt,
sell assets or obtain additional equity or debt financing. There can be no
assurance that any such refinancing or asset sales would be possible or that the
Company will be able to obtain additional equity or debt financing, if and when
needed, on terms that the Company finds acceptable. Any additional equity or
debt financing may involve substantial dilution to the interests of the
Company's shareholders as well as the holders of the Notes. The failure of the
Company to complete one or more of such alternatives or otherwise obtain
sufficient funds to satisfy its cash requirements could prevent the Company from
implementing its new operating strategy and, ultimately, could force the Company
to seek protection under the federal bankruptcy laws. Such events would
materially and adversely affect the value of the Company's debt and equity
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
RECENT LOSSES AND ANTICIPATED FUTURE LOSSES
The Company has experienced significant losses since its inception. Net
losses for 1994, 1995 and the six months ended June 30, 1996 were approximately
$3.0 million, $33.4 million and $59.2 million, respectively. As a result of
customer attrition and other factors, the Company expects revenue to continue to
decline during 1996 and the first quarter of 1997. See "-- Customer Attrition."
In addition, the execution of the Company's new operating strategy will require
the Company to substantially increase its investment in sales, marketing,
capital equipment, systems development and other areas. The Company expects that
a substantial portion of these expenditures will be made before the Company
realizes an increase in revenue or an improvement in gross margin. The Company
therefore expects that, during 1996 and the first three quarters of 1997,
operating costs will increase both in actual dollars and as a percentage of
revenue and net losses will continue. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Introduction."
MATERIAL WEAKNESSES IN INTERNAL FINANCIAL CONTROLS AND RESTATEMENTS OF FINANCIAL
RESULTS
In connection with the audit of Midcom's 1995 Consolidated Financial
Statements, Midcom's independent auditors identified two conditions which were
characterized as material weaknesses in its internal financial controls. One
material weakness identified by the auditors was the failure of the accounting
and finance systems to provide accurate information necessary to monitor the
Company's financial position, results of operations and liquidity, as
demonstrated by the restatement of the Company's third quarter results and the
difficulties in completing the 1995 year-end audit which resulted in numerous
material adjustments to preliminary fourth quarter results. Factors identified
as contributing to this weakness and requiring immediate attention included
insufficient staffing and systems to accommodate significant growth from
acquisitions, transitional difficulties associated
13
<PAGE> 15
with major new information and billing systems, inadequate communication between
senior management and the finance department and demands associated with the
Company's initial public offering. The second material weakness identified by
the auditors was the Company's process of estimating unbilled receivables. With
respect to this material weakness, the auditors recommended that the Company
review and revise, as necessary, all policies and procedures with regard to its
reconciliation of unbilled receivables with actual billings to ensure that all
unbilled amounts at a reporting date represent properly recorded revenue. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Material Weaknesses" and "Business -- Information Systems."
It is the Company's practice, which is common in the long distance
industry, to include in reported revenue and accounts receivable an amount for
unbilled calls equal to an estimate of the amount that will be billed and
collected for calls occurring in that reporting period. During 1995, the Company
converted its customer billing function for those calls for which it provides
direct billing to a new billing system. The Company experienced difficulties in
implementing the new billing system which caused an increased number of calls to
be billed later than expected by the Company. See "Business -- Information
Systems." Also, in the process of reconciling unbilled accounts as of December
31, 1995 with amounts ultimately billed, the Company discovered that certain
reports generated by its new information management system that were used for
recognizing unbilled revenue for the third quarter of 1995 failed to fully
reflect all discounts that were properly included in the bills subsequently sent
to the Company's customers. Primarily as a result of this failure, reported
revenue was overstated for the third quarter of 1995 and the Company's Quarterly
Report on Form 10-Q for that period had to be amended to restate reported
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Restatement of Results for the Third Quarter of 1995."
The Company is in the process of enhancing this billing system and converting
and modifying the customer support portions of its information systems. See
"Business -- Information Systems." However, in light of the foregoing and other
weaknesses in the systems, the Company's financial statements for 1995 included
a $2.5 million partial write-down of its capitalized software development costs
for the management information system. In addition, the Company had previously
been required to restate its financial statements for the year ended December
31, 1994 after determining that revenue and accounts receivable had been
overstated by approximately $1.8 million net of reserves as a result of using
historical averages of unbilled calls as the basis for its revenue estimates, a
practice that the Company discontinued in the first quarter of 1995.
In light of the volume of financial data to be processed, the reliance upon
timely receipt of call data records from suppliers, the anticipated rate of
growth of the Company, the demands on key financial personnel, turnover in key
finance and accounting positions, the challenges associated with the integration
of acquired businesses and other factors, there can be no assurance that the
Company will not encounter additional billing delays, other internal control
weaknesses or other difficulties in future financial reporting.
DISPUTES AND LITIGATION
The Company, its Chairman of the Board of Directors and largest
shareholder, the Company's former President, Chief Executive Officer and a
director, and the Company's former Chief Financial Officer are named as
defendants in a securities action filed in the U.S. District Court for the
Western District of Washington (the "Complaint"). The Complaint purports to be
filed on behalf of a class of purchasers of the Company's Common Stock during
the period beginning on July 6, 1995, the date of the Company's initial public
offering, and ending on March 4, 1996 (the "Class Period"). An amended complaint
(the "Amended Complaint") was filed on July 8, 1996. The Amended Complaint
alleges, among other things, that the registration statement and prospectus
relating to the Company's initial public offering contained false and misleading
statements concerning the Company's billing software and financial condition.
The Amended Complaint further alleges that, throughout the
14
<PAGE> 16
Class Period, the defendants inflated the price of the Common Stock by
intentionally or recklessly making material misrepresentations or omissions
which deceived the public about the Company's financial condition and prospects.
The Amended Complaint alleges claims under the Securities Act and the Securities
Exchange Act of 1934 (the "Exchange Act") as well as various state laws, and
seeks damages in an unstated amount. While the Company believes that it has
substantive defenses to the claims in the Amended Complaint and intends to
vigorously defend this lawsuit, it is unable to predict the outcome of this
action. If determined adversely to the Company, this lawsuit could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Legal Proceedings."
The Company was informed in May 1996 that the Commission was conducting an
informal inquiry regarding the Company's initial public offering and the
restatement of its 1995 third quarter results. The Company has voluntarily
provided the documents requested by the Commission, but has not been informed
whether the Commission intends to commence formal action against the Company or
any of its affiliates. The Company is, therefore, unable to predict the ultimate
outcome of the investigation. In the event that the Commission elects to
initiate a formal enforcement proceeding, the Company and its officers could be
subject to civil or criminal sanctions including monetary penalties and
injunctive measures. Any such enforcement proceeding could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Legal Proceedings."
In addition, by virtue of its rapid growth, acquisition activities and
large volume of business with suppliers, the Company is involved in litigation
or disputes with sellers of acquired operations, suppliers and other third
parties. See "Business -- Acquisitions, -- Suppliers, and -- Legal Proceedings."
Although the Company intends to defend its existing litigation and other
disputes vigorously, it is unable to predict the nature or timing of any
resolution of such matters. If the Company is determined to be liable for, or
otherwise agrees to settle or compromise, any claim, it would most likely be
required to make a payment in the form of cash, indebtedness or equity
securities. Depending on the size, type and timing of any such payment, it could
materially impair the Company's limited capital resources or significantly
dilute the Company's existing shareholders. See "-- Ability to Continue as a
Going Concern; Defaults Under Credit Facility; Need for Additional Working
Capital." In addition, the Company's pending litigation, investigations and
disputes could result in substantial legal costs to the Company and divert
management's attention from the other business affairs of the Company for
substantial periods of time.
MINIMUM VOLUME COMMITMENTS AND EXISTING SHORTFALLS
Midcom has entered into multiple-year supply contracts with AT&T, Sprint
and WorldCom and short-term contracts with a number of other suppliers for the
long distance telecommunication services provided to its customers. To obtain
favorable forward pricing from certain of its suppliers, the Company has
committed to purchase minimum volumes of a variety of long distance services
during stated periods whether or not such volumes are used or, in one case, to
pay a surcharge equal to a percentage of the Company's shortfall from a
specified quarterly minimum volume. For the final six months of 1996, these
commitments and maximum surcharge total approximately $53.2 million (including
approximately $37.2 million attributable to AT&T). As of June 30, 1996, Midcom's
minimum volume commitment under its supply contract with AT&T, its largest
supply contract, was $117.0 million. The Company estimates that, as of the last
measurement date on September 30, 1996, it would have been in shortfall of its
minimum commitments to AT&T by approximately $27.6 million based on current
contract requirements. However, on July 19, 1996 the Company and AT&T executed a
letter of intent to settle this anticipated liability as well as all other
pending disputes between the Company and AT&T, and to negotiate a new contract
pursuant to which the Company's minimum commitment to AT&T will be $17.0
million. In addition, Midcom will obtain more favorable pricing for certain
network services provided by AT&T. The settlement and new rate structure will
15
<PAGE> 17
not be effective until the Company and AT&T have executed a mutually acceptable
definitive agreement, which the parties are currently pursuing. Moreover, in
connection with the letter of intent, the AT&T tariff was amended to extend the
accrued shortfall penalty payment date to September 30, 1996 pending negotiation
and execution of a mutually acceptable definitive agreement. However, there can
be no assurance that the parties will reach a definitive agreement or that
further extensions of the accrued shortfall penalty payment date can be obtained
by the Company. Another major supplier has agreed to forebear from exercising
its rights to shortfalls incurred through April 30, 1996 which would otherwise
have required the Company to pay a surcharge and caused pricing from this
supplier to increase. This supplier has indicated that it will work with Midcom
to restate applicable minimums so that their attainment is more realistic. There
can be no assurance that the negotiations described above will be concluded in a
manner favorable to the Company or that the Company will be able to obtain
relief from its minimum contractual commitments in the future. If existing or
future shortfalls are not eliminated, the Company may be required to make
substantial payments without associated revenue from customers or the supplier
may terminate service and commence formal action against the Company. Such
payments are not presently contemplated in the Company's capital budgets and
would have a material adverse effect on the Company's business, financial
condition and results of operation. See "Business -- Suppliers."
Because of Midcom's commitments to purchase fixed volumes of use from
certain of its suppliers at predetermined rates, the Company could be adversely
affected if a supplier were to lower the rates it makes available to the
Company's target market without a corresponding reduction in the Company's
rates. Similarly, the Company could be adversely affected if its suppliers
failed to adjust their overall pricing, including prices to the Company, in
response to price reductions of other major carriers. See
"Business -- Suppliers" and Note 14 of the Notes to Consolidated Financial
Statements.
ABILITY TO IMPLEMENT NEW OPERATING STRATEGY
The Company's new management team has developed an operating strategy which
will emphasize the installation of dedicated switching facilities to create a
Company network and the reorganization and expansion of the Company's existing
sales and customer support departments. See "Business -- Company Strategy." In
addition to the capital requirements associated with the new operating strategy,
the Company's ability to realize the full benefit of its operating strategy is
contingent upon its ability to (i) conclude its negotiations of a definitive
agreement with AT&T, (ii) hire and retain sufficient numbers of new sales
personnel and (iii) overcome the logistical challenges of entering the local
telecommunications market. Midcom has executed a letter of intent with AT&T and
has made proposals to other suppliers to modify its supply agreements in a
manner that would be consistent with its network strategy; however, no
agreements have been signed and there can be no assurance that the Company will
be successful in its efforts. See "Business -- Suppliers." The Company plans to
increase the number of sales representatives during 1996 and 1997 from
approximately 35 at the end of July 1996 to approximately 200. There can be no
assurance that the Company will be able to hire and retain a sufficient number
of experienced or otherwise suitable employees to meet this goal. While the
Company's new operating strategy seeks to decrease the level of its sales force
turnover, there can be no assurance that its efforts to do so will be
successful. See "Business -- Marketing and Sales." Prior to reselling local
services to its customers, the Company must complete a number of operational,
marketing and regulatory tasks, including the negotiation of interconnect
agreements with local circuit providers, the development of a billing,
provisioning and customer service capability and the creation of a local
marketing, pricing and sales strategy. Failure to overcome these logistical
challenges would have a material adverse effect on the Company's ability to
implement its strategy to enter the local telecommunications market.
16
<PAGE> 18
ABILITY TO MANAGE GROWTH
The Company intends to pursue substantial growth in connection with the
implementation of its new operating strategy. This growth will place significant
demands on the Company's management and systems of financial and internal
controls and will require an increase in the capacity, efficiency and accuracy
of its billing and customer support systems. Moreover, this growth will require
an increase in the number of the Company's personnel, particularly sales,
customer service and technical personnel. The market for such personnel is
highly competitive and there can be no assurance that the Company will be able
to attract the personnel required by its operating strategy. Further, the
Company will be required to expand, train, motivate and manage its employee
base. This will require an increase in the level of responsibility for both
existing and new management personnel. There can be no assurance that the
management skills and systems currently in place, or to be implemented in
connection with the Company's new operating strategy, will be adequate or that
the Company will be able to assimilate its new employees successfully. Finally,
the Company has experienced a high level of turnover in its sales force. The
Company believes that this turnover is attributable to, among other things,
mobility and turnover common to the reseller segment of the industry, the
Company's recent operational difficulties and recent changes in senior
management. See "Business -- Marketing and Sales." Although one objective of the
Company's new operating strategy is to decrease the level of turnover in its
sales force, there can be no assurance that this objective will be achieved.
Failure to attract and retain sufficient qualified personnel or to train,
motivate and manage such personnel, could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON NEW MANAGEMENT TEAM
Midcom's ability to implement its new operating strategy is highly
dependent upon its ability to retain its new senior management team. These
individuals are generally in high demand and are often subject to competing
employment opportunities. Midcom believes that it will need to retain key
management personnel to meet the demands of its business. However, the Company's
recent performance may make the retention of key personnel more difficult. The
loss of William H. Oberlin, the Company's President and Chief Executive Officer
and one of the Company's directors, or the other key members of the management
team could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management."
CUSTOMER ATTRITION
Midcom's revenue is affected by customer attrition, a problem inherent in
the long distance industry. The attrition experienced by the Company is
attributable to a variety of factors, including the Company's termination of
customers for non-payment and the marketing and sales initiatives of the
Company's competitors such as, among other things, national advertising
campaigns, telemarketing programs and the use of cash or other incentives. In
particular, the Company commonly experiences high initial customer attrition
from acquired customer bases as these customers are transitioned to the
Company's services and systems. Moreover, in the past, one of the Company's
selling points has been the ability to accommodate its customers who express a
preference for a particular underlying long distance carrier, such as AT&T. In
connection with the establishment of its own network of switching facilities,
the Company no longer plans to accommodate such customer preferences. The
Company expects that, as a result, certain of its existing customers will
discontinue or reduce their purchases from the Company following the
implementation of its network of switching facilities. This is expected to
contribute to anticipated declines in revenue and could also impair the
Company's ability to compete for customers. Although one of the objectives of
the Company's new operating strategy is to reduce attrition, there can be no
assurance that this attrition will not remain at current levels or increase.
Failure to reduce attrition could have a material adverse effect on the
Company's business, financial condition and results of operations.
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<PAGE> 19
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Customer Attrition."
RAPID TECHNOLOGICAL CHANGE
The telecommunications industry is characterized by rapidly evolving
technology. Midcom believes that its success will increasingly depend on its
ability to offer, on a timely basis, new services based on evolving technologies
and industry standards. Midcom intends to increase its efforts to develop new
services; however, there can be no assurance that the Company will have the
ability or resources to develop such new services, that new technologies
required for such services will be available to the Company on favorable terms
or that such services and technologies will enjoy market acceptance. Further,
there can be no assurance that the Company's competitors will not develop
products or services that are technologically superior to those used by the
Company or that achieve greater market acceptance. The development of any such
superior technology by the Company's competitors, or the inability of the
Company to successfully respond to such a development, could render Midcom's
existing products or services obsolete and could have a material adverse effect
on the Company's business, financial condition and results of operations.
ABILITY TO INTEGRATE ACQUIRED OPERATIONS
Midcom experienced rapid growth through the end of 1995. A significant
portion of this growth, particularly in 1995, was attributable to acquisitions
of customer bases and other telecommunications service providers. These
acquisitions have placed significant demands on the Company's management and
have disrupted the Company's normal business operations. For a number of
reasons, the Company has not been able to fully consolidate and integrate the
sales and marketing, customer support, billing and other functions of certain
acquired operations. Pending such integration, the Company has maintained a
number of billing systems and other functions of certain acquired operations,
which has caused inefficiencies, additional operational complexity and expense
and greater risk of billing delays and financial reporting difficulties. The
Company believes that these integration problems have also increased customer
attrition and impaired the Company's efforts to cross-sell the disparate
products and services of certain of the acquired operations. The Company's
failure to fully integrate acquired operations with its own operations could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Acquisitions" and
"Business -- Information Services."
DEPENDENCE UPON INTEGRITY OF CALL DATA RECORDS
Midcom depends on the timeliness and accuracy of call data records provided
to it by facilities-based carriers supplying telecommunications services, and
there can be no assurance that accurate information will consistently be
provided by the carriers on a timely basis. Failure of the Company to receive
prompt and accurate call data records from its suppliers will impair the
Company's ability to bill its customers on a timely basis. Such billing delays
could impair the Company's ability to collect amounts owed by its customers. Due
to the multitude of billing rates and discounts which suppliers must apply to
the calls completed by the Company's customers, and due to routine logistical
issues such as the addition or termination of customers, the Company regularly
has disagreements with its suppliers concerning the amounts invoiced for its
customers' traffic. Since 1994, the Company has been paying its suppliers
according to its own calculation of the amounts owed as recorded on the computer
tapes provided by its suppliers. The Company's computations of amounts owed are
frequently less than the amount shown on the suppliers' invoices. Accordingly,
the suppliers may consider the Company to be in arrears in its payments until
the amount in dispute is resolved. Although these disputes have generally been
resolved on terms favorable to the Company, there can be no assurance that this
will continue to be the case. Future disputes which are not resolved favorably
to the Company could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Suppliers."
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<PAGE> 20
DEPENDENCE UPON FACILITIES-BASED CARRIERS
Midcom does not currently own a transmission network and, accordingly,
depends to a large extent on AT&T, Sprint, WorldCom and other facilities-based
carriers for actual transmission of customer calls and other services. Further,
the Company, like all other long distance providers, is dependent upon local
exchange carriers for call origination (carrying the call from the customer's
location to the long distance network of the interexchange carrier selected to
carry the call) and termination (carrying the call off the interexchange
carrier's network to the call's destination). The Company's ability to maintain
and expand its business depends, in part, on its ability to obtain
telecommunication services on favorable terms from facilities-based carriers and
the cooperation of both interexchange and local exchange carriers in initiating
and terminating service for its customers in a timely manner (the process of
initiating service for a customer is referred to as "provisioning"). FCC policy
currently requires all common carriers, including interexchange carriers, to
make their services available for resale and to refrain from imposing
unreasonable restrictions on such resale. Further, the Telecommunications Act
requires all incumbent local exchange carriers both to offer their services for
resale at wholesale rates and to allow access to unbundled network elements at
cost-based rates. The incumbent local exchange carriers are also required by the
Telecommunications Act to provide all interexchange carriers, including the
Company, with equal access for the origination and termination of long distance
calls. If any of these requirements were eliminated, the adverse impact on the
Company could be substantial. Access charges represent a substantial portion of
the Company's current cost of service. The FCC, however, has indicated that it
will initiate in the near future a comprehensive review of its access charge
structure, evaluating the embedded costs and subsidies that produce current
access charge levels. The FCC has also proposed to levy on interexchange
carriers a new per-call payphone usage fee for all toll-free and access code
calls originated from pay telephones. The level at which the FCC sets access
charges, universal service contributions and payphone use fees could have a
material adverse effect on the Company's business, financial condition and
results of operation. Moreover, implementation of a new access charge structure
and repricing of local transport could place many interexchange carriers,
including the Company, at a significant cost disadvantage relative to larger
competitors. See "Business -- Regulation."
In 1994, 1995 and the six months ended June 30, 1996, AT&T, Sprint and
WorldCom were collectively responsible for carrying traffic representing
approximately 97%, 67% and 62% of the Company's revenue, respectively, and for
those periods no single carrier was responsible for carrying traffic
representing more than 46%, 31% and 29% of the Company's revenue, respectively.
In the past, the Company has, from time to time, been substantially in arrears
of its payment obligations to AT&T and other suppliers. On July 16, 1996, AT&T
notified the Company that its was in breach of its obligations to AT&T by virtue
of its payment arrearages and provided notice that service would be discontinued
if payment defaults were not cured. On July 19, 1996, the Company and AT&T
agreed on a payment schedule for overdue amounts which require periodic payments
that will bring the Company current by the middle of October 1996. Although the
Company is generally entitled to be given notice of defaults and an opportunity
to cure under the terms of its agreements with its interexchange suppliers
before such service can be terminated, and although the Company has the ability
to transfer its customers' traffic from one supplier to another, provisioning a
customer that is not serviced by a Midcom switch to an alternate supplier takes
several days. Accordingly, if a major supplier were to decline to continue to
carry the Company's traffic, due to non-payment or otherwise, without sufficient
notice for the Company to make alternate arrangements, there is a possibility
that the customers serviced by that supplier would be temporarily without "1
plus" long distance calling which could have a material adverse effect on the
Company's business, financial condition and results of operation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Suppliers."
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<PAGE> 21
COMPETITION
The long distance telecommunications industry is highly competitive.
Several of the Company's current and potential competitors have substantially
greater financial, technical, marketing and other resources than the Company,
and there can be no assurance that the Company will be competitive in this
environment. The Company's ability to compete may also be impaired by its
leveraged capital structure and limited capital resources.
The long distance telecommunications industry is significantly influenced
by the marketing and pricing activities of the major industry participants,
including AT&T, MCI, Sprint and WorldCom. While the Company believes that AT&T,
MCI and Sprint historically have chosen not to concentrate their direct sales
efforts on small to medium-sized businesses, these carriers control
approximately 85% of that market. Moreover, AT&T, MCI and Sprint have recently
introduced new service and pricing options that are attractive to smaller
commercial users, and there can be no assurance that they will not market to
these customers more aggressively in the future. AT&T and, as an interim
measure, the structurally separate interexchange affiliates of the seven
regional Bell operating companies have recently been reclassified as
non-dominant carriers and, accordingly, have the same flexibility as the Company
in meeting competition by modifying rates and service offerings without pricing
constraints or extended waiting periods. These reclassifications may make it
more difficult for the Company to compete for long distance customers. See
"Business -- Regulation." In addition, a significant number of large regional
long distance carriers and new entrants in the industry compete directly with
the Company by concentrating their marketing and direct sales efforts on small
to medium-sized commercial users. Activities by competitors including, among
other things, national advertising campaigns, telemarketing programs and the use
of cash or other forms of incentives, contribute to significant customer
attrition in the long distance industry.
The Company contracts for call transmission over networks operated by
suppliers who may also be the Company's competitors. Both the interexchange
carriers and local exchange carriers providing transmission services for the
Company have access to information concerning the Company's customers for which
they provide the actual call transmission. Because these interexchange carriers
and local exchange carriers are potential competitors of the Company, they could
use information about the Company's customers, such as their calling volume and
patterns of use, to their advantage in attempts to gain such customers'
business. In addition, the Company's future success will depend, in part, on its
ability to continue to buy transmission services and access from these carriers
at a significant discount below the rates these carriers otherwise make
available to the Company's targeted customers.
Regulatory trends have had, and may have in the future, a significant
impact on competition in the telecommunications industry. See
"Business -- Regulation." As the result of the recently enacted
Telecommunications Act, the regional Bell operating companies are now permitted
to provide, and are providing or have announced their intention to provide, long
distance service originating (or in the case of "800" service, terminating)
outside their local service areas or offered in conjunction with other ancillary
services, including wireless services. Following application to and upon a
finding by the FCC that a regional Bell operating company faces facilities-based
competition and has satisfied a congressionally-mandated "competitive checklist"
of interconnection and access obligations, it will also be permitted to provide
long distance service within its local service area. The entry of these
well-capitalized and well-known entities into the long distance service market
could significantly alter the competitive environment in which the Company
operates.
The Telecommunications Act also removes all legal barriers to competitive
entry into the local telecommunications market and directs incumbent local
exchange carriers to allow competing telecommunications service providers such
as the Company to interconnect their facilities with the local exchange network,
to lease network components on an unbundled basis and to resell local
telecommunications services. Moreover, the Telecommunications Act seeks to
facilitate the development of local telecommunications competition by requiring
incumbent local exchange carriers,
20
<PAGE> 22
among other things, to allow end users to retain their telephone numbers when
changing service providers and to place short-haul toll calls without dialing
lengthy access codes. In response to these regulatory changes, MCI and AT&T have
each announced plans to enter the local telecommunications market, including
MCI's announcement that it will invest more than $2.0 billion in fiber optic
rings and local switching equipment in major metropolitan markets throughout the
United States, and AT&T's announcement that it has filed applications in all 50
states to provide local telecommunications services.
While the Telecommunications Act opens new markets to the Company, the
nature and value of the resultant business opportunities will be dependent in
large part upon subsequent regulatory interpretation of the statute's
requirements. The FCC has recently promulgated rules implementing the local
competition provisions of the Telecommunications Act; each state must now
individually adopt regulations applying the new national guidelines. The Company
anticipates that incumbent local exchange carriers will actively resist
competitive entry into the local telecommunications market and will seek to
undermine the operations and the service offerings of competitive providers,
leaving carriers such as the Company which are dependent on incumbent local
exchange carriers for network services vulnerable to anti-competitive abuses. No
assurance can be given that the local competition provision of the
Telecommunications Act will be implemented and enforced by federal and state
regulators in a manner which will permit the Company to successfully compete in
the local telecommunications market or that subsequent legislative and/or
judicial actions will not adversely impact the Company's ability to do so.
Moreover, federal and state regulators are likely to provide incumbent local
exchange carriers with increased pricing flexibility for their services as
competition in the local market increases. If incumbent local exchange carriers
are allowed by regulators to lower their rates substantially, engage in
excessive volume and term discount pricing practices for their customers, charge
excessive fees for network interconnection or access to unbundled network
elements or decline to make services available for resale at wholesale rates,
the ability of the Company to compete in the provision of local service could be
materially and adversely affected.
REGULATION
Federal and state regulations, regulatory actions and court decisions have
had, and may have in the future, both positive and negative effects on the
Company and its ability to compete. The Company is subject to regulation by the
FCC and by various state public service or public utility commissions as a
non-dominant or resale provider of long distance services. The Company is
required to file tariffs specifying the rates, terms and conditions of its
interstate and international services with the FCC and is required to file
tariffs or obtain other approvals in most of the states in which it operates.
Neither the FCC nor the relevant state utility commissions currently regulate
the Company's profit levels, but they often reserve the authority to do so. The
large majority of states require long distance service providers to apply for
authority to provide telecommunications services and to make filings regarding
their activities. The multiplicity of state regulations makes full compliance
with all such regulations a challenge for multistate providers such as the
Company. There can be no assurance that future regulatory, judicial and
legislative changes or other activities will not have a material adverse effect
on the Company or that regulators or third parties will not raise material
issues with regard to the Company's compliance with applicable laws and
regulations. The Company believes, however, that the trend has been, and will
continue to be, toward significant relaxation of federal and state regulation of
its operations and services.
Pursuant to the terms of the 1984 court decree which required AT&T to
divest its local exchange operations, the regional Bell operating companies were
prohibited from providing long distance telecommunications service between
certain defined geographic areas, known as Local Access Transport Areas or
"LATAs." However, the Telecommunications Act allows for immediate provision by
the regional Bell operating companies of long distance service outside their
respective local telephone service areas as well as long distance service
bundled with wireless, enhanced and certain other services. The
Telecommunications Act also provides a mechanism for eventual entry
21
<PAGE> 23
by the regional Bell operating companies into the long distance market within
their respective local service areas. The competition faced by the Company will
increase significantly as the regional Bell operating companies expand their
provision of inter-LATA services.
As a result of a 1994 court decision, the Company became obligated to
provide detailed rate schedules in all of its federal tariffs, and the Company
could possibly be liable for damages for following an FCC policy which did not
require the Company to file such detailed schedules of its domestic charges in
the past. The FCC has proposed to implement a policy of "mandatory detariffing"
for the domestic offerings of all non-dominant interexchange carriers, which, if
adopted, would not only absolve the Company, as well as its principal suppliers
and competition, from any obligation to file domestic interexchange tariffs, but
would affirmatively prohibit all such tariff filings. Also, AT&T and, as an
interim measure, the structurally separate interexchange affiliates of the
regional Bell operating companies have recently been reclassified as
non-dominant carriers and, accordingly, have the same flexibility as the Company
in meeting competition by modifying rates and service offerings without pricing
constraints or extended waiting periods. The reclassifications may make it more
difficult for the Company to compete for long distance customers. See
"Business -- Regulation."
SUBSTANTIAL LEVERAGE
The Company is highly leveraged. As of June 30, 1996, after giving pro
forma effect to the application of the net proceeds of the Private Placement,
the Company's total indebtedness and shareholders' equity would have been $108.0
million and $(32.2) million, respectively. On the same pro forma basis, the
Company's earnings would have been insufficient to cover its fixed charges by
$29.4 million and $59.2 million for the year ended December 31, 1995 and the six
months ended June 30, 1996, respectively. The Company's ability to make
scheduled payments of the principal of, or interest on, its indebtedness will
depend on its future performance, which is subject to economic, financial,
competitive and other factors beyond its control.
SUBORDINATION OF NOTES
The indebtedness evidenced by the Notes is subordinate to the prior payment
in full of all Senior Indebtedness (as defined herein). As of August 31, 1996,
there were no borrowings under the Revolving Credit Facility and, accordingly,
the Company had approximately $22,772,000 of Senior Indebtedness outstanding. In
addition, because a portion of the Company's operations is conducted through its
subsidiaries, claims of holders of indebtedness and of other creditors of such
subsidiaries will have priority with respect to the assets and earnings of such
subsidiaries over the claims of creditors of the Company, including holders of
the Notes. As of August 31, 1996, the aggregate liabilities of such subsidiaries
were approximately $1,088,000 (excluding intercompany indebtedness). The
Indenture does not limit the amount of additional indebtedness, including Senior
Indebtedness or pari passu indebtedness, that the Company or any of its
subsidiaries may create, incur, assume or guarantee. During the continuance of
any default (beyond any applicable grace period) in the payment of principal,
premium, interest or any other payment due on Designated Senior Indebtedness (as
defined herein), no payment of principal or interest on the Notes may be made by
the Company. In addition, upon any distribution of assets of the Company upon
any dissolution, winding up, liquidation or reorganization, the payment of the
principal and interest on the Notes will be subordinated to the extent provided
in the Indenture to the prior payment in full of all Senior Indebtedness and
will be structurally subordinated to claims of creditors of each subsidiary of
the Company. By reason of this subordination, in the event of the Company's
dissolution, holders of Senior Indebtedness may receive more, ratably, and
holders of the Notes may receive less, ratably, than the other creditors of the
Company. The Company's cash flows and ability to service debt, including the
Notes, are dependent, in part, upon the earnings of its subsidiaries and the
distribution of those earnings to, or upon payments by those subsidiaries to,
the Company. The ability of the Company's subsidiaries to make such
distributions or payments
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<PAGE> 24
may be subject to contractual or statutory restrictions. See "Description of
Notes -- Subordination."
REPURCHASE OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
In the event of a Change of Control (as defined herein), each holder of
Notes has the right to require that the Company repurchase the Notes in whole or
in part at a redemption price equal to 101% of the principal amount thereof,
plus accrued interest, if any, to the date of repurchase. See "Description of
Notes -- Repurchase of Notes at the Option of Holders Upon a Change of Control."
If a Change of Control were to occur, there can be no assurance that the Company
would have sufficient funds to pay such redemption price for all Notes tendered
by the holders thereof. See "Description of Notes -- Subordination." The
Company's ability to pay such redemption price is, and may in the future be,
limited by the terms of the Revolving Credit Facility or other agreements
relating to indebtedness that constitutes Senior Indebtedness.
SHARES ELIGIBLE FOR FUTURE SALE
At July 31, 1996, the Company had outstanding 15,838,202 shares of Common
Stock (assuming no redemption of the shares owned by Ashok Rao; see "Certain
Transactions") of which 9,131,201 shares were "restricted securities" subject to
restrictions set forth in Rule 144 promulgated under the Securities Act. Of the
restricted securities, upon expiration of a lock-up agreement described below,
5,496,522 shares may be sold under Rule 144, 3,534,679 shares will be tradable
pursuant to Rule 144 upon the expiration of the applicable two-year holding
period and 100,000 shares, sold in a transaction exempt from registration under
Regulation S of the Securities Act, will be tradeable pursuant to Rule 144 upon
the expiration of a one-year holding period. These periods will expire between
December 31, 1996 and December 30, 1997. If a proposed amendment to Rule 144 is
adopted, however, the two-year holding period would be reduced to one year. In
addition, as of July 31, 1996, the Company had reserved for issuance 4,211,024
shares of Common Stock under its Amended and Restated 1993 Stock Option Plan
(the "Stock Option Plan") (assuming shareholder approval of an increase in
options available for grant) and 258,625 shares of Common Stock for issuance
under its 1995 Employee Stock Purchase Plan (the "Stock Purchase Plan"). Under
the Stock Option Plan, as of July 31, 1996, options to purchase 3,408,474 shares
of Common Stock were outstanding and options to purchase 212,240 shares of
Common Stock were exercisable. Also, at July 31, 1996, warrants to purchase
874,970 shares of Common Stock were outstanding, including a warrant to purchase
815,470 shares of Common Stock issued in connection with the Bridge Loan which
expired upon the repayment in full of the Bridge Loan upon completion of the
Private Placement. In connection with the issuance of a note payable to one
seller of a customer base, the Company issued a warrant to acquire $2.0 million
of the Common Stock. In the event of non-payment of the note, the exercise price
of such warrant is cancellation of the note, the principal amount of which is
subject to adjustment, and the number of shares to be issued upon exercise of
the warrant would equal $2.0 million divided by the then current market price of
the Common Stock.
In connection with certain acquisitions and financings, the Company has
granted to individuals or entities rights to require the Company to register the
offer and sale of approximately 1,876,000 shares of Common Stock (including
shares of Common Stock issuable upon conversion or exercise of outstanding
warrants) under the Securities Act beginning as early as August 1996. Holders of
a portion of these shares have indicated their intent to exercise their demand
registration rights and sell shares of Common Stock in the public market as soon
as or shortly after their registration rights become exercisable. If these
registration rights are exercised, the Company will be required to maintain the
effectiveness of a resale registration for periods of up to 180 days. However,
in connection with the Private Placement, shareholders holding 1,236,012 of
these shares, as well as the Company and certain of its officers and directors,
have each agreed not to sell or grant any option for the sale of, or otherwise
dispose of, any Common Stock, or any securities convertible into
23
<PAGE> 25
or exchangeable or exercisable for shares of Common Stock and not to file or
request to be filed, as the case may be, any registration statement with respect
to the Common Stock for a period of 90 days after the completion of the Private
Placement (or earlier with the consent of PaineWebber on behalf of the Initial
Purchasers). In part to obtain this lock-up commitment, the Company has proposed
to file a shelf registration under the Securities Act with respect to
approximately 587,893 shares of Common Stock held by a portion of the holders of
the above-described demand registration rights. This shelf registration will
provide for the continuous offering, subject to certain exceptions, of such
shares in the public market for a period of one year after the effective date of
the shelf registration. Creation of this commitment is subject to execution of
new agreements with each affected shareholder which provide, among other things,
for termination of all of the holders' other registration rights. There can be
no assurance such arrangements will be finalized.
Sales of substantial amounts of Common Stock in the public market under
Rule 144, pursuant to the exercise of registration rights or otherwise, and even
the potential for such sales, may have a material adverse effect on the
prevailing market price of the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
CONTROL BY PRINCIPAL SHAREHOLDERS
At July 31, 1996, Midcom's directors and executive officers beneficially
owned or had the power to vote approximately 39.0% of the Common Stock. Although
such shareholders will not have the ability to control matters requiring
shareholder approval, they may have the ability to influence the affairs and
management of the Company and the elections of directors. This may have the
effect of delaying, deferring or preventing a change in control of the Company
and could limit the price that certain investors might be willing to pay in the
future for the Common Stock. See "Principal Shareholders."
ANTI-TAKEOVER CONSIDERATIONS
The Company is subject to the anti-takeover provisions of Chapter 23B.17 of
the Washington Business Corporation Act (the "WBCA") which prohibits, subject to
certain exceptions, a merger, sale of assets or liquidation of a corporation
involving a 20% shareholder unless determined to be at a fair price or approved
by disinterested directors or two-thirds of the disinterested shareholders. In
addition, Chapter 23B.19 of the WBCA prohibits a corporation registered under
the Exchange Act from engaging in certain significant transactions with a 10%
shareholder. Significant transactions include, among others, a merger with or
disposition of assets to the 10% shareholder. Further, the Company's Amended and
Restated Articles of Incorporation (the "Articles") require super-majority
shareholder approval of certain business combinations and provide for a
classified Board of Directors with staggered, three-year terms. Also, the
Company has the authority to issue up to 10 million shares of preferred stock in
one or more series and to fix the preferences and other rights thereof without
any further vote or action by the Company's shareholders. The issuance of
preferred stock, together with the effect of other anti-takeover provisions in
the Articles and under the WBCA, may have the effect of delaying, deferring or
preventing a change in control of the Company and could limit the price that
certain investors might be willing to pay in the future for the Common Stock.
See "Description of Capital Stock -- Washington Law" and "Description of Capital
Stock -- Certain Provisions in Amended and Restated Articles of Incorporation
and Bylaws."
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been, and is likely to continue to
be, volatile. There can be no assurance that the market price of the Common
Stock will not fluctuate significantly from its current level. The market price
of the Common Stock could be subject to significant fluctuations in response to
a number of factors, such as actual or anticipated variations in the Company's
quarterly operating results, the introduction of new products by the Company or
its competitors, changes in other conditions or trends in the Company's
industry, changes in governmental
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<PAGE> 26
regulations, changes in securities analysts' estimates of the Company's, or its
competitors' or industry's, future performance or general market conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition, stock markets have experienced extreme price and
volume volatility in recent years, which has had a substantial effect on the
market prices of securities of many smaller public companies for reasons
frequently unrelated to the operating performance of such companies. These broad
market fluctuations may have a material adverse effect on the market price of
the Common Stock. See "Price Range of Common Stock."
LIMITATIONS ON DIVIDENDS
Since its incorporation in 1989, the Company has not declared or paid cash
dividends on its Common Stock, and the Company anticipates that any future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends. In addition,
the terms of the Revolving Credit Facility prohibit the payment of cash
dividends without the consent of the Company's lenders. See "Dividend Policy"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ABSENCE OF EXISTING MARKET FOR THE NOTES
The Notes constitute a new issue of securities with no established trading
market. The Company does not intend to list the Notes on any national securities
exchange or to seek the admission thereof to trading in the National Association
of Securities Dealers Automated Quotation system. The Company has been advised
by the Initial Purchasers that they intend to make a market in the Notes.
However, the Initial Purchasers are not obligated to do so and any market-making
activities may be discontinued at any time without notice. In addition, such
market-making activity will be subject to the limits imposed by the Securities
Act and the Exchange Act, and may be limited during the pendency of the shelf
registration statement to be filed in connection with the sale of the Notes.
Although the Notes are eligible for trading in the PORTAL Market upon issuance,
no assurance can be given that an active trading market for the Notes will
develop or, if such market develops, as to the liquidity or sustainability of
such market. If a trading market does not develop or is not maintained, holders
of the Notes may experience difficulty in reselling the Notes or may be unable
to sell them at all. If a market for the Notes develops, any such market may be
discontinued at any time. Further, if a market for the Notes develops, future
trading prices of the Notes will depend on many factors, including, among other
things, prevailing interest rates, perceptions of the Company's
creditworthiness, the Company's results of operations and the market for similar
securities. Depending on prevailing interest rates, the market for similar
securities, the financial condition of the Company and other factors, the Notes
may trade at a discount from their principal amount.
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USE OF PROCEEDS
The Notes and the Conversion Shares are offered by the Selling
Securityholders and, accordingly, the Company will not receive any of the
proceeds from the sales thereof. Further, the Company will not receive any
proceeds from the issuance of Conversion Shares upon conversion of the Notes.
TRADING MARKET FOR SECURITIES
PRICE RANGE OF COMMON STOCK
Midcom's Common Stock has been quoted on the Nasdaq National Market since
July 6, 1995 under the symbol "MCCI." The stock prices below are the high and
low closing sales prices on the Nasdaq National Market for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
Third Quarter (from July 6, 1995).................................... $16 3/4 $11 1/4
Fourth Quarter....................................................... 18 7/8 13 3/4
1996
First Quarter........................................................ $18 1/4 $ 7
Second Quarter....................................................... 15 1/4 6 1/2
Third Quarter (through September 25, 1996)........................... 16 10 1/4
</TABLE>
On September 25, 1996, the closing sale price reported by the Nasdaq
National Market for the Common Stock was $14.41. As of July 31, 1996, there were
approximately 129 holders of record of the Common Stock.
PRICE RANGE OF THE NOTES
The Notes were originally issued on August 22 and September 6, 1996. As of
the date hereof, there is no public market for the Notes, although the Notes
have been eligible for trading in the PORTAL Market.
DIVIDEND POLICY
Since its incorporation in 1989, the Company has not declared or paid cash
dividends on its Common Stock, and the Company anticipates that any future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends. In addition,
the terms of the Revolving Credit Facility prohibit the payment of cash
dividends without the consent of the Company's lenders.
26
<PAGE> 28
CAPITALIZATION
The following table sets forth the cash, short-term obligations and
capitalization of the Company at June 30, 1996 and as adjusted to reflect the
completion of the Private Placement and the application of the net proceeds
therefrom to the repayment in full of the Bridge Loan and the Revolving Loans.
This table should be read in conjunction with the Consolidated Financial
Statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
AS
ACTUAL ADJUSTED(1)
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Cash.................................................................. $ 1,434 $ 42,607
======== ========
Short-term obligations, including current portion of long-term
obligations:
Notes payable(1).................................................... $ 11,706 $ 11,706
Bridge loan......................................................... 15,000 --
Revolving loans(2).................................................. 25,877 --
Capital lease obligations(2)........................................ 4,259 3,099
Other............................................................... 185 185
-------- --------
Total short-term obligations................................ $ 57,027 $ 14,990
======== ========
Long-term obligations, less current portion:
Convertible subordinated notes...................................... $ -- $ 85,000
Long-term debt...................................................... 800 800
Capital lease obligations(2)........................................ 125 1,285
Other............................................................... 5,951 5,951
-------- --------
Total long-term obligations................................. 6,876 93,036
-------- --------
Shareholders' equity:
Preferred stock, 10,000,000 shares authorized; none issued and
outstanding...................................................... -- --
Common stock, $.0001 par value; 90,000,000 shares authorized;
15,616,000 shares issued and outstanding(3)...................... 65,513 65,513
Accumulated deficit................................................. (97,749) (97,749)
-------- --------
Total shareholders' equity.................................. (32,236) (32,236)
-------- --------
Total capitalization.................................................. $(25,360) $ 60,800
======== ========
</TABLE>
- ---------------
(1) Both actual and as adjusted notes payable include $9.0 million payable in
connection with two customer base acquisitions which may be paid in cash or
by delivery of shares of Common Stock, as the Company may elect; provided,
however, that the Revolving Credit Facility prohibits payment of this
obligation in cash without the lenders' prior written consent. See
"Business -- Legal Proceedings."
(2) As a result of defaults existing on June 30, 1996 under the Revolving Credit
Facility, and corresponding cross-defaults under certain of the Company's
capital leases, short-term obligations includes Revolving Loans of $25,877
and non-current capital lease obligations of $3,186. The "as adjusted" data
reflects the completion of the Private Placement, the repayment in full of
the Bridge Loan and the Revolving Loans and the reclassification of certain
non-current capital lease obligations to long-term obligations following
the waiver of defaults under the Revolving Credit Facility effective upon
completion of the Private Placement. As of June 30, 1996, there were
Revolving Loans in an aggregate principal amount of approximately $26.0
million outstanding under the Revolving Credit Facility, and no Revolving
Loans were outstanding under the Revolving Credit Facility as of August 31,
1996. Pursuant to an amendment to the Revolving
27
<PAGE> 29
Credit Facility effective upon completion of the Private Placement, the
maximum borrowing availability under the Revolving Credit Facility is $43.0
million, subject to a borrowing base equal to 85% of the Company's eligible
accounts receivable less a minimum excess availability requirement of $20.0
million for the months of August 1996 through February 1997, declining in
stages to $8.0 million for the months of September through November 1997.
As of August 31, 1996, the Company had a borrowing base of $21.0 million
and a maximum borrowing availability, net of the minimum excess
availability requirement, of $1.0 million. See "Description of Certain
Indebtedness."
(3) Does not include (i) 4,211,650 shares reserved for issuance upon exercise of
options under the Stock Option Plan, of which options to purchase 3,026,342
shares were outstanding at June 30, 1996, (ii) 258,625 shares reserved for
issuance under the Stock Purchase Plan, (iii) 59,500 shares reserved for
issuance upon exercise of certain warrants issued to sellers of a customer
base acquired by the Company, (iv) 815,470 shares reserved for issuance
upon exercise of certain warrants issued in connection with the Bridge
Loan, which warrants expired upon the completion of the Private Placement
and the repayment in full of the Bridge Loan, (v) up to 236,193 shares held
in escrow or subject to issuance pursuant to the Company's obligations
under agreements entered into in connection with several acquisitions
completed in the second half of 1995, (vi) 128,119 shares that the Company
is required to issue in the event that the market price of the Common Stock
is below stated prices on designated true-up dates and upon the occurrence
of certain contingencies (based on the price of the Common Stock on August
14, 1996 and assuming the maximum contingent shares are issued) and (vii)
shares that may be issued to Cherry Communications as payment in lieu of a
$9.0 million cash payment in connection with the acquisition of a customer
base. See "Description of Capital Stock" and "Shares Eligible for Future
Sale."
28
<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial and operating data presented below with
respect to Midcom's consolidated statements of operations for each of the three
years in the period ended December 31, 1995, and with respect to Midcom's
consolidated balance sheets at December 31, 1994 and 1995, are derived from the
Consolidated Financial Statements included elsewhere in this Prospectus which
have been audited by Ernst & Young LLP, and such data are qualified by, and
should be read in conjunction with, such financial statements and the notes
related thereto. The selected consolidated financial and operating data
presented below with respect to Midcom's consolidated statements of operations
for the years ended December 31, 1991 and 1992, and with respect to Midcom's
consolidated balance sheets at December 31, 1991, 1992 and 1993, are derived
from consolidated financial statements which were also audited by Ernst & Young
LLP, and which are not included herein. The selected consolidated financial and
operating data presented below with respect to Midcom's consolidated statements
of operations for the six months ended June 30, 1995 and 1996 and with respect
to Midcom's consolidated balance sheet at June 30, 1996 are derived from
unaudited interim consolidated financial statements which, in the opinion of the
Company's management, reflect all material adjustments consisting only of normal
recurring adjustments necessary for a fair presentation of such data. Further,
the selected consolidated financial and operating data set forth below is
qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The following information as previously reported has been restated
to include Adval, Inc. and ADNET Telemanagement, Inc. which were acquired in
pooling of interests transactions on September 29, 1995 and December 29, 1995,
respectively.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue..................................... $10,895 $27,894 $66,010 $111,699 $203,554 $97,380 $ 93,860
Cost of revenue............................. 1,690 14,817 45,363 79,044 139,546 65,282 67,536
------- ------- ------- -------- -------- ------- --------
Gross profit................................ 9,205 13,077 20,647 32,655 64,008 32,098 26,324
Selling, general and administrative
expense................................... 8,871 11,246 18,125 27,697 62,061 27,483 32,314
Depreciation and amortization............... 245 295 1,881 4,134 13,790 4,898 19,210
Settlement of contract dispute.............. -- -- -- -- -- -- 8,800
Restructuring charge(1)..................... -- -- -- -- -- -- 2,220
Loss on impairment of assets(2)............. -- -- -- -- 11,830 -- 18,765
------- ------- ------- -------- -------- ------- --------
Operating income (loss)................... 89 1,536 641 824 (23,673) (283) (54,985)
Interest expense............................ 685 951 1,368 2,965 5,288 3,346 3,910
Other expense (income)...................... 1,880 (65) (249) 871 390 394 266
------- ------- ------- -------- -------- ------- --------
Income (loss) before income taxes and
extraordinary item...................... (2,476) 650 (478) (3,012) (29,351) (4,023) (56,161)
Provision (benefit) for income taxes........ (118) (4) 51 17 -- -- --
------- ------- ------- -------- -------- ------- --------
Loss before extraordinary item............ (2,358) 654 (529) (3,029) (29,351) (4,023) (59,161)
Extraordinary item(3)....................... -- -- -- -- (4,067) -- --
------- ------- ------- -------- -------- ------- --------
Net income (loss)......................... $(2,358) $ 654 $ (529) $ (3,029) $(33,418) $(4,023) $(59,161)
======= ======= ======= ======== ======== ======= ========
Per share amounts(4):
Income (loss) before extraordinary item... $ (0.24) $ 0.07 $ (0.05) $ (0.31) $ (2.42) $ (0.39) $ (3.86)
Extraordinary item........................ -- -- -- -- (0.34) -- --
------- ------- ------- -------- -------- ------- --------
Net income (loss)....................... $ (0.24) $ 0.07 $ (0.05) $ (0.31) $ (2.76) $ (0.39) $ (3.86)
======= ======= ======= ======== ======== ======= ========
Shares used in calculating per share data... 9,930 9,930 9,930 9,930 12,101 10,246 15,321
SUPPLEMENTAL OPERATING DATA:
EBITDA(5)................................... $ 334 $ 1,831 $ 2,522 $ 4,958 $ 1,947 $ 4,615 $ (5,990)
Ratio of earnings to fixed charges(6)....... -- 1.60 -- -- -- -- --
Deficiency of earnings to fixed
charges(6)................................ $(2,476) $ -- $ (478) $ (3,012) $(29,351) $(4,023) $(59,161)
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
------------------------------------------------ -------------------------
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED(7)
------- ------- ------- ------- -------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................... $ 447 $ 1,461 $ 808 $ 960 $ 1,083 $ 1,434 $ 42,607
Total assets........................... 3,530 11,090 35,414 66,078 133,331 87,587 131,710
Short-term obligations, including
current portion of long-term 2,241
obligations(8)....................... 294 279 8,719 56,297 57,027 14,990
Long-term obligations, less current 34,195
portion(8)........................... 8,119 8,618 16,431 3,691 6,876 93,036
Redeemable preferred stock............. -- -- -- 8,597 -- -- --
Shareholders' equity (deficit)......... (6,479) (6,196) (6,565) (6,304) 23,799 (32,236) (32,236)
</TABLE>
- ---------------
(1) Consists primarily of severance and lease cancellation charges relating to
restructuring of operations in March and April 1996.
(2) Consists of the following: (i) a $6.8 million write-down of the Company's
interest in its joint venture in Russia, (ii) a $2.5 million write-off of
the Company's existing limited capacity switching equipment as a result of
its decision to deploy new, state-of-the-art high capacity switches and
(iii) a $2.5 million partial write-down of the Company's capitalized
software development costs for its management information system.
(3) Includes $2,992 of original issue discount and $1,075 of deferred financing
costs written off in the third and fourth quarters of 1995, respectively.
(4) Net loss per share is based on the number of shares as described in Note 1
of the Notes to Consolidated Financial Statements.
(5) As used herein, "EBITDA" is defined as operating income plus depreciation,
amortization, loss on impairment of assets, restructuring charge and
settlement of contract dispute. EBITDA is commonly used to measure
performance of telecommunications companies because of (i) the importance of
maintaining cash flows in excess of debt-service obligations due to the
capital and acquisition-intensive nature of the telecommunications industry
and (ii) the noncash effect on earnings of generally high levels of both
amortization and depreciation expenses associated with capital equipment and
acquisitions common in this industry. EBITDA does not purport to represent
cash provided by operating activities as reflected in the Company's
consolidated statements of cash flows, is not a measure of financial
performance under generally accepted accounting principles and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(6) For purposes of calculating the ratio and deficiency of earnings to fixed
charges, "earnings" consist of income before income taxes plus fixed
charges, and "fixed charges" consist of interest expense, including the
amortization of deferred financing fees, and that portion of rental expense
deemed representative of the interest factor (estimated to be one-third of
rental expense).
(7) Adjusted to give effect to the application of the net proceeds of the
Private Placement to the repayment in full of the Bridge Loan and the
Revolving Loans.
(8) As a result of defaults existing on June 30, 1996 under the Revolving Credit
Facility, and corresponding cross-defaults under certain of the Company's
capital leases, short-term obligations as of June 30, 1996 includes
Revolving Loans of $25,877 and non-current capital lease obligations of
$3,186. The "as adjusted" data reflects the repayment in full of the Bridge
Loan and the Revolving Loans and the reclassification of certain non-current
capital lease obligations to long-term obligations following the waiver of
defaults under the Revolving Credit Facility effective upon completion of
the Private Placement. See "Description of Certain Indebtedness." Both
actual and as adjusted short-term obligations include $9.0 million payable
in connection with two customer base acquisitions which may be paid in cash
or by delivery of shares of Common Stock, as the Company may elect;
provided, however, that the Revolving Credit Facility prohibits payment of
this obligation in cash without the lenders' prior written consent. See
"Business -- Legal Proceedings."
30
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Midcom was formed in 1989 and initially operated as an aggregator of long
distance telecommunications services. In 1991, Midcom shifted its focus from
aggregation to providing telecommunications services and, accordingly, began to
(i) enter into volume-based supply agreements with multiple underlying
facilities-based carriers, (ii) establish a knowledgeable direct sales force to
target small and medium-sized business customers, (iii) obtain the necessary
federal and state certifications to provide interstate, intrastate and
international service, (iv) build an infrastructure to bill and service a large
volume of customers and (v) develop enhanced and value-added products and
services to supplement its basic long distance service. Midcom does not provide
its telecommunications services through the operation of its own transmission
network. Rather, Midcom purchases large volumes of long distance services
utilizing transmission networks owned and operated by various other
interexchange carriers, and then resells those services to its customers.
Midcom, or one of its billing agents, receives monthly records from its
underlying carriers which detail the calls made by its customers, then rates the
calls and bills its customers.
Subsequent to its initial public offering in July 1995, Midcom completed
numerous acquisitions of businesses and customer bases. Although these
acquisitions contributed to substantial growth, they have placed significant
demands on management resources and have disrupted Midcom's normal business
operations. In particular, the Company has been unable to fully integrate the
sales and marketing, customer support, billing and other functions of certain
acquired operations which has increased the Company's overall cost structure and
has resulted in lower profitability and cash flows. See
"Business -- Acquisitions." During the same period, the Company was in the
process of implementing a new management information system, including the
installation of a new billing system. Problems encountered in this
implementation process contributed to the Company's operational difficulties. In
addition, certain reports generated by the new management information system
that were used to estimate unbilled revenue for the third quarter of 1995 failed
to fully reflect all discounts that were properly included in the bills
subsequently sent to the Company's customers. See "Business -- Information
Systems." Primarily as a result of this failure, reported revenue was overstated
for the third quarter of 1995 and the Company's Quarterly Report on Form 10-Q
for that period had to be amended to restate reported results. See
"-- Restatement of Results for the Third Quarter of 1995." In addition, the
Company's profitability has been reduced as a result of the Company's supply
contract with AT&T which provides for higher rates than those provided by
competitive suppliers, although the Company and AT&T have entered into a letter
of intent contemplating substantial modifications to this contract which will
provide for more favorable rates in the future. See "Business -- Suppliers."
These factors contributed to defaults under the Revolving Credit Facility (which
defaults were subsequently waived) and caused the Company's auditors to include
a going concern qualification in their report on the Company's financial
statements for the year ended December 31, 1995. The Company's auditors also
identified certain material weaknesses in the Company's internal financial
controls. See "-- Material Weaknesses" and "Description of Certain
Indebtedness."
In response to these developments, during the second and third quarters of
1996 Midcom recruited a new executive management team with extensive experience
and expertise in the telecommunications industry. The new executive management
team has developed a restructuring, network and marketing strategy which it
plans to implement during 1996 and 1997 and which is designed to address the
Company's recent operational challenges and increase internally generated sales
and profitability. See "Business -- Company Strategy." As a result of
restructuring costs, customer attrition and other factors, the Company expects
that revenue is likely to decrease and selling, general and administrative
expenses are likely to increase substantially during the remainder of 1996 and,
perhaps, the first half of 1997. These expected trends will have a material
adverse
31
<PAGE> 33
impact on the Company's near term profitability and levels of cash flows. The
Company expects that the net proceeds of the Private Placement, funds available
under the Revolving Credit Facility and cash flows from operations will be
sufficient to fund its capital requirements during 1996 and 1997. However, there
can be no assurance that the Revolving Credit Facility will continue to be
available to the Company or that the net proceeds of the Private Placement
together with funds available under the Revolving Credit Facility and cash flows
from operations will be sufficient to fully implement the Company's new
operating strategy or meet its other capital requirements. See "-- Liquidity and
Capital Resources."
If Midcom successfully implements its new operating strategy, it
anticipates that, over the long term, (i) revenue will increase as a result of
its reorganized and expanded direct sales efforts, the development of a new tier
of distributors and reduced customer attrition and (ii) operating expenses will
decrease as a result of deploying its network of switching facilities and
obtaining more favorable terms from its suppliers. As a result of these expected
trends, the Company expects that gross margin as a percentage of revenue will,
over the long term, be comparable to other telecommunications providers despite
an anticipated increase in costs associated with its larger sales force and
customer support efforts. Although the Company believes that its new management
team has the relevant skills and experience necessary to implement this
strategy, its ability to do so is subject to an unusual number of risks and
uncertainties, and there can be no assurance that this strategy will be
successfully implemented or that the intended positive results will be achieved.
See "Forward-Looking Statements and the Private Securities Litigation Reform
Act."
RECENT ACQUISITIONS
In 1994, Midcom acquired PacNet, Inc. ("PacNet") and certain assets of
American Telephone Network, Inc. ("ATN"). In 1995, Midcom acquired Adval, Inc.
("Adval"), Cel-Tech International Corp. ("Cel-Tech"), ADNET Telemanagement, Inc.
("Adnet") and certain assets of Communique Telecommunications, Inc.
("Communique"). With the exception of ATN, the consideration for these
acquisitions was paid primarily in the form of Common Stock and the assumption
of certain liabilities. The consideration for ATN was primarily in the form of
cash and the assumption of certain liabilities, financed principally through
working capital and borrowings under an expired revolving credit facility. In
addition to the acquisitions of businesses, the Company has made numerous
acquisitions of customer bases, including acquisitions of two significant
customer bases from Cherry Communications Incorporated ("Cherry Communications")
in September and November 1995. See "Business -- Acquisitions" and
"Business -- Legal Proceedings."
To date, all business combinations have been accounted for using the
purchase method except for Adval and Adnet which have been accounted for as
pooling of interests transactions. The Company's consolidated financial
statements for the years ended December 31, 1994 and 1993 and the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations for 1994 versus 1993 have been restated to reflect the inclusion of
the accounts and results of operations of Adval and Adnet in both of those
periods. Using the purchase method, the purchase price paid in excess of the
fair market value of the assets acquired is recorded as an intangible asset and
amortized generally over three years using the straight-line method. During the
second quarter of 1996, the Company wrote down certain acquired customer bases
and equipment and recorded a loss on impairment of assets of $18.8 million. A
total of $27.3 million of intangibles associated with acquisitions remained to
be amortized as of June 30, 1996. See Note 5 of the Notes to Consolidated
Financial Statements.
SUPPLIER RELATIONSHIPS
Midcom has entered into multiple-year contracts with AT&T, Sprint and
WorldCom and short-term contracts with a number of other suppliers for the long
distance telecommunication services provided to its customers. To obtain
favorable forward pricing from certain suppliers, the Company has committed to
purchase minimum volumes of a variety of long distance services during stated
32
<PAGE> 34
periods whether or not such volumes are used or, in one case, to pay a surcharge
equal to a percentage of the Company's shortfall from a specified quarterly
minimum volume. For 1995, these commitments and maximum surcharge totaled
approximately $74.1 million, and for the final six months of 1996 they total
approximately $53.2 million (including approximately $37.2 million attributable
to AT&T). Under the Company's agreements with other suppliers, if certain volume
levels are not achieved during stated periods, pricing is adjusted going forward
to levels justified by actual volumes. Historically, the Company has directed
its customers' traffic among its suppliers in order to meet its minimum volume
commitments. The allocation of traffic among the Company's various suppliers
could contribute to fluctuations in gross margin between periods. The Company
estimates that, as of the last measurement date on September 30, 1996, it would
have been in shortfall of its minimum commitments to AT&T by approximately $27.6
million. The Company's current usage rates with AT&T are continuing to fall
below its minimum commitment levels and such shortfalls are expected to continue
to grow under current contract terms. However, on July 19, 1996, the Company and
AT&T executed a letter of intent to settle this anticipated liability as well as
all other pending disputes between the Company and AT&T, and to negotiate a new
contract pursuant to which the Company's minimum commitment to AT&T will be
reduced to $17.0 million. The letter of intent also provides for the payment by
the Company to AT&T of $8.8 million in two installments and contemplates that
Midcom would obtain more favorable pricing for certain network services provided
by AT&T. The settlement and new rates will not be effective until the Company
and AT&T have negotiated and executed a mutually acceptable definitive
agreement, which the parties are currently pursuing. The Company believes that
the renegotiation of these agreements is an important element to the Company's
restructuring strategy and will increase the Company's flexibility in utilizing
those suppliers while lowering its costs. There can be no assurance, however,
that the Company will be successful in its efforts to renegotiate the terms of
these agreements or that the Company will be able to obtain relief from minimum
contractual commitments in the future. If existing or future shortfalls are not
eliminated, the Company may be required to make substantial payments without
associated revenue from customers or the supplier may terminate service and
commence formal action against the Company. Such payments are not presently
contemplated in the Company's capital budgets and would have a material adverse
effect on the Company's business, financial condition and results of operation.
See "Business -- Switching Facilities," "Business -- Suppliers" and Note 14 of
the Notes to Consolidated Financial Statements.
ATTRITION
Midcom's revenue is affected by customer attrition, a problem inherent in
the long distance industry. The attrition experienced by the Company is
attributable to a variety of factors, including the Company's termination of
customers for non-payment and the marketing and sales initiatives of the
Company's competitors such as, among other things, national advertising
campaigns, telemarketing programs and the use of cash or other forms of
incentives. In particular, the Company commonly experiences high initial
customer attrition from acquired customer bases as these customers are
transitioned to the Company's services and systems. The Company believes that
this attrition occurs as a result of difficulties encountered in transitioning
acquired customer bases to the Company's services and systems, a process which
often prompts customers to consider competitive alternatives in the
telecommunications marketplace. Also, where the Company has not acquired the
sales channel associated with an acquired customer base, there is often a period
of increased exposure to competitors as the Company's sales force establishes a
relationship with its new customers. Moreover, one of the Company's selling
points in the past has been the ability to accommodate its customers who express
a preference for a particular underlying long distance carrier, such as AT&T. In
connection with the establishment of its own network of switching facilities,
the Company no longer plans to accommodate such customer preferences. The
Company expects that, as a result, certain of its existing customers will
discontinue or reduce their purchases from the Company following implementation
of its network of switching facilities. This is expected to contribute to
anticipated declines in revenue and could also impair the Company's ability to
compete
33
<PAGE> 35
for customers. See "Business -- Competition" and "Business -- Acquisitions." The
Company is aware of the significant impact attrition has on its business.
However, because of numerous acquisitions and lack of historical data concerning
its acquired customer bases, the Company has found it difficult to measure
customer attrition in a consistently meaningful manner. As a consequence, the
Company has not formulated a statistical basis for measuring or reporting
customer attrition.
MATERIAL WEAKNESSES
In connection with the audit of Midcom's 1995 Consolidated Financial
Statements, Midcom's independent auditors identified two conditions which were
characterized as material weaknesses in its internal financial controls. One
material weakness identified by the auditors was the failure of the Company's
accounting and finance systems to provide accurate information to monitor the
Company's financial position, results of operations and liquidity. Factors
identified as contributing to this weakness and requiring immediate attention
included insufficient staffing and systems to accommodate significant growth
from acquisitions, transitional difficulties associated with major new
information and billing systems, inadequate communication between senior
management and the finance department and demands associated with the Company's
initial public offering. The second material weakness identified by the auditors
was the Company's process of estimating unbilled receivables. With respect to
this material weakness, the auditors recommended that the Company review and
revise, as necessary, all policies and procedures with regard to its
reconciliation of unbilled receivables with actual billings to ensure that all
unbilled amounts at a reporting date represent properly recorded revenue. In
response to these recommendations, the Company has hired new finance and
accounting personnel, curtailed acquisitions and established a policy of billing
substantially all customer call traffic in a financial reporting period before
revenue for the period is reported. See "Business -- Information Systems."
RESTATEMENT OF RESULTS FOR THE THIRD QUARTER OF 1995
Midcom announced on March 4, 1996 that it would issue restated financial
statements for the third quarter and nine months ended September 30, 1995 that
would lower previously announced results. The restatement was primarily
attributable to an overrecognition of revenue and unbilled accounts receivable
which occurred during the conversion to a new billing system. In the process of
reconciling unbilled accounts as of December 31, 1995 with amounts ultimately
billed, the Company discovered that certain reports generated by its new
information management system that were used for recognizing unbilled revenue
did not fully reflect all discounts that were properly included in the bills
subsequently sent to the Company's customers. Primarily as a result of this
failure, the Company's Quarterly Report on Form 10-Q for the third quarter of
1995 was amended to report a $3.3 million reduction in revenue and a $4.5
million reduction in accounts receivable, consisting of a $3.8 million reduction
in unbilled accounts receivable and a $0.7 million increase in the allowance for
doubtful accounts. The amended 10-Q also reflects a reclassification of $1.2
million of customer adjustments to revenue to bad debt expense (included in
selling, general and administrative expenses on the statement of operations).
These adjustments resulted in the net loss for the quarter and nine months ended
September 30, 1995 being increased from $3.8 million and $8.0 million,
respectively, to $8.3 million and $12.5 million, respectively.
SEASONALITY
Due to its predominately commercial customer base, Midcom tends to
experience decreases in customer usage and revenue around national holidays and
traditional vacation periods. The Company anticipates revenue from existing
customers during the last two quarters of the year to be somewhat lower than
during the first two quarters. Historically, however, results have been affected
more significantly by acquisitions of customer bases and growth through
wholesale, direct and other sales channels than by seasonal factors.
34
<PAGE> 36
RESULTS OF OPERATIONS
PERCENTAGE OF REVENUE
The following table sets forth, for the periods indicated, the percentages
that certain items bear, except as noted, to total revenue:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue
Telecommunication Services.................... 89.4% 94.6% 99.1% 98.9% 99.3 %
Aggregation................................... 10.6 5.4 0.9 1.1 0.7
---- ---- ---- ---- ----
Total revenue......................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue
Telecommunication Services(1)................. 76.8 74.8 69.2 67.0 72.0
Aggregation................................... 0.0 0.0 0.0 0.0 0.0
---- ---- ---- ---- ----
Total cost of revenue................. 68.7 70.8 68.5 67.0 72.0
Gross margin.................................... 31.3 29.2 31.5 33.0 28.0
Selling, general and administrative expenses.... 27.5 24.8 30.5 28.2 34.4
Depreciation and amortization................... 2.8 3.7 6.8 5.1 20.4
Loss on impairment of assets, restructuring
charge and settlement of contract dispute..... -- -- 5.8 -- 31.8
---- ---- ---- ---- ----
Operating income (loss)....................... 1.0 0.7 (11.6) (0.3) (58.6)
Interest expense................................ (2.1) (2.6) (2.6) (3.4) (4.1)
Other income (expense).......................... 0.3 (0.8) (0.2) (0.4) (0.3)
---- ---- ---- ---- ----
Loss before extraordinary item.................. (0.8) (2.7) (14.4) (4.1) (63.0)
Extraordinary item.............................. -- -- (2.0) -- --
Net loss........................................ (0.8)% (2.7)% (16.4)% (4.1)% (63.0)%
==== ==== ==== ==== ====
Supplemental Operating Data:
EBITDA(2)....................................... 3.8% 4.4% 1.0% 4.7% (6.4%)
</TABLE>
- ---------------
(1) Cost of telecommunications services is stated as a percentage of
telecommunication services revenue.
(2) As used herein, "EBITDA" is defined as operating income plus depreciation,
amortization, loss on impairment of assets, restructuring charge and
settlement of contract dispute.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Revenue. For the first six months of 1996, the Company reported a 3.6%
decrease in revenue to $93.9 million from the $97.4 million reported for the
same period in 1995. The decrease is primarily attributable to customer
attrition principally with respect to the Company's acquired customer bases.
The Company expects that, during the remainder of 1996 and the first
quarter of 1997, revenue will continue to decline due to customer attrition,
seasonality and other factors. Due to its predominantly commercial customer
base, the Company tends to experience decreases in customer usage and revenue
around national holidays and traditional vacation periods. The Company
anticipates revenue from existing customers during the last two quarters of the
year to be lower than during the first two quarters. Historically, however,
results have been affected more significantly by acquisitions of customer bases
and growth through wholesale, direct and other sales channels than by seasonal
factors.
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<PAGE> 37
Gross Margin. The Company's cost of revenue consists of the cost of
services provided by local and interexchange carriers. Gross margin was 28.0% as
a percent of total revenue for the first six months of 1996 versus 33.0% for the
same period in 1995. The decline in gross margin is attributable to several
factors, including an increase in wholesale revenue as a percentage of total
revenue, which carry a lower gross margin percentage, and a decrease in revenue
per minute as a result of changes in the mix of customers. These factors were
offset, in part, by negotiation of price reductions with some of the Company's
suppliers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of payroll and related expenses for
administrative, customer support and marketing personnel, compensation costs for
direct sales personnel, commissions and other costs related to indirect
distribution and bad debt expense. Selling, general and administrative expenses
increased 17.6% in the six month period ended June 30, 1996 as compared to the
corresponding period in 1995. Selling, general and administrative expenses
increased as a percentage of revenue in the first six months of 1996 as well.
The increase in spending was due to several factors, including an increase in
bad debt expense, an increase in legal, accounting and other professional fees
and an increase in fees paid to third party billing agents. These increases were
offset, in part, by reductions in commission expenses, marketing expenses and
facilities related costs. The Company employed 356 and 445 persons on a fulltime
basis as of June 30, 1996 and 1995, respectively.
Depreciation. Depreciation expense increased to $2.7 million in the first
six months of 1996 versus $1.9 million in the first six months of 1995. The
increase is primarily attributable to the depreciation of computer systems and
equipment related to the Company's billing and management information system
which was placed into service in the second quarter of 1995. The increase was
partially offset by the reduction in depreciation of telephone switching
equipment due to the write-off of such equipment in the fourth quarter of 1995.
Amortization. Amortization expense increased as a percentage of revenue to
17.6% in the first six months of 1996 versus 3.0% for the same period of 1995.
In conjunction with the preparation of the first quarter financial statements,
the Company completed a review of its accounting policies and practices,
including those relating to intangible assets. Based on certain changes in
circumstances that occurred in the first quarter, including turnover in
personnel, reduction in sales force and continuing attrition of acquired
customer bases, the Company determined that effective January 1, 1996, a
reduction in the estimated useful life of acquired customer bases from 5 years
to 3 years was appropriate. The increase in amortization expense is a result of
the change in the estimated useful life and amortization of customer bases,
non-competition agreements and goodwill resulting from acquisitions completed in
the second half of 1995.
Charge Related to Anticipated Settlement of Contract Dispute. On July 19,
1996, the Company and AT&T executed a letter of intent to settle anticipated
shortfalls of minimum commitments under the Company's supply contract with AT&T
as well as all other pending disputes between the Company and AT&T and to
negotiate a new contract pursuant to which the Company's minimum commitment to
AT&T will be reduced from approximately $117 million to $17 million. The letter
of intent also provides for the payment by the Company to AT&T of $8.8 million
in two installments. The Company has recorded a charge of $8.8 million in the
second quarter of 1996 with respect to this anticipated settlement. The
settlement and other terms of the letter of intent will not be effective until
the Company and AT&T have executed a mutually acceptable definitive agreement,
which the parties are currently pursuing. There can be no assurance that a
definitive agreement will be reached. See "-- Liquidity and Capital Resources."
Restructuring Charges. In March and April 1996, the Company made
announcements regarding changes in senior management and the restructuring of
its operations in order to reduce expenses to the level of available capital.
These actions included the layoff of certain employees and contractors and the
closure of six sales offices. As a result, the Company recorded a charge of $1.6
million during the first quarter of 1996 and $0.6 million during the second
quarter of 1996, the major
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<PAGE> 38
components of which relate to severance and lease cancellation charges. Included
in the restructuring charge is approximately $0.4 million relating to the
extension of the time period to exercise outstanding stock options. As of June
30, 1996, $1.2 million of this restructuring charge remained in accrued
liabilities to cover payments to be made in the future.
Loss on Impairment of Assets. The Company periodically reviews the
carrying value of its intangible assets in accordance with Statement of
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Based on certain changes in
circumstances that occurred in 1996, including turnover in personnel, reduction
in sales force and continuing attrition of acquired customer bases, the Company
determined that effective January 1, 1996, a reduction in the estimated useful
life of acquired customer bases from 5 years to 3 years was appropriate.
Additionally, to the extent that the estimated future cash inflows attributable
to the asset, less estimated future cash outflows, is less than the carrying
amount, an impairment loss is recognized. In connection with such a review, the
Company wrote down certain acquired customer bases and equipment and recorded a
loss on impairment of assets totaling $18.8 million during the second quarter of
1996.
Other Expenses. Interest expense increased during the first six months of
1996 as compared to the first six months of 1995 primarily due to an increase in
average borrowings outstanding, an increase in average interest rates, and $1.1
million in fees paid in connection with the Bridge Loan. The Company
discontinued recording its share of the income or losses of the Russian joint
venture as of December 31, 1995 as the investment was written down as of that
date to its estimated current value of $2.0 million.
Income Taxes. The Company has incurred losses for all periods presented.
No tax benefit has been recorded with respect to these losses due to the
uncertainty as to the utilization of Company's net operating loss carryforward.
Net Loss. The substantial increase in net loss during the first six months
of 1996 as compared to the first six months of 1995 is attributable to the
declines in gross margin, the increases in operating expenses, the $18.8 million
loss on impairment of assets related to certain acquired customer bases and
equipment, the restructuring charges and anticipated settlement payments
described above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue. Total revenue in 1995 increased 82.2% to $203.6 million from
$111.7 million in 1994. The increase is primarily attributable to incremental
telecommunications services revenue resulting from acquisitions and, to a lesser
extent, new sales through the Company's combined sales channels, offset by the
impact of attrition. Increased revenue also was partially offset by a 70.6%
decrease in aggregation fee revenue compared to 1994. The decline in aggregation
fees is due to the attrition of aggregation customers and the Company's efforts
to convert aggregation customers to other Midcom products. See "-- Liquidity and
Capital Resources."
Gross Margin. Cost of revenue grew 76.5% in 1995, primarily as a result of
the increase in revenue as discussed above. The gross margin percentage for 1995
increased to 31.5% versus 29.2% in 1994. Telecommunications services gross
margin increased to 30.8% in 1995, up from 25.2% in 1994. The higher gross
margin in 1995 is attributable to several factors, including (i) acquisitions of
customer bases whose mix of customers generally result in higher average revenue
per minute and acquisitions of higher margin businesses, such as PacNet, (ii)
negotiation of price reductions with some of the Company's suppliers as a result
of increased traffic volume and (iii) an increase in traffic over the Company's
own switches, all of which were acquired or placed in service on or after
September 30, 1994. These factors were partially offset by an increase in
wholesale revenue as a percentage of total revenue, which carries a lower gross
margin percentage, a decline in aggregation fee revenue as a percentage of total
revenue, which has no cost of
37
<PAGE> 39
revenue, and the write-off of calls which were not billed during the conversion
to the Company's new billing system.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased as a percentage of total revenue from 24.8% in
1994 to 30.5% in 1995. The increase was due to several factors, including a
substantial increase in bad debt expense and other adjustments given to
customers largely attributable to delays in billing which occurred during the
conversion to the new billing system, higher commission rates associated with a
telemarketing program for lower volume customers, the addition of personnel and
other costs incurred in connection with conversion to the Company's new
information processing systems and costs to open sales offices, some of which
were closed in the first quarter of 1996. Midcom also incurred additional
expenses during 1995 in connection with the maintenance of duplicate billing and
information systems, including those of acquired businesses, and to a lesser
extent, additional personnel costs. The Company employed 457 and 366 persons on
a full-time basis as of December 31, 1995 and 1994, respectively.
Depreciation and Amortization. Depreciation and amortization expense
increased as a percentage of revenue during 1995. This increase reflects the
amortization of customer bases and goodwill, the depreciation of telephone
switching equipment resulting from acquisitions in the second half of 1994 and
throughout 1995 and the depreciation and amortization of significant continued
capital investment in computer equipment and software development used to
support internal systems. The Company expects depreciation and amortization
expenses to continue to increase due to the effect of recent acquisitions and
the development and placement into service of management information systems.
Loss on Impairment of Assets. The loss on impairment of assets consists of
the following: (i) a $6.8 million write-down of the Company's interest in the
joint venture in Russia to reflect the estimated current value of this
investment (see "Business -- Russian Joint Venture"), (ii) a $2.5 million
write-off of the Company's current telephone switching equipment as a result of
its decision to migrate to a different switching platform (see
"Business -- Switching Facilities") and (iii) a $2.5 million partial write-down
of the Company's capitalized software for its management information system due
to weaknesses identified in the system (see "Business -- Information Systems").
Interest Expense. Interest expense increased 78.4% to $5.3 million in 1995
from $3.0 million in 1994 primarily due to the increase in average borrowings
outstanding in 1995. At December 31, 1995, the Company had outstanding
interest-bearing obligations of $58.1 million, up from $36.3 million outstanding
as of December 31, 1994. The increase in debt was due to the funding of
acquisitions and the development of management information systems and purchase
of related equipment.
Extraordinary Item. In July 1995, the Company completed an initial public
offering which resulted in net proceeds of $54.2 million to the Company. The
Company used the proceeds to pay down various obligations, including $15.0
million in principal amount of certain subordinated notes. As a result of the
early extinguishment of these notes, the Company expensed as an extraordinary
item in the third quarter of 1995 the unamortized portion of original issue
discount which aggregated approximately $3.0 million. In addition, in the fourth
quarter of 1995, the Company obtained a new credit facility and paid off its
prior revolving credit facility. As a result, the Company was required to
write-off as an extraordinary item during the fourth quarter unamortized
deferred financing costs associated with its prior credit facility totaling
approximately $1.1 million.
Other Expense/Equity in Loss of Joint Venture. Other expense consists
mainly of finance charges and other nonoperating expenses. The Company's portion
of the loss generated by its Russian joint venture, Dal Telecom, was $52,000 in
1995, down from $458,000 in 1994, due mainly to improved operating results of
the joint venture.
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<PAGE> 40
Income Taxes. The Company has incurred losses for all periods presented.
No tax benefit has been recorded with respect to these losses due to the
Company's net operating loss carryforward which totalled approximately $19.1
million as of December 31, 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenue. Total revenue in 1994 increased 69.2% to $111.7 million from
$66.0 million in 1993. This increase consisted primarily of a 78.9% increase in
revenue from telecommunications services, to $105.6 million from $59.0 million
in 1993, which was offset by a 12.7% decrease in revenue from aggregation fees.
The increase in telecommunications services revenue in 1994 is attributable to
increased sales from the Company's direct sales and field service
representatives and independent distributors, as well as revenue attributable to
acquired customer bases. In 1993 and early 1994, the Company significantly
increased the size of its sales force. Also, in late 1993 the Company increased
the number of its independent distributors, primarily through acquisitions. To a
lesser extent, 1994 revenue increased as a result of the expansion of the
Company's products and services and increased sales to resellers.
Gross Margin. The Company's gross margin declined in 1994 to 29.2% from
31.3% in 1993. The decline was largely attributable to the decrease in
aggregation fees, which has no cost of sales. Telecommunications services gross
margin increased from 23.2% in 1993 to 25.1% in 1994 in spite of declining
revenue per minute caused by increasingly competitive market conditions. The
revenue per minute decline also reflects the Company's increasing emphasis,
commencing in mid-1993, on term contracts (two or three years) which offered
lower rates in exchange for fixed-term commitments. Nevertheless, these factors
were offset by price reductions obtained from some of the Company's suppliers as
a result of the Company's increased volume of use. In addition, in the fourth
quarter of 1994 the Company commenced use of its own switches which also
benefited gross margin.
Selling, General and Administrative Expenses. From 1993 to 1994, the
Company's selling, general, and administrative expenses declined as a percentage
of revenue from 27.5% to 24.8%. The actual dollar increase was primarily a
result of growth, including growth through acquisitions. The 1994 increase is
also attributable to additional personnel and other costs incurred in connection
with the development and initial implementation of the Company's new information
processing systems and to operate and maintain switches. The percentage decline
in 1994 is also attributable to the fact that the Company did not pay any
consulting fees to shareholders, compared to shareholder consulting fees of
$1,025,000 paid in 1993 to Paul Pfleger, the Company's then sole shareholder. In
1993, Mr. Pfleger, as a director and the sole shareholder of the Company,
actively consulted with management of the Company by participating in major
decisions and regularly giving direction and guidance to the Company's senior
officers. The amount paid for these services was based primarily on the
Company's operating results. Midcom incurred additional expenses in 1994 due to
the cost of maintaining duplicate systems of acquired businesses pending full
integration of these acquisitions. The decline in selling, general and
administrative expenses as a percentage of revenue was attributable to improved
operating leverage. The Company employed 366 and 248 persons on a full-time
basis at the end of 1994 and 1993, respectively.
Depreciation and Amortization. From 1993 to 1994, depreciation and
amortization expense increased as a percentage of revenue from 2.8% to 3.7%.
This increase reflects the significant capital investment in internal systems
and the amortization of intangible assets associated with acquisitions.
Interest Expense. From 1993 to 1994, interest expense increased from $1.4
million to $3.0 million. This increase was primarily due to increased borrowings
and, to a lesser extent, an increase in overall interest rates. At December 31,
1993, the Company had outstanding interest-bearing obligations of approximately
$23.5 million, while at December 31, 1994, this amount had grown to
39
<PAGE> 41
$36.3 million. The increase in debt is primarily due to funding acquisitions and
the purchase of systems and equipment.
Other Expense. Other expense in 1994 is mainly composed of the Company's
portion of the loss of its Russian joint venture. The Company's pro rata share
of the loss generated by its joint venture in Russia in 1994 was $365,000.
Additionally, the Company recorded a $93,000 incremental loss for the difference
between the Company's investment and its 50% allocable share of Dal Telecom's
net assets.
Income Taxes. Through December 31, 1993, the Company was an S corporation
for income tax purposes. Accordingly, the Company's income (losses) were
reported by the shareholders rather than by the Company. Effective with the
change from an S corporation to a C corporation, the Company recorded a tax
provision of $207,000, which was subsequently reversed due to losses incurred
during 1994.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Midcom has experienced rapid growth, which has required
substantial working capital to finance receivables, capital expenditures and
acquisitions and service indebtedness. Given Midcom's billing and collection
cycle with its customers and suppliers, Midcom generally pays its underlying
suppliers approximately 30 to 45 days prior to the time it is paid by its
customers for the related services. The Company has financed its growth with the
proceeds from its July 1995 initial public offering, proceeds from the Private
Placement, bank borrowings, subordinated debt, vendor financing, loans from
shareholders, capital leases, cash flows from operations, and the issuance of
Common Stock and assumption of indebtedness in connection with acquisitions of
businesses and customer bases.
Net cash provided by (used in) operating activities was $3.4 million and
($0.2) million for the first six months of 1995 and 1996, respectively. During
the first six months of 1996, the Company experienced operating losses and
incurred interest expenses which resulted in a use of cash in operating
activities. The Company reduced its unbilled receivables balances from $28.0
million as of December 31, 1995 to $10.7 million as of June 30, 1996. This was
primarily attributable to a reduction in the backlog of billings which built up
during the second half of 1995 and a reduction in the run rate of monthly
revenue.
Net cash used in investing activities decreased during the first six months
of 1996 to $1.1 million from $8.2 million in the first six months of 1995.
During the first six months of 1996, the Company invested $1.1 million to
purchase property, plant and equipment compared to $5.2 million for the same
period the prior year. In 1995, the Company used $1.9 million in business and
customer base acquisitions and $1.1 million in advances to a joint venture. In
1996, no similar investments were made. For the first six months of 1996, the
Company received $2.3 million in proceeds in connection with the exercise of
stock options and the purchase of shares under the Company's stock purchase plan
compared to $25,000 received in the first six months of 1995.
The Company has experienced significant losses since its inception, with
net losses of approximately $3.0 million, $33.4 million and $59.2 million for
1994, 1995 and the six months ended June 30, 1996, respectively. As a result of
these losses, the billing and collection cycle with its customers, acquisition
strategy and other factors, the Company has required substantial external
working capital.
In addition to funds required for day-to-day operations, the Company's
principal working capital requirements include capital expenditures (including
those associated with the proposed installation of new switching facilities),
interest and principal payable under the Notes and the other contingencies and
obligations described below. The Notes will mature on August 15, 2003. Interest
on the Notes is payable semi-annually on February 15 and August 15 of each year,
commencing February 15, 1997, in the aggregate amount of $4,031,899.
40
<PAGE> 42
In connection with the resignation of Ashok Rao, the Company's former
President and Chief Executive Officer, the Company has elected to repurchase
885,360 shares of Common Stock held by Mr. Rao and certain trusts established by
Mr. Rao at a price equal to the fair market value of such Common Stock on the
date of Mr. Rao's resignation, as determined by arbitration, to be paid ratably
over a period of 36 months. See "Certain Transactions." The Company's election
to repurchase such shares of Common Stock will adversely affect the Company's
liquidity. In addition, the unpaid balance of a promissory note delivered to
Cherry Communications in connection with the acquisitions of two customer bases
is approximately $10.2 million, of which $9.0 million may be paid in cash or by
delivery of Common Stock, as the Company may elect, and the remaining $1.2
million is subject to certain hold-back arrangements. The acquired customer
bases have not generated required minimum revenue levels and Cherry
Communications has failed to remit to the Company collections received by Cherry
Communications from a portion of the acquired customers. Accordingly, the
Company has withheld the final three installment payments for the second of the
two acquisitions, payment of invoices for carrier services for the acquired
bases (up to $9.7 million through June 30, 1996) and accrued customer service
charges through June 30, 1996 of $720,000. Negotiations between Cherry
Communications and the Company failed to produce a settlement of these disputes
and Cherry Communications has filed suit against the Company seeking to recover
alleged past due amounts. See "Business -- Acquisitions" and "Business -- Legal
Proceedings." The Company is also obligated to pay up to $2.0 million additional
cash pursuant to a customer base purchase agreement upon attainment of specified
revenue levels by such customer base, and a payment of a maximum of $2.0 million
to the former shareholder of Cel-Tech in the event that the Company sells or
transfers a majority of Cel-Tech's voting stock.
As of June 30, 1996, Midcom's minimum volume commitment under its supply
contract with AT&T, its largest supply contract, was $117.0 million. The Company
estimates that, as of the last measurement date on September 30, 1996, it would
have been in shortfall of its minimum commitments to AT&T by approximately $27.6
million based on current contract requirements. However, on July 19, 1996 the
Company and AT&T executed a letter of intent to settle this anticipated
liability as well as all other pending disputes between the Company and AT&T,
and to negotiate a new contract pursuant to which the Company's minimum
commitment to AT&T will be $17.0 million. In addition, Midcom expects to obtain
more favorable pricing for certain network services provided by AT&T. Pursuant
to the same letter of intent, Midcom and AT&T have negotiated a payment schedule
for overdue payments which will bring the Company's obligations to AT&T current
by the middle of October 1996. The settlement and new rate structure will not be
effective until the Company and AT&T have executed a mutually acceptable
definitive agreement, which the parties are currently pursuing. Moreover, in
connection with the letter of intent, the AT&T tariff was amended to extend the
accrued shortfall penalty payment date to September 30, 1996 pending negotiation
and execution of a mutually acceptable definitive agreement. However, there can
be no assurance that the parties will reach a definitive agreement or that
further extensions of the accrued shortfall penalty payment date can be obtained
by the Company. In consideration for the terms of the settlement and new rate
structure, the letter of intent provides for the payment by the Company to AT&T
of $8.8 million in two installments. The first payment of $5.0 million will be
due upon the execution of a definitive agreement, and the remaining balance of
$3.8 million will be due within 30 days of Midcom announcing quarterly gross
revenue in excess of $75.0 million, or upon completion of a change in control.
The Company's available sources of working capital consist of cash flows
from operations; approximately $50.0 million at September 15, 1996 in cash and
short-term, investment grade, interest-bearing securities, which funds represent
the remaining net proceeds from the Private Placement, and expected available
borrowings under its Revolving Credit Facility. Prior to completion of the
Private Placement, the Company had for several months experienced a severe
working capital short-fall which required the Company to seek extended payment
terms from certain of its suppliers, delay payments to many of its suppliers and
other vendors, delay or cancel purchases and take other steps to conserve
operating capital. As a result, a number of suppliers placed the
41
<PAGE> 43
Company on credit hold and/or initiated collection actions. Also, for several
months prior to completion the Private Placement, the Company was in default of
certain financial and other covenants under its Revolving Credit Facility,
although the lenders continued to permit borrowings under that facility. The
existence of defaults under the Revolving Credit Facility also constituted
defaults under certain of the Company's equipment lease facilities having
outstanding balances of approximately $3.7 million at June 30, 1996. As a result
of these defaults, Revolving Loans and capitalized lease obligations under these
equipment lease facilities have been classified as short-term obligations on the
Company's balance sheet at June 30, 1996. In addition, the report of the
Company's independent auditors with respect to the Company's Consolidated
Financial Statements for the year ended December 31, 1995 states that the
Company's recurring operating losses, working capital deficiency and credit
agreement defaults raise substantial doubt about the Company's ability to
continue as a going concern. The nature of this opinion itself constituted a
default under the Revolving Credit Facility. In connection with the completion
of the Private Placement and the application of the net proceeds therefrom to
the repayment in full of all obligations outstanding under the Revolving Credit
Facility, which aggregated approximately $34.0 million, the lenders under the
Revolving Credit Facility waived all existing defaults and amended the financial
covenants under the Revolving Credit Facility to be consistent with Midcom's
revised business plan. The Company's maximum borrowing availability under the
Revolving Credit Facility, as amended, is $43.0 million, subject to a borrowing
base equal to 85% of the Company's eligible accounts receivable less a minimum
excess availability requirement of $20.0 million for the months of August 1996
through February 1997, declining in stages to $8.0 million for the months of
September through November 1997. As of August 31, 1996, after giving effect to
the amendment, the Company had a borrowing base of approximately $21.0 million
and a maximum borrowing availability, net of the minimum excess availability
requirement, of approximately $1.0 million. These amounts will fluctuate from
day to day based on the timing of cash collections and payments. See
"Description of Certain Indebtedness."
The Company expects that it will require between $40.0 million and $50.0
million during 1996 and 1997 in order to fund (i) operating losses, (ii) working
capital requirements and (iii) capital expenditures, including an estimated
$22.0 million to acquire and install high capacity switches. The Company expects
that the remaining proceeds of the Private Placement, together with funds
available under the Revolving Credit Facility and cash flows from operations,
will be sufficient to fund these requirements during 1996 and 1997. However, the
exact amount and timing of these capital requirements will be determined by
numerous factors, including the level of, and gross margin on, future sales, the
outcome of outstanding contingencies and disputes such as pending lawsuits and
payment terms obtained from the Company's suppliers and the timing of capital
expenditures. Although the Company's current plans assume that the Company will
be able to replace or extend the Revolving Credit Facility after its expiration
in November 1997, there can be no assurance that the Revolving Credit Facility
will continue to be available to the Company. Further, there can be no assurance
that the net proceeds of the Private Placement together with funds available
under the Revolving Credit Facility and cash flows from operations will be
sufficient to fully implement the Company's new operating strategy or meet its
other capital requirements. If (i) the Company experiences greater than
anticipated capital requirements, (ii) it is determined to be liable for, or
otherwise agrees to settle or compromise, any material claim against it, (iii)
it is unable to make future borrowings under the Revolving Credit Facility for
any reason or (iv) the implementation of the Company's new operating strategy
fails to produce the anticipated cash flows from operations, the Company may be
required to refinance all or a portion of its existing debt, sell assets or
obtain additional equity or debt financing. There can be no assurance that any
such refinancing or asset sales would be possible or that the Company will be
able to obtain additional equity or debt financing, if and when needed, on terms
that the Company finds acceptable. Any additional equity or debt financing may
involve substantial dilution to the interests of the Company's shareholders as
well as the holders of the Notes. The failure of the Company to complete one or
more of such alternatives or otherwise obtain sufficient funds to satisfy its
cash requirements could prevent the
42
<PAGE> 44
Company from implementing its operating strategy and, ultimately, could force
the Company to seek protection under the federal bankruptcy laws. Such events
would materially and adversely affect the value of the Company's debt and equity
securities. See "Risk Factors -- Ability to Continue as a Going Concern;
Defaults Under Credit Facility; Need for Additional Working Capital."
ADOPTION OF ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation." This pronouncement
establishes accounting and reporting standards for stock-based employee
compensation plans, including stock purchase plans, stock options and stock
appreciation rights. This standard defines a fair value based method of
accounting for these equity instruments. This method measures compensation cost
based on the value of the award and recognizes that cost over the service
period. Companies may elect to adopt this standard or to continue accounting for
these types of equity instruments under current guidance, APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Companies which elect to continue
using the rules of APB Opinion No. 25 must make pro forma disclosures of net
income and earnings per share as if this new statement had been applied.
Effective January 1, 1996, the Company adopted Statement 123 and elected to
continue following the guidance of APB Opinion No. 25.
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was issued
in March 1995, requires impairment losses to be recorded on certain longlived
assets used in operations or expected to be disposed of. The Company adopted
Statement 121 in the fourth quarter of 1995.
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BUSINESS
INDUSTRY BACKGROUND
The existing domestic long distance telecommunications industry was
principally shaped by a 1984 court decree (the "Decree") that required the
divesture by AT&T of its 22 Bell operating companies ("BOCs"), organized the
BOCs under seven regional Bell operating companies ("RBOCs") and divided the
country into some 200 Local Access Transport Areas or "LATAs." The incumbent
local exchange carriers ("ILECs"), which include the seven RBOCs as well as
independent local exchange carriers, were given the right to provide local
telephone service, local access service to long distance carriers and intra-LATA
long distance service (long distance service within LATAs), but the RBOCs were
prohibited from providing inter-LATA service (service between LATAs). The right
to provide inter-LATA service was given to AT&T and the other interexchange
carriers ("IXCs"). Conversely, IXCs were prohibited from providing local
telephone service.
A typical inter-LATA long distance telephone call begins with the local
exchange carrier ("LEC") transmitting the call by means of its local network to
a point of connection with an IXC. The IXC, through its switching and
transmission network, transmits the call to the LEC serving the area where the
recipient of the call is located, and the receiving LEC then completes the call
over its local facilities. For each long distance call, the originating LEC
charges an access fee. The IXC also charges a fee for its transmission of the
call, a portion of which consists of a terminating fee which is passed on to the
LEC which delivers the call. To encourage the development of competition in the
long distance market, the Decree required LECs to provide all IXCs with access
to local exchange services "equal in type, quality and price" to that provided
to AT&T. These so-called "equal access" and related provisions were intended to
prevent preferential treatment of AT&T and to level the access charges that the
LECs could charge IXCs, regardless of their volume of traffic. As a result of
the Decree, customers of all long distance companies were eventually allowed to
initiate their calls by utilizing simple "1 plus" dialing, rather than having to
dial longer access or identification numbers and codes.
The Telecommunications Act is expected to significantly alter the
telecommunications industry. The Decree has been lifted and all restrictions and
obligations associated with the Decree have been eliminated by the new
legislation. The seven RBOCs are now permitted to provide long distance service
originating (or in the case of "800" service, terminating) outside their local
service areas or offered in conjunction with other ancillary services, including
wireless services. Following application to the FCC, and upon a finding by the
FCC that an RBOC faces facilities-based competition and has satisfied a
congressionally-mandated "competitive checklist" of interconnection and access
obligations, an RBOC will be permitted to provide long distance service within
its local service area, although in so doing, it will be subject to a variety of
structural and nonstructural safeguards intended to minimize abuse of its market
power in these local service areas. Having opened the interexchange market to
RBOC entry, the Telecommunications Act also removes all legal barriers to
competitive entry by interexchange and other carriers into the local
telecommunications market and directs RBOCs to allow competing
telecommunications service providers such as the Company to interconnect their
facilities with the local exchange network, to acquire network components on an
unbundled basis and to resell local telecommunications services. Moreover, the
Telecommunications Act prevents IXCs that serve greater than five percent of
presubscribed access lines in the U.S. (which includes the nation's three
largest long distance providers) from jointly marketing their local and long
distance services until the RBOCs have been permitted to enter the long distance
market or for three years, whichever is sooner. This gives all other long
distance providers such as the Company a competitive advantage over the larger
long distance providers in the newly-opened local telecommunications market. As
a result of the Telecommunications Act, long distance carriers such as the
Company will face significant new competition in the long distance
telecommunications market, but will also be afforded significant new business
opportunities in the local telecommunications market. See "-- Competition" and
"-- Regulation."
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Legislative, judicial and technological factors have helped to create the
foundation for smaller long distance providers to emerge as legitimate
alternatives to AT&T, MCI and Sprint for long distance telecommunication
services. The FCC has required that all IXCs allow the resale of their services,
and the Decree substantially eliminated different access arrangements as
distinguishing features among long distance carriers. In recent years, national
and regional network providers have substantially upgraded the quality and
capacity of their domestic long distance networks, resulting in significant
excess transmission capacity for voice and data communications. The Company
believes that, as a result of digital fiber optic technology, excess capacity
has been, and will continue to be, an important factor in long distance
telecommunications. As a consequence, not only have smaller long distance
service providers received legal protection to compete with the network-based
carriers, they also represent a source of traffic to carriers with excess
capacity.
THE COMPANY
Midcom provides long distance voice and data telecommunications services.
As primarily a nonfacilities-based reseller, Midcom principally utilizes the
network switching and transport facilities of Tier I long distance carriers,
such as AT&T, Sprint and WorldCom, to provide a broad array of integrated long
distance telecommunications services on a seamless and highly reliable basis.
Midcom's service offerings include basic "1 plus" and "800" long distance, frame
relay data transmission and wireless services, as well as enhanced
telecommunications services such as dedicated private lines between customer
locations, facsimile broadcast services, calling cards and conference calling.
Midcom focuses on serving small to medium-sized businesses. The Company
estimates that during the second quarter of 1996 it invoiced approximately
125,000 customer locations, a significant majority of which were located in the
major metropolitan areas of California, Florida, Illinois, New York, Ohio and
Washington. The Company believes that the larger long distance carriers, such as
AT&T, Sprint, WorldCom and MCI, tend to focus their sales and customer support
efforts on residential and large commercial customers and do not routinely
provide significant pricing discounts for small to medium-sized businesses. By
purchasing large usage volumes from the facilities-based carriers at wholesale
prices, Midcom seeks to offer its customers more favorable pricing than they
could obtain from such carriers directly. In addition, the Company believes that
businesses in this market segment do not typically have in-house
telecommunications expertise and therefore require more assistance with the
assessment and management of their telecommunications requirements. As a result,
the Company believes that it is able to differentiate its service offerings from
the larger carriers in this market segment on the basis of price, breadth of
service offerings, customer service and support and the ability to provide
customized solutions to the telecommunications requirements of its customers.
See "-- Marketing and Sales," "-- Competition" and "-- Customer Concentrations."
COMPANY STRATEGY
During the second and third quarters of 1996, Midcom recruited a new
executive management team with extensive experience and expertise in the
telecommunications industry. In May 1996, the Company hired William H. Oberlin
as its President and Chief Executive Officer, appointed Mr. Oberlin, Marvin C.
Moses and John M. Zrno to its Board of Directors and engaged Mr. Moses and Mr.
Zrno as consultants. These individuals formerly held senior management positions
at ALC Communications Corporation ("ALC"), a leading provider of long distance
and other services to small and medium-sized businesses. During their tenure at
ALC, ALC completed a successful turn-around and experienced profitable growth.
From the fiscal year ended December 31, 1991 through the 12 months ended June
30, 1995 (prior to ALC's merger into Frontier Corporation), ALC's revenue
increased from $346.9 million to $677.1 million and net income increased from
$5.3 million to $75.0 million. In addition, in July 1996 the Company appointed
Daniel M. Dennis to the Company's
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Board of Directors. Mr. Dennis has served in a number of management positions
with MCI for over 23 years.
Midcom's new executive management team has developed a restructuring,
network and marketing strategy which it plans to implement during 1996 and 1997
and which is designed to address the operational challenges experienced by the
Company and increase internally generated sales and profitability. Principal
components of the Company's strategy are set forth below. Although the Company
believes that its new management team has the relevant skills and experience
necessary to implement this strategy, its ability to do so is subject to a
number of risks and uncertainties, and there can be no assurance that this
strategy will be successfully implemented or that the intended positive results
will be achieved. See "Risk Factors."
OPERATIONAL RESTRUCTURING STRATEGY
Continue to Build Management Team. Midcom will continue to seek
opportunities to augment management with individuals who have telecommunications
industry experience and expertise. From May to September 1996, the Company
appointed 10 individuals to key operational management positions. These
individuals have extensive experience in the operation of a telecommunications
company, including (i) network design, implementation and operation, (ii)
marketing and sales, (iii) management information systems and (iv) bill
processing and collection. Midcom believes that the experience and depth of this
management team will improve the Company's ability to address its current
operational challenges and to pursue its transition from primarily a
nonfacilities-based reseller of long distance and other telecommunications
services to a switch-based provider of integrated telecommunications services.
Integrate and Improve Information Systems. Midcom intends to focus on
consolidating and integrating the Company's multiple information and billing
systems and other redundant functions of certain acquired operations and
enlarging and enhancing the Company's information system and financial reporting
functions. The Company believes that these activities will (i) reduce the
overhead and maintenance costs associated with its management information
systems, (ii) improve the amount and type of information that can be accessed
about customers, sales and operations, (iii) increase the speed with which
information can be processed and (iv) reduce the Company's working capital
investment by shortening the time it takes for the Company to produce and
distribute customer bills. See "-- Information Systems."
Renegotiate Carrier Agreements. The Company currently resells network
switching and transport facilities of long distance carriers such as AT&T,
Sprint and WorldCom. Midcom believes its relationships with these carriers
enables it to provide customers a broad array of integrated long distance
telecommunications services on a seamless and highly reliable basis. Despite the
Company's successful resale of these network facilities, the Company's
profitability has been reduced as a result of a supply contract with AT&T which
provides for higher rates than those obtained from alternative suppliers.
However, the Company and AT&T have entered into a letter of intent contemplating
substantial modifications to this contract which will provide for more favorable
rates in the future. The Company believes the successful renegotiation of its
supply agreement with AT&T will substantially improve the financial performance
of the Company while enabling the Company to continue to provide the same level
of service to its customers. See "-- Suppliers."
NETWORK STRATEGY
At the end of July 1996, Midcom owned and operated limited capacity
switches in nine locations. The Company intends to use a portion of the proceeds
of the Private Placement to acquire and install state-of-the-art high capacity
switches, with local and long distance functionality, in areas of the country
where it has a sufficient volume of long distance traffic and where the
regulatory environment and market conditions will permit it to provide local
service at acceptable margins. The Company believes that, in the cities where it
intends to deploy switches, there will be significant local
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circuit capacity at attractive rates available from competitive local exchange
carriers ("CLECs"), ILECs and 38GHz wireless providers. Using its own switches
will enable the Company to (i) direct customer call traffic over multiple
networks which is expected to minimize costs and improve gross margin, (ii)
switch local traffic, thereby increasing the economic viability of entering the
market for local telecommunication services, (iii) shield proprietary
information regarding its customers from the underlying carriers and thereby
increase customer control, (iv) facilitate access to call data records and (v)
implement differentiating features and billing enhancements without involving
the underlying carrier. See "-- Switching Facilities."
MARKETING STRATEGY
Reorganize and Expand Sales Efforts. To take full advantage of its planned
switching facilities network and expanded product offerings, Midcom is in the
process of reorganizing its direct sales force into (i) a special accounts group
consisting of highly experienced sales personnel focused on larger customers
with sophisticated telecommunications requirements and (ii) a general accounts
group focused on smaller customers. Both groups will be located in major
metropolitan areas where the Company believes it has significant market
opportunities and can compete effectively on the basis of price. The Company
intends to implement training programs and financial incentives designed to
increase the cross-selling efforts of its direct sales force and further
integrate the Company's broad array of service offerings. In addition to
reorganizing its sales efforts, the Company intends to increase the number of
sales representatives during 1996 and 1997 from approximately 35 at the end of
July 1996 to approximately 200. The Company will continue to supplement its
direct sales force with its existing network of resellers and distributors. In
addition to its existing distributors, the Company intends to develop a new tier
of distributors who will be offered long-term financial incentives and who will
be required, within selected territories, to market and sell the Company's
service offerings exclusively. The Company believes that these long-term
financial incentives and exclusive marketing arrangements will result in
improved performance and increased loyalty to the Company and its service
offerings. See "-- Marketing and Sales."
Expand and Enhance Customer Support Efforts. Midcom intends to support its
expanded sales efforts and reduce customer attrition by building an enhanced
customer service and support operation. The Company intends to increase its
customer service and support staff during 1996 and 1997 from approximately 45 at
the end of July 1996 to approximately 60. This expanded operation will include
(i) a staff of trained customer service representatives available during normal
business hours at a number of integrated customer service centers, (ii) trained
account representatives assigned and dedicated to individual customers with
sophisticated telecommunications requirements and (iii) teams of technical
specialists available to develop customized solutions for a customer's
telecommunication needs. See "-- Customer Service."
Resell Local Services and Provide a Single-Source Solution. Regulatory
changes resulting from the Telecommunications Act significantly expand the
number and types of services Midcom is permitted to offer. As a result, Midcom
intends to offer its customers local dial tone and a variety of other local
telecommunications services primarily in locations where it has a significant
sales and marketing presence or where it plans to deploy switching facilities.
The Company believes that its large and geographically concentrated customer
base of small to medium-sized businesses represents a significant potential
market for these additional services. These additional services will afford the
Company the opportunity to provide its customers with a single-source solution
for local, long distance, wireless and enhanced telecommunications services. The
Company believes that bundling these services will provide substantial
advantages to its customers, including lower overall costs and a higher level of
service due to a single source for ordering, installation, customer service and
account management. In addition, Midcom believes that offering a single source
for telecommunications services will permit the Company to (i) leverage its
significant customer base and increase sales by increasing its share of the
telecommunications expenditures of its customers and
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(ii) improve customer control and retention by strengthening its relationships
with its customers. See "-- Industry Background," "-- Regulation" and
"-- Competition."
MARKETING AND SALES
Midcom markets its services nationwide through three distinct channels:
direct sales, independent distributors and, on a wholesale basis, other
resellers.
Direct Sales. Midcom believes that direct sales activities are more
effective than advertising for securing and maintaining the business of small to
medium-sized commercial customers. The Company believes that the face-to-face
customer contact afforded by its direct sales activities results in increased
customer loyalty, improves cross-selling opportunities and will ultimately have
a positive effect on revenue. Accordingly, direct sales activities comprise a
substantial portion of the Company's marketing and sales resources. To optimize
the Company's selling efforts, the Company intends to increase the number of
sales representatives during 1996 and 1997 from approximately 35 at the end of
July 1996 to approximately 200 and reorganize the direct sales force into the
following two groups:
Special Accounts. The special accounts group will consist of highly
experienced sales personnel and will concentrate sales efforts on
businesses with sophisticated telecommunications requirements. Target
customers for special accounts generally include those which require
dedicated access to the Company's long distance points of presence and a
high level of customer service and support. In particular, the Company
expects that these customers will increasingly require support for data
communication applications. Dedicated account representatives will be
assigned to each of these customers. In addition, these customers will be
supported by technical specialist teams trained to provide customized
solutions to their telecommunications problems.
General Accounts. The general accounts group will concentrate sales
efforts on businesses with less sophisticated telecommunications
requirements. Typically, these customers do not require dedicated access to
the Company's long distance point of presence and utilize only basic "1
plus" and "800" long distance and cellular service and calling cards.
Moreover, although the Company will provide these customers access to its
customer service and support centers, it generally will not assign to them
a dedicated account representative.
Each of these groups will consist of approximately 50% of the Company's sales
force and will be geographically focused, concentrating on major metropolitan
areas where the Company has customer concentrations sufficient to support a
sales and marketing presence. Currently, the Company's direct sales force is
located in Charlotte, Chicago, Columbus, Indianapolis, Los Angeles, New Haven,
New York and Seattle. In addition to these locations, the Company plans to
deploy its direct sales force in Atlanta, Boston, Cleveland, Dallas, Detroit,
San Francisco and other cities during 1996 and 1997.
In 1995 and the first half of 1996, Midcom experienced a high level of
turnover in its direct sales force which has had a negative impact on internally
generated sales. The Company believes this turnover is attributable to, among
other things, the intense competition for, and the mobility of, qualified sales
personnel endemic to the reseller segment of the telecommunications industry,
coupled with difficulties experienced with the Company's information systems and
changes in senior sales management. The Company intends to restructure the
commission arrangements and other financial incentives offered to its direct
sales force in order to increase the incentive of its direct sales force to
cross-sell the Company's telecommunications offerings and bundle high margin
services with lower margin services thereby improving the Company's sales levels
and gross margins. The Company believes that appropriate financial incentives,
along with the recent additions to the Company's management team and
improvements to the Company's information systems, will result in decreased
turnover in its direct sales force. However, there can be no assurance that
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turnover in the Company's direct sales force will be reduced or that any of
these other objectives will be achieved.
Distributors. Midcom supplements its direct sales efforts by marketing
through independent distributors located throughout the country. The Company
enters into distributor agreements with, but is otherwise not affiliated with,
its distributors. The Company's existing distributor agreements generally grant
a non-exclusive right to solicit customers, require the distributor to maintain
a minimum quota and provide for commissions on business generated by the
distributor for the Company. The distributor network in existence in mid-1996
was not organized according to geographical area or service offerings.
Distributors maintain sales offices and sales staff at their own expense.
However, customers provided by distributors belong to the Company, are billed
directly by the Company or one of its billing agents and are in most instances
supported by the Company's customer service centers.
Midcom believes that distributors may have substantial telemarketing
programs, marketing resources and access to a large base of potential customers.
Accordingly, a key component of the Company's business strategy is to maintain
its existing distributors and to develop a new tier of distributors. During 1996
and 1997, the Company expects to engage approximately 30 new distributors,
primarily in cities where it currently does not have any significant marketing
presence. To improve performance and increase loyalty to the Company and its
service offerings, the new distributors will be offered long-term financial
incentives and will be required, within selected territories, to market and sell
the Company's service offerings exclusively. By making use of territorial
limitations, the Company intends to direct the marketing and sales efforts of
these new distributors in secondary cities which are outside the focus of the
Company's direct sales efforts. The Company expects these cities to include
Akron, Baltimore, Columbus, Denver, Houston, Kansas City, Memphis, Miami,
Milwaukee, Minneapolis, Nashville, New Orleans, Orlando, Philadelphia, Phoenix,
Pittsburgh, Portland, Raleigh, Salt Lake City, San Diego, St. Louis and
metropolitan areas of New Jersey and Connecticut.
Wholesale to Other Resellers. At the end of July 1996, Midcom offered
telecommunications services on a wholesale basis to approximately 20 small
resellers of long distance services. The Company does not have direct
relationships with the end users of the services purchased by its resellers.
Those customers are not billed by the Company and are not supported by the
Company's customer service centers. Although gross margins on sales to resellers
are generally lower than the Company's average, sales through this channel
enable the Company to (i) enter markets with minimal cost or risk where small
resellers have already built strong direct customer relationships, (ii) increase
the volume of services purchased by the Company from facilities-based carriers,
thereby obtaining higher volume discounts from those carriers, and (iii) spread
the costs of acquiring, installing and integrating the Company's switching
facilities over a larger revenue base.
CUSTOMER SERVICE
Midcom strives to provide superior customer service and believes that
personal contact with potential and existing customers is a significant factor
in customer acquisition and retention. The Company's goal is to have frequent
contact with prospects and customers both through its direct sales
representatives as well as its customer service representatives.
At the end of July 1996, Midcom's customer service and support staff
consisted of approximately 45 employees located at one of the Company's six
customer service centers. To support the planned expansion of Midcom's sales
efforts, Midcom intends to add approximately 15 customer service representatives
to its customer support staff during 1996 and 1997 and reorganize its customer
service and support efforts. This reorganization will involve consolidating and
integrating Midcom's service centers so that each is capable of supporting all
of Midcom's service offerings. Moreover, the Company's customer service
department will be organized into two groups, each with its own management and
reporting structure. One group will consist of customer service represent-
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atives who will primarily respond to customer calls. The other group will
consist of account representatives who will be dedicated to the Company's
special accounts customers and will take proactive measures to pursue
opportunities to cross-sell the Company's various service offerings to such
customers and address their telecommunications needs before they arise. The
account representatives will also coordinate customer access to teams of
technical specialists trained to provide customized solutions to the customer's
telecommunications problems. To ensure that customer service representatives and
account representatives have the knowledge required to support the Company's
broad range of service offerings, Midcom intends to allocate a portion of its
customer service resources to training programs for its customer service staff.
In addition, Midcom intends to establish a small group of customer service and
technical specialists who are available exclusively to the direct sales
representatives, customer service representatives, account representatives and
distributors. The Company believes that these changes will improve the level of
customer service and support provided to its customers.
PRODUCTS AND SERVICES
At the end of July 1996, Midcom, primarily through contractual arrangements
with facilities based carriers, offered small to medium-sized businesses a wide
variety of telecommunications services including basic "1 plus" and "800" long
distance, frame relay data transmission, enhanced and other value-added services
and wireless communications services. The Company also plans to provide local
telecommunications services in the newly opened local telecommunications market,
and to develop new products and services. Each of these services is discussed
below.
Long Distance. Historically, substantially all of Midcom's revenue
has been generated by basic "1 plus" and "800" long distance services.
Midcom believes it has been successful as a provider of these basic
services because of the volume discounts it has been able to negotiate with
underlying carriers and its ability to direct customer call traffic over
the transmission networks of more than one carrier. As the Company expands
its network of switching facilities, it will increasingly have the ability
to choose among the transmission networks of different carriers to take
advantage of the most favorable rates to different destinations at
different times of the day.
Data Transmission. Through its wholly-owned subsidiary, PacNet,
Midcom offers data transmission services using its own frame relay switches
and a digital microwave and fiber optic transmission network connecting
over 40 cities in the Western United States. PacNet is a member of the
UNI-SPAN(R) consortium of frame relay data network providers. Members of
the UNI-SPAN(R) consortium are permitted to contract for access to frame
relay networks of other members at favorable rates. In addition to cost
savings, the consortium enables the Company to provide end-to-end
connectivity to its customers on a nationwide basis.
Private Line Services. Midcom provides data transmission service on
private line facilities on a point-to-point basis. This enables high volume
users to send and receive voice and data transmissions between locations on
a highly reliable and cost effective basis.
Enhanced and Other Services. Midcom offers a variety of enhanced and
other value-added services, including the following:
- Fax Broadcast and Fax Mailbox. Through its wholly owned subsidiary,
Adval, Midcom offers facsimile-related services that allow a user to
send a facsimile to many destinations simultaneously (Fax Broadcast)
and to store and retrieve facsimiles in a manner similar to electronic
mail (Fax Mailbox).
- Travel Cards. Midcom's travel cards offer low-cost long distance
service through various flat-rate pricing or per-call fees.
- Conference Calling. Midcom offers a full-featured teleconferencing
service that allows for connection of multiple locations
simultaneously.
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- Custom Billing. Midcom provides many of its direct-billed customers
billing and management reports with a level of detail and features
that the major carriers generally provide only to their higher volume
customers. In addition, the Company's customers can choose to have one
centralized bill sent each month to their principal place of business
or individual bills sent to branch offices, with a master copy sent to
the principal place of business. The Company believes that its
value-added billing capability enables its customers to manage their
telecommunications costs more effectively, helps differentiate the
Company's services from services offered by the larger long distance
carriers and will continue to be an important factor in its ability to
successfully compete in its targeted market.
Wireless Services. At the end of July 1996, Midcom offered wireless
services in the Pacific Northwest through Cel-Tech, its wholly-owned
subsidiary. Outside the Pacific Northwest, there is a proliferation of
wireless opportunities that the Company intends to aggressively pursue in
order to provide wireless services in the other regions it serves. However,
the Company is not currently pursuing any specific wireless opportunity.
Local Service. Midcom is evaluating opportunities created by the
Telecommunications Act to offer local telecommunications services either on
a resale basis or over its proposed network of switching facilities. Prior
to offering the resale of local services to its customers, the Company must
complete a number of operational, market and regulatory tasks, including
the negotiation of interconnect agreements with local circuit providers,
the development of a billing, installation and customer service capability
and the creation of a marketing, pricing and sales strategy. Despite these
logistical challenges, the Company believes that introducing local services
will enable the Company to leverage its extensive customer base by
increasing the number of service offerings available to its customers. The
Company intends to offer local services in large cities where it has (i)
deployed high capacity switches, (ii) a significant customer concentration
and (iii) a sales and customer support presence. The Company believes that
targeting larger cities for local service will be advantageous due to the
availability of multiple local circuit capacity alternatives to the ILECs
and more favorable and less time consuming interconnection negotiations
with the ILECs.
New Services. Midcom intends to increase its efforts to develop new
telecommunications services based on evolving technologies and changing
industry standards. There can be no assurance, however, that the Company
will have the ability or resources to develop such new services, that new
technologies required for such services will be available to the Company on
favorable terms or that such services and technologies will enjoy market
acceptance.
Midcom markets its products under a number of registered and common law
service marks, including Infinity(R), Logicall(R), Simplicity(TM), ADNET(TM),
Cel-Tech(TM), Adval(TM), Midcom(R) and MIDCOM(R), as well as various registered
logos.
SWITCHING FACILITIES
A key element of the Company's new operating strategy is to deploy a
national switching network. The Company believes that successful implementation
of its strategy to increase switching capacity will improve its ability to
direct customer call traffic among networks owned by other long distance
carriers in order to take advantage of the most favorable rates to different
destinations at different times of the day. This is expected to minimize costs
and have a positive impact on gross margin. In addition, deployment of switches
is expected to enable the Company to (i) switch local traffic, thereby
increasing the economic viability of entering the market for local
telecommunications services, (ii) shield proprietary information regarding its
customers from the underlying carriers, thereby increasing customer control,
(iii) facilitate access to call data records and (iv) implement differentiating
features and billing enhancements without involving the underlying carrier.
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High Capacity Switches. The Company intends to acquire and install
state-of-the-art high capacity switches, with local and long distance
functionality, in areas of the country where it has a sufficient volume of long
distance traffic and where the regulatory environment and market conditions will
permit it to provide local service at acceptable margins. The Company believes
that, in the cities where it intends to deploy switches, there will be
significant local circuit capacity at attractive rates available from CLECs,
ILECs and 38GHz wireless providers. The Company currently anticipates acquiring
five to seven switches which it presently plans to install in Atlanta, Chicago,
Dallas, Los Angeles, New York and Seattle. The Company estimates that it will
take at least until the third quarter of 1997 to purchase, install and fully
integrate these switches, at a cost of approximately $2 million to $3 million
per switch. The Company anticipates employing at least three on-site technicians
at each switch location to provide switch service and support. In addition, the
Company is exploring the possibility of establishing a remote service center
staffed with approximately four technicians capable of monitoring and providing
limited service and support for each of its switches 24 hours a day, seven days
a week. The Company estimates that it will take at least four to five months to
establish a remote service center, at a cost of approximately $275,000 to
$300,000. There can be no assurance, however, that these switches will be
acquired, installed or fully operational, or that a remote service center will
be installed and operational, within anticipated deadlines and budgets, or that
the Company will not encounter technical, operational or other problems in the
installation or operation of this sophisticated switching and monitoring
equipment.
US ONE Relationship. Pending implementation of its strategy to acquire,
install and integrate a national network of high capacity switches and to
supplement its network of existing limited capacity switches, the Company will
continue to explore alternatives to contracting with its long distance providers
for origination and termination of traffic. In this regard, the Company has
signed a non-binding letter of intent with US ONE Communications Corporation
("US ONE") whereby the Company would gain access to a nationwide network of high
capacity switches. US ONE has placed orders for a number of switches, several of
which it expects to install in stages by the end of the fourth quarter of 1996.
Under the terms of this letter of intent, US ONE would provide Midcom with both
long distance origination and local dial tone service. For a number of reasons,
the Company believes that this arrangement would not be as desirable to the
Company as acquiring and installing its own switching capacity. However, the
Company believes that this arrangement has many advantages over utilization of
switching capacity owned by the major carriers, including (i) significant
savings on the cost of switched access, (ii) additional switching capacity in
smaller cities with lower population densities, (iii) local origination and
termination of calls in certain cities and (iv) increased customer control by
renting switching capacity from a non-competitor. There can be no assurance,
however, that a final agreement will be reached with US ONE or that US ONE will
acquire or install its network of switches according to the expected schedule.
Frame Relay Data Switches. In addition to voice switches, PacNet, a
wholly-owned subsidiary of the Company, currently offers data transmission
services using its own frame relay switches and a digital microwave and fiber
optic transmission network connecting over 40 cities in the Western United
States. PacNet is a member of the UNI-SPAN(R)consortium of frame relay data
network providers. Members of the UNI-SPAN(R) consortium are permitted to
contract for access to frame relay networks of other members at favorable rates.
In addition to cost savings, the consortium enables the Company to provide
end-to-end connectivity to its customers on a nationwide basis.
Limited Capacity Switches. At the end of July 1996, the Company owned and
operated limited capacity switches in nine locations, most of which were
acquired through acquisitions of other telecommunications service providers. As
a result of limitations inherent in these switches, the Company plans to replace
them with state-of-the-art, high capacity switches. The Company is currently
exploring the possibility of utilizing its existing switching equipment to
complement the planned deployment of high capacity switching facilities;
however, there can be no assurance that this will be feasible and, accordingly,
the Company's financial results for 1995 include a $2.5 million write-off of its
existing limited capacity switching equipment.
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ACQUISITIONS
Midcom experienced rapid growth through the end of 1995. A significant
portion of this growth, particularly in 1995, was attributable to acquisitions
of customer bases and other telecommunications service providers. These
acquisitions were intended to (i) enhance Midcom's sales force capability, (ii)
broaden its service offerings, and (iii) increase its customer base and revenue.
The following table provides a chronology of significant acquisitions completed
by the Company during 1994 and 1995:
<TABLE>
<CAPTION>
BUSINESS DATE ACQUIRED INTENDED STRATEGIC VALUE
- -------------------------------------- --------------- -------------------------------------
<S> <C> <C>
American Telephone Network, Inc. September 1994 Switches; customer base
PacNet, Inc. December 1994 Private line and frame relay network;
customer base
Communique Telecommunications, Inc. January 1995 Switches; customer base; billing and
collection agreements
Cel-Tech International Corp. September 1995 Cellular and paging service reseller
Adval, Inc. September 1995 Enhanced facsimile and related
services
ADNET Telemanagement, Inc. December 1995 Direct sales force
</TABLE>
The Company's acquisitions resulted in revenue growth and increased
customer concentrations in certain metropolitan areas which, in turn, increased
the Company's ability to control transmission routing for customers in those
areas in order to lower costs and improve gross margin. However, these
acquisitions have placed significant demands on management resources and have
disrupted the Company's normal business operations. For a number of reasons, the
Company is still in the process of consolidating and integrating the sales and
marketing, customer support, billing and other functions of certain acquired
operations. Pending such integration, the Company has maintained a number of
billing systems and other functions of certain acquired operations, which has
caused inefficiencies, additional operational complexity and expense and greater
risk of billing delays and financial reporting difficulties. Failure to
consolidate and integrate certain acquired operations has impaired the Company's
ability to cross-sell the various products and services offered by those
acquired operations. In addition, the Company commonly experiences high initial
customer attrition from acquired customer bases. The Company believes this
occurs as a result of difficulties encountered in transitioning acquired
customer bases to the Company's services and systems, a process which often
prompts customers to consider competitive alternatives in the telecommunications
marketplace. Also, where the Company has not acquired the sales channel
associated with an acquired customer base, there has often been a period of
enhanced exposure to competitors as the Company's sales force becomes familiar
with its newly acquired customers and establishes relationships with the
appropriate customer contacts. In addition to problems associated with
integration, consolidation and customer attrition, certain of the Company's
acquisitions have resulted in disputes between the Company and the sellers of
the acquired operations. See "-- Legal Proceedings."
The Company's current strategy is to generate growth primarily through
internal sales and marketing efforts, rather than through the acquisition of
customer bases or other telecommunication service providers. Although growth
through acquisitions is no longer central to the Company's growth strategy, the
Company will consider, on a selective basis, acquisitions which the Company
believes will contribute to its infrastructure, create synergies or which
otherwise have strategic value to the Company. There can be no assurance that
there will not be adverse consequences to the Company from its past or future
acquisitions. Further, there can be no assurance that the Company will be able
to identify attractive acquisition candidates in the future, that acquisitions
pursued by the Company will be completed, or that, if completed, such
acquisitions will be beneficial to the Company. The Company has no current
understanding, arrangement or agreement to make any
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acquisitions. Further, at the date of this Prospectus, limitations imposed by
the terms of the Revolving Credit Facility, limitations of internal systems and
other factors restrict the Company's ability to make acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
INFORMATION SYSTEMS
Telecommunication service providers generally must record and process
massive amounts of data quickly and accurately in order to bill customers in a
timely manner, verify billings from third party carriers, service customer
accounts, respond to customer inquiries and otherwise support operations. These
tasks require sophisticated, high capacity and reliable management information
and billing systems.
In late 1993, Midcom began the development of a proprietary information
system, referred to as "Keystone," designed to integrate its customer
information system, billing system and financial reporting system. The billing
module used in Keystone was designed to replace the Company's existing billing
system. The Company began using the Keystone billing module for a portion of its
customers in February 1995. Due to difficulties encountered during the
implementation of Keystone and required modifications to Midcom's customer data
base, which delayed full implementation of the Keystone billing module, the
Company continued to bill most of its customers under its prior billing system
until late April 1995. At that time, the Company completed the conversion to the
Keystone billing module.
The Company estimates that in 1995 the number of call data records
processed by the Company grew from approximately 20 million to as many as 35
million per month, each of which had to be identified with the appropriate
customer for proper billing. This growth was attributable in large part to
customers of acquired businesses and customer bases. Difficulties encountered
during the implementation of Keystone were compounded by this rapid growth and
contributed to operational difficulties. Partly as a result of these operational
difficulties, the Company is still in the process of consolidating and
integrating the sales and marketing, customer support, billing and other
functions of certain acquired operations. Pending such integration, the Company
has maintained a number of billing systems and other functions of certain
acquired operations. In addition, the Company contracts with several ILECs and
billing agencies which prepare bills for and collect accounts receivable from a
substantial number of the Company's customers. These factors have caused
operational inefficiencies, added complexity and expense to the billing and
financial reporting process and have increased the risk of billing delays and
financial reporting difficulties.
During the second, third and fourth quarters of 1995, difficulties in
implementing the new billing system caused an increased number of calls to be
billed later than expected by the Company. As a result, the Company's accounts
receivable increased at a faster rate than the increase in revenue. Delays in
billings also contributed to a significant increase in customer invoice
adjustments and bad debt expense in the fourth quarter of 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition, in the process of reconciling unbilled accounts as of
December 31, 1995 with amounts ultimately billed, the Company discovered that
certain reports generated by its new information management system for
recognizing unbilled revenue for the third quarter of 1995 failed to fully
reflect all discounts that were properly included in the bills subsequently sent
to the Company's customers. Primarily as a result of this failure, reported
revenue was overstated for the third quarter of 1995 and the Company's Quarterly
Report on Form 10-Q for that period had to be amended to restate reported
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Restatement of Results for the Third Quarter of 1995."
In connection with the audit of Midcom's 1995 Consolidated Financial
Statements, Midcom's independent auditors identified two conditions which were
characterized as material weaknesses in its internal financial controls. See
"Management's Discussion and Analysis of Financial Condition
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<PAGE> 56
and Results of Operations -- Material Weaknesses." In response to the
recommendations of the Company's auditors, the Company has hired additional
finance and accounting personnel, curtailed acquisitions and established the
policy of billing substantially all customer call traffic in a financial
reporting period before revenue for the period is reported, thereby eliminating
the need to estimate any material portion of revenue. In addition, as part of
the Company's operational restructuring, the Company intends to increase the
number of information systems personnel from approximately 18 full-time
employees and 7 independent contractors at the end of August 1996 to
approximately 35 full-time employees, make necessary improvements to its
management information system and focus on consolidating and integrating the
Company's multiple billing systems and other redundant functions of certain
acquired operations.
Although Midcom has experienced difficulties in the implementation of its
management information system, it is now able to provide many of its
direct-billed customers billing and management reports with a level of detail
and features that the major carriers generally provide only to their higher
volume users. The Company is currently able to collect numerous multiple call
data items for each phone call placed by a customer, including customer name,
call origination point, call destination point, billing code, minutes, date,
time and rate code. From this data, the Company can organize the customer's
monthly phone calls into a wide variety of report formats. These reports can
include: (i) state/international codes, (ii) date and hour distributions, (iii)
type of service ("1 plus", "800", etc.), (iv) frequently called numbers, area
codes, cities or states, (v) calling card summaries, (vi) graphic presentation
of data and (vii) color-coded long distance calling activity maps. In addition,
the Company's customers can choose to have one centralized bill sent each month
to their principal place of business or individual bills sent to branch offices,
with a master copy sent to the principal place of business. The Company believes
that its value-added billing capability enables its customers to manage their
telecommunications costs more effectively, helps differentiate the Company's
services from services offered by the larger long distance carriers and will
continue to be an important factor in its ability to successfully compete in its
targeted market.
In light of the volume of financial data to be processed, the reliance upon
timely receipt of call data records from suppliers, the anticipated rate of
growth of the Company, the demands on key financial personnel, turnover in key
finance and accounting positions, the challenges associated with the integration
of acquired businesses and other factors, there can be no assurance that the
Company will not encounter additional billing delays, other internal control
weaknesses or other difficulties in future financial reporting.
SUPPLIERS
Midcom purchases from facilities-based carriers the long-distance
telecommunications services that it provides to its customers. The Company has
entered into multiple-year supply contracts with AT&T, Sprint and WorldCom for
long distance telecommunication services. In addition to its contracts with its
major suppliers, the Company has entered or otherwise acquired short-term
contracts with other suppliers, including Frontier Corporation, Ameritech
Operating Companies, Pacific Bell, U.S. West, NYNEX, BellSouth, Bell Atlantic,
Southwestern Bell, GTE Telephone Operating Companies, LCI International Telecom
Corp., Cherry Communications and MCI. In 1994, 1995 and through the six months
ended June 30, 1996, approximately 97%, 67% and 62%, respectively, of Midcom's
revenue was attributable to traffic carried by AT&T, Sprint and WorldCom,
collectively, and for those periods no carrier was responsible for carrying
traffic representing more than 46%, 31% and 29%, respectively, of the Company's
revenue.
To obtain favorable forward pricing from certain of its suppliers, the
Company has committed to purchase minimum volumes of a variety of long distance
services during stated periods whether or not such volumes are used or, in one
case, to pay a surcharge equal to a percentage of the Company's shortfall from a
specified quarterly minimum volume. For 1995, these commitments and maximum
surcharge totaled approximately $74.1 million, and for the final six months of
1996, they total approximately $53.2 million (including approximately $37.2
million attributable to AT&T). As of
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June 30, 1996, Midcom's minimum volume commitment under its supply contract with
AT&T, its largest supply contract, was $117.0 million. The Company estimates
that, as of the last measurement date on September 30, 1996, it would have been
in shortfall of its minimum commitments to AT&T by approximately $27.6 million
based on current contract requirements. However, on July 19, 1996 the Company
and AT&T executed a letter of intent to settle this anticipated liability as
well as all other pending disputes between the Company and AT&T, and to
negotiate a new contract pursuant to which the Company's minimum commitment to
AT&T will be $17.0 million. In addition, Midcom will obtain more favorable
pricing for certain network services provided by AT&T. Pursuant to the same
letter of intent, Midcom and AT&T have negotiated a payment schedule for overdue
payments which will bring the Company's obligations to AT&T current by the
middle of October 1996. The settlement and new rate structure will not be
effective until the Company and AT&T have executed a mutually acceptable
definitive agreement, which the parties are currently pursuing. Moreover, in
connection with the letter of intent, the AT&T tariff was amended to extend the
accrued shortfall penalty payment date to September 30, 1996 pending negotiation
and execution of a mutually acceptable definitive agreement. However, there can
be no assurance that the parties will reach a definitive agreement or that
further extensions of the accrued shortfall penalty payment date can be obtained
by the Company. In consideration for the terms of the settlement and new rate
structure, the letter of intent provides for the payment by the Company to AT&T
of $8.8 million in two installments. The first payment of $5.0 million will be
due upon the execution of a definitive agreement, and the remaining balance of
$3.8 million will be due within 30 days of Midcom announcing quarterly gross
revenue in excess of $75.0 million, or upon completion of a change in control.
Another major supplier has agreed to forebear from exercising its rights to
shortfalls incurred through April 30, 1996 which would otherwise have required
the Company to pay a surcharge and caused pricing from this supplier to
increase. This supplier has indicated that it will work with Midcom to restate
applicable minimums so that their attainment is more realistic. There can be no
assurance that the above-described negotiations will be concluded in a manner
favorable to the Company or that the Company will be able to obtain relief from
its minimum contractual commitments in the future. If existing or future
shortfalls are not eliminated, the Company may be required to make substantial
payments without associated revenue from customers or the supplier may terminate
service and commence formal action against the Company. Such payments are not
presently contemplated in the Company's capital budgets and would have a
material adverse effect on the Company's business, financial condition and
results of operation.
Because of Midcom's commitments to purchase fixed volumes of use from
certain of its suppliers at predetermined rates, the Company could be adversely
affected if a supplier were to lower the rates it makes available to the
Company's target market without a corresponding reduction in the Company's
rates. Similarly, the Company could be adversely affected if its suppliers
failed to adjust its overall pricing, including prices to the Company, in
response to price reductions of other major carriers. See Note 14 of the Notes
to Consolidated Financial Statements.
Each month, Midcom receives invoices from its suppliers. In those areas in
which the Company directs call traffic through its own switches, it receives
bills directly from the ILECs for access charges. Due to the multitude of
billing rates and discounts which suppliers must apply to calls completed by the
Company's customers, and due to routine logistical issues such as the addition
or termination of customers, the Company regularly has disagreements with its
suppliers concerning the sums invoiced for its customers' traffic. Since 1994,
the Company has been paying its suppliers according to its own calculation of
amounts owed as recorded on computer tapes provided by its suppliers. The
Company's computations of amounts owed are frequently less than the amount shown
on the suppliers' invoices. Accordingly, the suppliers may consider the Company
to be in arrears in its payments until the amount in dispute is resolved.
Although these disputes have generally been resolved on terms favorable to the
Company, there can be no assurance that this will continue to be the case. In
accordance with generally accepted accounting principles, the Company records as
an expense amounts in dispute that correspond to the aggregate amount that the
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Company believes it will be required to pay and adjusts that amount as the
underlying disputes are resolved.
Midcom, like all other long distance providers, is dependent upon local
exchange carriers for call origination (carrying the call from the customer's
location to the long distance network of the IXC selected to carry the call) and
termination (carrying the call off the IXC's network to the call's destination).
FCC policy currently requires all common carriers, including IXCs, to make their
services available for resale and to refrain from imposing unreasonable
restrictions on such resale. The Telecommunications Act further requires all
ILECs both to offer their services for resale at wholesale rates and to allow
access to unbundled network elements at cost-based rates. ILECs are also
required by the Telecommunications Act to provide all IXCs, including the
Company, with equal access for the origination and termination of long distance
calls. If any of these requirements were eliminated, the adverse impact on the
Company could be substantial. Access charges represent a substantial portion of
the Company's current cost of service. The FCC, however, has indicated that it
will initiate in the near future a comprehensive review of its access charge
structure, evaluating the embedded costs and subsidies that produce current
access charge levels. The FCC has also proposed to levy on IXCs a new per-call
payphone usage fee for all toll-free and access code calls originated from pay
telephones. The level at which the FCC sets access charges, universal service
contributions and payphone use fees could have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover,
implementation of a new access charge structure and repricing of local transport
could place many IXCs, including the Company, at a significant cost disadvantage
relative to larger competitors. See "-- Regulation."
COMPETITION
The long distance telecommunications industry is highly competitive. Midcom
believes that the principal competitive factors in this industry include
pricing, customer service, network quality, value-added services and the
flexibility to adapt to changing market conditions. Several of the Company's
current and potential competitors have substantially greater financial,
technical, marketing and other resources than the Company, and there can be no
assurance that the Company will remain competitive in this environment. The
Company's ability to compete may also be impaired by its leveraged capital
structure and limited capital resources.
The long distance telecommunications industry is significantly influenced
by the marketing and pricing activities of the major industry participants,
including AT&T, MCI, Sprint and WorldCom. While the Company believes that AT&T,
MCI and Sprint historically have chosen not to concentrate their direct sales
efforts on small to medium-sized businesses, these carriers control
approximately 85% of that market. Moreover, AT&T, MCI and Sprint have recently
introduced new service and pricing options that are attractive to smaller
commercial users, and there can be no assurance that they will not market to
these customers more aggressively in the future. AT&T and, as an interim
measure, the structurally separate interexchange affiliates of the RBOCs have
recently been reclassified as non-dominant carriers and, accordingly, have the
same flexibility as the Company in meeting competition by modifying rates and
service offerings without pricing constraints or extended waiting periods. These
reclassifications may make it more difficult for the Company to compete for long
distance customers. See "-- Regulation." In addition, a significant number of
large regional long distance carriers and new entrants in the industry compete
directly with the Company by concentrating their marketing and direct sales
efforts on small to medium-sized commercial users. Activities by competitors
including, among other things, national advertising campaigns, telemarketing
programs and the use of cash or other forms of incentives, contribute to
significant customer attrition in the long distance industry.
The Company contracts for call transmission over networks operated by
suppliers who may also be the Company's competitors. Both the IXCs and LECs
providing transmission services for the Company have access to information
concerning the Company's customers for which they provide the actual call
transmission. Because these IXCs and LECs are potential competitors of the
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Company, they could use information about the Company's customers, such as their
calling volume and patterns of use, to their advantage in attempts to gain such
customers' business. The Telecommunications Act has strengthened the rules which
govern the privacy of customer proprietary information by expressly prohibiting
telecommunications carriers which receive proprietary information from resale
carriers for purposes of providing telecommunications services to those resale
carriers from using such information for their own marketing purposes. In
addition, the Company's future success will depend, in part, on its ability to
continue to buy transmission services and access from these carriers at a
significant discount below the rates these carriers otherwise make available to
the Company's targeted customers.
Regulatory trends have had, and may have in the future, a significant
impact on competition in the telecommunications industry. See "-- Regulation."
As a result of the recently enacted Telecommunications Act, the RBOCs are now
permitted to provide, and are providing or have announced their intention to
provide, long distance service originating (or in the case of "800" service,
terminating) outside their local service areas or offered in conjunction with
other ancillary services, including wireless services. Following application to
and upon a finding by the FCC that an RBOC faces facilities-based competition
and has satisfied a congressionally-mandated "competitive checklist" of
interconnection and access obligations, an RBOC will also be permitted to
provide long distance service within its local service area. The entry of these
well-capitalized and well-known entities into the long distance service market
could significantly alter the competitive environment in which the Company
operates.
The Telecommunications Act also removes all legal barriers to competitive
entry into the local telecommunications market and directs ILECs to allow
competing telecommunications service providers such as the Company to
interconnect their facilities with the local exchange network, to acquire
network components on an unbundled basis and to resell local telecommunications
services. Moreover, the Telecommunications Act seeks to facilitate the
development of local telecommunications competition by requiring ILECs, among
other things, to allow end users to retain their telephone numbers when changing
service providers and to place short-haul toll calls without dialing lengthy
access codes. In response to these regulatory changes, MCI and AT&T have each
announced its intention to enter the local telecommunication market, including
MCI's announcement that it will invest more than $2.0 billion in fiber optic
rings and local switching equipment in major metropolitan markets throughout the
United States, and AT&T's announcement that it filed applications in all 50
states to provide local telecommunications services.
While the Telecommunications Act opens new markets to the Company, the
nature and value of the resultant business opportunities will be dependent in
large part upon subsequent regulatory interpretation of the statute's
requirements. The FCC has recently promulgated rules implementing the local
competition provisions of the Telecommunications Act; each state must now
individually adopt regulations applying the new national guidelines. The Company
anticipates that ILECs will actively resist competitive entry into the local
telecommunications market and will seek to undermine the operations and the
service offerings of competitive providers, leaving carriers such as the Company
which are dependent on ILECs for network services vulnerable to anti-competitive
abuses. No assurance can be given that the local competition provisions of the
Telecommunications Act will be implemented and enforced by federal and state
regulators in a manner which will permit the Company to successfully compete in
the local telecommunications market or that subsequent legislative and/or
judicial actions will not adversely impact the Company's ability to do so.
Moreover, federal and state regulators are likely to provide ILECs with
increased pricing flexibility for their services as competition in the local
market increases. If ILECs are allowed by regulators to lower their rates
substantially, engage in excessive volume and term discount pricing practices
for their customers, charge excessive fees for network interconnection or access
to unbundled network elements, or decline to make services available for resale
at wholesale rates, the ability of the Company to compete in the provision of
local service could be materially and adversely affected.
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The Company believes it competes favorably in its targeted market segment,
principally due to its economies of scale, personalized service and enhanced
billing and reporting. The Company also believes that its success will
increasingly depend on its ability to offer on a timely basis new services based
on evolving technologies and industry standards. However, there can be no
assurance that new technologies or services will be made available to the
Company on favorable terms.
TELECOMMUNICATIONS ACT
On February 8, 1996, Congress enacted the Telecommunications Act, which
effected a sweeping overhaul of the Communications Act of 1934 (the
"Communications Act"). In particular, the Telecommunications Act substantially
amends Title II of the Communications Act, which governs telecommunications
common carriers. The Telecommunications Act was intended by Congress to open
telephone exchange service markets to full competition, to promote competitive
development of new service offerings, to expand public availability of
telecommunications services and to streamline regulation of the industry. The
Telecommunications Act makes all state and local barriers to competition
unlawful, prohibits state and local governments from enforcing any law, rule or
legal requirement that prohibits or has the effect of prohibiting any person
from providing interstate or intrastate telecommunications services and directs
the FCC to conduct rulemaking proceedings on local competition and other related
matters.
Implementation of the provisions of the Telecommunications Act will be the
task of the FCC, the state public utility commissions and a joint federal-state
board. Much of the implementation of the Telecommunications Act must be
completed in numerous rulemaking proceedings with short statutory deadlines.
These proceedings are expected to address issues and proposals already before
the FCC in pending rulemaking proceedings affecting the long distance industry
as well as additional areas of telecommunications regulation not previously
addressed by the FCC and the states. States retain jurisdiction under the
Telecommunications Act to adopt laws necessary to preserve universal service,
protect public safety and welfare, ensure the continued quality of
telecommunications services and safeguard the rights of consumers.
Some specific provisions of the Telecommunications Act which are expected
to affect long distance service providers are summarized below:
Expanded Interconnection Obligations. The Telecommunications Act
establishes a general duty of all telecommunications carriers to interconnect
with other carriers, directly or indirectly. The Telecommunications Act also
contains a detailed list of requirements with respect to the interconnection
obligations of LECs. These interconnection obligations include resale, number
portability, dialing parity, access to rights-of-way and reciprocal
compensation.
ILECs have additional obligations including: to negotiate in good faith; to
provide for network interconnection at any technically feasible point on terms
that are reasonable and non-discriminatory; to provide non-discriminatory access
to facilities, equipment, features, functions and capabilities on an unbundled
basis; to offer for resale at wholesale rates any service that ILECs provide on
a retail basis; and to provide actual co-location of equipment necessary for
interconnection or access.
The Telecommunications Act establishes a framework for state commissions to
mediate and arbitrate negotiations between ILECs and carriers requesting
interconnection, services or network elements. The Telecommunications Act
establishes deadlines, policy guidelines for state commission decision making
and federal preemption in the event a state commission fails to act. While the
FCC has recently promulgated rules implementing these provisions of the
Telecommunications Act, the impact of these rules on the Company cannot be
determined at this time.
Provision of Interexchange Services. The Telecommunications Act eliminates
the previous prohibition on RBOC provision of interexchange services originating
(or in the case of "800" service, terminating) outside their local service areas
and all interexchange services associated with
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the provision of most commercial mobile wireless services, including services
originating within their local service areas.
In addition, the Telecommunications Act allows RBOCs to provide landline
interexchange services in the states in which they provide landline local
exchange service; provided, however, that before engaging in landline long
distance services in a state in which it provides landline local exchange
service, an RBOC must (i) provide access and interconnection to one or more
unaffiliated competing facilities-based providers of telephone exchange service,
unless after 10 months after enactment of the Telecommunications Act no such
competing provider has requested such access and interconnection more than three
months before the RBOC has applied for authority and (ii) demonstrate to the FCC
its satisfaction of the Telecommunications Act's "competitive checklist."
The specific interconnection requirements contained in the "competitive
checklist," which the RBOCs must offer on a non-discriminatory basis, include
network interconnection and unbundled access to network elements, including
local loops, switching and transport; access to poles, ducts, conduits and
rights-of-way owned or controlled by them; access to emergency 911, directory
assistance, operator call completion and white pages; access to telephone
numbers, databases and signaling for call routing and completion; availability
of number portability; local dialing parity; reciprocal compensation
arrangements; and resale opportunities.
Review of Universal Service Requirements. The Telecommunications Act
contemplates that interstate telecommunications providers will "make an
equitable and non-discriminatory contribution" to support the cost of providing
universal service, although the FCC can grant exemptions in certain
circumstances. The FCC is in the process of promulgating rules to implement
these provisions of the Telecommunications Act, and the outcome of such
proceedings and its effect on the Company cannot be determined.
Limitation on Joint Marketing of Local and Long Distance Services. Long
distance providers that serve greater than five percent of presubscribed access
lines in the United States (which includes the nation's three largest long
distance providers) are precluded from jointly marketing local and long distance
service until the RBOCs are permitted to enter the long distance market, or
three years from the date of enactment of the Telecommunications Act, whichever
is sooner.
Deregulation. The FCC is authorized to forebear from applying any
statutory or regulatory provision that is not necessary to keep
telecommunications rates and terms reasonable or to protect consumers. A state
may not apply a statutory or regulatory provision that the FCC decides to
forebear from applying. In addition, the FCC must review its telecommunications
regulations every two years and change any that are no longer necessary.
REGULATION
The terms and conditions under which Midcom provides communications
services are subject to government regulation. Federal laws and FCC regulations
apply to interstate telecommunications, while particular state regulatory
authorities have jurisdiction over telecommunications that originate and
terminate within the same state.
FEDERAL
Midcom is classified by the FCC as a non-dominant carrier and therefore is
subject to relaxed regulation. Historically, the FCC has generally either
excused or presumed compliance by non-dominant carriers with many of the
statutory requirements and regulations to which dominant carriers are subject,
including most reporting, accounting and record keeping obligations. However, a
number of these requirements are imposed, at least in part, on non-dominant
carriers such as the Company whose annual operating revenues exceed $100
million. The FCC retains the jurisdiction to impose fines or other penalties on,
or to act upon complaints against, any common carrier, including
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non-dominant carriers, for failure to comply with its statutory or regulatory
obligations. The FCC also has the authority to impose more stringent regulatory
requirements on the Company and change its regulatory classification. In the
current regulatory atmosphere; however, the Company believes that the FCC is
unlikely to do so. Non-dominant carriers are also subject to a variety of
miscellaneous regulations that, for instance, dictate the materials required to
document and the procedures necessary to verify a consumer's election to change
its preferred long distance telephone provider, mandate disclosure of rate and
other data associated with the provision of operator services and require
contribution to a variety of FCC-mandated funds and payment of various
regulatory and other fees. There has generally been increased enforcement
activity by the FCC and the states with respect to such regulations,
particularly with respect to those regulations governing the verification of
consumer elections to change long distance service providers.
Among domestic carriers, only the ILECs are classified as dominant
carriers, although ILECs currently would only be classified as dominant in their
provision of long distance telecommunications services if they were to provide
such services other than through structurally separate affiliates. As a
consequence, the FCC regulates many of their rates, charges and services to a
greater degree than the Company's, although the FCC is currently evaluating
proposals to streamline and otherwise relax its regulation of the ILECs. AT&T
and, as an interim measure, the structurally separate interexchange affiliates
of the RBOCs have recently been reclassified as non-dominant carriers and,
accordingly, have the same flexibility as the Company in meeting competition by
modifying rates and service offerings without pricing constraints or extended
waiting periods. The impact on the Company of the reclassification of AT&T and
the RBOC interexchange affiliates as non-dominant carriers cannot be determined
at this time, but it could make it more difficult for the Company to compete for
long distance customers.
With the passage of the Telecommunications Act, the RBOCs are now free to
offer local service outside their respective local telephone service areas as
well as local service bundled with wireless, enhanced and other ancillary
services. Following application to and upon a finding by the FCC that an RBOC
faces facilities-based competition and has satisfied a congressionally-mandated
"competitive checklist" of interconnection and access obligations, the RBOC will
be permitted to provide long distance service within its local service area,
although in so doing, it will be subject to a variety of structural and
nonstructural safeguards intended to minimize abuse of its market power in these
local service areas. As a result of the removal of the legal barriers to
competitive entry into the local market, long distance carriers like the Company
will be allowed to compete with the RBOCs in the provision of local service. It
is impossible to predict the impact of RBOC entry into the long distance
telecommunications market on the Company's business and prospects, but it could
make it more difficult for the Company to compete for long distance customers.
The Company has all necessary authority to provide domestic interstate
telecommunications services under current laws and regulations. The Company and
one or more of its subsidiaries have been granted authority by the FCC to
provide international telecommunications services through the resale of switched
services of U.S. facilities-based carriers. The FCC reserves the right to
condition, modify or revoke such international authority for violations of
federal law or rules, as well as to approve assignments and transfers of control
of such international authority.
Both domestic and international non-dominant carriers must maintain tariffs
on file with the FCC. Although the tariffs of non-dominant carriers, and the
rates and charges they specify, are subject to FCC review, they are presumed to
be lawful and are seldom contested. As a domestic non-dominant carrier, the
Company is permitted to make tariff filings on a single day's notice and without
cost support to justify specific rates. As an international non-dominant
carrier, the Company has always been required to include, and has included,
detailed rate schedules in its international tariffs, but, as a result of recent
FCC action, is now permitted to make tariff filings on a single day's notice.
Prior to a 1995 court decision, Southwestern Bell v. FCC, 43 F.3rd 1515 (D.C.
Cir. 1995), domestic non-dominant carriers were permitted by the FCC to file
tariffs with a "reasonable range of rates" instead of the detailed schedules of
individual charges required of dominant carriers. In
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reliance on the FCC's past practice of allowing relaxed tariff-filing
requirements for non- dominant domestic carriers, the Company and most of its
competitors did not maintain detailed rate schedules for domestic offerings in
their tariffs. Until the two-year statute of limitation expires, the Company
could be held liable for damages for its failure to do so, although it believes
that such an outcome is highly unlikely and would not have a material adverse
effect on the Company's operations.
To date, the FCC has exercised its regulatory authority to set rates only
with respect to the rates of dominant carriers, and it has increasingly relaxed
its control in this area. Thus, the FCC does not regulate the rates of the
Company or any other long distance telecommunications provider, including AT&T,
although it would regulate the rates charged by any ILEC that elected to provide
interexchange services other than through a structurally separate affiliate.
While the FCC continues to cap the prices that dominant ILECs may charge to
originate and terminate interstate calls, it has afforded the ILECs a modicum of
geographically-restricted pricing flexibility when they face competition in a
given market. The FCC has indicated that it will initiate in the near future a
comprehensive review of its access charge structure, evaluating embedded costs
and subsidies that produce current access charge levels. The FCC is currently
conducting a rulemaking procedure to implement the universal service provisions
of the Telecommunications Act and will be determining in that proceeding the
contributions that telecommunications companies such as the Company will be
required to make to support universal service. The FCC also has recently
completed a rulemaking proceeding to implement the local competition provisions
of the Telecommunications Act. In that proceeding, the FCC has set forth
comprehensive national rules and guidelines for states and local competitors to
follow that, among other things, govern the interconnection obligations among
telecommunications carriers, including interconnection with the local exchange
network, and access to a minimum set of unbundled network elements, as required
by the Act. The FCC also has set forth pricing methodologies for both the FCC
and the states to follow in implementing the Telecommunications Act's
requirement that interconnection and access to unbundled network elements be
made available by ILECs at cost-based rates with a reasonable profit.
The FCC-styled "trilogy" of access charge reform, universal service and
local competition proceedings comprise the FCC's effort to respond to the
Telecommunications Act's goal of transitioning telecommunications markets to
full competition. The FCC does not expect this framework to be complete until
state public service commissions complete their own efforts to implement and
supplement the Telecommunications Act's provisions. Until the FCC's "trilogy" of
proceedings is completed, and until such state actions are taken, the impact of
the FCC's actions on the Company's access arrangements or access charge
obligations, or more broadly, on the Company's operations in general, cannot be
determined at this time.
The Telecommunications Act grants the FCC authority to forebear from
applying any statutory requirement or regulation to classes of carriers or
services upon a determination that such application is unnecessary and no longer
in the public interest. Utilizing this newly-granted authority, the FCC has
already reduced, and has proposed further reductions in, its regulation of non-
dominant IXCs such as the Company. Among other things, the FCC has proposed
"mandatory detariffing" for the domestic offerings of non-dominant IXCs. This
proposed rule, if adopted, would not only relieve the Company of its obligation
to file tariffs applicable to its domestic interexchange offerings, but would
prohibit all non-dominant IXCs, including AT&T, MCI, Sprint and WorldCom, from
filing such tariffs. The magnitude of the impact on the Company of mandatory
detariffing of its principal suppliers and competitors cannot be determined at
this time, although such an action would, if adopted, render enforcement of the
FCC's resale and nondiscrimination requirements more difficult.
The microwave licenses held by the Company's subsidiary, PacNet, are
subject to FCC regulation and licensing. PacNet's licenses are for
point-to-point microwave systems operating in the Private Operational Fixed
Microwave Service ("OFS"). Such facilities must be constructed and operated in
strict conformance with their authorizing licenses and FCC rules and policies
and such licenses may not be modified, transferred or assigned without prior FCC
approval. OFS licenses
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may be cancelled or revoked, and fines and other non- monetary penalties imposed
on OFS licensees, for failure to comply with FCC requirements. OFS licenses are
granted for a fixed five-year term, with the potential for renewal. The majority
of PacNet's licenses expire in December 1997 and the balance expire in June
1999. The Company intends to seek renewal of the microwave licenses for each of
PacNet's stations and currently anticipates that these licenses will be renewed
in the ordinary course of business. Failure to obtain renewal of microwave
licenses upon expiration could adversely affect the Company's profitability in
providing data transmission services, although the Company does not expect that
this would affect the Company's other telecommunication services. The Company
does not expect the Telecommunications Act to significantly impact the Company's
microwave licenses.
STATE
The intrastate long distance telecommunications operations of Midcom are
also subject to various state laws and regulations, including initial
certification, registration and/or notification, as well as various tariffing
and reporting requirements. Currently, the Company is certified and tariffed,
where required, to provide intrastate service to customers throughout the United
States except in Alaska and Hawaii. The Company continuously monitors regulatory
developments in all 50 states and intends to obtain licenses wherever feasible.
The Company will require additional certifications in most, if not all, states
at such time as it elects to enter the local telecommunications market.
Midcom is currently subject to varying levels of regulation in the 48
states in which it provides intrastate telecommunications. The large majority of
the states require Midcom to apply for certification to provide
telecommunications services, or at least to register or to be found exempt from
regulation, before commencing intrastate service. At present, 34 states also
require Midcom to file and maintain detailed tariffs listing its rates for
intrastate service. Many states also impose various reporting requirements
and/or require prior approval for transfers of control of certified carriers,
assignments of carrier assets (including customer bases), carrier stock
offerings and/or incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, cancelled,
terminated or revoked by state regulatory authorities for failure to comply with
state law and/or the rules, regulations, and policies of the state regulatory
authorities. Fines and other penalties, including the return of all monies
received for intrastate traffic from residents of a state, may be imposed for
such violations. With two exceptions, the Company has secured approval for its
acquisitions of the capital stock, customer bases or other assets of other
telecommunications service providers. Requests for approval are currently
pending in Arkansas, California and Ohio with respect to the Company's
acquisition of a customer base from Cherry Communications and in Minnesota and
Ohio with respect to the Company's acquisition of a customer base from G.E.
Capital Communications Service Corporation. In both cases, the relevant states
have requested additional information from the parties selling the customer
bases, which has delayed the review process. The Company does not believe that
failure to obtain these pending approvals prior to completing the acquisitions
will have a material adverse effect on the Company's business, financial
condition or results of operation.
RUSSIAN JOINT VENTURE
In December 1993, Midcom contracted to acquire a 50% interest in Dal
Telecom, a provider of local, long distance, international and cellular
telecommunications services to several hundred customers in three of the four
largest cities in the Russian Far East. To acquire its interest in Dal Telecom,
Midcom committed to make a capital contribution of cash, equipment and services
of approximately $12.7 million. In March 1996, the Company and the joint venture
partner agreed to amend the terms of the joint venture to provide that the
Company had a 40% equity interest in the joint venture and that, upon payment of
an additional capital contribution of $3.5 million, the Company would have a 50%
equity interest in the joint venture. Upon final payment of such additional
capital contribution, under the terms of agreements with its joint venture
partner, Midcom
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would control 50% of the voting rights of the capital stock of Dal Telecom and
would be entitled to receive 50% of the profits of that entity. However, the
terms of the Revolving Credit Facility prohibit the Company from making any
additional capital contributions to the joint venture.
The Company's commitment to Dal Telecom has required significant amounts of
capital resources and management attention given the logistics of maintaining a
relationship in Russia. The Company now believes it is in its best interests to
dispose of its interest in the joint venture and focus on its domestic business.
As a consequence, in 1995 the Company initiated efforts to find a buyer for its
interest in Dal Telecom or to otherwise liquidate its position in the joint
venture. As a result of its inability to fund additional contributions to the
joint venture, the Company has written down its investment in Dal Telecom to
$2.0 million. There can be no assurance that the Company will be successful in
its efforts to sell its interest in Dal Telecom or that, if sold, the Company
will recover the carrying value of its interest in the joint venture or that
additional losses on its investment in Dal Telecom will not be incurred in the
future. See Note 4 of the Notes to Consolidated Financial Statements.
EMPLOYEES
As of July 31, 1996, the Company employed 366 persons on a full-time basis.
None of the Company's employees are members of a labor union or are covered by a
collective bargaining agreement.
PROPERTIES
The Company's headquarters in Seattle consist of approximately 74,000
square feet of office space under a lease that expires on November 30, 2004 and
that requires minimum annual lease payments in 1996 of approximately $1.3
million. In addition, the Company and its subsidiaries lease an aggregate of
approximately 77,000 square feet of space for 25 offices in 15 states.
Management believes its present office facilities, together with additional
space available under expansion options, are adequate for its operations for the
foreseeable future and that similar additional space can readily be obtained as
needed.
CUSTOMER CONCENTRATIONS
The Company estimates that during the second quarter of 1996 it invoiced
approximately 125,000 customer locations. Certain Midcom customers receive
multiple billing invoices because they have multiple locations. At this time,
the Company is unable to aggregate the invoices of such customers to determine
an exact customer count. During 1994, 1995 and for the six months ended June 30,
1996, no one customer accounted for more than 5.0% of Midcom's revenues. Midcom
believes that the loss of any single customer would not have a material adverse
effect on its business, financial condition or results of operations.
LEGAL PROCEEDINGS
Class Action Lawsuit. The Company, its Chairman of the Board of Directors
and largest shareholder, the Company's former President, Chief Executive Officer
and director and the Company's former Chief Financial Officer are named as
defendants in a securities action filed in the U.S. District Court for the
Western District of Washington (the "Complaint"). The Complaint purports to be
filed on behalf of a class of purchasers of the Company's Common Stock during
the period beginning on July 6, 1995, the date of the Company's initial public
offering, and ending on March 4, 1996 (the "Class Period"). An amended complaint
(the "Amended Complaint") was filed on July 8, 1996. The Amended Complaint
alleges, among other things, that the registration statement and prospectus
relating to the Company's initial public offering contained false and misleading
statements concerning the Company's billing software and financial condition.
The Amended Complaint further alleges that, throughout the Class Period, the
defendants inflated the price of the Common
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Stock by intentionally or recklessly making material misrepresentations or
omissions which deceived the public about the Company's financial condition and
prospects. The Amended Complaint alleges claims under the Securities Act and the
Exchange Act as well as various state laws, and seeks damages in an unstated
amount. Defendants filed a motion to dismiss on August 7, 1996 and filed a reply
to plaintiffs' opposition on September 18, 1996. The parties expect a
determination by the court by October 18, 1996 or a scheduling of oral arguments
on such motion sometime in October 1996. All discovery proceedings are stayed
until defendants' motion to dismiss is heard or otherwise acted on by the court.
While the Company believes that it has substantive defenses to the claims in the
Amended Complaint, intends to vigorously defend this lawsuit and is in the
process of preparing a motion to dismiss the Amended Complaint for failure to
state a claim on which relief can be granted, it is unable to predict the
outcome of this action.
SEC Investigation. The Company was informed in May 1996 that the
Commission was conducting an informal inquiry regarding the Company's initial
public offering and the restatement of its 1995 third quarter results. The
Company has voluntarily provided the documents requested by the Commission, but
has not been informed whether or not the Commission intends to commence a formal
action against the Company or any of its affiliates. The Company is, therefore,
unable to predict the ultimate outcome of the investigation. In the event that
the Commission elects to initiate a formal enforcement proceeding, the Company
and its officers could be subject to civil or criminal sanctions including
monetary penalties and injunctive measures. Any such enforcement proceeding
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Frontier Lawsuit. On August 19, 1996 the Company was served with a
complaint filed in the U.S. District Court for the Eastern District of Michigan
by Frontier Corporation ("Frontier"). This complaint names as defendants the
Company and eleven individuals, all of whom are former employees of Frontier who
resigned their positions with Frontier at various times in the last year. These
individuals include William H. Oberlin, the President and Chief Executive
Officer and a director of the Company, Charles I. Gragg III, the Vice
President-Marketing of the Company, and nine other employees of the Company. The
complaint alleges, among other things, that: (i) certain of the individual
defendants, with the acquiescence and active assistance of the Company, have
engaged in a systematic strategy to hire key employees and independent
contractors of Frontier in violation of various written agreements; (ii) the
individual defendants have used confidential information belonging to Frontier
in their new employment with Midcom in violation of written agreements and
fiduciary duties and (iii) Mr. Oberlin has breached fiduciary duties as a former
employee and officer of Frontier and breached obligations under an employment
agreement with Frontier. The complaint further alleges that: (i) Midcom is in
violation of a non-disclosure agreement between Frontier and Midcom by virtue of
its alleged use of confidential information of Frontier obtained through
employees hired from Frontier and otherwise; (ii) Midcom has aided and abetted
Mr. Oberlin's alleged breaches of fiduciary duties and (iii) Midcom and the
other defendants have tortiously interfered in Frontier's contractual
relationships with various Frontier employees and contractors. The complaint
seeks: (i) that the defendants be preliminarily and permanently enjoined from
breaching their respective agreements with Frontier; (ii) that Midcom be
enjoined from aiding and abetting certain alleged breaches of fiduciary duties;
(iii) an order that the defendants hold all profits which Midcom earns as a
result of its hiring of the individual defendants and other Frontier employees
as constructive trustees for the benefit of Frontier; (iv) an accounting of all
profits realized by Midcom as a result of its hiring of the defendants and other
Frontier employees; (v) a declaratory judgment on its various claims; (vi)
damages in an unspecified amount; (vii) Frontier's costs, including reasonable
attorney's fees, incurred in bringing the action; and (viii) other appropriate
relief. The Company is in the early stages of reviewing Frontier's complaint and
intends to vigorously defend this action. Based on the Company's preliminary
review of the allegations in the complaint and the underlying facts, the Company
believes that the ultimate outcome of this matter will not have a material
adverse effect on the Company's business, financial condition, results of
operations or liquidity.
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Adnet Lawsuit. On August 1, 1996, a lawsuit was filed in the Superior
Court of the State of California for the County of Orange against the Company,
the Company's former President and Chief Executive Officer and other defendants
to be named at a later date by David and Maria Wiegand, the former shareholders
of Adnet. The plaintiffs have agreed to dismiss this action without prejudice as
described below. Adnet was acquired by the Company on December 29, 1995 in
exchange for 453,250 shares of Common Stock, of which 45,325 shares (the "Adnet
Escrow Shares") were placed in escrow to be held until December 28, 1996 for
satisfaction of certain contingencies. Adnet provides long distance services to
medium-to-large businesses. The acquisition was accomplished through the merger
of Adnet into the Company and has been accounted for as a pooling of interests.
Mr. Wiegand is currently a vice president of the Company in charge of the
continuing operations of Adnet. At the date of closing of this acquisition, the
last reported sale price for the Company's Common Stock as reported by Nasdaq
National Market was $18.25. During 1996 (through July 31, 1996), the Common
Stock has traded as low as $6.50 per share. The complaint alleged intentional
misrepresentations, intentional concealment of facts, negligent
misrepresentation, breach of contract, breach of implied covenant of good faith
and fair dealing and violation of California Securities Laws in connection with
the acquisition. The plaintiffs sought recovery of monetary damages in an amount
which the plaintiffs describe as "not yet ascertainable, but potentially [in
excess of] $10,000,000." The plaintiffs furthermore sought rescission of the
Merger Agreement, restoration of all consideration paid by the plaintiffs to the
Company pursuant to the Merger Agreement, an order enjoining the Company from
undertaking any acts which would further merge Adnet into the Company, and which
would prevent the plaintiffs from being accorded full relief upon rescission of
the Merger Agreement, punitive damages in an amount to be determined at trial
and attorneys' fees and other costs and expenses of suit.
The plaintiffs' claims are based in part on the restatement by the Company
of its financial results for the third quarter and the nine months ended
September 30, 1995 from those reported in its Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995 as originally filed in November 1995. The
restated results, which were first announced in March 1996, reflected a $3.3
million reduction in revenue and $4.5 million reduction in accounts receivable
for the quarter and the nine months ended September 30, 1995. These and other
adjustments resulted in the Company's net loss for the quarter and the nine
months ended September 30, 1995 being increased from $3.8 million and $8.0
million, respectively, to $8.3 million and $12.5 million, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Restatement of Results for the Third Quarter of 1995." The Company
had represented in the Merger Agreement with Adnet that the financial statements
included in its filings with the Commission "fairly present the . . . financial
position of MIDCOM . . . as of the dates thereof and its . . . results of
operations and cash flow for the periods then ended . . . are correct and
complete in all respects."
On August 8, 1996 the Company and the plaintiffs entered into an agreement
whereby the plaintiffs agreed to dismiss the complaint without prejudice and not
to re-file the complaint before August 31, 1996, and the parties agreed to meet
before August 31, 1996 to pursue a negotiated settlement of the plaintiffs'
claims. In connection with execution of this agreement, the Company agreed to
release the Adnet Escrow Shares to the plaintiffs, following dismissal of the
complaint. Although as of the date of this Prospectus, the plaintiffs have not
re-filed their complaint, the parties have not negotiated a settlement to the
plaintiffs' claims. If the Company is unable to reach an agreement with the
plaintiffs to settle their claims, it is likely that the complaint will be
re-filed. Although the Company would vigorously defend this action, it cannot
predict the outcome of these claims. Should the Company agree or otherwise be
required to pay additional consideration to the plaintiffs, the Company may be
required to account for the acquisition of Adnet using the purchase method,
which would require the Company to restate its financial statements for all
prior periods. The operating results of Adnet contributed $8.5 million and $3.7
million in revenue and $925,000 and $276,000 in net income to the Company's
results for 1995 and the six months ended June 30, 1996, respectively.
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Cherry Communications Lawsuit. In September and December 1995, the Company
acquired two significant customer bases from Cherry Communications. The first
transaction ("Cherry I") provided for the purchase of long distance customer
accounts having monthly revenue for the three months preceding the date of
closing of $2.0 million, net of taxes, customer credits and bad debt. The second
transaction ("Cherry II") provided for the purchase of long distance customer
accounts having monthly revenue which were to average $2.0 million per month
over the 12 months following the transaction, net of taxes, customer credits and
bad debt. The Company is responsible for the underlying carrier costs associated
with the customer traffic acquired from Cherry Communications at a rate which
would yield to the Company a gross profit on such traffic at an agreed rate. The
purchase price payable with respect to Cherry I was a total of $10.5 million, of
which $5.5 million was paid in cash and the balance was paid by the delivery of
317,460 shares of Common Stock (subject to a possible increase in such number
based on the future value of the Common Stock), of which 126,984 shares are held
in escrow to be applied to indemnity claims or to cover shortfalls in revenue
from the $2.0 million monthly average. The purchase price for Cherry II was
$18.0 million, of which $7.0 million has been paid in cash. Additional
installments of $3.4 million were due in February, March and April of 1996, of
which $400,000 of each installment was to be placed in an escrow account for
satisfaction of indemnity claims or to cover shortfalls in revenue from the $2.0
million monthly average. The parties later agreed that the Company could pay up
to $9.0 million of the Cherry II payments either in cash or by delivery of
shares of Common Stock, although the terms of the Revolving Credit Facility
prohibit the Company from paying any portion of this obligation in cash without
the lenders' prior written consent. Separately, the Company also agreed to pay
Cherry Communications $40,000 per month per customer base for servicing customer
accounts on behalf of the Company. The acquired customer bases have not
generated the required minimum revenue levels and Cherry Communications has
failed to remit to the Company collections received by Cherry Communications
from a portion of the acquired customers. Accordingly, the Company has withheld
the final three installment payments for Cherry II (a total of $9.0 million
excluding escrowed sums), payment of invoices for carrier service for the
acquired bases (up to $9.7 million through June 30, 1996) and accrued customer
service charges through June 30, 1996 of $720,000. Negotiations between Cherry
Communications and the Company failed to produce a settlement of these disputes
Cherry Communications filed a lawsuit against the Company in the United
States District Court for the Northern District of Illinois, Eastern Division.
In its First Amended Complaint filed on July 18, 1996, Cherry Communications
seeks recovery of (i) approximately $7.2 million plus interest and attorneys'
fees alleged to be due and owing under a Rebiller/Reseller Agreement for
Switched Services between Cherry Communications and the Company, (ii)
approximately $9.0 million plus interest and attorney's fees alleged to be due
and owing under the November 1, 1995 Customer Base Purchase and Sale Agreement
between Cherry Communications and the Company (the "Cherry II Agreement"), and a
Promissory Note executed in connection with the Cherry II Agreement, (iii)
customer service charges of $40,000 per month for each month of customer service
Cherry Communications has provided to the Company under the September 1, 1995
Customer Base Purchase and Sale Agreement between Cherry Communications and the
Company (the "Cherry I Agreement"); and (iv) customer service charges of $40,000
per month for each month of customer service Cherry Communications has provided
to the Company under the Cherry II Agreement. It is the position of the Company
that Cherry Communications has breached its obligations under the Cherry I
Agreement and the Cherry II Agreement by among other breaches (i) failing to
sell Midcom customer bases having the average monthly revenues required by the
customer base agreements, and (ii) failing to remit to Midcom monies collected
from the customer bases. It is also the position of the Company that, as a
result of Cherry Communication's breaches of the Cherry I Agreement and the
Cherry II Agreement, as amended by certain addenda, that the Company has
substantial offsets and counterclaims against Cherry Communications. The Company
is attempting to negotiate a resolution of the disputes. In the event that a
settlement is not reached,
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the Company intends to vigorously defend the lawsuit filed by Cherry
Communications. However, the Company is unable to predict the outcome of this
lawsuit.
Cel-Tech Lawsuit. On April 30, 1996, a lawsuit was filed in the Superior
Court of the State of Washington, King County, against the Company and certain
of its officers and directors by the former owner of Cel-Tech seeking rescission
of his sale of Cel-Tech to the Company. The complaint alleged misrepresentation
of facts concerning the value of the Company's Common Stock and breach of
contract. In addition to rescission of the sale transaction, plaintiff sought
unspecified damages and an injunction placing Cel-Tech under the plaintiff's
control until resolution of the dispute. The Plaintiff has filed a second
amended complaint in order to seek damages in lieu of rescission. The Company
believes there is no merit to the allegations in the amended complaint and plans
to vigorously defend this lawsuit and to file counterclaims on a variety of
issues. However, the Company is unable to predict the outcome of this lawsuit.
Discom Lawsuit. On July 2, 1993, a complaint was filed in the Superior
Court of the State of New Jersey, Bergen County, Law Division, by Discom
Corporation ("Discom") against the Company, Paul Pfleger, who is the largest
shareholder and Chairman of the Board of Directors, and Pamcom, Inc., a
corporation wholly owned by Mr. Pfleger ("Pamcom"), alleging unjustified
customer provisioning delays, customer rejections, improper changes in pricing
policies and failure to deal in good faith causing a breach of contract with a
third party beneficiary. Discom seeks compensatory damages of $3.0 million for
lost profits and lost commissions. Claims against Mr. Pfleger were dismissed on
jurisdictional grounds. The Company has filed counterclaims against Discom for
unfair competition and trademark infringement. Discom was a distributor of
aggregation services under a contract between AT&T and Midcom Consultants, Inc.
("Consultants"). In exchange for the right to place its own aggregation
customers under Consultant's contract with AT&T, the Company provided
provisioning, billing and other support services for all aggregation customers
under Consultant's aggregation contract, including Discom's customers. In
January 1995, the Company acquired certain of the assets and liabilities of
Consultants. Pamcom, Inc., the sole remaining co-defendant in this action, was
the sole shareholder of Consultants at the time of the alleged events that are
the subject of this action. On October 25, 1995, Discom filed notice for
arbitration in New York against Consultants alleging breach of the distributor
agreement between the parties. The Company moved to consolidate the pending
litigation between Discom and the Company with Discom's claim in arbitration
against Consultants. Pursuant to an order of the Superior Court, the entire case
has been transferred to arbitration in New York for disposition of the claims
and counterclaims. A hearing by a panel of arbitrators has been indefinitely
postponed. The Superior Court proceeding has been stayed with jurisdiction
reserved solely to resolve any discovery disputes. The Company has deposited
$645,000 in an interest-bearing escrow account, which the Company believes
exceeds the total of all commissions payable to Discom from August 1, 1993
through December 31, 1995. Although the outcome of any litigation or arbitration
is uncertain, the Company believes that it has significant defenses to the
claims of Discom and intends to vigorously defend itself in this matter and
believes that the outcome of this matter will not have a material adverse effect
on the Company's business, financial condition, results of operations or
liquidity.
The Company is also party to other routine litigation incident to its
business and to which its property is subject. The Company's management believes
the ultimate resolution of these matters will not have a material adverse effect
on the Company's business, financial condition or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as to the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------------------- --- -----------------------------------
<S> <C> <C>
Paul Pfleger............................ 60 Chairman of the Board and Director
William H. Oberlin...................... 51 President, Chief Executive Officer
and Director
Robert L. Nitschke...................... 49 Executive Vice President and Chief
Operating Officer
Robert J. Chamberlain................... 43 Senior Vice President of Finance
and Administration and Chief
Financial Officer
Jay T. Caldwell......................... 43 Senior Vice President of Revenue
Management
Paul P. Senio........................... 64 Vice President, Secretary and
General Counsel
Charles I. Gragg III.................... 38 Vice President of Marketing
Thomas A. Marino........................ 54 Vice President of Network
Operations
Judith W. Johnson....................... 36 Vice President of Customer Service
John M. Orehek(1)(2).................... 42 Director
Scott B. Perper(2)...................... 40 Director
Karl D. Guelich(1)...................... 54 Director
John M. Zrno............................ 58 Director
Marvin C. Moses(1)...................... 51 Director
Daniel M. Dennis(2)..................... 48 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
PAUL PFLEGER has been Chairman of the Board of the Company since its
formation in 1989. Mr. Pfleger served as acting President and Chief Executive
Officer of the Company from April 1996 to May 1996. Since 1969, Mr. Pfleger has
been actively involved in the real estate industry. He was a founder and
currently is Chairman of the Board of Directors of SP Investments, Inc. Mr.
Pfleger has been Chairman of the Board of Directors of Interfinancial Real
Estate Management Company ("IREMCO") since 1984 and has been its President since
April 1993. IREMCO is the General Partner of the following four limited
partnerships: Urban Improvement Fund Limited ("UIFL"); UIFL 1973; UIFL 1973-II;
and UIFL 1974. Shareholders party to the Shareholders' Agreement (as defined
below) have agreed to vote their shares to elect Mr. Pfleger to the Board of
Directors. The Shareholders' Agreement expires on June 7, 1999. See "Description
of Capital Stock -- Shareholders' Agreement."
WILLIAM H. OBERLIN has served as President, Chief Executive Officer and a
director of the Company since May 1996. Prior to joining the Company, Mr.
Oberlin was President and Chief Operating Officer of Frontier Corporation, a
long distance telecommunications provider, from August 1995 to November 1995 and
was Executive Vice President, Chief Operating Officer and a director of ALC
Communications Corporation, a long distance telecommunications provider ("ALC"),
from October 1988, July 1990 and July 1993, respectively, until its merger with
Frontier Corporation in August 1995.
69
<PAGE> 71
ROBERT L. NITSCHKE has served as Executive Vice President and Chief
Operating Officer since October 1995. Prior to joining the Company, Mr. Nitschke
was Vice President for U.S. Intelco Holdings, a telecommunications holding
company, and President of its subsidiary, USI-Gateway, Inc., a developer of
products and services for local number portability, from July 1995 to October
1995, and was Vice President of Operations of its subsidiary, U.S. Intelco
Network, a billing aggregation and database and information services provider to
local exchange carriers, from September 1989 to July 1995.
ROBERT J. CHAMBERLAIN has served as Senior Vice President of Finance and
Administration and Chief Financial Officer of the Company since April 1996. He
also served as a consultant to the Company, advising on financial matters, from
January 1995 to May 1995 and from January 1996 to April 1996. Prior to joining
the Company, Mr. Chamberlain was the Vice President of Finance and Operations
and Chief Financial Officer of ElseWare Corporation, a font technology software
developer, from January 1992 to December 1995. Prior to that, Mr. Chamberlain
was a partner at KPMG Peat Marwick.
JAY T. CALDWELL has served as Senior Vice President of Revenue Management
of the Company since May 1995. In that position, he is responsible for all
revenue, costing and carrier compliance functions for the Company. He also
served as Vice President -- Finance from October 1993 to October 1994 and Vice
President -- Revenue Management from November 1994 to May 1995. Prior to joining
the Company, Mr. Caldwell was corporate controller for Logic Modeling
Corporation, a manufacturer of microprocessor and electronic component
simulation tools, from September 1992 to October 1993, and Director of Finance
for Applied Microsystems Corporation, a manufacturer of microprocessor
diagnostic and emulation equipment, from January 1985 to September 1992.
PAUL P. SENIO has served as Secretary of the Company since 1989, becoming
Vice President and General Counsel in January 1994 and a Senior Vice President
in September 1994. From 1984 to December 1993, Mr. Senio served as General
Counsel for Security Properties Inc., a real estate management company
controlled by Paul Pfleger.
CHARLES I. GRAGG III has served as Vice President of Marketing of the
Company since June 1996. Prior to joining the Company, he was Vice President of
Retail Marketing at Detroit Edison, an electric utility, from March 1996 to June
1996. From August 1995 to February 1996, Mr. Gragg was Vice President of
Marketing of Frontier Corporation and was Vice President of Marketing of ALC
from September 1991 until its merger with Frontier Corporation in August 1995.
THOMAS A. MARINO has served as Vice President of Network Operations of the
Company since June 1996. Prior to joining the Company, from August 1995 to June
1996 he was Vice President of Network Operations and Engineering of Frontier
Corporation and was Vice President of Administration and Technical Services of
ALC from April 1992 until its merger with Frontier Corporation in August 1995.
JUDITH W. JOHNSON has served as Vice President of Customer Service of the
Company since June 1996. Prior to joining the Company, from October 1995 to June
1996 she was Vice President of Customer Service of Frontier Corporation. Ms.
Johnson was also Vice President of Client Services of Optel Systems, a software
developer, from November 1994 to October 1995 and was Senior Manager of Customer
Service of ALC, from February 1992 until November 1994.
JOHN M. OREHEK has served as a director of the Company since December 1992.
Mr. Orehek has served as President and Chief Executive Officer of SP Investments
Inc., an investment management company, from 1991 to the present. In addition,
Mr. Orehek has been a director of IREMCO since 1993. From 1987 to 1991, Mr.
Orehek was President of Hallmark Capital Partners, Ltd., a Seattle-based real
estate development corporation.
SCOTT B. PERPER has served as a director of the Company since June 1994.
Mr. Perper has been a Senior Vice President of First Union Corporation, a bank
holding company, and First Union National Bank of North Carolina since January
1990, and an executive of First Union Capital
70
<PAGE> 72
Partners, the private equity and mezzanine investment arm of First Union
Corporation, since February 1989.
KARL D. GUELICH has served as a director of the Company since November 1995
and served as a consultant to the Company from March 1996 to April 1996. Since
March 1993, Mr. Guelich has been in private practice as a certified public
accountant. From June 1964 to February 1993, Mr. Guelich was employed by Ernst &
Young LLP, where he served as the Area Managing Partner for the Pacific
Northwest offices headquartered in Seattle from October 1986 to November 1992.
JOHN M. ZRNO has served as a director of the Company and a consultant to
the Company since May 1996. From August 1995 to October 1995, Mr. Zrno was Vice
Chairman of Frontier Corporation and was President, Chief Executive Officer and
a director of ALC from August 1988 until its merger with Frontier Corporation in
August 1995.
MARVIN C. MOSES has served as a director of the Company and a consultant to
the Company since May 1996. From August 1995 to January 1996, Mr. Moses was
Executive Vice President and Chief Financial Officer and from January 1996 to
April 1996 Mr. Moses was Vice Chairman and Chief Financial Officer of Frontier
Corporation. He also was Chief Financial Officer and a director of ALC from
October 1988 and September 1989, respectively, until its merger with Frontier
Corporation in August 1995.
DANIEL M. DENNIS has served as a director of the Company since July 1996.
Mr. Dennis served in numerous executive positions since joining MCI in 1973, the
most recent being president of MCI Large Accounts, a division of MCI, from
February 1996 to August 1996. Although Mr. Dennis continues to serve as a
consultant to MCI, he has resigned from MCI effective August 1996.
BOARD OF DIRECTORS
Commencing with the next annual meeting of the Company's shareholders, the
Company's Board of Directors will consist of three classes, each of which will
be as nearly equal in number as possible. Class 1 directors will have an initial
term of one year; Class 2 directors will have an initial term of two years; and
Class 3 directors will have an initial term of three years. Following the
initial term, each class will have a term of three years. In connection with the
next annual meeting of the Company's shareholders to be held on October 29,
1996, Messrs. Guelich and Perper have been nominated to be elected as Class 1
directors, Messrs. Dennis, Moses and Orehek have been nominated to be elected as
Class 2 directors and Messrs. Oberlin, Pfleger and Zrno have been nominated to
be elected as Class 3 directors. All directors hold office until the annual
meeting of shareholders at which their term expires and until their successors
have been duly elected and qualified. Directors may be removed only for cause by
holders of a majority of the outstanding shares of Common Stock. Officers are
elected by, and serve at the discretion of, the Board of Directors.
The Company has established two standing committees of the Board of
Directors: an Audit Committee and a Compensation Committee. The Audit Committee
reviews the functions of the Company's management and independent auditors
pertaining to the Company's financial statements and performs such other related
duties and functions as are deemed appropriate by the Audit Committee and the
Board of Directors. The Compensation Committee makes recommendations to the
Board of Directors concerning the compensation of the Company's executive
officers and directors and administers the Company's Stock Option Plan and the
Stock Purchase Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of John M.
Orehek, Scott B. Perper and Daniel M. Dennis. None of these individuals has
served at any time as an officer or employee of the Company.
71
<PAGE> 73
From time to time, the Company has engaged in certain transactions with
members of the Board of Directors and the Compensation Committee. See "Certain
Transactions."
EXECUTIVE COMPENSATION
The following table shows compensation paid by the Company for services
rendered during its fiscal years ended December 31, 1994 and 1995 to the Chief
Executive Officer during 1995 and to the executive officers of the Company
serving on December 31, 1995, whose salary and bonuses in 1995 made them the
three most highly compensated executive officers of the Company in 1995
(collectively, the "Named Executive Officers").
SUMMARY ANNUAL COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) OPTIONS(#)(1) COMPENSATION($)(2)
- -------------------------------------- ----- --------- ------------ ------------------
<S> <C> <C> <C> <C>
Ashok Rao(3).......................... 1995 $ 292,500 3,000 $ 7,830
President and Chief 1994 300,000 278,775 3,762
Executive Officer
Eric G. Peterson(4)................... 1995 117,000 1,000 4,105
Executive Vice President 1994 118,667 1,663 4,521
and Treasurer
Jay T. Caldwell....................... 1995 97,500 15,750 3,207
Senior Vice President of 1994 100,000 5,478 17,289
Revenue Management
</TABLE>
- ---------------
(1) The 1994 amounts include immediately exercisable options granted in March
1995 in lieu of cash bonuses for 1994 to Messrs. Rao, Peterson and Caldwell
of 18,375, 1,663 and 1,103 shares of Common Stock, respectively. These
options are exercisable at $2.29 per share and expire on the tenth
anniversary of the date of grant.
(2) Represents payments under the Company's 401(k) plan and payments for term
life insurance premiums.
(3) Mr. Rao resigned as an officer of the Company effective April 1996.
(4) Mr. Peterson resigned as an officer of the Company effective May 1996.
72
<PAGE> 74
STOCK OPTION GRANTS
The following table sets forth further information regarding grants of
options to purchase Common Stock made by the Company pursuant to the Company's
Stock Option Plan during the fiscal year ended December 31, 1995 to each of the
Named Executive Officers.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE VALUE
NUMBER OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS EXERCISE MARKET STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO PRICE PER PRICE ON FOR OPTION TERM(4)
OPTIONS EMPLOYEES SHARE DATE OF EXPIRATION ----------------------------
NAME GRANTED(#)(1) IN 1995 ($/SH)(2) GRANT($)(3) DATE 0%($) 5%($) 10%($)
- ------------------ ------------- ---------- --------- ----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ashok Rao(5)...... 18,375 2.48% $ 2.29 $ 9.14 03/15/05 $125,869 $231,490 $393,534
3,000 0.40 15.75 15.75 07/26/05 -- 29,715 75,304
Eric G.
Peterson(5)..... 1,663 0.22 2.29 9.14 03/15/05 11,392 20,951 35,616
1,000 0.13 15.75 15.75 07/26/05 -- 9,905 25,101
Jay T. Caldwell... 8,750 1.18 9.14 9.14 02/07/05 -- 50,296 127,460
1,103 0.15 2.29 9.14 03/15/05 7,556 13,896 23,623
6,000 0.81 10.50 11.00 07/06/05 3,000 44,507 108,187
1,000 0.13 15.75 15.75 07/26/05 -- 9,905 25,101
</TABLE>
- ---------------
(1) Generally under the Company's Stock Option Plan, twenty percent of the
options vest for each full year that the optionee renders services to the
Company after the date of grant. All of the grants listed, however, were
fully vested at the time of the grant, with the exception of the grants of
options for 8,750 and 6,000 shares to Mr. Caldwell. The vesting of options
may be accelerated at the discretion of the administrator of the Stock
Option Plan.
(2) The exercise price may be paid by delivery of already owned shares, subject
to certain conditions.
(3) The fair market value of the underlying Common Stock on the date of grant is
determined by the Board of Directors.
(4) Potential realizable value is based on the assumption that the fair market
value of the Common Stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the option term.
Disclosure of these assumed rates of appreciation are mandated by the rules
of the Securities and Exchange Commission and do not represent the Company's
estimate or projection of future Common Stock prices. The actual value
realized may be greater or less than the potential realizable value set
forth in the table.
(5) Messrs. Rao and Peterson resigned effective April and May 1996,
respectively.
The following table sets forth certain information regarding options to
purchase Common Stock held as of December 31, 1995 by each of the Named
Executive Officers. None of such executive officers exercised any options during
the year ended December 31, 1995.
AGGREGATED 1995 YEAR-END OPTIONS
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT AT DECEMBER 31,
DECEMBER 31, 1995(#) 1995($)(2)
-------------------------------- -----------------------------
EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE
----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Ashok Rao(3)...................... 125,535 156,240 $ 1,701,717 $ 2,101,427
Eric G. Peterson(3)............... 68,288 21,875 1,076,416 349,125
Jay T. Caldwell................... 16,103 22,625 208,623 221,938
</TABLE>
73
<PAGE> 75
- ---------------
(1) Future ability to exercise is subject to vesting and the optionee remaining
employed by the Company.
(2) Calculated on the basis of the closing price of the Company's Common Stock
on December 29, 1995 which was $18.25, less the exercise price. There is no
guarantee that if and when these options are exercised they will have this
value.
(3) Messrs. Rao and Peterson resigned effective April and May 1996,
respectively.
DIRECTOR COMPENSATION
At the time of the Company's initial public offering on July 6, 1995, the
Company's Stock Option Plan provided for the automatic grant of a Nonqualified
Option (as defined herein) to purchase 8,750 shares of Common Stock to
nonemployee directors of the Company (other than Paul Pfleger, John M. Orehek
and Scott B. Perper) upon their election to the Board of Directors, and an
additional option to purchase 4,375 shares of Common Stock each subsequent year,
both at a price equal to the fair market value of the Company's Common Stock on
the date of grant. Such options vest at a rate of fifty percent (50%) per year
and expire ten (10) years after the date of grant. On November 9, 1995, the
Board of Directors approved an amendment to the Stock Option Plan that would
allow Paul Pfleger, John M. Orehek and Scott B. Perper to receive Nonqualified
Options pursuant to the Stock Option Plan with the same terms and conditions as
other nonemployee directors of the Company subject to the approval of such
amendment by the shareholders. If such Amendment is approved by the
shareholders, Messrs. Pfleger, Orehek and Perper will each be deemed to have
been granted an option to purchase 8,750 shares of Common Stock as of November
9, 1995 at an exercise price of $18.50, of which fifty percent (50%) will be
exercisable as of November 9, 1996 and the balance exercisable as of November 9,
1997. In addition, pursuant to automatic grants under the plan to all
non-employee directors, Messrs. Pfleger, Orehek and Perper were each also
granted options to purchase 4,375 shares of Common Stock at an exercise price of
$8.63 per share of which fifty percent (50%) vest beginning on March 19, 1997
and the balance vest on March 19, 1998.
On July 25, 1996, the Board approved an additional amendment to the Stock
Option Plan to revise the provisions relating to automatic grants of options to
purchase shares of the Company's Common Stock to all non-employee directors.
Pursuant to the Stock Option Plan as amended, non-employee directors are each
granted a Nonqualified Option to purchase 50,000 shares of Common Stock upon
initial election to the Board of Directors at an exercise price equal to the
fair market value of the Common Stock on the date of the grant. Such options
vest at a rate of twenty percent (20%) per year and expire ten years after the
date of grant. The July 1996 Board action also provided for the grant to each
non-employee director serving on the Board on July 25, 1996 of an option to
purchase shares of Common Stock equal to 50,000 minus the number of shares
subject to options granted to each non-employee director under the Stock Option
Plan prior to its amendment. The vesting schedule of these additional option
grants begins on November 9, 1995, the date the Stock Option Plan was originally
amended, with respect to Messrs. Pfleger, Orehek, and Perper and on the date of
election to the Board for all other non-employee directors at a rate of twenty
percent (20%) per year. These options were granted subject to approval by
shareholders of an increase in shares available for purchase under the Stock
Option Plan.
On March 15, 1996, the Company entered into a consulting agreement with
Karl D. Guelich whereby Mr. Guelich would assist the Company with respect to
financial matters. The consulting agreement provided for monthly compensation of
$20,000. The consulting agreement terminated effective April 30, 1996. Mr.
Guelich was paid a total of $35,000 pursuant to this agreement.
The Company has entered into consulting agreements with Marvin C. Moses and
John M. Zrno pursuant to which Messrs. Moses and Zrno (collectively, the
"Consultants") have each agreed to provide consulting services to the Company
with respect to (a) identifying and assisting in the negotiation and closing of
new business acquisitions, (b) establishing investor and other strategic
74
<PAGE> 76
relations, and (c) advising the Company's Board of Directors on critical
strategic financial matters. Under the consulting agreements, the Consultants
are to make themselves reasonably available to the Company's Board of Directors
and are to devote approximately twenty-five percent (25%) of their time and
efforts to the Company's affairs. Pursuant to the consulting agreements, the
Company is required to pay each of the Consultants Nonqualified Options for the
purchase of 253,681 shares of the Company's Common Stock pursuant to and in
accordance with the Company's Stock Option Plan, subject to shareholder approval
of an amendment to the Stock Option Plan increasing the number of shares
authorized for issuance thereunder. The options vest rateably over a five-year
period beginning in June 1997 and are exercisable for $8.00 per share. The
consulting agreements each terminate after a period of five years beginning on
June 1, 1996, unless terminated earlier in accordance with the terms thereof.
The Company has the right to terminate the consulting agreements at any time for
cause, as defined therein. The Company or either of the Consultants may
terminate the consulting agreements, or reduce the time required to be devoted
to the Company thereunder, at any time upon 30 days prior written notice, in
which case the Consultant's retainer and unvested stock options shall be reduced
proportionately.
STOCK OPTION PLAN
The following summary of the Stock Option Plan is a brief description of
the material provisions of the Stock Option Plan and is qualified in its
entirety by the full text of the Stock Option Plan.
General. Pursuant to the Stock Option Plan, the Company may grant options
to purchase shares of Common Stock which qualify as "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended ("Code") ("Incentive Options") or which do not so qualify ("Nonqualified
Options"). The Compensation Committee of the Board of Directors is currently the
Plan Administrator for the Stock Option Plan. Incentive Options may be granted
to any employee, including employees who are directors, and Nonqualified Options
may be granted to such persons as the Plan Administrator shall select, including
employees, consultants and directors of the Company. The Plan Administrator
determines the terms and conditions of options granted under the Stock Option
Plan, including the exercise price, provided that the exercise price for
Incentive Options must be equal to or greater than the fair market value of the
Common Stock on the date of grant.
Unless otherwise provided by the Plan Administrator, options granted under
the Stock Option Plan vest at a rate of twenty percent (20%) after the first
year and thereafter at twenty percent (20%) per year over a four-year period so
that all options are fully vested after five years. Outstanding options vest, at
the discretion of the Plan Administrator, upon the occurrence of the liquidation
or dissolution of the Company. Options are exercisable for a period of ten years
from the date of grant, except that Incentive Options granted to persons who own
more than ten percent of the Common Stock are exercisable only for a period of
five years from the date of grant. Options granted under the Stock Option Plan
are nontransferable other than by will or the laws of descent and distribution.
Notwithstanding a vesting schedule, the Stock Option Plan provides for the
immediate vesting of options that have been outstanding for at least six months
upon the occurrence of certain events. In general, such events include (i) the
purchase by any person of thirty percent (30%) or more of the Common Stock of
the Company pursuant to a tender offer or exchange offer made by any person
other than the Company, and (ii) the approval by the Company's shareholders of
any merger, consolidation, reorganization or other transaction providing for the
conversion or exchange of more than fifty percent (50%) of the outstanding
shares of Common Stock of the Company. Under certain circumstances, accelerated
vesting could have the effect of delaying, deferring or preventing unfriendly
offers or other efforts to obtain control of the Company and could thereby
deprive the shareholders of opportunities to receive a premium on their Common
Stock and could make removal of incumbent management more difficult. On the
other hand, accelerated vesting may induce any person seeking control of the
Company or business combination with the Company to negotiate on terms
acceptable to the Board of Directors. The
75
<PAGE> 77
Stock Option Plan was recently amended to permit limited transfers of certain
options pursuant to newly effective SEC regulations.
Pursuant to the Company's Stock Option Plan, Nonqualified Options are
automatically granted to non-employee directors of the Company, with certain
exceptions, as described in "Director Compensation" above.
Assuming shareholder approval of an amendment to the Stock Option Plan
increasing the number of shares authorized for issuance thereunder, there were
an aggregate of 4,211,463 shares of Common Stock reserved for issuance pursuant
to the Stock Option Plan at August 23, 1996, subject to adjustment for stock
splits and similar changes in the Company's capitalization. At August 23, 1996,
options to purchase an aggregate of 3,401,286 shares of Common Stock were
outstanding under the Stock Option Plan (of which 2,217,751 had been granted
subject to shareholder approval of the proposed 3,000,000 share increase) and a
total of 782,249 shares of Common Stock remained available for grant. At August
23, 1996, outstanding options were exercisable at prices ranging from $2.29 to
$18.50 per share. Shares subject to options granted under the Stock Option Plan
that have lapsed or terminated may again be subject to options granted under the
Stock Option Plan.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with William Oberlin,
the Company's President and Chief Executive Officer. The agreement is effective
as of May 24, 1996 and provides for a monthly base salary of $25,000 per month
as well as certain other compensation, subject to annual review by the Board of
Directors. The agreement requires that the Board of Directors formulate and
adopt a bonus plan for the year ending December 31, 1996 on or before August 30,
1996. For each calendar year effective with the year starting January 1, 1997,
the bonus plan is to be structured to provide one hundred percent of Mr.
Oberlin's base salary if the Company meets targets set forth in its annual
business plan, or a greater or lesser percentage of the base salary in
proportion to the amount by which the Company exceeds or falls short of such
targets. In connection with entering into the agreement, the Company has granted
Mr. Oberlin options to purchase 1,214,724 shares of Common Stock pursuant to the
Stock Option Plan, subject to shareholder approval of an amendment to the Stock
Option Plan increasing the number of shares authorized for issuance thereunder.
The options are to vest ratably over a five-year period, with the first twenty
percent (20%) installment vesting in May 1997, and are exercisable for $8.00 per
share. In the event that Mr. Oberlin's employment is terminated by the Board of
Directors "without cause," or if Mr. Oberlin voluntarily resigns within 180 days
of a "change of control" of the Company (as such terms are defined in the
agreement), Mr. Oberlin is entitled to two years severance. In the event that
Mr. Oberlin's employment is terminated by mutual agreement, or if Mr. Oberlin
voluntarily resigns under certain limited circumstances, Mr. Oberlin is entitled
to 12 months severance. Severance equals the sum of (i) the annualized base
salary at the time of termination, and (ii) either the average annual bonuses
for the fiscal years preceding termination or, if no bonuses have been
established or paid for such period, the annualized base salary at the time of
termination. Severance is payable in equal monthly installments, without
interest, commencing on the last day of the month of termination. In the event
that Mr. Oberlin is entitled to severance, he will continue to receive medical,
life, disability and group term life insurance benefits (or the cash equivalent
thereof), and options granted to him under the Stock Option Plan will continue
to vest, during the applicable severance period as if his employment had not
been terminated. In the event of Mr. Oberlin's death, vesting of options
otherwise vesting over the two-year period following his death will be
accelerated. The agreement also contains a non-interference provision pursuant
to which Mr. Oberlin has agreed, for a period of six months after the
termination of his employment, to preserve the confidentiality of the Company's
customer list, to refrain from actively soliciting the Company's customers
existing at the date of termination and to refrain from soliciting or hiring the
Company's executive or management level employees.
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<PAGE> 78
SELLING SECURITYHOLDERS
The following table sets forth certain information as of the date hereof
with respect to the aggregate principal amount of the Notes beneficially owned
by each of the Selling Securityholders which may be offered from time to time
pursuant to this Prospectus. The Securities which may be offered from time to
time pursuant to this Prospectus may be offered in whole or in part by the
persons named below or by their transferees, as to whom applicable information
will be set forth in an accompanying Prospectus Supplement to the extent
required. The following table has been prepared based upon information furnished
to the Company by the Trustee, by DTC and by or on behalf of the Selling
Securityholders.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
NOTES
BENEFICIALLY
NAME OF SELLING SECURITYHOLDER OWNED
- ------------------------------------------------------------------------------ ------------
<S> <C>
Fidelity Equity Fund.......................................................... $ 12,810,000
Fidelity Freedom Fund......................................................... 7,319,000
Salomon Brothers Asset Management on behalf of General Motors Inc............. 4,250,000
Fidelity Convertible Security................................................. 4,000,000
Putnam Convertible Fund....................................................... 3,775,000
Lynch & Mayer, Inc. for the benefit of Lincoln National Life.................. 3,755,000
William H. Oberlin............................................................ 2,650,000
OCM Convertible Trust......................................................... 2,460,000
State of Connecticut.......................................................... 2,050,000
Scotia McLeod Inc............................................................. 2,000,000
Vanguard Convertible Security Fund............................................ 2,000,000
Robertson Stephens Growth & Income Fund....................................... 1,900,000
Moore Capital Emerging Markets................................................ 1,750,000
Oaktree Operations Center for the benefit of Delta Airlines................... 1,720,000
Ardsley Partners Fund Bond.................................................... 1,500,000
Ardsley Partners Fund 2....................................................... 1,500,000
Ardsley Partners Institute.................................................... 1,000,000
Frank Russell Company......................................................... 1,000,000
Montgomery Small Capital Partner II, L.P...................................... 1,000,000
Helix Investment Partners, L.P................................................ 750,000
Morgan Stanley & Co. Inc...................................................... 750,000
Oaktree Operations Center for the benefit of the State of Delaware............ 620,000
NH Retirement Convertible Portfolio........................................... 610,000
Putnam Convertible Opportunity & Income Fund.................................. 520,000
Putnam Fiduciary Company for the benefit of Promutal.......................... 510,000
Paul H. Pfleger............................................................... 450,000
Montgomery Small Capital Partners III, L.P.................................... 400,000
Montgomery Small Capital Partners, L.P........................................ 400,000
Zrno Family Living Trust...................................................... 400,000
Phoenix Partners.............................................................. 357,000
Marvin C. Moses Trust......................................................... 250,000
John M. Orehek................................................................ 250,000
OCM Convertible Limited Partnership........................................... 150,000
Betje Partners................................................................ 143,000
Fidelity Management Trust..................................................... 420,000
Balanced Equity Portfolio..................................................... 220,000
</TABLE>
77
<PAGE> 79
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
NOTES
BENEFICIALLY
NAME OF SELLING SECURITYHOLDER OWNED
- ------------------------------------------------------------------------------ ------------
<S> <C>
Putnam Balanced Retirement Fund............................................... 250,000
Heritage Asset Management..................................................... 250,000
Putnam for the benefit of Boston College Endowment............................ 235,000
The Amazon Fund............................................................... 200,000
Lynch & Mayer, Inc. for the benefit of United National Ins.................... 100,000
Putnam Advisory Co. for the benefit of Museum of Fine Arts.................... 100,000
Austin Firefighter Convertible................................................ 95,000
Mass Financial Services Co.................................................... 5,000
Lincoln National Convertible Securities Fund Inc.............................. 1,725,000
Lynch & Mayer Inc. A/C Weiton-Lynch & Mayer Inc. Convertible.................. 420,000
Dean Witter................................................................... 1,500,000
Investors Bank & Trust........................................................ 8,000,000
Montgomery Asset Management................................................... 3,100,000
Neuberger Berman.............................................................. 500,000
Quota Fund N.V................................................................ 2,600,000
Fidelity Management A/C Cincinnati Bell Pen Pln T............................. 70,000
Fidelity Management Trust CO A/C Chicago Transit Authority.................... 130,000
Fidelity Management Trust CO A/C Deluxe Check................................. 300,000
Fidelity Management Trust CO A/C NASL Equity Trust............................ 2,069,000
Fidelity A/C NY Nurses Assoc.................................................. 70,000
Fidelity Management & Research A/C Ohio Edison Master TR...................... 100,000
Fidelity Management CO FBO St. Louis County Ret. Tr........................... 40,000
Fidelity Management Trust A/C ISBI IL BRD Investment Trust Settlements........ 310,000
Diversified Growth Fund....................................................... 400,000
Robertson Stephens & Co. Emerging Growth Fund................................. 1,000,000
Mass Financial Services A/C Lifetime Emerging Growth.......................... 4,600,000
Nicholas Applegate............................................................ 205,000
Bankerst Tr. Co. FAO Presbyterian Healthcare.................................. 175,000
Nicholas Applegate Income & Growth Fund....................................... 785,000
Baptist Hospital STI Trust & Investment OPS................................... 65,000
Northern Trust FAO San Diego City Employees Retirement System................. 265,000
Security Pacific National Bank A/C Occidental College......................... 80,000
Nicholas Applegate Capital Mgmt............................................... 25,000
Bank of New York A/C SDO Convertible -- 827896................................ 925,000
Engineers PENS................................................................ 130,000
Income Managed Equity Portfolio............................................... 430,000
Fidelity Management & Trust A/C Sant Inc. Ret. Plan/Fund...................... 100,000
Bear Stearns FAO Helix........................................................ 750,000
------------
TOTAL....................................................................... $ 97,743,000
============
</TABLE>
Each Selling Securityholder is registering the entire amount of the Notes
set forth opposite its name above. In addition, each Selling Securityholder is
registering the entire number of Conversion Shares which may be issued upon
conversion of the Notes set forth opposite its name above. The exact number of
Conversion Shares which may be issued upon conversion of the Notes cannot be
determined until the date of such conversion, as the conversion price is subject
to adjustment upon the occurrence of certain dilutive events. See "Description
of Notes." At the initial conversion price
78
<PAGE> 80
of $14.0875 per share, each $1000 principal amount of Notes entitles the holder
thereof to 70.985 shares of Common Stock. Further, because the Selling
Securityholders may offer pursuant to this Prospectus all or some part of the
Securities which they beneficially own and because such offer is not being
underwritten on a firm commitment basis, no estimate can be given as to the
amount of Securities to be offered for sale by the Selling Securityholders
pursuant to this Prospectus or the amount of Securities that will be held by the
Selling Securityholders upon termination of the offering pursuant to this
Prospectus. See "Plan of Distribution." To the extent required, the specific
amount of Securities to be sold by a Selling Securityholder in connection with a
particular offer pursuant to this Prospectus will be set forth in an
accompanying Prospectus Supplement.
Other than as a result of the ownership of Notes or Common Stock, none of
the Selling Securityholders named herein has, or has had within the past three
years, any material relationship with the Company.
The Company and the Selling Securityholders have agreed to indemnify each
other against certain liabilities arising under the Securities Act. The Company
has agreed to pay all expenses incident to the offer and sale of the Notes and
Common Stock to the public other than selling commissions and fees. See "Plan of
Distribution."
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<PAGE> 81
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Midcom's Common Stock, as of July 31, 1996, with respect to (i)
each shareholder known by Midcom to be the beneficial owner of more than five
percent of the outstanding shares of Common Stock, (ii) each director of Midcom,
(iii) Midcom's Chief Executive Officer and the other most highly compensated
executive officer in 1995 and (iv) all directors and executive officers as a
group. Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Stock listed below have sole investment and voting power
with respect to such shares, subject to community property laws where
applicable. The following table does not include Common Stock issuable upon
conversion of Notes purchased by any of the foregoing individuals. See "Certain
Transactions."
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND NATURE OF OUTSTANDING
NAME AND ADDRESS BENEFICIAL OWNERSHIP SHARES(1)
- ---------------------------------------------------------- -------------------- -----------
<S> <C> <C>
Black Creek Limited Partnership(2)........................ 5,659,964 35.7%
(Paul Pfleger)
1201 Third Avenue
Suite 5400
Seattle, WA 98101
US Online Communications L.L.C.(3)........................ 1,666,667 10.5
1201 Third Avenue
Suite 5400
Seattle, WA 98101
Ashok Rao................................................. 846,723(4) 5.3
5456 E. Mercer Way
Mercer Island, WA 98040
William H. Oberlin(6)..................................... 0 *
Jay T. Caldwell........................................... 19,928(5) *
John M. Orehek(7)......................................... 2,149,343 13.6
Scott B. Perper(8)........................................ 3,000 *
Karl D. Guelich........................................... 225 *
John M. Zrno(8)........................................... 0 *
Marvin C. Moses(10)....................................... 0 *
Daniel M. Dennis.......................................... 0 *
All Executive Officers and Directors as a Group (15 6,194,368(11) 39.0%
persons)................................................
</TABLE>
- ---------------
* Less than 1%
(1) This table is based upon information supplied by directors, officers and
principal shareholders. Percentage of ownership is based on 15,838,202
shares of Common Stock outstanding as of July 31, 1996. Beneficial
ownership is determined in accordance with the Rules of the Commission, and
includes voting and investment power with respect to the shares. Shares of
Common Stock subject to options or warrants which are currently exercisable
or exercisable within 60 days of July 31, 1996 are deemed outstanding when
computing the percentage ownership of the person holding such options, but
are not deemed outstanding for purposes of computing the percentage
ownership of any other person.
(2) Mr. Paul Pfleger, the Chairman of the Board of the Company, has sole voting
and investment power with respect to 3,993,297 shares by virtue of being
the President and sole director of the corporate general partner of this
limited partnership. Mr. Pfleger shares voting and investment power with
respect to 1,666,667 shares of Common Stock owned by US Online
Communications L.L.C. See footnote (3) below. Does not include 31,943
shares of Common
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<PAGE> 82
Stock issuable upon conversion of $450,000 aggregate principal of Notes
purchased by Mr. Pfleger on August 22, 1996.
(3) Mr. Pfleger and Mr. Orehek are managers of US Online Communications L.L.C.
(formerly Communications Access L.L.C.) and share voting and investment
power over the shares held by this entity.
(4) Does not include 38,637 shares of Common Stock held in trusts for the
benefit of the children, two nieces and a nephew of Mr. Rao and one
unrelated person, over which Mr. Rao disclaims beneficial ownership. All
shares owned by Mr. Rao or the trusts will be repurchased by the Company in
connection with Mr. Rao's resignation as President, Chief Executive Officer
and Director of the Company. See "Certain Transactions."
(5) Represents options exercisable within 60 days of July 31, 1996.
(6) Does not include 188,110 shares of Common Stock issuable upon conversion of
$2,650,000 aggregate principal of Notes purchased by Mr. Oberlin on August
22, 1996.
(7) Mr. Orehek has sole voting and investment power with respect to 482,676
shares owned by Madrona Ridge Limited Partnership by virtue of being the
President and sole director of the corporate general partner of this
limited partnership and shares voting and investment power with respect to
1,666,667 shares held by US Online Communications L.L.C. See footnote (3)
above. Does not include 17,746 shares of Common Stock issuable upon
conversion of $250,000 aggregate principal of Notes purchased by Mr. Orehek
on August 22, 1996.
(8) Scott B. Perper is an officer of First Union Corporation. Does not include
640,484 shares of Common Stock held by First Union Corporation, as to which
Mr. Perper disclaims beneficial ownership.
(9) Does not include 28,393 shares of Common Stock issuable upon conversion of
$400,000 aggregate principal of Notes purchased by Mr. Zrno on August 22,
1996.
(10) Does not include 17,746 shares of Common Stock issuable upon conversion of
$250,000 aggregate principal of Notes purchased by Mr. Moses on August 22,
1996.
(11) Includes 48,503 shares subject to options exercisable within 60 days of
July 31, 1996. Does not include 283,938 shares of Common Stock issuable
upon conversion of Notes purchased on August 22, 1996.
81
<PAGE> 83
CERTAIN TRANSACTIONS
In June 1994, the Company entered into a Senior Subordinated Note and
Warrant Agreement with, and completed the sale of $14.8 million principal amount
of senior subordinated notes (the "Subordinated Notes") to, First Union
Corporation ("First Union"). Following the sale of the Subordinated Notes, Scott
B. Perper, a Senior Vice President of First Union, was appointed to serve on the
Company's Board of Directors, and he continues to serve in that capacity. The
Company paid First Union a loan initiation fee of $375,000 in connection with
issuance of the Subordinated Notes. During 1995, the Company paid interest on
the Subordinated Notes to First Union in the amount of $782,575. The Company
prepaid the Subordinated Notes in full with the proceeds of its initial public
offering.
In connection with the issuance of the Subordinated Notes, the Company also
issued warrants to First Union to acquire up to 640,484 shares of Common Stock,
for a purchase price of $.0001 per share. In July 1995, First Union exercised
these warrants for a total of 640,484 shares of Common Stock. First Union has
certain preemptive rights to purchase additional shares of Common Stock offered
by the Company, subject to a number of exceptions. The Company has granted
certain registration rights under the Securities Act with respect to the shares
of Common Stock held by it. In addition, First Union has certain rights to
information concerning the Company until the shares of Common Stock held by it
constitute less than one percent of the outstanding Common Stock.
In August 1994, the Company entered into a revolving credit agreement with
First Union National Bank of North Carolina ("First Union Bank"), a subsidiary
of First Union, providing a line of credit of up to $25.0 million, for which
First Union Bank received a commitment fee of $43,750. In March 1995, this
facility was amended to increase the maximum amount of borrowings by $4.0
million to a total of $29.0 million, for which First Union Bank was paid an
additional commitment fee of $80,000. This additional amount was originally due
on June 30, 1995. In June 1995, First Union Bank agreed to extend the due date
for borrowings in excess of $25.0 million to July 20, 1995. Mr. Perper, a
director of the Company, is also a Senior Vice President of First Union Bank.
During 1995, the Company paid interest of $2,021,055 to First Union Bank in
connection with this revolving credit facility. The revolving credit facility
was paid in full and terminated on November 8, 1995.
In June 1994, the Company issued to Paul Pfleger 859,653 shares of Series A
Redeemable Preferred Stock in consideration of (i) the contribution to the
Company by Mr. Pfleger of two notes payable by the Company to Mr. Pfleger, net
of a receivable for the benefit of the Company from Mr. Pfleger in the amount of
$1,233,846 and (ii) the assumption by Mr. Pfleger of a note payable by the
Company by December 31, 2002 to Mr. McCaugherty in the amount of $4,864,795
which included accrued interest at the rate of 12% per annum. The two notes
payable by the Company which were contributed by Mr. Pfleger were for an
aggregate of $6,865,578, including accrued interest. The Company's receivable
from Mr. Pfleger arose from his assignment to the Company earlier in 1994 of his
right to receive payments later in 1994 from a third party, for which the
Company paid $1.2 million. Remaining principal and accrued interest under the
Company's notes payable to Mr. Pfleger, aggregating $1.9 million, were paid in
June 1994, and there were no related party notes outstanding as of December 31,
1994. In July 1995, the Company redeemed all of the shares of Series A
Redeemable Preferred Stock held by Mr. Pfleger for $8.6 million.
Paul Pfleger and Ashok Rao, formerly the Company's Chief Executive Officer,
President and a director, own 88% and 12%, respectively, of QuestWest Inc.
("QuestWest"), one of two general partners of Quest America L.P. ("Quest LP").
John M. Orehek is the sole limited partner of Quest LP. Messrs. Pfleger, Rao and
Orehek are directors and Messrs. Rao and Orehek are officers of QuestWest.
QuestWest holds an 84.995% interest in Quest LP, subject to reduction if Quest
LP meets certain earnings and sales targets. In December 1993, Quest LP entered
into a distribution agreement with the Company pursuant to which Quest LP is
entitled to receive commissions on sales for the Company at a rate equal to the
most favorable rate provided by the Company to any of its distributors. Quest LP
received $66,456 in net commissions on 1994 invoices. Effective March 6,
82
<PAGE> 84
1995, Messrs. Pfleger, Rao and Orehek granted the Company an option to purchase
their entire interests in QuestWest and Quest LP for an exercise price equal to
the total amount paid to acquire their respective interests, which then
aggregated $823,170. The parties terminated the option effective October 24,
1995.
In June 1995, Paul Pfleger and Ashok Rao agreed in writing to indemnify and
hold the Company harmless from any costs, expenses or other liabilities incurred
by the Company in connection with a claim asserted in June 1995 by an affiliate
of the co-general partner of Quest LP that he or an affiliated party is entitled
to purchase 3% of the Company's outstanding stock for $1 million. The Company
believes that no such right exists and that this claim is without merit.
On March 15, 1996, the Company entered into a consulting agreement with
Karl D. Guelich, a director of the Company, whereby Mr. Guelich would assist the
Company with respect to financial matters. The consulting agreement provided for
monthly compensation of $20,000. The consulting agreement terminated effective
April 30, 1996.
In June 1994, the Company entered into an employment agreement with Ashok
Rao, then the President, Chief Executive Officer and a director of the Company.
In April 1996, Mr. Rao resigned from the Company. The Company and Mr. Rao are
currently negotiating a Resignation Agreement and General Release (the
"Resignation Agreement") to define the terms of Mr. Rao's resignation from the
Company. The terms of the Resignation Agreement are not finalized, but it likely
will include payments to Mr. Rao for 24 months, confirmation of non-competition
and confidentiality agreements signed by Mr. Rao upon joining the Company and
mutual releases of claims. In addition, pursuant to the terms of the
Shareholders' Agreement, the Company has called for the repurchase of all of the
shares of Common Stock owned by Mr. Rao and by certain trusts established by Mr.
Rao (the "Rao Shares"). Because the Company and Mr. Rao have been unable to
reach mutual agreement on the purchase price for the Rao Shares, pursuant to the
Shareholders' Agreement, the purchase price shall be the fair market value of
the Rao Shares as of the date of Mr. Rao's resignation as determined by
arbitration. The Company and Mr. Rao are in disagreement as to the effective
date of Mr. Rao's resignation and whether a restricted security discount should
be applied to the Rao Shares. The purchase price will be payable in 36 equal
monthly installments and will bear interest at a rate of 8% per annum. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Capital
Stock -- Shareholders' Agreement." Under an agreement between Mr. Rao and Paul
Pfleger pursuant to which Mr. Rao purchased the Rao Shares from Mr. Pfleger, Mr.
Pfleger is entitled to receive payments aggregating approximately $2.2 million
out of proceeds received by Mr. Rao from the sale of the Rao Shares.
The Company has entered into consulting agreements with Marvin C. Moses and
John M. Zrno, each a director of the Company, pursuant to which Mr. Moses and
Mr. Zrno (collectively, the "Consultants") have each agreed to provide
consulting services to the Company with respect to (a) identifying and assisting
in the negotiation and closing of new business acquisitions, (b) establishing
investor and other strategic relations, and (c) advising the Company's Board of
Directors on critical strategic financial matters. Under the consulting
agreements, the Consultants are to make themselves reasonably available to the
Board of Directors and are to devote approximately 25% of their time and efforts
to the Company's affairs. Pursuant to the consulting agreements, the Company is
required to pay each of the Consultants a retainer of $8,333 per month. In
addition to the retainers, the Company has granted to each of the Consultants
nonqualified stock options to purchase of 253,681 shares of Common Stock
pursuant to the Stock Option Plan, subject to shareholder approval of an
amendment to the Stock Option Plan increasing the number of shares authorized
for issuance thereunder. The options vest ratably over a five-year period
beginning in June 1996 and are exercisable for $8.00 per share. The consulting
agreements each terminate after a period of five years beginning on June 1,
1996, unless terminated earlier in accordance with the terms thereof. The
Company has the right to terminate the consulting agreements at any time for
cause, as defined therein. The Company or either of the Consultants may
terminate the consulting
83
<PAGE> 85
agreements, or reduce the time required to be devoted to the Company thereunder,
at any time upon 30 days' prior written notice, in which case the Consultant's
retainer and unvested stock options shall be reduced proportionately.
On April 4, 1996, the Company entered into an agreement with Tie
Communications, Inc. ("Tie"), appointing Tie as an independent distributor for
selling the Company's long distance services. Mr. Pfleger and Mr. Orehek
together own 95.2% of Tie. Through July 31, 1996, no commissions had been paid
to Tie pursuant to this agreement.
William H. Oberlin, John M. Zrno, Marvin C. Moses, Paul Pfleger and John M.
Orehek beneficially own $2,650,000, $400,000, $250,000, $450,000 and $250,000
principal amount of Notes, respectively. Mr. Oberlin is the Company's President
and Chief Executive Officer as well as a director. Mr. Pfleger is Chairman of
the Company's Board of Directors. Messrs. Zrno, Moses and Orehek are directors.
The foregoing individuals own the Notes on the same terms, and subject to the
same conditions, applicable to all other holders of the Notes.
DESCRIPTION OF NOTES
Set forth below is a summary of certain provisions of the Notes. The Notes
were issued pursuant to an indenture (the "Indenture") between the Company and
IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"). The following
summary of the Notes, the Indenture and the Registration Rights Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all of the provisions of the Indenture and the Registration
Rights Agreement, including the definitions therein. Copies of the Indenture and
the Registration Rights Agreement can be obtained from the Company upon request
by a holder of the Notes (a "Holder"). The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939 (the "Trust Indenture Act"). The definitions of
certain terms used in the following summary are set forth below under
"-- Certain Definitions." Capitalized terms used herein without definition have
the meanings ascribed to them in the Indenture.
As used in this Description of Notes, "the Company" refers to MIDCOM
Communications Inc., exclusive of its subsidiaries.
GENERAL
The Notes are unsecured, subordinated, general obligations of the Company,
and will mature on August 15, 2003. The Notes bear interest from the date of
issuance, or from the most recent date to which interest has been paid or
provided for, at the rate stated on the cover page hereof, payable in arrears on
February 15 and August 15 of each year commencing on February 15, 1997, to
Holders of record on the immediately preceding February 1 and August 1. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
Principal, premium, if any, interest and Liquidated Damages, if any, on the
Notes will be payable at the office or agency of the Company maintained for such
purpose within The City of New York or, at the option of the Company, payment of
interest and Liquidated Damages, if any, may be made by check mailed to the
Holders of the Notes at their respective addresses set forth in the register of
Holders of Notes; provided that all payments with respect to Notes the Holders
of which have given wire transfer instructions to the Company will be required
to be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose.
The Notes have been issued in registered form, without coupons, and in
denominations of $1,000 and integral multiples thereof.
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<PAGE> 86
The Indenture does not contain any financial covenants or restrictions on
the payment of dividends, the incurrence of Senior Indebtedness or issuance or
repurchase of securities of the Company. The Indenture contains no covenants or
other provisions to afford protection to Holders of the Notes in the event of a
highly leveraged transaction or a change in control of the Company except to the
extent described under "-- Repurchase of Notes at the Option of Holders Upon a
Change of Control."
CONVERSION RIGHTS
The Holder of any Note has the right to convert such Note, or any portion
thereof which is an integral multiple of $1,000, into shares of Common Stock of
the Company at any time prior to maturity (unless earlier redeemed or
repurchased), initially at the conversion price stated on the cover page hereof
(which is equivalent to a conversion rate of 70.985 shares per $1,000 principal
amount of Notes), subject to adjustment as described below (the "Conversion
Price"). The right to convert Notes called for redemption will terminate at the
close of business on the Business Day immediately preceding the Redemption Date
(as defined below) (unless the Company defaults in making the payments due upon
redemption, in which case the conversion right shall not terminate until the
close of business on the date such default is cured and such Notes are
redeemed). A Note for which a Holder has delivered a notice exercising the
option of such Holder to require the Company to repurchase such Note may be
converted only if such notice is withdrawn by a written notice of withdrawal
delivered by such Holder to the Company (or an agent designated by the Company
for such purpose) prior to the close of business on the Repurchase Date (as
defined below) in accordance with the terms of the Indenture. The Notes are
convertible at the offices or agencies of the Company maintained for such
purposes in The City of New York.
The Conversion Price is subject to adjustment upon the occurrence of
certain events, including (i) the issuance of shares of Common Stock as a
dividend or distribution on the Common Stock; (ii) the subdivision, combination
or reclassification of the outstanding Common Stock; (iii) the issuance to all
or substantially all holders of Common Stock of rights, warrants or options to
subscribe for or purchase Common Stock (or securities convertible into Common
Stock) at a price per share less than the then current market price per share,
as defined in the Indenture; (iv) the distribution of shares of Capital Stock of
the Company (other than Common Stock), evidences of indebtedness or other assets
(excluding dividends payable exclusively in cash) to all or substantially all
holders of Common Stock; (v) the distribution to all or substantially all of the
holders of Common Stock of rights or warrants to subscribe for Capital Stock
(other than Common Stock) at a price per share less than the then current market
price per share of such Capital Stock; (vi) the issuance of Common Stock for a
price per share less than the current market price per share (determined as set
forth below) on the date the Company fixes the offering price of such additional
shares (other than issuances of Common Stock under certain employee benefit
plans of the Company and certain other issuances described in the Indenture);
(vii) the distribution, by dividend or otherwise, of cash (excluding any cash
portion of a distribution resulting in an adjustment pursuant to clause (iv)
above) to all holders of Common Stock in an aggregate amount that, combined
together with (A) all other distributions of cash that did not trigger a
Conversion Price adjustment to all holders of Common Stock within the 12 months
preceding the date fixed for determining the shareholders entitled to such
distribution plus (B) any cash and the fair market value of consideration that
did not trigger a Conversion Price adjustment payable in respect of any tender
offer by the Company or any of its subsidiaries for Common Stock (as described
in clause (viii) below) consummated within the 12 months preceding the date
fixed for determining the shareholders entitled to such distribution, exceeds
15% of the product of the current market price per share (determined as set
forth below) on the date fixed for the determination of shareholders entitled to
receive such distribution times the number of shares of Common Stock outstanding
on such date; and (viii) the completion of a tender offer made by the Company or
any of its subsidiaries for Common Stock involving an aggregate consideration
that, together with (A) any cash and the fair market value of any consideration
that did not trigger a Conversion Price adjustment paid or
85
<PAGE> 87
payable in respect of any previous tender offer by the Company or its subsidiary
for Common Stock consummated with the 12 months preceding the consummation of
such tender offer plus (B) the aggregate amount of any distribution of cash that
did not trigger a Conversion Price adjustment (as described in clause (vii)
above) to all holders of Common Stock within the 12 months preceding the
consummation of such tender offer, exceeds 15% of the product of the current
market price per share (determined as set forth below) immediately prior to the
expiration of such offer times the number of shares of Common Stock outstanding
at the expiration of such offer. In the event of a distribution to all or
substantially all holders of Common Stock of rights to subscribe for additional
shares of the Company's Capital Stock (other than those referred to in clause
(iii) above), the Company may, instead of making an adjustment in the Conversion
Price, make proper provisions so that each holder of a Note who converts such
Note after the record date for such distribution and prior to the expiration or
redemption of such rights shall be entitled to receive upon such conversion, in
addition to shares of Common Stock, an appropriate number of such rights. No
adjustment of the Conversion Price will be made until cumulative adjustments
amount to one percent or more of the Conversion Price as last adjusted.
If any Note is converted between the Record Date for the payment of
interest and the next succeeding Interest Payment Date, such Note must be
accompanied by funds equal to the interest payable on such succeeding Interest
Payment Date on the principal amount so converted (unless such Note shall have
been called for redemption, in which case no such payment shall be required),
and the interest on the principal amount of the Note being converted will be
paid on such next succeeding Interest Payment Date to the registered holder of
such Note on the immediately preceding Record Date, except as provided in the
Indenture. A Note converted on an Interest Payment Date need not be accompanied
by any payment, and the interest on the principal amount of the Note being
converted will be paid on such Interest Payment Date to the registered holder of
such Note on the immediately preceding Record Date. Subject to the aforesaid
right of the registered holder to receive interest, no payment or adjustment
will be made on conversion for interest accrued on the converted Note or for
dividends on the Common Stock issued on conversion. Fractional shares of Common
Stock shall not be issued upon conversion, but, in lieu thereof, the Company
will pay a cash adjustment based upon the market price of the Common Stock on
the first business day prior to the day of conversion, as provided in the
Indenture.
In the Indenture, the "current market price" per share of Common Stock on
any date shall be deemed to be the average of the Daily Market Prices for the
shorter of (i) 30 consecutive Business Days ending on the last full trading day
on the exchange or market referred to in determining such Daily Market Prices
prior to the time of determination or (ii) the period commencing on the date
next succeeding the first public announcement of the issuance of such rights or
warrants or such distribution through such last full trading day prior to the
time of determination.
In case of any consolidation or merger of the Company with or into any
other corporation, or in the case of any consolidation or merger of another
corporation into the Company in which the Company is the surviving corporation,
involving in either case a reclassification, conversion, exchange or
cancellation of shares of Common Stock, or any sale or transfer of all or
substantially all of the assets of the Company, the Holder of each Note shall,
after such consolidation, merger, sale or transfer, have the right to convert
such Note into the kind and amount of securities or other property, which may
include cash, which such Holder would have been entitled to receive upon such
consolidation, merger, sale or transfer if such Holder had held the Common Stock
issuable upon the conversion of such Note immediately prior to the effective
date of such consolidation, merger, sale or transfer.
OPTIONAL REDEMPTION BY THE COMPANY
The Notes are not redeemable at the Company's option prior to August 15,
2001. Thereafter, the Notes are subject to redemption at the option of the
Company, in whole or in part (in any integral multiple of $1,000), upon not less
than 30 nor more than 60 days' notice, at the following redemption
86
<PAGE> 88
prices (expressed as percentages of principal amount), if redeemed during the
12-month period beginning on August 15 of the years indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
------------------------------------------------------- ----------
<S> <C>
2001................................................... 101.179%
2002 and thereafter.................................... 100.000
</TABLE>
in each case together with accrued but unpaid interest and Liquidated Damages,
if any, to the redemption date (subject to the right of Holders of record on the
relevant record date to receive interest due on an Interest Payment Date that is
on or prior to the Redemption Date).
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange or national market
system, if any, on which the Notes are listed, or, if the Notes are not so
listed, on a pro rata basis, by lot or by such other method as the Trustee shall
deem fair and appropriate; provided that no Notes of $1,000 principal amount or
less shall be redeemed in part. Notice of any redemption will be sent, by
first-class mail, at least 30 days and not more than 60 days prior to the date
fixed for redemption, to the Holder of each Note to be redeemed to such Holder's
last address as then shown upon the registry books of the Registrar. The notice
of redemption must state the Redemption Date, the Redemption Price and the
amount of accrued interest to be paid. Any notice that relates to a Note to be
redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the Redemption
Date, upon surrender of such Note, a new Note or Notes in principal amount equal
to the unredeemed portion thereof will be issued. On and after the Redemption
Date, interest will cease to accrue on the Notes or portion thereof called for
redemption, unless the Company defaults in its obligations with respect thereto.
The Notes will not have the benefit of any sinking fund.
REPURCHASE OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
The Indenture provides that in the event that a Change of Control (as
defined below) has occurred, each Holder will have the right, at such Holder's
option, pursuant to an irrevocable and unconditional offer by the Company (the
"Repurchase Offer"), to require the Company to repurchase all or any part of
such Holder's Notes (provided, that the principal amount of such Notes must be
$1,000 or an integral multiple thereof) on the date (the "Repurchase Date") that
is no later than 60 days after the occurrence of such Change of Control at a
cash price equal to 101% of the principal amount thereof, together with accrued
and unpaid interest and Liquidated Damages, if any, to the Repurchase Date (the
"Repurchase Price"). The Repurchase Offer shall be made within 30 days following
a Change of Control and shall remain open for a period specified by the Company
but not less than 20 Business Days following its commencement (the "Repurchase
Offer Period"). Upon expiration of the Repurchase Offer Period, the Company
shall purchase all Notes tendered in response to the Repurchase Offer in the
manner described below. If required by applicable law, the Repurchase Date and
the Repurchase Offer Period may be extended to the extent required; however, if
so extended, it shall nevertheless constitute an Event of Default if the
Repurchase Date does not occur within 90 days of the Change of Control.
The Indenture provides that a "Change of Control" will be deemed to have
occurred when: (i) any "person" or "group" (as such terms are used for purposes
of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable),
other than a Permitted Holder, is or becomes the "beneficial owner," directly or
indirectly, of shares representing more than 50% of the combined total voting
power of the then outstanding securities entitled to vote generally in elections
of directors of the Company ("Voting Stock"), (ii) the Company consolidates with
or merges into any other person or conveys, transfers or leases, whether
directly or indirectly, all or substantially all of its assets to any person, or
any other person merges into the Company, and, in the case of any such
transaction, the outstanding Common Stock of the Company is changed or exchanged
as a result,
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unless the shareholders of the Company immediately before such transaction own,
directly or indirectly immediately following such transaction, at least a
majority of the combined voting power of the outstanding voting securities of
the corporation resulting from such transaction in substantially the same
proportion inter se as their ownership of the Voting Stock immediately before
such transaction, (iii) at any time the Continuing Directors (as defined below)
do not constitute the majority of the Board of Directors of the Company (or, if
applicable, a successor corporation to the Company), or (iv) the Common Stock of
the Company (or other common stock into which the Notes are then convertible) is
neither listed for trading on a United States national securities exchange or
approved for trading on an established automatic over-the-counter trading market
in the United States. "Continuing Directors" means, as of any date of
determination, any member of the Board of Directors of the Company who (i) was a
member of the Board of Directors on the date of the Indenture or (ii) was
nominated for election or elected to such Board of Directors with the approval
of a majority of the Continuing Directors who were members of the Board of
Directors at the time of such nomination or election.
On or before the Repurchase Date, the Company will (i) accept for payment
Notes or portions thereof properly tendered pursuant to the Repurchase Offer,
(ii) deposit with the Paying Agent cash sufficient to pay the Repurchase Price
of all Notes so tendered and (iii) deliver to the Trustee Notes so accepted,
together with an Officers' Certificate listing the Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail to the
Holders of Notes so accepted payment in an amount equal to the Repurchase Price
(together with accrued and unpaid interest), and the Trustee will promptly
authenticate and mail or deliver to such Holders a new Note or Notes equal in
principal amount to any unpurchased portion of the Notes surrendered. Any Notes
not so accepted will be promptly mailed or delivered by the Company to the
Holder thereof. The Company will publicly announce the results of the Repurchase
Offer on or as soon as practicable after the Repurchase Date.
The phrase "all or substantially all" off the assets of the Company is
likely to be interpreted by reference to applicable state law at the relevant
time, and will be dependent on the facts and circumstances existing at such
time. As a result, there may be a degree of uncertainty in ascertaining whether
a sale or transfer of "all or substantially all" of the assets of the Company
has occurred. In addition, no assurances can be given that the Company will be
able to acquire the Notes tendered upon the occurrence of a Change of Control.
For purposes of the definition of Change of Control, (i) the terms "person"
and "group" shall have the meaning used for purposes of Rules 13d-3 and 13d-5 of
the Exchange Act as in effect on the Issuance Date, whether or not applicable;
and (ii) the term "beneficial owner" shall have the meaning used in Rules 13d-3
and 13d-5 under the Exchange Act as in effect on the Issuance Date, whether or
not applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time or upon
the occurrence of certain events.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control purchase feature resulted from negotiations
between the Company and the Initial Purchasers.
The provisions of the Indenture relating to a Change of Control may not
afford the Holders protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger, spin-off or similar transaction that may
adversely affect Holders, if such transaction does not constitute a Change of
Control, as set forth above. In addition, the Company may not have sufficient
financial resources available to fulfill its obligation to repurchase the Notes
upon a Change of Control or to repurchase other debt securities of the Company
or its Subsidiaries providing similar rights to the holders thereof.
To the extent applicable and if required by law, the Company will comply
with Section 14 of the Exchange Act and the provisions of Regulation 14E and any
other tender offer rules under the
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Exchange Act and any other securities laws, rules and regulations that may then
be applicable to any offer by the Company to purchase the Notes at the option of
Holders upon a Change in Control.
The right to require the Company to repurchase Notes as a result of the
occurrence of a Change of Control could create an event of default under Senior
Indebtedness as a result of which any repurchase could, absent a waiver, be
blocked by the subordination provision of the Notes. See "-- Subordination."
Failure of the Company to repurchase the Notes when required would result in an
Event of Default with respect to the Notes whether or not such repurchase is
permitted by the subordination provisions.
SUBORDINATION
The payment of principal, premium, if any, interest and Liquidated Damages,
if any, on the Notes is subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Indebtedness, whether
outstanding on the date of the Indenture or thereafter incurred. Upon any
distribution to the creditors of the Company in a liquidation or dissolution of
the Company or in a bankruptcy, reorganization, insolvency, receivership or
other similar proceeding relating to the Company or its property, an assignment
for the benefit of creditors or any marshalling of the Company's assets and
liabilities, the holders of the Senior Indebtedness will be entitled to receive
payment in full of all obligations in respect of such Senior Indebtedness before
the Holders will be entitled to receive any payment with respect to the Notes.
In the event of any acceleration of the Notes because of an Event of
Default, the holders of any Senior Indebtedness then outstanding would be
entitled to payment in full of all obligations in respect of such Senior
Indebtedness before the Holders are entitled to receive any payment or
distribution in respect of the Notes. The Indenture further requires that the
Company promptly notify holders of Senior Indebtedness if payment of the Notes
is accelerated because of an Event of Default.
The Company also may not make any payment upon or in respect of the Notes
if (i) a default in the payment of the principal of, premium, if any, interest,
rent or other Obligations in respect of Designated Senior Indebtedness occurs
and is continuing beyond any applicable period of grace or (ii) any other
default occurs and is continuing with respect to Designated Senior Indebtedness
that permits holders of the Designated Senior Indebtedness as to which such
default relates to accelerate its maturity and the Trustee receives a notice of
such default (a "Payment Blockage Notice") from the Company or other person
permitted to give such notice under the Indenture. Payments on the Notes may and
shall be resumed (a) in the case of a payment default, upon the date on which
such default is cured or waived and (b) in the case of a nonpayment default, the
earlier of the date on which such nonpayment default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is received.
No new period of payment blockage may be commenced unless and until (i) 365 days
shall have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice and (ii) all scheduled payments of principal, premium, if any,
and interest on the Notes that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis of a
subsequent Payment Blockage Notice.
By reason of the subordination provisions described above, in the event of
the Company's liquidation or insolvency, holders of Senior Indebtedness may
receive more, ratably, and Holders of the Notes may receive less, ratably, than
the other creditors of the Company. Such subordination will not prevent the
occurrences of any Event of Default under the Indenture.
The Notes are obligations exclusively of the Company. Since certain
operations of the Company are conducted through its Subsidiaries, the cash flow
and the consequent ability to service debt, including the Notes, of the Company,
are dependent upon the earnings of its Subsidiaries and the distribution of
those earnings to, or upon loans or other payments of funds by those
Subsidiaries to, the Company. The payment of dividends and the making of loans
and advances to the Company by
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its Subsidiaries may be subject to statutory or contractual restrictions, are
dependent upon the earnings of those Subsidiaries and are subject to various
business considerations.
Any right of the Company to receive assets of any of its Subsidiaries upon
their liquidation or reorganization (and the consequent right of the Holders of
the Notes to participate in those assets) will be effectively subordinated to
the claims of that Subsidiary's creditors (including trade creditors), except to
the extent that the Company is itself recognized as a creditor of such
Subsidiary, in which case the claims of the Company would still be subordinate
to any security interests in the assets of such Subsidiary and any indebtedness
of such Subsidiary senior to that held by the Company.
As of August 31, 1996, the Company had approximately $22,772,000 of
indebtedness outstanding that would have constituted Senior Indebtedness
(excluding liabilities of a type not required to be reflected as a liability on
the balance sheet of the Company in accordance with GAAP) and approximately
$1,088,000 of indebtedness outstanding and other obligations of Subsidiaries of
the Company (excluding intercompany liabilities and liabilities of a type not
required to be reflected as a liability on the balance sheet of such
Subsidiaries in accordance with GAAP) as to which the Notes would have been
structurally subordinated. The Indenture does not limit the amount of additional
indebtedness, including Senior Indebtedness, which the Company is permitted to
create, incur, assume or guarantee, nor does the Indenture limit the amount of
indebtedness and other liabilities which any Subsidiary is permitted to create,
incur, assume or guarantee.
In the event that, notwithstanding the foregoing, the Trustee or any Holder
receives any payment or distribution of assets of the Company of any kind in
contravention of any of the terms of the Indenture, whether in cash, property or
securities, including, without limitation by way of set-off or otherwise, in
respect of the Notes before all Senior Indebtedness is paid in full, then such
payment or distribution will be held by the recipient in trust for the benefit
of holders of Senior Indebtedness, and will be immediately paid over or
delivered to the holders of Senior Indebtedness or their representative or
representatives to the extent necessary to make payment in full of all Senior
Indebtedness remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of Senior
Indebtedness.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company to
comply with the provisions described under the caption "-- Repurchase of Notes
at the Option of Holders Upon a Change of Control"; (iv) failure by the Company
for 60 days after notice to comply with any of its other agreements in the
Indenture or the Notes; (v) default under any mortgage, indenture or instrument
under which there is issued or by which there is secured or evidenced any
indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such indebtedness or guarantee now exists, or is created after the date
of the Indenture, which default (a) is caused by a failure to pay principal of
or premium, if any, or interest on such indebtedness prior to the expiration of
the grace period provided in such indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such indebtedness prior
to its express maturity and, in each case, the principal amount of any such
indebtedness, together with the principal amount of any other such indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, is an amount which, in the aggregate, is equal to or greater
than $10 million; (vi) failure by the Company or any of its Subsidiaries to pay
final judgments in an amount which, in the aggregate, exceeds $10 million and
which judgments are not paid, discharged, bonded or stayed
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within 60 days after their entry; and (vii) certain events of bankruptcy or
insolvency with respect to the Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee, may on behalf of all Holders waive any
existing Default or Event of Default and its consequences under the Indenture
except a continuing Default or Event of Default in the payment of interest on,
or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company may not consolidate or merge with
or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company is
the surviving corporation, Person or entity formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; and (iii) immediately after
such transaction no Default or Event of Default exists.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders (i) all quarterly and annual financial information
that would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, an audit report
thereon by the Company's certified independent accountants and (ii) all current
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. In addition, whether or not
required by the rules and regulations of the Commission, the Company will file a
copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing). In addition,
the Company has agreed to furnish to the Holders or beneficial holders of the
Notes or the underlying Common Stock and prospective purchasers of the Notes or
the underlying Common Stock designated by the Holders of the Notes or the
underlying Common Stock, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4)
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under the Securities Act until such time as such securities are no longer
"restricted securities" within the meaning of Rule 144 under the Securities Act.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder, by accepting a Note, waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note is treated as the owner of the Note for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, the Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"-- Repurchase of Notes at the Option of Holders Upon a Change of Control"),
(iii) reduce the rate of or change the time for payment of interest on any Note,
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest or Liquidated Damages, if any, on the Notes (except
a rescission of acceleration of the Notes by the Holders of at least a majority
in aggregate principal amount of the Notes and a waiver of the payment default
that resulted from such acceleration), (v) make any Note payable in money other
than that stated in the Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of Notes
to receive payments of principal of, premium, if any, interest or Liquidated
Damages, if any, on the Notes, (vii) waive a redemption payment with respect to
any Note (other than a payment required by one of the covenants described above
under the caption "-- Repurchase of Notes at the Option of Holders Upon a Change
of Control") (viii) modify the conversion or subordination provisions of the
Indenture in a manner adverse to the Holders of the Notes or (ix) make any
change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder, the
Company and the Trustee may amend or supplement the Indenture or the Notes to
cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes
in addition to or in place of certificated Notes, to
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provide for the assumption of the Company's obligations to Holders in the case
of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders or that does not adversely affect
the legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee is permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that in case an Event of Default shall occur
(which shall not be cured), the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee is under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
Holder, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
The Notes sold within the United States to qualified institutional buyers
("Qualified Institutional Buyers") have been issued in the form of a Rule 144A
Global Note. The Rule 144A Global Note has been deposited with, or on behalf of,
DTC and registered in the name of DTC or its nominee (the "Global Note Holder").
Except as set forth below, the Rule 144A Global Note may be transferred, in
whole and not in part, only to DTC or another nominee of DTC. Investors may hold
their beneficial interests in the Rule 144A Global Note directly through DTC if
they are Participants in such system or indirectly through organizations that
are Participants in such system.
The Notes originally sold to "accredited investors" (as defined in Rule
501(a)(l), (2), (3), (4) or (7) under the Securities Act and referred to as
"Accredited Investors") who are not Qualified Institutional Buyers have been
issued and registered in certificated form without coupons and bear a legend
containing restrictions on transfers (the "Certificated Notes"). Certificated
Notes are not eligible to be exchanged for an interest in a Global Note.
The Notes sold outside of the United States in reliance on Regulation S
under the Securities Act initially are represented by the Regulation S Permanent
Global Note. The Regulation S Permanent Global Note will be deposited with a
custodian and will be registered in the name of a nominee of DTC. Cedel Bank and
Euroclear will hold beneficial interests in the Regulation S Permanent Global
Note on behalf of their participants through their respective depositaries,
which in turn will hold such beneficial interests in the Regulation S Permanent
Global Note in participants' securities accounts in the depositaries' names on
the books of DTC. In addition, Notes sold outside of the United States in
reliance on Regulation S under the Securities Act may, to the extent permitted
by Regulation S, be issued and registered in certificated form without coupons
and will bear a legend containing restrictions on transfers (the "Regulation S
Certificated Notes"). Any such Regulation S Certificated Notes will be subject
to limitations on any further transfer or exchange in a manner consistent with
the requirements of Regulation S.
A beneficial interest in the Regulation S Permanent Global Note may be
transferred to a person who takes delivery in the form of an interest in the
Rule 144A Global Note only upon receipt by the Trustee of a written
certification from the transferor in the form required by the Indenture to the
effect that such transfer is being made (i)(a) to a person whom the transferor
reasonably believes
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is a Qualified Institutional Buyer in a transaction meeting the requirements of
Rule 144A or (b) pursuant to another exemption from the registration
requirements under the Securities Act (in which case such certificate must be
accompanied by an opinion of counsel regarding the availability of such
exemption) and (ii) in accordance with all applicable securities laws of any
state of the United States or any other jurisdiction. Beneficial interests in
the Rule 144A Global Note may be transferred to a person who takes delivery in
the form of an interest in the Regulation S Permanent Global Note, whether
before, on or after the 40-day restricted period, only upon receipt by the
Trustee of a written certification from the transferor in the form required by
the Indenture to the effect that such transfer is being made in accordance with
Regulation S. Any beneficial interest in one of the Global Notes that is
transferred to a person who takes delivery in the form of an interest in another
Global Note will, upon transfer, cease to be an interest in such Global Note and
become an interest in such other Global Note and, accordingly, will thereafter
be subject to all transfer restrictions and other procedures applicable to
beneficial interests in such other Global Note for as long as it remains such an
interest.
Because of time-zone differences, the securities accounts of Euroclear or
Cedel Bank participants (each, a "Member Organization") purchasing an interest
in a Global Note from a Participant that is not a Member Organization will be
credited during the securities settlement processing day (which must be a
business day for Euroclear or Cedel Bank, as the case may be) immediately
following the DTC settlement date. Transactions in interests in a Global Note
settled during any securities settlement processing day will be reported to the
relevant Member Organization on the same day. Cash received in Euroclear or
Cedel Bank as a result of sales of interests in a Global Note by or through a
Member Organization to a Participant that is not a Member Organization will be
received with value on the DTC settlement date, but will not be available in the
relevant Euroclear or Cedel Bank cash account until the business day following
settlement at DTC. The Notes are eligible for trading in the PORTAL Market.
Subject to compliance with the transfer restrictions applicable to the
Global Notes described above and in the Indenture, cross-market transfers
between holders of interests in the Rule 144A Global Note, on the one hand, and
direct or indirect account holders at a Member Organization holding interests in
the Regulation S Permanent Global Note, on the other, will be effected through
the DTC in accordance with its rules and the rules of Euroclear or Cedel Bank,
as applicable. Such cross-market transactions will require, among other things,
delivery of instructions by such Member Organization to Euroclear or Cedel Bank,
as the case may be, in accordance with the rules and procedures and within
deadlines (Brussels time) established in Euroclear or Cedel Bank, as the case
may be. If the transaction complies with all relevant requirements, Euroclear or
Cedel Bank, as the case may be, will then deliver instructions to its depositary
to take action to effect final settlement on its behalf.
DTC is a limited-purpose trust company that was created to hold securities
for its participating organizations (collectively, the "Participants") and to
facilitate the clearance and settlement of transactions in such securities
between Participants through electronic book-entry changes in accounts thereof.
DTC's Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through
Participants or Indirect Participants.
The Company expects that pursuant to procedures established by DTC (i) upon
the issuance of the Rule 144A Global Notes, or the Regulation S Permanent Global
Notes (each, a "Global Note" and together, the "Global Notes"), DTC will credit
the accounts of Participants designated by the Initial Purchaser with portions
of the principal amount of the Global Notes and (ii) ownership of the Notes
evidenced by the Global Notes will be shown on, and the transfer of ownership
thereof will be
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effected only through, records maintained by DTC (with respect to the interests
of the Participants), Participants and Indirect Participants. Prospective
purchasers are advised that the laws of some states require that certain persons
take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer Notes evidenced by the Global Notes will
be limited to such extent. For certain other restrictions on the transferability
of the Notes, see "Notice to Investors."
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Notes. Beneficial owners of Notes evidenced by the
Global Notes are considered the owners or holders thereof under the Indenture
for any purpose, including with respect to the giving of any directions,
instructions or approvals to the Trustee thereunder. Neither the Company nor the
Trustee has any responsibility or liability for any aspect of the records of DTC
or for maintaining, supervising or reviewing any records of DTC relating to the
Notes.
Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any Notes registered in the name of the Global
Note Holder on the applicable Record Date are payable by the Trustee to or at
the direction of the Global Note Holder in its capacity as the registered holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee may treat the persons in whose names Notes, including the Global Notes,
are registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of Notes (including principal, premium, if any, interest and Liquidated Damages,
if any). The Company believes, however, that it is currently the policy of DTC
to immediately credit the accounts of the relevant Participants with such
payments, in amounts proportionate to their respective holdings of beneficial
interests in the relevant security as shown on the records of DTC. Payments by
Participants and Indirect Participants to the beneficial owners of Notes will be
governed by standing instructions and customary practice and will be the
responsibility of Participants or Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Notes may, upon request to the Trustee, exchange such beneficial
interest for Notes evidenced by registered, definitive Certificated Notes. Upon
any such issuance, the Trustee is required to register such Certificated Notes
in the name of, and cause the same to be delivered to, such person or persons
(or the nominee of any thereof). All such Certificated Notes would be subject to
the legend requirements described herein under "Notice to Investors." In
addition, if (i) the Company notifies the Trustee in writing that DTC is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
the form of Certificated Notes under the Indenture, then, upon surrender by the
Global Note Holder of its Global Notes, Notes in such form will be issued to
each person that the Global Note Holder and DTC identify as being the beneficial
owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or DTC in identifying the beneficial owners of Notes and the
Company and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from the Global Note Holder or DTC for all purposes.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Pursuant to the Registration Rights Agreement, the Company has agreed for
the benefit of the Holders, that (i) it will, at its cost, within 60 days after
the closing of the Private Placement (the "Closing"), file a shelf registration
statement (the "Shelf Registration Statement") with the
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Commission with respect to resales of the Notes and the Conversion Shares, (ii)
it will use its best efforts to cause such Shelf Registration Statement to be
declared effective by the Commission within 150 days after the Closing, and
(iii) it will use its best efforts to keep such Shelf Registration Statement
continuously effective under the Securities Act until, subject to certain
exceptions specified in the Registration Rights Agreement, the third anniversary
of the date of the Closing. The Company will be permitted to suspend use of the
prospectus that is part of the Shelf Registration Statement during certain
periods of time and in certain circumstances relating to pending corporate
developments and public filings with the Commission and similar events. If (a)
the Company fails to file the Shelf Registration Statement required by the
Registration Rights Agreement on or before the date specified for such filing,
(b) such Shelf Registration Statement is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date") or (c) the Shelf Registration Statement is declared
effective but thereafter ceases to be effective or usable in connection with
resales of Transfer Restricted Securities (as defined below) during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (c) above a "Registration Default"), then the Company will
pay Liquidated Damages to each Holder, with respect to the first 90-day period
immediately following the occurrence of such Registration Default in an amount
equal to $.05 per week per $1,000 aggregate principal amount of the Notes held
by such Holder. The amount of the Liquidated Damages will increase by an
additional $.05 per week per $1,000 aggregate principal amount of the Notes held
by each Holder with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $.25 per week per $1,000 aggregate principal amount of the Notes held
by each Holder. All accrued Liquidated Damages will be paid by the Company on
each Interest Payment Date in cash. Such payment will be made to the Holder of
the Global Notes by wire transfer of immediately available funds or by federal
funds check and to Holders of Certificated Notes, if any, by wire transfer to
the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease.
For purposes of the foregoing, "Transfer Restricted Securities" means the
Notes and the Conversion Shares until (i) the date on which such Notes or
Conversion Shares have been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement, (ii) the date
on which such Notes or Conversion Shares are distributed to the public pursuant
to Rule 144 under the Securities Act (or any similar provision then in effect)
or are saleable pursuant to Rule 144(k) under the Securities Act and all legends
relating to transfer restrictions have been removed or (iii) the date on which
such Notes or Conversion Shares cease to be outstanding.
Holders of Notes will be required to deliver information to be used in
connection with the Shelf Registration Statement within the time periods set
forth in the Registration Rights Agreement in order to have their Notes or the
Common Stock issuable upon exercise thereof included in the Shelf Registration
Statement and benefit from the provisions regarding Liquidated Damages set forth
above.
If the Company determines that it is permissible to do so under applicable
law, in lieu of filing or maintaining the effectiveness of the shelf
registration statement with respect to the Notes, the Company may, at its
option, file with the Commission a registration statement with respect to an
issue of notes identical in all material respects to the Notes (the "New Notes")
except as to transfer restrictions and, upon such registration statement
becoming effective, offer the holders of the Notes the opportunity to exchange
their Notes for the New Notes. The Company has not determined that any such
registered exchange offer is permissible under applicable law, and there can be
no assurance that it will do so in the future.
The Company will provide to each registered holder of the Notes or the
Conversion Shares, who is named in the prospectus and who so requests in
writing, copies of the prospectus which will be a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration
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Statement for the Notes or the Conversion Shares has become effective and take
certain other actions as are required to permit unrestricted resales of the
Notes or the Conversion Shares. A holder of Notes or the Conversion Shares that
sells such securities pursuant to a Shelf Registration Statement generally will
be required to be named as a selling security holder in the related prospectus
and to deliver a prospectus to purchasers, will be subject to certain of the
civil liability provisions under the Securities Act in connection with such
sales and will be bound by the provisions of the Registration Rights Agreement
which are applicable to such a holder (including certain indemnification and
contribution rights and obligations).
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes
represented by the Global Note (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available funds to the accounts specified by the Global Note Holder. With
respect to Certificated Notes, the Company will make all payments of principal,
premium, if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearing-house or next-day funds. In
contrast, the Notes represented by the Global Note are eligible to trade in the
PORTAL Market and to trade in the DTC's Same-Day Funds Settlement System, and
any permitted secondary market trading activity in such Notes is, therefore,
required by DTC to be settled in immediately available funds. The Company
expects that secondary trading in the Certificated Notes will also be settled in
immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture and the
Registration Rights Agreement. Reference is made to the Indenture and the
Registration Rights Agreement for a full disclosure of all such terms, as well
as any other capitalized terms used herein for which no definition is provided.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Credit Agreement" means that certain Credit Agreement, dated as of
November 8, 1995, by and among the Company, PacNet Inc., Advanced Network
Design, AdVal, Inc., Cel-Tech International Corp. and Transamerica Business
Credit Corporation, as agent for the lenders, as amended, providing for up to
$43 million of revolving credit borrowings, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
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"Designated Senior Indebtedness" means any particular Senior Indebtedness
having an outstanding principal amount or commitment in excess of $10 million
with respect to which the instrument creating or evidencing the same or the
assumption or guarantee thereof (or related agreements or documents to which the
Company is a party) expressly provides that such Indebtedness shall be
"Designated Senior Indebtedness" for purposes of the Indenture (provided that
such instrument, agreement or other document may place limitations and
conditions on the right of such Senior Indebtedness to exercise the rights of
Designated Senior Indebtedness.)
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Global Notes" means the Rule 144A Global Note, the Regulation S Temporary
Global Note and the Regulation S Permanent Global Note.
"Indebtedness" means, with respect to any person, all obligations, whether
or not contingent, of such person (i)(a) for borrowed money (including, but not
limited to, any indebtedness secured by a security interest, mortgage or other
lien on the assets of the Company which is (1) given to secure all or part of
the purchase price of property subject thereto, whether given to the vendor of
such property or to another, or (2) existing on property at the time of
acquisition thereof), (b) evidenced by a note, debenture, bond or other written
instrument, (c) under a lease required to be capitalized on the balance sheet of
the lessee under GAAP, (d) in respect of letters of credit, bank guarantees or
bankers' acceptances (including reimbursement obligations with respect to any of
the foregoing), (e) with respect to Indebtedness secured by a mortgage, pledge,
lien, encumbrance, charge or adverse claim affecting title or resulting in an
encumbrance to which the property or assets of such person are subject, whether
or not the obligation secured thereby shall have been assumed by or shall
otherwise be such person's legal liability, (f) in respect of the balance of
deferred and unpaid purchase price of any property or assets or (g) under
interest rate or currency swap agreements, cap, floor and collar agreements,
spot and forward contracts and similar agreements and arrangements; (ii) with
respect to any obligation of others of the type described in the preceding
clause (i) or under clause (iii) below assumed by or guaranteed in any manner by
such person, contingent or otherwise (and, without duplication, the obligations
of such person under any such assumptions, guarantees or other such
arrangements); and (iii) any and all deferrals, renewals, extensions,
refinancings and refundings of, or amendments, modifications or supplements to,
any of the foregoing.
"Issuance Date" means the date on which the Notes are originally issued and
authenticated under the Indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Designee" means (i) a spouse or child of a Permitted Holder,
(ii) trusts for the benefit of a Permitted Holder or a spouse or child of a
Permitted Holder, (iii) in the event of death or incompetence of a Permitted
Holder, his estate, heirs, executor, administrator, committee or other personal
representative or (iv) any Affiliate of a Permitted Holder.
"Permitted Holders" means Paul Pfleger, John M. Orehek and their Permitted
Designees.
"person" or "Person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Regulation S" means Regulation S promulgated under the Securities Act.
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"Regulation S Permanent Global Note" means a permanent global note that is
deposited with and registered in the name of the Depositary or its nominee,
representing a series of Notes sold in reliance on Regulation S.
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"Rule 144A Global Note" means a permanent global note that is deposited
with and registered in the name of the Depositary or its nominee, representing a
series of Notes sold in reliance on Rule 144A.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on, rent under, and any other amounts payable on or in respect of the Credit
Agreement and any other Indebtedness of the Company (including, without
limitation, any Obligations in respect of such Indebtedness and, in the case of
Designated Senior Indebtedness, any interest accruing after the filing of a
petition by or against the Company under any Bankruptcy Law, whether or not
allowed as a claim after such filing in any proceeding under such Bankruptcy
Law), whether outstanding on the date of this Indenture or thereafter created,
incurred, assumed, guaranteed or in effect guaranteed by the Company (including
all deferrals, renewals, extensions or refundings of, or amendments,
modifications or supplements to the foregoing); provided, however, that Senior
Indebtedness does not include (v) Indebtedness evidenced by the Notes, (w) any
liability for federal, state, local or other taxes owed or owing by the Company,
(x) Indebtedness of the Company to any of its Subsidiaries, (y) trade payables
of the Company, and (z) any particular Indebtedness in which the instrument
creating or evidencing the same or the assumption or guarantee thereof (or
related agreements or documents to which the Company is a party) expressly
provides that such Indebtedness shall not be senior in right of payment to, or
is pari passu with, or is subordinated or junior to, the Notes.
"Significant Subsidiary" means any subsidiary of the Company that would be
a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act and the Exchange Act, as such
Regulation is in effect on the date of the Indenture.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
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DESCRIPTION OF CAPITAL STOCK
The Company's Articles provide for authorized capital of 100,000,000
shares, consisting of 90,000,000 shares of Common Stock and 10,000,000 shares of
Preferred Stock, par value $.0001 per share ("Preferred Stock").
COMMON STOCK
As of July 31, 1996, there were 15,838,202 outstanding shares of Common
Stock. As of July 31, the Common Stock was held of record by 129 persons or
entities. Holders of the Common Stock are entitled to cast one vote for each
share held of record on all matters acted upon at any meeting of the Company's
shareholders. Holders of Common Stock are entitled to receive ratably such
dividends if, as and when declared by the Board of Directors out of funds
legally available therefor, subject to preferences that may be applicable to any
outstanding Preferred Stock. There are no cumulative voting rights, the absence
of which will, in effect, allow the holders of a majority of the outstanding
shares of the Common Stock to elect all of the directors then standing for
election. The absence of cumulative voting rights could have the effect of
delaying, deferring or preventing a change in control of Midcom. In the event of
any liquidation, dissolution or winding up of Midcom, each holder of Common
Stock will be entitled to participate, subject to the rights of any outstanding
Preferred Stock, ratably in all assets of Midcom remaining after payment of
liabilities. Holders of Common Stock have no preemptive or conversion rights.
All outstanding shares of Common Stock are, and all shares of Common Stock
issuable upon conversion of the Notes will be, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority to issue 10,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof including dividend rights, conversion
rights, voting rights, redemption rights, liquidation preferences and the number
of shares constituting any series, without any further vote or action by the
shareholders. The issuance of Preferred Stock with voting and conversion rights
may adversely affect the voting power of the holders of Common Stock. In
addition, because the terms of such Preferred Stock may be fixed by the Board of
Directors without shareholder action, the Preferred Stock could be designated
and issued quickly in the event Midcom requires additional equity capital. The
Preferred Stock could also be designated and issued with terms calculated to
defeat a proposed take-over of Midcom, or with terms that may have the effect of
delaying, deferring or preventing a change of control of Midcom. Under certain
circumstances, this could have the effect of decreasing the market price of the
Common Stock.
WARRANTS
Midcom has outstanding three warrants to purchase a total of 59,500 shares
of Common Stock, exercisable through March 28, 1999 at an exercise price of
$7.44 per share, which price is subject to adjustment to prevent dilution. The
warrants were issued in connection with the Company's acquisition of certain
assets of Telnet Communications, Inc., and the Company is obligated to register
the shares underlying these warrants. See "-- Registration Rights."
In connection with the issuance of a note payable to a seller of a customer
base purchased by the Company, the Company issued a warrant to acquire $2
million of Common Stock. In the event of non-payment of the note, the exercise
price is cancellation of the note, the principal amount of which is subject to
adjustment, and the number of shares to be issued upon exercise of the warrant
would equal $2 million divided by the then current market price of the Common
Stock.
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ESCROW SHARES AND CONTINGENT SHARES
In connection with its acquisition of certain businesses and customer
bases, Midcom has the obligation to issue or release from escrow up to 236,193
additional shares of Common Stock. Midcom has an obligation to issue or release
these shares upon the occurrence of certain contingencies, including, among
others, attainment of specified revenue levels for the acquired customer base,
adjustment of liabilities assumed and receivables purchased, and satisfaction of
general representations and warranties.
In connection with its acquisition of certain businesses and customer
bases, Midcom is obligated to issue additional shares of Common Stock in the
event that the market price of the Common Stock is below stated prices on
designated true-up dates and upon the occurrence of certain other contingencies.
Based on the price of the Common Stock on August 14, 1996 and assuming the
maximum contingent shares are issued, an additional 128,119 shares of Common
Stock would be issuable as a result of these obligations. The contingency
periods range from six months to two years.
SHAREHOLDERS AGREEMENTS
Midcom has entered into a Shareholders' Agreement dated June 7, 1994 (the
"Shareholders' Agreement") with Paul Pfleger, Ashok Rao, John M. Orehek, and
Trusts for the benefit of each of Siddhartha Rao, Kavita Rao, Divya Rao and
Anjali Rao (collectively the "Founding Shareholders"). The Shareholders'
Agreement provides that Midcom and the Founding Shareholders have a right of
first refusal if Mr. Orehek or Mr. Rao wish to sell their shares and have a
right to purchase Mr. Rao's shares in the event he resigns from the Company.
Following Mr. Rao's resignation as President, Chief Executive Officer and a
director in April 1996, the Company called for the redemption of Mr. Rao's
shares and the shares owned by the four trusts. The terms of the redemption will
be determined through arbitration. See "Certain Transactions." Pursuant to the
Shareholders' Agreement, the Founding Shareholders have agreed to vote their
shares to elect Mr. Pfleger and Mr. Rao to the Company's Board of Directors. As
part of Mr. Rao's Resignation Agreement, the Shareholders' Agreement will be
amended to remove the requirement that the Founding Shareholders vote to elect
Mr. Rao to the Company's Board of Directors. See "Certain Transactions." If,
during the term of the Shareholders' Agreement, Midcom proposes to register any
of its Common Stock under the Securities Act, the Founding Shareholders may
require Midcom to include in such registration shares of Common Stock owned by
them, subject to certain conditions and limitations. See "-- Registration
Rights." The term of the Shareholders' Agreement expires on June 7, 1999. In
connection with a transfer of their Common Stock, Messrs. Pfleger and Orehek
have each transferred his rights and obligations under the Shareholders'
Agreement to a limited partnership of which he is a beneficial owner. The two
limited partnerships have further transferred certain shares of Common Stock to
a limited liability company that also assumed the rights and obligations under
the Shareholders' Agreement. See "Principal Shareholders."
REGISTRATION RIGHTS
Holders of 9,832,946 shares of Common Stock (including shares of Common
Stock issuable upon conversion or exercise of outstanding warrants and shares
held in escrow which are deemed not to be issued, as described elsewhere in this
Prospectus) are entitled to certain rights with respect to the registration of
such shares for offer and sale to the public under the Securities Act.
Under the terms of the Registration Rights Agreement dated as of June 10,
1994 between Midcom, First Union and The Robinson-Humphrey Company, Inc.
("Robinson-Humphrey"), if Midcom proposes to register any of its securities
within five years of its initial public offering, First Union and
Robinson-Humphrey may require Midcom, at its sole expense, to include in such
registration any shares of Common Stock owned by them, subject to certain
conditions and limitations. First Union and Robinson-Humphrey may, prior to the
third anniversary of Midcom's
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initial public offering, demand that Midcom register their shares up to two
times on Form S-1 or Form S-2 and an unlimited number of times on Form S-3.
Midcom will not be obligated to effect any demand registration within six months
after the effective date of a previous demand registration or a registration in
which First Union or Robinson-Humphrey was entitled to include its shares. In
addition, so long as any shares issued to First Union or Robinson-Humphrey upon
exercise of certain warrants remain outstanding, subject to certain exceptions,
the Company shall not, without the prior written consent of the holders of a
majority of such shares: (i) make any amendment to the Company's Articles or
Bylaws, or file any resolution of the Board of Directors with the Washington
Secretary of State containing any provisions which could adversely affect or
otherwise impair the rights of the holders of such shares; or (ii) enter into,
or permit any subsidiary to enter into, related party transactions. At any time
after June 1, 2000, the Company has the right to purchase all (but not less than
all) of the shares issued to First Union or Robinson-Humphrey upon exercise of
their warrants in accordance with an agreed formula.
Under the terms of the Shareholders' Agreement if, during the term thereof,
Midcom proposes to register any of its Common Stock under the Securities Act,
the Founding Shareholders may require Midcom to include in such registration
shares of Common Stock owned by them, subject to certain conditions and
limitations. All expenses incurred in connection with such registration shall be
borne by Midcom except for the Founding Shareholders' legal fees and any
additional expenses that Midcom would not incur but for the registration of the
Founding Shareholders' shares. See "-- Shareholders' Agreement."
Under the terms of a Registration Rights Agreement dated as of December 30,
1994 between Midcom and Richard W. Stroup, if Midcom proposes to register its
Common Stock under the Securities Act at any time prior to December 31, 1996,
Mr. Stroup may require Midcom, at its sole expense, to include in such
registration any shares of Common Stock owned by him that he acquired in
connection with Midcom's acquisition of PacNet, subject to certain conditions
and limitations.
Under the terms of a registration rights agreement between Midcom and three
individuals who were the shareholders of Telnet Communications, Inc. and now
hold warrants to purchase a total of 59,500 shares of Common Stock, subject to
possible adjustment, if Midcom proposes to register Common Stock under the
Securities Act for its own account pursuant to an underwritten offering at any
time prior to April 1, 2000, each of these individuals may require Midcom, at
its sole expense, to include in such registration any shares of Common Stock
owned by him. In addition, these individuals may each demand that Midcom
register his shares one time on Form S-3, which rights expire on March 28, 1999.
Under the terms of a registration rights agreement between the Company and
Communication Services of America ("CSA"), if the Company proposes to register
Common Stock under the Securities Act for its own account pursuant to an
underwritten offering at any time prior to August 31, 1998, CSA may require the
Company, at its sole expense, to include in such registration any shares of
Common Stock owned by CSA, subject to certain conditions and limitations. In
addition, CSA may demand that the Company register CSA's shares one time on Form
S-3, provided that such shares would have an aggregate expected selling price of
at least $100,000.
Under the terms of a registration rights agreement between the Company and
Cherry Communications, if the Company proposes to register Common Stock under
the Securities Act for its own account pursuant to an underwritten offering at
any time prior to July 31, 1996, Cherry Communications may require the Company,
at its sole expense, to include in such registration any shares of Common Stock
acquired by Cherry Communications in connection with the Company's purchase from
Cherry Communications of certain customer bases, subject to certain conditions
and limitations. In addition, Cherry Communications may demand that the Company
register its shares on two occasions on Form S-3, provided that such shares
would have an aggregate expected selling price of at least $300,000.
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Under the terms of a registration rights agreement among the Company,
Theodore Berns, Donald Dean and WorldCom (each a "Rights Holder"), Rights
Holders holding a majority of the shares of Common Stock held by all Rights
Holders may demand that the Company register the shares on two occasions on Form
S-3, provided that the shares would have an aggregate expected selling price of
at least $300,000.
Under the terms of a registration rights agreement between the Company and
Richard E. John, if the Company proposes to register Common Stock under the
Securities Act for its own account pursuant to an underwritten offering or to
register the Common Stock of another pursuant to a demand registration at any
time prior to August 31, 1998, Mr. John may require the Company, at its sole
expense, to include in such registration any shares of Common Stock owned by him
that he acquired in connection with the Company's acquisition of Cel-Tech,
subject to certain conditions and limitations. In addition, Mr. John may demand
that the Company register his shares one time on Form S-3, provided that such
shares would have an aggregate expected selling price of at least $200,000.
Under the terms of a registration rights agreement between the Company and
four individuals who were shareholders of Fairfield County Telephone Corporation
("Fairfield"), each such individual may demand, on three occasions, that the
Company register on Form S-3 any shares of Common Stock owned by him or her that
he or she acquired in connection with the Company's acquisition of Fairfield,
provided that such shares would have an aggregate expected selling price of at
least $300,000.
Under the terms of a registration rights agreement among the Company and
two individuals who were shareholders of Adnet, if the Company proposes to
register Common Stock under the Securities Act at any time prior to December 31,
1998, such individuals may require the Company, at its sole expense, to include
in such registration any shares of Common Stock owned by them that were acquired
in connection with the Company's acquisition of Adnet, subject to certain
conditions and limitations. In addition, such individuals may demand that the
Company register their shares on two occasions on Form S-3, provided that such
shares would have an aggregate expected selling price of at least $300,000.
Holders of a portion of the shares subject to the foregoing registration
rights have indicated their intent to exercise their registration rights and
sell their shares in the public market as soon as, or shortly after, their
registration rights become exercisable. However, in connection with the Private
Placement, shareholders holding 1,236,012 shares subject to registration rights,
as well as the Company and certain of its officers and directors, have agreed
not to sell or grant any option for the sale of, or otherwise dispose of, any
Common Stock, or any securities convertible into or exchangeable or exercisable
for shares of Common Stock, and not to file or request to be filed, as the case
may be, any registration statement with respect to the Common Stock for a period
of 90 days after the completion of the Private Placement without the prior
written consent of PaineWebber on behalf of the Initial Purchasers.
In part to obtain the lock-up commitment referred to above, the Company has
proposed to file a shelf registration under the Securities Act with respect to
approximately 587,893 shares of Common Stock subject to demand registration
rights. This shelf registration will provide for the continuous offering,
subject to certain exceptions, of such shares in the public market for a period
of one year after the effective date of the shelf registration. Creation of this
commitment is subject to execution of new agreements with each affected
shareholder which provide, among other things, for termination of all of the
holders' other registration rights. There can be no assurance such arrangements
will be finalized.
As a result of having filed an Exchange Act report with the Commission
after its due date, the Company is not eligible to register shares on Form S-3,
an abbreviated form of registration statement, until April 1997.
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WASHINGTON LAW
Washington law contains certain provisions that may have the effect of
delaying or discouraging a hostile takeover of the Company. Chapter 23B.17 of
the Washington Business Corporation Act (the "WBCA") prohibits, subject to
certain exceptions, a merger, sale of assets or liquidation of a corporation
involving an "Interested Shareholder" (defined generally as a person or
affiliated group of persons acting in concert or under common control who
beneficially own 20% or more of the corporation's outstanding voting securities)
unless determined to be at a "fair price" or otherwise approved by a majority of
the Company's disinterested directors or the holders of two-thirds of the votes
of each voting group entitled to vote separately on the transaction, excluding
the votes of the Interested Shareholder. In addition, Chapter 23B.19 of the WBCA
prohibits a corporation having a class of securities registered pursuant to
Section 12 of the Exchange Act, with certain exceptions, from engaging in
certain significant business transactions with a person or group of persons
acting in concert or under common control who beneficially acquires 10% or more
of the corporation's outstanding voting securities for a period of five years
after such acquisition. The prohibited transactions include, among others, a
merger with, disposition of assets to, or issuance or redemption of stock to or
from, such person or group of persons, or allowing such person or group of
persons to receive a disproportionate benefit as a shareholder. Notwithstanding
the foregoing, an otherwise prohibited transaction may be consummated if such
transaction is approved by a majority of the members of the board of directors
prior to the date that the third parties became Interested Shareholders. These
provisions could have the effect of delaying, deterring or preventing a change
in control of the Company which, under certain circumstances, could have the
effect of decreasing the market price of the Common Stock.
CERTAIN PROVISIONS IN AMENDED AND RESTATED ARTICLES OF INCORPORATION AND BYLAWS
The WBCA permits amendment of the Articles with the approval of the holders
of a majority of the shares entitled to vote. The holders of outstanding shares
of a class may vote as a class on a proposed amendment if the amendment would
change the number of authorized shares or alter or change the powers,
preferences or special rights of such class. Holders of the same series of stock
have identical voting rights.
The Articles provide that special meetings of the shareholders may be
called by the Chairman of the Board, the President, the Board of Directors or
holders of not less than 30% of the outstanding shares entitled to vote at the
meeting. The Articles provide that certain business combinations, such as a
merger or share exchange with another corporation or the sale of a substantial
part of the Company's assets, must be approved by the holders of not less than
two-thirds of the outstanding Common Stock and any other class of stock entitled
to vote thereon voting as a single class, and the affirmative vote of a majority
of each outstanding series or class, voting as a separate class; provided,
however, that if certain continuing members of the Company's Board of Directors
approve such business combination, it may be approved by not less than a
majority of the holders of outstanding Common Stock and any other class of stock
entitled to vote thereon voting as a single class and the affirmative vote of a
majority of each outstanding series or class, voting as a separate class.
Pursuant to the Articles, commencing on the next annual meeting of the
Company's shareholders, the Company's Board of Directors is to be divided into
three classes having staggered, three-year terms. See "Management -- Board of
Directors."
The Company's Bylaws may be amended or repealed by the Board of Directors
or by the vote of holders of not less than two-thirds of the outstanding Common
Stock and any other stock entitled to vote thereon.
It is possible that the provisions described above could have the effect of
delaying, deterring or preventing a change in control or management of the
Company which, under certain circumstances, could have the effect of decreasing
the market value of the Common Stock.
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LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY
As permitted by Section 23B.08.320 of the WBCA, Article 14 of the Company's
Articles eliminates in certain circumstances the personal liability of the
Company's directors to the Company or its shareholders for monetary damages
resulting from breaches of their fiduciary duty. This provision does not
eliminate the liability of directors for (i) acts or omissions that involve
intentional misconduct or a knowing violation of law, (ii) improper declarations
of dividends, or (iii) transactions from which a director derived an improper
personal benefit.
The Company's Bylaws require the Company to indemnify its directors and
officers to the fullest extent permitted by Washington law, including under
circumstances in which indemnification is otherwise discretionary. The Company
maintains officers' and directors' liability insurance of $1 million for members
of its Board of Directors and key employees.
TRANSFER AGENT AND REGISTRAR
The transfer agent for the Common Stock is ChaseMellon Shareholder
Services. The registrar for the Notes is IBJ Schroder Bank & Trust Company.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company obtained the Revolving Credit Facility on November 8, 1995. The
facility originally provided for Revolving Loans of up to $50.0 million, subject
to a borrowing base limitation of 85% of eligible accounts receivable and other
financial ratios. In March 1996, the maximum amount available was reduced to
$43.0 million in connection with the withdrawal of one of the participating
lenders. On March 28, 1996, Transamerica, one of the lenders under the Revolving
Credit Facility, provided the Bridge Loan of $15 million in consideration of a
loan fee of $500,000. The Bridge Loan was repaid in full upon completion of the
Private Placement. Although the Bridge Loan was originally due in full on April
27, 1996, the Company had the right to extend the due date for additional 30-day
periods upon payment of an additional fee of $200,000 for each such extension,
with final payment of the Bridge Loan due by September 24, 1996. Four 30-day
extensions were exercised by the Company prior to the completion of the Private
Placement and the repayment in full of the Bridge Loan. Transamerica also
received a warrant to purchase shares of the Company's Common Stock in an
initial amount of 815,470 shares, subject to adjustment in connection with a
variety of dilutive events, at an exercise price of $.0001 per share. The
warrant expired upon completion of the Private Placement and the repayment in
full of the Bridge Loan. The Revolving Loans are collateralized by substantially
all of the assets of the Company and its subsidiaries (including the pledge of
all outstanding stock of such subsidiaries) and bear interest at the higher of
three lenders' prime rates plus 0.5% per annum or the LIBOR rate plus 2.5% per
annum. The Revolving Credit Facility expires on November 8, 1997.
Under the terms of the Revolving Credit Facility, the Company is required
to meet certain operating and financial covenant requirements and is subject to
a number of negative covenants which place limitations on, among other things,
investments (including a preclusion on any further cash investments in the
Company's Russian joint venture) and additional debt and changes in the
Company's capital structure. Other covenants preclude payment of cash dividends
except in certain limited circumstances and require the Company to obtain the
lenders' written consent prior to making any acquisition. The Company was in
default of a number of the financial covenants contained in the Revolving Credit
Facility during 1996. Also, the going concern qualification included in the
Company's independent auditors report with respect to the Company's 1995
Consolidated Financial Statements constituted an additional default under the
Revolving Credit Facility. In connection with the completion of the Private
Placement and the application of the net proceeds therefrom to the repayment in
full of the Bridge Loan and the Revolving Loans, the lenders waived all existing
defaults under the Revolving Credit Facility and amended the financial covenants
contained in the Revolving Credit Facility to, among other things, reduce the
minimum EBITDA
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financial covenant to a level consistent with the Company's revised business
plan and eliminate the minimum fixed charge ratio of EBITDA to interest expense
financial covenants. The amendment also requires that the Company maintain
minimum excess availability in an initial amount of $20.0 million for the months
of August 1996 through February 1997, declining in stages to $8.0 million for
the months of September through November 1997. As of August 31, 1996, after
giving effect to the amendment, the Company had a borrowing base of
approximately $21.0 million and a maximum borrowing availability, net of the
minimum excess availability requirement, of approximately $1.0 million. These
numbers fluctuate from day to day based on the timing of cash collections and
payments. There can be no assurance that the Company will not be in violation in
the future of its obligations under the Revolving Credit Facility or that
borrowings under this facility will continue to be available. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
SHARES ELIGIBLE FOR FUTURE SALE
At July 31, 1996, the Company had outstanding 15,838,202 shares of Common
Stock (assuming no redemption of the shares owned by Ashok Rao; see "Certain
Transactions") of which 9,131,201 shares were "restricted securities" subject to
restrictions set forth in Rule 144 promulgated under the Securities Act. Of the
restricted securities, upon expiration of a lock-up agreement described below,
3,534,679 shares will be tradeable under Rule 144 (subject to volume and manner
of sales restrictions), 3,534,685 shares will be tradable pursuant to Rule 144
upon the expiration of the applicable two-year holding period and 100,000
shares, sold in a transaction exempt from registration pursuant to Regulation S
of the Securities Act, will be tradable pursuant to Rule 144 upon the expiration
of a one-year holding period. Of the restricted shares, 236,193 shares are held
in escrow or are to be issued pursuant to the Company's obligations under
agreements entered into in connection with several acquisitions completed in the
second half of 1995. Also, in connection with certain acquisitions, the Company
is required to issue shares of Common Stock as additional consideration (i) in
the event that the market price of the Common Stock is below stated prices on
designated true-up dates, and (ii) upon the occurrence of certain contingencies.
Based on the price of the Common Stock on August 14, 1996, and assuming the
maximum contingent shares are issued, the Company would be required to issue
128,119 shares of Common Stock. Also, in connection with the acquisition of a
customer base from Cherry Communications, the Company may elect to issue shares
of Common Stock in lieu of a cash payment of $9.0 million. See "Management's
Discussion and Analysis -- Liquidity and Capital Resources" and "Description of
Capital Stock."
The Company has reserved for issuance 4,211,024 shares of Common Stock
under its Stock Option Plan (assuming shareholder approval of an increase in
options available for grant) and 258,625 shares of Common Stock for issuance
under its Stock Purchase Plan. Under the Stock Option Plan, as of July 31, 1996
options to purchase 3,408,474 shares of Common Stock are outstanding and options
to purchase 212,240 shares of Common Stock are exercisable. Shares issued under
the Stock Option Plan and the Stock Purchase Plan are freely tradable in the
open market, subject, in the case of affiliates, to the volume, manner of sale,
notice and public information requirements of Rule 144.
At July 31, 1996, warrants to purchase 874,970 shares of Common Stock were
outstanding, including a warrant to purchase 815,470 shares of Common Stock
issued in connection with the Bridge Loan, which warrant expired upon the
completion of the Private Placement and the repayment in full of the Bridge
Loan. In connection with the issuance of a note payable to one seller of a
customer base, the Company issued a warrant to acquire $2.0 million of the
Company's common stock. In the event of non-payment of the note, the exercise
price of such warrant is cancellation of the note, the principal amount of which
is subject to adjustment, and the number of shares to be issued upon exercise of
the warrant would equal $2.0 million divided by the then
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current market price of the Common Stock. See "Description of Capital
Stock -- Warrants" and "Description of Certain Indebtedness."
At July 31, 1996, 14 individuals or entities were entitled to require the
Company to register the offer and sale of a total of approximately 1,876,000
shares of Common Stock (including shares of Common Stock issuable upon
conversion or exercise of outstanding warrants) under the Securities Act as
early as August 1996. See "Description of Capital Stock -- Registration Rights."
Holders of a portion of shares subject to registration rights have indicated
their intent to exercise their registration rights and sell their shares in the
public market as soon as, or shortly after, their registration rights become
exercisable. If these registration rights are exercised, the Company will be
required to maintain the effectiveness of a resale registration for periods of
up to 180 days. However, in connection with Private Placement, shareholders
holding 1,236,012 shares subject to registration rights, as well as the Company
and certain of its officers and directors, have agreed not to sell or grant any
option for the sale of, or otherwise dispose of, any Common Stock, or any
securities convertible into or exchangeable or exercisable for shares of Common
Stock and not to file or request to be filed, as the case may be, any
registration statement with respect to the Common Stock for a period of 90 days
after the completion of the Private Placement (or earlier with the consent of
PaineWebber on behalf of the Initial Purchasers).
In part to obtain the lock-up commitment referred to above, the Company has
proposed to file a shelf registration under the Securities Act with respect to
approximately 587,893 shares of Common Stock subject to demand registration
rights. This shelf registration will provide for the continuous offering,
subject to certain exceptions, of such shares in the public market for a period
of one year after the effective date of such shelf registration. Creation of
this commitment is subject to execution of new agreements with each affected
shareholder which provide, among other things, for termination of all of the
holders other registration rights. There can be no assurance such arrangements
will be finalized.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), who has beneficially owned restricted securities
within the meaning of Rule 144 ("Restricted Shares") for at least two years,
including the holding period of any prior owner except an affiliate, is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of the Company's Common
Stock and (ii) the average weekly trading volume of the Common Stock in the
over-the-counter market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144 are
also subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. Any person (or
persons whose shares are aggregated) who is not deemed to have been an
"affiliate" of the Company at any time during the 90 days preceding a sale, and
who owns Restricted Shares that were purchased from the Company (or any
affiliate) at least three years previously, will be entitled to sell such shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements. If a
proposed amendment to Rule 144 is adopted, the two- and three-year holding
period requirements described above would be reduced to one and two years,
respectively.
No prediction can be made as to the effect, if any, that future sales of
shares, the availability of shares for future sale, or the registration of
substantial amounts of currently restricted shares will have on the market price
of the Common Stock prevailing from time to time. Sales of substantial amounts
of Common Stock in the public market, under Rule 144, pursuant to the exercise
of registration rights or otherwise, and even the potential for such sales,
could have a material adverse effect on the prevailing market price of the
Common Stock and impair the Company's ability to raise capital through the sale
of its equity securities.
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PLAN OF DISTRIBUTION
The Selling Securityholders may sell all or a portion of the Notes and the
Conversion Shares offered hereby from time to time while the Registration
Statement of which this Prospectus is a part remains effective. Pursuant to the
Registration Rights Agreement, the Company is obligated to maintain the
effectiveness of the Registration Statement for a period of three years from the
completion of the Private Placement or, if shorter, when (i) all the Securities
have been sold pursuant to the Registration Statement or (ii) the date on which
there ceases to be any outstanding Securities. The Selling Securityholders may
sell Notes or Conversion Shares on terms to be determined at the times of such
sales through customary brokerage channels, negotiated transactions or by a
combination of these methods, at fixed prices that may be changed, at market
prices then prevailing or at negotiated prices then obtainable. There is no
assurance that the Selling Securityholders will sell any or all of the Notes or
Conversion Shares offered pursuant to this Prospectus. Each of the Selling
Securityholders reserves the right to accept and, together with its agents from
time to time, to reject in whole or in part any proposed purchase of the Notes
or Conversion Shares to be made directly or through agents. The Company will not
receive any of the proceeds from the sale of Notes or Conversion Shares pursuant
to this Prospectus. The aggregate proceeds to the Selling Securityholders from
the sale of the Notes and the Conversion Shares offered by the Selling
Securityholders hereby will be the purchase price of such Notes or Conversion
Shares less any discounts or commissions.
The Company has been advised by the Selling Securityholders that the
Selling Securityholders, acting as principals for their own account, may sell
Notes or Conversion Shares from time to time directly to purchasers.
Alternatively, the Selling Securityholders may, from time to time, sell Notes or
Conversion Shares through agents, dealers or underwriters to be designated by
the Selling Securityholders from time to time who may receive compensation in
the form of underwriting discounts, commissions or concessions from the Selling
Securityholders and the purchasers of the Notes or Conversion Shares for whom
they may act as agent. To the extent required, the aggregate principal amount of
the Notes and the number of Conversion Shares to be sold, the names of the
Selling Securityholders, the purchase price, the name of any agent, dealer or
underwriter and any applicable commissions with respect to a particular offer
will be set forth in an accompanying Prospectus Supplement or, if appropriate, a
post-effective amendment to the Registration Statement of which this Prospectus
is a part. The Selling Securityholders and any agents, broker-dealers or
underwriters that participate with the Selling Securityholders in the
distribution of the Notes or the Conversion Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, in which event any
discounts, commissions or concessions received by such broker-dealers, agents or
underwriters and any profit on the resale of the Notes or the Conversion Shares
purchased by them may be deemed to be underwriting discounts or commissions
under the Securities Act.
A Selling Securityholder may elect to engage a broker or dealer to effect
sales in one or more of the following transactions: (a) block trades in which
the broker or dealer so engaged will attempt to sell the Securities as agent but
may position and resell a portion of the block as principal to facilitate the
transaction, (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus, and (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
In effecting sales, brokers and dealers engaged by Selling Securityholders may
arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from Selling Securityholders in amounts to be
negotiated (and, if such broker-dealer acts as agent for the purchaser of such
Securities, from such purchaser). Broker-dealers may agree with the Selling
Securityholders to sell a specified number of such Securities at a stipulated
price, and, to the extent such broker-dealer is unable to do so acting as agent
for a Selling Securityholder, to purchase as principal any unsold Securities at
the price required to fulfill the broker-dealer commitment to such Selling
Securityholder. Broker-dealers who acquire Securities as principal may
thereafter resell such Securities from time to time in transactions (which may
involve crosses and block transaction and sales to and through other
broker-dealers,
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including transactions of the nature described above) in the over-the-counter
market or otherwise at prices and on terms then prevailing at the time of sale,
at prices then related to the then-current market price or in negotiated
transactions and, in connection with such resales, may pay to or receive from
the purchasers of such Securities commissions as described above.
The Securities originally issued by the Company in the Private Placement
contained legends as to their restricted transferability. Upon the effectiveness
of the Registration Statement of which this Prospectus is a part, these legends
will no longer be necessary. Upon the transfer by the Selling Securityholders of
any of the Securities, new certificates representing such Securities will be
issued to the transferee, free of any such legends.
To comply with the securities laws of certain states, if applicable, the
Notes and the Conversion Shares will be sold in such states only through
registered or licensed brokers or dealers. In addition, in certain states the
Notes and the Conversion Shares may not be offered or sold unless they have been
registered or qualified for sale in such state or an exemption from the
registration or qualification requirement is available and is complied with.
The Company will pay all expenses incident to the offering and sale of the
Notes and the Conversion Shares to the public other than underwriting discounts,
selling commissions and fees. Pursuant to the Registration Rights Agreement, the
Company and the Selling Securityholders have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
Prior to the date hereof, there has been no public market for the Notes and
there can be no assurance regarding the future development of a market for the
Notes. The Notes are eligible for trading on the PORTAL Market; however, no
assurance can be given as to the liquidity of, or trading market for, the Notes.
The Company has been advised by the Initial Purchasers that they intend to make
a market in the Notes. However, the Initial Purchasers are not obligated to do
so and any market-making activities with respect to the Notes may be
discontinued at any time without notice. Accordingly, no assurance can be given
as to the liquidity of or the trading market for the Notes.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material federal income tax
consequences expected to result from the purchase, ownership, conversion and
disposition of the Notes. This summary is based upon current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury
regulations, judicial authority and administrative rulings and practice.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
below. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to Holders. Moreover, no assurance can be
offered that the Internal Revenue Service (the "Service") will not take contrary
positions, and no rulings from the Service have been or will be sought.
The following summary is for general information only. This summary does
not discuss all aspects of federal income taxation that may be relevant to
particular Holders in light of their specific circumstances or to certain types
of Holders that may be subject to special rules (including insurance companies,
tax-exempt organizations, financial institutions or broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States). EACH PURCHASER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING, CONVERTING AND DISPOSING OF
THE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS.
STATED INTEREST
Stated interest on the Notes will be reported to Holders and the Service,
and generally will be taxable to the Holders as ordinary income in accordance
with their methods of accounting for tax purposes.
BACKUP WITHHOLDING
A Holder may be subject to backup withholding at the rate of 31% with
respect to interest paid on and gross proceeds from a sale of, the Notes, unless
(i) the Holder is a corporation or comes within certain other exempt categories
and, when required, demonstrates the relevant facts or (ii) the Holder provides
a correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A Holder who does not provide the Company with his
or her correct taxpayer identification number may be subject to penalties
imposed by the Service. The Company will report to the Holders and the Service
the amount of any "reportable payments" (including stated interest on the Notes)
and any amount withheld with respect to the Notes during the calendar year. The
amount of any backup withholding generally will be allowed as a credit against
the Holder's federal income tax liability, and excess withholdings may entitle
the Holder to a refund.
CONVERSION
A Holder should not recognize gain or loss on the conversion of a Note into
Common Stock, except with respect to cash received in lieu of fractional shares.
(To the extent the Notes converted are subject to accrued market discount, the
amount of the accrued market discount will carry over to the Common Stock on
conversion and will be treated as interest income on disposition of the Common
Stock.) If Common Stock is received by a Holder without recognition of gain or
loss, the holding period of the Common Stock received upon conversion of a Note
will include the period during which the Note was held (provided the Note was a
capital asset in the hands of the Holder prior to the conversion), and the
Holder's aggregate tax basis in the Common Stock will be equal to his or her tax
basis in the Note surrendered, less any tax basis allocable to any fractional
share that otherwise would have been received.
A Holder will recognize taxable gain or loss on cash received in lieu of
fractional shares of Common Stock in an amount equal to the difference between
the amount of cash received and the
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portion of the Holder's adjusted tax basis in the Note allocable to the
fractional shares. The gain or loss should be capital gain or loss if the
fractional shares are capital assets in the hands of the holder and should be
long-term capital gain or loss if the fractional shares have been deemed held
for more than one year.
Adjustments in the conversion price of the Notes made pursuant to the
anti-dilution provisions to reflect distributions to holders of Common Stock may
result in constructive distributions to holders that could be taxable to them as
dividends pursuant to Section 305 of the Code.
TAXABLE DISPOSITION
In general, a Holder will recognize gain or loss upon the sale, exchange,
redemption or other taxable disposition of a Note measured by the difference
between (i) the amount realized (the amount of cash and the fair market value of
property received) and (ii) the Holder's tax basis in the Note (as increased by
any market discount previously included in income by the Holder and decreased by
any amortizable bond premium deducted over the term of the Note). Any such gain
or loss will generally be long-term capital gain or loss, provided the Note was
a capital asset in the hands of the Holder and had been held for more than one
year. If any portion of the amount realized by the Holder is attributable to
accrued but as yet unreported interest income, it will not be taken into account
in determining any gain or loss, and instead will be reportable as ordinary
income.
MARKET DISCOUNT
Purchasers of Notes should be aware that they may be affected by the market
discount provisions of the Code. A purchase at a market discount includes a
purchase at or after the original issue at a price below the stated redemption
price at maturity. Those rules generally provide that, subject to a
statutorily-defined de minimis exception, if a holder of a debt instrument
purchases it at a market discount and later recognizes gain on a disposition of
the debt instrument (including a gift), the lesser of the gain (or appreciation,
in the case of a gift) or the portion of the market discount that accrued while
the debt instrument was held by the holder will be treated as ordinary interest
income at the time of the disposition.
The market discount rules also provide that a holder who acquires a debt
instrument at a market discount (and who does not elect to include the market
discount in income on a current basis) may be required to defer a portion of any
interest expense that may otherwise be deductible on any indebtedness incurred
or maintained to purchase or carry that debt instrument until the holder
disposes of the debt instrument in a taxable transaction.
The Notes provide that they may be redeemed, in whole or in part, before
maturity. If some or all of the Notes are redeemed in part, each holder of a
Note acquired at a market discount would be required to treat the principal
payment as ordinary interest income to the extent of any accrued market discount
on such Note.
A holder of a debt instrument acquired at a market discount may elect to
have market discount accrue on a constant interest rate basis (as opposed to a
straight line basis). In addition, a holder of a debt instrument acquired at a
market discount may elect to include the market discount in income as the
discount accrues, either on a straight line basis or, if elected, on a constant
interest rate basis. The current inclusion election, once made, applies to all
market discount obligations acquired by the holder on or after the first day of
the first taxable year to which the election applies, and may not be revoked
without the consent of the Service. If a Holder elects to include market
discount in income in accordance with the preceding sentence, the rules
described above concerning the recognition of ordinary income on a sale or
certain other dispositions of such a Note and the deferral of interest
deductions on indebtedness related to such a Note would not apply.
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AMORTIZABLE BOND PREMIUM
Purchasers of Notes also should be aware that they may be affected by the
amortizable bond premium provisions of the Code. Generally, if the tax basis of
an obligation held as a capital asset exceeds the amount payable at maturity of
the obligation, the excess may constitute amortizable bond premium that the
holder may elect to amortize under the constant interest rate method and deduct
over the period from his or her acquisition date to the obligation's maturity
date. A Holder who elects to amortize bond premium must reduce his or her tax
basis in the related obligation by the amount of the aggregate deductions
allowable for amortizable bond premium.
In the case of a debt instrument, such as a Note, that may be called at a
premium prior to maturity, an earlier call date of the debt instrument is
treated as the maturity date of the debt instrument and the amount of bond
premium is determined by treating the amount payable on that call date as the
amount payable at maturity if the calculation produces a smaller amortizable
bond premium than the method described in the preceding paragraph. If a holder
of a debt instrument is required to amortize and deduct bond premium by
reference to a certain call date, the debt instrument will be treated as
maturing on that date for the amount payable and, if not redeemed on that date,
the debt instrument will be treated as reissued on that date for the amount so
payable. If a debt instrument purchased at a premium is redeemed prior to its
maturity, a purchaser who has elected to deduct bond premium may be permitted to
deduct any remaining unamortized bond premium as an ordinary loss in the taxable
year of redemption.
The amortizable bond premium deduction is treated as an offset to interest
income on the related security for federal income tax purposes. Each potentially
affected Holder is urged to consult his or her tax advisor as to the
consequences of the treatment of any such premium as an offset to interest
income for federal income tax purposes.
The foregoing discussion of certain federal income tax consequences is for
general information only and is not tax advice. Accordingly, each purchaser of
Notes should consult his or her tax advisor with respect to the tax consequences
to him or her of the acquisition, ownership, conversion and disposition of the
Notes, including the applicability and effect of state, local, foreign and other
tax laws.
LEGAL MATTERS
Certain legal matters with respect to the Securities offered hereby will be
passed upon for Midcom by Heller, Ehrman, White & McAuliffe, Seattle,
Washington.
EXPERTS
The Consolidated Financial Statements of Midcom at December 31, 1994 and
1995 and for each of the three years in the period ended December 31, 1995
appearing in this Prospectus and the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed the Registration Statement with the Commission under
the Securities Act with respect to the Securities offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain parts of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Securities offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus regarding the contents of any
112
<PAGE> 114
contract or other document are not necessarily complete and in each instance
reference is hereby made to the copy of such contract to document filed as an
exhibit to the Registration Statement. Copies of the Registration Statement and
the exhibits and scheduled thereto may be inspected, without charge, at the
principal office of the Commission located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, the New York Regional Office located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and the Chicago Regional Office
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, or obtained upon payment of prescribed rates from the Public
Reference Section of the Commission at its principal office in Washington, D.C.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy materials and other information with the
Commission. Such reports, proxy materials and other information may be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: Seven World Trade Center, 13th Floor, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such reports, proxy materials and other information may also be inspected
at the National Association of Securities Dealers, Inc., at 1735 K Street, N.W.
Washington, D.C. 20006. In addition, the Commission maintains a World Wide Web
site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
113
<PAGE> 115
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 116
MIDCOM COMMUNICATIONS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995, and June 30, 1996
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995, and the six months ended June 30, 1995 and 1996 (unaudited)............... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December
31, 1993, 1994 and 1995, and the six months ended June 30, 1996 (unaudited)......... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995, and the six months ended June 30, 1995 and 1996 (unaudited)............... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 117
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
MIDCOM Communications Inc.
We have audited the accompanying consolidated balance sheets of MIDCOM
Communications Inc. as of December 31, 1994 and 1995, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
MIDCOM Communications Inc. at December 31, 1994 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring operating losses and has a working capital
deficiency. In addition, the Company is in default with regard to certain loan
agreements with its lenders. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Seattle, Washington
March 29, 1996
F-2
<PAGE> 118
MIDCOM COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30,
------------------- JUNE 30,
1994 1995 1996
------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 960 $ 1,083 $ 1,434
Accounts receivable, less allowance for doubtful accounts
of $2,872, $10,581 and $8,488 in 1994, 1995 and
1996.................................................. 28,702 51,814 42,497
Due from related parties................................. 640 502 116
Notes receivable......................................... 476 86 --
Prepaid expenses and other current assets................ 1,621 2,424 2,549
------- -------- --------
Total current assets............................. 32,399 55,909 46,596
Investments in and advances to joint venture............. 5,643 2,000 2,000
Plant and equipment, net................................. 12,983 13,719 11,100
Intangible assets, less accumulated amortization of
$3,514, $12,812 and $29,341 in 1994, 1995 and 1996.... 13,278 60,781 27,275
Other assets and deferred charges, net................... 1,775 922 616
------- -------- --------
Total assets..................................... $66,078 $133,331 $ 87,587
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 5,145 $ 7,397 $ 5,463
Carrier accounts payable................................. 19,336 32,534 40,898
Accrued expenses......................................... 2,801 9,570 9,516
Notes payable............................................ 1,627 14,576 11,706
Current portion of long-term obligations................. 614 41,721 45,321
Deferred income.......................................... 67 43 43
------- -------- --------
Total current liabilities........................ 29,590 105,841 112,947
Long-term debt, less current portion..................... 32,070 827 800
Capital lease obligations, less current portion.......... 1,952 1,017 125
Deferred income.......................................... 173 130 108
Other long-term liabilities.............................. -- 1,717 5,843
Commitments and contingencies
Preferred stock, 10,000,000 shares authorized for all
Series, $.0001 par value, 859,653 shares designated
as Series A Redeemable Preferred, all of which are
issued and outstanding in 1994...................... 8,597 -- --
Shareholders' equity (deficit):
Common stock, $.0001 par value (stated at amounts
paid in); 90,000,000 shares authorized, 8,125,000,
15,129,000 and 15,616,000 shares issued and
outstanding in 1994, 1995 and 1996.................. (2,691) 62,400 66,120
Deferred compensation.................................... (34) (13) (607)
Accumulated deficit...................................... (3,579) (38,588) (97,749)
------- -------- --------
Total shareholders' equity (deficit)............. (6,304) 23,799 (32,236)
------- -------- --------
Total liabilities and shareholders' equity
(deficit)...................................... $66,078 $133,331 $ 87,587
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 119
MIDCOM COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- -------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $66,010 $111,699 $203,554 $97,380 $ 93,860
Cost of revenue.......................... 45,363 79,044 139,546 65,282 67,536
------- -------- -------- ------- -------
Gross profit............................. 20,647 32,655 64,008 32,098 26,324
Operating expenses:
Selling, general and administrative.... 18,125 27,697 62,061 27,483 32,314
Depreciation........................... 644 1,477 4,481 1,938 2,674
Amortization........................... 1,237 2,657 9,309 2,960 16,536
Settlement of contract dispute......... -- -- -- -- 8,800
Restructuring charge................... -- -- -- -- 2,220
Loss on impairment of assets........... -- -- 11,830 -- 18,765
------- -------- -------- ------- -------
Total operating expenses....... 20,006 31,831 87,681 32,381 81,309
------- -------- -------- ------- -------
Operating income (loss).................. 641 824 (23,673) (283) (54,985)
Equity in loss of joint venture.......... -- (458) (52) (166) --
Other income (expense)................... 249 (413) (338) (228) (266)
Interest expense......................... (304) (2,531) (5,288) (3,346) (3,910)
Interest expense -- shareholders......... (1,064) (434) -- -- --
------- -------- -------- ------- -------
Loss before income taxes and
extraordinary item..................... (478) (3,012) (29,351) (4,023) (59,161)
Income tax expense....................... (51) (17) -- -- --
------- -------- -------- ------- -------
Loss before extraordinary item........... (529) (3,029) (29,351) (4,023) (59,161)
Extraordinary item: loss on early
redemption of debt..................... -- -- (4,067) -- --
------- -------- -------- ------- -------
Net loss............................ $ (529) $ (3,029) $(33,418) (4,023) (59,161)
======= ======== ======== ======= =======
Per share amounts:
Loss before extraordinary item........... $ (0.05) $ (0.31) $ (2.42) (.39) (3.86)
Extraordinary item....................... -- -- (0.34) -- --
------- -------- -------- ------- -------
Net loss............................ $ (0.05) $ (0.31) $ (2.76) (.39) (3.86)
======= ======== ======== ======= =======
Shares used in calculating
per share data......................... 9,930 9,930 12,101 10,246 15,321
======= ======== ======== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 120
MIDCOM COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
NUMBER COMMON DEFERRED ACCUMULATED EQUITY
OF SHARES STOCK COMPENSATION DEFICIT (DEFICIT)
--------- ------- ------------ ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993......... 7,786 $ 154 $ -- $ (6,350) $ (6,196)
Issuance of compensatory stock
options.......................... -- 146 (146) -- --
Issuance of common stock........... 225 202 -- -- 202
Compensation attributable to stock
options vesting.................. -- -- 42 -- 42
Distributions by acquired
company.......................... -- -- -- (84) (84)
Net loss for the year.............. -- -- -- (529) (529)
------ ------- ----- -------- -------
Balance at December 31, 1993....... 8,011 502 (104) (6,963) (6,565)
Conversion from S corporation to C
corporation...................... -- (7,679) -- 7,679 --
Stock issued in acquisition........ 114 1,040 -- -- 1,040
Compensation attributable to stock
options vesting.................. -- -- 20 -- 20
Stock option forfeitures........... -- (54) 50 -- (4)
Issuance of common stock warrant... -- 3,500 -- -- 3,500
Distributions by acquired
company.......................... -- -- -- (1,266) (1,266)
Net loss for the year.............. -- -- -- (3,029) (3,029)
------ ------- ----- -------- -------
Balance at December 31, 1994....... 8,125 (2,691) (34) (3,579) (6,304)
Issuance of compensatory stock
options.......................... -- 268 -- -- 268
Stock issued in acquisitions....... 500 4,757 -- -- 4,757
Compensation attributable to stock
options vesting.................. -- -- 21 -- 21
Stock issued in initial public
offering......................... 5,456 54,182 -- -- 54,182
Stock issued in customer base
acquisitions..................... 331 5,120 -- -- 5,120
Stock issued for exercise of stock
options and warrants and employee
stock purchase plan.............. 717 442 -- -- 442
Distributions by acquired
company.......................... -- -- -- (1,269) (1,269)
Conversion of acquired company from
S corporation to C corporation... -- 322 -- (322) --
Net loss for the year.............. -- -- -- (33,418) (33,418)
------ ------- ----- -------- -------
Balance at December 31, 1995....... 15,129 62,400 (13) (38,588) 23,799
Additional shares issued in
acquisitions (unaudited)......... 24 329 -- -- 329
Compensation attributable to stock
options vesting (unaudited)...... -- 420 75 -- 495
Issuance of compensatory stock
options (unaudited).............. -- 669 (669) -- --
Stock issued for exercise of stock
options (unaudited).............. 463 2,302 -- -- 2,302
Net loss for the period
(unaudited)...................... -- -- -- (59,161) (59,161)
------ ------- ----- -------- -------
Balance at June 30, 1996
(unaudited)...................... 15,616 $66,120 $ (607) $ (97,749) $ (32,236)
====== ======= ===== ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 121
MIDCOM COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
-------- ------- -------- -------- --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Reconciliation of net loss to net cash provided by (used in)
operating activities:
Net loss.......................................................... $ (529) $(3,029) $(33,418) $ (4,023) 59,161)
Depreciation...................................................... 644 1,477 4,481 1,938 2,674
Amortization of intangibles....................................... 1,237 2,657 9,309 2,960 16,536
Amortization of original issue discount financing................. -- 483 620 497 --
Loss on impairment of assets...................................... -- 11,830 -- 18,765
Settlement of contract dispute.................................... -- -- -- 8,800
Equity in loss of joint venture................................... -- 458 52 160 --
Compensation attributable to stock options........................ 42 16 289 279 495
Noncompetition payments........................................... (300) (250) -- -- --
Extraordinary item -- write-off of original issue discount and
deferred financing costs........................................ -- -- 4,067 -- --
Changes in operating assets and liabilities:
Increase in accounts receivable................................... (10,361) (9,811) (17,784) (18,201) 9,317
(Increase) decrease in due from related parties................... 336 (606) 138 515 386
(Increase) decrease in notes receivable........................... (128) (348) 390 (49) 86
(Increase) decrease in prepaid expenses and other
current assets.................................................. 24 (1,201) (719) (2,547) (125)
(Increase) decrease in other assets............................... (64) 11 (142) 341 436
Increase (decrease) in accounts payable and
accrued expenses................................................ 2,414 4,062 (3,559) 2,492 (2,447)
Increase in carrier accounts payable.............................. 5,429 8,236 16,638 18,887 3,364
Increase (decrease) in deferred income............................ 2,912 (3,229) (67) (12) (22)
Increase (decrease) in other long-term liabilities................ 168 (202) 1,717 (22) 326
Increase (decrease) in accrued interest payable................... 384 (869) 228 153 330
------- ------- -------- ------- --------
Net cash provided by (used in) operating activities................. 2,208 (2,145) (5,930) 3,368 (240)
INVESTING ACTIVITIES
Purchases of plant and equipment.................................... (1,614) (4,187) (6,884) (5,209) (1,063)
Net assets acquired in business and customer base acquisitions...... (9,282) (5,089) (11,407) (1,928) --
Investment in and advances to joint venture......................... (1,911) (4,190) (2,625) (1,052) --
Loan to related party............................................... -- (1,234) -- -- --
------- ------- -------- ------- --------
Net cash used in investing activities............................... (12,807) (14,700) (20,916) (8,189) (1,063)
FINANCING ACTIVITIES
Proceeds of loans from related parties.............................. 5,292 -- -- -- --
Repayment of loans from related parties............................. (798) (3,617) -- -- --
Proceeds from notes payable......................................... 6,411 3,485 -- -- --
Repayment of notes payable.......................................... -- (10,592) (21,628) (2,660) (3,200)
Proceeds from long-term debt........................................ -- 34,350 69,205 8,695 20,920
Proceeds from common stock issued for stock purchase
plan and stock options............................................ -- -- 442 25 2,302
Issuance of common stock............................................ -- -- 54,182 -- --
Preferred stock redemption.......................................... -- -- (8,597) -- --
Repayment of long-term debt......................................... (875) (3,851) (64,841) (488) (18,239)
Distributions to shareholders of acquired companies................. (84) (1,266) (1,269) (287) --
Deferred financing costs............................................ -- (1,512) (525) -- (129)
------- ------- -------- ------- --------
Net cash provided by financing activities........................... 9,946 16,997 26,969 5,285 1,654
------- ------- -------- ------- --------
Net increase (decrease) in cash..................................... (653) 152 123 464 351
Cash at the beginning of period..................................... 1,461 808 960 960 1,083
------- ------- -------- ------- --------
Cash at the end of period........................................... $ 808 $ 960 $ 1,083 $ 1,424 $ 1,434
======= ======= ======== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 122
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. NATURE OF OPERATIONS AND GOING CONCERN
MIDCOM Communications Inc. and Subsidiaries (Midcom or Company) provides
long distance voice and frame relay data communication services, wireless
communication services, and enhanced telecommunication services such as
facsimile broadcast, conference calling and calling cards, primarily as a
nonfacilities-based reseller. The Company's customers are primarily small to
medium-sized commercial businesses, wholesalers and certain significant
customers located throughout the United States.
GOING CONCERN AND LIQUIDITY
The Company incurred operating losses during each of the three years ended
December 31, 1995 and, as of December 31, 1995, had an accumulated deficit of
$38,588, a working capital deficit of $49,932 and was in default with regard to
certain agreements with its lenders. The consolidated financial statements have
been prepared assuming the Company will continue as a going concern and do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets and liabilities that may result from
the outcome of this uncertainty.
As a result of its rapid growth, acquisition strategy, operating losses and
other factors, the Company has required substantial working capital to fund its
operations. To date, the Company has financed its operations principally through
bank borrowings, subordinated debt, capital lease facilities and the net
proceeds from its July 1995 initial public offering of common stock. The
Company's available sources of working capital consist of cash flow from
operations and available borrowings under a revolving credit facility. The
existence of the going concern paragraph in the independent auditors' report, as
well as other covenant violations, gives rise to defaults under the Company's
revolving credit facility. Although the lenders were continuing to permit
borrowings under the facility in spite of the existence of certain covenant
violations, there can be no assurance that borrowings will continue to be
permitted under the facility. The events of default under the credit facility
trigger default clauses in certain capital lease obligations. As noted in Note
7, all long-term debt in default has been classified as a current liability in
these financial statements. Based on existing covenants, it is reasonably
possible that further covenant violations could occur. The Company is engaged in
discussions with its lenders concerning waivers and modifications to certain
covenants.
The Company is uncertain how long cash flow from operations and borrowings
under the credit facility will be sufficient to continue operations at current
levels. However, these sources are not sufficient to repay a $15,000 bridge loan
due September 24, 1996 (See Note 7) and fund remaining payments to sellers of
customer bases. The Company's ability to continue as a going concern depends on
its ability to reduce operating expenses, increase its gross margins and obtain
additional working capital. The Company has taken steps to reduce expenses,
curtail acquisition activities and reduce capital equipment expenditures. The
Company is also actively pursuing possible sources of additional working capital
through the issuance of subordinated debt or equity securities, and has engaged
investment bankers to assist with this process and to investigate strategic
alternatives to maximize shareholder value, including a possible sale or merger
of the Company. The Company has received proposals from investors which would
provide additional working capital, although each of these proposals is subject
to a number of conditions.
F-7
<PAGE> 123
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company is not able to secure additional sources of working capital,
it will be forced to further curtail operations, dispose of assets or seek
extended payment terms from its vendors in order to continue as a going concern.
There can be no assurance that the Company's lenders will waive existing or
future covenant violations or continue to make borrowings available under the
Credit Agreement, that additional financing will be available on acceptable
terms or, at all, or that the Company will be able to further reduce expenses,
obtain payment terms from vendors or successfully complete other steps necessary
to continue as a going concern. Any additional financing may involve substantial
dilution to the interests of the Company's shareholders.
RISKS AND UNCERTAINTIES
The Company is also subject to certain other significant risks and
uncertainties that may affect the amounts reported in the financial statements.
These significant risks and uncertainties include limits on acquisitions due to
the current financial condition, impairment of assets, litigation and
commitments with certain suppliers. Additional information concerning these
risks and uncertainties is included in the notes to the consolidated financial
statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
MIDCOM Communications Inc. and its wholly-owned subsidiaries, PacNet Inc.
(PacNet), Cel-Tech International Corp. (Cel-Tech), AdVal, Inc. (AdVal) and
Advanced Network Design (AND) (collectively referred to as the "Company"). All
significant intercompany accounts and transactions have been eliminated. AdVal
and Adnet Telemanagement, Inc. (Adnet), the parent company of AND, were acquired
on September 29, 1995 and December 29, 1995, respectively, in transactions that
were accounted for as pooling of interests. As a result, the consolidated
financial statements for all periods prior to the acquisitions have been
restated to include the accounts and results of operations of AdVal and Adnet
and its wholly-owned subsidiary.
The Company's investment in Dal Telecom International (Dal Telecom), a
Russian corporate joint venture, is accounted for on the equity method, adjusted
to estimated fair value, in accordance with generally accepted accounting
principles. The Company recorded its pro rata share of Dal Telecom's income or
loss one month in arrears (see Note 4).
INTERIM FINANCIAL INFORMATION
The financial information at June 30, 1996 and for the six months ended
June 30, 1995 and 1996 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of the financial position at such date and the operating
results and cash flows for those periods. Operating results for the June 30,
1996 period are not necessarily indicative of the results that may be expected
for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates.
F-8
<PAGE> 124
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Resale and transmission revenue and related costs are recognized in the
period the customer utilizes the Company's service. Aggregation fees are
recognized by the Company based upon notification of customers' participation in
the AT&T program. At December 31, 1994, 1995, and June 30, 1996, unbilled resale
revenue totaled and $13,373, $27,985 and $10,743, respectively.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments consist of cash, accounts and notes
receivable, accounts and carrier accounts payable, notes payable and long-term
obligations. The fair value of the financial instruments, except long-term
obligations, approximates their recorded value based on the short-term maturity
of the instruments. The fair value of the long-term obligations approximates
their recorded value based on the current rates offered to the Company for
similar debt of the same maturities. The Company does not have financial
instruments with off-balance-sheet risk.
Financial instruments that potentially subject the Company to
concentrations of credit risk are accounts receivable. The Company continually
evaluates the creditworthiness of its customers; however, it generally does not
require collateral. The Company's allowance for doubtful accounts is based on
historical trends, current market conditions and other relevant factors.
DEFERRED FINANCING COSTS
Financing costs are capitalized and amortized over the term of the related
debt on a straight-line basis which approximates the effective-interest method.
Included in other assets at December 31, 1995 and June 30, 1996 are deferred
financing costs of $510 and $459, respectively (net of accumulated amortization
of $15 and $195, respectively).
PLANT AND EQUIPMENT
Plant and equipment are stated at cost. The direct employee costs and
outside consultant costs related to development of the Company's management
information systems were capitalized (see Note 3). Depreciation and
amortization, which includes amortization of assets recorded under capital
leases, are computed using the straight-line method over the following useful
lives:
<TABLE>
<S> <C>
Buildings and towers................................ 30 years
Transmission equipment.............................. 12 to 15 years
Data processing systems and equipment............... 3 to 5 years
Switches............................................ 5 to 7 years
Furniture, equipment and leasehold improvements..... 3 to 7 years
</TABLE>
INTANGIBLE ASSETS
Intangible assets represent the excess of the purchase price over the
estimated fair value of identifiable assets acquired in business and customer
base acquisitions. Amounts are allocated primarily to customer bases which are
amortized over five years (three years effective January 1, 1996) using the
straight-line method. Amounts are also allocated to noncompete agreements,
goodwill and a reseller agreement, as applicable, which are amortized using the
straight-line method over terms ranging from 18 months to 25 years.
In conjunction with the preparation of its financial statements for the
first quarter of 1996, the Company completed a review of its accounting policies
and practices, including those relating to intangible assets. Based on certain
changes in circumstances that occurred in the first quarter,
F-9
<PAGE> 125
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
including turnover in personnel, reduction in sales force and continuing
attrition of acquired customer bases, the Company determined that effective
January 1, 1996, a reduction in the estimated life of acquired customer bases
from 5 years to 3 years was appropriate.
INCOME TAXES
Prior to January 1, 1994, Midcom was taxed as an S corporation. As an S
corporation, all earnings or losses of Midcom were taxed directly to the
shareholders. Effective January 1, 1994, Midcom became subject to income taxes
directly as a C corporation.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires that deferred income taxes be provided based on the estimated future
tax effects of differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
FOREIGN CURRENCY TRANSLATION
The Company's Russian joint venture, Dal Telecom, operates in a highly
inflationary country, and therefore, a combination of current and historical
rates is used in translating assets and liabilities. The related exchange
adjustments are included in net loss. Operating results are translated at the
average rates during the period.
RESTRUCTURING CHARGE
In March and April 1996, the Company made announcements regarding changes
in senior management and the restructuring of its operations in order to reduce
expenses to the level of available capital. These actions included the layoff of
certain employees and contractors and closure of six sales offices. As a result,
the Company recorded a charge of $1,600 during the first quarter of 1996 and
$600 during the second quarter of 1996, the major components of which relate to
severance and lease cancellation charges. Included in the first quarter
restructuring charge is approximately $400 relating to the extension of the time
period to exercise certain outstanding stock options. As of June 30, 1996,
$1,200 of this restructuring charge remained in accrued liabilities.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common and
equivalent shares outstanding using the treasury stock method and the number of
shares issued in the Company's initial public offering whose net proceeds were
used to redeem the Series A Redeemable Preferred Stock. Common stock equivalents
are excluded from the calculation of net loss per share due to their
antidilutive effect, except that pursuant to Securities and Exchange Commission
(SEC) requirements, common and equivalent shares issued during the 12-month
period prior to the initial public offering have been included in the
calculation as if they were outstanding for all periods prior to the completion
of the Company's initial public offering using the treasury stock method.
ACCOUNTING FOR LONG-LIVED ASSETS
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was issued
in March 1995, requires impairment losses to be recorded on certain longlived
assets used in operations or expected to be disposed of. The Company adopted
Statement 121 in the fourth quarter of 1995.
F-10
<PAGE> 126
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year presentation.
3. PLANT AND EQUIPMENT
Major classes of plant and equipment, including assets under capital
leases, consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Buildings and towers.................................... $ 764 $ 787 $ 532
Transmission equipment.................................. 2,772 3,747 3,301
Data processing systems and equipment................... 6,260 11,120 11,070
Switches................................................ 1,487 -- 117
Furniture, equipment and leasehold improvements......... 4,552 4,663 5,371
------- ------- -------
15,835 20,317 20,3916
Accumulated depreciation and amortization............... (2,852) (6,598) (9,291)
------- ------- -------
$12,983 $13,719 $ 11,100
======= ======= =======
</TABLE>
The gross amount of plant and equipment recorded under capital leases was
$2,685 at December 31, 1994 and $6,073 at December 31, 1995 and June 30, 1996.
Included in plant and equipment are unamortized development costs related
to the Company's proprietary management information system. This system was
placed in service in May 1995 and is being amortized on a straight-line basis
over five years. As a result of billing problems encountered after the system
was placed in service, the Company evaluated the system during the fourth
quarter of 1995 and determined that the system would require additional
enhancements to meet its initial design objectives and that its value had been
impaired. As a result, the Company reduced the unamortized costs from $4,471 to
$2,000 and in 1995 recorded a $2,471 loss on impairment of the asset.
Included in plant and equipment are switches, the majority of which were
acquired through acquisitions of other telecommunications service providers.
During the fourth quarter of 1995, the Company determined that it intended to
replace these limited capacity switches with newer switches with increased
functionality and capacity through sharing or reseller arrangements with
operators of switches. As a result of this decision, the Company wrote off its
existing switches and recorded in 1995 a $2,544 loss on impairment of these
assets.
4. INVESTMENT IN AND ADVANCES TO JOINT VENTURE
In December 1993, Midcom advanced $1,911 to Dal Telecom, to be used in
building a long distance telephone network in the Russian Far East. In January
1994, Midcom formed a 50/50 joint venture with the Russian owner of Dal Telecom
to continue this activity and committed to invest a total of $15,000 to acquire
its 50% interest in the joint venture. This amount was subsequently reduced to
$12,700. Midcom converted the advance outstanding at December 31, 1993 to an
investment in the joint venture and during 1994 and 1995, invested an additional
$4,190 and $2,625, respectively.
F-11
<PAGE> 127
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial data for Dal Telecom follows:
<TABLE>
<CAPTION>
NOVEMBER 30, 1995
-----------------
<S> <C>
Current assets..................................................... $ 2,708
Noncurrent assets.................................................. 9,567
Current liabilities................................................ 352
Noncurrent liabilities............................................. 668
Equity............................................................. 11,255
</TABLE>
<TABLE>
<CAPTION>
12 MONTHS ENDED
NOVEMBER 30, 1995
-----------------
<S> <C>
Revenue............................................................ $ 3,821
Gross profit....................................................... 1,902
Translation loss................................................... (127)
Net income (loss).................................................. 135
</TABLE>
Substantially all of the assets of Dal Telecom are located in Russia. The
Company has obtained insurance against political and expropriation risks of up
to 90% of the Company's invested capital in the joint venture through a U.S.
Government sponsored agency.
As of December 31, 1995, the Company was required to invest an additional
$3,100 in order to maintain its 50% interest in Dal Telecom, although there is
currently no fixed schedule for providing these funds. The Russian joint venture
partner disputes the amount remaining to be contributed by Midcom for a variety
of tax, accounting and other reasons. In May 1996, the Company and the joint
venture partner agreed to amend the terms of the joint venture to provide that
the Company had a 40% interest in the joint venture and that, upon payment of an
additional capital contribution of $3,500, the Company would have a 50% equity
interest in the joint venture.
The Company's commitment to the Russian joint venture has required
significant amounts of capital resources and management attention given the
logistics of maintaining a relationship in Russia. Given the Company's current
financial condition, it is unable to fund any additional contributions to the
joint venture. The Company now believes it is in its best interests to focus on
its domestic business and, as a consequence, is actively seeking to sell its
interest in Dal Telecom during 1996. As result of this decision, the Company
wrote down its investment in Dal Telecom to $2,000, which is the Company's
estimate of the net recoverable value of its investment in Dal Telecom, and
recorded a $6,870 loss on impairment of the asset. This estimate is based on
market information currently available to the Company and certain assumptions
about the future operations of Dal Telecom, over which the Company has limited
control. As a result, a material change in these estimates could occur in the
near future.
There can be no assurance that the Company will be successful in its
efforts to sell its interest in Dal Telecom or that, if sold, the Company will
recover its carrying value or that additional losses on its investment in Dal
Telecom will not be incurred in the future.
At December 31, 1995, prior to the write-down of its investment, the
difference between the Company's investment and 50% of the equity in Dal
Telecom's net assets was $2,210. The difference relates to the Company's
investment in the joint venture and was being amortized over 20 years. During
1995 and 1994, $120 and $93 was amortized, respectively, and is included in
equity in loss of joint venture in the consolidated statements of operations. As
a result of the write-down described above, this difference has been eliminated.
F-12
<PAGE> 128
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. BUSINESS COMBINATIONS
In September 1995, the Company acquired all of the outstanding stock of
AdVal in exchange for 250,000 shares of common stock valued at $3,750. In
December 1995, the Company acquired all of the outstanding stock of Adnet and
its wholly-owned subsidiary, Advanced Network Design, in exchange for 453,250
shares of common stock valued at $8,272. These transactions have been accounted
for as pooling of interests and, accordingly, the consolidated financial
statements for all periods presented have been restated to include the accounts
and results of operations of AdVal and Adnet.
Net revenue, extraordinary items and net income (loss) of the separate
companies were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, MIDCOM ADVAL ADNET COMBINED
----------------------------------------- -------- ------ ------ --------
<S> <C> <C> <C> <C>
1993:
Net revenue............................ $ 56,623 $ 733 $8,654 $ 66,010
Net income (loss)...................... (840) 51 260 (529)
1994:
Net revenue............................ $ 99,815 $3,282 $8,602 $111,699
Net income (loss)...................... (3,984) (313) 1,268 (3,029)
1995:
Net revenue............................ $191,990 $3,102 $8,462 $203,554
Extraordinary loss..................... (4,067) -- -- (4,067)
Net income (loss)...................... (34,274) (69) 925 (33,418)
</TABLE>
During 1994 and 1995, the Company also completed a series of acquisitions
from other telecommunications companies offering services similar to those
offered by the Company. Certain of these acquisitions included the purchase of
substantially all of the operating assets of the acquiree, including customer
bases, and in other situations only specific customer bases. The asset
acquisitions have been accounted for using the purchase method, with the excess
of the purchase price over the net tangible assets acquired being allocated to
acquired customer bases, non-compete agreements and goodwill. Revenue generated
from the acquired customer bases are included in the accompanying statements of
operations from the dates of the acquisitions.
F-13
<PAGE> 129
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summary information concerning the acquisitions is as follows:
<TABLE>
<CAPTION>
TOTAL GROSS
PURCHASE INTANGIBLE
SELLING COMPANY ACQUISITION DATE PRICE ASSETS
--------------------------------------- ------------------- -------- ----------
<S> <C> <C> <C>
Balance at December 31, 1993........... $ 10,788 $ 8,882
Business acquisitions:
American Telephone Network Inc.
(ATN)............................. September 30, 1994 2,030 509
PacNet, Inc. (PacNet)................ December 30, 1994 4,816 439
Customer base acquisitions............. Various 6,962 6,962
------- --------
Balance at December 31, 1994........... 24,596 16,792
Communique Telecommunications, Inc.
(Communique)...................... January 20, 1995 14,829 11,265
Concord Network, Inc. (Concord)...... January 31, 1995 1,292 613
Cel-Tech International Corp.
(Cel-Tech)........................ September 12, 1995 4,587 4,155
Customer base acquisitions............. Various 43,323 40,768
------- --------
Balance at December 31, 1995........... 88,627 73,593
Customer base acquisitions............. 788 788
Loss on impairment of assets........... -- (17,765)
------- --------
Balance at June 30, 1996............... $ 89,415 $ 56,616
======= ========
</TABLE>
The above purchases have generally been financed through borrowings under
the Company's lines of credit, issuance of debt and stock (see Notes 6 and 7)
and assumption of liabilities.
Components of intangible assets at December 31, 1995 and June 30, 1996 and
their respective estimated useful lives were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, ESTIMATED
1995 1996 USEFUL LIFE
------------ -------- ------------
<S> <C> <C> <C>
Customer bases............................... $ 66,855 $ 49,878 3 years
Non-compete agreements....................... 3,195 3,195 2 to 4
Goodwill..................................... 1,848 1,848 25 years
------- -------
$ 73,593 $ 56,616
======= =======
</TABLE>
The Company periodically reviews the carrying value of its intangible
assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. To the extent the estimated future cash inflows
attributable to the asset, less estimated future cash outflows, is less than the
carrying amount, an impairment loss is recognized. Substantially all of the
Company's intangible assets consist of acquired customer bases which are subject
to attrition. The estimated useful lives of these customer bases are based on
attrition rates considered standard in the industry. If the Company's actual
attrition rates were to exceed these estimates, or other unfavorable changes in
business conditions were to occur, the value of the related customer bases would
be impaired and future operating results would be adversely affected.
Based on certain changes in circumstances that occurred in 1996, including
turnover in personnel, reduction in sales force and continuing attrition of
acquired customer bases, the Company determined that effective January 1, 1996,
a reduction in the estimated useful life of acquired customer bases from 5 years
to 3 years was appropriate. Additionally, to the extent that
F-14
<PAGE> 130
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the estimated future cash inflows attributable to the asset, less estimated
future cash outflows, is less than the carrying amount, an impairment loss is
recognized. In connection with such a review, the Company wrote down certain
acquired customer bases and recorded a loss on impairment of assets totaling
$17,765 during the second quarter of 1996.
The following condensed pro forma information presents the results of
operations of Midcom as if the acquisitions of ATN, PacNet, Communique, Concord
and Cel-Tech had occurred on January 1, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Revenue...................................................... $169,718 $205,494
Net loss..................................................... (1,873) (33,364)
Pro forma loss per share..................................... (0.19) (2.76)
</TABLE>
The pro forma results do not necessarily represent results which would have
occurred if the acquisitions had taken place on the dates indicated nor are they
necessarily indicative of the results of future operations.
In connection with the Communique acquisition, 371,875 shares of common
stock were held in escrow and subsequently sold as part of the Company's initial
public offering in July 1995 (see Note 16). The net proceeds of $3,800 from the
sale of these shares were held in escrow pending the results of an arbitration
hearing. On March 13, 1996, the arbitration decision was received, pursuant to
which the Company received approximately $352.
In connection with several of the other transactions described above, the
Company has an obligation to issue or release from escrow up to a maximum of
276,346 additional shares of its common stock representing an aggregate value of
approximately $4,226 at the transaction dates, upon the satisfaction of certain
contingencies. Such contingencies include, among other things, maintenance of
specified revenue levels, adjustment of liabilities assumed and receivables
purchased, and satisfaction of general representations and warranties. The
contingency periods range from six months to two years. The Company is also
obligated to pay up to a maximum of $2,000 additional cash in connection with a
customer base purchase agreement upon the maintenance of specified revenue
levels. In addition, in the event of the sale or other transfer of the majority
of the voting stock of Cel-Tech, a payment of a maximum of $2,000 would become
payable to the former shareholder.
In accordance with applicable accounting standards, the common stock or
other consideration issuable under the contingency arrangements has not been
included in the determination of purchase price, nor have the shares been
considered outstanding for purposes of earnings per share calculations.
Additional consideration will be recorded when the outcome of a contingency is
determined.
The Company is also obligated in certain cases to issue additional shares
of its Common Stock in the event that the market price of such stock, when the
shares become registerable, is less than the price at the acquisition dates.
Based on the Company's stock price on March 29, 1996, approximately 513,000
additional shares would be issuable as a result of these obligations (128,119
additional shares as of August 14, 1996).
F-15
<PAGE> 131
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES PAYABLE
At December 31, 1994 and 1995 and June 30, 1996, the Company had $680 in 8%
per annum subordinated convertible demand notes outstanding held by the three
sellers of Telnet, secured by a personal guarantee of the principal shareholder
of the Company. Interest was payable monthly on these notes and they were
convertible, at the option of the holders, into 0.1% per $100 of principal debt
of the Company's common stock. Effective April 1, 1995, the notes and associated
agreements were amended as follows: (i) the convertibility option was
eliminated, (ii) if not paid sooner upon 30-day demand, the maturity date was
set at March 28, 1999, (iii) interest was set at a prime plus 2%, but in no
event lower than 9% or greater than 13% per annum, and (iv) the three note
holders were granted warrants to purchase up to a total of 59,500 shares of
common stock at an exercise price of $7.44 per share, subject to adjustments in
the exercise price related to dilutive or anti-dilutive activities. The warrants
expire on March 28, 1999.
At December 31, 1994, the Company had notes payable of $947 which were
secured by certain assets of the Company and were repaid in full in 1995.
In connection with the acquisition of Communique in January 1995, and the
extension of a payable to one carrier in March 1995, the Company issued notes
payable to three carriers aggregating $8.5 million with interest ranging from
10% to 12%. The notes were paid in full in July 1995 with the proceeds from the
Company's initial public offering.
In connection with a customer base purchase agreement, the Company has a
noninterest-bearing obligation totaling $12.0 million as of December 31, 1995.
The unsecured obligation required monthly payments of $3.0 million from January
through April 1996, payable in cash or common stock. The Company paid $3.0
million to the seller in January 1996 and is currently in negotiations with the
seller to satisfy the remaining payment obligation, including possibly selling
back a portion of the customer bases originally acquired. There can be no
assurance that the Company will be successful in selling back these customer
bases or that, if sold, it would not incur a material loss on such disposition.
The Company is currently prohibited from paying this obligation in cash without
the prior written consent of its primary lender. Based on the Company's stock
price on June 30, 1996, the Company would be required to issue 626,087 shares of
its common stock to satisfy this obligation.
At December 31, 1995, the Company had an additional note payable of
approximately $2,000 to a seller of certain customer bases. The note was
non-interest bearing and was payable in varying installments in 1996. In
connection with the issuance of this note, the Company issued a warrant to
acquire $2,000 of the Company's common stock. In the event of nonpayment of the
note, the exercise price is cancellation of the note, the principal amount of
which is subject to adjustment, and the number of shares to be issued upon
exercise of the warrant equals $2,000 divided by the then current market price
of the Company's common stock. The warrant would expire on April 30, 1997.
F-16
<PAGE> 132
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE
----------------- 30,
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
$25,000 Senior Revolving Credit Facility with First Union
National Bank of North Carolina. Interest was generally
payable at the Company's option at either the Bank's prime
rate plus 1% or LIBOR plus 2.57%. Applicable interest rates on
outstanding advances at December 31, 1994 ranged from 7.625%
to 8.75%. This facility was secured by substantially all of
the Company's assets and was paid in full November, 1995...... $19,350 $ -- $ --
Senior Revolving Credit Facility with Transamerica Business
Credit Interest is generally payable at the Company's option
at either LIBOR plus 2.50% or .5% plus the higher of the Prime
Rate or the latest published annualized rate for 90-day dealer
commercial paper. Applicable interest rate on outstanding
advances at December 31, 1995 was 9%. The balance is due
November 7, 1997. This facility is secured by substantially
all of the Company's assets................................... -- 37,428 25,877
Bridge loan with Transamerica Business Credit, renewable in 30
day extensions with final payment due September 24, 1996. The
loan bears interest at 12% and is secured by substantially all
of the Company's assets....................................... -- -- 15,000
10% Senior Subordinated Notes Payable. Interest paid quarterly.
The note was repaid in full in July 1995...................... 15,000 -- --
Unsecured seller notes payable, interest at 5% to 8%, principal
and interest are payable in quarterly installments through May
31, 1997...................................................... 386 89 58
Note payable to bank, secured by certain property and equipment,
interest at the bank's prime rate plus 1%. Paid in full in
January 1996.................................................. -- 240 --
Note payable secured by assets acquired, interest payable
quarterly at the prime rate plus 1%. Balance due in full
September 30, 1998............................................ 800 800 800
Notes payable to equipment vendors, secured by related
equipment, interest at 9.5% to 15%, principal and interest
payments due in monthly installments through
November 1, 1996.............................................. 159 79 127
------- ------- -------
35,695 38,636 41,862
Less original issue discount on 10% Senior Subordinated Notes
Payable....................................................... 3,247 -- --
------- ------- -------
32,448 38,636 41,862
Less current portion............................................ 378 37,809 41,062
------- ------- -------
$32,070 $ 827 $ 800
======= ======= =======
</TABLE>
The $25,000 Senior Revolving Credit Facility and the Senior Subordinated
Note agreements contained covenants which, among other matters, restricted the
ability of the Company to pay
F-17
<PAGE> 133
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dividends, incur additional indebtedness, and repurchase stock, and required the
Company to maintain certain financial covenants.
In connection with the issuance of the Senior Subordinated Notes Payable in
the amounts of $14,800 and $200 to First Union Corporation and the
Robinson-Humphrey Company, Inc., respectively, the Company issued detachable
warrants to the note holders to purchase common stock of the Company for $.0001
per share. The number of shares of common stock issuable upon exercise of the
warrants was dependent upon the completion of a public offering or other defined
events ("Liquidity Event(s)"). On July 6, 1995, the Company successfully
completed an initial public offering of its stock and 648,119 shares of common
stock were issued upon exercise of the warrants. The Company repaid the Senior
Subordinated Notes with proceeds from the initial public offering and recorded
as an extraordinary item in the third quarter a $2,992 loss on write-off of
unamortized original issue discount.
During 1995, the $25,000 Senior Revolving Credit Facility was amended to
increase the maximum borrowing by $4,000 (total of $29,000). Interest was
payable on the additional amount at the prime rate plus 2.5% and this amount was
repaid with proceeds from the Company's initial public offering of its stock.
In November 1995, the Company obtained a new Senior Revolving Credit
Facility (Facility), which provided for borrowings of up to $50,000 subject to a
limitation of 85% of eligible receivables and other financial covenants. The
Company was not in compliance with some of these covenants as of December 31,
1995. The agreement was further amended in March 1996 to reduce the overall
commitment by the lender from $50,000 to $43,000. As of June 30, 1996, the
Company was again in default of certain covenants under its Senior Revolving
Credit Facility and as a result, all borrowings under this Facility are
classified as current in the accompanying consolidated financial statements. The
default on this Facility also creates a default under the bridge loan described
below.
Concurrent with obtaining the new Senior Revolving Credit Facility, the
Company terminated its prior credit facility and recorded, as an extraordinary
item in the fourth quarter, a $1,075 loss on write-off of deferred financing
costs.
Principal maturities of long-term debt at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.............................................................. $37,809
1997.............................................................. 27
1998.............................................................. 800
-------
Total................................................... $38,636
=======
</TABLE>
On March 28, 1996, the Company obtained a bridge loan of $15,000 from the
principal lender of its Facility. The bridge loan is secured by substantially
all of the Company's assets, bears interest at 12% and was originally due on
April 27, 1996. The Company paid an initial loan fee of $500 and has the right
to extend the due date of the loan for 30-day periods upon payment of an
additional fee of $200 for each 30-day extension, with final payment due by
September 24, 1996. This loan has been extended through July 1996 and is
expected to be repaid in August 1996. The Company also gave the lender a warrant
to purchase 815,470 shares of the Company's common stock for nominal
consideration. The number of shares that can be purchased is subject to
adjustment for certain defined dilutive events. The warrant only becomes
exercisable if the bridge loan is not paid in full on or before September 24,
1996.
F-18
<PAGE> 134
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PREFERRED STOCK
During 1994, the Company's Board of Directors approved the issuance of a
new Series of preferred stock and issued 859,653 shares to retire shareholder
notes payable (see Note 12). The preferred stock was nonvoting, was not entitled
to dividends and had a preference in liquidation of $10 per share. The preferred
stock was redeemed at $10 per share in July 1995 with proceeds from the
Company's initial public offering.
9. COMMON STOCK
Prior to its initial public offering, the Company had authorized voting and
nonvoting common stock. Nonvoting common stock was convertible into an equal
number of shares of common stock upon the occurrence of certain events,
including the public sale of securities of the Company or a change in control of
the Company. In all other respects, the two classes have the same rights and
privileges. Concurrent with the closing of the Company's initial public
offering, all authorized nonvoting common stock converted by its terms to common
stock.
At December 31, 1995 and June 30, 1996, common stock was reserved for the
following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ---------
<S> <C> <C>
Exercise and future grant of stock options................ 1,672,730 4,211,650
Employee stock purchase plan.............................. 260,071 258,625
Exercise of outstanding warrants.......................... 59,500 874,970
--------- ---------
Total common stock reserved..................... 1,992,301 5,345,245
========= =========
</TABLE>
10. STOCK OPTION PLAN
The Company has a stock option plan and, as of December 31, 1995, the plan
provided for the granting of nonqualified and incentive stock options to
purchase up to 1,739,063 shares of common stock. In May 1996, the Company
authorized an additional 3,000,000 shares of common stock for the Company's
stock option plan, subject to shareholder approval at the Company's next Annual
Meeting of Shareholders. Options granted become exercisable over vesting periods
of up to five years at exercise prices determined by the Board of Directors,
generally expire ten years from the date of grant and are dependent upon
continuous employment.
A summary of activity under the stock option plan is as follows:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options outstanding at December 31, 1993............... 484,805 $2.29 - $5.71
Granted.............................................. 663,139 $2.29 - $9.14
Canceled............................................. (117,460) $2.29 - $9.14
Options outstanding at December 31, 1994............... 1,030,484 $2.29 - $9.14
Granted.............................................. 740,954 $1.00 - $18.50
Canceled............................................. (365,619) $2.29 - $15.75
Exercises............................................ (66,333) $2.29 - $18.50
Options outstanding at December 31, 1995............... 1,339,486 $1.00 - $18.50
Granted.............................................. 2,504,861 $3.12 - $15.50
Canceled............................................. (356,925) $2.29 - $18.50
Exercises............................................ (461,080) $2.29 - $9.14
Options outstanding at June 30, 1996................... 3,026,342 $2.29 - $18.50
</TABLE>
F-19
<PAGE> 135
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options have generally been granted at or in excess of the estimated
fair value as determined by the Board of Directors, at the date of grant.
However, certain options have been granted at less than the estimated fair
value, in which case compensation expense is recognized over the vesting period
based on the excess of the fair value of the stock at the date of grant over the
exercise price.
At December 31, 1995 and June 30, 1996, options to purchase 585,427 and
233,832 shares of Common Stock were fully vested and exercisable.
11. INCOME TAXES
Until January 1, 1994, Midcom was treated as an S corporation for income
tax purposes. Accordingly, Midcom's income (losses) were taxed directly to the
shareholders rather than to Midcom. When Midcom made the conversion to a C
corporation, a net deferred tax liability of $207 was recorded. However, this
amount was offset by losses during the balance of the year and, accordingly, no
provision for income taxes was required.
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
------ -------
<S> <C> <C>
Deferred tax assets:
Sales reserves and allowances................................. $ 469 $ 1,326
Intangible tax amortization different than financial
accounting amortization.................................... 200 1,832
Provisions not currently deductible........................... 370 1,343
Losses and write-down of foreign joint venture................ 184 2,953
Net operating loss carryforwards.............................. 1,435 7,648
Other......................................................... 87 69
Total deferred tax assets.................................. 2,745 15,171
Valuation allowance for deferred tax assets..................... (316) (13,017)
2,429 2,154
Deferred tax liabilities:
Systems development expensed for tax.......................... (719) (995)
Tax depreciation different than financial accounting
depreciation............................................... (590) (396)
Cash to accrual change........................................ (1,120) (763)
------
Total deferred tax liabilities............................. (2,429) (2,154)
------
Net deferred tax liabilities............................... $ -- $ --
======
</TABLE>
On January 1, 1994, when the Company became a C corporation, a valuation
allowance on deferred tax assets was not required due to the net deferred tax
liability position. At December 31, 1994, the valuation allowance of $316 was
established for the deferred tax assets in excess of deferred tax liabilities.
At December 31, 1995, the valuation allowance was increased to $13,017 for
deferred tax assets in excess of deferred tax liabilities.
At December 31, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of $19.1 million, which are available to offset
future federal taxable income, if any, through 2010.
F-20
<PAGE> 136
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provisions for income taxes differ from "expected" income tax benefit
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1995
--------------- --------
----------------
<S> <C> <C> <C> <C>
Computed expected federal tax benefit $(1,030) (34)% $(11,362) (34)%
State taxes, net of federal benefit............ (182) (6) (2,005) (6)
Deferred taxes associated with Midcom S
corporation to C corporation conversion,
January 1, 1994.............................. 207 7 -- --
Deferred tax asset realization related to
acquisitions................................. 507 17 -- --
Change in valuation allowance for net deferred
tax assets................................... 316 10 12,701 38
Nondeductible expenses......................... 182 6 142 1
Other.......................................... -- -- 524 1
------- --- ------- ---
$ -- --% $ -- --%
======= === ======= ===
</TABLE>
12. RELATED-PARTY TRANSACTIONS
At December 31, 1993, the Company had notes payable to certain shareholders
and officers totaling $13,448, including accrued interest of $1,277. The notes
accrued interest at rates ranging from 12% to 18% per annum. In 1994, $9,831 of
the notes and accrued interest was repaid by offsetting a shareholder note
receivable of $1,234 and issuing 859,653 shares of redeemable preferred stock.
The remaining notes and related accrued interest were paid in full in June 1994.
During 1993, the Company charged to expense $1,025 for business consulting
services provided by shareholders. Such charges were based, in part, on
available earnings and approved by the Company's Board of Directors. The
consulting arrangement was terminated effective January 1, 1994.
Mid-Com Consultants, Inc. (Consultants) is a long distance
telecommunications distributor owned indirectly by the Company's majority
shareholder. Prior to March 1994, Consultants owned certain AT&T contracts which
the Company utilized in its aggregation business in exchange for the Company
providing various billing, collection and operational support services to
Consultants. No value has been assigned to the exchange of these services in the
financial statements as the amounts are not material. At December 31, 1994, the
Company was owed approximately $137 for cash forwarded to Consultants in advance
of actual collections, which was paid to the Company in 1995.
At December 31, 1994, the Company also had a receivable from ATN of $465
for expenses paid by the Company on behalf of ATN which was collected in 1995.
The former President and the largest shareholder of the Company jointly own
QuestWest Inc. QuestWest Inc., in turn, holds approximately an 85% interest in
Quest America Limited Partnership (Quest LP). In December 1993, the Company
entered into a distribution agreement with Quest LP that entitles Quest LP to a
sales commission from the Company at a rate equal to the most favorable rate
available to other comparable Company distributors. In October 1995 the
President and the largest shareholder sold their interest in Quest LP to a third
party and the most favorable rate clause in the distribution agreement was
eliminated. During 1995 and 1994, Quest LP received $295 and $66, respectively,
in net commissions.
F-21
<PAGE> 137
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1995, the Company was granted an option to purchase 100% of the
stock of QuestWest Inc. through March 2000. The option price will be equal to
the amount the shareholders have currently invested in QuestWest Inc. plus 9.0%
per annum, reduced by the pro rata amount of any distributions made by Quest LP
to QuestWest Inc. This option was canceled in October 1995.
At December 31, 1995 and June 30, 1996, the Company had loans outstanding
to certain employees of $502 and $116, respectively.
13. EMPLOYEE BENEFIT PLANS
401(K) SALARY DEFERRAL AND PROFIT SHARING PLAN
Prior to February 1, 1996, the Company maintained a 401(k) Salary Deferral
and Profit Sharing Plan ("Retirement Plan") with its affiliate SP Investments
Inc. ("SPII"). Effective February 1, 1996, SPII withdrew from the Retirement
Plan and the Company will continue to maintain the Retirement Plan on the same
terms.
The Retirement Plan contains profit sharing and 401(k) components. Under
the 401(k) portion of the Retirement Plan, each eligible employee may elect to
contribute up to 15% of his or her pre-tax gross earnings subject to annual
limits. Under the profit sharing portion of the Retirement Plan, the Company
makes annual matching contributions equal to 50% of the participant's
contributions up to 6% of his or her compensation. In general, a participant is
100% vested in his or her own contributions and vests in the Company matching
and discretionary contributions at 20% for each full year of service. The
Company reserves the right to amend the Retirement Plan at any time.
PacNet, a wholly owned subsidiary of the Company, had a 401(k) Profit
Sharing Plan (the "PacNet Plan") with profit sharing and 401(k) components.
Under the 401(k) portion of the PacNet Plan, each eligible employee could elect
to contribute up to 5% of his or her pre-tax gross earnings subject to annual
limits. Under the profit sharing portion of the PacNet Plan, PacNet made annual
mandatory contributions equal to 100% of the participant's contributions and
could make additional discretionary contribution of 5% of the employee's gross
earnings. In general, a participant was 100% vested in his or her own
contributions and in PacNet's matching contributions. In May 1995, the Company's
Board of Directors voted to combine the Retirement Plan and the PacNet Plan
under the terms and conditions of the Retirement Plan, effective July 1, 1995.
Contributions to all salary deferral and profit sharing plans are subject
to statutory limitations regarding maximum contributions. Contribution expense
was $54, $156 and $253 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $146 for the six months ended June 30, 1996.
EMPLOYEE STOCK PURCHASE PLAN
In December 1994, the Company established an Employee Stock Purchase Plan
(the "Purchase Plan") which is meant to qualify under Section 423 of the
Internal Revenue Code. The Purchase Plan became effective upon the successful
completion of the Company's initial public offering of common stock. Under the
Purchase Plan, the Company reserved up to 262,500 shares of common stock for
purchase by employees who meet certain eligibility requirements. Eligible
employees may contribute up to 10% of their compensation to the Purchase Plan to
purchase shares at 95% of the fair market value of the stock on the first or the
last day of each six-month offering period, as defined in the Purchase Plan. The
Purchase Plan establishes a maximum number of shares a participant may purchase
during any period. This maximum number of shares is determined by dividing
$12,500 by the fair market value of a share of common stock on the first day of
the offering period. The offering periods generally begin January 1 and July 1,
and the first
F-22
<PAGE> 138
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
offering period was September 1, 1995 to December 31, 1995. During this initial
period, 2,429 shares were purchased at an average price of $14.61 per share.
14. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office space and certain equipment under terms of
noncancelable operating leases, which expire on various dates through 2004. The
Company also leases equipment under various capital leases expiring on various
dates through 2002. The leases generally require that the Company pay certain
maintenance, insurance and other operating expenses. Rent expense under
operating leases for the years ended December 31, 1993, 1994 and 1995 was $566,
$1,163, $2,535, respectively, and $1,405 for the six months ended June 30, 1996.
At December 31, 1995, minimum future lease payments under capital leases
and noncancelable operating leases with initial or remaining terms of one year
or more are as follows:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
---------------------------------------------------------------- ------- ---------
<S> <C> <C>
1996............................................................ $ 1,542 $ 2,099
1997............................................................ 1,644 1,723
1998............................................................ 1,015 1,537
1999............................................................ 789 1,447
Thereafter...................................................... 1,282 5,515
------ -------
Total minimum future lease payments................... 6,272 $12,321
=======
Less interest................................................... 1,343
------
Present value of future minimum lease payments.................. 4,929
Less current portion............................................ 3,912
------
$ 1,017
======
</TABLE>
COMMITMENTS WITH PROVIDERS
Under the terms of carrier contracts executed with AT&T and other carriers,
the Company has made commitments to maintain or achieve certain volume levels in
order to obtain special forward pricing. Under some of these contracts, the
Company guarantees to sell a certain amount of long distance volume within a
certain time period or purchase all or a portion of any unused volume. Under
others, if certain volume levels are not achieved during stated periods, pricing
is adjusted going forward to levels justified by current volumes.
Total future minimum usage commitments are as follows:
<TABLE>
<CAPTION>
PERIODS ENDING DECEMBER 31, JUNE 30,
DECEMBER 31, 1995 1996
----------------------------------------------------------- ------------ --------
<S> <C> <C>
1996....................................................... $126,000 $ 53,000
1997....................................................... 111,000 77,000
1998....................................................... 77,000 78,000
-------- --------
Total............................................ $314,000 $208,000
======== ========
</TABLE>
As of June 30, 1996, the Company's minimum volume commitment with one of
its principal suppliers was $117,000. The Company estimates that, as of the last
measurement date on
F-23
<PAGE> 139
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1996, it would have been in shortfall of its minimum commitments
to this supplier by approximately $27,600 based on current contract
requirements. However, on July 19, 1996, the Company and this supplier executed
a letter of intent to settle this anticipated liability as well as other pending
disputes between the Company and the supplier, and to negotiate a new contract
pursuant to which the Company's minimum commitment to this supplier will be
$17,000, in exchange for payments aggregating $8,800, payable in two
installments. The Company has recorded a charge of $8,800 in the second quarter
of 1996 with respect to this anticipated settlement. The settlement and other
terms of the letter of intent will not be effective until the Company and the
supplier have executed a mutually acceptable definitive agreement. Another major
supplier has agreed to forebear from exercising its rights to shortfalls
incurred through April 30, 1996 which would otherwise have required the Company
to pay a surcharge and caused pricing from this supplier to increase. This
supplier has indicated that it will work with the Company to restate applicable
minimums so that their attainments more realistic. However, there can be no
assurance that these negotiations will be successful nor any assurance that the
minimum usage commitments will be achieved in the future. If such negotiations
are not successful or commitments are not achieved, future operating results
could be adversely affected.
During the years ended December 31, 1993, 1994 and 1995, the Company relied
on three carriers to carry traffic representing approximately 98%, 97% and 67%
of the Company's revenue, respectively. The Company has the ability to transfer
its customers' traffic from one supplier to another in the event a supplier
declines to continue to carry the Company's traffic. However, such transfers
could result in disruption of service to the customers, with a subsequent loss
of revenue which would adversely affect operating results.
ACQUISITIONS
In connection with several business or customer base acquisition
agreements, the Company is obligated to issue additional consideration upon the
satisfaction of certain contingencies (see Note 5).
REGULATION
FEDERAL
The Company has all necessary authority to provide domestic interstate and
international telecommunications services under current FCC regulations. Midcom
has filed both domestic and international tariffs with the FCC, and PacNet has,
and is only required to file, international tariffs. Pursuant to a recent court
decision, detailed rate schedules now must be filed in lieu of the "reasonable
range of rates" tariff previously accepted by the FCC. In reliance on the FCC's
past practice of allowing relaxed range of rates tariffs for non-dominant
carriers, Midcom and most of its competitors did not maintain detailed rate
schedules. Until the two-year statute of limitations expires, Midcom could be
held liable for damages for its failure to maintain detailed rate schedules,
although it believes that such an outcome is highly unlikely and would not have
a material adverse effect on it. Pursuant to authority granted to it in the 1996
Telecommunications Act, the FCC is considering "mandatory detariffing" for
domestic non-dominant carriers. This proposal, if adopted, would relieve the
Company of its obligation to file tariffs applicable to its domestic
interexchange offerings.
F-24
<PAGE> 140
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATE
The intrastate long distance operations of Midcom are also subject to
various state laws. The majority of states require certification or
registration, which the Company has secured in 47 states and Washington, D.C.
Many states require tariff filings as well.
In certain states, approval for transfers of control and acquisitions of
customer bases must be obtained. Midcom has been successful in obtaining all
necessary regulatory approvals to date, although revisions of tariffs,
authorities and approvals are being made on a continuing basis, and many such
requests are pending at any one time.
Some states may assess penalties on long distance service providers for
traffic sold prior to tariff approval or the state's consent to an acquisition.
Such states may require refunds to be made to customers. It is the opinion of
management that such penalties and refunds, if any, would not have a material
adverse effect on the results of operations or financial condition of the
Company.
DISPUTES AND LITIGATION
In the third quarter of 1993, the Company was named a defendant in a
lawsuit by Discom Corporation. The allegations include unjustified customer
provisioning delays, customer rejections, improper changes in pricing policies
and failure to deal in good faith. Discom seeks compensatory damages of $3,000.
The Company filed a counterclaim against the distributor for unfair competition
and trade name and trademark infringement. This action has been transferred to
an arbitration proceeding in New York and hearing before a panel of arbitrators
has been postponed.
The Company, its Chairman of the Board of Directors and largest
shareholder, the Company's former President, Chief Executive Officer and
director and the Company's former Chief Financial Officer are named as
defendants in a securities action filed in the U.S. District Court for the
Western District of Washington (the "Complaint"). The Complaint purports to be
filed on behalf of a class of purchasers of the Company's Common Stock during
the period beginning on July 6, 1995, the date of the Company's initial public
offering, and ending on March 4, 1996 (the "Class period"). An amended complaint
(the "Amended Complaint") was filed on July 8, 1996. The Amended Complaint
alleges, among other things, that the registration statement and prospectus
relating to the Company's initial public offering contained false and misleading
statements concerning the Company's billing software and financial condition.
The Amended Complaint further alleges that, throughout the Class Period, the
defendants inflated the price of the Common Stock by intentionally or recklessly
making material misrepresentations or omissions which deceived the public about
the Company's financial condition and prospects. The Amended Complaint alleges
claims under the Securities Act and the Exchange Act as well as various state
laws, and seeks damages in an unstated amount. Defendant's motion to dismiss was
filed on August 7, 1996 and filed a reply to plaintiffs' opposition on September
18, 1996. The parties expect a determination by the court by October 18, 1996 or
a scheduling of oral arguments on such motion sometime in October 1996. All
discovery proceedings are stayed until defendant's motion to dismiss is heard or
otherwise acted on by the court. While the Company believes that it has
substantive defenses to the claims in the Amended Complaint, is in the process
of preparing a motion to dismiss the Amended complaint for failure to state a
claim on which relief can be granted and intends to vigorously defend this
lawsuit, it is unable to predict the outcome of this action.
The Company was informed in May 1996 that the Commission was conducting an
informal inquiry regarding the Company's initial public offering and the
restatement of its 1995 third quarter results. The Company has voluntarily
provided the documents requested by the Commission, but has not been informed
whether or not the Commission intends to commence a formal action against
F-25
<PAGE> 141
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company or any of its affiliates. The Company is, therefore, unable to
predict the ultimate outcome of the investigation. In the event that the
Commission elects to initiate a formal enforcement proceeding, the Company and
its officers could be subject to civil or criminal sanctions including monetary
penalties and injunctive measures. Any such enforcement proceeding could have a
material adverse effect on the Company's business, financial condition and
results of operations.
On July 18, 1996, a lawsuit was filed in the United States District Court
for the Northern District of Illinois, Eastern division, against the Company by
Cherry Communications. The Complaint seeks recovery of amounts owed under two
agreements between the Company and Cherry Communications. It is the Company's
position that Cherry Communications has breached its obligations under those
agreements and that the Company has substantial offsets and counterclaims. The
Company is attempting to negotiate a resolution of these disputes, and in the
event a settlement is not reached, intends to vigorously defend the lawsuit.
On April 30, 1996, a lawsuit was filed in the Superior court of the State
of Washington, King County, against the Company and certain of its officers and
directors by the former owner of Cel-Tech seeking recission of his sale of
Cel-Tech to the Company. The complaint alleges misrepresentation of the facts
concerning the value of the company's Common Stock and breach of contract. In
addition to rescinding the sale transaction, plaintiff seeks unspecified damages
and an injunction placing Cel-Tech under the plaintiff's control until
resolution of the dispute. The plaintiff has filed a second amended complaint in
order to seek damages in lieu of recission. The Company believes there is no
merit to the allegations set forth in the amended complaint and plans to
vigorously defend this lawsuit and to file counterclaims on a variety of issues.
However, the Company is unable to predict the outcome of this lawsuit.
On August 1, 1996, a lawsuit was filed in the Superior Court of the State
of California for the County of Orange against the Company, the Company's former
president and chief executive officer and other defendants to be named at a
later date by David and Maria Wiegand, the former shareholders of Adnet. The
Complaint has been voluntarily dismissed by the plaintiffs without prejudice as
described below. Adnet was acquired by the Company on December 29, 1995 in
exchange for 453,250 shares of the Company's common stock, of which 45,325
shares (the "Escrow Shares") were placed in escrow to be held until December 28,
1996 for satisfaction of certain contingencies. Adnet provides long distance
services to medium-to-large businesses. The acquisition was accomplished through
the merger of Adnet into the Company and has been accounted for as a pooling of
interest. Mr. Wiegand is currently a vice president of the Company in charge of
the continuing operations of Adnet. At the closing of the acquisition, the last
reported sale price for the Company's Common Stock as reported by Nasdaq
National Market was $18.25. During 1996 the Common Stock has traded as low as
$6.50 per share. The complaint alleged intentional misrepresentations,
intentional concealment of facts, negligent misrepresentation, breach of
contract, breach of implied covenant of good faith and fair dealing and
violation of California Securities Laws in connection with the acquisition. The
plaintiffs sought recovery of monetary damages in an amount which the plaintiffs
describe as "not yet ascertainable, but potentially in [excess of] $10,000,000."
The plaintiffs furthermore sought recission of the Merger Agreement, restoration
of all consideration paid by the plaintiffs to the Company pursuant to the
Merger Agreement, an order enjoining the Company from undertaking any acts which
would further merge Adnet into the Company and which would prevent the
plaintiffs from being accorded full relief upon rescission of the Merger
Agreement, punitive damages in an amount to be determined at trial and
attorney's fees and other costs and expenses of suit.
F-26
<PAGE> 142
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The plaintiffs' claims are based in part on the restatement by the Company
of its financial results for the third quarter and nine months ended September
30, 1995 from those reported in its Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995 as originally filed in November 1995. The
restated results, which were first announced in March 1996, reflected a $3.3
million reduction in revenue and $4.5 million reduction in accounts receivable
for the quarter and nine months ended September 30, 1995. These and other
adjustments resulted in the Company's net loss for the quarter and nine months
ended September 30, 1995 being increased from $3.8 million and $8.0 million,
respectively, to $8.3 million and $12.5 million, respectively. The Company had
represented in the merger agreement with Adnet that the financial statements
included in its filings with the Commission "fairly present the . . . financial
position of Midcom . . . as of the dates thereof and its . . . results of
operations and cash flow for the periods then ended . . . are correct and
complete in all respects. . ."
In August 1996, the Company and the plaintiffs entered into an agreement
whereby the plaintiffs agreed to dismiss the compliant without prejudice and not
to re-file the complaint before August 31, 1996, and the parties agreed to meet
before August 31, 1996 to pursue a negotiated settlement of the plaintiffs'
claims. In connection with execution of this agreement, the Company agreed to
release the Escrow Shares to the plaintiffs. Although as of the date of this
Prospectus, the plaintiffs have not re-filed their complaint, the parties have
not negotiated a settlement to plaintiffs' claims. If the Company is unable to
reach an agreement with the plaintiffs to settle their claims, it is likely that
the complaint will be re-filed. Although the Company would vigorously defend
this action, it cannot predict the outcome of these claims. Should the Company
agree or otherwise be required to pay additional consideration to the
plaintiffs, the Company may be required to account for the acquisition of Adnet
using the purchase method, which would require the Company to restate its
financial statements. The operating results of Adnet contributed $3.7 million in
revenue and $0.3 million in net income for the first six months of 1996.
Although the outcome of any litigation is uncertain, the Company believes
that it has significant defenses to such claims and intends to vigorously defend
itself in these matters, and also believes that the outcome of these matters
will not have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
F-27
<PAGE> 143
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS
ENDING
YEAR ENDING DECEMBER 31, JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Noncash investing and financing
activities:
Application of related-party accounts
receivable to related-party accounts
payable.............................. $ -- $1,234 $ -- $ -- $ --
Conversion of amounts due to related
parties to redeemable preferred
stock................................ -- 8,597 -- -- --
Issuance of notes payable and assumption
of liabilities for acquisitions of
customer bases....................... 3,557 5,154 42,591 13,261 487
Capital lease obligation for
equipment............................ 239 2,207 1,892 66 --
Issuance of notes payable for
equipment............................ 255 -- 310 310 --
Issuance of common stock warrants in
connection with financing............ -- 3,500 -- -- --
Issuance of common stock for
acquisitions......................... 202 1,040 9,877 2,776 329
Issuance of note payable for settlement
of carrier accounts payable.......... -- -- 3,500 3,500 8,800
Cash paid for interest.................... 1,215 1,453 4,128 2,336 2,485
Cash paid for income taxes................ 21 131 25 -- --
</TABLE>
16. INITIAL PUBLIC OFFERING
On March 21, 1995, the Company's Board of Directors authorized management
to file a Registration Statement with the Securities and Exchange Commission to
permit the Company to sell shares of its common stock to the public.
On July 6, 1995, the Company completed the initial public offering of
shares of its common stock at $11.00 per share, which resulted in net proceeds
of approximately $54,182 to the Company after deducting the expenses of the
offering. The net proceeds were used to repay indebtedness and redeem all of the
outstanding Series A Redeemable Preferred Stock.
17. NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation. This pronouncement establishes
accounting and reporting standards for stock-based employee compensation plans,
including: stock purchase plans, stock options and stock appreciation rights.
This standard defines a fair valuebased method of accounting for these equity
instruments. This method measures compensation cost based on the value of the
award and recognizes that cost over the service period. Companies may elect to
adopt this standard or to continue accounting for these types of equity
instruments under current guidance, APB Opinion No. 25, Accounting for Stock
Issued to Employees. Companies which elect to continue using the rules of APB
Opinion No. 25 must make pro forma disclosures of net income and earnings per
share as if this new Statement had been applied. Effective January 1, 1996, the
Company adopted Statement No. 123 and elected to continue following the guidance
of APB Opinion No. 25.
F-28
<PAGE> 144
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY
OFFER TO BUY THE NOTES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS
SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Forward-looking Statements and
the Private Securities Litigation
Reform Act......................... 11
Risk Factors......................... 12
Use of Proceeds...................... 26
Trading Market for Securities........ 26
Dividend Policy...................... 26
Capitalization....................... 27
Selected Consolidated Financial
and Operating Data................. 29
Management's Discussion and Analysis
of Financial Condition
and Results of Operations.......... 31
Business............................. 44
Management........................... 69
Selling Securityholders.............. 77
Principal Shareholders............... 80
Certain Transactions................. 82
Description of Notes................. 84
Description of Capital Stock......... 100
Description of Certain
Indebtedness....................... 105
Shares Eligible for Future Sale...... 106
Plan of Distribution................. 108
Certain Federal Income Tax
Consequences....................... 110
Legal Matters........................ 112
Experts.............................. 112
Available Information................ 112
Index to Financial Statements........ F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$97,743,000
MIDCOM
COMMUNICATIONS INC.
8 1/4% CONVERTIBLE SUBORDINATED
NOTES DUE 2003
(INTEREST PAYABLE FEBRUARY 15 AND AUGUST 15)
------------------------
PROSPECTUS
------------------------
OCTOBER , 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 145
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the issuance and distribution of the securities being registered. All the
amounts shown are estimated, except the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market(R) listing
fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee..................... $33,704.48
NASD Filing Fee......................................................... *
Nasdaq National Market(R) Listing Fee................................... *
Blue Sky Fees and Expenses (includes fees and expenses of counsel)...... *
Transfer Agent and Registrar Fees.......................................
Accounting Fees and Expenses............................................ *
Legal Fees and Expenses................................................. *
Printing, Engraving and Delivery Expenses............................... *
Insurance Coverage Acquired for the Offering............................ *
Miscellaneous........................................................... *
----------
Total......................................................... $ *
==========
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a corporation to indemnify its directors,
officers, employees and agents against certain liabilities they may incur in
such capacities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"), provided they acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation. The Registrant's Bylaws (Exhibit 3.2 hereto) require the Registrant
to indemnify its officers and directors to the fullest extent permitted by
Washington law.
Section 23B.08.320 of the WBCA authorizes a corporation to limit or
eliminate its directors' liability to the corporation or its shareholders for
monetary damages for breaches of fiduciary duties, other than for (1) acts or
omissions that involve intentional misconduct or a knowing violation of law, (2)
improper declaration of dividends, or (3) transactions from which a director
derives an improper personal benefit. The Registrant's Amended and Restated
Articles of Incorporation (Exhibit 3.1 hereto) contain provisions limiting the
liability of the directors to the Registrant and to its shareholders to the
fullest extent permitted by Washington law.
The above discussion of the WBCA and the Registrant's Bylaws and Amended
and Restated Articles of Incorporation is not intended to be exhaustive and is
qualified in its entirety by such statute, the Bylaws and the Amended and
Restated Articles of Incorporation, respectively.
The Registrant maintains officers' and directors' liability insurance of on
its directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On August 22, 1996 and September 6, 1996, the Company completed sales of
$97,743,000 in aggregate principal amount of 8 1/4% Convertible Subordinate
Notes due 2003. PaineWebber Incor-
II-1
<PAGE> 146
porated and Wheat, First Securities, Inc. acted as the Initial Purchasers and
resold the notes to qualified institutional buyers pursuant to Rule 144A
promulgated under the Securities Act, to accredited investors under Regulation D
promulgated under the Securities Act, and to non-U.S. persons pursuant to
Regulation S promulgated under the Securities Act. The Company believes these
transactions are exempt from registration pursuant to Rule 144A, Regulation D
and Regulation S promulgate under Securities Act as transactions not involving a
public offering. The Company filed a Form D and an Amended Form D to perfect an
exemption from registration under Rule 506, as promulgated under Section 4(2) of
the Securities Act, with respect to the sales of the notes to the Initial
Purchasers.
On December 29, 1995, the Company issued to David Wiegand and Maria Wiegand
453,240 shares of Common Stock valued at $18.25 per share in exchange for
substantially all of the assets of ADNET Telemanagement, Inc. The Company
believes that the issuance of the shares was exempt from the registration by
virtue of Section 4(2) of the Securities Act as a transaction not involving a
public offering. The Company has committed to register the shares for resale.
On September 29, 1995, the Company issued to the shareholders of AdVal,
Inc. ("Adval") 250,000 shares of Common Stock valued at $15.25 per share in
exchange for all of the outstanding capital stock of Adval. The Company believes
that the issuance of the shares was exempt from the registration by virtue of
Section 4(2) of the Securities Act as a transaction not involving a public
offering. The Company has committed to register the shares for resale.
On September 1, 1995, the Company issued to Cherry Communications
Incorporated ("Cherry Communications") 317,460 shares of Common Stock valued at
$15.75 per share plus additional consideration in exchange for certain assets of
Cherry Communications. The Company believes that the issuance of the shares was
exempt from the registration by virtue of Section 4(2) of the Securities Act as
a transaction not involving a public offering. The Company has committed to
register the shares for resale.
On August 19, 1995, the Company issued to Richard E. John 141,935 shares of
Common Stock valued at $16.25 per share in exchange for all of the outstanding
capital stock of Cel-Tech International Corp. ("Cel-Tech"). The Company believes
that the issuance of the shares was exempt from the registration by virtue of
Section 4(2) of the Securities Act as a transaction not involving a public
offering. The Company has committed to register the shares for resale.
Effective April 1, 1995, the Company issued to Darren Narins, Kevin Narins
and Steven Tomsic, the shareholders of Telnet Communications Inc., warrants to
purchase 59,500 shares of Common Stock for $7.44 per share. The Company believes
that the issuance of the warrants was exempt from registration by virtue of
Section 4(2) of the Securities Act as transactions not involving a public
offering. The Company has committed to register the shares issuable upon
exercise of the warrants (but not the warrants) for resale.
On January 20, 1995, the Company issued to Communique Telecommunications,
Inc. ("Communique") 371,875 shares of Common Stock valued at $9.14 per share
plus additional consideration in exchange for certain assets of Communique. The
Company believes that the issuance of the shares was exempt from the
registration by virtue of Section 4(2) of the Securities Act as a transaction
not involving a public offering. The Company has committed to register the
shares for resale.
On November 6, 1995, the Company issued to four individuals who were
shareholders of Fairfield County Telephone Corporation ("Fairfield") 98,762
shares of Common Stock valued at $18.25 per share in exchange for substantially
all of the outstanding capital stock of Fairfield. The Company believes that the
issuance of the shares was exempt from the registration by virtue of Section
4(2) of the Securities Act as a transaction not involving a public offering. The
Company has committed to register the shares for resale.
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<PAGE> 147
On August 31, 1995, the Company issued to 27,100 shares of Common Stock
valued at $15.25 per share plus additional consideration in exchange for a
portion of substantially all of the assets of Communications Services of
America. The Company believes that the issuance of the shares was exempt from
the registration by virtue of Section 4(2) of the Securities Act as a
transaction not involving a public offering. The Company has committed to
register the shares for resale.
In September 1995, the Company issued to GE Capital Communications
Services, Inc. ("GE Capital") a warrant to purchase shares of Common Stock with
an aggregate value of $2,000,000 plus additional consideration in exchange for a
portion of GE Capital's customer base. The Company believes that the issuance of
the shares was exempt from the registration by virtue of Section 4(2) of the
Securities Act as a transaction not involving a public offering. The Company has
committed to register the shares issuable upon exercise of the warrant for
resale.
In December 1994, the Company issued to Richard W. Stroup 113,750 shares of
Common Stock valued at $11.43 per share in exchange for all of the outstanding
shares of stock of PacNet, Inc. In addition, the Company issued to Richard W.
Stroup an option to purchase 52,000 shares of Common Stock at an exercise price
of $5.71 per share. The Company believes that the issuance of the shares and the
option were exempt from registration by virtue of Section 4(2) of the Securities
Act as a transaction not involving a public offering. The Company has committed
to register the shares (but not the options or the shares issuable upon exercise
thereof) for resale.
On June 10, 1994, the Company issued to Paul Pfleger, the Company's
Chairman of the Board and a director, 859,653 shares of Series A Preferred Stock
in consideration for the assignment by Mr. Pfleger to the Company of notes and
receivables in the aggregate amount of $3,731,729 and the assumption by Mr.
Pfleger of the Company's indebtedness to a third party evidenced by a note in
the original principal amount of $4 million, bearing interest at a rate of 12%
per annum and maturing December 31, 2002. The Company believes that the issuance
of the note was exempt from registration by virtue of Section 4(2) of the
Securities Act.
On June 10, 1994, the Company issued to First Union Corporation a warrant
to purchase 1,493,059 shares of Nonvoting Common Stock, at an exercise price of
$0.0001 per share. The Company believes that the issuance of the warrant was
exempt from registration by virtue of Section 4(2) of the Securities Act as a
transaction not involving a public offering and filed a Form D to perfect an
exemption from registration under Rule 506, as promulgated under Section 4(2).
The Company has committed to register the shares issuable on exercise of the
warrant for resale.
On June 10, 1994, the Company issued to The Robinson-Humphrey Company, Inc.
a warrant to purchase 20,177 shares of Common Stock, at an exercise price of
$0.0001 per share. In connection with the conclusion of that financing the
Company paid a cash fee to Robinson-Humphrey of $444,000. The Company believes
that the issuance of the warrant was exempt from registration by virtue of
Section 4(2) of the Securities Act as a transaction not involving a public
offering and filed a Form D to perfect an exemption from registration under Rule
506, as promulgated under Section 4(2). The Company has committed to register
the shares issuable on exercise of the warrant for resale.
II-3
<PAGE> 148
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K) EXHIBIT DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation.(6)
3.2 Bylaws.(1)
4.1 Form of Common Stock Certificate.(1)
4.2 See Exhibits numbered 3.1 and 3.2 for provisions of the Articles of
Incorporation and Bylaws of the Company defining the rights of the holders of
Common Stock.
*4.3 Purchase Agreement dated August 15, 1996 among the Company, PaineWebber
Incorporated and Wheat, First Securities, Inc.
*4.4 Indenture dated as of August 22, 1996 between the Company and IBJ Schroder
Bank & Trust Company.
*4.5 Registration Rights Agreement dated as of August 22, 1996 by and among the
Company, PaineWebber Incorporated and Wheat, First Securities, Inc.
**5.1 Opinion of Heller Ehrman White & McAuliffe.
10.1 Senior Subordinated Note and Warrant Purchase Agreement dated as of June 10,
1994 by and among the Company, First Union Corporation and The Robinson-
Humphrey Company, Inc.(1)
10.6 Warrant Agreement dated as of June 10, 1996 by and among the Company, First
Union Corporation and The Robinson-Humphrey Company, Inc.(1)
10.7 Registration Rights Agreement dated as of June 10, 1994 by and among the
Company, First Union Corporation and The Robinson-Humphrey Company, Inc.(1)
10.17 Agreement of Formation and Activities of Russian-American Joint Stock Venture
"Dal Telekom International" dated as of December 5, 1993, by and among the
Company, DalREO, the joint stock company Rostelekom and the state enterprise
Rossvyazinform in the cities of Khabarovsk, Blagoveschensk and Petropavlovsk-
Kamchatski, as amended; Addendum to Agreement Regarding Reorganization of Dal
Telecom International dated as of December 5, 1993, by and between the
Company and DalREO; Amendment to the Agreement on the Joint Venture between
the Company and DalREO dated July 13, 1994; Second Amendment to the Agreement
on the Joint Venture between the Company and DalREO dated December 19, 1994;
Proxy with regard to Voting of Shares of Dal Telecom International dated
December 5, 1993.(1)
10.21 Shareholders Agreement dated as of June 7, 1994 by and among Paul Pfleger,
Ashok Rao, the trust for the benefit of Siddhartha Rao, the trust for the
benefit of Kavita Rao, the trust for the benefit of Divya Rao, the trust for
the benefit of Anjali Rao, John M. Orehek, and the Company.(1)
10.23 Registration Rights Agreement dated as of December 30, 1994 by and between
the Company and Richard W. Stroup.(1)
</TABLE>
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<PAGE> 149
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K) EXHIBIT DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
<C> <S>
**10.25 1993 Stock Option Plan, adopted by the Board of Directors on December 30,
1993 and the shareholders on December 29, 1994, as amended by the Board of
Directors on February 21, 1994, March 28, 1994, January 19, 1995 and March
21, 1995, such amendments being approved by the shareholders on October 7,
1994 and March 30, 1995, and further amended by the Board of Directors on
April 25, 1995, July 26, 1995, November 9, 1995 and July 25, 1996.
10.26 1995 Employee Stock Purchase Plan adopted by the Board of Directors and the
shareholders on December 9, 1994.(1)
10.27 Employment Agreement dated as of June 7, 1994 by and between the Company and
Ashok Rao.(1)
10.30 Reseller Service Agreement dated as of December 31, 1992 by and between West
Coast Telecommunications, Inc. and the Company.(1)
10.34 Software License and Services Agreement dated as of October 26, 1993 by and
between ORACLE Corporation and the Company.(1)
10.35 Service Agreement, as amended, dated as of February 7, 1995 by and between
the Company and Oracle Corporation.(1)
10.36 One Plus Billing and Information Management Services Volume Purchase
Agreement dated March 4, 1995 by and between Zero Plus Dialing, Inc. d/b/a
U.S. Billing and the Company.(1)
10.42 Distributor Agreement dated as of December 28, 1993 by and between the
Company and Quest America L.P. Confidential treatment was requested for
portions of this exhibit and was granted on July 6, 1995, by an order of the
Securities and Exchange Commission under File No. 33-90814.(1)
10.50 Agreement and Plan of Reorganization dated as of November 8, 1994 by and
among the Company, P.N. Acquisition Corporation, PacNet, Inc. and Richard W.
Stroup.(1)
10.51 Agreement for the purchase of Mid-Com Consultants' Aggregation Customer Base
and Aggregation Plans by Mid-Com Communications, Inc. dated as of January 3,
1995 by and between the Company and Mid-Com Consultants, Inc.(1)
10.52 Asset Purchase Agreement dated as of January 20, 1995 by and between the
Company and Communique Telecommunications, Inc.(1)
10.60 1111 Third Avenue Lease Agreement dated as of March 8, 1994.(1)
10.61 Agreement of Sublease dated January 1, 1994 by and between Bank of New
Zealand and the Company.(1)
10.62 Real Estate Sub-Lease dated as of October 1, 1994 by and between Digital
Telecommunications, Inc. and the Company.(1)
10.66 Option Agreement dated March 6, 1995 by and among Paul H. Pfleger, Ashok Rao,
John M. Orehek and the Company.(1)
10.67 Release and Settlement Agreement dated January 1995. Confidential treatment
was requested for portions of this exhibit and was granted on July 6, 1995,
by an order of the Securities and Exchange Commission under File No.
33-90814.(1)
10.73 Overseas Private Investment Corporation Contract of Insurance against
Business Income Loss.(1)
</TABLE>
II-5
<PAGE> 150
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K) EXHIBIT DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
<C> <S>
10.74 Overseas Private Investment Corporation Contract of Insurance against
Expropriation Political Violence.(1)
10.75 Letter Agreement dated May 12, 1995 between First Union Corporation and the
Company.(1)
10.78 Registration Rights Agreement dated as of April 1, 1995 by and among the
Company and Darren Narans, Kevin Narans and Steven Tomsic.(1)
10.79 Stock Purchase Warrant issued on April 1, 1995 by the Company to Darren
Narans granting Darren Narans the right to purchase from the Company 12,250
shares of the Company's Common Stock.(1)
10.80 Stock Purchase Warrant issued on April 1, 1995 by the Company to Kevin Narans
granting Kevin Narans the right to purchase from the Company 23,625 shares of
the Company's Common Stock.(1)
10.81 Stock Purchase Warrant issued on April 1, 1995 by the Company to Steven
Tomsic granting Steven Tomsic the right to purchase from the Company 23,625
shares of the Company's Common Stock.(1)
10.83 Letter Agreement dated June 6, 1995 between First Union Corporation, The
Robinson-Humphrey Company, Inc. and the Company.(1)
10.85 Indemnification and Hold Harmless Agreement dated June 29, 1995 by and among
the Company, Paul H. Pfleger, Black Creek Limited Partnership and Ashok
Rao.(1)
10.86 Carrier Transport Switched Services Agreement dated June 14, 1995 by and
between Sprint Communications Company L.P. and the Company, amended November
1, 1995. Confidential treatment was requested for portions of this exhibit
and was granted on July 6, 1995, by an order of the Securities and Exchange
Commission under File No. 33-90814.(1)
10.87 Telecommunications Services Agreement dated March 27, 1996 by and between
Worldcom Network Service, Inc. d/b/a WilTel and the Company. Confidential
treatment was requested for portions of this exhibit and was granted by the
SEC on May 31, 1996.
10.88 Customer Base Purchase and Sale Agreement dated as of September 1, 1995
between Cherry Communications Incorporated and the Company.(2)
10.89 Master Equipment Lease Agreement dated as of September 12, 1995 between
Keycorp Leasing Ltd. and the Company.(3)
10.90 Agreement and Plan of Reorganization dated as of September 29, 1995 among the
Company, AV Acquisition Corporation, AdVal, Inc., AdVal Data Corporation,
Theodore D. Berns and Donald D. Dean.(4)
10.91 Credit Agreement dated as of November 8, 1995 among the Company, PacNet,
AdVal, Cel-Tech(the "Borrowers") and Transamerica Business Credit
Corporation, as agent.(6)
10.92 Revolving Note dated December 20, 1995 in the amount of $30,000,000 made by
the Borrowers to the order of Transamerica Business Credit Corporation.(6)
10.93 Revolving Note dated December 20, 1995 in the amount of $7,000,000 made
by the Borrowers to the order of Keybank of Washington.(6)
10.94 Revolving Note dated December 20, 1995 in the amount of $13,000,000 made by
the Borrowers to the order of Nationsbank of Georgia, N.A.(6)
</TABLE>
II-6
<PAGE> 151
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K) EXHIBIT DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
<C> <S>
10.95 Stock Pledge Agreement dated as of November 8, 1995 made by the Company in
favor of Transamerica Business Credit Corporation, as agent.(6)
10.96 Security Agreement dated as of November 8, 1995 made by the Borrowers in
favor of Transamerica Business Credit Corporation, as agent.(6)
10.97 Letter Agreement dated March 6, 1996 between the Borrowers and Transamerica
Business Credit Corporation, as agent.(6)
10.98 Letter Agreement dated March 18, 1996 between the Borrowers and Transamerica
Business Credit Corporation, as agent.(6)
10.99 First Amendment to Credit Agreement dated March 28, 1996 between the
Borrowers and Transamerica Business Credit Corporation, as agent.(6)
10.100 Promissory Note dated March 28, 1996 in the amount of $15,000,000 made by the
Company to the order of Transamerica Business Credit Corporation.(6)
10.101 Warrant Purchase Agreement dated March 28, 1996 between the Company and
Transamerica Business Credit Corporation.(6)
10.102 Warrant issued on March 28, 1996 by the Company to Transamerica Business
Credit Corporation.(6)
10.103 Agreement and Plan of Reorganization dated December 29, 1995 among the
Company, AdNet Telemanagement, Inc., David Wiegand and Maria Wiegand.(5)
10.104 Contract Tariff No. 969 effective February 15, 1996 between the Company and
AT&T Corp.(6)
**10.105 Second Amendment to Credit Agreement dated July 26, 1996 among the Company,
PacNet, AdVal, Cel-Tech, Advanced Network Design and Transamerica Business
Credit Corporation, as agent.
**10.106 Third Amendment to Credit Agreement dated August 21, 1996 between the
Company, PacNet, AdVal, Cel-Tech and Advanced Network Design and Transamerica
Business Credit Corporation.
**10.107 Customer Base Purchase and Sale Agreement dated as of November 1, 1995
between Cherry Communications Incorporated.
**10.108 Letter of Intent dated July 19, 1996 between the Company and AT&T Corp.
**10.109 Distributor Agreement dated April 4, 1996 between the Company and Tie
Communications, Inc.
**10.110 Employment Agreement dated May 24, 1996 between the Company and William H.
Oberlin.
**10.111 Consulting Agreement dated May 24, 1996 between the Company and John M. Zrno.
**10.112 Consulting Agreement dated May 24, 1996 between the Company and Marvin C.
Moses.
11.1 Statement re: computation of per share earnings.(6)
21.1 List of significant subsidiaries of the Company.(6)
23.1 Consent of Ernst & Young LLP (See page II-12).
23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.1).
</TABLE>
II-7
<PAGE> 152
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K) EXHIBIT DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
<C> <S>
24.1 Power of Attorney (See page II-11).
**25.1 Form T-1 Statement of Eligibility and Qualification of the Trustee under the
Trust Indenture Act of 1939.
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
(1) Exhibit is incorporated by reference to an identically numbered exhibit to
the Company's Registration Statement on Form S-1, file no. 33-90814.
(2) Exhibit is incorporated by reference to Exhibit 2.3 filed with the Company's
Current Report on Form 8-K filed with the Commission on December 18, 1995.
(3) Exhibit is incorporated by reference to Exhibit 10.1 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
(4) Exhibit is incorporated by reference to Exhibit 2.1 filed with the Company's
Current Report on Form 8-K filed with the Commission on October 13, 1995.
(5) Exhibit is incorporated by reference to Exhibit 2.1 filed with the Company's
Current Report on Form 8-K filed with the Commission on January 11, 1996.
(6) Exhibit is incorporated by reference to identically numbered exhibits filed
with the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
b. Financial Statements.
Consolidated Financial Statements filed as part of this Registration
Statement are listed in the Index to the Financial Statements on page F-1.
c. Financial Statement Schedules.
Consolidated Financial Statement Schedules filed as part of this
Registration Statement are listed in the Index to the Financial Statement
Schedules on page S-1. All other schedules have been omitted because the
information is not required or is not applicable, or because the information
required is included in the Consolidated Financial Statements or the Notes
thereto included elsewhere in this Registration Statement.
ITEM 17. UNDERTAKINGS.
(a) Rule 415 Offering.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof), which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
II-8
<PAGE> 153
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities as that time shall be deemed
to be the initial bona fide offering thereof;
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Indemnification for Liabilities
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(c) Registration Statement Permitted by Rule 430A
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
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<PAGE> 154
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Seattle, State of
Washington, on September 30, 1996.
MIDCOM COMMUNICATIONS INC.
By: /s/ Robert J. Chamberlain
------------------------------------
Robert J. Chamberlain
Senior Vice President
Chief Financial Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Robert J. Chamberlain and Paul P. Senio, and each of them, with full
power of substitution and full power to act without the other, as his true and
lawful attorney-in-fact and agent to act in his name, place and stead and to
execute in the name and on behalf of each person, individually and in each
capacity stated below, and to file, any and all amendments to this registration
statement, and to file the same, including any and all post-effective amendments
and any registration statement relating to the same offering as this
registration statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorneys-in-fact, or their
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated below on the 30th day of September, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------- --------------------------------------------------
<S> <C>
/s/ PAUL H. PFLEGER Chairman of the Board
- -------------------------------------
Paul H. Pfleger
/s/ WILLIAM H. OBERLIN President, Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
William H. Oberlin
/s/ ROBERT J. CHAMBERLAIN Senior Vice President and Chief Financial Officer
- ------------------------------------- (Principal Accounting and Financial Officer)
Robert J. Chamberlain
/s/ JOHN M. OREHEK Director
- -------------------------------------
John M. Orehek
/s/ SCOTT B. PERPER Director
- -------------------------------------
Scott B. Perper
</TABLE>
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<PAGE> 155
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------- --------------------------------------------------
<S> <C>
/s/ KARL D. GUELICH Director
- -------------------------------------
Karl D. Guelich
/s/ JOHN M. ZRNO Director
- -------------------------------------
John M. Zrno
/s/ MARVIN C. MOSES Director
- -------------------------------------
Marvin C. Moses
/s/ DANIEL M. DENNIS Director
- -------------------------------------
Daniel M. Dennis
</TABLE>
II-11
<PAGE> 156
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial and Operating Data" and "Experts" and to the use of our
reports dated March 29, 1996, in the Registration Statement (Form S-1) and
related Prospectus of MIDCOM Communications Inc. for the registration of
$97,743,000 of its 8 1/4% Convertible Subordinated Notes due 2003 (the "Notes")
and an indeterminate number of shares of its common stock, par value $.0001 per
share, as may be issued upon conversion of such Notes.
ERNST & YOUNG LLP
Seattle, Washington
October 16, 1996
II-12
<PAGE> 157
MIDCOM COMMUNICATIONS INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors on Financial Statement Schedule..... S-2
Schedule II. Valuation and Qualifying Accounts....................................... S-3
</TABLE>
S-1
<PAGE> 158
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
The Shareholders and Board of Directors
MIDCOM Communications Inc.
We have audited the consolidated financial statements of MIDCOM
Communications Inc. as of December 31, 1995 and 1994, and for each of the three
years in the period ended December 31, 1995, and have issued our report thereon
dated March 29, 1996 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Seattle, Washington
March 29, 1996
S-2
<PAGE> 159
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS AT END
PERIOD EXPENSES -- DESCRIBE --DESCRIBE OF PERIOD
------------ ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Description
YEAR ENDED DECEMBER 31, 1993
Reserve and allowances deducted from
assets accounts
Allowance for doubtful accounts.......... $1,168 $ 940 318(1) $ (1,259)(3) $ 1,167
YEAR ENDED DECEMBER 31, 1994
Reserve and allowances deducted from
assets accounts
Allowance for doubtful accounts.......... $1,167 $1,505 1,948(1) 1,748)(3) $ 2,872
YEAR ENDED DECEMBER 31, 1995
Reserve and allowances deducted from
assets accounts
Allowance for doubtful accounts.......... $2,872 $9,874 2,832(1) (9,403)(3) $ 10,581
4,406(2)
</TABLE>
- ---------------
(1) Receivable reserves associated with business and customer base acquisitions.
(2) Amounts primarily charged against revenues.
(3) Amounts written off, net of recoveries.
S-3
<PAGE> 160
MIDCOM COMMUNICATIONS INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGINATION BY
(REFERENCED TO SEQUENTIAL
ITEM 601 OF NUMBERING
REGULATION S-K) EXHIBIT DESCRIPTION SYSTEM
- ---------------- -------------------------------------------------------------- -------------
<C> <C> <S> <C>
3.1 -- Articles of Incorporation.(6)
3.2 -- Bylaws.(1)
4.1 -- Form of Common Stock Certificate.(1)
4.2 -- See Exhibits numbered 3.1 and 3.2 for provisions of the
Articles of Incorporation and Bylaws of the Company defining
the rights of the holders of Common Stock.
*4.3 -- Purchase Agreement dated August 15, 1996 among the Company,
PaineWebber Incorporated and Wheat, First Securities, Inc. 701
*4.4 -- Indenture dated as of August 22, 1996 between the Company and
IBJ Schroder Bank & Trust Company. 768
*4.5 -- Registration Rights Agreement dated as of August 22, 1996 by
and among the Company, PaineWebber Incorporated and Wheat,
First Securities, Inc. 857
**5.1 -- Opinion of Heller Ehrman White & McAuliffe.
10.1 -- Senior Subordinated Note and Warrant Purchase Agreement dated
as of June 10, 1994 by and among the Company, First Union
Corporation and The Robinson-Humphrey Company, Inc. (1)
10.6 -- Warrant Agreement dated as of June 10, 1996 by and among the
Company, First Union Corporation and The Robinson-Humphrey
Company, Inc. (1)
10.7 -- Registration Rights Agreement dated as of June 10, 1994 by and
among the Company, First Union Corporation and The Robinson-
Humphrey Company, Inc. (1)
10.17 -- Agreement of Formation and Activities of Russian-American
Joint Stock Venture "Dal Telekom International" dated as of
December 5, 1993, by and among the Company, DalREO, the joint
stock company Rostelekom and the state enterprise
Rossvyazinform in the cities of Khabarovsk, Blagoveschensk and
Petropavlovsk-Kamchatski, as amended; Addendum to Agreement
Regarding Reorganization of Dal Telecom International dated as
of December 5, 1993, by and between the Company and DalREO;
Amendment to the Agreement on the Joint Venture between the
Company and DalREO dated July 13, 1994; Second Amendment to
the Agreement on the Joint Venture between the Company and
DalREO dated December 19, 1994; Proxy with regard to Voting of
Shares of Dal Telecom International dated December 5, 1993.(1)
</TABLE>
<PAGE> 161
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGINATION BY
(REFERENCED TO SEQUENTIAL
ITEM 601 OF NUMBERING
REGULATION S-K) EXHIBIT DESCRIPTION SYSTEM
- ---------------- -------------------------------------------------------------- -------------
<C> <C> <S> <C>
10.21 -- Shareholders Agreement dated as of June 7, 1994 by and among
Paul Pfleger, Ashok Rao, the trust for the benefit of
Siddhartha Rao, the trust for the benefit of Kavita Rao, the
trust for the benefit of Divya Rao, the trust for the benefit
of Anjali Rao, John M. Orehek, and the Company.(1)
10.23 -- Registration Rights Agreement dated as of December 30, 1994 by
and between the Company and Richard W. Stroup.(1)
**10.25 -- 1993 Stock Option Plan, adopted by the Board of Directors on
December 30, 1993 and the shareholders on December 29, 1994,
as amended by the Board of Directors on February 21, 1994,
March 28, 1994, January 19, 1995 and March 21, 1995, such
amendments being approved by the shareholders on October 7,
1994 and March 30, 1995, and further amended by the Board of
Directors on April 25, 1995, July 26, 1995, November 9, 1995
and July 25, 1996.
10.26 -- 1995 Employee Stock Purchase Plan adopted by the Board of
Directors and the shareholders on December 9, 1994.(1)
10.27 -- Employment Agreement dated as of June 7, 1994 by and between
the Company and Ashok Rao.(1)
10.30 -- Reseller Service Agreement dated as of December 31, 1992 by
and between West Coast Telecommunications, Inc. and the
Company.(1)
10.34 -- Software License and Services Agreement dated as of October
26, 1993 by and between ORACLE Corporation and the Company.(1)
10.35 -- Service Agreement, as amended, dated as of February 7, 1995 by
and between the Company and Oracle Corporation.(1)
10.36 -- One Plus Billing and Information Management Services Volume
Purchase Agreement dated March 4, 1995 by and between Zero
Plus Dialing, Inc. d/b/a U.S. Billing and the Company.(1)
10.42 -- Distributor Agreement dated as of December 28, 1993 by and
between the Company and Quest America L.P. Confidential
treatment was requested for portions of this exhibit and was
granted on July 6, 1995, by an order of the Securities and
Exchange Commission under File No. 33-90814.(1)
10.50 -- Agreement and Plan of Reorganization dated as of November 8,
1994 by and among the Company, P.N. Acquisition Corporation,
PacNet, Inc. and Richard W. Stroup.(1)
10.51 -- Agreement for the purchase of Mid-Com Consultants' Aggregation
Customer Base and Aggregation Plans by Mid-Com Communications,
Inc. dated as of January 3, 1995 by and between the Company
and Mid-Com Consultants, Inc.(1)
10.52 -- Asset Purchase Agreement dated as of January 20, 1995 by and
between the Company and Communique Telecommunications, Inc.(1)
</TABLE>
<PAGE> 162
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGINATION BY
(REFERENCED TO SEQUENTIAL
ITEM 601 OF NUMBERING
REGULATION S-K) EXHIBIT DESCRIPTION SYSTEM
- ---------------- -------------------------------------------------------------- -------------
<C> <C> <S> <C>
10.60 -- 1111 Third Avenue Lease Agreement dated as of March 8,
1994.(1)
10.61 -- Agreement of Sublease dated January 1, 1994 by and between
Bank of New Zealand and the Company.(1)
10.62 -- Real Estate Sub-Lease dated as of October 1, 1994 by and
between Digital Telecommunications, Inc. and the Company.(1)
10.66 -- Option Agreement dated March 6, 1995 by and among Paul H.
Pfleger, Ashok Rao, John M. Orehek and the Company.(1)
10.67 -- Release and Settlement Agreement dated January 1995.
Confidential treatment was requested for portions of this
exhibit and was granted on July 6, 1995, by an order of the
Securities and Exchange Commission under File No. 33-90814.(1)
10.73 -- Overseas Private Investment Corporation Contract of Insurance
against Business Income Loss.(1)
10.74 -- Overseas Private Investment Corporation Contract of Insurance
against Expropriation Political Violence.(1)
10.75 -- Letter Agreement dated May 12, 1995 between First Union
Corporation and the Company.(1)
10.78 -- Registration Rights Agreement dated as of April 1, 1995 by and
among the Company and Darren Narans, Kevin Narans and Steven
Tomsic.(1)
10.79 -- Stock Purchase Warrant issued on April 1, 1995 by the Company
to Darren Narans granting Darren Narans the right to purchase
from the Company 12,250 shares of the Company's Common
Stock.(1)
10.80 -- Stock Purchase Warrant issued on April 1, 1995 by the Company
to Kevin Narans granting Kevin Narans the right to purchase
from the Company 23,625 shares of the Company's Common
Stock.(1)
10.81 -- Stock Purchase Warrant issued on April 1, 1995 by the Company
to Steven Tomsic granting Steven Tomsic the right to purchase
from the Company 23,625 shares of the Company's Common
Stock.(1)
10.83 -- Letter Agreement dated June 6, 1995 between First Union
Corporation, The Robinson-Humphrey Company, Inc. and the
Company.(1)
10.85 -- Indemnification and Hold Harmless Agreement dated June 29,
1995 by and among the Company, Paul H. Pfleger, Black Creek
Limited Partnership and Ashok Rao.(1)
10.86 -- Carrier Transport Switched Services Agreement dated June 14,
1995 by and between Sprint Communications Company L.P. and the
Company, amended November 1, 1995. Confidential treatment was
requested for portions of this exhibit and was granted on July
6, 1995, by an order of the Securities and Exchange Commission
under File No. 33-90814.(1)
</TABLE>
<PAGE> 163
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGINATION BY
(REFERENCED TO SEQUENTIAL
ITEM 601 OF NUMBERING
REGULATION S-K) EXHIBIT DESCRIPTION SYSTEM
- ---------------- -------------------------------------------------------------- -------------
<C> <S> <C>
10.87 -- Telecommunications Services Agreement dated March 27, 1996 by
and between Worldcom Network Service, Inc. d/b/a WilTel and
the Company. Confidential treatment was requested for portions
of this exhibit and was granted by the SEC on May 31, 1996.
10.88 -- Customer Base Purchase and Sale Agreement dated as of
September 1, 1995 between Cherry Communications Incorporated
and the Company.(2)
10.89 -- Master Equipment Lease Agreement dated as of September 12,
1995 between Keycorp Leasing Ltd. and the Company.(3)
10.90 -- Agreement and Plan of Reorganization dated as of September 29,
1995 among the Company, AV Acquisition Corporation, AdVal,
Inc., AdVal Data Corporation, Theodore D. Berns and Donald D.
Dean.(4)
10.91 -- Credit Agreement dated as of November 8, 1995 among the
Company, PacNet, AdVal, Cel-Tech (the "Borrowers") and
Transamerica Business Credit Corporation, as agent.(6)
10.92 -- Revolving Note dated December 20, 1995 in the amount of
$30,000,000 made by the Borrowers to the order of Transamerica
Business Credit Corporation.(6)
10.93 -- Revolving Note dated December 20, 1995 in the amount of
$7,000,000 made by the Borrowers to the order of Keybank of
Washington.(6)
10.94 -- Revolving Note dated December 20, 1995 in the amount of
$13,000,000 made by the Borrowers to the order of Nationsbank
of Georgia, N.A.(6)
10.95 -- Stock Pledge Agreement dated as of November 8, 1995 made by
the Company in favor of Transamerica Business Credit
Corporation, as agent.(6)
10.96 -- Security Agreement dated as of November 8, 1995 made by the
Borrowers in favor of Transamerica Business Credit
Corporation, as agent.(6)
10.97 -- Letter Agreement dated March 6, 1996 between the Borrowers and
Transamerica Business Credit Corporation, as agent.(6)
10.98 -- Letter Agreement dated March 18, 1996 between the Borrowers
and Transamerica Business Credit Corporation, as agent.(6)
10.99 -- First Amendment to Credit Agreement dated March 28, 1996
between the Borrowers and Transamerica Business Credit
Corporation, as agent.(6)
10.100 -- Promissory Note dated March 28, 1996 in the amount of
$15,000,000 made by the Company to the order of Transamerica
Business Credit Corporation.(6)
10.101 -- Warrant Purchase Agreement dated March 28, 1996 between the
Company and Transamerica Business Credit Corporation.(6)
</TABLE>
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGINATION BY
(REFERENCED TO SEQUENTIAL
ITEM 601 OF NUMBERING
REGULATION S-K) EXHIBIT DESCRIPTION SYSTEM
- ---------------- -------------------------------------------------------------- -------------
<C> <C> <S> <C>
10.102 -- Warrant issued on March 28, 1996 by the Company to
Transamerica Business Credit Corporation.(6)
10.103 -- Agreement and Plan of Reorganization dated December 29, 1995
among the Company, AdNet Telemanagement, Inc., David Wiegand
and Maria Wiegand.(5)
10.104 -- Contract Tariff No. 969 effective February 15, 1996 between
the Company and AT&T Corp.(6)
**10.105 -- Second Amendment to Credit Agreement dated July 26, 1996 among
the Company, PacNet, AdVal, Cel-Tech, Advanced Network Design
and Transamerica Business Credit Corporation, as agent.
**10.106 -- Third Amendment to Credit Agreement dated August 21, 1996
between the Company, PacNet, AdVal, Cel-Tech and Advanced
Network Design and Transamerica Business Credit Corporation.
**10.107 -- Customer Base Purchase and Sale Agreement dated as of November
1, 1995 between Cherry Communications Incorporated.
**10.108 -- Letter of Intent dated July 19, 1996 between the Company and
AT&T Corp.
**10.109 -- Distributor Agreement dated April 4, 1996 between the Company
and Tie Communications, Inc.
**10.110 -- Employment Agreement dated May 24, 1996 between the Company
and William H. Oberlin.
**10.111 -- Consulting Agreement dated May 24, 1996 between the Company
and John M. Zrno.
**10.112 -- Consulting Agreement dated May 24, 1996 between the Company
and Marvin C. Moses.
11.1 -- Statement re: computation of per share earnings.(6)
21.1 -- List of significant subsidiaries of the Company.(6)
23.1 -- Consent of Ernst & Young LLP (See page II-12).
23.2 -- Consent of Heller Ehrman White & McAuliffe (included in
Exhibit 5.1).
24.1 -- Power of Attorney (See page II-11).
**25.1 -- Form T-1 Statement of Eligibility and Qualification of the
Trustee under the Trust Indenture Act of 1939.
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
(1) Exhibit is incorporated by reference to an identically numbered exhibit to
the Company's Registration Statement on Form S-1, file no. 33-90814.
(2) Exhibit is incorporated by reference to Exhibit 2.3 filed with the Company's
Current Report on Form 8-K filed with the Commission on December 18, 1995.
(3) Exhibit is incorporated by reference to Exhibit 10.1 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
<PAGE> 165
(4) Exhibit is incorporated by reference to Exhibit 2.1 filed with the Company's
Current Report on Form 8-K filed with the Commission on October 13, 1995.
(5) Exhibit is incorporated by reference to Exhibit 2.1 filed with the Company's
Current Report on Form 8-K filed with the Commission on January 11, 1996.
(6) Exhibit is incorporated by reference to identically numbered exhibits filed
with the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
<PAGE> 1
EXHIBIT 4.3
MIDCOM COMMUNICATIONS INC.
$85,000,000 8 1/4% Convertible Subordinated Notes due 2003
PURCHASE AGREEMENT
August 15, 1996
PAINEWEBBER INCORPORATED
WHEAT, FIRST SECURITIES, INC.
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
MIDCOM Communications Inc., a Washington corporation (the "Company"),
proposes to issue and sell to PaineWebber Incorporated and Wheat, First
Securities, Inc. (collectively, the "Initial Purchasers," which term shall also
include any Initial Purchaser substituted as hereinafter provided in Section 9
hereof), the respective principal amounts set forth in Schedule A hereto of
$85,000,000 in aggregate principal amount of the Company's 8 1/4% Convertible
Subordinated Notes due 2003 (the "Firm Securities"). The Company also proposes
to grant to the Initial Purchasers, acting severally and not jointly, an option
to purchase all or any part of an additional $12,750,000 principal amount of 8
1/4% Convertible Subordinated Notes due 2003 to cover over-allotments, if any
(the "Option Securities," and together with the Firm Securities, the
"Securities").
The Securities are to be issued pursuant to an indenture, dated as of
August 22, 1996 (the "Indenture"), between the Company and IBJ Schroder Bank &
Trust Company, as trustee (the "Trustee"). The Securities are convertible into
shares of common stock, par value $.0001 per share, of the Company (the "Common
Stock") in accordance with the terms of the Securities and the Indenture, at
the conversion price specified in Schedule B hereto.
The Securities will be offered and sold to the Initial Purchasers
pursuant to an exemption from the registration requirements under the
Securities Act of 1933, as amended (the "Securities Act"), and the Initial
Purchasers propose to resell the Securities to qualified institutional buyers
(within the meaning of Rule 144A ("Rule 144A") under the Securities Act)
("Qualified Institutional Buyers") in reliance upon Rule 144A, to a limited
number of "accredited investors" (within the meaning of Rule 501(a)(1), (2),
(3), (4) or (7) under the Securities Act) ("Accredited Investors"), and to
certain persons outside the United States in reliance on Regulation S under the
Securities Act ("Regulation S") (collectively, "Subsequent Purchasers"). Upon
original issuance of the Securities and until such time as the Company deems
that
<PAGE> 2
it is no longer required under the Securities Act, the certificates
representing the Securities and the shares of the Company's Common Stock
issuable upon conversion of the Securities (and all securities issued in
exchange of any therefor or in substitution of any thereof) shall bear the
legend set forth on Exhibit A.
The Company has prepared and delivered to each Initial Purchaser
copies of a preliminary offering memorandum dated July 31, 1996 (the
"Preliminary Offering Memorandum") and has prepared and will deliver to each
Initial Purchaser, on the date hereof copies of a final offering memorandum
dated August 15, 1996 (the "Final Offering Memorandum"), each to be used by
such Initial Purchaser in connection with its solicitation of purchases of, or
offering of, the Securities. "Offering Memorandum" means, with respect to any
date or time referred to in this Agreement, the most recent offering memorandum
(whether the Preliminary Offering Memorandum or the Final Offering Memorandum,
or any amendment or supplement to either such document), including exhibits
thereto and any documents incorporated therein by reference, which has been
prepared and delivered by the Company to the Initial Purchasers in connection
with their solicitation of purchases of, or offering of, the Securities.
All references in this Agreement to financial statements and other
information which is "contained," "included" or "stated" in the Offering
Memorandum (or other references of like import) shall be deemed to mean and
include all such financial statements and other information which is
incorporated by reference in the Offering Memorandum; and all references in
this Agreement to amendments or supplements to the Offering Memorandum shall be
deemed to mean and include the filing of any document under the Securities
Exchange Act of 1934 (the "Exchange Act") which is incorporated by reference in
the Offering Memorandum.
The Company confirms as follows its agreements with the several Initial
Purchasers.
1. Agreement to Sell and Purchase.
On the basis of the representations, warranties and agreements
herein contained and subject to all the terms and conditions hereof:
(a) The Company agrees to sell to each Initial Purchaser,
severally and not jointly, and each Initial Purchaser, severally and not
jointly, agrees to purchase from the Company, at the price set forth in Schedule
B, the aggregate principal amount of Firm Securities set forth in Schedule A
opposite the name of such Initial Purchaser, plus any additional principal
amount of Firm Securities which such Initial Purchaser may become obligated to
purchase pursuant to the provisions of Section 9 hereof.
(b) The Company hereby grants an option (the "Option") to
the Initial Purchasers to purchase, severally and not jointly, the Option
Securities at the price set forth in Schedule B, plus accrued interest, if any,
from the Closing Date (as defined below) to the Option Closing Date (as defined
below). The Option will expire 30 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of
covering over-allotments which may be made in connection with the offering and
distribution of the Firm Securities upon written or telegraphic notice by the
Initial Purchasers to the Company setting forth the number of Option Securities
as to which the several Initial Purchasers are then exercising the Option and
the time and date of payment and delivery for such Option Securities. Any such
time and date of delivery (an "Option Closing Date") shall be determined by the
Initial Purchasers, but shall not be later than seven full business days after
the exercise of the Option nor in any event prior to the Closing Date, as
hereinafter defined. If the Option is exercised as to all or any
2
<PAGE> 3
portion of the Option Securities, each of the Initial Purchasers, acting
severally and not jointly, will purchase that proportion of the total principal
amount of Option Securities then being purchased which the principal amount of
Firm Securities set forth in Schedule A opposite the name of such initial
Purchaser bears to the total principal amount of Firm Securities. Delivery of
the Option Securities, and payment therefor, shall be made as provided in
Section 2 hereof.
2. Delivery and Payment.
Delivery of certificates for the Firm Securities shall be made
to the Initial Purchasers, against payment of the purchase price therefor by
wire transfer of same day funds, at the office of Latham & Watkins, 885 Third
Avenue, Suite 1000, New York, New York (the "Closing Location") or at such other
place as shall be agreed upon by the Initial Purchasers and the Company, at
10:00 A.M. on August 22, 1996 (unless postponed in accordance with the
provisions of Section 9), or such other time as shall be agreed upon by the
Initial Purchasers and the Company (such time and date of delivery and payment
being herein called the "Closing Date").
In addition, in the event that any or all of the Option
Securities are purchased by the Initial Purchasers, payment of the purchase
price for, and delivery of certificates for, such Option Securities shall be
made at the above-mentioned offices, or at such other place as shall be agreed
upon by the Initial Purchasers and the Company, on each Option Closing Date as
specified in the notice form the Initial Purchasers to the Company.
At least 24 hours prior to the closing Date, the Company shall
deliver to The Depository Trust Company ("DTC") a global certificate or
certificates, bearing the applicable legends set forth on Exhibit A, registered
in the name of Cede & Co., the nominee of DTC, and representing all Securities
the beneficial interests in which are to be sold to Qualified Institutional
Buyers (collectively, the "144A Global Note"). The interests of such beneficial
owners will be represented by book entries on the records of DTC and
participating members thereof. Any Securities sold outside the United States to
a non-U.S. person within the meaning of Regulation S under the Securities Act in
a transaction meeting the requirements of Rule 904 under the Securities Act will
initially be issued in the form of a temporary global certificate or
certificates (collectively, the "Regulation S Temporary Global Note") bearing
the applicable legend set forth on Exhibit A, and the interests of the
beneficial holders thereof will be represented by book entries on the records of
Euroclear or Cedel. Any Securities sold to Accredited Investors that are not
Qualified Institutional Buyers shall be issued in definitive fully registered
form (collectively, the "Certificated Notes"), and in such denominations ($1,000
or integral multiples thereof) and registered in such names as the Initial
Purchasers may request upon at least 48 hours' prior written notice to the
Company, and shall bear the applicable legend set forth on Exhibit A. The 144A
Global Note, the Regulation S Temporary Global Note and the Certificated Notes
shall be made available for examination by the Initial Purchasers in The City of
New York at 10:00 A.M. on the business day immediately preceding the Closing
Date or the relevant Option Closing Date, as the case may be.
The documents to be delivered at the Closing Date or on behalf
of the parties hereto pursuant to Section 5 hereof, including the cross-receipt
for the Securities, will be delivered at such time and date at the Closing
Location. A meeting will be held at the Closing Location at 2:00 p.m. New York
City time on the business day next preceding the Closing Date, at which meeting
the final drafts of the documents to be delivered pursuant to the preceding
sentence will be available for review by the parties hereto.
3
<PAGE> 4
If the Option is exercised after the third business day prior to
the Closing Date, delivery of the Option Securities shall be made to the Initial
Purchasers, against payment of the purchase price therefor, at the Closing
Location and on the Option Closing Date. The manner of payment of the purchase
price for, and the terms and conditions governing the delivery, denominations
and registrations of and legends on certificates (as well as the checking and
packaging thereof) evidencing, the Option Securities and the prior review of
documents shall be the same as provided in this Section 2 with respect to
Securities purchased on the Closing Date, except that with respect to the Option
Securities references to the Closing Date shall be deemed to have reference to
the relevant Option Closing Date. The obligation of the Initial Purchasers to
purchase the Option Securities on any Option Closing Date shall be conditioned
upon receipt of supplemental documents as provided in Section 5(p) hereof.
The cost of original issue tax stamps, if any, in connection
with the issuance and delivery of the Securities by the Company to the Initial
Purchasers shall be borne by the Company. The Company will pay and save each
Initial Purchaser and any subsequent holder of the Securities harmless from any
and all liabilities with respect to or resulting from any failure or delay in
paying federal and state stamp and other transfer taxes, if any, which may be
payable or determined to be payable in connection with the original issuance or
sale to each Initial Purchaser of the Securities.
3. Representations and Warranties.
(a) Representations and Warranties by the Company. The
Company represents and warrants to each Initial Purchaser as of the date hereof
and as of the Closing Date referred to in Section 2 hereof, and as of each
Option Closing Date (if any) referred to in Section 2 hereof, and agrees with
each Initial Purchaser, as follows:
(i) Similar Offerings. The Company and its
affiliates have not, directly or indirectly, sold, offered to sell,
solicited any offer to buy or otherwise negotiated in respect of, and
will not, directly or indirectly, sell, offer to sell, solicit any offer
to buy or otherwise negotiate in respect of, any security which is or
would be integrated with the sale of the Securities in a manner that
would require the Securities to be registered under the Securities Act.
(ii) Offering Memorandum. The Offering Memorandum
does not, and at the Closing Date (and, if any Option Securities are
purchased, at each Option Closing Date) will not, include an untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided that
this representation, warranty and agreement shall not apply to
statements in or omissions from the Offering Memorandum made in reliance
upon and in conformity with information furnished to the Company in
writing by any Initial Purchaser through PaineWebber expressly for use
in the Offering Memorandum. The Company acknowledges for all purposes of
this Agreement (including, but not limited to, Section 6 hereof) that
the statements set forth in the last paragraph on the front cover page,
the last paragraph on page 3 and in the fifth, sixth, seventh and ninth
paragraphs under the caption "Plan of Distribution" in the Offering
Memorandum (to the extent such statements relate to the Initial
Purchasers) constitute the only information relating to any Initial
Purchaser furnished in writing to the Company by the Initial Purchasers
specifically for inclusion therein. The Company has not distributed or
caused the distribution of any offering material in connection with the
offering
4
<PAGE> 5
or sale of the Securities other than the Preliminary Offering Memorandum
or the Final Offering Memorandum or other material, if any, permitted by
the Securities Act.
(iii) Incorporated Documents. The Offering Memorandum
as delivered from time to time shall incorporate by reference the most
recent Annual Report of the Company on Form 10-K filed with Securities
and Exchange Commission (the "Commission") on April 16, 1996, as amended
by Form 10K/A filed with the Commission on April 29, 1996 (the "Amended
1995 10-K"), the Quarterly Report of the Company on Form 10-Q for the
quarter ended March 31, 1996 filed with the Commission on May 15, 1996
(the "First Quarter 1996 10-Q"), the Quarterly Report of the Company on
Form 10-Q for the quarter ended June 30, 1996 filed with the Commission
on August 14, 1996 (the "Second Quarter 1996 10-Q") and all other
reports of the Company filed with the Commission pursuant to section
13(a), 13(c), 14 or 15(d) of the Exchange Act since June 30, 1996. The
Amended 1995 10-K, the First Quarter 1996 10-Q, the Second Quarter 1996
10-Q and all other documents incorporated or deemed to be incorporated
by reference in the Offering Memorandum at the time they were or
hereafter are filed with the Commission complied and will comply in all
material respects as to both form and substance with the requirements of
the Exchange Act and the rules and regulations of the Commission
thereunder, and when read together with the other information in the
Offering Memorandum, at the date of the Offering Memorandum and at the
Closing Date (and, if any Option Securities are purchased, at the
relevant Option Closing Date) will not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(iv) Independent Accountants. Ernst & Young LLP, who
have certified the financial statements included in the Offering
Memorandum, are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of Regulation S-X
under the Securities Act.
(v) Financial Statements. The financial statements
and schedules, if any, included in, or incorporated by reference into,
the Offering Memorandum, together with the related notes thereto,
present fairly the financial position of the Company and its
consolidated subsidiaries, at the dates indicated and the statement of
operations, shareholders' equity (or deficit) and cash flows of the
Company and its consolidated subsidiaries, for the periods specified;
said financial statements have been prepared in conformity with U.S.
generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The summary and
selected financial and operating data included in the Offering
Memorandum present fairly the information shown therein and have been
compiled on a basis consistent with that of the audited financial
statements included in the Offering Memorandum.
(vi) No Material Adverse Change in Business. Since
the respective dates as of which information is given in the Offering
Memorandum, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in
the results of operations, revenues, earnings or business of the Company
and its subsidiaries considered as one enterprise (a "Material Adverse
Effect"), whether or not arising in the ordinary course of business, (B)
there have been no transactions entered into by the Company or any of
its subsidiaries other than those in the ordinary course of business,
which are material with respect to the Company and its subsidiaries
considered as one enterprise, and (C) there has been
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no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock, nor any redemptions or
repurchases by the Company of any shares of its capital stock other
than the Rao Shares (as defined in the Offering Memorandum).
(vii) Good Standing of the Company. The Company has
been duly incorporated and is validly existing as a corporation under
the laws of the State of Washington with corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Offering Memorandum and to enter into and perform its
obligations under this Agreement; and the Company is duly qualified as a
foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required whether by reason
of the ownership or leasing of property or the conduct of business or
otherwise.
(viii) Good Standing of Subsidiaries. Each subsidiary
of the Company has been duly incorporated and is validly existing as a
corporation in good standing (to the extent that corporations may or may
not be in good standing under the laws of the applicable jurisdiction)
under the laws of the jurisdiction of its incorporation, has corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Offering Memorandum and is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct
of business or otherwise; except as otherwise disclosed in the Offering
Memorandum, all of the issued and outstanding capital stock of each such
subsidiary has been duly authorized and validly issued, is fully paid
and non-assessable and is owned by the Company, directly or through its
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity, except for the pledge of all such
shares pursuant to the Credit Agreement, dated as of November 8, 1995,
by and among the Company, PacNet Inc., Adval, Inc., Advanced Network
Design, Cel-Tech International Corp. and Transamerica Business Credit
Corporation, as agent for the lenders, as amended through the date
hereof; none of the outstanding shares of capital stock of any
subsidiary of the Company was issued in violation of the preemptive or
similar rights arising by operation of law, or under the charter or
by-laws of any such subsidiary or under any agreement to which the
Company or any of its subsidiaries is a party. The only subsidiaries of
the Company are the subsidiaries listed on Schedule C hereto.
(ix) Capitalization. The authorized, issued and
outstanding capital stock of the Company is as set forth in the Offering
Memorandum in the column entitled "Actual" under the caption
"Capitalization" (except for subsequent issuances, if any, pursuant to
this Agreement, pursuant to employee benefit plans referred to in the
Offering Memorandum or pursuant to the exercise of convertible
securities, warrants or options referred to in the Offering Memorandum).
The shares of the Company's issued and outstanding Common Stock have
been duly authorized and validly issued and are fully paid and
non-assessable, have been issued in compliance with all federal and
state securities laws and were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase
securities. There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, or commitments related to or
entitling any person to purchase or otherwise to acquire from the
Company or any subsidiary any shares of the capital stock of, or other
ownership interest in, the Company or any subsidiary thereof except as
otherwise disclosed in the Offering Memorandum. Complete and correct
copies
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of the articles of incorporation and of the bylaws of the Company and
each of its subsidiaries and all amendments thereto have been delivered
to the Initial Purchasers, and no changes therein will be made
subsequent to the date hereof and prior to the Closing Date.
(x) Authorization of Agreement. This Agreement has
been duly authorized, executed and delivered by the Company.
(xi) Authorization of the Indenture. The Indenture
has been duly authorized by the Company and, at the Closing Date, will
have been duly executed and delivered by the Company and will constitute
a valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as the enforcement thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally
or by general equitable principles.
(xii) Authorization of the Securities. The Securities
have been duly authorized and, at the Closing Date, will have been duly
executed by the Company and, when authenticated in the manner provided
for in the Indenture and delivered against payment of the purchase price
therefor, will constitute valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms, except
as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles, and will be in the form contemplated by, and entitled to the
benefits of, the Indenture.
(xiii) Description of the Securities and the Indenture.
The Securities and the Indenture will conform in all material respects
to the respective statements relating thereto contained in the Offering
Memorandum.
(xiv) Authorization of Registration Rights Agreement.
The Registration Rights Agreement has been duly authorized by the
Company and at the Closing Date will have been duly executed and
delivered by the Company and will constitute a valid and binding
obligation of the Company, enforceable against the Company in accordance
with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to or affecting creditor's rights generally or by general
equitable principles and, as to rights of indemnification and
contribution, by principles of public policy.
(xv) Authorization and Description of Common Stock.
The Common Stock conforms to all statements relating thereto contained
or incorporated by reference in the Offering Memorandum and such
description conforms to the rights set forth in the instruments defining
the same. Upon issuance and delivery of the Securities in accordance
with this Agreement and the Indenture, the Securities will be
convertible at the option of the holder thereof for shares of Common
Stock in accordance with the terms of the Securities and the Indenture;
the shares of Common Stock issuable upon conversion of the Securities
have been duly and validly authorized and reserved for issuance upon
such conversion by all necessary corporate action of the Company and
such shares, when issued upon such conversion in accordance with the
terms of the Securities and the Indenture, will be duly and validly
issued and will be fully paid and non-assessable; no holder of such
shares will be subject to personal liability solely by reason of being
such a holder; and the issuance of such shares upon such conversion in
accordance with the terms of the
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Securities and the Indenture will not be subject to the preemptive or other
similar rights of any securityholder of the Company arising by operation of
law, or under the Articles of Incorporation or bylaws of the Company or under
any agreement to which the Company is a party or by which the Company is bound.
(xvi) Description of Certain Transactions and Documents.
Except as disclosed in the Offering Memorandum, there are no business
relationships or related party transactions required to be disclosed therein by
Item 404 of Regulation S-K of the Commission and each business relationship or
related party transaction described therein is a fair and accurate description
of the relationships and transactions so described. No contract or document of
a character that would be required to be described in the Offering Memorandum if
the Offering Memorandum were a prospectus included in a registration statement
on Form S-1 under the Securities Act is not so described.
(xvii) Absence of Defaults and Conflicts. Neither the Company
nor any of its subsidiaries is in violation of its articles of incorporation,
bylaws or other charter documents or in default in the performance or observance
of any material obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other instrument
to which the Company or any of its subsidiaries is a party or by which it or any
of them may be bound, or to which any of the property or assets of the Company
or any of its subsidiaries is subject (collectively, "Agreements and
Instruments") except for such defaults or alleged defaults that are described in
the Offering Memorandum and such other defaults that would not result in a
Material Adverse Effect; and the execution, delivery and performance of this
Agreement, the Indenture, the Securities, the Registration Rights Agreement and
any other agreement or instrument entered into or issued or to be entered into
or issued by the Company in connection with the transactions contemplated
hereby, thereby or in the Offering Memorandum, and the consummation of the
transactions contemplated herein, therein and in the Offering Memorandum
(including the issuance and sale of the Securities, the use of the proceeds from
the sale of the Securities as described in the Offering Memorandum under the
caption "Use of Proceeds" and the issuance of the shares of Common Stock
issuable upon conversion of the Securities) and compliance by the Company with
its obligations hereunder and thereunder, have been duly authorized by all
necessary corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute a
breach of, or default or Repayment Event (as defined below) under, or result in
the creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any of its subsidiaries pursuant to, the Agreements
and Instruments except for such conflicts, breaches, default, Repayment Events
or liens, charges or encumbrances that would not result in a Material Adverse
Effect, nor will such action result in any violation of the provisions of the
articles of incorporation, bylaws or other charter documents of the Company or
any of its subsidiaries or any applicable law, statute, rule, regulation,
judgment, order, writ or decree of any government, government instrumentality or
court, domestic of foreign, having jurisdiction over the Company or any of its
subsidiaries or any of their assets or properties, except for such violations of
law, statutes, rules, regulations, judgments, orders, writs or decrees that
would not result in a Material Adverse Effect. As used herein, a "Repayment
Event" means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on such
holder's behalf) the right to require the repurchase, redemption or repayment of
all or a portion of such indebtedness by the Company or any of its subsidiaries.
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(xviii) Absence of Labor Dispute. No labor dispute with the
employees of the Company or any of its subsidiaries exists or, to the knowledge
of the Company, is imminent and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its or any of its
subsidiaries' principal suppliers, manufacturers, customers or contractors,
which, in either case, may reasonably be expected to result in a Material
Adverse Effect.
(xix) Absence of Proceedings. Except as set forth in the
Offering Memorandum, there is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending or, to
the knowledge of the Company, threatened, against or affecting the Company or
any of its subsidiaries or any of their respective officers of directors in
their capacity as such or any of their respective property or assets, that is
required to be disclosed in the Offering Memorandum (other than disclosed
therein), or which might reasonably be expected to result in any Material
Adverse Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation of the
transactions contemplated by this Agreement or the Registration Rights
Agreement, or the performance by the Company of its obligations hereunder and
thereunder; the aggregate of all pending legal or governmental proceedings to
which the Company or any subsidiary thereof is a party or of which any of their
respective property or assets is the subject which are not described in the
Offering Memorandum, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material Adverse
Effect. Without limiting the foregoing, except as otherwise set forth in the
Offering Memorandum, there are no legal or governmental proceedings, including
rulemaking proceedings of general applicability in the industry or industries in
which the Company or any of it subsidiaries operate, by or before the Federal
Communications Commission (the "FCC") or any state public utility commission or
similar state governmental agency ("PUC"), now pending or, to the Company's
knowledge, threatened or contemplated, which in each case might reasonably be
expected to result in any Material Adverse Effect. In addition, all
applications, reports and other filings required by the FCC or the PUC to be
filed through the date hereof, have been duly and timely filed as of the date
hereof except as otherwise set forth in the Offering Memorandum and except for
failures which are not reasonably expected to have a Material Adverse Effect.
(xx) Possession of Intellectual Property. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms, sufficient
rights to use the patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names (collectively, "Intellectual Property") currently
employed by them in connection with the business now operated by them, and
neither the Company nor any of its subsidiaries has received any notice or is
otherwise aware of any infringement of or conflict with asserted rights of
others with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or any of its subsidiaries
therein, and which infringement or conflict (if the subject of any unfavorable
decision, ruling or finding) or invalidity or inadequacy, individually or in
the aggregate, would result in a Material Adverse Effect.
(xxi) Absence of Further Requirements. Except for filings
required under the federal securities laws or the securities or blue sky laws
of the various states, no filing with, or authorization, approval, consent,
license, order, registration, qualification, or decree of any
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court or governmental authority or agency is necessary or required for
(i) the performance by the Company of its obligations hereunder, (ii)
in connection with the offering, issuance and sale of the Securities
hereunder, (iii) the issuance of shares of Common Stock upon
conversion of Securities, (iv) the consummation of the transactions
contemplated by this Agreement or the Registration Rights Agreement,
or (v) for the due execution, delivery and performance of the
Indenture by the Company.
(xxii) Possession of Licenses and Permits. The
Company and its subsidiaries possess such permits, certificates,
licenses, approvals, consents, orders and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate
federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them, except for
such permits, certificates, licenses, approvals, consents, orders and
other authorizations the absence of which would not have a Material
Adverse Effect; the Company and its subsidiaries are in compliance
with the terms and conditions of all such Governmental Licenses,
except where the failure so to comply would not, individually or in
the aggregate, have a Material Adverse Effect; all of the Governmental
Licenses are valid and in full force and effect, except when the
invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation, withdrawal, cancellation, modification, suspension or
non-renewal of any such Governmental Licenses which, individually or
in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect.
(xxiii) Title to Property. The Company and its
subsidiaries have good and marketable title to all real property owned
by the Company and its subsidiaries and good title to all other
properties owned by them, in each case, free and clear of all
mortgages, pledges, liens, security interests, claims, restrictions or
encumbrances of any kind except such as (a) are described in the
Offering Memorandum or (b) do not, individually or in the aggregate,
materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company
or any of its subsidiaries; and all of the leases and subleases
material to the business of the Company and its subsidiaries,
considered as one enterprise, and under which the Company or any of
its subsidiaries holds properties described in the Offering
Memorandum, are in full force and effect, and neither the Company nor
any of its subsidiaries has any notice of any claim that has been
asserted by anyone adverse to the rights of the Company or any of its
subsidiaries under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or any subsidiary
thereof to the continued possession of the leased or subleased
premises under any such lease or sublease which might reasonably be
expected to have a Material Adverse Effect.
(xxiv) Tax Returns. The Company and its subsidiaries
have filed all federal, state, local and foreign tax returns that are
required to be filed or have duly requested extensions thereof, except
as described in the Offering Memorandum and except for such returns the
failure to file would not have a Material Adverse Effect, and have paid
all taxes required to be paid by any of them and any related
assessments, fines or penalties, except as described in the Offering
Memorandum and except for any such tax, assessment, fine or penalty
that is being contested in good faith and by appropriate proceedings
and except for any such tax, assessment, fine or penalty for which the
failure to pay would not have a Material Adverse Effect; and adequate
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charges, accruals and reserves have been provided for in the financial
statements referred to in Section 1(a)(v) above in respect of all federal,
state, local and foreign taxes for all periods as to which the tax liability of
the Company or any of its subsidiaries has not been finally determined or
remains open to examination by applicable taxing authorities.
(xxv) Environmental Laws. Except as described in the
Offering Memorandum, (A) neither the Company nor any of its subsidiaries is in
violation of any federal, state, local or foreign statute, law, rule,
regulation, ordinance, code, policy or rule of common law and any judicial or
administrative interpretation thereof including any judicial or administrative
order, consent, decree or judgment, relating to pollution or protection of human
health, the environment (including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or threatened
release of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), except for such violations as would not, individually or
in the aggregate, result in Material Adverse Effect, (B) neither the Company nor
any of its subsidiaries has received any notice from any governmental authority
or third party of an asserted claim under any Environmental Law, (C) the Company
and its subsidiaries have all permits, authorizations and approvals required
under any applicable Environmental Laws and are each in compliance with their
requirements, except for such permits, authorizations and approvals the absence
of which would not, individually or in the aggregate, result in Material Adverse
Effect, (D) there are no pending or, to the Company's knowledge, threatened
administrative, regulatory or judicial actions, suits, demands, demand letters,
claim, liens, notices of noncompliance or violation, investigation or
proceedings relating to any Environmental Law against the Company or any of its
subsidiaries, except for such actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation, investigation or proceedings which
if decided adversely to the Company would not, individually or in the aggregate,
result in Material Adverse Effect, and (E) to the Company's knowledge, there are
no events or circumstances that might reasonably be expected to form the basis
of an order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the Company
or any of its subsidiaries relating to any Hazardous Materials or the violation
of any Environmental Laws.
(xxvi) Compliance with Cuba Act. The Company has complied
with, and is and will be in compliance with, the provisions of that certain
Florida act relating to disclosure of doing business with Cuba, codified as
Section 517.075 of the Florida statutes, and the rules and regulations
thereunder or is exempt therefrom.
(xxvii) Investment Company Act. The Company is not, and upon
the issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Offering
Memorandum will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company Act of
1940, as amended (the "Investment Company Act"), nor is the Company an
"open-ended investment trust," "unit investment trust" or "face-amount
certificate company" that is or is required to be registered under Section 8 of
the Investment Company Act.
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(xxviii) Rule 144A Eligibility. The Securities meet the
requirements set forth in Rule 144A as securities eligible for resale pursuant
to Rule 144A and will not be, at the Closing Date, of the same class as
securities listed on a national securities exchange registered under Section 6
of the Exchange Act or quoted in a U.S. automated interdealer quotation system.
The Offering Memorandum, as of its date, contains all the information specified
in, and meeting the requirements of, Rule 144A(d)(4) under the Act.
(xxix) No General Solicitation. None of the Company, its
affiliates (as defined in Rule 501(b) under the Securities Act) or any person
(other than the Initial Purchasers and their respective affiliates, as to whom
the Company makes no representation) acting on its behalf has engaged or will
engage, in connection with the offering of the Securities, in any form of
general solicitation or general advertising within the meaning of Rule 502(c)
under the Securities Act.
(xxx) No Directed Selling Efforts. With respect to those
Securities sold in reliance on Regulation S, (A) none of the Company, its
affiliates or any person acting on its or their behalf (other than the Initial
Purchasers, as to whom the Company makes no representations) has engaged or
will engage in any directed selling efforts as that term is defined in
Regulation S and (B) each of the Company and its affiliates and any person
acting on its or their behalf (other than the Initial Purchasers, as to whom
the Company makes no representation) has complied and will comply with the
offering restrictions requirements of Regulation S. There is no "substantial
U.S. market interest" as defined in Regulation S for the Securities or any
security of the same class as the Securities.
(xxxi) No Registration Required. Assuming that the Initial
Purchasers' representations and warranties in Section 8 are true, and subject
to compliance by the Initial Purchasers with the covenants set forth in Section
8 hereof, it is not necessary in connection with the offer, sale and delivery
of the Securities to the Initial Purchasers and to each Subsequent Purchaser in
the manner contemplated by this Agreement and the Offering Memorandum to
register the Securities under the Securities Act or to qualify the Indenture
under the Trust Indenture Act of 1939, as amended.
(xxxii) PORTAL. The Company has applied to have the
Securities designated as PORTAL securities in accordance with the rules and
regulations of the National Association of Securities Dealers, Inc. ("NASD").
(xxxiii) Board of Governors of the Federal Reserve Regulation.
None of the Company or any agent thereof acting on behalf of the Company has
taken, and none of them will take, any action that might cause this Agreement or
the issuance or sale of the Securities to violate Regulation G (12 C.F.R. Part
207), Regulation T (12 C.F.R. Part 220), Regulation U (12 C.F.R. Part 221) or
Regulation X (12 C.F.R. Part 224) of the Board of Governors of the Federal
Reserve System.
(xxxiv) Employee Pension or Benefit Plans. Set forth on
Schedule D hereto is a list of each employee pension or benefit plan with
respect to which the Company or any corporation considered an affiliate of the
Company within the meaning of Section 407(d)(7) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") is a party in interest or
disqualified person. The execution and delivery of this Agreement, the other
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documents contemplated hereby and the sale of the Securities to be purchased by
the Subsequent Purchasers will not involve any prohibited transaction within
the meaning of Section 406 of ERISA or Section 4975 of the Code. The
representation made by the Company in the preceding sentence is made in
reliance upon and subject to the accuracy of, and compliance with, the
representations and covenants made or deemed made by the Subsequent Purchasers
as set forth in the Offering Memorandum under the caption "Notice to Investors."
(xxxv) No Violations of Laws. Neither the Company nor any of
its subsidiaries has violated any foreign, federal or state law relating to
discrimination in the hiring, promotion or pay of employees nor any applicable
federal or state law relating to discrimination in the hiring, promotion or pay
of employees nor any applicable federal or state wages and hours laws, nor any
provisions of ERISA or the rules and regulations promulgated thereunder nor any
provisions of the Federal Communications Act of 1934, as amended, or the rules
or regulations promulgated thereunder, or any applicable state law or regulation
concerning intra-state telecommunications (such state laws and regulations,
along with the Federal Communications Act of 1934 and the regulations thereunder
being referred to herein as the "Communications Laws"), except for such
violations as will not have a Material Adverse Effect.
(xxxvi) Registration Rights. Except as otherwise set forth in
the Offering Memorandum, no holder of any security of the Company has any right
to require registration of shares of Common Stock or any other security of the
Company. The Company has exercised its rights under all existing registration
rights agreements to defer any such registration of securities of such holders,
or has otherwise obtained the waiver of such registration rights by such
holders, in each case to the extent that any registration rights in existence
at the Closing Date will not conflict with the transactions contemplated by the
Registration Rights Agreement.
(xxxvii) Internal Accounting Controls. The books, records and
accounts of the Company and its subsidiaries accurately and fairly reflect, in
all material respects, in reasonable detail, the transactions in and
dispositions of the assets of the Company and its subsidiaries. The Company
and each of its subsidiaries maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded amount for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(xxxviii) No Bids; No Manipulation. Except for the purchase
of Securities from the Initial Purchasers by certain of the Company's
directors, no bid or purchase by the Company, and no bid or purchase that could
be attributed to the Company (as a result of bids or purchases by an "affiliated
purchaser" within the meaning of Rule 10b-6 under the Exchange Act) for or of
the Common Stock, any securities of the same class or series as the Common
Stock or any securities immediately convertible into or exchangeable for or
that represent any right to acquire Common Stock, is now pending or in progress
or will have commenced at any time prior to the completion of the resale of the
Securities by the Initial Purchasers. Neither the Company nor any of its
directors, officers or controlling persons has taken, directly or indirectly,
any action
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designed, or which might reasonably be expected, to cause or result, under the
Securities Act or otherwise, in, or which has constituted, stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities in violation of the Exchange Act.
(xxxix) Reporting Issuer. The Company is a "reporting
issuer" as defined in Rule 902(l) of Regulation S promulgated under the
Securities Act.
(b) Officer's Certificates. Any certificate signed by any
officer of the Company or any of its subsidiaries and delivered to the Initial
Purchasers, the Initial Purchasers or to counsel for the Initial Purchasers
shall be deemed a representation and warranty by the Company to each of the
Initial Purchasers as to the matters covered thereby.
4. Covenants of the Company. The Company covenants with each
Initial Purchaser as follows:
(a) Offering Memorandum. The Company, as promptly as
possible, will furnish to each Initial Purchaser, without charge, such number of
copies of the Preliminary Offering Memorandum, the Final Offering Memorandum and
any amendments and supplements thereto and documents incorporated by reference
therein as such Initial Purchaser may reasonably request. The Company consents
to the use of the Preliminary Offering Memorandum and the Final Offering
Memorandum and any amendment or supplement thereto by the Initial Purchasers in
connection with the offering and sale of the Securities.
(b) Notice and Effect of Material Events. The Company will
immediately notify each Initial Purchaser, and confirm such notice in writing,
of (x) any filing made by the Company of information relating to the offering of
the Securities with any securities exchange or any other regulatory body in the
United States or any other jurisdiction, and (y) prior to the completion of the
placement of the Securities by the Initial Purchasers as evidenced by a notice
in writing from the Initial Purchasers to the Company, any material changes in
or affecting the condition, financial or otherwise, or the results of
operations, revenues, earnings or business of the Company and its subsidiaries
which (i) make any statement in the Offering Memorandum false or misleading or
(ii) are not disclosed in the Offering Memorandum. In such event, or if during
such time any event shall occur as a result of which it is necessary, in the
reasonable opinion of the Company, its counsel, the Initial Purchasers or
counsel for the Initial Purchasers to amend or supplement the Offering
Memorandum in order that the Offering Memorandum not include any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein not misleading in the light of the
circumstances then existing, the Company will forthwith amend or supplement the
Offering Memorandum by preparing and furnishing to each Initial Purchaser an
amendment or amendments of, or a supplement or supplements to, the Offering
Memorandum (in form and substance reasonably satisfactory to counsel for the
Initial Purchasers) so that, as so amended or supplemented, the Offering
Memorandum will not include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances existing at the time it is delivered to a Subsequent
Purchaser, not misleading. The Company shall use its reasonable best efforts to
prevent the issuance of any order suspending the qualification or exemption of
the Securities under any state securities or Blue Sky laws, and if at any time
any state securities commission or other regulatory authority shall issue an
order suspending the qualification or exemption of the Securities under any
state securities or Blue Sky
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<PAGE> 15
laws, the Company shall use its reasonable best efforts to obtain the withdrawal
or lifting of such order at the earliest possible time.
(c) Amendment to Offering Memorandum and Supplements. The
Company will advise each Initial Purchaser promptly of any proposal to amend or
supplement the Offering Memorandum and will not effect such amendment or
supplement without the consent of the Initial Purchasers. Neither the consent of
the Initial Purchasers, not the Initial Purchasers' delivery of any such
amendment or supplement, shall constitute a waiver of any of the conditions set
forth in Section 5 hereof. The Company shall promptly prepare, upon any
reasonable request by the Initial Purchasers, any amendment or supplement to the
Offering Memorandum that the Initial Purchasers may deem necessary or advisable
in connection with sales to Subsequent Purchasers.
(d) Blue Sky Qualifications. The Company will use its
reasonable best efforts, in cooperation with the Initial Purchasers, to qualify
the Securities and the shares of Common Stock issuable upon conversion of
Securities for offering and sale under the applicable securities laws of such
states and other jurisdictions of the United States as the Initial Purchasers
may designate; provided, however, that the Company shall not be obligated to
file any general consent to service of process or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which it is not
so qualified or to subject itself to taxation in respect of doing business in
any jurisdiction in which it is not otherwise so subject. In each jurisdiction
in which the Securities have been so qualified, the Company will file such
statements and reports as may be required by the laws of such jurisdiction to
continue such qualification in effect for a period of not less than one year
from the date of the Offering Memorandum.
(e) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in the
Offering Memorandum under the caption "Use of Proceeds."
(f) Integration. The Company agrees that no future offer and
sale of securities of the Company of any class will be made if, as a result of
the doctrine of "integration" referred to in Rule 502 under the Securities Act,
such offer and sale would render invalid (for the purpose of (i) the sale of
Securities by the Company to the Initial Purchasers, (ii) the resale of the
Securities by the Initial Purchasers to Subsequent Purchasers or (iii) the
resale of the Securities by such Subsequent Purchasers to others) the exemption
from the registration requirements of the Securities Act provided by Section
4(2) thereof or by Rule 144A or by Regulation S thereunder.
(g) Rule 144A Information. The Company agrees that, in order
to render the Securities eligible for resale pursuant to Rule 144A under the
Securities Act, while any of the Securities remain outstanding, to make
available, upon request, to any holder of Securities or prospective purchasers
of Securities the information specified in Rule 144A(d)(4), unless the Company
furnishes information to the Commission pursuant to Section 13 or 15(d) of the
Exchange Act.
(h) Restriction on Repurchases. Until the expiration of
three years after the original issuance of the Securities, the Company will not,
and will cause its "affiliates" (as such term is defined in Rule 144(a)(1) under
the Securities Act) not to, purchase or agree to purchase or otherwise acquire
any Securities which are "restricted securities" (as such term is defined under
Rule 144(a)(3) under the Securities Act), whether as beneficial owner or
otherwise (except as agent on behalf of and for the account of customers in the
ordinary course of business as a securities broker in unsolicited broker's
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<PAGE> 16
transactions) unless, immediately upon any such purchase, the Company or any
such affiliate shall submit such Securities to the Trustee for cancellation.
(i) Restriction on Sale of Securities. During a period of 90
days from the date of the Offering Memorandum, the Company will not, without the
prior written consent of PaineWebber directly or indirectly, issue, sell, offer
to sell, grant any option for the sale of, or otherwise dispose of, any
securities of the Company that are substantially similar to the Securities.
(j) Restrictions on Sale of Common Stock. During a period of
90 days from the date of the Offering Memorandum, the Company will not, without
the prior written consent of PaineWebber, (i) directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any share of Common Stock or any
securities convertible into to or exercisable or exchangeable for Common Stock
or file any registration statement under the Securities Act with respect to any
of the foregoing or (ii) enter into any swap or any other agrement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock, or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Securities to be sold hereunder, (B) any
shares of Common Stock issued by the Company upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof and
referred to in the Offering Memorandum, (C) any shares of Common Stock issued or
options to purchase Common Stock granted pursuant to existing employee benefit
plans of the Company referred to in the Offering Memorandum, (D) any shares of
Common Stock issued pursuant to any non-employee director stock plan or dividend
reinvestment plan, or (E) any shares of Common Stock issued pursuant to any
agreement which was entered into prior to the date hereof and is referred to in
the Offering Memorandum.
(k) Compliance with Registration Rights Agreement. On the
Closing Date, the Company shall enter into the Registration Rights Agreement in
substantially the form attached hereto as Exhibit B and thereafter the Company
will comply with its agreements in the Registration Rights Agreement.
(l) Inclusion of Securities in PORTAL and DTC. The Company
will use its best efforts to effect and maintain the designation of the
Securities as PORTAL securities in accordance with the rules and regulations of
the NASD and shall cause the Securities to be eligible for clearance and
settlement through DTC.
(m) Listing. The Company will use its best efforts to effect
and maintain the quotation of the Common Stock issuable upon conversion of the
Securities on the Nasdaq National Market and will file with the Nasdaq National
Market all documents and notices required by the Nasdaq National Market of
companies that have securities that are traded in the over-the-counter market
and quotations for which are reported by the Nasdaq National Market.
(n) Usury Laws. The Company will not voluntarily claim, and
will actively resist any attempts to claim, the benefit of any usury laws
against the holders of the Securities.
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<PAGE> 17
(o) Rule 158. The Company will timely file such reports
pursuant to the Exchange Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings statement
for the purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the Securities Act.
(p) Investment Company Act. The Company will not be or
become, at any time prior to the expiration of three years after the Closing
Date, an "open-end investment trust," "unit investment trust" or face-amount
certificate company" that is or is required to be registered under Section 8 of
the Investment Company Act.
(q) Commission Filings. After the Securities have been
issued, the Company will, so long as the Securities are outstanding, file on a
timely basis with the Commission, to the extent such filings are accepted by the
Commission, and whether or not the Company has a class of securities registered
under the Exchange Act, the annual reports, quarterly reports and other
documents that the Company would be required to file if it were subject to
Section 13 or Section 15 of the Exchange Act. During the period of five years
after the Closing Date and thereafter for so long as the Initial Purchasers are
making a market in the Securities, the Company will furnish to the Initial
Purchasers as soon as available copies of all such reports and information,
together with such other documents, reports and information as shall be
furnished by the Company to the holders of the Securities.
(r) Expenses. Whether or not the transactions contemplated
by this Agreement are consummated or this Agreement is terminated, the Company
will pay, or reimburse if paid by the Initial Purchasers, all costs and expenses
(reasonable out-of-pocket costs and expenses in the case of any reimbursement of
the Initial Purchasers) incident to the performance of the obligations of the
Company under this Agreement, including but not limited to all costs and
expenses of or relating to (i) the preparation, printing and delivery to the
Initial Purchasers of copies of the Preliminary Offering Memorandum and the
Final Offering Memorandum and any amendments or supplements thereto, (ii) the
preparation, printing and delivery to the Initial Purchasers of this Agreement,
any Agrement among Initial Purchasers, the Indenture, the Registration Rights
Agrement and such other documents as may be required in connection with the
offering, purchase, sale and delivery of the Securities, (iii) the preparation,
issuance and delivery of the certificates for the Securities to the Initial
Purchasers, including any charges of DTC in connection therewith, (iv) the fees
and disbursements of the transfer agent and registrar for the Securities and the
Company's counsel, accountants and other advisors, (v) the qualification of the
Securities and the Common Stock issuable upon conversion thereof under
securities laws in accordance with the provisions of Section 5(d) hereof,
including filing fees and the fees and disbursements of counsel for the Initial
Purchasers in connection therewith and in connection with the preparation of the
preliminary and final Blue Sky Surveys, (vi) the printing and delivery to the
Initial Purchasers of copies of the Blue Sky Survey, (vii) the fees and expenses
of the Trustee, including the fees and disbursements of counsel for the Trustee,
in connection with the Indenture and the Securities, (viii) any fees payable in
connection with the rating of the Securities, (viii) all expenses and listing
fees in connection with the application for quotation of the Securities in the
PORTAL Market, (ix) all fees and expenses (including fees and expenses of
counsel) of the Company in connection with approval of the Securities by DTC for
"book-entry" transfer, and (x) all other costs and expenses incident to the
performance by the Company of its other obligations under this Agreement which
are not otherwise specifically provided for in this Section.
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<PAGE> 18
(s) Termination of Agreement. If this Agreement is
terminated by the Initial Purchasers in accordance with the provisions of
Section 5 (other than for the failure to deliver the opinion required under
Section 5(f), unless such failure is attributable to any action or omission of
the Company) or Section 7(a)(i) hereof, the Company shall reimburse the Initial
Purchasers for all of their out-of-pocket expenses, including the reasonable
fees and disbursements of counsel for the Initial Purchasers.
5. Conditions of Initial Purchasers Obligations. The obligations
of the several Initial Purchasers hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 3 hereof and
in certificates of any officer of the Company or any of its subsidiaries
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness. (i) No order suspending the
effectiveness of the qualification or registration of the Securities
under the securities or Blue Sky laws of any jurisdiction shall be in
effect and no proceeding for such purpose shall be pending before, or
threatened against the Company by, the authorities of any such
jurisdiction, (ii) any request for additional information on the part
of any such authorities shall have been complied with to the
satisfaction of the staff of such authorities, (iii) after the date
hereof, no amendment or supplement to the Offering memorandum shall
have been used unless a copy thereof was first submitted to the Initial
Purchasers and the Initial Purchasers did not object thereto in good
faith, and (iv) the Initial Purchasers shall have received
certificates, dated the Closing Date and signed by the Chief Executive
Officer of the Company and the Chief Financial Officer of the Company
(who may, as to proceedings threatened or contemplated, rely upon the
best of their information and belief), to the effect of clauses (i) and
(ii).
(b) Absence of Changes. Since the date as of which
information is given in the Offering Memorandum, (i) there shall not
have been any change in the Company's authorized or outstanding
capital stock (other than changes attributable to (w) the shares of
Common Stock issuable upon conversion of the Securities, (x) shares of
Common Stock issuable upon the exercise of presently outstanding stock
options (y) shares of Common Stock issuable pursuant to the exercise
of warrants outstanding as of the date hereof, and (z) shares of
Common Stock issuable pursuant to other agreements described in the
Offering Memorandum) or any increase in the long-term debt of the
Company or any of its subsidiaries or any change in the business or
financial condition of the Company and the subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course
of business, in each case other than as set forth in or contemplated
by the Offering Memorandum and (ii) neither the Company nor any of its
subsidiaries shall have sustained any loss or interference with its
business or properties from fire, explosion, flood or other casualty,
whether or not covered by insurance, from any labor dispute or any
court or legislative or other governmental action, order or decree,
which is not set forth in the Offering Memorandum, which reasonably
would be expected to result in a Material Adverse Effect and if in the
judgment of the Initial Purchasers any such development makes it
impracticable or inadvisable to consummate the resale and delivery of
the Securities by the Initial Purchasers in accordance with the terms
hereof.
(c) No Proceedings. Since the date as of which
information is given in the Offering Memorandum, there shall have been
no litigation or other proceeding instituted against the Company or
any of the subsidiaries or any of their respective officers or
directors in their
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<PAGE> 19
capacities as such or any of their property or assets, before or by
any local, state, federal, or foreign court, commission, regulatory
body, administrative agency or other governmental body, which
litigation or proceeding, either singly or in the aggregate, may
reasonably be expected to result in an unfavorable ruling, decision or
finding that is reasonably likely to have a Material Adverse Effect.
(d) Representations and Warranties. Each of the
representations and warranties of the Company contained herein shall
be true and correct in all material respects at the Closing Date as if
made at the Closing Date; provided, however, that if any such
representation or warranty is already qualified by materiality, for
purposes of determining whether this condition has been satisfied,
such representation or warranty as so qualified must be true and
correct in all respects; and all covenants and agreements herein
contained to be performed on the part of the Company and all
conditions herein contained to be fulfilled or complied with by the
Company at or prior to the Closing Date shall have been duly
performed, fulfilled or complied with in all material respects.
(e) Opinions of Counsel for Company. At the Closing Date,
the Initial Purchasers shall have received the favorable opinions,
dated as of the Closing Date, of (i) Heller Ehrman White & McAuliffe,
counsel for the Company, in form and substance satisfactory to counsel
for the Initial Purchasers, substantially in the form of Exhibit C
hereto, and to such further effect as counsel for the Initial
Purchasers may reasonably request; (ii) Winthrop, Stimson, Putnam &
Roberts, local New York counsel to the Company, in form and substance
satisfactory to counsel for the Initial Purchasers, substantially in
the form of Exhibit D hereto; (iii) Paul Senio, general counsel for the
Company, in form and substance satisfactory to counsel for the Initial
Purchasers, substantially in the form of Exhibit E hereto, and to such
further effect as counsel for the Initial Purchasers may reasonably
request; and (iii) Hunter & Mow, P.C., special regulatory counsel for
the Company, in form and substance satisfactory to counsel for the
Initial Purchasers, substantially in the form of Exhibit F hereto, and
to such further effect as counsel for the Initial Purchasers may
reasonably request. In giving such opinions, such counsel may rely, as
to all matters governed by the laws of jurisdictions other than the law
of the State of Washington and the federal law of the United States,
upon the opinions of counsel satisfactory to the Initial Purchasers.
Such counsel may also state that, insofar as such opinion involves
factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its subsidiaries and
certificates of public officials.
(f) Opinion of Counsel for Initial Purchasers. At the
Closing date, the Initial Purchasers shall have received the favorable
opinion, dated as of the Closing Date, of Latham & Watkins, counsel for
the Initial Purchasers, with respect to such matters as the Initial
Purchasers shall reasonably request. In giving such opinion, such
counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of New York and the
federal law of the United States, upon the opinions of counsel
satisfactory to the Initial Purchasers. Such counsel may also state
that, insofar as such opinion involves factual matters, they have
relied, to the extent they deem proper, upon certificates of officers
of the Company and its subsidiaries and certificates of public
officials.
(g) Officers' Certificate. At the Closing Date, there
shall not have been, since the date hereof or since the respective
dates as of which information is given in the Offering
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<PAGE> 20
Memorandum, any material adverse change in the condition, financial or
otherwise, or in the results of operations, revenues, earnings or
business of the Company and its subsidiaries considered as one
enterprise (a "Material Adverse Change"), whether or not arising in the
ordinary course of business, and the Initial Purchasers shall have
received a certificate of the President or a Vice President of the
Company and of the chief financial or chief accounting officer of the
Company, dated as of the Closing Date, to the effect that (i) there has
been no such Material Adverse Change, (ii) the representations and
warranties in Section 3 hereof are true and correct with the same force
and effect as though expressly made at and as of the Closing Date, and
(iii) the Company has complied in all material respects with all
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Closing Date.
(h) Accountant's Comfort Letter. At the time of the
execution of this Agreement, the Initial Purchasers shall have received
from Ernst & Young LLP, a letter dated as of such date, in form and
substance satisfactory to the Initial Purchasers, containing statements
and information of the type ordinarily included in accountants'
"comfort letters" to the Initial Purchasers with respect to the
financial statements and certain financial information contained in the
Offering Memorandum.
(i) Bring-down Comfort Letter. At the Closing Date, the
Initial Purchasers shall have received from the accountants specified
in subsection (d) of this Section, as applicable, a letter, dated as of
the Closing Date, to the effect that they reaffirm the statements made
in the letter furnished pursuant to subsection (d) of this Section,
except that the specified date referred to shall be a date not more
than three business days prior to the Closing Date.
(j) Approval of Listing. At the Closing Date, the Common
Stock issuable on conversion of the Securities shall have been approved
for inclusion in the Nasdaq National Market, subject only to official
notice of issuance.
(k) PORTAL. At the Closing Date, the Securities shall
have been designated PORTAL securities in accordance with the rules and
regulations of the NASD.
(l) Additional Documents. At the Closing Date and at each
Option Closing Date, counsel for the Initial Purchasers shall have been
furnished with such documents as they may reasonably request for the
purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated, or in order to evidence the accuracy
of any of the representations or warranties, or the fulfillment of any
of the conditions, herein contained; and all proceedings taken by the
Company in connection with the issuance and sale of the Securities as
herein contemplated shall be satisfactory in form and substance to the
Initial Purchasers and counsel for the Initial Purchasers.
(m) Indenture and Registration Rights Agreement. At the
Closing Date, the Company and the Trustee shall have entered into the
Indenture and the Initial Purchasers shall have received counterparts,
conformed as executed, thereof and the Company and the Initial
Purchasers shall have entered into the Registration Rights Agreement
and the Initial Purchasers shall have received counterparts, conformed
as executed, thereof.
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<PAGE> 21
(n) Availability of Offering Memorandum. The Final
Offering Memorandum shall have been printed and copies distributed to
the Initial Purchasers not later than 2:00 P.M., New York City time,
on August 16, 1996, or at such later date and time as the Initial
Purchasers may approve in writing; no stop order suspending the sale
of the Securities in any jurisdiction shall have been issued and no
proceeding for that purpose shall have been commenced or shall be
pending or threatened.
(o) Lock-up Agreements. At the date of this Agreement,
the Initial Purchasers shall have received an agreement substantially
in the form of Exhibit G hereto signed by the persons listed on
Schedule E hereto.
(p) Conditions to Purchase of Option Securities. In the
event that the Initial Purchasers exercise their option provided in
Section 1(b) hereof to purchase all or any portion of the Option
Securities, the representations and warranties of the Company
contained herein and the statements in any certificates furnished by
the Company or any of its subsidiaries hereunder shall be true and
correct as of each Option Closing Date and, at the relevant Option
Closing Date, the Initial Purchasers have received:
(i) Officers' Certificate. A certificate, dated
such Option Closing Date, of the President or a Vice President
of the Company and of the chief financial or chief accounting
officer of the Company confirming that the certificate
delivered at the Closing Date pursuant to Section 5(g) hereof
remains true and correct as of such Option Closing Date.
(ii) Opinions of Counsel for Company. The
favorable opinion of Heller Ehrman White & McAuliffe, counsel
for the Company, the favorable opinion of Winthrop, Stimson,
Putnam & Roberts, local New York counsel to the Company, the
favorable opinion of Paul Senio, general counsel to the
Company, and the favorable opinion of Hunter & Mow, P.C.,
special regulatory counsel to the Company, each in form and
substance satisfactory to counsel for the Initial Purchasers,
dated such Option Closing Date, relating to the Option
Securities to be purchased on such Option Closing Date and
otherwise to the same effect as the opinions required by
Section 5(e) hereof.
(iii) Bring-down Comfort Letter. A letter from
Ernst & Young LLP, in form and substance satisfactory to the
Initial Purchasers and dated such Option Closing Date,
substantially in the same form and substance as the letter
furnished to the Initial Purchasers pursuant to Section 5(h)
hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more
than five days prior to such Option Closing Date.
(q) Termination of Agreement. If any condition specified
in this Section 5 shall not have been fulfilled when and as required
to be fulfilled, this Agreement, or, in the case of any condition to
the purchase of Option Securities, on an Option Closing Date which is
after the Closing Date, the obligations of the several Initial
Purchasers to purchase the relevant Option Securities, may be
terminated by the Initial Purchasers at their sole discretion by
notice to the Company at any time at or prior to the Closing Date or
such Option Closing Date, as the case may be. Any such termination
shall be without liability of any party to any other party except
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<PAGE> 22
as provided in Sections 4(r) and (s) and except that Sections 3 and 6
hereof shall survive any such termination and remain in full force and
effect.
6. Indemnification.
(a) The Company will indemnify and hold harmless each
Initial Purchaser, the directors, officers, employees and agents of each
Initial Purchaser and each person, if any, who controls each Initial Purchaser
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, from and against any and all losses, claims, liabilities,
expenses and damages, joint or several (including any and all investigative,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim asserted),
to which they, or any of them, may become subject under the Securities Act, the
Exchange Act or other federal, state or foreign statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, liabilities, expenses
or damages arise out of or are based on any untrue statement or alleged untrue
statement of a material fact contained in the Preliminary Offering Memorandum,
the Final Offering Memorandum, any document incorporated by reference therein
or any amendment or supplement thereto or the omission or alleged omission to
state in such documents a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that (i) the
Company will not be liable to be extent that such loss, claim, liability,
expense or damage arises from the sale of the Securities to any person by an
Initial Purchaser and is based on an untrue statement or omission or alleged
untrue statement or omission made in reliance on and in conformity with
information relating to any Initial Purchaser furnished in writing to the
Company by any Initial Purchaser expressly for inclusion in the Preliminary
Offering Memorandum or the Final Offering Memorandum and (ii) the Company will
not be liable to any Initial Purchaser under the indemnity agreement in this
Section 6(a) with respect to the Preliminary Offering Memorandum to the extent
that any such loss, claim, liability, expense or damage of such Initial
Purchaser results solely from an untrue statement of a material fact contained
in, or the omission of a material fact from, the Preliminary Offering
Memorandum which untrue statement or omission was completely corrected in the
Final Offering Memorandum, if the Company shall sustain the burden of proving
that such Initial Purchaser sold Securities to the person alleging such loss,
claim, liability, expense or damage without sending or giving, at or prior to
the written confirmation of such sale, a copy of the Final Offering Memorandum
if the Company had previously furnished copies thereof to such Initial
Purchaser within a reasonable amount of time prior to such sale or such
confirmation. This indemnity agreement will be in addition to any liability
that the Company might otherwise have.
(b) Each Initial Purchaser will indemnify and hold
harmless the Company, each person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
each director of the Company and each officer of the Company to the same extent
as the foregoing indemnity from the Company to each Initial Purchaser, but only
insofar as losses, claims, liabilities, expenses or damages arise out of or are
based on any untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to any
Initial Purchaser furnished in writing to the Company by any Initial Purchaser
on behalf of such Initial Purchaser expressly for use in the Preliminary
Offering Memorandum or the Final Offering Memorandum. This indemnity will be
in addition to any liability that each Initial Purchaser might otherwise have.
(c) Any party that proposes to assert the right to be
indemnified under this Section 6 will, promptly after receipt of notice of
commencement of any action against such party in respect of
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<PAGE> 23
which a claim is to be made against an indemnifying party or parties under this
Section 6, notify each indemnifying party of the commencement of such action,
enclosing a copy of all papers served, but the omission so to notify such
indemnifying party (i) will not relieve it from any liability that it may have
to any indemnified party under the foregoing provisions of this Section 6
unless, and only to the extent that, it did not otherwise learn of such action
and such omission results in the forfeiture of substantive rights or defenses
by the indemnifying party and (ii) will not, in any event relieve the
indemnifying party from any obligations to any indemnified party other than the
indemnification obligations in Sections 6(a) and 6(b) hereof. If any such
action is brought against any indemnified party and it notifies the
indemnifying party of its commencement, the indemnifying party will be entitled
to participate in and, to the extent that it elects by delivering written
notice to the indemnified party promptly after receiving notice of the
commencement of the action from the indemnified party, jointly with any other
indemnifying party similarly notified, to assume the defense of the action,
with counsel satisfactory to the indemnified party, and after notice from the
indemnifying party to the indemnified party of its election to assume the
defense, the indemnifying party will not be liable to the indemnified party for
any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified
party in connection with the defense. The indemnified party will have the
right to employ its own counsel in any such action, but the fees, expenses and
other charges of such counsel will be at the expense of such indemnified party
unless (1) the employment of counsel by the indemnified party has been
authorized in writing by the indemnifying party, (2) the indemnified party has
reasonably concluded (based on advice of counsel to the indemnified party) that
there may be legal defense available to it or other available indemnified
parties that are different from or in addition to those available to the
indemnifying party, (3) a conflict or potential conflict exists (based on
advice of counsel to the indemnified party) between the indemnified party and
the indemnifying party (in which case the indemnifying party will not have the
right to direct the defense of such action on behalf of the indemnified party)
or (4) the indemnifying party has not in fact employed counsel to assume the
defense of such action within a reasonable time after receiving notice of the
commencement of the action, in each of which cases the reasonable fees,
disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or parties. Such
firm shall be designated in writing by PaineWebber Incorporated in the case of
parties indemnified pursuant to Section 6(a) and by the Company, in the case of
parties indemnified pursuant to Section 6(b). All such fees, disbursements and
other charges will be reimbursed by the indemnifying party promptly as they are
incurred. No indemnifying party shall, without the prior written consent of
each indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding relating to
the matters contemplated by this Section 6 (whether or not any indemnified
party is a party thereto), unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising or that may arise out of such claim, action or proceeding.
(d) In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in the
foregoing paragraphs of this Section 6 is applicable in accordance with its
terms but for any reason is held to be unavailable from the Company or the
Initial Purchasers, or insufficient, the Company and the Initial Purchasers
will contribute to the total losses, claims, liabilities, expenses and damages
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted, but after deducting any contribution received
by the Company from persons other than
23
<PAGE> 24
the Initial Purchasers, such as persons who control the Company within the
meaning of the Securities Act or the Exchange Act and officers and directors of
the Company, who also may be liable for contribution) to which the Company and
any one or more of the Initial Purchasers may be subject in such proportion as
shall be appropriate to reflect the relative benefits received by the Company
on the one hand and the Initial Purchasers on the other. The relative benefits
received by the Company on the one hand and the Initial Purchasers on the other
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the total
discounts and sale commissions received by the Initial Purchasers in the
purchase of the Securities from the Company and the resale thereof by the
Initial Purchasers, in each case as set forth in the Final Offering Memorandum.
If, but only if, the allocation provided by the foregoing sentence is not
permitted by applicable law, the allocation of contribution shall be made in
such proportion as is appropriate to reflect not only the relative benefits
referred to in the foregoing sentence but also the relative fault of the
Company, on the one hand, and the Initial Purchasers, on the other, with
respect to the statements or omissions which resulted in such loss, claim,
liability, expense or damage, or action in respect thereof, as well as any
other relevant equitable considerations with respect to such offering. Such
relative fault shall be determined by reference to whether the untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company or the
Initial Purchasers, the intent of the parties and their relative knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and the Initial Purchasers agree that it would not be
just and equitable if contributions pursuant to this Section 6(d) were to be
determined by pro rata allocation (even if the Initial Purchasers were treated
as one entity for such purpose) or by any other method of allocation which does
not take into account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of the loss, claim,
liability, expense or damage, or action in respect thereof, referred to above
in this Section 6(d) shall be deemed to include, for purpose of this Section
6(d), any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 6(d), no Initial Purchasers
shall be required to contribute any amount in excess of the discounts and sales
commissions received by it in the purchase of the Securities from the Company
and the resale by it of the Securities, and no person found guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) will be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Initial Purchasers'
obligations to contribute as provided in this Section 6(d) are several in
proportion to their respective underwriting obligations and not joint. For
purposes of this Section 6(d), any person who controls a party to this
Agreement within the meaning of the Act will have the same rights to
contribution as that party, and each officer of the Company will have the same
rights to contribution, as the Company, subject in each case to the provisions
hereof. Any party entitled to contribution promptly after receipt of notice of
commencement of any action against such party in respect of which a claim for
contribution may be made under this Section 6(d), will notify any such party or
parties from whom contribution may be sought, but the omission so to notify
will not relieve the party or parties from whom contribution may be sought from
any other obligation it or they may have under this Section 6(d). No party
will be liable for contribution with respect to any action or claim settled
without its written consent (which consent will not be unreasonably withheld or
delayed).
(e) The indemnity and contribution agreements contained
in this Section 6 and the agreements, representations, warranties and other
statements of the Company contained in this Agreement shall remain operative
and in full force and effect regardless of (i) any investigation (or any
statements as to the results thereof) made by or on behalf of the Initial
Purchasers or any controlling person or any
24
<PAGE> 25
Initial Purchaser, (ii) acceptance of any of the Securities and payment
therefor or (iii) any termination of this Agreement.
(f) The respective indemnities, contribution agreements,
representations, warranties and other statements of the Company, its officers
and directors and of the several Initial Purchasers set forth in or made
pursuant to this Agreement shall remain operative and in full force and effect
for the applicable period of the statute of limitations with respect thereto,
and will survive delivery of and payment for the Securities, regardless of (i)
any investigation or statement as to the results thereof, made by or on behalf
of any Initial Purchaser or any controlling person of such Initial Purchaser or
by or on behalf of the Company, the officers or directors of the Company or any
controlling person of the Company, (ii) acceptance of the Securities and
payment for them as provided hereunder and (iii) termination of this Agreement.
7. Termination of Agreement.
The obligations of the several Initial Purchasers under this
Agreement may be terminated at any time on or prior to the Closing Date by
notice to the Company from the Initial Purchasers, without liability on the
part of any Initial Purchaser to the Company, if, prior to delivery and payment
for the Securities, in the sole judgment of the Initial Purchasers, (i) there
has been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the Offering Memorandum, any Material
Adverse Change, whether or not arising in the ordinary course of business, or
(ii) there has occurred any material adverse change in the financial markets in
the United States, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the
Initial Purchasers, impracticable to market the Securities or to proceed with
the completion of the offering or sale of and payment for the Securities, or
(iii) trading in any securities of the Company has been suspended or limited by
the Commission or if trading generally on the New York Stock Exchange or the
American Stock Exchange or in the Nasdaq National Market System has been
suspended or limited, or minimum or maximum prices for trading have been fixed,
or maximum ranges for prices have been required, by any of said exchanges or by
such system or by order of the Commission, the National Association of
Securities Dealers, Inc. or any other governmental authority, or (iv) a banking
moratorium has been declared by either federal, New York or Washington
authorities.
8. Subsequent Offers and Resales of the Securities.
(a) The Initial Purchasers have advised the Company that
they propose to offer the Securities for resale upon the terms and conditions
set forth in this Agreement. Each Initial Purchaser hereby severally
represents and warrants to, and agrees with, the Company that such Initial
Purchaser is a Qualified Institutional Buyer and (ii) will solicit offers for
such Securities only from, and will offer such Securities only (x) to persons
who it reasonably believes are Qualified Institutional Buyers in transactions
meeting the requirements of Rule 144A, (y) to a limited number of persons
reasonably believed by such Initial Purchaser to be Accredited Investors in
transactions exempt from registration under the Securities Act, or (z) outside
the United States to certain non-U.S. persons (as defined under Regulation S)
in reliance on Regulation S under the Securities Act, as more fully set forth
in the case of clauses (x) and (y) in Section 8(b)(1) below.
25
<PAGE> 26
(b) Each Initial Purchaser further severally represents
and warrants to, and agrees with, the Company that:
(1) Such Initial Purchaser acknowledges that the
Securities have not been registered under the Securities Act and may
not be offered or sold within the United States or to, or for the
account or benefit of, U.S. persons except in accordance with
Regulation S or pursuant to an exemption from the registration
requirements of the Securities Act; that it has offered and sold the
Securities, and will offer and sell the Securities, (x) as part of
their distribution at any time and (y) otherwise until 40 days after
the later of the commencement of the offering of the Securities and
the Closing Date, only in accordance with Rule 903 under the
Securities Act or Rule 144A or to a limited number of Accredited
Investors in accordance with subsection (ii) of Section 8(a) and
accordingly, neither the Initial Purchasers nor their affiliates, nor
any persons acting on their behalf, have engaged or will engage in any
directed selling efforts within the meaning of Rule 901(b) of
Regulation S with respect to the Securities, and the Initial
Purchasers, their affiliates and all persons acting on their behalf
have complied and will comply with the offering restrictions
requirements of Regulation S at or prior to confirmation of sale of
the Securities, other than a sale pursuant to Rule 144A or a sale to
an Accredited Investor in accordance with subsection (ii), the Initial
Purchasers will have sent to each distributor, dealer or other person
receiving a selling concession, fee or other remuneration that
purchases the Securities from the Initial Purchasers during the
restricted period a confirmation or notice substantially to the
following effect:
"The Securities covered hereby have not been registered under
the U.S. Securities Act of 1933 (the "Securities Act") and may
not be offered or sold within the United States or to, or for
the account or benefit of, U.S. persons (i) as part of their
distribution at any time or (ii) otherwise until 40 days after
the date of the commencement of the offering and the closing
date, except in either case in accordance with Regulation S
(or Rule 144A if available) under the Securities Act. Terms
used above have the meanings given to them by Regulation S."
Terms used in this Section 8(b)(1) have the meanings given to them by
Regulation S;
(2) Such Initial Purchaser has offered, or may offer
and sell, Securities to institutions or officers or directors of the
Company, each of which is reasonably believed by such Initial
Purchaser to be an "accredited investor" within the meaning of Rule
501(a)(1), (2), (3), (4) or (7) under the Securities Act or an entity
in which all of the equity owners are accredited investors within the
meaning of Rule 501(a)(1), (2), (3), (4) or (7) under the Securities
Act; provided that each such Accredited Investor executes and delivers
to the Initial Purchasers and the Company, prior to the consummation
of any sale of Securities to such Accredited Investor, an Transferee
Letter of Representations in substantially the form attached as Annex
A to the Offering Memorandum (a "Transferee Letter of
Representations");
(3) Such Initial Purchaser will not offer or sell
the Securities purchased from the Company hereunder in the United
States by means of any form of general solicitation or general
advertising within the meaning of Rule 502(c) under the Securities
Act, including, but not limited to (i) any advertisement, article,
notice or other communication published in any newspaper,
26
<PAGE> 27
magazine or similar media or broadcast over television or radio, or
(ii) any seminar or meeting whose attendees have been invited by any
general solicitation or general advertising; provided, however, that
such limitation shall not preclude the Initial Purchasers from placing
any tombstone announcement with respect to the resale by the Initial
Purchasers of the Securities after the earlier of the expiration or
exercise in full of the Option, provided that such announcement is not
prohibited by Regulation S;
(4) With respect to resales made in reliance on Rule
144A, other than through PORTAL, of any of the Securities purchased
from the Company hereunder, the Initial Purchasers will deliver either
with the confirmation of such resale or otherwise prior to settlement
of such resale a notice to the effect that the resale of such
Securities has been made in reliance upon the examination from the
registration requirements of the Securities Act provided by Rule 144A;
and
(5) The Initial Purchasers (i) have not offered or
sold, and will not offer or sell in the United Kingdom, by means of
any document, any Securities other than to persons whose ordinary
business it is to buy or sell shares or debentures, whether as a
principal or agent, or in circumstances which do not constitute an
offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995, (ii) have complied and
will comply with all applicable provisions of the Financial Services
Act 1986 with respect to anything done by it in relation to the
Securities in, from or otherwise involving the United Kingdom, and
(iii) have only issued or passed on and will only issue or pass on to
any person in the United Kingdom any document received by it in
connection with the issue of the Securities if the person is of a kind
described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1995 or is a person to
whom the document may otherwise lawfully be issued or passed on.
(c) Each Initial Purchaser severally warrants and agrees
that it has not entered, and will not enter, into any contractual arrangement
with respect to the distribution of the Securities other than the Agreement
Between Managers between the Initial Purchasers dated the date hereof, except
with its affiliates or with the prior written consent of the Company.
(d) Each Initial Purchaser shall not sell less than U.S.
$100,000 in aggregate principal amount of the Securities to each Subsequent
Purchaser. If the Subsequent Purchaser is a non-bank fiduciary acting on
behalf of others, each Initial Purchaser shall not sell to such Subsequent
Purchaser unless each person for whom such Subsequent Purchaser is acting as
fiduciary is purchasing from the Initial Purchaser at least U.S. $100,000 in
aggregate principal amount of the Securities.
(e) Each Initial Purchaser shall deliver to each
purchaser of the Securities from such Initial Purchaser, in connection with its
original distribution of the Securities, a copy of the Offering Memorandum, as
amended and supplemented at the date of such delivery.
(f) The Initial Purchasers acknowledge that the Company
and, for purposes of the opinions to be delivered to the Initial Purchasers
pursuant to Section 5 hereof, counsel to the Company and counsel to the Initial
Purchasers, will rely upon the accuracy and truth of the foregoing
representations and the Initial Purchasers hereby consent to such reliance.
27
<PAGE> 28
9. Substitution of Initial Purchasers. If any one or more of the
Initial Purchasers shall fail or refuse to purchase any of the Securities which
it or they have agreed to purchase hereunder, and the amount of Securities which
such defaulting Initial Purchaser or Initial Purchasers agreed but failed or
refused to purchase is not more than one-tenth of the Securities, the other
Initial Purchasers shall be obligated, severally, to purchase the Securities
which such defaulting Initial Purchaser or Initial Purchasers agreed but failed
or refused to purchase, in the proportions which the Securities which they have
respectively agreed to purchase pursuant to Section 1 bears to the aggregate
amount of Securities which all such non-defaulting Initial Purchasers have so
agreed to purchase, or in such other proportions as the Initial Purchasers may
specify; provided that in no event shall the maximum amount of Securities which
any Initial Purchaser has become obligated to purchase pursuant to Section 1 be
increased pursuant to this Section 9 by more than one-tenth of the Securities
without the prior written consent of such Initial Purchaser. If any Initial
Purchaser or Initial Purchasers shall fail or refuse to purchase any Securities
and the aggregate amount of Securities which such defaulting Initial Purchaser
or Initial Purchasers agreed but failed or refused to purchase exceeds one-tenth
of the aggregate amount of the Securities and arrangements satisfactory to the
Initial Purchasers and the Company for the purchase of such Securities are not
made within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Initial Purchaser or the Company for
the purchase or sale of any Securities under this Agreement. In any such case,
either the Initial Purchasers or the Company shall have the right to postpone
the Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Preliminary Offering Memorandum or the Offering
Memorandum, as amended or supplemented, or in any other documents or
arrangements may be effected. Any action taken pursuant to this Section 9 shall
not relieve any defaulting Initial Purchaser from liability in respect of any
default of such Initial Purchaser under this Agreement. As used herein, the
term "Initial Purchaser" includes any person substituted for an Initial
Purchaser under this Section 9.
10. Miscellaneous.
(a) Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to
the Initial Purchasers shall be directed to the Initial Purchasers, c/o
PaineWebber Incorporated at 1285 Avenue of the Americas, 12th Floor, New York,
New York 10019, attention: Corporate Finance Department; notices to the Company
shall be directed to it at 1111 Third Avenue, Seattle, Washington 98101,
attention: General Counsel. Any such notice shall be effective only upon
receipt. Any notice under Section 6 or 9 may be made by telex or telephone,
but if so made shall be subsequently confirmed in writing.
(b) Parties. This Agreement shall inure to the benefit
of and be binding upon the Initial Purchasers and the Company and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the Initial Purchasers and the Company and their respective successors and
the controlling persons, directors and officers referred to in Section 6 hereof
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the Initial Purchasers and
the Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any Initial Purchaser shall be deemed to be a successor by reason merely
of such purchase.
28
<PAGE> 29
(c) Governing Law and Time. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
(d) Effect of Headings. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
(e) Action by Initial Purchasers. Any action required or
permitted to be taken by the Initial Purchasers under this Agreement may be
taken by them jointly or by PaineWebber Incorporated.
(f) Counterparts. This Agreement may be signed in two or
more counterparts with the same effect as if the signatures thereto and hereto
were upon the same instrument.
(g) Severability. In case any provision in this
Agreement shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
(h) Waiver of Jury Trials. The Company and each Initial
Purchaser each hereby irrevocably waive any right they may have to a trial by
jury in respect of any claim based upon or arising out of this Agreement or the
transactions contemplated hereby.
[signature page follows]
29
<PAGE> 30
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Initial Purchasers.
Very truly yours,
MIDCOM COMMUNICATIONS INC.
By: ROBERT J. CHAMBERLAIN
---------------------------------
Name: Robert J. Chamberlain
Title: Senior Vice President,
Chief Financial Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
PAINEWEBBER INCORPORATED
By:
-------------------------------
Name: William E. Fletcher
Title: First Vice President
WHEAT, FIRST SECURITIES, INC.
By:
-------------------------------
Name: Wayne L. Hunter
Title: Managing Director
S-1
<PAGE> 31
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Initial Purchasers.
Very truly yours,
MIDCOM COMMUNICATIONS INC.
By:
---------------------------------
Name: Robert J. Chamberlain
Title: Senior Vice President,
Chief Financial Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
PAINEWEBBER INCORPORATED
By: WILLIAM E. FLETCHER
-------------------------------
Name: William E. Fletcher
Title: First Vice President
WHEAT, FIRST SECURITIES, INC.
By:
-------------------------------
Name: Wayne L. Hunter
Title: Managing Director
S-1
<PAGE> 32
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Initial Purchasers.
Very truly yours,
MIDCOM COMMUNICATIONS INC.
By:
---------------------------------
Name: Robert J. Chamberlain
Title: Senior Vice President,
Chief Financial Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
PAINEWEBBER INCORPORATED
By:
-------------------------------
Name: William E. Fletcher
Title: First Vice President
WHEAT, FIRST SECURITIES, INC.
By: WAYNE L. HUNTER
-------------------------------
Name: Wayne L. Hunter
Title: Managing Director
S-1
<PAGE> 33
SCHEDULE A
<TABLE>
<CAPTION>
Principal Amount
Name of Initial Purchasers of Securities
-------------
<S> <C>
PaineWebber Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,125,000
Wheat, First Securities, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . $31,875,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $85,000,000
</TABLE>
Sch. A-1
<PAGE> 34
SCHEDULE B
MIDCOM COMMUNICATIONS INC.
(a Washington corporation)
Convertible Subordinated Notes due 2003
1. The price of the Securities to be resold to Subsequent
Purchasers shall be 100.0% of the principal amount thereof, plus accrued
interest, if any, from the date of issuance.
2. The purchase price to be paid by the Initial Purchasers for
the Securities shall be 97.0% of the principal amount thereof.
3. The interest rate on the Securities shall be 8 1/4% per annum.
4. The Securities shall be convertible into shares of voting
common stock, par value $.001 per share, of the Company at an initial
conversion price of $14.0875 per share.
5. The redemption price for Securities redeemed at the option of
the Company (expressed as percentages of principal amount), if redeemed during
the 12-month period beginning on August 15 of the years indicated, shall be:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2001 . . . . . . . . . . . . . . . . . . . 101.179%
2002 and thereafter . . . . . . . . . . . 100.000%
</TABLE>
The amount payable upon redemption of Securities shall include the
redemption price shown above, together with accrued and unpaid interest to the
date fixed for redemption.
Sch. B-1
<PAGE> 35
SCHEDULE C
SUBSIDIARIES OF THE COMPANY
AdVal, Inc.
Advanced Network Design
Cel-Tech International Corp.
PacNet Inc.
Sch. C-1
<PAGE> 36
SCHEDULE D
EMPLOYEE BENEFIT PLANS
1. MIDCOM Communication Inc. and Affiliates 401(k) Salary Deferral and
Profit Sharing Plan.
2. Flexible Benefits Plan, effective January 1, 1994 (Section 125).
(Provides for employees to elect to reduce their pretax wages to cover
their portion of health and child care costs.)
3. Group Life Insurance, Voluntary Insurance, AD&D, Short Term Disability
and Long Term Disability with Unum Life Insurance Co. of America
effective May 1, 1996.
4. The Company operates under a self-funded health benefits plan
administered by Travelers Plan Administrators Inc. With respect to
such plan, the Company maintains a stop-loss insurance policy with
Safeco Insurance Company.
Sch. D-1
<PAGE> 37
SCHEDULE E
PERSONS SUBJECT TO THE LOCK-UP AGREEMENT
William H. Oberlin President/Chief Executive Officer
Robert L. Nitschke Executive Vice President/Chief Operating
Officer
Robert Chamberlain Senior Vice President/Chief Financial Officer
Jay T. Caldwell Senior Vice President, Revenue Management
Paul P. Senio Vice President, Secretary/General Counsel
Pat Twomey Vice President, NDD (National Dealer &
Distributor Sales)
Kenneth Hughes Vice President, Information Services
Dave Wiegand Vice President, National Accounts Division
Judith W. Johnson Vice President, Customer Services
David Lynch Vice President, Sales-General Business
Thomas A. Marino Vice President, Network Services
Charles I. Gragg, III Vice President, Marketing
Kris M. Goldman Vice President, Human Resources
Jim Ottinger Vice President, Wholesale and Carrier Services
Edward McNamara Vice President, Alternate Channels
Gary Graham Vice President, Sales, Special Accounts
Paul H. Pfleger Chairman of the Board
John M. Orehek Director
Scott B. Perper Director
Karl D. Guelich Director
John M. Zrno Director
Marvin C. Moses Director
Daniel M. Dennis Director
First Union Capital Partners
The Robinson-Humphrey Company, Inc.
Fidelity Communication Corporation/Communications Service of America, Inc.
Richard W. Stroup
Sch. E-1
<PAGE> 38
EXHIBIT A
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED
STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY
EVIDENCED HEREBY AND ANY SHARES OF COMMON STOCK ISSUED UPON CONVERSION HEREOF
MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE
SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON
THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED
BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES
FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY AND ANY SHARES OF COMMON
STOCK ISSUED UPON CONVERSION HEREOF MAY BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c)
OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH
ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND
BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE
COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH
CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND
EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE
SECURITY EVIDENCED HEREBY OR ANY COMMON STOCK ISSUED UPON CONVERSION HEREOF OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
Exh. A-1
<PAGE> 39
EXHIBIT B
FORM OF REGISTRATION RIGHTS AGREEMENT
See attached.
Exh. B-1
<PAGE> 40
================================================================================
$85,000,000
8 1/4% Convertible Subordinated Notes due 2003
REGISTRATION RIGHTS AGREEMENT
Dated as of August 22, 1996
by and among
MIDCOM Communications Inc.
and
PaineWebber Incorporated
Wheat, First Securities, Inc.
================================================================================
<PAGE> 41
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and
entered into as of August 22, 1996 by and among MIDCOM Communications Inc., a
Washington corporation (the "Company"), and PaineWebber Incorporated and Wheat,
First Securities, Inc., as initial purchasers (the "Initial Purchasers").
The Company proposes to issue and sell to the Initial Purchasers (the
"Initial Placement") $85,000,000 aggregate principal amount (plus up to an
additional $12,750,000 principal amount to cover over-allotments, if any) of
its 8 1/4% Convertible Subordinated Notes due 2003 (the "Notes"), pursuant to
the terms of a Purchase Agreement, dated as of August 15, 1996 (the "Purchase
Agreement"). As an inducement to the Initial Purchasers to enter into the
Purchase Agreement, and in satisfaction of a condition to the Initial
Purchasers' obligations thereunder, the Company agrees with the Initial
Purchasers, (i) for the benefit of the Initial Purchasers and (ii) for the
benefit of the holders from time to time of the Transfer Restricted Securities
(as defined) whose names appear in the register maintained by the Company's
registrar in accordance with the provisions of the Indenture (as defined in
Section 1 hereof) (including the Initial Purchasers) (each of the foregoing a
"Holder," and collectively the "Holders"), as follows:
1. Definitions. Capitalized terms used herein without definition
shall have their respective meanings set forth in the Purchase Agreement. As
used in this Agreement, the following capitalized terms shall have the
following meanings:
"Affiliate" of any specified person means any other person which,
directly or indirectly, is in control of, is controlled by, or is under common
control with, such specified person. For purposes of this definition, control
of a person means the power, direct or indirect, to direct or cause the
direction of the management and policies of such person whether by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Business Day" means any day other than a Saturday, a Sunday or a day
on which banking institutions in the State of New York are not required to be
open.
"Closing Date" has the meaning set forth in the Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, $.0001 par value per share, of
the Company.
"Damages Payment Date" means each regular interest payment date with
respect to the Notes provided for in the Indenture and the Notes.
"Effectiveness Target Date" has the meaning set forth in Section 3(a)
hereto.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and the rules and regulations of the Commission promulgated
thereunder.
"Exchange Offer Registration Statement" has the meaning set forth in
Section 4 hereof.
Exh. B-1
<PAGE> 42
"Holder" has the meaning set forth in the preamble hereto.
"Indenture" means the Indenture dated as of August 22, 1996, between
the Company and IBJ Schroder Bank & Trust Company, as trustee, pursuant to
which the Notes are to be issued, as the same may be amended, modified or
supplemented from time to time in accordance with the terms thereof.
"Initial Purchasers" has the meaning set forth in the preamble
hereto.
"Initial Placement" has the meaning set forth in the preamble hereto.
"Losses" has the meaning set forth in Section 9(d) hereof.
"Majority Holders" means the Holders of a majority of the aggregate
principal amount of securities registered under a Shelf Registration Statement
(provided that Holders of Common Stock issued upon conversion of Notes shall be
deemed to be Holders of the aggregate principal amount of Notes from which such
Common Stock was converted).
"Managing Underwriters" means the investment banker or investment
bankers and manager or managers that shall administer an Underwritten Offering
of the securities covered by the Shelf Registration Statement.
"New Notes" means debt securities of the Company identical in all
material respects to the Notes (except that the New Notes shall not be subject
to restrictions on transfer), which may be issued pursuant to Section 4 hereof.
"Notes" means the 8 1/4% Convertible Subordinated Notes due 2003 of
the Company.
"Offering Memorandum" has the meaning set forth in the Purchase
Agreement.
"Person" means any individual, partnership, corporation, limited
liability company, trust or unincorporated organization, or a government or
agency or political subdivision thereof.
"Prospectus" means the prospectus included in any Shelf Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of Transfer Restricted Securities, covered by
such Shelf Registration Statement, and all amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference into such Prospectus.
"Registration Default" has the meaning set forth in Section 5 hereto.
"Securities Act" means the Securities Act of 1933, as amended from
time to time, and the rules and regulations of the Commission promulgated
thereunder.
"Shelf Registration Period" has the meaning set forth in Section 3(b)
hereof.
Exh. B-2
<PAGE> 43
"Shelf Registration Statement" means a "shelf" registration statement
of the Company pursuant to the provisions of Section 3 hereof which covers the
Transfer Restricted Securities, on an appropriate form under Rule 415 under the
Securities Act, or any similar rule that may be adopted by the Commission,
amendments and supplements to such registration statement, including
post-effective amendments, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by reference
therein.
"Supplement Delay Period" means any period commencing on the date of
receipt by a Holder of Transfer Restricted Securities of any notice from the
Company of the existence of any fact or event of the kind described in Section
6(c)(2) hereof and ending on the date of receipt by such Holder of an amended
or supplemented Shelf Registration Statement or Prospectus, as contemplated by
Section 6(i) hereof, or the receipt by such Holder of written notice from the
Company (the "Advice") that the use of the Prospectus may be resumed, and
receipt of copies of any additional or supplemental filings that are
incorporated by reference in the Prospectus.
"Transfer Restricted Securities" means each Note and the Common Stock
issuable upon conversion thereof until (i) the date on which such Note or the
Common Stock issuable upon conversion thereof has been effectively registered
under the Securities Act and disposed of pursuant to an effective registration
statement or, with respect to any Note, exchanged for a New Note pursuant to
Section 4 hereof, (ii) the date on which such Note or the Common Stock issuable
upon conversion thereof is distributed to the public pursuant to Rule 144 under
the Securities Act (or any similar provision then in effect) or is saleable
pursuant to Rule 144(k) under the Securities Act and all legends thereon
relating to transfer restrictions have been removed, or (iii) the date on which
such Note or the Common Stock issuable upon conversion thereof ceases to be
outstanding.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended.
"Trustee" means the trustee with respect to the Notes under the
Indenture.
"Underwritten Offering" or "Underwritten Registration" means a
registration in which securities of the Company are sold to one or more
underwriters for reoffering to the public.
2. Securities Subject to This Agreement. The securities entitled
to the benefits of this Agreement are the Transfer Restricted Securities.
3. Shelf Registration.
(a) The Company shall, within 60 days after Closing Date, file with
the Commission and thereafter shall use its best efforts to cause to be
declared effective under the Securities Act by the 150th day after the Closing
Date (the "Effectiveness Target Date"), a Shelf Registration Statement relating
to the offer and sale of the Transfer Restricted Securities by the Holders from
time to time in accordance with the methods of distribution elected by such
Holders and set forth in such Shelf Registration Statement.
(b) The Company shall use its best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the Prospectus
forming a part thereof to be usable by Holders for a period of three years from
the Closing Date or such shorter period that will terminate when (i) all the
Transfer
Exh. B-3
<PAGE> 44
Restricted Securities covered by the Shelf Registration Statement have been
sold pursuant to the Shelf Registration Statement, or (ii) the date on which
there ceases to be outstanding any Transfer Restricted Securities (in any such
case, such period being called the "Shelf Registration Period"). The Company
shall be deemed not to have used its best efforts to keep the Shelf
Registration Statement effective during the requisite period if it voluntarily
takes any action that would result in Holders of Transfer Restricted Securities
covered thereby not being able to offer and sell such securities during that
period, unless (i) such action is required by applicable law, (ii) such action
is taken by the Company in good faith and for valid business reasons (not
including avoidance of the Company's obligations hereunder), including the
acquisition or divestiture of assets, so long as the Company promptly
thereafter complies with the requirements of Section 6(i) hereof, if
applicable, or (iii) such action is taken because of any fact or circumstance
giving rise to a Supplement Delay Period.
(c) The Company shall prepare and file with the Commission such
amendments, including post-effective amendments, to the Shelf Registration
Statement as may be necessary to keep such Registration Statement continuously
effective for the applicable time period; cause the related Prospectus to be
supplemented by any required Prospectus supplement and as so supplemented to be
filed pursuant to Rule 424 (or any similar provisions then in force) under the
Securities Act; and comply with the provisions of the Securities Act and the
Exchange Act with respect to the disposition of all securities covered by such
Shelf Registration Statement during the applicable period in accordance with
the intended methods of disposition by the sellers thereof set forth in such
Shelf Registration Statement as so amended or in such Prospectus as so
supplemented.
4. Registered Exchange Offer. If the Company determines that it
is permissible to do so, in lieu of filing the Shelf Registration Statement or
maintaining the effectiveness of the Shelf Registration Statement as
contemplated herein, the Company, in its discretion, may file with the
Commission a registration statement on Form S-4 or other applicable form with
respect to the New Notes (the "Exchange Offer Registration Statement") and upon
the Exchange Offer Registration Statement becoming effective, offer the holders
of Notes the opportunity to exchange their Notes for an equal principal amount
of New Notes. Upon the effectiveness of an Exchange Offer Registration
Statement, the holders of Notes constituting Transfer Restricted Securities
shall not be entitled to include any such Notes in a Shelf Registration
Statement hereunder; provided, however, the effectiveness of an Exchange Offer
Registration Statement shall not affect the Company's obligations hereunder
with respect to any Holder's Common Stock constituting Transfer Restricted
Securities. Notwithstanding the foregoing, in no event shall the Company have
any obligation to file a registration statement with respect to, or to register
any Notes pursuant to, an Exchange Offer Registration Statement.
5. Liquidated Damages.
(a) Subject to Section 6(m), if (i) the Company fails to file the
Shelf Registration Statement required by Section 3 of this Agreement on or
before the date specified for such filing under Section 3(a) hereof, (ii) such
Shelf Registration Statement is not declared effective by the Commission on or
prior to the Effectiveness Target Date or (iii) the Shelf Registration
Statement is declared effective but thereafter ceases to be continuously
effective or usable in connection with resales of Transfer Restricted
Securities during the Shelf Registration Period (each such event referred to in
clauses (a) through (c) above a "Registration Default"), then the Company will
pay Liquidated Damages to each Holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $0.05 per week per $1,000 aggregate
principal amount of the
Exh. B-4
<PAGE> 45
Transfer Restricted Securities held by such Holder. The amount of the
Liquidated Damages will increase by an additional $0.05 per week per $1,000
aggregate principal amount of the Transfer Restricted Securities held by each
Holder with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages of $0.25
per week per $1,000 aggregate principal amount of the Transfer Restricted
Securities held by each Holder. In no event shall the Company pay Liquidated
Damages in excess of such maximum amount set forth in the preceding sentence,
regardless of whether one or multiple Registration Defaults exist. A
Registration Default under clause (a) above shall be cured on the date that the
Shelf Registration Statement is filed with the Commission; a Registration
Default under clause (b) above shall be cured on the date that the Shelf
Registration Statement is declared effective by the Commission; and a
Registration Default under clause (c) above shall be cured on the date of the
Shelf Registration Statement is declared effective or usable. All accrued
Liquidated Damages will be paid by the Company on each Damages Payment Date in
cash. Such payment will be made to the Holder(s) of the Global Notes (as
defined in the Indenture) by wire transfer of immediately available funds or by
federal funds check and to Holders of Transfer Restricted Securities
represented by Certificated Notes, if any, by wire transfer to the accounts
specified by them or by mailing checks to their registered addresses if no such
accounts have been specified. Following the cure of all Registration Defaults,
the accrual of Liquidated Damages will cease. For purposes of this Section 5,
Notes which have been converted into shares of Common Stock constituting
Transfer Restricted Securities shall be deemed to bear the principal amount at
which such securities were converted.
(b) Upon the occurrence of any event contemplated by Section
6(c)(2)(v) hereof and delivery of the Advice relating to such occurrence, the
Company shall be entitled to suspend the use of the Shelf Registration
Statement for three Supplement Delay Periods of up to 30 days for each such
period during which no Registration Default shall be deemed to occur under
Section 5(a)(iii). Such periods may run consecutively if a separate Advice is
delivered to Holders prior to the expiration of the preceding 30-day Supplement
Delay Period; provided, however, that such periods may not exceed an aggregate
of 45 days in any twelve-month period. The Company shall use its reasonable
best efforts to cause the use of the Shelf Registration Statement to be resumed
as soon as reasonably practicable following the commencement of a Supplement
Delay Period. A Registration Default shall be deemed to have occurred if the
use of the Shelf Registration Statement may not be resumed immediately upon the
expiration of a Supplement Delay Period permitted under this Section 5(b) and
Liquidated Damages in respect thereof shall accrue from the beginning of such
Supplement Delay Period.
(c) The parties hereto agree that the Liquidated Damages provided
for in this Section 5 constitute a reasonable estimate of the damages that may
be incurred by Holders of Transfer Restricted Securities by reason of the
failure of the Shelf Registration Statement to be filed, declared effective or
maintained effective, as the case may be, in accordance with the provisions
hereof.
6. Registration Procedures. In connection with any Shelf
Registration Statement, the following provisions shall apply:
(a) The Company shall furnish to the Initial Purchasers, the
Holders, the Managing Underwriters, if any, and their respective counsel,
not less than five Business Days prior to the filing thereof with the
Commission, a copy of any Shelf Registration Statement and each amendment
thereof, and each amendment or supplement, if any, to the Prospectus
included therein, and shall
Exh. B-5
<PAGE> 46
use its best efforts to reflect in each such document, when so filed with
the Commission, such comments as the Initial Purchasers and the Holders or
their counsel may reasonably propose.
(b) The Company shall use its best efforts to ensure that (i) any
Shelf Registration Statement and any amendment thereto and any Prospectus
forming part thereof and any amendment or supplement thereto complies in
all material respects with the Securities Act and the rules and
regulations thereunder, (ii) assuming any information provided by Holders
of Transfer Restricted Securities for inclusion in any Shelf Registration
Statement pursuant to Section 6(m) is true and correct, any Shelf
Registration Statement and any amendment or supplement thereto does not,
when it becomes effective, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) assuming
any information provided by Holders of Transfer Restricted Securities for
inclusion in any Shelf Registration Statement pursuant to Section 6(m) is
true and correct, any Prospectus forming part of any Shelf Registration
Statement, and any amendment or supplement to such Prospectus, does not
include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading.
(c) (1) The Company shall advise the Initial Purchasers, the
Holders of Transfer Restricted Securities named in the Shelf Registration
Statement and the Managing Underwriters, if any, and, if requested by the
Initial Purchasers, any such Holder or the Managing Underwriters, if any,
confirm such advice in writing, when a Shelf Registration Statement or any
amendment thereto has been filed with the Commission and when the Shelf
Registration Statement or any post-effective amendment thereto has become
effective.
(2) The Company shall advise the Initial Purchasers, the
Holders of Transfer Restricted Securities named in the Shelf Registration
Statement, the Managing Underwriters, if any, and their respective counsel
and, if requested by any such person, confirm such advice in writing:
(i) of any request by the Commission for amendments or
supplements to the Shelf Registration Statement or the Prospectus
included therein or for additional information;
(ii) of the initiation by the Commission of proceedings
relating to a stop order suspending the effectiveness of the Shelf
Registration Statement;
(iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Shelf Registration
Statement;
(iv) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the securities
included therein for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; and
(v) of the existence of any fact and the happening of any
event (including, without limitation, pending negotiations relating
to, or the consummation of, a transaction or the occurrence of any
event which would require additional disclosure of material
non-public information by the Company in the Shelf Registration
Statement as to which the Company has a bona fide business purpose
for preserving confidential or which renders the Company unable
Exh. B-6
<PAGE> 47
to comply with Commission requirements) that, in the opinion of the
Company, makes untrue any statement of a material fact made in its
Shelf Registration Statement, the Prospectus or any amendment or
supplement thereto or any document incorporated by reference therein
or requires the making of any changes in the Shelf Registration
Statement or the Prospectus so that, as of such date, the statements
therein are not misleading and do not omit to state a material fact
required to be stated therein or necessary to make the statements
therein (in the case of the Prospectus, in light of the circumstances
under which they were made) not misleading.
Such Advice may be accompanied by an instruction to suspend the use of the
Prospectus until the requisite changes have been made.
(d) The Company shall use its best efforts to obtain the withdrawal
of any order suspending the effectiveness of the Shelf Registration
Statement, or the lifting of any suspension of the qualification (or
exemption from qualification) of the Transfer Restricted Securities for
sale in any jurisdiction, at the earliest possible time.
(e) The Company shall furnish to each selling Holder named in the
Shelf Registration Statement and each underwriter, if any, without charge,
at least one conformed copy of such Shelf Registration Statement and any
post-effective amendment thereto, including financial statements and
schedules. Upon written request, the Company shall furnish to each
selling Holder named in the Shelf Registration Statement and each
underwriter, if any, without charge, one copy of all exhibits to such
Shelf Registration Statement (including those incorporated by reference).
(f) The Company shall, during the Shelf Registration Period, deliver
to each Holder of Transfer Restricted Securities named in the Shelf
Registration Statement and each underwriter, if any, without charge, as
many copies of the Prospectus (including each preliminary Prospectus)
included in such Shelf Registration Statement and any amendment or
supplement thereto as such Holder or underwriters may reasonably request;
and, subject to any notice by the Company in accordance with Section 7(b),
the Company consents to the use of the Prospectus or any amendment or
supplement thereto by each of the selling Holders and such underwriters
for the purposes of offering and resale of the Transfer Restricted
Securities covered by the Prospectus or any amendment or supplement
thereto.
(g) Prior to the offering of Transfer Restricted Securities pursuant
to the Shelf Registration Statement, the Company shall use its best
efforts to register or qualify or cooperate with the Holders of Transfer
Restricted Securities named therein, the underwriters, if any, and their
respective counsel in connection with the registration or qualification
(or exemption from such registration or qualification) of such Transfer
Restricted Securities for offer and sale under the securities or blue sky
laws of such jurisdictions of the United States as any such Holders or
underwriters reasonably request in writing; keep each such registration or
qualification (or exemption therefrom) effective during the period the
Shelf Registration Statement is required to be kept effective and do any
and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Transfer Restricted Securities
covered by the Shelf Registration Statement; provided, however, that the
Company will not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action which
would subject it to general service of process or to taxation in any such
jurisdiction where it is not then so subject.
Exh. B-7
<PAGE> 48
(h) The Company shall cooperate with the Holders of Transfer
Restricted Securities and underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Transfer Restricted
Securities to be sold pursuant to the Shelf Registration Statement, free
of any restrictive legends and in such denominations and registered in
such names as such Holders or underwriters may request in writing at least
two Business Days prior to sales of securities pursuant to such Shelf
Registration Statement.
(i) Upon the occurrence of any event contemplated by Section
6(c)(2)(v) hereof, subject to Section 5(b), the Company shall promptly
prepare a post-effective amendment to the Shelf Registration Statement or
an amendment or supplement to the related Prospectus or any document
incorporated therein by reference or file any other required document so
that as thereafter delivered to purchasers of the Transfer Restricted
Securities covered thereby, the Prospectus will not include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(j) Not later than the effective date of any such Shelf Registration
Statement hereunder, the Company shall cause to be provided CUSIP numbers
for the Transfer Restricted Securities registered under such Shelf
Registration Statement, and provide the Trustee with printed certificates
for such Transfer Restricted Securities where necessary, in a form
eligible for deposit with The Depository Trust Company.
(k) The Company shall use its best efforts to comply with all
applicable rules and regulations of the Commission and shall make
generally available to its security holders in a regular filing on Form
10-Q or Form 10-K an earnings statement satisfying the provisions of Rule
158 (which need not be audited) for the twelve-month period commencing
after effectiveness of the Shelf Registration Statement.
(l) The Company shall cause the Indenture to be qualified under the
Trust Indenture Act in a timely manner.
(m) The Company may require each Holder of Transfer Restricted
Securities to be sold pursuant to the Shelf Registration Statement to
furnish to the Company within 10 Business Days after written request for
such information has been made by the Company such customary information
regarding the Holder and the distribution of such securities as the
Company may from time to time reasonably require for inclusion in such
Shelf Registration Statement and such other information as may be
necessary or advisable in the reasonable opinion of the Company and its
counsel, in connection with such Shelf Registration Statement (and, with
respect to any Holder not previously identified by the Company in an
effective Shelf Registration Statement, such Holder shall notify the
Company in writing, not less than 5 Business Days prior to any sale by
such Holder under the Shelf Registration Statement of its name and the
number of Transfer Restricted Securities to be included in the Shelf
Registration Statement). No Holder of Transfer Restricted Securities
shall be entitled to the benefit of any Liquidated Damages under Section 5
of this Agreement or be entitled to use the Prospectus unless and until
such Holder shall have furnished the information required by this Section
6(m) and all such other information required to be disclosed in order to
make such information previously furnished to the Company by such Holder
not materially misleading.
Exh. B-8
<PAGE> 49
(n) The Company shall, if requested, promptly incorporate in the
Shelf Registration Statement or Prospectus, if necessary, pursuant to a
supplement or post-effective amendment to the Shelf Registration
Statement, such information as the Managing Underwriters, if any, or the
Majority Holders reasonably request to have included therein and shall
make all required filings of such Prospectus supplement or post-effective
amendment as soon as practicable after the Company is notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment.
(o) The Company shall enter into such agreements on terms reasonably
acceptable to the Company (including underwriting agreements) in form,
scope and substance as are customary in underwritten offerings, and take
all other reasonable actions necessary to facilitate the registration or
the disposition of the Transfer Restricted Securities included in the
Shelf Registration Statement.
(p) The Company shall (i) make reasonably available at reasonable
times for inspection by the Holders of Transfer Restricted Securities to
be registered thereunder, any underwriter participating in any disposition
pursuant to such Shelf Registration Statement, and any attorney,
accountant or other agent retained by the Holders or such underwriters, at
the office where normally kept during normal business hours, all financial
and other records, pertinent corporate documents and properties of the
Company and its subsidiaries, and cause the Company's officers, directors
and employees to supply all relevant information reasonably requested by
the Holders, underwriters, attorney, accountant or other agent in
connection with the Shelf Registration Statement as is customary for
similar due diligence examinations, provided, however, that such persons
shall first agree in writing with the Company that any information that is
reasonably and in good faith designated by the Company in writing as
confidential at the time of delivery of such information shall be kept
confidential by such persons; (ii) obtain opinions of counsel to the
Company and updates thereof (which counsel, if different from counsel to
the Company referred to in the Purchase Agreement, shall be reasonably
satisfactory to the Majority Holders of Transfer Restricted Securities to
be registered thereunder, the underwriters, if any, and their respective
counsel) addressed to each selling Holder covering such matters in form,
scope and substance as are customary in underwritten offerings; (iii)
obtain "cold comfort" letters (or, in the case of any person that does not
satisfy the conditions for receipt of a "cold comfort" letter specified in
Statement on Auditing Standards No. 72, an "agreed-upon procedures
letter") and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other independent
certified public accountants of any subsidiary of the Company or of any
business acquired by the Company for which financial statements and
financial data are, or are required to be, included in the Registration
Statement), addressed where reasonably practicable to each selling Holder
of Transfer Restricted Securities registered thereunder, and the
underwriters, if any, in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with primary
underwritten offerings; and (iv) deliver such documents and certificates
as may be reasonably requested by the Majority Holders and the Managing
Underwriters, if any, including those to evidence compliance with Section
6(i). The foregoing actions set forth in clauses (ii), (iii) and (iv) of
this Section 6(p) shall be performed at (A) the effectiveness of such
Shelf Registration Statement and each post-effective amendment thereto and
(B) each closing under any underwriting or similar agreement as and to the
extent required thereunder.
(q) The Company shall (i) list all Common Stock covered by such
Shelf Registration Statement on any securities exchange on which the
Common Stock is then listed or (ii) authorize for quotation
Exh. B-9
<PAGE> 50
on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") or the National Market System of NASDAQ all Common Stock
covered by such Shelf Registration Statement if the Common Stock is then
so authorized for quotation.
7. Holders' Agreements. Each Holder of Transfer Restricted
Securities, by the acquisition of such Transfer Restricted Securities agrees:
(a) To furnish the information required to be furnished pursuant to
Section 6(m) hereof within the time periods set forth therein. The
Company may exclude from any Shelf Registration Statement the Transfer
Restricted Securities of any Holder who does not furnish such information.
Each Holder of Transfer Restricted Securities shall promptly furnish to
the Company all such information required to be disclosed in order to make
the information previously furnished to the Company by such Holder not
materially misleading.
(b) That upon receipt of a notice of the commencement of a
Supplement Delay Period, it will keep the fact of such notice
confidential, forthwith discontinue disposition of its Transfer Restricted
Securities, as the case may be, pursuant to the Shelf Registration
Statement, and will not deliver any Prospectus forming a part thereof
until receipt of the amended or supplemented Shelf Registration Statement
or Prospectus, as applicable, as contemplated by Section 6(i) hereof, or
until receipt of the Advice.
(c) If so directed by the Company in a notice of the commencement of
a Supplement Delay Period, each Holder of Transfer Restricted Securities,
as the case may be, will deliver to the Company (at the Company's expense)
all copies, other than permanent file copies then in such Holder's
possession, of the Prospectus covering the Transfer Restricted Securities,
as the case may be.
(d) Sales of such Transfer Restricted Securities pursuant to a Shelf
Registration Statement shall only be made in the manner set forth in such
currently effective Shelf Registration Statement.
8. Registration Expenses. The Company shall bear all expenses
incurred in connection with the performance of its obligations under Sections
2, 3, 5 and 6 hereof and will reimburse the Holders for the reasonable fees and
disbursements of one firm or counsel designated by the Majority Holders to act
as counsel for the Holders in connection therewith. Notwithstanding the
foregoing or anything in this Agreement to the contrary, each Holder shall pay
all underwriting discounts and commissions of any underwriters with respect to
any Transfer Restricted Securities sold by it.
9. Indemnification and Contribution.
(a) In connection with the Shelf Registration Statement, the Company
will indemnify and hold harmless each Holder of Transfer Restricted Securities
covered thereby, the directors, officers, employees and agents of each such
Holder and each person who controls any such Holder within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act from
and against any and all losses, claims, liabilities, expenses and damages,
joint or several (including any and all investigative, legal and other expenses
reasonably incurred in connection with, and any amount paid in settlement of,
any action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Securities Act, the Exchange Act or other
federal, state or foreign statutory law or regulation,
Exh. B-10
<PAGE> 51
at common law or otherwise, insofar as such losses, claims, liabilities,
expenses and damages arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the Shelf Registration
Statement as originally filed or in any amendment thereof, or in any
preliminary Prospectus or Prospectus, or in any amendment thereof or supplement
thereto, or the omission or alleged omission to state in such documents a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, that (i) the Company will not be liable to
the extent that any such loss, claim, liability expense or damage arises out of
or is based on any such untrue statement or omission or alleged untrue
statement or omission made therein in reliance on and in conformity with
information relating to any Holder of Transfer Restricted Securities furnished
in writing to the Company by any such Holder expressly for inclusion therein
and (ii) the Company will not be liable to any Holder of Transfer Restricted
Securities under the indemnity agreement in this Section 9(a) with respect to
any preliminary Prospectus or a Prospectus that is subsequently amended or
supplemented to the extent that any such loss, claim, liability, expense or
damage of such Holder results solely from an untrue statement of a material
fact contained in, or the omission of a material fact from, the preliminary
Prospectus or Prospectus which untrue statement or omission was completely
corrected in the final Prospectus or the Prospectus as amended or supplemented,
as the case may be, if the Company shall sustain the burden of proving that
such Holder sold Transfer Restricted Securities to the person alleging such
loss, claim, liability, expense or damage without sending or giving, at or
prior to the written confirmation of such sale, a copy of the final Prospectus
or the Prospectus as amended or supplemented, as the case may be, if the
Company had previously furnished copies thereof to such Holder within a
reasonable amount of time prior to such sale or such confirmation. This
indemnity agreement will be in addition to any liability which the Company
might otherwise have.
The Company also agrees to indemnify or contribute to the losses,
claims, liabilities, expenses and damages, joint or several (including any and
all investigative, legal and other expenses reasonably incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claim asserted) of any underwriters of Transfer Restricted Securities
registered under the Shelf Registration Statement, their officers and directors
and each person who controls such underwriters on substantially the same basis
as that of the indemnification of the selling Holders provided in this Section
9(a) and shall, if requested by any Holder, enter into a customary underwriting
agreement reflecting such agreement, as provided in Section 6(o) hereof.
(b) Each Holder of Transfer Restricted Securities covered by the
Shelf Registration Statement will severally indemnify and hold harmless the
Company, each person who controls the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, each
director of the Company and each officer of the Company to the same extent as
the foregoing indemnity from the Company to each such Holder, but only insofar
as losses, claims, liabilities, expenses or damages arise out of or are based
on any untrue statement or omission or alleged untrue statement or omission
made in reliance on and in conformity with information relating to such Holder
furnished to the Company by or on behalf of such Holder expressly for use in
the Shelf Registration Statement as originally filed or in any amendment
thereof, or in any preliminary Prospectus or Prospectus, or in any amendment
thereof or supplement thereto. This indemnity agreement will be in addition to
any liability that such Holder might otherwise have.
(c) Any party that proposes to assert the right to be indemnified
under this Section 9 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 9, notify each
Exh. B-11
<PAGE> 52
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party (i) will
not relieve it from any liability that it may have to any indemnified party
under the foregoing provisions of this Section 9 unless, and only to the extent
that, it did not otherwise learn of such action and such omission results in
the forfeiture of substantive rights or defenses by the indemnifying party and
(ii) will not, in any event relieve the indemnifying party from any obligations
to any indemnified party other than the indemnification obligations in Sections
9(a) and 9(b) hereof. If any such action is brought against any indemnified
party and it notifies the indemnifying party of its commencement, the
indemnifying party will be entitled to participate in and, to the extent that
it elects by delivering written notice to the indemnified party promptly after
receiving notice of the commencement of the action from the indemnified party,
jointly with any other indemnifying party similarly notified, to assume the
defense of the action, with counsel satisfactory to the indemnified party, and
after notice from the indemnifying party to the indemnified party of its
election to assume the defense, the indemnifying party will not be liable to
the indemnified party for any legal or other expenses except as provided below
and except for the reasonable costs of investigation subsequently incurred by
the indemnified party in connection with the defense. The indemnified party
will have the right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of such
indemnified party unless (1) the employment of counsel by the indemnified party
has been authorized in writing by the indemnifying party, (2) the indemnified
party has reasonably concluded (based on advice of counsel to the indemnified
party) that there may be legal defense available to it or other available
indemnified parties that are different from or in addition to those available
to the indemnifying party, (3) a conflict or potential conflict exists (based
on advice of counsel to the indemnified party) between the indemnified party
and the indemnifying party (in which case the indemnifying party will not have
the right to direct the defense of such action on behalf of the indemnified
party) or (4) the indemnifying party has not in fact employed counsel to assume
the defense of such action within a reasonable time after receiving notice of
the commencement of the action, in each of which cases the reasonable fees,
disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or parties. Such
firm shall be designated in writing by the Majority Holders in the case of
parties indemnified pursuant to Section 9(a) and by the Company, in the case of
parties indemnified pursuant to Section 9(b). All such fees, disbursements and
other charges will be reimbursed by the indemnifying party promptly as they are
incurred. No indemnifying party shall, without the prior written consent of
each indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding relating to
the matters contemplated by this Section 9 (whether or not any indemnified
party is a party thereto), unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising or that may arise out of such claim, action or proceeding.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 9 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company or the Holders of
Transfer Restricted Securities, or insufficient, the Company and such Holders
will contribute to the total losses, claims, liabilities, expenses and damages
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted, but after deducting any contribution received
by the Company from persons other than such Holders, such as persons who
control the Company within the meaning of the Securities Act or the
Exh. B-12
<PAGE> 53
Exchange Act and officers and directors of the Company, who also may be liable
for contribution) (collectively, "Losses") to which the Company and any one or
more of such Holders of Transfer Restricted Securities may be subject in such
proportion as shall be appropriate to reflect the relative benefits received by
the Company on the one hand and such Holders on the other. The relative
benefits received by the Company shall be deemed to be equal to the sum of (x)
the total net proceeds from the Initial Placement (before deducting expenses)
as set forth on the cover page of the Offering Memorandum and (y) the total
amount of Liquidated Damages, if any, which the Company was not required to pay
as a result of registering the securities covered by the Shelf Registration
Statement which resulted in such Losses. Benefits received by the Initial
Purchasers shall be deemed to be equal to the total purchase discounts and
commissions as set forth on the cover page of the Offering Memorandum, and
benefits received by any other Holders shall be deemed to be equal to the value
of receiving Notes or Common Stock issuable upon conversion thereof, as
applicable, registered under the Securities Act. Benefits received by any
underwriter shall be deemed to be equal to the total underwriting discounts and
commissions, as set forth on the cover page of the Prospectus forming a part of
the Shelf Registration Statement which resulted in such Losses. If, but only
if, the allocation provided by the foregoing sentence is not permitted by
applicable law, the allocation of contribution shall be made in such proportion
as is appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company, on the one hand,
and the Holders, on the other, with respect to the statements or omissions
which resulted in such loss, claim, liability, expense or damage, or action in
respect thereof, as well as any other relevant equitable considerations with
respect to such offering. Such relative fault shall be determined by reference
to whether the untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Holders, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Holders agree that it would
not be just and equitable if contributions pursuant to this Section 9(d) were
to be determined by pro rata allocation (even if the Holders were treated as
one entity for such purpose) or by any other method of allocation which does
not take into account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of the loss, claim,
liability, expense or damage, or action in respect thereof, referred to above
in this Section 9(d) shall be deemed to include, for purpose of this Section
9(d), any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9(d), in no case shall any
Initial Purchaser or any subsequent Holder of any Transfer Restricted
Securities be responsible, in the aggregate, for any amount in excess of the
purchase discount or commission applicable to such Notes, as set forth on the
cover page of the Offering Memorandum, nor shall any underwriter be responsible
for any amount in excess of the underwriting discount or commission applicable
to the securities purchased by such underwriter under the Shelf Registration
Statement which resulted in such Losses. No person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Holders' obligations to contribute as
provided in this Section 9(d) are several and not joint. For purposes of this
Section 9(d), any person who controls the Company or a Holder within the
meaning of the Securities Act will have the same rights to contribution as that
party, and each officer or director of the Company or such Holder will have the
same rights to contribution, as the Company or such Holder, as applicable,
subject in each case to the provisions hereof. Any party entitled to
contribution promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 9(d), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may
Exh. B-13
<PAGE> 54
be sought from any other obligation it or they may have under this Section
9(d). No party will be liable for contribution with respect to any action or
claim settled without its written consent (which consent will not be
unreasonably withheld or delayed).
(e) The indemnity and contribution agreements contained in this
Section 9 will remain in full force and effect, regardless of any investigation
made by or on behalf of any Holder or the Company or any of the officers,
directors or controlling persons referred to in this Section 9, and will
survive the sale by a Holder of securities covered by the Shelf Registration
Statement.
10. Rules 144 and 144A. The Company shall use its best efforts to
file the reports required to be filed by it under the Securities Act and the
Exchange Act in a timely manner and, if at any time it is not required to file
such reports but in the past had been required to or did file such reports, it
will, upon the request of any holder of Transfer Restricted Securities, make
available other information as reasonably required by, and so long as necessary
to permit, sales of its Transfer Restricted Securities pursuant to Rule 144 and
Rule 144A. Notwithstanding the foregoing, nothing in this Section 10 shall be
deemed to require the Company to register any of its securities pursuant to the
Exchange Act.
11. Miscellaneous.
(a) Remedies. In the event of a breach by the Company of its
obligations under this Agreement, each Holder, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Agreement. The
Company agrees that monetary damages (including the Liquidated Damages
contemplated hereby) would not be adequate compensation for any loss incurred
by reason of a breach by it of the provisions of this Agreement and hereby
agrees to waive the defense in any action for specific performance that a
remedy at law would be adequate. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law; provided, that monetary
damages relating solely to a Registration Default shall be limited to the
amount of Liquidated Damages calculated in accordance with Section 5 hereof.
(b) No Inconsistent Agreements. The Company has not, as of the date
hereof, entered into, nor shall it, on or after the date hereof, enter into,
any agreement with respect to its securities that is inconsistent with the
rights granted to the Holders herein or otherwise conflicts with the provisions
hereof.
(c) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, qualified,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given, unless the Company has obtained the written
consent of the Holders of at least a majority of the then outstanding aggregate
principal amount of Transfer Restricted Securities; provided that, with respect
to any matter that directly or indirectly affects the rights of any Initial
Purchaser hereunder, the Company shall obtain the written consent of each such
Initial Purchaser against which such amendment, qualification, supplement,
waiver or consent is to be effective. Notwithstanding the foregoing (except
the foregoing proviso), a waiver or consent to departure from the provisions
hereof with respect to a matter that relates exclusively to the rights of
Holders whose securities are being sold pursuant to a Shelf Registration
Statement and that does not directly or indirectly affect the rights of other
Holders may be given by the Majority Holders, determined on the basis of Notes
being sold rather than registered under such Shelf Registration Statement.
Exh. B-14
<PAGE> 55
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered or
certified first-class mail, telex, telecopier, or air courier guaranteeing
overnight delivery:
(1) if to a Holder, at the most current address given by such
Holder to the Company in accordance with the provisions of this
Section 11(d), which address initially is, with respect to each
Holder, the address of such Holder maintained by the registrar under
the Indenture, with a copy in like manner to PaineWebber
Incorporated;
(2) if to the Initial Purchasers, initially at the address set
forth in the Purchase Agreement; and
(3) if to the Company, initially at its address set forth in
the Purchase Agreement.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next Business Day, if timely delivered to an air courier guaranteeing overnight
delivery.
The Initial Purchasers or the Company by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
(e) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties hereto, including, without the need for an express assignment or any
consent by the Company thereto, subsequent Holders of Transfer Restricted
Securities. The Company hereby agrees to extend the benefits of this Agreement
to any Holder of Transfer Restricted Securities and any such Holder may
specifically enforce the provisions of this Agreement as if an original party
hereto. The Company may not assign its rights or obligations hereunder without
the prior written consent of each Holder of Transfer Restricted Securities.
(f) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof. All
references made in this Agreement to "Section" and "paragraph" refer to such
Section or paragraph of this Agreement, unless expressly stated otherwise.
(h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE (WITHOUT
REFERENCE TO THE CONFLICT OF LAW RULES THEREOF).
(i) Submission to Jurisdiction. The Company hereby irrevocably
submits to the non-exclusive jurisdiction of any New York state court sitting
in the Borough of Manhattan in the City of New York or any federal court
sitting in the Borough of Manhattan in the City of New York in respect of any
suit, action or proceeding arising out of or relating to this Agreement, and
irrevocably accepts for itself and
Exh. B-15
<PAGE> 56
in respect of its property, generally and unconditionally, jurisdiction of the
aforesaid courts. The Company irrevocably waives, to the fullest extent it may
effectively do so under applicable law any objection that it may now or
hereafter have to the laying of the venue of any such suit, action or
proceeding brought in any such court and any claim that any such suit, action
or proceeding brought in any such court has been brought in an inconvenient
forum.
(j) Severability. In the event that any one of more of the
provisions contained herein, or the application thereof in any circumstances,
is held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in any way impaired
or affected thereby, it being intended that all of the rights and privileges of
the parties shall be enforceable to the fullest extent permitted by law.
(k) Attorneys' Fees. In any action or proceeding brought to enforce
any provision of this Agreement, or where any provision hereof is validly
asserted as a defense, the prevailing party, as determined by the court, shall
be entitled to recover its reasonable attorneys' fees in addition to any other
available remedy.
(l) Approval of Holders. Whenever the consent or approval of
holders of a specified percentage of Transfer Restricted Securities is required
hereunder, Transfer Restricted Securities held by the Company or its affiliates
(as such term is defined in Rule 405 under the Securities Act) shall not be
counted in determining whether such consent or approval was given by the
holders of such required percentage. For purposes of calculating the consent
or approval of holders of a majority of the then outstanding aggregate
principal amount of Transfer Restricted Securities, Transfer Restricted
Securities which have been converted into shares of Common Stock shall be
deemed to bear the principal amount at which such securities were converted.
(m) Entire Agreement. This Agreement is intended by the parties as
a final expression of their agreement relating to the registration under the
Securities Act of the Transfer Restricted Securities and is intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein and the
registration rights granted by the Company with respect to the Notes sold
pursuant to the Purchase Agreement and the Common Stock issuable upon
conversion of the Notes. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein, with respect to
the registration rights granted by the Company with respect to the Notes or the
Common Stock issuable upon conversion of the Notes. This Agreement supersedes
all prior agreements and understandings among the parties with respect to such
registration rights.
(n) Further Assurances. Each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all appropriate action, do or
cause to be done all things reasonably necessary, proper or advisable under
applicable law, and execute and deliver such documents and other papers, as may
be required to carry out the provisions of this Agreement and the other
documents contemplated hereby and consummate and make effective the
transactions contemplated hereby.
[signature page follows]
Exh. B-16
<PAGE> 57
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
MIDCOM COMMUNICATIONS INC.
By:
---------------------------------
Name:
Title:
PaineWebber Incorporated
By:
-------------------------------
Name:
Title:
Wheat, First Securities, Inc.
By:
-------------------------------
Name:
Title:
S-1
<PAGE> 58
EXHIBIT C
FORM OF OPINION OF HELLER EHRMAN WHITE & MCAULIFFE
TO BE DELIVERED PURSUANT TO SECTION 5(e)(i)
(i) The Company has been duly incorporated and is validly existing
as a corporation under the laws of the State of Washington.
(ii) The Company has all requisite corporate power and corporate
authority to enter into and perform its obligations under the Purchase
Agreement, the Indenture, the Securities and the Registration Rights Agreement
and to own its properties and to carry on its business as described in the
Offering Memorandum.
(iii) The Company is duly qualified to do business as a foreign
corporation and in good standing in all states in the United States (other than
Washington).
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Offering Memorandum under the caption
"Capitalization" (except for subsequent issuances, if any, pursuant to the
Purchase Agreement or pursuant to reservations, agreements, employee benefit
plans or the exercise of convertible securities or options referred to in the
Offering Memorandum); the shares of issued and outstanding capital stock of the
Company have been duly authorized and validly issued and are fully paid and
non-assessable; and none of the outstanding shares of capital stock of the
Company was issued in violation of the preemptive rights of any securityholder
of the Company arising pursuant to the Company's Amended and Restated Articles
of Incorporation, the Company's bylaws, any agreement or other instrument
identified on Schedule B, or the Washington Business Corporation Act.
(v) Each of PacNet Inc. ("PacNet"), AdVal, Inc. ("AdVal"),
Cel-Tech International Corp. ("Cel-Tech") and Advanced Network Design ("AND")
has been duly incorporated and is validly existing as a corporation under the
laws of the jurisdiction of its incorporation, has all requisite corporate
power and corporate authority to own its properties and to carry on its
business as described in the Offering Memorandum. PacNet is duly qualified to
do business as a foreign corporation and is in good standing in the states of
Arizona, California, Colorado, Hawaii, Idaho, Illinois, Nevada, New Mexico,
Oregon, Utah and Wyoming. AdVal is duly qualified to do business as a foreign
corporation and is in good standing in the states of California, Colorado,
Florida, Illinois, Maryland, Minnesota, New York, Oregon, Tennessee and
Washington. Cel-Tech is duly qualified to do business as a foreign corporation
and is in good standing in the states of Colorado, Florida, Minnesota, Oregon
and Utah. All of the issued and outstanding capital stock of PacNet, AdVal,
Cel-Tech and AND has been duly authorized and validly issued, is fully paid and
non-assessable and, to our knowledge, is owned by the Company, directly or
through subsidiaries, free and clear of any adverse claim except as described
in the Offering Memorandum.
(vi) The Purchase Agreement has been duly authorized by all
necessary corporate action on the part of the Company, and has been duly
executed and delivered by the Company.
Exh. C-1
<PAGE> 59
(vii) The Registration Rights Agreement has been duly authorized by
all necessary corporate action on the part of the Company, and has been duly
executed and delivered by the Company and is a valid and binding obligation of
the Company, enforceable in accordance with its terms, except as rights to
indemnity and contribution thereunder may be limited by applicable law and
subject, as to enforcement, to (i) bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer and other similar laws of general applicability
affecting the enforcement of creditors' rights and (ii) to general principles
of equity, regardless of whether enforcement is considered in a proceeding in
equity or at law.
(viii) The Indenture has been duly authorized by all necessary
corporate action on the part of the Company, and has been duly executed and
delivered by the Company and (assuming the due authorization, execution and
delivery thereof by the Trustee) is a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, subject,
as to enforcement, to (i) bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and other similar laws of general applicability affecting
the enforcement of creditors' rights and (ii) to general principles of equity,
regardless of whether enforcement is considered in a proceeding in equity or at
law.
(ix) The Securities are in the form contemplated by the Indenture,
have been duly authorized by the Company and, when executed by the Company and
authenticated by the Trustee in the manner provided in the Indenture (assuming
the due authorization, execution nd delivery of the Indenture by the Trustee)
and delivered against payment of the purchase price therefor, the Securities
will be entitled to the benefits of the Indenture and will constitute valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject, as to enforcement, to (i) bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and other similar
laws of general applicability affecting the enforcement of creditors' rights
and (ii) to general principles of equity, regardless of whether enforcement is
considered in a proceeding in equity or at law.
(x) The Indenture and the Securities conform in all material
respects to the descriptions thereof contained in the Offering Memorandum.
(xi) The shares of Common Stock issuable upon conversion of the
Securities have been duly authorized and reserved for issuance upon such
conversion by all necessary corporate action of the Company; such shares, when
issued upon such conversion, will be duly and validly issued and fully paid and
non-assessable and free of any preemptive rights pursuant to the Company's
Amended and Restated Articles of Incorporation and Bylaws, any agreement or
instrument identified on Schedule B or the Washington Business Corporation Act;
no holder of such Common Stock is or will be subject to personal liability by
reason of being such a holder.
(xii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable requirements of the
Washington Business Corporation Act, with any applicable requirements of the
Company's Amended and Restated Articles of Incorporation and Bylaws.
(xiii) We have no knowledge of any action, suit, proceeding, inquiry
or investigation to which the Company or any of its subsidiaries is a party, or
to which the property of the Company or any of its subsidiaries is subject,
which is pending or threatened in writing other than those set forth in
Schedule A attached hereto.
Exh. C-2
<PAGE> 60
(xiv) The information in the Offering Memorandum under
"Business--Legal Proceedings," "Certain Transactions," "Description of Capital
Stock," "Description of Certain Indebtedness," "Shares Eligible For Future
Sale," and "Certain Federal Income Tax Consequences," insofar as such
statements constitute descriptions of law or legal conclusions, have been
reviewed by us and are accurate in all material respects.
(xv) To our knowledge, neither the Company nor any of its
subsidiaries is in violation of its respective articles of incorporation or
bylaws.
(xvi) No governmental consents, approvals, authorizations,
registrations, declarations or filings (other than such as may be required
under federal securities laws or the securities or blue sky laws of the various
states, as to which we express no opinion) are required, on behalf of the
Company, for the execution and delivery of the Purchase Agreement, the
Registration Rights Agreement and the Indenture or for the offering, issuance
or sale of the Securities to the Initial Purchasers and the resale of the
Securities by the Initial Purchasers in accordance with the Purchase Agreement
or for the issuance of shares of Common Stock upon conversion of the Securities
pursuant to the terms of the Indenture.
(xvii) Assuming the accuracy of the representations and warranties of
the Company contained in Section 3 of the Purchase Agreement, the adherence to
the covenants of the Company as contained in Section 4 of the Purchase
Agreement, the accuracy of the representations of the Initial Purchasers in
Section 8 of the Purchase Agreement and the adherence to the covenants of the
Initial Purchasers contained in Section 8 of the Purchase Agreement, the
accuracy of the representations of any Subsequent Purchaser that is an
Accredited Investor contained in the Transferee Letter of Representations
attached to the Offering Memorandum as Annex A, and the offer, sale and
delivery of the Notes to the Initial Purchasers and to each Subsequent
Purchaser in the manner contemplated by the Purchase Agreement and the Offering
Memorandum, it is not necessary to register the Securities under the Securities
Act or to qualify the Indenture under the Trust Indenture Act.
(xviii) The execution, delivery and performance of the Purchase
Agreement, the Indenture, the Securities and the Registration Rights Agreement
and the consummation of the transactions contemplated by the Purchase Agreement
and the Registration Rights Agreement and compliance by the Company with its
obligations under the Purchase Agreement, the Indenture, the Securities and the
Registration Rights Agreement will not (i) result in any violation of the
provisions of the articles of incorporation or bylaws of the Company or any
subsidiary thereof, (ii) violate any applicable laws, regulations, judgments or
court decrees known to us to be applicable to the Company or any subsidiary
thereof or any of their respective properties, assets or operations, or (iii)
conflict with or constitute a breach of any of the terms or provisions of, or
default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any subsidiary
thereof pursuant to, any material contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or any other agreement or instrument of
the Company or any subsidiary thereof identified on Schedule B attached hereto.
(xix) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
Investment Company Act.
Exh. C-3
<PAGE> 61
(xx) To our knowledge, except as set forth in the Offering
Memorandum, no holder of any security of the Company has any right to require
registration of shares of Common Stock or any other security of the Company.
In connection with the preparation of the Offering Memorandum, we
advised the Company as to the requirements of the Securities Act and the
applicable rules and regulations promulgated thereunder and rendered other
legal advice and assistance in the course of preparation of the Offering
Memorandum, and we also participated in conferences with representatives of the
Initial Purchasers and the Company, counsel to the Initial Purchasers, and the
Company's accountants, at which the contents of the Offering Memorandum and
related matters were discussed and reviewed and, although we have not
independently verified and are not passing upon, and assume no responsibility
for the accuracy, completeness or fairness of the statements contained in the
Offering Memorandum, on the basis of the information which was developed in the
course of the performance of such services and other information developed in
the course of our representation of the Company, nothing has come to our
attention that would lead us to believe that the Offering Memorandum (except
for financial statements and schedules and other financial data included or
incorporated by reference therein as to which we express no belief), as of the
date of the Offering Memorandum and as of the date hereof, contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
[In rendering such opinion, such counsel may rely, as to all matters
governed by the laws of jurisdictions other than the law of the State of
Washington and the federal laws of the United States upon the opinions of
counsel satisfactory to the Initial Purchasers. In addition, such counsel may
rely, as to matters of fact (but not as to legal conclusions), to the extent
they deem proper, on certificates of responsible officers of the Company and
public officials. The contents of the schedules referred to in such counsel's
opinion shall be in form and content reasonably satisfactory to counsel for the
Initial Purchasers. Such opinion shall not state that it is to be governed or
qualified by, or that it is otherwise subject to, any treatise, written policy
or other document relating to legal opinions, including, without limitation,
the Legal Opinion Accord of the ABA Section of Business Law (1991).]
Exh. C-4
<PAGE> 62
EXHIBIT D
FORM OF OPINION OF WINTHROP, STIMSON, PUTNAM & ROBERTS
TO BE DELIVERED PURSUANT TO SECTION 5(e)(ii)
(i) The Registration Rights Agreement is a valid and binding
obligation of the Company, enforceable in accordance with its terms, except as
rights to indemnity and contribution thereunder may be limited by applicable
law and subject to bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and other similar laws of general applicability affecting
creditors' rights and to general principles of equity, regardless of whether
enforcement is considered in a proceeding in equity or at law.
(ii) The Indenture (assuming the due authorization, execution and
delivery thereof by the Trustee) is a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, subject
to bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
other similar laws of general applicability affecting creditors' rights and to
general principles of equity, regardless of whether enforcement is considered
in a proceeding in equity or at law.
(iii) The Securities are in the form contemplated by the Indenture
and, when executed by the Company and authenticated by the Trustee in the
manner provided in the Indenture (assuming the due authorization, execution nd
delivery of the Indenture by the Trustee) and delivered against payment of the
purchase price therefor, the Securities will be entitled to the benefits of the
Indenture and will constitute valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms, subject to
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
other similar laws of general applicability affecting creditors' rights and to
general principles of equity, regardless of whether enforcement is considered
in a proceeding in equity or at law.
[Such counsel shall render the foregoing opinions under the laws of
the State of New York and the federal laws of the United States. In addition,
such counsel may rely, (i) as to matters governed by the laws of the State of
Washington, on an opinion of Heller Ehrman White & McAuliffe and (ii) as to
matters of fact (but not as to legal conclusions), to the extent they deem
proper, on certificates of responsible officers of the Company and public
officials. Such opinion shall not state that it is to be governed or qualified
by, or that it is otherwise subject to, any treatise, written policy or other
document relating to legal opinions, including, without limitation, the Legal
Opinion Accord of the ABA Section of Business Law (1991).]
Exh. D-1
<PAGE> 63
EXHIBIT E
FORM OF OPINION OF PAUL SENIO
TO BE DELIVERED PURSUANT TO SECTION 5(e)(iii)
(i) To the best of my knowledge, there is no legal or governmental
proceeding pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of their respective property is subject
which is required to be described in the Offering Memorandum and is not so
described, or of any contract or other document which is required to be
described in the Offering Memorandum or is required to be incorporated by
reference into the Offering Memorandum which is not so incorporated by
reference; and
(ii) The Company and each of its subsidiaries has such
certificates, permits, licenses, franchises and authorizations of governmental
or regulatory authorities as are necessary to own, lease and operate its
respective properties and to conduct its business in the manner described in
the Offering Memorandum except where the failure to have such certificates,
permits, licenses, franchises and authorizations would not result in a Material
Adverse Effect.
(iii) To the best of my knowledge, no default by the Company or any
of its subsidiaries exists in the due performance or observance of any material
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other agreement or
instrument that is described or referred to in the Offering Memorandum or
incorporated by reference therein, except as described in the Offering
Memorandum and except where such default would not result in a Material Adverse
Effect.
(iv) All descriptions in the Offering Memorandum of contracts and
other documents to which the Company or any of its subsidiaries is a party are
accurate in all material respects.
(v) To the best of my knowledge, except as set forth in the
Offering Memorandum, no holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security of the
Company.
I have participated in conferences with the representatives of the
Initial Purchasers and the Company, counsel to the Initial Purchasers, counsel
to the Company and the Company's accountants at which the contents of the
Offering Memorandum and related matters were discussed and reviewed. Nothing
has come to my attention that would lead me to believe that, at the time the
Offering Memorandum was issued, at the time any such amended or supplemented
Offering Memorandum was issued or at the Closing Time, the Offering Memorandum
or any amendment or supplement thereto (except for the financial statements and
schedules and other financial data included or incorporated by reference
therein as to which I express no belief), contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
Exh. E-1
<PAGE> 64
EXHIBIT F
FORM OF OPINION OF HUNTER & MOW, P.C.
TO BE DELIVERED PURSUANT TO SECTION 5(e)(iv)
(i) Except as set forth on Schedule 2 attached hereto and
incorporated herein by reference and except for matters which would not have a
material adverse effect on the business, operations, finances and prospects of
the Company !s?ws ("State Rules") applicable to the Company, PacNet, AdVal,
ADNET or Cel-Tech, and (vi) to our knowledge, any decree from any court, and
(B) no authorization of or filing with the FCC or any state telecommunications
regulatory authorities ("State Authority"), is necessary for the execution and
delivery of the Purchase Agreement, the Indenture, the Securities and the
Registration Rights Agreement by the Company and the consummation of the
transactions contemplated hereby and thereby in accordance with the terms
hereof and thereof;
(ii) The Company is a nondominant carrier validly authorized by the
FCC to provide interstate interexchange telecommunications services. The
Company has been granted authority by the FCC under Section 214 of the
Communications Act to provide international switched and private line
telecommunications services through the resale of the international services of
authorized U.S. common carriers pursuant to Part 63 of the FCC Rules. The
Company currently has on file with the FCC tariffs applicable to its domestic
interstate and international services. Except as set forth on Schedule 3
attached hereto and incorporated herein by reference, and to our knowledge, no
further FCC authority is required by the Company, PacNet, AdVal, ADNET or
Cel-Tech, to conduct their respective businesses as described in the Offering
Memorandum; provided, however, that the Company will be required to file
interstate tariffs with the FCC if it provides such services in conjunction
with the provision of local telecommunications services.
(iii) The Company is validly certified or registered to resell
intrastate interLATA telecommunications services in each of the states listed
on Schedule 4 attached hereto and incorporated herein by reference, and is not
required to be certified or registered to resell intrastate interLATA
telecommunications services in the states listed on Schedule 5 attached hereto
and incorporated herein by reference. Except as otherwise noted on Schedule 4,
the Company has a tariff or price list on file in each of the states listed on
Schedule 4. Except as otherwise noted on Schedules 4 and 5 and to our
knowledge, no further authority is required from any of the State Authorities
by the Company, PacNet, AdVal, ADNET or Cel-Tech to conduct their respective
businesses as described in the Offering Memorandum; provided, however, the
Company will require additional authority from the State Authorities to engage
in the provision of local telecommunications services.
Exh. F-1
<PAGE> 65
(iv) To our knowledge after due inquiry and excepting matters which
are set forth on Schedule 6 attached hereto and incorporated herein by
reference or which would not have a Material Adverse Effect on the Company as a
whole, (i) no decree or order of the FCC or a State Authority has been issued
and is currently effective against the Company, PacNet, AdVal, ADNET or
Cel-Tech and (ii) no litigation, proceeding, inquiry or investigation has been
commenced or threatened, and no notice of violation or order to show cause has
been issued and is currently effective, against the Company, PacNet, AdVal,
ADNET or Cel-Tech before or by the FCC or a State Authority. To our knowledge
after due inquiry and excepting matters which are set forth on Schedule 7
attached hereto and incorporated herein by reference, there are no rulemakings
or other administrative proceedings pending before the FCC which (i) are
generally applicable to interexchange telecommunications services or the resale
thereof and (ii) which, if decided adversely to the Company's interest, would
have a material adverse effect on the business, operations, finances and
prospects of the Company as a whole.
(v) To our knowledge after due inquiry, there are no contracts to
which the Company is a party and which are material to the business,
operations, finances and prospects of the Company as a whole that are not
described in the Offering Memorandum or incorporated by reference therein.
(vi) To our knowledge after due inquiry and excepting matters which
are set forth on Schedule 8 attached hereto and incorporated herein by
reference, and which would not have a material adverse effect on the business,
operations, finances and prospects of the Company as a whole, the Company is in
current and material compliance with applicable State Laws and State Rules in
the States of California, Florida, Illinois, Indiana, New York, Ohio, Oregon
and Washington.
(vii) Although we are not passing upon, or assuming responsibility
for, the accuracy, completeness or fairness of statements contained in the
Offering Memorandum, nothing has come to our attention in our review of the
Offering Memorandum or other documents we have examined in connection with
this opinion or through our participation in conferences with officers,
employees or other representatives of the Company which would cause us to
believe that on the date hereof those sections of the Offering Memorandum
captioned "Risk Factors--Dependence on Facilities-Based Carriers,"
"--Competition," and "--Regulation," "Business--Industry Background,"
"--Competition," "--Telecommunications Act," and "--Regulation" contain any
untrue statement of any material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading. Notwithstanding anything stated above, we express no
belief regarding the financial statements and other financial data contained in
the Offering Memorandum.
The contents of the schedules referred to in such counsel's opinion
shall be in form and content reasonably satisfactory to counsel for the Initial
Purchasers.
Exh. F-2
<PAGE> 66
EXHIBIT G
FORM OF LOCK-UP AGREEMENT
_________________, 1996
PAINEWEBBER INCORPORATED
WHEAT FIRST BUTCHER SINGER
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
MIDCOM Communications Inc.
1111 Third Avenue, Suite 1600
Seattle, Washington 98101
Re: MIDCOM Communications Inc.
Dear Sirs:
The undersigned is an officer and/or director of MIDCOM
Communications Inc., a Washington corporation (the "Issuer"), or an owner of
record or beneficially of certain shares of common stock, par value $.0001 per
share, of the Issuer (the "Common Stock"), or securities convertible into or
exchangeable or exercisable for Common Stock. The undersigned understands that
PaineWebber Incorporated ("PaineWebber") and Wheat, First Securities, Inc.
("Wheat First", and together with Painewebber, the "Initial Purchasers")
propose to enter into a Purchase Agreement (the "Purchase Agreement") with the
Issuer, providing for the private placement of $85,000,000 aggregate principal
amount ($86,250,000 aggregate principal amount if the Initial Purchasers'
over-allotment option is exercised in full) of the Issuer's Convertible
Subordinated Notes due 2003 (the "Notes") which are convertible into shares of
Common Stock. The undersigned acknowledges that the Initial Purchasers and the
Issuer are relying on the representations and agreements of the undersigned
contained in this letter in carrying out such offering of the Notes (the
"Offering") and in entering into the Purchase Agreement.
In recognition of the benefit that the Offering will confer
upon the undersigned as a stockholder, officer and/or director of the Issuer,
and for other good and valuable consideration, the undersigned agrees with each
Initial Purchaser and the Issuer that, for a period commencing on the date
hereof and continuing to a date 90 days after the closing of the Offering, the
undersigned will not, without the prior written consent of PaineWebber (which
consent may be withheld in its sole discretion), directly or indirectly, sell,
offer, contract or grant any option to sell (including without limitation any
short sale), pledge, transfer, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock, or securities
Exh. G-1
<PAGE> 67
exchangeable or exercisable for or convertible into shares of Common Stock
currently owned or hereafter acquired and owned, either of record or
beneficially (as defined in Rule 13d-3 under the Exchange Act) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing, or file or request to be filed any registration statement with
respect to the Common Stock or any securities exchangeable or exercisable for
or convertible into shares of Common Stock. The undersigned also agrees and
consents to the entry of stop transfer instructions with the Company's transfer
agent and registrar against the transfer of shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock
held by the undersigned except in compliance with the foregoing restrictions.
This agreement is irrevocable and will be binding on the
undersigned and the respective successors, heirs, personal representatives, and
assigns of the undersigned.
Very truly yours,
Signature:
-------------------------
Print Name:
Exh. G-2
<PAGE> 1
EXHIBIT 4.4
================================================================================
MIDCOM COMMUNICATIONS INC.
Issuer
_______________________
8 1/4% Convertible Subordinated Notes due 2003
_______________________
INDENTURE
Dated as of August 22, 1996
_________________________________
IBJ Schroder Bank & Trust Company
as Trustee
================================================================================
<PAGE> 2
CROSS-REFERENCE TABLE1
<TABLE>
TRUST INDENTURE ACT SECTION INDENTURE SECTION
<S> <C>
310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.10
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.10
(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.10
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.08; 9.10
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.11
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.11
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.05
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.03
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.03
313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.06
(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.06
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.06, 12.02
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.06
314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.03, 4.04, 12.02
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.04
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.04
(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.05
(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.05
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.11
316(a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.09
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.05
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.04
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.07
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.04
317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.08
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.09
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.04
318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.01
</TABLE>
N.A. means not applicable
____________________
1 This Cross-Reference Table is not part of the Indenture.
i
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. OTHER DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 1.04. RULES OF CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE II
THE NOTES
SECTION 2.01. FORM AND DATING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.02. EXECUTION AND AUTHENTICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 2.03. REGISTRAR, PAYING AGENT AND CONVERSION AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 2.05. NOTEHOLDER LISTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 2.06. TRANSFER AND EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 2.07. REPLACEMENT NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 2.08. OUTSTANDING NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 2.09. TREASURY SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 2.10. TEMPORARY NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.11. CANCELLATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 2.12. DEFAULTED INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 2.13. CUSIP NUMBERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE III
REDEMPTION
SECTION 3.01. NOTICES TO TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 3.03. NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.06. NOTES REDEEMED IN PART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 3.07. OPTIONAL REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE IV
COVENANTS
SECTION 4.01. PAYMENT OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 4.02. MAINTENANCE OF OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 4.03. SEC REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 4.04. COMPLIANCE CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 4.05. CORPORATE EXISTENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 4.06. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 4.07. CHANGE OF CONTROL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 4.08. STAY, EXTENSION AND USURY LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE V
CONVERSION
SECTION 5.01 CONVERSION PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 5.02 MANNER OF EXERCISE OF CONVERSION PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 5.03 CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 5.04 ADJUSTMENT OF CONVERSION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 5.05 NOTICE TO HOLDERS PRIOR TO CERTAIN CORPORATE ACTIONS . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 5.06 RESERVATION OF SHARES OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 5.07 TAXES UPON CONVERSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 5.08 COVENANTS AS TO COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 5.09 CONSOLIDATION OR MERGER OR SALE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 5.10 DISCLAIMER OF RESPONSIBILITY FOR CERTAIN MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 5.11 CANCELLATION OF CONVERTED NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 5.12 VOLUNTARY REDUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE VI
SUBORDINATION
SECTION 6.01. AGREEMENT TO SUBORDINATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 6.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 6.03. DEFAULT ON DESIGNATED SENIOR INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 6.04. ACCELERATION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 6.05. WHEN DISTRIBUTION MUST BE PAID OVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 6.06. NOTICE BY COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 6.07. SUBROGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 6.08. RELATIVE RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 6.09. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 6.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 6.11. RIGHTS OF TRUSTEE AND PAYING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 6.12. AUTHORIZATION TO EFFECT SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 6.13. ARTICLE APPLICABLE TO PAYING AGENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 6.14. SENIOR INDEBTEDNESS ENTITLED TO RELY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE VII
SUCCESSORS
SECTION 7.01. MERGER, CONSOLIDATION OR SALE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 7.02. SUCCESSOR CORPORATION SUBSTITUTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 7.03. PURCHASE OPTION ON CHANGE OF CONTROL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
</TABLE>
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<TABLE>
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ARTICLE VIII
DEFAULTS AND REMEDIES
SECTION 8.01. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 8.02. ACCELERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.03. OTHER REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.04. WAIVER OF PAST DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.05. CONTROL BY MAJORITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 8.06. LIMITATION ON SUITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 8.07. RIGHTS OF NOTEHOLDERS TO RECEIVE PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 8.08. COLLECTION SUIT BY TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 8.09. TRUSTEE MAY FILE PROOFS OF CLAIM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 8.10. PRIORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 8.11. UNDERTAKING FOR COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
ARTICLE IX
THE TRUSTEE
SECTION 9.01. DUTIES OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 9.02. RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 9.03. INDIVIDUAL RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 9.04. TRUSTEE'S DISCLAIMER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 9.05. NOTICE OF DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 9.06. REPORTS BY TRUSTEE TO NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 9.07. COMPENSATION AND INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 9.08. REPLACEMENT OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 9.09. SUCCESSOR TRUSTEE BY MERGER, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 9.10. ELIGIBILITY; DISQUALIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 9.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY . . . . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE X
DISCHARGE OF INDENTURE
SECTION 10.01. TERMINATION OF COMPANY'S OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 10.02. REPAYMENT TO COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
ARTICLE XI
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 11.01. WITHOUT CONSENT OF NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 11.02. WITH CONSENT OF NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 11.03. COMPLIANCE WITH TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 11.04. REVOCATION AND EFFECT OF CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 11.05. NOTATION ON OR EXCHANGE OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 11.06. TRUSTEE PROTECTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
</TABLE>
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<TABLE>
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ARTICLE XII
MISCELLANEOUS
SECTION 12.01. TRUST INDENTURE ACT CONTROLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 12.02. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 12.03. COMMUNICATION BY NOTEHOLDERS WITH OTHER
NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 12.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 12.06. RULES BY TRUSTEE AND AGENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 12.07. LEGAL HOLIDAYS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 12.08. NO RECOURSE AGAINST OTHERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 12.09. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 12.10. OTHER PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 12.11. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 12.12. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 12.13. SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 12.14. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 12.15. TABLE OF CONTENTS, HEADINGS, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
EXHIBIT A FORM OF CONVERTIBLE SUBORDINATED NOTE
EXHIBIT B FORM OF TRANSFER CERTIFICATE PURSUANT TO SECTION 2.06(a)(ii)
EXHIBIT C FORM OF TRANSFER CERTIFICATE PURSUANT TO SECTION 2.06(a)(iii)
EXHIBIT D FORM OF TRANSFER CERTIFICATE PURSUANT TO SECTION 2.06(a)(iv) and (v)
EXHIBIT E FORM OF TRANSFER CERTIFICATE PURSUANT TO SECTION 2.06(a)(iv) and (vi)
EXHIBIT F FORM OF TRANSFER CERTIFICATE PURSUANT TO SECTION 2.06(a)(v) (Transferor)
EXHIBIT G FORM OF TRANSFER CERTIFICATE PURSUANT TO SECTION 2.06(a)(v) (Euroclear or Cedel)
EXHIBIT H FORM OF TRANSFER CERTIFICATE PURSUANT TO SECTION 2.06(a)(v) (Certificated Notes)
</TABLE>
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<PAGE> 7
INDENTURE dated as of August 22, 1996 between MIDCOM
Communications Inc., a Washington corporation (the "Company"), and IBJ Schroder
Bank & Trust Company, a New York banking corporation, as trustee (the
"Trustee").
Each party agrees as follows for the benefit of the other
party and for the equal and ratable benefit of the holders of $85,000,000
aggregate principal amount of the Company's 8 1/4% Convertible Subordinated
Notes due 2003, or, if PaineWebber Incorporated and Wheat, First Securities,
Inc. (the "Initial Purchasers") exercise their over-allotment option granted in
the Purchase Agreement defined below, of up to $97,750,000 aggregate principal
amount of the Company's 8 1/4% Convertible Subordinated Notes due 2003 (in
either case, the "Notes"):
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. DEFINITIONS.
"Affiliate" of any specified person means any other person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling", "controlled by" and "under common control with"), as used with
respect to any person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of
such person, whether through the ownership of voting securities or by agreement
or otherwise.
"Agent" means any Registrar, Paying Agent, Conversion Agent or
co-registrar.
"Applicable Procedures" means the applicable procedures of the
Depositary, Euroclear or Cedel, as the case may be.
"Board of Directors" means the Board of Directors of the
Company or any authorized committee of the Board.
"Board Resolution" means a duly authorized and adopted
resolution of the Board of Directors certified by the Secretary of the Company
as in full force and effect and delivered to the Trustee.
"Business Day" means any day that is not a Legal Holiday.
"Capital Stock" means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interest, participations, rights or other equivalents (however
designated) or corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Change of Control" means the occurrence of one or more of the
following events: (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), other than a Permitted Holder,
is or becomes the "beneficial owner" (as defined in Rules
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<PAGE> 8
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of shares
representing more than 50% of the combined total voting power of the then
outstanding securities entitled to vote generally in elections of directors of
the Company (the "Voting Stock"), (b) the Company consolidates with or merges
into any other corporation, or conveys, transfers, or leases, whether directly
or indirectly, all or substantially all of its assets to any person, or any
other person merges into the Company, and, in the case of any such transaction,
the outstanding Common Stock of the Company is changed or exchanged as a
result, unless the stockholders of the Company immediately before such
transaction own, directly or indirectly immediately following such transaction,
at least a majority of the combined voting power of the outstanding voting
securities of the corporation resulting from such transaction in substantially
the same proportion inter se as their ownership of the Voting Stock immediately
before such transaction, (c) at any time the Continuing Directors do not
constitute a majority of the Board of Directors of the Company (or, if
applicable, a successor corporation to the Company) or (d) the Common Stock (or
other common stock into which the Notes are then convertible) is neither listed
for trading on a United States national securities exchange nor approved for
trading on an established automated over-the-counter trading market in the
United States.
"Common Stock" means the common stock of the Company as the
same exists at the date of the execution of this Indenture or as such stock may
be constituted from time to time.
"Company" means the party named as such above until a
successor replaces it in accordance with Article VII and thereafter means the
successor.
"Continuing Directors" means, as of any date of determination,
any member of the Board of Directors who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of the Board of Directors at the time of
such nomination or election.
"Conversion Price" means the initial conversion price
specified in Section 9 of the form of Note, as adjusted in accordance with the
provisions of Article V.
"Credit Agreement" means that certain Credit Agreement, dated
as of November 8, 1995, by and among the Company, PacNet, Inc., Adval, Inc.,
Advanced Network Design, Cel-Tech International Corp., Transamerica Business
Credit Corporation, as agent for the lenders, and the lenders parties thereto,
as amended through July 26, 1996, providing for up to $43 million of revolving
credit borrowings, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, renewed, refunded, replaced or refinanced from
time to time.
"Daily Market Price" means the price of a share of Common
Stock on the relevant date, determined (a) on the basis of the last reported
sale price regular way of the Common Stock as reported on the Nasdaq National
Market (the "NNM"), or if the Common Stock is not then listed on the NNM, as
reported on such national securities exchange upon which the Common Stock is
listed, or (b) if there is no such reported sale on the day in question, on the
basis of the average of the closing bid and asked quotations regular way as so
reported, or (c) if the Common Stock is not listed on the NNM or on any
national securities exchange, on the basis of the average of the high bid and
low asked quotations regular way on the day in question in the over-the-counter
market as reported by the National Association of Securities Dealers Automated
Quotation System, or if not so quoted, as reported by National Quotation
Bureau, Incorporated, or a similar organization.
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<PAGE> 9
"Default" means any event that is, or with the passage of time
or the giving of notice or both would be, an Event of Default.
"Depositary" means The Depository Trust Company, its nominees
and their respective successors.
"Designated Senior Indebtedness" means any particular Senior
Indebtedness having an outstanding principal amount or commitment in excess of
$10 million with respect to which the instrument creating or evidencing the
same or the assumption or guarantee thereof (or related agreements or documents
to which the Company is a party) expressly provides that such Indebtedness
shall be "Designated Senior Indebtedness" for purposes of the Indenture
(provided that such instrument, agreement or other document may place
limitations and conditions on the right of such Senior Indebtedness to exercise
the rights of Designated Senior Indebtedness.)
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession, which are in effect from time to time.
"Global Notes" means, individually and collectively, the
Regulation S Temporary Global Note, the Regulation S Permanent Global Note and
the Rule 144A Global Note.
"Indebtedness" means, with respect to any person, all
obligations, whether or not contingent, of such person (i) (a) for borrowed
money (including, but not limited to, any indebtedness secured by a security
interest, mortgage or other lien on the assets of the Company which is (1)
given to secure all or part of the purchase price of property subject thereto,
whether given to the vendor of such property or to another, or (2) existing on
property at the time of acquisition thereof), (b) evidenced by a note,
debenture, bond or other written instrument, (c) under a lease required to be
capitalized on the balance sheet of the lessee under GAAP, (d) in respect of
letters of credit, bank guarantees or bankers' acceptances (including
reimbursement obligations with respect to any of the foregoing), (e) with
respect to Indebtedness secured by a mortgage, pledge, lien, encumbrance,
charge or adverse claim affecting title or resulting in an encumbrance to which
the property or assets of such person are subject, whether or not the
obligation secured thereby shall have been assumed by or shall otherwise be
such person's legal liability, (f) in respect of the balance of deferred and
unpaid purchase price of any property or assets, or (g) under interest rate or
currency swap agreements, cap, floor and collar agreements, spot and forward
contracts and similar agreements and arrangements; (ii) with respect to any
obligation of others of the type described in the preceding clause (i) or under
clause (iii) below assumed by or guaranteed in any manner by such person,
contingent or otherwise (and, without duplication, the obligations of such
person under any such assumptions, guarantees or other such arrangements); and
(iii) any and all deferrals, renewals, extensions, refinancings and refundings
of, or amendments, modifications or supplements to, any of the foregoing.
"Indenture" means this Indenture as amended or supplemented
from time to time.
"Initial Purchasers" means PaineWebber Incorporated and Wheat,
First Securities, Inc.
"Interest Payment Date" has the meaning set forth in Section
1 of the Notes.
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<PAGE> 10
"Issuance Date" means the date on which the Notes are first
authenticated and issued under this Indenture.
"Liquidated Damages" has the meaning set forth in Section 10
of the Notes.
"Maturity Date" means August 15, 2003
"Noteholder" or "holder" means a person in whose name a Note
is registered.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Offering Memorandum" means the offering memorandum relating
to the Notes dated August 15, 1996.
"Officer" means the Chairman of the Board, the Chief Executive
Officer, the President, any Vice-President, the Treasurer, the Secretary, any
Assistant Treasurer or any Assistant Secretary of the Company.
"Officers' Certificate" means a certificate signed by two
Officers, one of whom must be the Chairman of the Board, the Chief Executive
Officer, the President, the Treasurer or a Vice-President of the Company.
"Opinion of Counsel" means a written opinion that meets the
requirements of Section 12.05 from legal counsel who is acceptable to the
Trustee. So long as such counsel is acceptable to the Trustee, such counsel
may be an employee of or counsel to the Company or the Trustee or may be
outside counsel to the Company or the Trustee, except to the extent otherwise
indicated in this Indenture.
"Permitted Designee" means (i) a spouse or child of a
Permitted Holder, (ii) trusts for the benefit of a Permitted Holder or a spouse
or child of a Permitted Holder, (iii) in the event of death or incompetence of
a Permitted Holder, his estate, heirs, executor, administrator, committee or
other personal representative or (iv) any Affiliate of a Permitted Holder.
"Permitted Holders" means Paul Pfleger, John M. Orehek and
their Permitted Designees.
"person" or "Person" means any individual, corporation,
limited liability company, partnership, joint venture, association, joint stock
company, trust, unincorporated organization or government or any agency or
political subdivision thereof.
"principal" of a debt security means the principal of the
security plus the premium, if any, on the security.
"Record Date" has the meaning set forth in Section 1 of the
Notes.
"Registration Rights Agreement" means the Registration Rights
Agreement relating to the Notes dated as of August 22, 1996, between the
Company and the Initial Purchasers.
"Regulation S" means Regulation S promulgated under the
Securities Act.
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<PAGE> 11
"Regulation S Global Note" means a Regulation S Temporary
Global Note or Regulation S Permanent Global Note, as appropriate.
"Regulation S Permanent Global Note" means a permanent global
note that contains the Global Securities Legend on the face thereof and the
additional schedule referred to in footnote 1 to the form of the Note attached
hereto as Exhibit A, and that is deposited with and registered in the name of
the Depositary or its nominee, representing a series of Notes sold in reliance
on Regulation S.
"Regulation S Certificated Note" means a certificated note in
fully registered form without coupons and that contains the Restricted
Securities Legend on the face thereof, in the form of the Note attached hereto
as Exhibit A, sold in reliance on Regulation S.
"Regulation S Temporary Global Note" means a temporary global
note that contains the Global Securities Legend and the Regulation S Temporary
Note Legend on the face thereof and the additional schedule and paragraph
referred to in footnotes 1 and 2 to the form of the Note attached hereto as
Exhibit A, and that is deposited with and registered in the name of the
Depositary or its nominee, representing a series of Notes sold in reliance on
Regulation S.
"Representative" means the (a) trustee, agent or
representative for any Senior Indebtedness or (b) with respect to any Senior
Indebtedness that does not have any such trustee, agent or other
representative, (i) in the case of such Senior Indebtedness issued pursuant to
an agreement providing for voting arrangements as among the holders or owners
of such Senior Indebtedness, any holder or owner of such Senior Indebtedness
acting with the consent of the required persons necessary to bind such holders
or owners of such Senior Indebtedness and (ii) in the case of all other such
Senior Indebtedness, the holder or owner of such Senior Indebtedness.
"Rule 144A" means Rule 144A promulgated under the Securities
Act.
"Rule 144A Global Note" means a permanent global note that
contains the Global Securities Legend on the face thereof and the additional
schedule referred to in footnote 1 to the form of the Note attached hereto as
Exhibit A, and that is deposited with and registered in the name of the
Depositary, representing a series of Notes sold in reliance on Rule 144A.
"SEC" means the Securities and Exchange Commission.
"Securities" means the Notes described above issued under this
Indenture.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Indebtedness" means the principal of, premium, if any,
and interest on, rent under, and any other amounts payable on or in respect of
the Credit Agreement and any other Indebtedness of the Company (including,
without limitation, any Obligations in respect of such Indebtedness and, in the
case of Designated Senior Indebtedness, any interest accruing after the filing
of a petition by or against the Company under any Bankruptcy Law, whether or
not allowed as a claim after such filing in any proceeding under such
Bankruptcy Law), whether outstanding on the date of this Indenture or
thereafter created, incurred, assumed, guaranteed or in effect guaranteed by
the Company (including all deferrals, renewals, extensions or refundings of, or
amendments, modifications or supplements to the foregoing); provided, however,
that Senior Indebtedness does not include (v) Indebtedness evidenced by the
Notes, (w) any liability for federal, state, local or other taxes owed or owing
by the Company, (x) Indebtedness of the Company to any Subsidiary of the
Company, (y) trade payables of the Company, and (z) any
5
<PAGE> 12
particular Indebtedness in which the instrument creating or evidencing the same
or the assumption or guarantee thereof (or related agreements or documents to
which the Company is a party) expressly provides that such Indebtedness shall
not be senior in right of payment to, or is pari passu with, or is subordinated
or junior to, the Notes.
"Shelf Registration Statement" shall have the meaning set
forth in the Registration Rights Agreement.
"Significant Subsidiary" means any subsidiary of the Company
which is a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated under the Securities Act and the Exchange Act (as
such Regulation is in effect on the date hereof).
"Subsidiary" means, with respect to any Person, (i) any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of Capital stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or indirectly,
by such Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code
Sections 77aaa-77bbbb) as in effect on the date of execution of this Indenture.
"Time of Determination" means the time and date of the earlier
of (i) the record date for determining stockholders entitled to receive their
rights, warrants or distributions referred to in Section 5.04(b) and (c), or
(ii) the commencement of "ex-dividend" trading on the exchange or market
referred to in the definition of the term "Daily Market Price."
"Transfer Restricted Securities" shall have the meaning set
forth in the Registration Rights Agreement.
"Trustee" means the party named as such above until a
successor replaces it in accordance with the applicable provisions of this
Indenture and thereafter means the successor.
"Trust Officer" means the Chairman of the Board, the
President, any Vice President or any other officer or assistant officer of the
Trustee assigned by the Trustee to administer its corporate trust matters.
"U.S. Government Obligations" means direct obligations of the
United States of America for the payment of which the full faith and credit of
the United States of America is pledged. In order to have money available on a
payment date to pay principal or interest on the Notes, the U.S. Government
Obligations shall be payable as to principal or interest on or before such
payment date in such amounts as will provide the necessary money. U.S.
Government Obligations shall not be callable at the issuer's option.
"U.S. person" has the meaning specified in Regulation S.
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<PAGE> 13
SECTION 1.02. OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Defined in
Term Section
- ---- -------
<S> <C>
"Agent Members" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.01
"Bankruptcy Law" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.01
"Cedel" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.01
"Certificated Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.01
"Change of Control Notice" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.07
"Change of Control Offer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.07
"Change of Control Payment" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.07
"Change of Control Payment Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.07
"Commencement Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.07
"Conversion Agent" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.03
"Conversion Notice" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.02
"Custodian" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.01
"Euroclear" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.01
"Event of Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.01
"Expiration Time" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.04
"Legal Holiday" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.07
"Non-Global Purchaser" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.01
"Offer Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.07
"Paying Agent" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.03
"Payment Blockage Notice" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.03
"Payment Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.01
"Purchase Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.01
"Purchased Shares" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.04
"QIBs" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.01
"Registrar" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.03
"Tender Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.07
</TABLE>
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the
following meanings:
"Commission" means the SEC;
"indenture securities" means the Notes;
"indenture security holder" means a Noteholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee; and
"obligor" on the Notes means the Company or any other obligor
on the Notes.
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<PAGE> 14
All other terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule under
the TIA have the meanings so assigned to them.
SECTION 1.04. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(c) references to "GAAP" shall mean GAAP in effect as of
the time when and for the period as to which such accounting
principles are to be applied;
(d) "or" is not exclusive;
(e) words in the singular include the plural, and words
in the plural include the singular; and
(f) provisions apply to successive events and
transactions.
ARTICLE II
THE NOTES
SECTION 2.01. FORM AND DATING.
The Notes and the Trustee's certificate of authentication
relating thereto shall be substantially in the form of Exhibit A hereto, which
Exhibit A is hereby incorporated in and expressly made a part of this
Indenture. The Notes may have notations, legends or endorsements required by
law, stock exchange rule, agreements to which the Company is subject, if any,
or usage. The Company shall furnish any such legend not contained in Exhibit A
to the Trustee in writing. Each Note shall be dated the date of its
authentication.
The terms and provisions contained in the Notes shall
constitute, and are hereby expressly made, a part of this Indenture and the
Company and the Trustee, by their execution and delivery of this Indenture,
expressly agree to such terms and provisions and to be bound thereby.
The Notes shall be issued only in denominations of $1,000 and
integral multiples thereof.
(a) Global Notes. Notes offered and sold to qualified
institutional buyers as defined in Rule 144A ("QIBs") in reliance on Rule 144A
shall be issued initially in the form of one or more Rule 144A Global Notes in
definitive, fully registered form, which shall be deposited on behalf of the
purchasers of the Notes represented thereby with the Trustee, at its New York
office, as custodian for the Depositary, and registered in the name of the
Depositary or a nominee of the Depositary, duly executed by the Company and
authenticated by the Trustee as hereinafter provided. The aggregate principal
amount of the Rule 144A Global Notes may from time to time
8
<PAGE> 15
be increased or decreased by adjustments made on the records of the Trustee and
the Depositary or its nominee as hereinafter provided.
Notes offered and sold in reliance on Regulation S shall be
issued initially in the form of (i) Regulation S Certificated Notes or (ii) the
Regulation S Temporary Global Note in fully registered form which shall be
deposited on behalf of the purchasers of the Notes represented thereby with the
Trustee, at its New York office, as custodian for the Depositary, and
registered in the name of the Depositary or the nominee of the Depositary for
the accounts of designated agents holding on behalf of the Euroclear System
("Euroclear") or Cedel Bank, societe anonyme ("Cedel"), duly executed by the
Company and authenticated by the Trustee as hereinafter provided. The "40-day
restricted period" (as defined in Regulation S) shall be terminated upon the
receipt by the Trustee of (i) a written certificate from the Depositary,
together with copies of certificates from Euroclear and Cedel Bank certifying
that they have received certification of non-United States beneficial ownership
of 100% of the aggregate principal amount of the Regulation S Temporary Global
Note (except to the extent of any beneficial owners thereof who acquired an
interest therein pursuant to another exemption from registration under the
Securities Act and who will take delivery of a beneficial ownership interest in
a Rule 144A Global Note, all as contemplated by Section 2.06(a)(ii) hereof),
and (ii) an Officers' Certificate from the Company. Following the termination
of the 40-day restricted period, beneficial interests in the Regulation S
Temporary Global Note shall be exchanged for beneficial interests in Regulation
S Permanent Global Notes pursuant to the Applicable Procedures. Simultaneously
with the authentication of Regulation S Permanent Global Notes, the Trustee
shall cancel the Regulation S Temporary Global Note. The aggregate principal
amount of the Regulation S Temporary Global Note and the Regulation S Permanent
Global Notes may from time to time be increased or decreased by adjustments
made on the records of the Trustee and the Depositary or its nominee, as the
case may be, in connection with transfers of interest as hereinafter provided.
Each Global Note shall represent such of the outstanding Notes
as shall be specified therein and each shall provide that it shall represent
the aggregate amount of outstanding Notes from time to time endorsed thereon
and that the aggregate amount of outstanding Notes represented thereby may from
time to time be reduced or increased, as appropriate, to reflect exchanges and
redemptions. Any endorsement of a Global Note to reflect the amount of any
increase or decrease in the amount of outstanding Notes represented thereby
shall be made by the Trustee or the Note Custodian, at the direction of the
Trustee, in accordance with instructions given by the Holder thereof as
required by Section 2.06 hereof.
The provisions of the "Operating Procedures of the Euroclear
System" and "Terms and Conditions Governing Use of Euroclear" and the
"Management Regulations" and "Instructions to Participants" of Cedel Bank shall
be applicable to interests in the Regulation S Temporary Global Note and the
Regulation S Permanent Global Notes that are held by the Agent Members through
Euroclear or Cedel Bank.
Except as set forth in Section 2.06 hereof, the Global Notes
may be transferred, in whole and not in part, only to another nominee of the
Depositary or to a successor of the Depositary or its nominee.
Upon effectiveness of the Shelf Registration Statement, the
Notes resold or transferred pursuant to the prospectus forming part of the
Shelf Registration Statement may be represented by one or more permanent global
Notes in definitive, fully registered form without interest coupons with the
Global Securities Legend but not the Restricted Securities Legend set forth in
Exhibit A hereto, registered in the name of the Depositary or a nominee of the
Depositary, duly executed by the Company and authenticated by the Trustee as
hereinafter provided. The
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<PAGE> 16
aggregate principal amount of such global Notes may from time to time be
increased or decreased by adjustments made on the records of the Trustee and
the Depositary or its nominee to reflect transfers of beneficial interests from
the Regulation S Permanent Global Notes and the Rule 144A Global Notes, subject
to the rules and procedures of Euroclear and Cedel, as the case may be, and the
Depositary.
(b) Book-Entry Provisions. This Section 2.01(b) shall
apply only to the Rule 144A Global Note and the Regulation S Permanent Global
Note deposited with or on behalf of the Depositary.
The Company shall execute and the Trustee shall, in accordance
with this Section 2.01(b), authenticate and deliver initially the Global Notes
that (a) shall be registered in the name of the Depositary or the nominee of
the Depositary and (b) shall be delivered by the Trustee to the Depositary or
pursuant to the Depositary's instructions or held by the Trustee as custodian
for the Depositary.
Members of, or participants in, the Depositary ("Agent
Members") shall have no rights either under this Indenture with respect to any
Global Note held on their behalf by the Depositary or by the Trustee as
custodian for the Depositary or under such Global Note, and the Depositary may
be treated by the Company, the Trustee and any agent of the Company or the
Trustee as the absolute owner of such Global Note for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or any agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depositary
or impair, as between the Depositary and its Agent Members, the operation of
customary practices of such Depositary governing the exercise of the rights of
an owner of a beneficial interest in any Global Note.
(c) Certificated Notes. Except as provided in Sections
2.06 and 2.10, owners of beneficial interests in Global Notes will not be
entitled to receive physical delivery of certificated Notes. Purchasers of
Notes who are not QIBs and did not purchase Notes sold in reliance on
Regulation S under the Securities Act (referred to herein as the "Non-Global
Purchasers") will receive certificated Notes bearing the Restricted Securities
Legend set forth in Exhibit A hereto ("Certificated Notes"). Certificated
Notes will bear the Restricted Securities Legend set forth on Exhibit A unless
removed in accordance with Section 2.06(b) hereof and may not be exchanged for
a Global Note, or interest therein, at any time.
After a transfer of any Notes during the period of the
effectiveness of a Shelf Registration Statement with respect to the Notes, all
requirements pertaining to the Restricted Security Legend on such Notes will
cease to apply, the requirements requiring any such Note issued to certain
holders be issued in global form will cease to apply, and a Certificated Note
without the Restricted Securities Legend will be available to the holder of
such Notes who transfers such Notes pursuant to a prospectus which is part of
such Shelf Registration Statement.
SECTION 2.02. EXECUTION AND AUTHENTICATION.
Two Officers shall sign the Notes for the Company by manual or
facsimile signature. The Company's seal shall be reproduced, either manually
or by facsimile, on the Notes.
If an Officer whose signature is on a Note no longer holds
that office at the time the Note is authenticated, the Note shall nevertheless
be valid.
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<PAGE> 17
A Note shall not be valid until authenticated by the manual
signature of an authorized signatory of the Trustee. Such signature shall be
conclusive evidence that the Note has been authenticated under this Indenture.
Upon a written order of the Company signed by two Officers,
the Trustee shall authenticate the Notes for original issue up to an aggregate
principal amount of $85,000,000 (plus up to $12,750,000 aggregate principal
amount of Notes that may be sold by the Company pursuant to the over-allotment
option granted pursuant to the Purchase Agreement). The aggregate principal
amount of Notes outstanding at any time shall not exceed such amount except as
provided in Section 2.07.
The Trustee may appoint an authenticating agent acceptable to
the Company to authenticate Notes. An authenticating agent may authenticate
Notes whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company
or an Affiliate of the Company.
SECTION 2.03. REGISTRAR, PAYING AGENT AND CONVERSION AGENT.
The Company shall maintain in the Borough of Manhattan, City
of New York, State of New York (i) an office or agency where Notes may be
presented for registration of transfer or for exchange ("Registrar"), (ii) an
office or agency where Notes may be presented for payment ("Paying Agent") and
(iii) an office or agency where Notes may be presented for conversion
("Conversion Agent"). The Registrar shall keep a register of the Notes and of
their transfer and exchange. The Company may appoint one or more
co-registrars, one or more additional paying agents and one or more additional
conversion agents in such other locations as it shall determine. The term
"Paying Agent" includes any additional paying agent and the term "Conversion
Agent" includes any additional conversion agent. The Company may change any
Paying Agent, Registrar, co-registrar or Conversion Agent without prior notice
to any Noteholder. The Company shall notify the Trustee of the name and
address of any Agent not a party to this Indenture. If the Company fails to
appoint or maintain another entity as Registrar, Paying Agent or Conversion
Agent, the Trustee shall act as such. The Company or any of its Affiliates may
act as Paying Agent, Registrar, co-registrar or Conversion Agent.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the
Trustee to agree in writing that the Paying Agent will hold in trust for the
benefit of Noteholders or the Trustee all money held by the Paying Agent for
the payment of principal or interest on the Notes, and will notify the Trustee
of any default by the Company in making any such payment. While any such
default continues, the Trustee may require a Paying Agent to pay all money held
by it to the Trustee. The Company at any time may require a Paying Agent to
pay all money held by it to the Trustee and to account for any money disbursed
by it. Upon payment over to the Trustee, the Paying Agent (if other than the
Company or an Affiliate of the Company) shall have no further liability for the
money. If the Company or an Affiliate of the Company acts as Paying Agent, it
shall segregate and hold in a separate trust fund for the benefit of the
Noteholders all money held by it as Paying Agent.
SECTION 2.05. NOTEHOLDER LISTS.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of Noteholders and shall otherwise
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<PAGE> 18
comply with TIA Section 312(a). If the Trustee is not the Registrar, the
Company shall furnish to the Trustee on or before each Interest Payment Date
and at such other times as the Trustee may request in writing a list in such
form and as of such date as the Trustee may reasonably require of the names and
addresses of Noteholders.
SECTION 2.06. TRANSFER AND EXCHANGE.
Where Notes are presented to the Registrar or a co-registrar
with a request to register a transfer or to exchange them for an equal
principal amount of Notes of other denominations, the Registrar shall register
the transfer or make the exchange if its requirements for such transactions are
met. To permit registrations of transfers and exchanges, the Company shall
issue and deliver to the Trustee and the Trustee shall authenticate Notes at
the Registrar's request. No service charge shall be made for any registration
of transfer or exchange (except as otherwise expressly permitted herein), but
the Company may require payment of a sum sufficient to cover any transfer tax
or similar governmental charge payable in connection therewith (other than any
such transfer tax or similar governmental charge payable upon exchanges
pursuant to Sections 2.10, 3.06 or 11.05 hereof).
The Company shall not be required (i) to issue, register the
transfer of or exchange Notes during a period beginning at the opening of
business fifteen (15) days before the day of any selection of Notes for
redemption under Section 3.02 and ending at the close of business on the day of
selection, (ii) to register the transfer or exchange of any Notes so selected
for redemption in whole or in part, except the unredeemed portion of any Notes
being redeemed in part or (iii) to register the transfer of any Notes
surrendered for repurchase pursuant to Section 4.07.
All Notes issued upon any transfer or exchange of Notes in
accordance with this Indenture shall be the valid and binding obligations of
the Company, evidencing the same debt, and entitled to the same benefits under
this Indenture as the Notes surrendered upon such registration of transfer or
exchange.
(a) Notwithstanding any provision to the contrary in this
Indenture, so long as a Global Note remains outstanding and is held by or on
behalf of the Depositary, transfers of a Global Note, in whole or in part, or
of any beneficial interest therein, shall only be made in accordance with
Section 2.01(b) and this Section 2.06(a); provided, however, that beneficial
interests in a Global Note may be transferred to persons who take delivery
thereof in the form of a beneficial interest in the same Global Note in
accordance with the transfer restrictions set forth in the Restricted
Securities Legend and under the heading "Notice to Investors" in the Offering
Memorandum.
(i) Except for transfers or exchanges made in accordance
with any of clauses (ii) through (v) of this Section 2.06(a),
transfers of a Global Note shall be limited to transfers of such
Global Note in whole, but not in part, to nominees of the Depositary
or to a successor of the Depositary or such successor's nominee.
(ii) Rule 144A Global Note to Regulation S Global Note.
If, at any time, an owner of a beneficial interest in a Rule 144A
Global Note deposited with the Depositary or the Trustee as custodian
for the Depositary wishes to transfer its interest in such Rule 144A
Global Note to a person who is required or permitted to take delivery
thereof in the form of an interest in a Regulation S Global Note, such
owner shall, subject to the Applicable Procedures, exchange or cause
the exchange of such interest for an equivalent beneficial interest in
a Regulation S Global Note as provided in this Section 2.06(a)(ii).
Upon receipt by the Trustee of (1) instructions given in accordance
with the Applicable
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<PAGE> 19
Procedures from an Agent Member directing the Trustee to credit or
cause to be credited a beneficial interest in the Regulation S Global
Note in an amount equal to the beneficial interest in the Rule 144A
Global Note to be exchanged, (2) a written order given in accordance
with the Applicable Procedures containing information regarding the
participant account of the Depositary and the Euroclear or Cedel
account to be credited with such increase and (3) a certificate in the
form of Exhibit B attached hereto given by the owner of such
beneficial interest stating that the transfer of such interest has
been made in compliance with the transfer restrictions applicable to
the Global Notes and pursuant to and in accordance with Rule 903 or
Rule 904 of Regulation S, then the Trustee shall instruct the
Depositary to reduce or cause to be reduced the aggregate principal
amount at maturity of the applicable Rule 144A Global Note and to
increase or cause to be increased the aggregate principal amount at
maturity of the applicable Regulation S Global Note by the principal
amount at maturity of the beneficial interest in the Rule 144A Global
Note to be exchanged, to credit or cause to be credited to the account
of the person specified in such instructions a beneficial interest in
the Regulation S Global Note equal to the reduction in the aggregate
principal amount at maturity of the Rule 144A Global Note, and to
debit or cause to be debited from the account of the person making
such exchange or transfer the beneficial interest in the Rule 144A
Global Note that is being exchanged or transferred.
(iii) Regulation S Global Note to Rule 144A Global Note.
If, at any time, an owner of a beneficial interest in a Regulation S
Global Note deposited with the Depositary or with the Trustee as
custodian for the Depositary wishes to transfer its interest in such
Regulation S Global Note to a person who is required or permitted to
take delivery thereof in the form of an interest in a Rule 144A Global
Note, such owner shall, subject to the Applicable Procedures, exchange
or cause the exchange of such interest for an equivalent beneficial
interest in a Rule 144A Global Note as provided in this Section
2.06(a)(iii). Upon receipt by the Trustee of (1) instructions from
Euroclear or Cedel, if applicable, and the Depositary, directing the
Trustee, as Registrar, to credit or cause to be credited a beneficial
interest in the Rule 144A Global Note equal to the beneficial interest
in the Regulation S Global Note to be exchanged, such instructions to
contain information regarding the participant account with the
Depositary to be credited with such increase, (2) a written order
given in accordance with the Applicable Procedures containing
information regarding the participant account of the Depositary and
(3) a certificate in the form of Exhibit C attached hereto given by
the owner of such beneficial interest and stating (A) if the transfer
is pursuant to Rule 144A, that the person transferring such interest
in a Regulation S Global Note reasonably believes that the person
acquiring such interest in a Rule 144A Global Note is a QIB and is
obtaining such beneficial interest in a transaction meeting the
requirements of Rule 144A and any applicable blue sky or securities
laws of any state of the United States, (B) that the transfer complies
with the requirements of Rule 144A under the Securities Act and any
applicable blue sky or securities laws of any state of the United
States or (C) if the transfer is pursuant to any other exemption from
the registration requirements of the Securities Act, that the transfer
of such interest has been made in compliance with the transfer
restrictions applicable to the Global Notes and pursuant to and in
accordance with the requirements of the exemption claimed, such
statement to be supported by an Opinion of Counsel from the transferee
or the transferor in form reasonably acceptable to the Company and to
the Registrar, then the Trustee, as Registrar, shall instruct the
Depositary to reduce or cause to be reduced the Regulation S Global
Note and to increase or cause to be increased the aggregate principal
amount at maturity of the applicable Rule 144A Global Note by the
principal amount at maturity of the beneficial interest in the
Regulation S Global Note to be exchanged, and the Trustee, as
Registrar, shall instruct the Depositary, concurrently with such
reduction, to credit or cause to be credited to the account of the
person specified in such instructions a beneficial
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<PAGE> 20
interest in the applicable Rule 144A Global Note equal to the
reduction in the aggregate principal amount at maturity of the
Regulation S Global Note and to debit or cause to be debited from the
account of the person making such transfer the beneficial interest in
the Regulation S Global Note that is being transferred.
(iv) Global Note to Certificated Note. If an owner of a
beneficial interest in a Global Note deposited with the Depositary or
with the Trustee as custodian for the Depositary wishes at any time to
transfer its interest in such Global Note to a person who is required
or permitted to take delivery thereof in the form of a Certificated
Note, such owner may, subject to the Applicable Procedures, cause the
exchange of such interest for one or more Certificated Notes of any
authorized denomination or denominations and of the same aggregate
principal amount at maturity. Upon receipt by the Trustee of (1)
instructions from Euroclear or Cedel, if applicable, and the
Depositary directing the Trustee, as Registrar, to authenticate and
deliver one or more Certificated Notes of the same aggregate principal
amount at maturity as the beneficial interest in the Global Note to be
exchanged, such instructions to contain the name or names of the
designated transferee or transferees, the authorized denomination or
denominations of the Certificated Notes to be so issued and
appropriate delivery instructions, (2) a certificate in the form of
Exhibit D attached hereto given by the owner of such beneficial
interest and stating that the person transferring such interest in
such Global Note reasonably believes that the person acquiring the
Certificated Notes for which such interest is being exchanged is an
"accredited investor" (as defined in Rule 501(a)(1), (2), (3), (4) or
(7) of Regulation D under the Securities Act) and is acquiring such
Certificated Notes having an aggregate principal amount of not less
than $100,000 for its own account or for one or more accounts as to
which the transferee exercises sole investment discretion, (3) a
certificate in the form of Exhibit E attached hereto given by the
person acquiring the Certificated Notes for which such interest is
being exchanged, to the effect set forth therein, and (4) such other
certifications, legal opinions or other information as the Company or
the Trustee may reasonably require to confirm that such transfer is
being made pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act, then
Euroclear or Cedel, if applicable, or the Trustee, as Registrar, shall
instruct the Depositary to reduce or cause to be reduced such Global
Note by the aggregate principal amount at maturity of the beneficial
interest therein to be exchanged and to debit or cause to be debited
from the account of the person making such transfer the beneficial
interest in the Global Note that is being transferred, and
concurrently with such reduction and debit the Company shall execute,
and the Trustee shall authenticate and deliver, one or more
Certificated Notes of the same aggregate principal amount at maturity
in accordance with the instructions referred to above.
(v) Regulation S Temporary Global Note to Regulation S
Permanent Global Note. Within a reasonable period of time following
the termination of the "restricted period" (as defined in Regulation S
under the Securities Act) with respect to the issuance of the Notes,
beneficial interests in the Regulation S Temporary Global Note shall
be exchanged for an interest in the Regulation S Permanent Global Note
in definitive, fully registered form pursuant to the Applicable
Procedures; provided, however, that prior to (i) the payment of
interest or principal with respect to a holder's beneficial interest
in the Regulation S Temporary Global Note and (ii) any exchange of
such beneficial interest for a beneficial interest in the Regulation S
Permanent Note, Euroclear or Cedel receive a certificate substantially
in the form of Exhibit F hereto from the beneficial owner of such
beneficial interest and Euroclear or Cedel deliver a certificate
substantially in the form of Exhibit G hereto to the Trustee (or the
paying agent if different from the Trustee). Upon proper presentment
to the Trustee of a certificate substantially in the form of Exhibit H
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hereto and subject to the rules and procedures of the Depositary or
its direct or indirect participants, including Euroclear and Cedel, an
interest in a Regulation S Permanent Global Note may be exchanged for
a Certificated Note that is free from any restriction on transfer
(other than such as are solely attributable to any holder's status).
(vi) Certificated Note to Certificated Note. If a holder
of a Certificated Note wishes at any time to transfer such
Certificated Note to a person who is required to take delivery thereof
in the form of a Certificated Note, such holder may, subject to the
restrictions on transfer set forth herein and in such Certificated
Note, cause the exchange of such Certificated Note for one or more
Certificated Notes of any authorized denomination or denominations and
of the same aggregate principal amount at maturity. Upon receipt by
the Trustee, as Registrar, at its office in The City of New York of
(1) such Certificated Note, duly endorsed as provided herein, (2)
instructions from such holder directing the Trustee, as Registrar, to
authenticate and deliver one or more Certificated Notes of the same
aggregate principal amount at maturity as the Certificated Note to be
exchanged, such instructions to contain the name or authorized
denomination or denominations of the Certificated Notes to be so
issued and appropriate delivery instructions, (3) a certificate from
the holder of the Certificated Note to be exchanged in the form of
Exhibit D attached hereto, (4) a certificate in the form of Exhibit E
attached hereto given by the person acquiring the Certificated Notes
for which such interest is being exchanged, to the effect set forth
therein, and (5) such other certifications, legal opinions or other
information as the Company may reasonably require to confirm that such
transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the
Securities Act, then the Trustee, as Registrar, shall cancel or cause
to be cancelled such Certificated Note and concurrently therewith, the
Company shall execute, and the Trustee shall authenticate and deliver,
one or more Certificated Notes of the same aggregate principal amount
at maturity, in accordance with the instructions referred to above.
(vii) Certificated Note for Global Note. A Certificated
Note may not be transferred or exchanged for a beneficial interest in
a Global Note.
(viii) Other Exchanges. In the event that a beneficial
interest in a Global Note is exchanged for Notes in definitive
registered form pursuant to Section 2.10, prior to the effectiveness
of a Shelf Registration Statement with respect to such Notes, such
Notes may be exchanged only in accordance with such procedures as are
substantially consistent with the provisions of clauses (ii) through
(v) above (including the certification requirements intended to ensure
that such transfers comply with Rule 144A or Regulation S under the
Securities Act, as the case may be) and such other procedures as may
from time to time be adopted by the Company and furnished in an
Officers' Certificate to the Trustee.
(ix) Restricted Period. Prior to the termination of the
"restricted period" (as defined in Regulation S under the Securities
Act) with respect to the issuance of the Notes, transfers of interests
in the Regulation S Temporary Global Note to "U.S. persons" (as
defined in Regulation S under the Securities Act) shall be limited to
transfers made pursuant to the provisions of Section 2.06(a)(iii).
The Company shall provide an Officers' Certificate to advise the
Trustee as to the termination of the restricted period and the Trustee
may rely conclusively thereon.
(b) Except in connection with a Shelf Registration
Statement contemplated by and in accordance with the terms of the Registration
Rights Agreement, if Notes are issued upon the transfer, exchange or
replacement of Notes bearing the Restricted Securities Legend set forth
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in Exhibit A hereto, or if a request is made to remove such Restricted
Securities Legend on Notes, the Notes so issued shall bear the Restricted
Securities Legend, or the Restricted Securities Legend shall not be removed, as
the case may be, unless there is delivered to the Company such satisfactory
evidence, which may include an opinion of counsel licensed to practice law in
the State of New York, as may be reasonably required by the Company or the
Trustee, that neither the legend nor the restrictions on transfer set forth
therein are required to ensure that transfers thereof comply with the
provisions of Rule 144A, Rule 144 or Regulation S under the Securities Act or,
with respect to Certificated Notes, that such Notes are not "restricted" within
the meaning of Rule 144 under the Securities Act. Upon provision of such
satisfactory evidence, the Trustee, at the direction of the Company, shall
authenticate and deliver Notes that do not bear the legend.
(c) Neither the Company nor the Trustee shall have any
responsibility for any actions taken or not taken by the Depositary.
SECTION 2.07. REPLACEMENT NOTES.
If the holder of a Note claims that the Note has been lost,
destroyed or wrongfully taken or if such Note is mutilated and is surrendered
to the Trustee, the Company shall issue and the Trustee shall authenticate a
replacement Note if the Trustee's and the Company's requirements are met. If
required by the Trustee or the Company, an indemnity bond must be sufficient in
the judgment of both to protect the Company, the Trustee, any Agent or any
authenticating agent from any loss which any of them may suffer if a Note is
replaced. The Company may charge the relevant holder for its expenses in
replacing a Note.
In case any such mutilated, destroyed, lost or stolen Note has
become or is about to become due and payable, or is about to be purchased by
the Company pursuant to Article III hereof, the Company in its discretion may,
instead of issuing a new Note, pay or purchase such Note, as the case may be.
Every replacement Note is an additional obligation of the
Company.
SECTION 2.08. OUTSTANDING NOTES.
The Notes outstanding at any time are all the Notes
authenticated by the Trustee except for those canceled by it, those delivered
to it for cancellation, and those described in this Section as not outstanding.
If a Note is replaced, paid or purchased in accordance with
the terms of this Indenture, it ceases to be outstanding unless the Trustee
receives proof satisfactory to it that the replaced, paid or purchased Note is
held by a bona fide purchaser.
If Notes are considered paid under Section 4.01 hereof or
converted under Article V hereof, they cease to be outstanding and interest on
them ceases to accrue.
Subject to Section 2.09 hereof, a Note does not cease to be
outstanding because the Company or an Affiliate of the Company holds the Note.
SECTION 2.09. TREASURY SECURITIES.
In determining whether the Noteholders of the required
principal amount of Notes have concurred in any direction, waiver or consent,
Notes owned by the Company or an Affiliate of the Company shall be considered
as though they are not outstanding, except that for the
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purposes of determining whether the Trustee shall be protected in relying on
any such direction, waiver or consent, only Notes identified to the Trustee as
so owned shall be so disregarded.
SECTION 2.10. TEMPORARY NOTES.
(a) Until definitive Notes are ready for delivery, the
Company may prepare and the Trustee, upon receipt of a written order of the
Company as set forth in Section 2.02, shall authenticate temporary Notes.
Temporary Notes shall be substantially in the form of definitive Notes but may
have variations that the Company considers appropriate for temporary Notes.
Without unreasonable delay, the Company shall prepare and the Trustee shall
authenticate definitive Notes in exchange for temporary Notes. Until so
exchanged, the temporary Notes shall in all respects be entitled to the same
benefits under this Indenture as definitive Notes.
(b) A Global Note deposited with the Depositary or with
the Trustee as custodian for the Depositary pursuant to Section 2.01 shall be
transferred to the beneficial owners thereof in the form of Certificated Notes
only if such transfer complies with Section 2.06 and (i) the Depositary
notifies the Company that it is unwilling or unable to continue as Depositary
for such Global Note or if at any time such Depositary ceases to be a "clearing
agency" registered under the Exchange Act and a successor depositary is not
appointed by the Company within 90 days of such notice, or (ii) the Company, at
its option, notifies the Trustee in writing that it elects to cause the
issuance of Notes in the form of Certificated Notes under the Indenture, then
upon surrender by the Global Note holder of its Global Notes, Notes in
certificated form will be issued to each person that the Global Note holder and
the Depositary identify as being a beneficial owner of the related Notes.
(c) Any Global Note that is transferable to the
beneficial owners thereof in the form of Certificated Notes pursuant to this
Section 2.10 shall be surrendered by the Depositary to the Trustee located in
the Borough of Manhattan, The City of New York, to be so transferred, in whole
or from time to time in part, without charge, and the Trustee shall
authenticate and deliver, upon such transfer of each portion of such Global
Note, an equal aggregate principal amount at maturity of Notes of authorized
denominations in the form of Certificated Notes. Any portion of a Global Note
transferred pursuant to this Section shall be executed, authenticated and
delivered only in denominations of $1,000 and any integral multiple thereof and
registered in such names as the Depositary shall direct. Any Note in the form
of Certificated Notes delivered in exchange for an interest in the Rule 144A
Global Note shall, except as otherwise provided by Section 2.06(b), bear the
Restricted Securities Legend set forth in Exhibit A hereto. Any Note in the
form of Certificated Notes delivered in exchange for an interest in the
Regulation S Temporary Global Note shall, except as otherwise provided by
Section 2.06(b), bear the Restricted Securities Legend set forth in Exhibit A
hereto.
(d) Subject to the provisions of Section 2.10(c), the
registered holder of a Global Note may grant proxies and otherwise authorize
any person, including Agent Members and persons that may hold interests through
Agent Members, to take any action which a holder is entitled to take under this
Indenture or the Notes.
(e) In the event of the occurrence of either of the
events specified in Section 2.10(b), the Company will promptly make available
to the Trustee a reasonable supply of Certificated Notes in definitive, fully
registered form without interest coupons.
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SECTION 2.11. CANCELLATION.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar, Paying Agent and Conversion Agent shall forward
to the Trustee any Notes surrendered to them for registration of transfer,
redemption, conversion, exchange or payment. The Trustee shall promptly cancel
all Notes surrendered for registration of transfer, redemption, conversion,
exchange, payment, replacement or cancellation and shall dispose of canceled
Notes in accordance with its standard procedures or as the Company directs.
The Company may not issue new Notes to replace Notes that it has paid or
redeemed or that have been delivered to the Trustee for cancellation or that
any holder has converted.
SECTION 2.12. DEFAULTED INTEREST.
If the Company fails to make a payment of interest on the
Notes, it shall pay such defaulted interest plus any interest payable on the
defaulted interest, in any lawful manner. It may pay such defaulted interest,
plus any such interest payable on it, to the persons who are holders of Notes
on a subsequent special record date. The Company shall fix any such record
date and payment date. At least 15 days before any such record date, the
Company shall mail or cause to be mailed to Noteholders a notice that states
such record date, payment date and amount of such interest to be paid.
SECTION 2.13. CUSIP NUMBERS.
The Company in issuing the Notes may use one or more "CUSIP"
numbers, and if so, such CUSIP number(s) shall be included in notices of
redemption, repurchase or exchange as a convenience to holders of Notes;
provided, however, that any such notice may state that no representation is
made as to the correctness or accuracy of any CUSIP number printed in the
notice or on the Notes and that reliance may be placed only on the other
identification numbers printed on the Notes. The Company will promptly notify
the Trustee of any change in the CUSIP number(s).
ARTICLE III
REDEMPTION
SECTION 3.01. NOTICES TO TRUSTEE.
If the Company elects to redeem Notes pursuant to the optional
redemption provision of the Notes (Section 5 of the Notes) and Section 3.07
hereof, it shall furnish to the Trustee at least 45 days but not more than 60
days before the redemption date (unless a shorter notice period shall be
satisfactory to the Trustee) an Officers' Certificate setting forth (i) the
Section of this Indenture pursuant to which the redemption shall occur, (ii)
the redemption date, (iii) the principal amount of Notes (if less than all) to
be redeemed and (iv) the redemption price.
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED.
If less than all the Notes are to be redeemed, the Trustee
shall select the Notes to be redeemed pro rata, by lot or such other method
that the Trustee considers fair and appropriate, or by a method that complies
with the requirements of the principal national securities exchange or national
market system on which the Notes are listed, if any. The Trustee shall make
the selection not less than 30 days and not more than 60 days before the
redemption date from Notes
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outstanding and not previously called for redemption. The Trustee may select
for redemption portions of the principal of Notes that have denominations
larger than $1,000. Notes and portions thereof that the Trustee selects shall
be in amounts of $1,000 or integral multiples of $1,000. Provisions of this
Indenture that apply to Notes called for redemption also apply to portions of
Notes called for redemption. The Trustee shall notify the Company promptly
upon selection by the Trustee of the Notes or portions of Notes to be called
for redemption.
If any Note selected for partial redemption is converted in
part after such selection, the converted portion of such Note shall be deemed
(so far as may be) to be the portion to be selected for redemption. The Notes
(or portions thereof) so selected shall be deemed duly selected for redemption
for all purposes hereof, notwithstanding that any such Note is converted in
whole or in part before the mailing of the notice of redemption. Upon any
redemption of less than all the Notes, the Company and the Trustee may treat as
outstanding any Notes surrendered for conversion during the period 15 days next
preceding the mailing of a notice of redemption and need not treat as
outstanding any Note authenticated and delivered during such period in exchange
for the unconverted portion of any Note converted in part during such period.
SECTION 3.03. NOTICE OF REDEMPTION.
At least 30 days but not more than 60 days before a redemption
date, the Company shall mail a notice of redemption to each holder whose Notes
are to be redeemed at such holder's registered address.
The notice shall identify the Notes to be redeemed and shall
state:
(a) the redemption date;
(b) the redemption price;
(c) the amount of accrued interest to be paid;
(d) if any Note is being redeemed in part, the portion of
the principal amount of such Note to be redeemed and that, after the
redemption date, upon surrender of such Note, a new Note or Notes in
principal amount equal to the unredeemed portion will be issued;
(e) the name and address of the Paying Agent;
(f) that Notes called for redemption must be surrendered
to the Paying Agent to collect the redemption price;
(g) that interest on Notes called for redemption ceases
to accrue on and after the redemption date (unless the Company
defaults in the payment of the redemption price);
(h) the section of the Notes and/or Section of this
Indenture pursuant to which the Notes called for redemption are being
redeemed;
(i) the aggregate principal amount of Notes (if less than
all) that are being redeemed;
(j) the CUSIP number(s), if any, of the Notes (provided
that the disclaimer permitted by Section 2.13 may be made);
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(k) that Notes called for redemption may be converted at
any time prior to the close of business on the last trading day
immediately preceding the redemption date and if not converted prior
to the close of business on such date, the right of conversion will be
lost; and
(l) that in the case of Notes or portions thereof called
for redemption on a date that is also an Interest Payment Date, the
interest payment due on such date shall be paid to the person in whose
name the Note is registered at the close of business on the relevant
Record Date.
Such notice shall also state the current Conversion Price and
the date on which the right to convert such Notes or portions thereof into
Common Stock of the Company will expire.
At the Company's request, the Trustee shall give notice of
redemption in the Company's name and at the Company's expense.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed, Notes called for
redemption become due and payable by the Company on the redemption date at the
price set forth in the Note.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE.
At least one Business Day prior to the redemption date, the
Company shall deposit with the Trustee or with the Paying Agent money in
immediately available funds sufficient to pay the redemption price of and
accrued interest on all Notes to be redeemed on that date unless theretofore
converted into Common Stock pursuant to the provisions hereof. On the
redemption date, the Trustee or the Paying Agent shall return to the Company
any money not required for that purpose.
On and after the redemption date, unless the Company shall
default in the payment of the redemption price, interest will cease to accrue
on the principal amount of the Notes or portions thereof called for redemption
and for which funds have been set apart for payment. In the case of Notes or
portions thereof redeemed on a redemption date which is also an Interest
Payment Date, the interest payment due on such date shall be paid to the person
in whose name the Note is registered at the close of business on the relevant
Record Date.
SECTION 3.06. NOTES REDEEMED IN PART.
Upon surrender of a Note that is redeemed in part, the Company
shall issue and the Trustee shall authenticate for the holder at the sole
expense of the Company a new Note equal in principal amount to the unredeemed
portion of the Note surrendered.
SECTION 3.07. OPTIONAL REDEMPTION.
The Company may redeem all or any portion of the Notes, upon
the terms and at the redemption prices set forth in Section 5 of the Notes.
Any redemption pursuant to this Section 3.07 shall be made pursuant to the
provisions of Section 3.01 through 3.06 hereof.
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ARTICLE IV
COVENANTS
SECTION 4.01. PAYMENT OF NOTES.
The Company shall pay the principal of, interest and
Liquidated Damages (if any) on, the Notes on the dates and in the manner
provided in the Notes. Principal and interest and Liquidated Damages, if any,
shall be considered paid on the date due if the Paying Agent (other than the
Company or a Subsidiary of the Company) holds as of 10:00 A.M. New York City
time on that date money designated for and sufficient to pay all principal and
interest and Liquidated Damages, if any, then due unless such money is paid to
holders of Senior Indebtedness pursuant to Article VI. To the extent lawful,
the Company shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law, to the extent allowed under such
Bankruptcy Law) on overdue installments of interest (without regard to any
applicable grace period) at the rate borne by the Notes, compounded
semiannually.
SECTION 4.02. MAINTENANCE OF OFFICE.
The Company shall maintain in the Borough of Manhattan, The
City of New York, an office or agency (which may be an office of the Trustee or
an affiliate of the Trustee, Registrar or co-registrar) where Notes may be
surrendered for registration of transfer or exchange and where notices and
demands to or upon the Company in respect of the Notes and this Indenture may
be served. The Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Administration Office of the Trustee specified in Section 12.10.
The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, The City of New York, for such purposes. The Company
shall give prompt written notice to the Trustee of any such designation or
rescission and of any change in the location of any such other office or
agency.
SECTION 4.03. SEC REPORTS.
(a) Whether or not required by the rules and regulations of
the SEC and within the applicable time periods that are (or would be)
prescribed thereby, so long as any Notes are outstanding, the Company shall
furnish to the Trustee and all holders (i) all quarterly and annual financial
information that would be required to be contained in a filing with the SEC on
Forms 10-Q and 10-K if the Company were required to file such forms, including
a "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, an audit report
thereon by the Company's certified independent accountants and (ii) all current
reports that would be required to be filed with the SEC on Form 8-K if the
Company were required to file such reports. In addition, whether or not
required by the rules and regulations of the SEC, the Company shall file a copy
of all such information with the SEC for public availability (unless the SEC
will not accept such a filing) and shall promptly make such information
available to all prospective investors and Noteholders who request it in
writing. The Company shall at all times comply with TIA Section 314(a).
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(b) For so long as any Transfer Restricted Securities (as
defined in the Registration Rights Agreement) remain outstanding, the Company
shall furnish to all holders or beneficial holders and prospective purchasers
of the Notes designated by the holders of Transfer Restricted Securities,
promptly upon their written request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
(c) The Company shall reimburse the Trustee for its
reasonable expenses incurred in reproducing a sufficient number of copies of
all reports and other documents and information that the Trustee may be
requested to deliver to the Holders and others under this Section 4.03.
SECTION 4.04. COMPLIANCE CERTIFICATE.
The Company shall deliver to the Trustee, within 95 days after
the end of each fiscal year of the Company, an Officers' Certificate stating
that a review of the activities of the Company and its subsidiaries during the
preceding fiscal year has been made under the supervision of the signing
Officers with a view to determining whether the Company has kept, observed,
performed and fulfilled all of its obligations under, and complied with the
covenants and conditions contained in, this Indenture, and further stating, as
to each such Officer signing such certificate, that to the best of his
knowledge the Company has kept, observed, performed and fulfilled each and
every covenant, and complied with the covenants and conditions contained in
this Indenture and is not in default in the performance or observance of any of
the terms, provisions and conditions hereof (or, if a Default or Event of
Default shall have occurred, describing all such Defaults or Events of Default
of which such Officer may have knowledge) and that to the best of such
Officer's knowledge no event has occurred and remains in existence by reason of
which payments on account of the principal of, interest and Liquidated Damages
(if any) on, the Notes are prohibited.
One of the Officers signing such Officers' Certificate shall
be either the Company's principal executive officer, principal financial
officer or principal accounting officer.
The Company will, so long as any of the Notes are outstanding,
deliver to the Trustee, forthwith upon becoming aware of:
(a) any Default or Event of Default; or
(b) any event of default under any other mortgage,
indenture or instrument of the Company or any of its Subsidiaries, as
such term is used in Section 8.01(e),
an Officers' Certificate specifying such Default or Event of Default.
Immediately upon the occurrence of any event giving rise to
the payment of Liquidated Damages in accordance with Section 10 of the Notes or
the termination of any such payment obligation, the Company shall deliver an
Officers' Certificate to the Trustee notifying the Trustee of such event giving
rise to such payment of Liquidated Damages or the termination of such payment
obligation.
SECTION 4.05. CORPORATE EXISTENCE.
Subject to Article VII hereof, the Company will do or cause to
be done all things necessary to preserve and keep in full force and effect its
corporate existence and the corporate,
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partnership or other existence of each subsidiary of the Company in accordance
with the respective organizational documents of each subsidiary and the rights
(charter and statutory), licenses and franchises of the Company and its
subsidiaries; provided, however, that the Company shall not be required to
preserve any such right, license or franchise, or the corporate, partnership or
other existence of any subsidiary, if the Board of Directors shall determine
that the preservation thereof is no longer desirable in the conduct of the
business of the Company and its subsidiaries taken as a whole and that the loss
thereof is not adverse in any material respect to the Noteholders.
SECTION 4.06. TAXES.
The Company shall, and shall cause each of its subsidiaries
to, pay prior to delinquency all taxes, assessments and governmental levies,
except as contested in good faith and by appropriate proceedings and except
when the failure to make such payment will not have a material adverse effect
on the Company and its Subsidiaries taken as a whole or be adverse in any
material respect to the Noteholders.
SECTION 4.07. CHANGE OF CONTROL.
(a) Upon the occurrence of a Change of Control, each
holder of Notes shall have the right, in accordance with this Section 4.07, to
require the Company to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such holder's Notes (the "Change of Control
Offer") at a cash purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the
Change of Control Payment Date (the "Change of Control Payment").
(b) The Change of Control Offer shall remain open for a
period specified by the Company which shall be no less than 20 Business Days
following the delivery of a Change of Control Notice (as defined below) (the
"Commencement Date"), except to the extent that a longer period is required by
applicable law (the "Tender Period"). The Change of Control Payment Date and
the Tender Period may be extended to the extent required by law; however, if so
extended, it shall constitute an Event of Default if the Change of Control
Payment Date does not occur within 90 days of the Change of Control. Upon the
expiration of the Tender Period (the "Change of Control Payment Date"), the
Company shall purchase the principal amount of Notes required to be purchased
pursuant to this Section 4.07 (the "Offer Amount").
(c) If the Change of Control Payment Date is on or after
a Record Date and on or before the related Interest Payment Date, any accrued
interest will be paid to the person in whose name a Note is registered at the
close of business on such Record Date, and no additional interest will be
payable to Noteholders who tender Notes pursuant to the Change of Control
Offer.
(d) The Company shall provide the Trustee with notice of
the Change of Control Offer at least 10 days before the Commencement Date.
(e) Within 30 days following any Change of Control, the
Company or the Trustee (at the expense of the Company) shall send, by
first-class mail, a notice (the "Change of Control Notice") to each of the
Noteholders, which shall govern the terms of the Change of Control Offer and
shall state:
(i) that the Change of Control Offer is being made
pursuant to this Section 4.07 hereof and the Tender Period;
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(ii) the Offer Amount, the Change of Control Payment (as
determined in accordance with this Section 4.07), the Change of
Control Payment Date, and that all Notes tendered will be accepted for
payment;
(iii) that Noteholders electing to have a Note or portion
thereof purchased pursuant to any Change of Control Offer will be
required to surrender the Note, with the form entitled "Option of
Noteholder To Elect Purchase" on the reverse of the Note completed, to
the Company, a depositary, if appointed by the Company, or a Paying
Agent at the address specified in the notice prior to the close of
business on the third Business Day preceding the Change of Control
Payment Date;
(iv) that Noteholders will be entitled to withdraw their
election if the Company, depositary or Paying Agent, as the case may
be, receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, or such
longer period as may be required by law, a letter or a telegram,
telex, facsimile transmission (receipt of which is confirmed and
promptly followed by a letter) setting forth the name of the
Noteholder, the principal amount of the Note or portion thereof the
Noteholder delivered for purchase and a statement that such Noteholder
is withdrawing his election to have the Note or portion thereof
purchased;
(v) that any Note or portion thereof not tendered or
accepted for payment will continue to accrue interest;
(vi) that, unless the Company defaults in the payment of
the Change of Control Payment, any Note or portion thereof accepted
for payment pursuant to the Change of Control Offer shall cease to
accrue interest after the Change of Control Payment Date; and
(vii) that Noteholders whose Notes are being purchased only
in part will be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered, which unpurchased
portion must be equal to $1,000 in principal amount or an integral
multiple thereof.
In addition, the Change of Control Notice shall, to the extent
permitted by applicable law, be accompanied by a copy of the information
regarding the Company and its Subsidiaries which is required to be contained in
the most recent Quarterly Report on Form 10-Q or Annual Report on Form 10-K
(including any financial statements or other information required to be
included or incorporated by reference therein) and any Reports on Form 8-K
filed since the date of such Quarterly Report or Annual Report which the
Company has filed with the SEC on or prior to the date of the notice. The
Change of Control Notice shall contain all instructions and materials necessary
to enable such Noteholders to tender Notes pursuant to the Change of Control
Offer.
(f) At least one Business Day prior to the Change of
Control Payment Date, the Company shall irrevocably deposit with the Trustee or
a Paying Agent in immediately available funds an amount equal to the Offer
Amount to be held for payment in accordance with the terms of this Section. On
the Change of Control Payment Date, the Company shall, to the extent lawful,
(i) accept for payment the Notes or portions thereof tendered pursuant to the
Change of Control Offer, (ii) deliver or cause the depositary or Paying Agent
to deliver to the Trustee Notes so accepted and (iii) deliver to the Trustee an
Officers' Certificate stating such Notes or portions thereof have been accepted
for payment by the Company in accordance with the terms of this Section 4.07.
The depositary, the Paying Agent or the Company, as the case may be, shall
promptly (but in any case not later than 10 calendar days after the Change of
Control Payment
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Date) mail or deliver to each tendering Noteholder an amount equal to the
purchase price of the Notes tendered by such Noteholder, and the Trustee shall
promptly authenticate and mail or deliver to such Noteholders a new Note equal
in principal amount to any unpurchased portion of the Note surrendered. Any
Notes not so accepted shall be promptly mailed or delivered by or on behalf of
the Company to the holder thereof. The Company will publicly announce in a
newspaper of general circulation the results of the Change of Control Offer on,
or as soon as practicable after, the Change of Control Payment Date.
(g) The Change of Control Offer shall be made by the
Company in compliance with all applicable provisions of the Exchange Act, and
all applicable tender offer rules promulgated thereunder.
SECTION 4.08. STAY, EXTENSION AND USURY LAWS.
The Company covenants (to the extent that it may lawfully do
so) that it will not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension or
usury law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture, including, without
limitation, the payment of the Notes; and the Company (to the extent it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not, by resort to any such law, hinder, delay
or impede the execution of any power herein granted to the Trustee, but will
suffer and permit the execution of every such power as though no such law has
been enacted.
ARTICLE V
CONVERSION
SECTION 5.01 CONVERSION PRIVILEGE.
Subject to and upon compliance with the provisions of this
Article V, the holder of any Note shall have the right, at his option, at any
time on or prior to the close of business on the Maturity Date (or, if such
Note or portion thereof is called for redemption pursuant to Article III, then
in respect of such Note or portion thereof, on or prior to the close of
business on the Business Day immediately preceding the date fixed for
redemption, unless the Company shall default in payment due upon redemption
thereof in which case such conversion right will terminate at the close of
business on the date such default is cured), to convert the principal amount of
any such Note, or any portion of such principal amount which is $1,000 or an
integral multiple thereof, into that number of fully paid and nonassessable
whole shares of Common Stock obtained by dividing the principal amount of the
Note or portion thereof to be converted by the Conversion Price in effect at
such time and by surrender of the Note so to be converted in whole or in part,
such surrender to be made in the manner provided in Section 5.02.
SECTION 5.02 MANNER OF EXERCISE OF CONVERSION PRIVILEGE.
In order to exercise the conversion privilege, the holder of
any Note to be converted in whole or in part shall surrender such Note, duly
endorsed or assigned to the Company or in blank, at any of the offices or
agencies to be maintained for such purpose by the Company pursuant to Section
4.02, accompanied by the funds, if any, required by the last paragraph of this
Section, and shall give irrevocable written notice of conversion in the form
provided on the Notes (or such other notice as is acceptable to the Company) to
the Company (a "Conversion Notice") at such office or agency that the holder
elects to convert such Note or the portion thereof specified
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in said notice. Such Conversion Notice shall also state the name or names,
together with the address or addresses, in which the certificate or
certificates for shares of Common Stock which shall be issuable in such
conversion shall be issued. Each Note surrendered for conversion shall, unless
the shares issuable on conversion are to be issued in the same name as the name
in which such Note is registered, be accompanied by instruments of transfer, in
form satisfactory to the Company, duly executed by the holder or his duly
authorized attorney and in amount sufficient to pay any transfer or similar
tax. As promptly as practicable after the surrender of such Note and the
receipt of such Conversion Notice, instruments of transfer and funds, if any,
as aforesaid, the Company shall issue and shall deliver at such office or
agency to such holder, or on his written order, a certificate or certificates
for the number of whole shares of Common Stock issuable upon the conversion of
such Note or portion thereof in accordance with the provisions of this Article
V and a check or cash in respect of any fractional interest in a share of
Common Stock arising upon such conversion, as provided in Section 5.03. In
case any Note of a denomination greater than $1,000 shall be surrendered for
partial conversion, the Company shall execute and the Trustee shall register or
cause to be registered and shall authenticate and deliver to or upon the order
of the holder of the Note so surrendered at the expense of the Company, a new
Note or Notes in authorized denominations in an aggregate principal amount
equal to the unconverted portion of the surrendered Note.
Each conversion shall be deemed to have been effected
immediately prior to the close of business on the date on which such Note shall
have been surrendered and such Conversion Notice (and any applicable
instruments of transfer and any required funds) received by the Company as
aforesaid, and the Person or Persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become the holder or holders of record of the shares
represented thereby at such time on such date and such conversion shall be at
the Conversion Price in effect at such time on such date, unless the stock
transfer books of the Company shall be closed on that date, in which event such
Person or Persons shall be deemed to have become such holder or holders of
record at the close of business on the next succeeding day on which such stock
transfer books are open, but such conversion shall be at the Conversion Price
in effect on the date upon which such Note shall have been surrendered and such
Conversion Notice received by the Company.
Any Note or portion thereof surrendered for conversion after
the close of business on a Record Date for payment of interest and prior to the
opening of business on the next succeeding Interest Payment Date shall be
accompanied by payment, in funds acceptable to the Company, of an amount equal
to the interest thereon that is to be paid on such Interest Payment Date on the
principal amount being converted (unless any such Note or portion thereof being
converted shall have been called for redemption on a redemption date occurring
between the close of business on such Record Date and the opening of business
on such Interest Payment Date, in which case no such payment shall be
required); provided, however, that no such payment need be made if there shall
exist at the time of conversion a default in the payment of interest on the
Notes. An amount equal to such payment shall be paid by the Company on such
Interest Payment Date to the holder of such Notes at the close of business on
such Record Date; provided, however, that, if the Company shall default in the
payment of interest on such Interest Payment Date, such amount shall be paid to
the Person who made such required payment. Except as provided for above in
this Section, no payments or adjustments shall be made upon conversion on
account of accrued interest on the Notes or for any dividends or distributions
on any shares of Common Stock delivered upon the conversion of such Notes as
provided in this Article.
In order to exercise the conversion privilege with respect to
any interest in a Global Note, the beneficial holder must complete the
appropriate instruction form for conversion pursuant
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to the Depositary's book-entry conversion program and follow the other
procedures set forth in such program.
Upon the conversion of a Global Note, the Trustee, or the
Custodian at the direction of the Trustee, shall make a notation on such Global
Note as to the reduction in the principal amount represented thereby.
SECTION 5.03 CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES.
No fractional shares or scrip representing fractions of shares
of Common Stock shall be issued upon conversion of the Notes. If more than one
Note shall be surrendered for conversion at one time by the same holder, the
number of full shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate principal amount of the Notes, or
specified portions thereof to be converted, so surrendered. Instead of any
fractional interest in a share of Common Stock which would otherwise be
deliverable upon the conversion of any Note or Notes, the Company shall pay to
the holder of such Note an amount in cash (computed to the nearest cent) equal
to the Daily Market Price thereof at the close of business on the Business Day
next preceding the day of conversion multiplied by the fractional interest
(expressed as a percentage) that otherwise would have been deliverable to such
holder upon such conversion of the Notes.
SECTION 5.04 ADJUSTMENT OF CONVERSION PRICE.
The Conversion Price shall be as specified in Section 9 of the
form of Note, subject to adjustment as provided below. The Conversion Price
shall be adjusted from time to time by the Company as follows:
(a) In case the Company, after the date of this
Indenture, shall (i) pay a dividend or make a distribution on its Common Stock
in shares of Common Stock, (ii) subdivide its outstanding shares of Common
Stock into a greater number of shares, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares, or (iv) issue by reclassification
of its Common Stock any shares of Capital Stock of the Company, the Conversion
Price in effect immediately prior to such action shall be adjusted so that the
holder of any Note thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock or other Capital Stock of the
Company that it would have owned or been entitled to receive immediately
following such action had such Note been converted immediately prior to the
occurrence of such event. An adjustment made pursuant to this subsection (a)
shall become effective immediately after the record date, in the case of a
dividend or distribution, or immediately after the effective date, in the case
of a subdivision, combination or reclassification. If, as a result of an
adjustment made pursuant to this subsection (a), the holder of any Note
thereafter surrendered for conversion shall become entitled to receive shares
of two or more classes of Capital Stock or shares of Common Stock and other
Capital Stock of the Company, the Board of Directors (whose determination shall
be conclusive and shall be described in a statement filed by the Company with
the Trustee and with any Conversion Agent as soon as practicable) shall
determine the allocation of the adjusted Conversion Price between or among
shares of such classes of Capital Stock or shares of Common Stock and other
Capital Stock.
(b) In case the Company, after the date of this
Indenture, shall issue rights, warrants or options to all or substantially all
holders of its outstanding shares of Common Stock entitling them (for a period
expiring within 45 days after the date fixed for determination for shareholders
entitled to receive such rights, warrants or options) to subscribe for or
purchase shares of Common Stock (or securities convertible into Common Stock)
at a price per share less than the
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current market price per share (as determined pursuant to subsection (h) of
this Section 5.04) of the Common Stock, the Conversion Price in effect
immediately prior thereto shall be adjusted so that it shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the date of issuance of such rights, warrants or options by a fraction of which
the numerator shall be the number of shares of Common Stock outstanding on the
date of issuance of such rights, warrants or options (immediately prior to such
issuance), plus the number of shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered for
subscription or purchase (or the aggregate conversion price of the convertible
securities so offered for subscription or purchase) would purchase at such
current market price, and of which the denominator shall be the number of
shares of Common Stock outstanding on the date of issuance of such rights,
warrants or options (immediately prior to such issuance) plus the number of
additional shares of Common Stock so offered for subscription or purchase (or
into which the convertible securities so offered for subscription or purchase
are convertible). Such adjustment shall be made successively whenever any such
rights, warrants or options are issued, and shall become effective immediately
after the record date for the determination of stockholders entitled to receive
such rights, warrants or options. In determining whether any rights, warrants
or options entitle the holders to subscribe for or purchase shares of Common
Stock (or securities convertible into Common Stock) at less than such current
market price, and in determining the aggregate offering price of such shares of
Common Stock (or conversion price of such convertible securities), there shall
be taken into account any consideration received by the Company for such
rights, warrants or options (and for such convertible securities), the value of
such consideration, if other than cash, to be determined by the Board of
Directors (whose determination shall be conclusive and shall be described in a
certificate filed with the Trustee and with any Conversion Agent by the Company
as soon as practicable). If at the end of the period during which such
warrants, rights or options are exercisable not all such warrants, rights or
options shall have been exercised, the adjusted Conversion Price shall be
immediately readjusted to what it would have been based on the number of
additional shares of Common Stock actually issued (or the number of shares of
Common Stock issuable upon conversion of convertible securities actually
issued).
(c) In case the Company, after the date of this
Indenture, shall distribute to all or substantially all holders of its
outstanding Common Stock any shares of Capital Stock (other than Common Stock),
evidences of its indebtedness or assets (excluding dividends payable
exclusively in cash and any issuance of Capital Stock pursuant to
reclassifications for which adjustment is required pursuant to subsection (a)
of this Section 5.04) or rights, warrants or options to subscribe for or
purchase Capital Stock of the Company (excluding those referred to in
subsection (b) of this Section 5.04) entitling them to subscribe for or
purchase Capital Stock at a price per share less than the fair market value of
such Capital Stock (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution), then in
each such case the Conversion Price shall be adjusted so that the same shall
equal the price determined by multiplying the Conversion Price in effect
immediately prior to the record date of such distribution by a fraction of
which the numerator shall be the current market price per share (as determined
pursuant to subsection (h) of this Section 5.04) of the Common Stock less the
fair market value on such record date (as determined by the Board of Directors,
whose determination shall be conclusive and shall be described in a certificate
filed with the Trustee and with any Conversion Agent by the Company as soon as
practicable) of the portion of the Capital Stock or the evidences of
indebtedness or the assets so distributed to the holder of one share of Common
Stock or of such subscription rights, warrants or options applicable to one
share of Common Stock and of which the denominator shall be such current market
price per share of Common Stock. Such adjustment shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such distribution. If at the end of the period during
which warrants, rights or options described in this subsection (c) are
exercisable not all such warrants, rights or options shall have been exercised,
the adjusted Conversion Price shall be immediately
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readjusted to what it would have been based on the number of warrants, rights
or options actually exercised. Notwithstanding the foregoing, in the event
that the fair market value of the Capital Stock, evidences of indebtedness,
assets, subscription rights, warrants or options so distributed exceeds the
current market price per share of Common Stock, or such current market price
exceeds such fair market value by less than $0.10 per share, the Company may,
in lieu of making an adjustment in the Conversion Price pursuant to this
subsection (c), make adequate provision so that each Noteholder who converts
such Note after the record date for such distribution will be entitled to
receive upon such conversion, in addition to shares of Common Stock, the amount
of Capital Stock, evidences of indebtedness, assets, subscription rights,
warrants or options such Noteholder would have received had such Note been
converted immediately prior to the record date for such distribution.
(d) Notwithstanding anything in subsection (b) or (c) of
this Section 5.04 to the contrary, with respect to any rights, warrants or
options covered by subsection (b) or (c) of this Section 5.04, if such rights,
warrants or options are only exercisable upon the occurrence of certain
triggering events, then for purposes of this Section 5.04 such rights, warrants
or options shall not be deemed issued or distributed, and any adjustment to the
Conversion Price required by subsection (b) or (c) of this Section 5.04 shall
not be made until such triggering events occur and such rights, warrants or
options become exercisable.
(e) In case the Company, after the date of this
Indenture, shall (i) issue shares of its Common Stock (excluding those
issuances referred to in subsection (a) or (b) to this Section 5.04) at a price
per share less than the current market price per share (as determined pursuant
to subsection (h) of this Section 5.04) on the date the Company fixes the
offering price of such additional shares or (ii) issue any options, warrants or
other securities convertible into or exchangeable or exercisable for Common
Stock (such options, warrants or other securities being collectively referred
to herein as "Equity Interests") for a consideration per share of Common Stock
initially deliverable upon conversion, exchange or exercise of such securities
less than the current market price per share (as determined pursuant to
subsection (h) of this Section 5.04) then, in either case, the Conversion Price
shall be reduced immediately thereafter so that it shall equal the price
determined by multiplying such Conversion Price in effect immediately prior
thereto by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares plus the number of shares of Common Stock which the aggregate offering
price of the total number of shares of Common Stock so offered, or, in the case
of clause (ii) above, the aggregate consideration for the issuance of such
Equity Interests, would purchase at the current market price and the
denominator shall be the number of shares of Common Stock that would be
outstanding immediately after the issuance of such additional shares, or, in
the case of clause (ii) above, such number of outstanding shares plus the
maximum number of shares of Common Stock deliverable upon conversion or in
exchange for or upon exercise of such Equity Interests at the initial
conversion, exchange or exercise price. Such adjustment shall be made
successively whenever such an issuance is made.
This subsection (e) does not apply to:
(1) any transaction described in subsections (a),
(b) or (c) of this Section 5.04; or
(2) the issuance of the Notes or the issuance of
Common Stock upon conversion of the Notes; or
(3) the issuance of Common Stock upon (i) the
exercise of any Equity Interests issued after the date of the Indenture, to the
extent that any required adjustment to the
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Conversion Price has been made pursuant to this subsection (e); (ii) the
issuance of Common Stock pursuant to the exercise of any Equity Interest
outstanding on the date of this issuance, or pursuant to any contract or other
arrangement described in the Offering Memorandum; or
(4) any Common Stock or Equity Interests issued
to the Company's (or any Subsidiary's) employees or directors pursuant to any
plan or agreement approved by either the stockholders of the Company or a
majority of the Company's independent directors; or
(5) the issuance of any Common Stock or Equity
Interests in any bona fide underwritten public offering.
(f) In case the Company, after the date of this
Indenture, shall, by dividend or otherwise, at any time distribute to all
holders of its Common Stock cash (including any cash that is distributed as
part of a distribution referred to in subsection (c) of this Section) in an
aggregate amount that, together with (i) the aggregate amount of any other
distributions to all holders of its Common Stock made exclusively in cash
within the 12 months preceding the date fixed for determining the stockholders
entitled to such distribution and in respect of which no Conversion Price
adjustment pursuant to this subsection (f) has been made and (ii) the aggregate
of any cash plus the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a Board
Resolution), as of such date of determination, of consideration payable in
respect of any tender offer by the Company or a subsidiary for all or any
portion of the Common Stock consummated within 12 months preceding the date
fixed for determining the stockholders entitled to such distribution and in
respect of which no Conversion Price adjustment pursuant to subsection (g) of
this Section has been made, exceeds 15% of the product of the current market
price per share (determined as provided in subsection (h) of this Section) on
the date fixed for the determination of stockholders entitled to receive such
distribution times the number of shares of Common Stock outstanding on such
date, the Conversion Price shall be reduced by multiplying such Conversion
Price by a fraction of which the numerator shall be the current market price
per share (determined as provided in subsection (h) of this Section) on the
date fixed for such determination less the amount of cash so distributed during
such period applicable to one share of Common Stock and the denominator shall
be such current market price, such reduction to become effective immediately
prior to the opening of business on the date after the date fixed for such
determination. Notwithstanding the foregoing, in the event that the amount of
cash and the fair market value of such consideration so distributed exceeds the
current market price per share of Common Stock, or such current market price
exceeds such fair market value by less than $0.10 per share, the Company may,
in lieu of making an adjustment in the Conversion Price pursuant to this
subsection (f), make adequate provision so that each Noteholder who converts
such Note after the record date for such distribution will be entitled to
receive upon such conversion, in addition to shares of Common Stock, the amount
of cash or other consideration such Noteholder would have received had such
Note been converted immediately prior to the record date for such distribution.
(g) In case a tender offer made by the Company or any
subsidiary, after the date of this Indenture, for all or any portion of the
Common Stock shall be consummated and such tender offer shall involve an
aggregate consideration having a fair market value (as determined by the Board
of Directors, whose determination shall be conclusive and described in a Board
Resolution) as of the last time (the "Expiration Time") that tenders may be
made pursuant to such tender offer (as it may be amended) that, together with
(i) aggregate of the cash plus the fair market value (as determined by the
Board of Directors, whose determination shall be conclusive and described in a
Board Resolution), as of the consummation of such tender offer, of other
consideration paid or payable in respect of any tender offer by the Company or
a subsidiary for all or any portion of the Common Stock consummated within the
12 months preceding the
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consummation of such tender offer and in respect of which no Conversion Price
adjustment pursuant to this subsection (g) has been made and (ii) the aggregate
amount of any distributions to all holders of Common Stock made exclusively in
cash within the 12 months preceding the consummation of such tender offer and
in respect of which no Conversion Price adjustment pursuant to subsection (f)
of this Section has been made, exceeds 15% of the product of the current market
price per share (determined as provided in subsection (h) of this Section)
immediately prior to the Expiration Time times the number of shares of Common
Stock outstanding (including any tendered shares) at the Expiration Time, the
Conversion Price shall be reduced by multiplying the Conversion Price in effect
immediately prior to the Expiration Time by a fraction of which the numerator
shall be (i) the product of the current market price per share (determined as
provided in subsection (h) of this Section) immediately prior to the Expiration
Time times the number of shares of Common Stock outstanding (including any
tendered shares) at the Expiration Time minus (ii) the fair market value
(determined as aforesaid) of the aggregate consideration payable to
stockholders upon consummation of such tender offer (the shares accepted for
payment in the tender offer being referred to as the "Purchased Shares") and
the denominator shall be the product of (x) such current market price per share
times (y) such number of outstanding shares at the Expiration Time minus the
number of Purchased Shares, such reduction to become effective immediately
prior to the opening of business on the day following the Expiration Time;
provided that, if the number of Purchased Shares or the aggregate consideration
payable therefor have not been finally determined by such opening of business,
the adjustment required by this subsection (g) shall, pending such final
determination, be made based upon the preliminary announced results of such
tender offer, and, after such final determination shall have been made, the
adjustment required by this subsection (g) shall be made based upon the number
of Purchased Shares and the aggregate consideration payable therefor as so
finally determined.
(h) For the purpose of any computation under subsections
(b) through (g) of this Section 5.04, the current market price per share of
Common Stock on any date shall be deemed to be the average of the Daily Market
Prices for the shorter of (i) 30 consecutive Business Days ending on the last
full trading day on the exchange or market referred to in determining such
Daily Market Prices prior to the Time of Determination or (ii) the period
commencing on the date next succeeding the first public announcement of the
issuance of such rights or warrants or such distribution through such last full
trading day prior to the Time of Determination.
(i) In any case in which this Section 5.04 shall require
that an adjustment be made immediately following a record date or an effective
date, the Company may elect to defer (but only until five business days
following the filing by the Company with the Trustee and any Conversion Agent
of the certificate required by subsection (k) of this Section 5.04) issuing to
the holder of any Note converted after such record date or effective date the
shares of Common Stock issuable upon such conversion over and above the shares
of Common Stock issuable upon such conversion on the basis of the Conversion
Price prior to adjustment, and paying to such holder any amount of cash in lieu
of a fractional share.
(j) No adjustment in the Conversion Price shall be
required to be made unless such adjustment would require an increase or
decrease of at least 1% in such price; provided, however, that any adjustments
which by reason of this subsection (j) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 5.04 shall be made to the nearest cent or to
the nearest 1/100th of a share, as the case may be. No adjustment to the
Conversion Price need be made if only the par value of the Common Stock is
changed (including any change to no par value Common Stock). To the extent
that the Notes become convertible into cash, no adjustment need be made
thereafter as to such cash and interest will not accrue on such cash. Anything
in this Section 5.04 to the contrary notwithstanding, the Company shall be
entitled to make such reduction in the Conversion Price,
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in addition to those required by this Section 5.04, as it in its discretion
shall determine to be advisable in order that any stock dividend, subdivision
of shares, distribution of rights to purchase stock or securities, or
distribution of securities convertible into or exchangeable for stock hereafter
made by the Company to its stockholders shall not be taxable to the recipients.
(k) Whenever the Conversion Price is adjusted as herein
provided, (i) the Company shall promptly file with the Trustee and any
Conversion Agent other than the Trustee a certificate signed by the President,
any Vice President or the Treasurer of the Company setting forth the Conversion
Price after such adjustment and setting forth a brief statement of the facts
requiring such adjustment and the manner of computing the same, which
certificate shall be conclusive evidence of the correctness of such adjustment,
and (ii) a notice stating that the Conversion Price has been adjusted and
setting forth the adjusted Conversion Price shall forthwith be given by the
Company to the holders of Notes in the manner provided in Section 12.02. The
Company may correct any previous certificate and notice given pursuant to this
subsection (k) by (i) promptly filing with the Trustee and any Conversion Agent
other than the Trustee a new certificate in the form required by this
subsection (k) and (ii) giving a new notice to the holders of Notes in the form
and manner required by this subsection (k). Such new certificate and notice
shall state that such certificate and notice are being provided to correct the
previous certificate and notice. Except as otherwise provided in Section 9.01,
neither the Trustee nor any Conversion Agent shall be under any duty or
responsibility with respect to the certificate required by this subsection (k)
except to exhibit the same to any holder of Notes who requests to inspect it.
The certificate required by this subsection (k) shall be filed at each office
or agency maintained for the purposes of conversion of Notes pursuant to
Section 2.03.
(l) In the event that at any time, as a result of an
adjustment made pursuant to subsection (a) of this Section 5.04, the holder of
any Note thereafter surrendered for conversion shall become entitled to receive
any shares of the Company other than shares of Common Stock, thereafter the
Conversion Price of such other shares so receivable upon conversion of any Note
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to Common Stock
contained in this Article V and the other provisions of this Article V
applicable to Common Stock shall apply to such other shares.
(m) Consideration Received
For purposes of any computation respecting consideration
received pursuant to subsection (e) of this Section 5.04, the following shall
apply:
(1) in the case of the issuance of shares of
Common Stock for cash, the consideration shall be the amount of such
cash, provided that in no case shall any deduction be made for any
commissions, discounts or other expenses incurred by the Company for
any underwriting of the issue or otherwise in connection therewith;
(2) in the case of the issuance of shares of
Common Stock for a consideration in whole or in part other than cash,
the consideration other than cash shall be deemed to be the fair
market value thereof (irrespective of the accounting treatment
thereof) as determined in good faith by the Board of Directors; and
(3) in the case of the issuance of Equity
Interests, the aggregate consideration received therefor shall be
deemed to be the consideration received by the Company for the
issuance of such Equity Interests plus the additional minimum
consideration, if any, to be received by the Company upon the
conversion, exchange or
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exercise thereof (the consideration in each case to be determined in
the same manner as provided in clauses (1) and (2) of this
subsection).
SECTION 5.05 NOTICE TO HOLDERS PRIOR TO CERTAIN CORPORATE ACTIONS.
In case:
(a) the Company shall take any action that would
require an adjustment in the Conversion Price pursuant to Section
5.04(c); or
(b) the Company shall authorize the granting to the
holders of its Common Stock generally of rights, warrants or options
to subscribe for or purchase any shares of stock of any class or of
any other rights (other than employee or director stock options); or
(c) there shall be any reorganization or
reclassification of the Common Stock (other than a subdivision or
combination of the outstanding Common Stock and other than a change in
the par value of the Common Stock), or any consolidation or merger to
which the Company is a party, or any conveyance, transfer, sale or
lease of the Company's properties and assets as, or substantially as,
an entirety; or
(d) the Company takes any action which would require
a supplemental indenture pursuant to Section 5.09; or
(e) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then the Company shall cause to be filed with the Trustee and any Conversion
Agent, and shall cause to be given to the holders of Notes, in the manner
provided in Section 12.02, as promptly as possible, but in any event at least
10 days prior to the applicable date hereinafter specified, a notice stating
(i) the date on which a record is to be taken for the purpose of such dividend,
or distribution or rights or warrants, or, if a record is not to be taken, the
date as of which the holders of Common Stock of record to be entitled to such
distribution or rights are to be determined, or (ii) the date on which such
reorganization, reclassification, consolidation, merger, conveyance, transfer,
sale, lease, dissolution, liquidation or winding up is expected to become
effective or occur, and, if applicable, the date as of which it is expected
that holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities, cash or other property deliverable upon
such reorganization, reclassification, consolidation, merger, conveyance,
transfer, sale, lease, liquidation or winding up. Failure to give such notice
or any defect therein shall not affect the legality or validity of the
proceedings described in subsection (a), (b), (c) or (d) of this Section 5.05.
SECTION 5.06 RESERVATION OF SHARES OF COMMON STOCK.
The Company shall at all times reserve and keep available,
free from preemptive rights, out of the aggregate of its authorized but
unissued shares of Common Stock or its issued shares of Common Stock held in
its treasury, or both, for the purpose of effecting conversions of Notes, the
full number of shares of Common Stock deliverable upon the conversion of all
outstanding Notes not theretofore converted.
Before taking any action that would cause an adjustment
reducing the Conversion Price below the then par value (if any) of the shares
of Common Stock deliverable upon conversion
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of the Notes, the Company shall take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Company may validly and
legally issue fully paid and nonassessable shares of Common Stock at such
adjusted Conversion Price.
SECTION 5.07 TAXES UPON CONVERSION.
The Company shall pay any and all documentary, stamp or
similar issue or transfer taxes payable in respect of the issue or delivery of
shares of Common Stock on conversions of Notes pursuant hereto; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issue or delivery of shares
of Common Stock in a name other than that of the holder of the Note or Notes to
be converted and no such issue or delivery shall be made unless and until the
Person requesting such issue or delivery has paid to the Company the amount of
any such tax or has established to the satisfaction of the Company that such
tax has been paid.
SECTION 5.08 COVENANTS AS TO COMMON STOCK.
The Company covenants that all shares of Common Stock which
may be delivered upon conversions of Notes will upon delivery be duly and
validly issued and fully paid and nonassessable, free of all liens,
encumbrances and charges and not subject to any preemptive rights. Shares of
Common Stock issuable upon conversion of a Transfer Restricted Security shall
bear such restrictive legends as the Company shall provide in accordance with
applicable law. If shares of Common Stock are to be issued upon conversion of
a Transfer Restricted Security and they are to be registered in a name other
than that of the holder of such Transfer Restricted Security, then the person
in whose name such shares of Common Stock are to be registered must deliver to
the Trustee a certificate satisfactory to the Company and signed by such person
as to compliance with the restrictions on transfer contained in such
restrictive legends.
The Company further covenants that, for so long as the Common
Stock shall be listed on the Nasdaq National Market or any national securities
exchange, the Company will, if permitted by the rules of Nasdaq National Market
or such national securities exchange, list and keep listed all Common Stock
issuable upon conversion of the Notes.
SECTION 5.09 CONSOLIDATION OR MERGER OR SALE OF ASSETS.
Notwithstanding any other provision herein to the contrary, in
case of any consolidation or merger to which the Company is a party (other than
a merger or consolidation which does not result in any reclassification,
conversion, exchange or cancellation of the outstanding shares of Common Stock
of the Company), or in case of any conveyance, transfer, sale or lease to
another corporation of the properties and assets of the Company as, or
substantially as, an entirety, the corporation formed by such consolidation, or
the corporation whose securities, cash or other property will immediately after
the merger or consolidation be owned, by virtue of the merger or consolidation,
by the holders of Common Stock of the Company immediately prior to the merger
or the corporation which shall have acquired such properties and assets of the
Company, as the case may be, shall promptly execute and deliver to the Trustee
a supplemental indenture providing that the holder of each Security then
outstanding shall have the right thereafter to convert such Note, during the
period such Note is convertible as specified in this Article V, into the kind
and amount of securities, cash or other property receivable upon such
consolidation, merger, conveyance, transfer, sale or lease by a holder of the
number of shares of Common Stock into which such Note might have been converted
immediately prior to such consolidation, merger, conveyance, transfer, sale or
lease, assuming such holder of Common Stock (i) is not a Person with which the
Company consolidated or into which the Company merged or was merged or to
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which such conveyance, transfer, sale or lease was made or an Affiliate of such
Person and (ii) did not exercise statutory rights of election, if any, as to
the kind or amount of securities, cash or other property receivable upon such
consolidation, merger, conveyance, transfer, sale or lease (provided that, if
the kind or amount of securities, cash or other property receivable upon such
consolidation, merger, conveyance, transfer, sale or lease is not the same for
each share of Common Stock in respect of which such rights of election shall
not have been exercised ("non-electing share"), then for the purposes of this
Section 5.09 the kind and amount of securities, cash or other property
receivable upon such consolidation, merger, conveyance, transfer, sale or lease
for each non-electing share shall be deemed to be the kind and amount so
receivable per share by the holders of a plurality of the non-electing shares).
Such supplemental indenture shall provide for adjustments which, for events
subsequent to the effective date of such supplemental indenture, shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Article V in relation to any shares of stock or other securities or property
thereafter deliverable on the conversion of the Notes.
The above provisions of this Section 5.09 shall similarly
apply to successive consolidations, mergers, conveyances, transfers, sales or
leases.
The Company shall give notice of the execution of such a
supplemental indenture to the holders of Notes in the manner provided in
Section 12.02 within 30 days after the execution thereof; provided, however,
that such notice need not be given if such information has been provided
prospectively in the notice given pursuant to Section 5.05. Failure to give
such notice, or any defects therein, shall not affect the legality or validity
of any such supplemental indenture or any transaction contemplated in this
Section 5.09.
SECTION 5.10 DISCLAIMER OF RESPONSIBILITY FOR CERTAIN MATTERS.
Neither the Trustee nor any Conversion Agent shall at any time
be under any duty or responsibility to any holder of Notes to determine whether
any facts exist which may require any adjustment of the Conversion Price, or
with respect to the nature or extent of any such adjustment when made, or with
respect to the method employed, or herein or in any supplemental indenture
provided to be employed, in making the same. Neither the Trustee nor any
Conversion Agent shall be accountable with respect to the listing or
registration referred to in Section 5.08 or the validity or value (or the kind
or amount) of any shares of Common Stock, or of any securities, cash or other
property, which may at any time be issued or delivered upon the conversion of
any Note; and neither the Trustee nor any Conversion Agent makes any
representation with respect thereto. Neither the Trustee nor any Conversion
Agent shall be responsible for any failure of the Company to issue, transfer or
deliver any shares of Common Stock or stock certificates or other securities or
property or to make any cash payment upon the surrender of any Note for the
purpose of conversion or, subject to the provisions of Section 9.01, to comply
with any of the covenants of the Company contained in this Article V.
SECTION 5.11 CANCELLATION OF CONVERTED NOTES.
All Notes delivered for conversion shall be delivered to the
Trustee to be cancelled by or at the direction of the Trustee, which shall
dispose of the same as provided in Section 2.11.
SECTION 5.12 VOLUNTARY REDUCTION.
The Company from time to time may reduce the Conversion Price
by any amount for any period of time if the period is at least 20 days or such
longer period as may be required by law and if the reduction is irrevocable
during such period.
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ARTICLE VI
SUBORDINATION
SECTION 6.01. AGREEMENT TO SUBORDINATE.
The Company agrees, and each holder of Notes by accepting a
Note agrees, that the indebtedness evidenced by the Note is subordinated in
right of payment, to the extent and in the manner provided in this Article VI,
to the prior payment in full of all Senior Indebtedness (whether outstanding on
the date hereof or hereafter created, incurred, assumed or guaranteed), and
that the subordination is for the benefit of the holders of Senior
Indebtedness.
SECTION 6.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY.
Upon any distribution to creditors of the Company in a
liquidation or dissolution of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company or its
property, in an assignment for the benefit of creditors or any marshalling of
the Company's assets and liabilities:
(1) holders of Senior Indebtedness shall be entitled to
receive payment in full of all Obligations due in respect of such
Senior Indebtedness in cash or U.S. Government Obligations or other
payment satisfactory to the holders of the Senior Indebtedness before
holders of Notes shall be entitled to receive any payment with respect
to the Notes; and
(2) until all Senior Indebtedness then due and payable is
paid in full in cash or U.S. Government Obligations or other payment
satisfactory to the holders of the Senior Indebtedness, any
distribution to which holders of Notes would be entitled but for this
Article VI shall be made to holders of Senior Indebtedness, as their
interests may appear.
SECTION 6.03. DEFAULT ON DESIGNATED SENIOR INDEBTEDNESS.
The Company may not make any payment or distribution to the
Trustee, any Paying Agent or any holder of Notes in respect of Obligations with
respect to the Notes and may not acquire from the Trustee or any holder of
Notes any Notes until all Designated Senior Indebtedness has been paid in full
in cash or U.S. Government Obligations or other payment satisfactory to the
holders of the Designated Senior Indebtedness if:
(i) a default in the payment of any principal of,
premium, if any, interest, rent or other Obligations in respect of
Designated Senior Indebtedness occurs and is continuing beyond any
applicable grace period in the agreement, indenture or other document
governing such Designated Senior Indebtedness; or
(ii) a default, other than a payment default, on
Designated Senior Indebtedness occurs and is continuing that then
permits holders of such Designated Senior Indebtedness to accelerate
its maturity and the Trustee receives a notice of the default (a
"Payment Blockage Notice") from a person who may give it pursuant to
Section 6.11 hereof.
If the Trustee receives any Payment Blockage Notice pursuant
to this Section 6.03, no subsequent Payment Blockage Notice shall be effective
for purposes of such Section unless and until (i) at least 365 days shall have
elapsed since the effectiveness of the immediately prior Payment Blockage
Notice and (ii) all scheduled payments of principal, premium, if any, and
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interest on the Notes that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for
a subsequent Payment Blockage Notice.
The Company may and shall resume payments on and distributions
in respect of the Notes and may acquire them upon the earlier of:
(1) the date upon which the default is cured or waived, or
(2) in the case of a default referred to in Section
6.03(ii) hereof, 179 days pass after notice is received if the
maturity of such Designated Senior Indebtedness has not been
accelerated,
if this Article otherwise permits the payment, distribution or acquisition at
the time of such payment, distribution or acquisition.
SECTION 6.04. ACCELERATION OF NOTES.
In the event of the acceleration of the Notes because of an
Event of Default, the Company may not make any payment or distribution to the
Trustee or any holder of Notes in respect of Obligations with respect to Notes
and may not acquire or purchase any Notes from the Trustee or any holder of
Notes until all Senior Indebtedness then due and payable has been paid in full
in cash or U.S. Government Obligations or other payment satisfactory to the
holders of Senior Indebtedness or such acceleration is rescinded in accordance
with the terms of this Indenture. If payment of the Notes is accelerated
because of an Event of Default, the Company shall promptly notify holders of
Senior Indebtedness of the acceleration.
SECTION 6.05. WHEN DISTRIBUTION MUST BE PAID OVER.
In the event the Company shall have made distributions of
assets of the Company of any kind for any Obligations with respect to the Notes
to the Trustee, Paying Agent or directly to any holder of Notes whether in
cash, property or securities, including without limitation by way of set-off or
otherwise, at a time when such payment or distribution is prohibited by this
Indenture, such payment shall be held by the Trustee, Paying Agent or such
holder, in trust for the benefit of, and shall be paid forthwith over and
delivered, to the extent necessary to make payment in full of any Senior
Indebtedness remaining unpaid, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Indebtedness; provided that the
foregoing shall apply to the Trustee and any Paying Agent only if the Trustee
or such Paying Agent has actual knowledge (as determined in accordance with
Section 6.11) that such payment or distribution is prohibited by this
Indenture.
With respect to the holders of Senior Indebtedness, the
Trustee undertakes to perform only such obligations on the part of the Trustee
as are specifically set forth in this Article VI, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to
owe any fiduciary duty to the holders of Senior Indebtedness, and shall not be
liable to any such holders if the Trustee shall pay over or distribute to or on
behalf of holders of Notes or the Company or any other person money or assets
to which any holders of Senior Indebtedness shall be entitled by virtue of this
Article VI, except if such payment is made as a result of the wilful misconduct
or gross negligence of the Trustee.
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SECTION 6.06. NOTICE BY COMPANY.
The Company shall promptly notify the Trustee of any facts
known to the Company that would cause a payment of any Obligations with respect
to the Notes or the purchase of any Notes by the Company to violate this
Article, but failure to give such notice shall not affect the subordination of
the Notes to the Senior Indebtedness as provided in this Article.
SECTION 6.07. SUBROGATION.
After all Senior Indebtedness is paid in full and until the
Notes are paid in full, holders of Notes shall be subrogated (equally and
ratably with all other indebtedness pari passu with the Notes) to the rights of
holders of Senior Indebtedness to receive distributions applicable to Senior
Indebtedness to the extent that distributions otherwise payable to the holders
of Notes have been applied to the payment of Senior Indebtedness. A
distribution made under this Article to holders of Senior Indebtedness that
otherwise would have been made to holders of Notes is not, as between the
Company and holders of Notes, a payment by the Company on the Notes.
SECTION 6.08. RELATIVE RIGHTS.
This Article defines the relative rights of holders of Notes
and holders of Senior Indebtedness. Nothing in this Indenture shall:
(a) impair, as between the Company and holders of Notes,
the obligation of the Company, which is absolute and unconditional, to
pay principal of, and interest and Liquidated Damages (if any) on, the
Notes in accordance with their terms;
(b) affect the relative rights of holders of Notes and
creditors (other than with respect to Senior Indebtedness) of the
Company other than their rights in relation to holders of Senior
Indebtedness; or
(c) prevent the Trustee or any holder of Notes from
exercising its available remedies upon a Default or Event of Default,
subject to the rights of holders and owners of Senior Indebtedness to
receive distributions and payments otherwise payable to holders of
Notes.
If the Company fails because of this Article to pay principal of, or
interest or Liquidated Damages (if any) on, a Note on the due date, the failure
is still a Default or Event of Default.
SECTION 6.09. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY.
No right of any holder of Senior Indebtedness to enforce the
subordination of the indebtedness evidenced by the Notes shall be impaired by
any act or failure to act by the Company or any holder of Notes or by the
failure of the Company or any such holder to comply with this Indenture.
SECTION 6.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE.
Whenever a distribution is to be made or a notice given to
holders of Senior Indebtedness, the distribution may be made and the notice
given to their Representative.
Upon any payment or distribution of assets of the Company
referred to in this Article VI, the Trustee and the holders of Notes shall be
entitled to rely upon any order or decree
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made by any court of competent jurisdiction or upon any certificate of such
Representative or of the liquidating trustee or agent or other person making
any distribution to the Trustee or to the holders of Notes for the purpose of
ascertaining the persons entitled to participate in such distribution, the
holders of the Senior Indebtedness and other indebtedness of the Company, the
amount thereof or payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this Article VI.
SECTION 6.11. RIGHTS OF TRUSTEE AND PAYING AGENT.
Notwithstanding the provisions of this Article VI or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee (other than pursuant to Section 6.05), and the
Trustee may continue to make payments on the Notes, unless the Trustee shall
have received at least two business days prior to the date of such payment or
distribution written notice of facts that would cause such payment or
distribution with respect to the Notes to violate this Article. Only the
Company or a Representative may give the notice.
Nothing in this Article VI shall impair the claims of, or
payments to, the Trustee under or pursuant to Section 9.07 hereof.
The Trustee in its individual or any other capacity may hold
Senior Indebtedness with the same rights it would have if it were not Trustee.
Any Agent may do the same with like rights.
SECTION 6.12. AUTHORIZATION TO EFFECT SUBORDINATION.
Each holder of a Note by the holder's acceptance thereof
authorizes and directs the Trustee on the holder's behalf to take such action
as may be necessary or appropriate to effectuate the subordination as provided
in this Article VI, and appoints the Trustee to act as the holder's
attorney-in-fact for any and all such purposes. If the Trustee does not file a
proper proof of claim or proof of debt in the form required in any proceeding
referred to in Section 6.02 hereof at least 30 days before the expiration of
the time to file such claim, the holders of any Senior Indebtedness or their
Representatives are hereby authorized to file an appropriate claim for and on
behalf of the holders of the Notes.
SECTION 6.13. ARTICLE APPLICABLE TO PAYING AGENTS.
In case at any time any Paying Agent other than the Trustee
shall have been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article VI shall in such case (unless the context
otherwise requires) be construed as extending to and including such Paying
Agent within its meaning as fully for all intents and purposes as if such
Paying Agent were named in this Article in addition to or in place of the
Trustee; provided, however, that the second and third paragraphs of Section
6.11 shall not apply to the Company or any subsidiary of the Company if it or
such subsidiary acts as Paying Agent.
SECTION 6.14. SENIOR INDEBTEDNESS ENTITLED TO RELY.
The holders of Senior Indebtedness shall have the right to
rely upon this Article VI, and no amendment or modification of the provisions
contained herein shall diminish the rights of such holders unless such holders
shall have agreed in writing thereto.
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ARTICLE VII
SUCCESSORS
SECTION 7.01. MERGER, CONSOLIDATION OR SALE OF ASSETS.
The Company may not consolidate or merge with or into, or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions to, another corporation, person or entity unless:
(a) the Company is the surviving corporation or the
entity or the person formed by or surviving any such consolidation or
merger (if other than the Company) or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made
is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia;
(b) the entity or person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or
person to which such sale, assignment, transfer, lease, conveyance or
other disposition will have been made expressly assumes all the
Obligations of the Company, pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee, under the Notes and the
Indenture;
(c) immediately after such transaction no Default or
Event of Default exists; and
(d) the Company or such person shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel each
stating that such consolidation, merger, conveyance, transfer or lease
and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture, comply with this provision
of this Indenture and that all conditions precedent in this Indenture
relating to such transaction have been satisfied.
SECTION 7.02. SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger, or any sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the assets of the Company in accordance with Section 7.01 hereof, the successor
corporation formed by such consolidation or into or with which the Company is
merged or to which such sale, assignment, transfer, lease, conveyance or other
disposition is made shall succeed to, and be substituted for and may exercise
every right and power of, the Company under this Indenture with the same effect
as if such successor person has been named as the Company herein; and the
Company shall be released from its obligations under this Indenture and the
Securities, except as to any obligation that arises from or as a result of such
transaction.
SECTION 7.03. PURCHASE OPTION ON CHANGE OF CONTROL.
This Article VII does not affect the obligations of the
Company (including without limitation any successor to the Company) under
Section 4.07.
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ARTICLE VIII
DEFAULTS AND REMEDIES
SECTION 8.01. EVENTS OF DEFAULT.
An "Event of Default" occurs if:
(a) the Company defaults in the payment of interest or
Liquidated Damages, if any on any Note when the same becomes due and
payable and the Default continues for a period of 30 days after the
date due and payable;
(b) the Company defaults in the payment of the principal
of any Note when the same becomes due and payable at maturity, upon
redemption or otherwise;
(c) the Company fails to observe or perform any covenant
or agreement contained in Section 4.07 or Article V hereof;
(d) the Company or any Subsidiary thereof fails to
observe or perform any other covenant or agreement contained in this
Indenture or the Notes required by any of them to be performed and the
Default continues for a period of 60 days after notice from the
Trustee to the Company or from the holders of 25% in aggregate
principal amount of the outstanding Notes to the Company and the
Trustee stating that such notice is a "Notice of Default";
(e) there is a default under any mortgage, indenture or
instrument under which there is issued or by which there is secured or
evidenced any indebtedness for money borrowed by the Company or any of
its Subsidiaries (or the payment of which is guaranteed by the Company
or any of its Subsidiaries), whether such indebtedness or guarantee
now exists or is created after the Issuance Date, which default (i) is
caused by a failure to pay when due principal of or interest on such
indebtedness within the grace period provided for in such indebtedness
(which failure continues beyond any applicable grace period) (a
"Payment Default") or (ii) results in the acceleration of such
indebtedness prior to its express maturity and, in each case, the
principal amount of any such indebtedness, together with the principal
amount of any other such indebtedness under which there is a Payment
Default or the maturity of which has been so accelerated, aggregates
$10 million or more;
(f) a final judgment or judgments for the payment of
money are entered by a court or courts of competent jurisdiction
against the Company or any Subsidiary of the Company which remains
undischarged for a period (during which such judgment (s) shall not be
bonded or execution shall not be effectively stayed) of 60 days,
provided that the aggregate of all such judgments which are not fully
insured by a reputable insurance company exceeds $10 million;
(g) the Company or any Significant Subsidiary pursuant to
or within the meaning of any Bankruptcy Law; (i) commences a voluntary
case, (ii) consents to the entry of an order for relief against it in
an involuntary case in which it is the debtor, (iii) consents to the
appointment of a Custodian of it or for all or substantially all of
its property, (iv) makes a general assignment for the benefit of its
creditors, or (v) generally is unable to pay its debts as the same
become due; or
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(h) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that: (i) is for relief against the
Company or any Significant Subsidiary in an involuntary case, (ii)
appoints a Custodian of the Company or any Significant Subsidiary or
for all or substantially all of its property, or (iii) orders the
liquidation of the Company or any Significant Subsidiary, and the
order or decree remains unstayed and in effect for 60 days.
The term "Bankruptcy Law" means Title 11, U.S. Code or any
similar federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.
SECTION 8.02. ACCELERATION.
If an Event of Default (other than an Event of Default
specified in clauses (g) and (h) of Section 8.01 hereof) occurs and is
continuing, the Trustee by notice to the Company, or the Noteholders of at
least 25% in principal amount of the then outstanding Notes by notice to the
Company and the Trustee, may declare all the Notes to be due and payable. Upon
such declaration, the principal of, premium, if any, and interest and
Liquidated Damages, if any, on the Notes shall be due and payable immediately.
If an Event of Default specified in clause (g) or (h) of Section 8.01 hereof
occurs, such an amount shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Noteholder. The Noteholders of a majority in aggregate principal amount of the
then outstanding Notes by notice to the Trustee may rescind an acceleration and
its consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of the
acceleration.
SECTION 8.03. OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee
may pursue any available remedy to collect the payment of principal of, or
interest or Liquidated Damages (if any) on, the Notes or to enforce the
performance of any provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Notes or does not produce any of them in the proceeding. A
delay or omission by the Trustee or any Noteholder in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. All
remedies are cumulative to the extent permitted by law.
SECTION 8.04. WAIVER OF PAST DEFAULTS.
The holders of a majority in aggregate principal amount of the
then outstanding Notes by notice to the Trustee may waive an existing Default
or Event of Default and its consequences except a continuing Default or Event
of Default in the payment of the principal of, or interest or Liquidated
Damages (if any) on, any Note (other than the non-payment of principal of the
Notes which has become due solely by virtue of an acceleration which has been
duly rescinded as provided above), or in respect of a covenant or provision of
this Indenture which cannot be modified or amended without the consent of all
holders of Notes. When a Default or Event of Default is waived, it is cured
and ceases; but no such waiver shall extend to any subsequent or other Default
or impair any right consequent thereon.
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SECTION 8.05. CONTROL BY MAJORITY.
The holders of a majority in principal amount of the then
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on it. However, the Trustee may refuse to follow any direction
that conflicts with law or this Indenture, is unduly prejudicial to the rights
of other Noteholders, or would involve the Trustee in personal liability.
SECTION 8.06. LIMITATION ON SUITS.
A Noteholder may pursue a remedy with respect to this
Indenture or the Notes only if:
(a) the Noteholder gives to the Trustee notice of a
continuing Event of Default;
(b) the Noteholders of at least 25% in principal amount
of the then outstanding Notes make a request to the Trustee to pursue
the remedy;
(c) such Noteholder or Noteholders offer to the Trustee
indemnity satisfactory to the Trustee against any loss, liability or
expense;
(d) the Trustee does not comply with the request within
60 days after receipt of the request and the offer of indemnity; and
(e) during such 60-day period the Noteholders of a
majority in principal amount of the then outstanding Notes do not give
the Trustee a direction inconsistent with the request.
A Noteholder may not use this Indenture to prejudice the
rights of another Noteholder or to obtain a preference or priority over another
Noteholder.
SECTION 8.07. RIGHTS OF NOTEHOLDERS TO RECEIVE PAYMENT.
Subject to the provisions of Article VI hereof, the right of
any Noteholder of a Note to receive payment of principal of, and interest and
Liquidated Damages (if any) on, the Note, on or after the respective due dates
expressed in the Note, or to bring suit for the enforcement of any such payment
on or after such respective dates, shall not be impaired or affected without
the consent of the Noteholder made pursuant to this Section.
SECTION 8.08. COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 8.01(a) or (b)
occurs and is continuing, the Trustee may recover judgment in its own name and
as trustee of an express trust against the Company for the whole amount of
principal of, and interest and Liquidated Damages (if any) on, on the Notes
remaining unpaid and, to the extent lawful, interest on overdue principal and
interest and Liquidated Damages, if any, and such further amount as shall be
sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
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SECTION 8.09. TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee and the Noteholders allowed in any judicial proceedings relative to the
Company, its creditors or its property. Nothing contained herein shall be
deemed to authorize the Trustee to authorize or consent to or accept or adopt
on behalf of any Noteholder any plan of reorganization, arrangement, adjustment
or composition affecting the Notes or the rights of any Noteholder thereof, or
to authorize the Trustee to vote in respect of the claim of any Noteholder in
any such proceeding.
SECTION 8.10. PRIORITIES.
If the Trustee collects any money pursuant to this Article, it
shall pay out the money in the following order:
First: to the Trustee for all amounts due under Section 9.07
hereof;
Second: to the holders of Senior Indebtedness to the extent
required by Article VI;
Third: to Noteholders for amounts due and unpaid on the Notes
for principal and interest and Liquidated Damages, if any, ratably,
without preference or priority of any kind, according to the amounts
due and payable on the Notes for principal and interest and Liquidated
Damages, if any, respectively; and
Fourth: to the Company.
The Trustee may fix a record date and payment date for any
payment to Noteholders made pursuant to this Section.
SECTION 8.11. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under
this Indenture or in any suit against the Trustee for any action taken or
omitted by it as a Trustee, a court in its discretion may require the filing by
any party litigant in the suit of an undertaking to pay the costs of the suit,
and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section does not apply to a suit by the Trustee, a suit by a
holder pursuant to Section 8.07 hereof, or a suit by Noteholders of more than
10% in principal amount of the then outstanding Notes.
ARTICLE IX
THE TRUSTEE
SECTION 9.01. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is
continuing, the Trustee shall exercise such of the rights and powers vested in
it by this Indenture, and use the same degree of care and skill in their
exercise, as a prudent man would exercise or use under the circumstances in the
conduct of his own affairs.
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(b) Except during the continuance of an Event of Default
of which the Trustee has been charged with knowledge pursuant to Section
9.02(e): (i) the Trustee need perform only those duties that are specifically
set forth in this Indenture and no others and (ii) the Trustee may in good
faith conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. However, the
Trustee shall examine the certificates and opinions to determine whether or not
they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for
its own negligent action, its own negligent failure to act, or its own wilful
misconduct, except that: (i) this paragraph does not limit the effect of
paragraph (b) of this Section 9.01; (ii) the Trustee shall not be liable for
any error of judgment made in good faith by a Trust Officer, unless it is
proved that the Trustee was negligent in ascertaining the pertinent facts and
(iii) the Trustee shall not be liable with respect to any action it takes or
omits to take in good faith in accordance with a direction received by it
pursuant to Section 8.05 hereof.
(d) Every provision of this Indenture that in any way
relates to the Trustee is subject to paragraphs (a), (b) and (c) of this
Section 9.01.
(e) The Trustee may refuse to perform any duty or
exercise any right or power unless it receives indemnity satisfactory to it
against any loss, liability or expense.
(f) The Trustee shall not be liable for interest on any
money received by it except as the Trustee may agree in writing with the
Company. Money held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.
SECTION 9.02. RIGHTS OF TRUSTEE.
(a) The Trustee may rely, and shall be protected in
acting or refraining from acting, on any document believed by it to be genuine
and to have been signed or presented by the proper person. The Trustee need
not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it
may require an Officers' Certificate or an Opinion of Counsel, or both. The
Trustee shall not be liable for any action it takes or omits to take in good
faith in reliance on such Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any agent appointed by the
Trustee with due care.
(d) The Trustee shall not be liable for any action it
takes or omits to take in good faith which it believes to be authorized or
within its rights or powers.
(e) The Trustee shall not be charged with knowledge of
any Event of Default under subsection (c), (d), (e) or (f) of Section 8.01 or
of the identity of any Significant Subsidiary unless either (1) a Trust Officer
assigned to Corporate Trust Administration shall have actual knowledge thereof,
or (2) the Trustee shall have received notice thereof in accordance with
Section 12.02 hereof from the Company or any holder.
(f) The Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture or other paper or document, but the Trustee, in its
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discretion, may make such further inquiry or investigation into such facts or
matters as it may see fit.
SECTION 9.03. INDIVIDUAL RIGHTS OF TRUSTEE.
Subject to Sections 9.10 and 9.11 hereof, the Trustee in its
individual or any other capacity may become the owner or pledgee of Notes and
may otherwise deal with the Company or an Affiliate of the Company with the
same rights it would have if it were not Trustee. Any Agent may do the same
with like rights.
SECTION 9.04. TRUSTEE'S DISCLAIMER.
The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture or the Notes,
it shall not be accountable for the Company's use of the proceeds from the
Notes, and it shall not be responsible (i) for any statement of the Company in
the Indenture or any statement in the Notes other than its authentication or
(ii) for compliance by the Company with the Registration Rights Agreement.
SECTION 9.05. NOTICE OF DEFAULTS.
If a Default or Event of Default occurs and is continuing and
if the Trustee is charged with knowledge thereof pursuant to Section 9.02(e),
the Trustee shall mail to Noteholders a notice of the Default or Event of
Default within 60 days after it occurs. Except in the case of a Default or
Event of Default in payment on any Note, the Trustee may withhold the notice if
and so long as the Trustee in good faith determines that withholding the notice
is in the interests of Noteholders.
SECTION 9.06. REPORTS BY TRUSTEE TO NOTEHOLDERS.
Within 60 days after the reporting date stated in Section
12.10, the Trustee shall mail to Noteholders a brief report dated as of such
reporting date that complies with TIA Section 313(a) if and to the extent
required by such Section 313(a). The Trustee also shall comply with TIA
Section 313(b)(2). The Trustee shall also transmit by mail all reports as
required by TIA Section 313(c).
A copy of each report at the time of its mailing to
Noteholders shall be filed with the SEC and each stock exchange or securities
market on which the Notes are listed. The Company shall timely notify the
Trustee when the Notes are listed or quoted on any stock exchange or securities
market.
SECTION 9.07. COMPENSATION AND INDEMNITY.
The Company shall pay to the Trustee from time to time
compensation for its services hereunder in accordance with a written agreement
between the Company and the Trustee. The Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The
Company shall reimburse the Trustee upon request for all reasonable
disbursements, expenses and advances incurred or made by it. Such
disbursements and expenses may include the reasonable disbursements,
compensation and expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee against any loss,
liability or reasonable expense incurred by it arising out of or in connection
with the acceptance or administration of its
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duties under this Indenture and the trusts hereunder, including the reasonable
costs and expenses of defending itself against or investigating any claim of
liability in the premises, except as set forth in the next paragraph. The
Trustee shall notify the Company promptly of any claim for which it may seek
indemnity. Failure by the Trustee to so notify the Company shall not relieve
the Company of its obligations hereunder. The Company shall defend the claim
with counsel designated by the Company, who may be outside counsel to the
Company but shall in all events be reasonably satisfactory to the Trustee, and
the Trustee shall cooperate in the defense. In addition, the Trustee may
retain separate counsel and, if the Trustee shall have been advised by such
counsel that there may be one or more legal defenses available to the Trustee
which are different from or in addition to those available to the Company and
which the counsel designated by the Company would be precluded from asserting
or that the Trustee has one or more interests that conflict with those of the
Company, the Company shall pay the reasonable fees and expenses of such
separate counsel. The indemnification herein extends to any settlement,
provided that the Company will not be liable for any settlement made without
its consent, provided, further, that such consent will not be unreasonably
withheld.
The Company need not reimburse any expense or indemnify
against any loss or liability incurred by the Trustee through its negligence,
lack of good faith or wilful misconduct.
The obligations of the Company under this Section 9.07 shall
survive the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 8.01(g) or (h) occurs, the expenses and
the compensation for the services (including the fees and expenses of its
agents and counsel) are intended to constitute expenses of administration under
any Bankruptcy Law.
SECTION 9.08. REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section.
The Trustee may resign by so notifying the Company. The
holders of a majority in principal amount of the then outstanding Notes may
remove the Trustee by so notifying the Trustee and the Company. The Company
may remove the Trustee if:
(a) the Trustee fails to comply with Section 9.10 hereof,
unless the Trustee's duty to resign is stayed as provided in TIA
Section 310(b);
(b) the Trustee is adjudged a bankrupt or an insolvent or
an order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(c) a Custodian or public officer takes charge of the
Trustee or its property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office,
the Noteholders of a majority in principal amount of the then
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outstanding Notes may appoint a successor Trustee to replace the successor
Trustee appointed by the Company.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company or the Noteholders of at least 10% in principal amount of the then
outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee fails to comply with Section 9.10 hereof,
unless the Trustee's duty to resign is stayed as provided in TIA Section
310(b), any Noteholder who has been a bona fide holder of a Note for at least
six months may petition any court of competent jurisdiction for the removal of
the Trustee and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Noteholders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee. Notwithstanding
replacement of the Trustee pursuant to this Section 9.08, the Company's
obligations under Section 9.07 hereof shall continue for the benefit of the
retiring trustee with respect to expenses and liabilities incurred by it prior
to such replacement.
SECTION 9.09. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the successor corporation without any further act shall be the
successor Trustee.
SECTION 9.10. ELIGIBILITY; DISQUALIFICATION.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA Section 310(a)(1) and (5). The Trustee shall always have
a combined capital and surplus as stated in Section 12.10 hereof. The Trustee
is subject to TIA Section 310(b).
SECTION 9.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee is subject to TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A Trustee who has
resigned or been removed shall be subject to TIA Section 311(a) to the extent
indicated therein.
ARTICLE X
DISCHARGE OF INDENTURE
SECTION 10.01. TERMINATION OF COMPANY'S OBLIGATIONS.
This Indenture shall cease to be of further effect (except
that the Company's obligations under Sections 9.07 and 10.02 hereof shall
survive) when all outstanding Notes theretofore authenticated and issued have
been delivered to the Trustee for cancellation and the Company has paid all
sums payable hereunder.
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Thereupon, the Trustee upon request of the Company, shall
acknowledge in writing the discharge of the Company's obligations under this
Indenture, except for those surviving obligations specified above.
SECTION 10.02. REPAYMENT TO COMPANY.
The Trustee and the Paying Agent shall promptly pay to the
Company upon request any excess money or securities held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon
request any money held by them for the payment of principal of, or interest or
Liquidated Damages (if any) on, the Notes that remains unclaimed for two years
after the date upon which such payment shall have become due; provided,
however, that the Company shall have first caused notice of such payment to the
Company to be mailed to each Noteholder entitled thereto no less than 30 days
prior to such payment. After payment to the Company, the Trustee and the
Paying Agent shall have no further liability with respect to such money and
Noteholders entitled to the money must look to the Company for payment as
general creditors unless any applicable abandoned property law designates
another person.
ARTICLE XI
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 11.01. WITHOUT CONSENT OF NOTEHOLDERS.
The Company and the Trustee may amend or supplement this
Indenture or the Notes without the consent of any Noteholder:
(a) to cure any ambiguity, defect or inconsistency in a
manner not adverse to the interests of any Noteholder;
(b) to comply with Sections 5.12 and 7.01 hereof;
(c) to provide for uncertificated Notes in addition to
certificated Notes;
(d) to make any change that does not adversely affect the
interests hereunder of any Noteholder;
(e) to make any changes to or add to the covenants of the
Company for the benefit of the holders of Notes; or
(f) to qualify this Indenture under the TIA or to comply
with the requirements of the SEC in order to maintain the
qualification of the Indenture under the TIA.
SECTION 11.02. WITH CONSENT OF NOTEHOLDERS.
Subject to Section 8.07 hereof, the Company and the Trustee
may amend or supplement this Indenture or the Notes with the written consent
(including consents obtained in connection with any tender offer) of the
Noteholders of at least a majority in principal amount of the then outstanding
Notes. Subject to Sections 8.04 and 8.07 hereof, the Noteholders of a majority
in principal amount of the Notes then outstanding may also waive compliance in
a
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particular instance by the Company with any provision of this Indenture or the
Notes. However, without the consent of each Noteholder affected, an amendment,
supplement or waiver under this Section may not:
(a) reduce the principal amount of Notes whose holders
must consent to an amendment, supplement or waiver;
(b) reduce the rate of or change the time for payment of
interest on any Note;
(c) reduce the principal of or change the fixed maturity
of any Note or alter the redemption provisions of Sections 5, 6 and 7
of the Notes;
(d) make any Note payable in money other than that stated
in the Note;
(e) make any change in Section 8.04, 8.07 or 11.02 hereof
(including this sentence);
(f) waive a default in the payment of the principal of,
or interest or Liquidated Damages (if any) on, any Note (except a
rescission of acceleration of the Notes by the holders of at least a
majority in aggregate principal amount of the outstanding Notes and a
waiver of the Payment Default that resulted from such acceleration);
(g) waive a redemption payment payable on any Note (other
than a payment pursuant to Section 4.07); or
(h) make any change in Articles V and VI hereof that
adversely affects the interests of the Noteholders.
To secure a consent of the Noteholders under this Section
11.02, it shall not be necessary for the Noteholders to approve the particular
form of any proposed amendment, supplement or waiver, but it shall be
sufficient if such consent approves the substance thereof.
Neither the Company nor any of its Subsidiaries shall,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any holder of Notes or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of this
Indenture or the Notes unless such consideration is offered to be paid or
agreed to be paid to all holders of the Notes that consent, waive or agree to
amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or agreement.
After an amendment, supplement or waiver under this Section
becomes effective, the Company shall mail to Noteholders a notice briefly
describing the amendment or waiver.
SECTION 11.03. COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment to this Indenture or the Notes shall be set
forth in a supplemental indenture that complies with the TIA as then in effect.
SECTION 11.04. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplement or waiver becomes effective, a
consent to it by a Noteholder of a Note is a continuing consent by the
Noteholder and every subsequent Noteholder of a Note or portion of a Note that
evidences the same debt as the consenting Noteholder's Note,
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even if notation of the consent is not made on any Note. However, any such
Noteholder or subsequent Noteholder may revoke the consent as to such
Noteholder's Note or portion of a Note if the Trustee receives the notice of
revocation before the date on which the Trustee receives an Officers'
Certificate certifying that the Noteholders of the requisite principal amount
of Notes have consented to the amendment, supplement or waiver.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Noteholders entitled to consent to any
amendment, supplement or waiver. If a record date is fixed, then
notwithstanding the provisions of the immediately preceding paragraph, those
persons who were Noteholders at such record date (or their duly designated
proxies), and only those persons, shall be entitled to consent to such
amendment, supplement or waiver or to revoke any consent previously given,
whether or not such persons continue to be Noteholders after such record date.
No consent shall be valid or effective for more than 90 days after such record
date unless consents from Noteholders of the principal amount of Notes required
hereunder for such amendment or waiver to be effective shall have also been
given and not revoked within such 90-day period.
After an amendment, supplement or waiver becomes effective it
shall bind every Noteholder, unless it is of the type described in any of
clauses (a) through (h) of Section 11.02 hereof. In such case, the amendment
or waiver shall bind each Noteholder who has consented to it and every
subsequent Noteholder that evidences the same debt as the consenting
Noteholder's Note.
SECTION 11.05. NOTATION ON OR EXCHANGE OF NOTES.
The Trustee may place an appropriate notation about an
amendment or waiver on any Note thereafter authenticated. The Company in
exchange for all Notes may issue, and the Trustee shall authenticate, new Notes
that reflect the amendment or waiver.
SECTION 11.06. TRUSTEE PROTECTED.
The Trustee shall sign all supplemental indentures, except
that the Trustee may, but need not, sign any supplemental indenture that
adversely affects its rights.
ARTICLE XII
MISCELLANEOUS
SECTION 12.01. TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies, or
conflicts with another provision which is automatically deemed to be
incorporated in this Indenture by the TIA, the incorporated provision shall
control.
SECTION 12.02. NOTICES.
Any notice or communication by the Company or the Trustee to
the other is duly given if in writing and delivered in person or mailed by
first-class mail with postage prepaid (registered or certified, return receipt
requested) to the other's address stated in Section 12.10 hereof. The Company
or the Trustee by notice to the other may designate additional or different
addresses for subsequent notices or communications.
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Any notice or communication to a Noteholder shall be mailed by
first-class mail, with postage prepaid, to his address shown on the register
kept by the Registrar. Failure to mail a notice or communication to a
Noteholder or any defect in it shall not affect its validity or sufficiency
with respect to other Noteholders.
If a notice or communication is mailed in the manner provided
above within the time prescribed, it is duly given, whether or not the
addressee receives it.
If the Company mails a notice or communication to Noteholders,
it shall mail a copy to the Trustee and each Agent at the same time.
All other notices or communications shall be in writing.
In case by reason of the suspension of regular mail service,
or by reason of any other cause, it shall be impossible to mail any notice as
required by the Indenture, then such method of notification as shall be made
with the approval of the Trustee shall constitute a sufficient mailing of such
notice.
SECTION 12.03. COMMUNICATION BY NOTEHOLDERS WITH OTHER NOTEHOLDERS.
Noteholders may communicate pursuant to TIA Section 312(b)
with other Noteholders with respect to their rights under this Indenture or the
Notes. The Company, the Trustee, the Registrar and anyone else shall have the
protection of TIA Section 312(c).
SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee
to take any action under this Indenture, the Company shall furnish to the
Trustee:
(a) an Officers' Certificate, in form and substance
reasonably satisfactory to the Trustee (which shall include the
statements set forth in Section 12.05), stating that, in the opinion
of the signers, all conditions precedent and covenants, if any,
provided for in this Indenture relating to the proposed action have
been satisfied; and
(b) an Opinion of Counsel, in form and substance
reasonably satisfactory to the Trustee (which shall include the
statements set forth in Section 12.05), stating that, in the opinion
of such counsel, all such conditions precedent and covenants have been
satisfied.
SECTION 12.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than pursuant to
Section 4.03) shall include:
(a) a statement that the person signing such certificate
or rendering such opinion has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
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(c) a statement that, in the opinion of such person, such
person has made such examination or investigation as is necessary to
enable such person to express an informed opinion as to whether or not
such covenant or condition has been satisfied; and
(d) a statement as to whether or not, in the opinion of
such person, such condition or covenant has been satisfied.
SECTION 12.06. RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for action by, or a
meeting of, Noteholders. The Registrar or Paying Agent may make reasonable
rules and set reasonable requirements for its functions.
SECTION 12.07. LEGAL HOLIDAYS.
A "Legal Holiday" is a Saturday, a Sunday or a day on which
banking institutions in the State of New York are not required to be open. If
a payment date is a Legal Holiday at a place of payment, payment may be made at
that place on the next succeeding day that is not a Legal Holiday, and no
interest shall accrue for the intervening period. If any other operative date
for purposes of this Indenture shall occur on a Legal Holiday then for all
purposes the next succeeding day that is not a Legal Holiday shall be such
operative date.
SECTION 12.08. NO RECOURSE AGAINST OTHERS.
No director, officer, employee or shareholder, as such, of the
Company shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of or by reason of
such obligations or their creation. Each Noteholder by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for the issue of the Notes.
SECTION 12.09. COUNTERPARTS.
This Indenture may be executed in any number of counterparts
and by the parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together
shall constitute one and the same agreement.
SECTION 12.10. OTHER PROVISIONS.
The Company initially appoints the Trustee as Paying Agent,
Registrar, Conversion Agent and authenticating agent, as provided in Section
2.02.
The first certificate pursuant to Section 4.03 hereof shall be
for the fiscal year ending on December 31, 1996.
The reporting date for Section 9.06 hereof is May 15 of each
year. The first reporting date is May 15, 1997.
The Trustee shall always have a combined capital and surplus
of at least $100,000,000 as set forth in its most recent published annual
report of condition.
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The Company's address is:
MIDCOM Communications Inc.
1111 Third Avenue, Suite 1600
Seattle, Washington 98101
Telephone: (206) 628-8000
Facsimile: (206) 628-8295
The Trustee's address is:
IBJ Schroder Bank & Trust Company
One State Street
New York, New York 10004
Attention: Corporate Trust Administration
Telephone: (212) 858-2000
Facsimile: (212) 425-0542
SECTION 12.11. GOVERNING LAW.
THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS
INDENTURE AND THE NOTES, WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS
THEREOF.
SECTION 12.12. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret another indenture,
loan or debt agreement of the Company or an Affiliate. Any such indenture,
loan or debt agreement may not be used to interpret this Indenture.
SECTION 12.13. SUCCESSORS.
All agreements of the Company in this Indenture and the Notes
shall bind its successor. All agreements of the Trustee in this Indenture
shall bind its successor.
SECTION 12.14. SEVERABILITY.
In case any provision in this Indenture or in the Notes shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
SECTION 12.15. TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table, and headings of
the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part hereof, and shall in no way
modify or restrict any of the terms or provisions hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed, all as of the date first written above.
MIDCOM COMMUNICATIONS INC.
By: Robert J. Chamberlain
--------------------------------
Name: Robert J. Chamberlain
Title: Senior Vice President of
Finance and Administration and
Chief Financial Officer
Attest:
By: Paul P. Senio
-----------------------------------
Name: Paul P. Senio
Title: Vice President and Secretary
IBJ SCHRODER BANK & TRUST COMPANY,
as Trustee
By:
--------------------------------
Name: Thomas J. Bogert
Title: Vice President
Attest:
By:
--------------------------
Name:
Title:
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IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed, all as of the date first written above.
MIDCOM COMMUNICATIONS INC.
By:
--------------------------------
Name: Robert J. Chamberlain
Title: Senior Vice President of
Finance and Administration and
Chief Financial Officer
Attest:
By:
-----------------------------------
Name: Paul P. Senio
Title: Vice President and Secretary
IBJ SCHRODER BANK & TRUST COMPANY,
as Trustee
By: Thomas J. Bogert
--------------------------------
Name: Thomas J. Bogert
Title: Vice President
Attest:
By: Anthony Lieggi
--------------------------
Name: Anthony Lieggi
Title: Assistant Secretary
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EXHIBIT A
[FORM OF FACE OF NOTE]
[Global Securities Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"),
NEW YORK, NEW YORK, TO MIDCOM COMMUNICATIONS INC. (THE "COMPANY") OR ITS AGENT
FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED
IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR
TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC)
ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY
PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Securities Legend]
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS
ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF
THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE
SECURITY EVIDENCED HEREBY AND ANY SHARES OF COMMON STOCK ISSUED UPON CONVERSION
HEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE
SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON
THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED
BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES
FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY AND ANY SHARES OF COMMON
STOCK ISSUED UPON CONVERSION HEREOF MAY BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c)
OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH
ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND
BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE
COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH
CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
1
<PAGE> 64
UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND
EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE
SECURITY EVIDENCED HEREBY OR ANY COMMON STOCK ISSUED UPON CONVERSION HEREOF OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
[Regulation S Temporary Note Legend]
THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL
NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE, ARE AS
SPECIFIED IN THE INDENTURE. NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF
THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF
INTEREST HEREON.
2
<PAGE> 65
CUSIP No. 59563X AA 0 (59563X AB 8)
CINS No. U59360 AA 2
[ISIN No. U59360 AA 2 7]
No. __________ $_________
MIDCOM COMMUNICATIONS INC.
8 1/4% CONVERTIBLE SUBORDINATED NOTE DUE 2003
MIDCOM Communications Inc., a Washington corporation (the
"Company"), promises to pay to
________________________________________________________________ or registered
assigns, the principal sum of $________ [(or such lesser or greater amounts as
indicated on Schedule A hereof)](1) on August 15, 2003, subject to the further
provisions of this Note set forth on the reverse hereof which further
provisions shall for all purposes have the same effect as if set forth at this
place.
Interest Payment Dates: February 15 and August 15, commencing February 15, 1997
Interest Record Dates: February 1 and August 1
IN WITNESS WHEREOF, MIDCOM Communications Inc. has caused this
Note to be signed manually or by facsimile by its duly authorized officers and
a facsimile of its corporate seal to be affixed hereto or imprinted hereon.
Dated: MIDCOM COMMUNICATIONS, INC.
By:
--------------------------------
By:
--------------------------------
[Seal]
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 8 1/4% Convertible Subordinated
Notes due 2003 described in the within-mentioned Indenture.
IBJ SCHRODER BANK & TRUST COMPANY, as Trustee
By:
-------------------------------
Authorized Signatory
- ---------------
(1) Applicable to Global Securities only.
3
<PAGE> 66
MIDCOM COMMUNICATIONS INC.
1. INTEREST. MIDCOM Communications Inc., a Washington
corporation (the "Company"), promises to pay interest on the principal amount
of this Note at the rate of 8 1/4% per annum. The Company will pay interest
semiannually on each February 15 and August 15 (each an "Interest Payment
Date"), commencing on February 15, 1997, to holders of record on the
immediately preceding February 1 and August 1 (each a "Record Date").
Interest on the Notes will accrue from the most recent date to which
interest has been paid, or if no interest has been paid, from August 22, 1996.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. To the extent lawful, the Company shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law, to the
extent allowed under such Bankruptcy Law) on overdue installments of interest
(without regard to any applicable grace period) at the rate borne by the Notes,
compounded semiannually.
2. METHOD OF PAYMENT. The Company will pay interest on
the Notes (except defaulted interest) to the Persons who are registered holders
of the Notes at the close of business on the Record Date immediately preceding
the relevant Interest Payment Date (other than with respect to a Note or
portion thereof called for redemption on a redemption date, or repurchased in
connection with a Change of Control on a repurchase date, during the period
from the close of business on a Record Date to (but excluding) the next
succeeding Interest Payment Date (in which case accrued interest shall be
payable, unless such Note is converted, to the holder of the Note or portion
thereof redeemed or repurchased in accordance with the applicable redemption or
repurchase provisions of the Indenture). Holders must surrender Notes to a
Paying Agent to collect principal payments. The Company will pay principal and
interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts. The Company may pay principal
and interest by check payable in such money, and may mail such check to the
holder's registered address; provided that all payments with respect to Notes
the holders of which have given wire transfer instructions to the Company and
to the Trustee at least five Business Days prior to the applicable Interest
Payment Date will be required to be made by wire transfer of immediately
available funds to the accounts specified by the holders thereof.
3. PAYING AGENT, REGISTRAR AND CONVERSION AGENT.
Initially, the Trustee will act as Paying Agent, Registrar and Conversion
Agent. The Company may change any Paying Agent, Registrar, co-registrar or
Conversion Agent without prior notice. The Company or any of its Affiliates
may act in any such capacity.
4. INDENTURE. The Company issued the Notes under an
indenture, dated as of August 22, 1996 (the "Indenture"), between the Company
and IBJ Schroder Bank & Trust Company, as Trustee. The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
the Trust Indenture Act of 1939, as amended (15 U.S. Code Section Section
77aaa-77bbbb) as in effect on the date of the Indenture. The Notes are subject
to, and qualified by, all such terms, certain of which are summarized hereon,
and holders are referred to the Indenture and such Act for a statement of such
terms. The Notes are unsecured general obligations of the Company limited in
aggregate principal amount to $85,000,000 (or, if the Initial Purchasers'
over-allotment option is exercised in full, $97,750,000) and subordinated in
right of payment to all existing and future Senior Indebtedness of the Company.
Capitalized terms not defined herein have the same meaning as is given to them
in the Indenture.
5. OPTIONAL REDEMPTION. The Notes are not redeemable at
the Company's option prior to August 15, 2001. Thereafter, the Notes will be
subject to redemption at the option
4
<PAGE> 67
of the Company, in whole or in part (in any integral multiple of $1,000), upon
not less than 30 nor more than 60 days prior notice at the following redemption
prices (expressed as percentages of the principal amount), if redeemed during
the 12-month period beginning on August 15 of the years indicated:
<TABLE>
<CAPTION>
Redemption
Year Price
- ---- ----------
<S> <C>
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.179%
2002 and thereafter . . . . . . . . . . . . . . . . . . . . . . 100.000%
</TABLE>
in each case together with accrued but unpaid interest and Liquidated Damages,
if any, to the redemption date (subject to the right of holders of record on
the relevant Record Date to receive interest due on an Interest Payment Date
that is on or prior to such Redemption Date). On or after the redemption date,
interest will cease to accrue on the Notes, or portion thereof, called for
redemption, unless the Company defaults in its obligations with respect
thereto.
6. NOTICE OF REDEMPTION. Notice of redemption will be
mailed, by first-class mail, at least 30 days but not more than 60 days prior
to the date fixed for redemption to the holder of each Note to be redeemed at
such holder's last address of record on the books of the Registrar. The Notes
in denominations larger than $1,000 may be redeemed in part but only in
integral multiples of $1,000. In the event of a redemption of less than all of
the Notes, the Notes will be chosen for redemption by the Trustee in accordance
with the Indenture.
If this Note is redeemed subsequent to a Record Date with
respect to any Interest Payment Date specified above and on or prior to such
Interest Payment Date, then any accrued interest will be paid to the person in
whose name this Note is registered at the close of business on such Record
Date.
7. REPURCHASE AT OPTION OF HOLDER. If there is a Change
of Control, the Company shall be required to offer to purchase on the Change of
Control Payment Date all outstanding Notes at a cash purchase price equal to
101% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the Change of Control Payment Date. Holders of
Notes that are subject to an offer to purchase will receive a Change of Control
Offer from the Company at least 20 Business Days prior to any related Change of
Control Payment Date and may elect to have such Notes or portions thereof in
authorized denominations purchased by completing the form entitled "Option of
Holder To Elect Purchase" appearing below. Holders have the right to withdraw
their election by delivering a written notice of withdrawal to the Company or
the Paying Agent in accordance with the terms of the Indenture.
8. SUBORDINATION. The payment of the principal of,
interest on or any other amounts due on the Notes is subordinated in right of
payment to all existing and future Senior Indebtedness of the Company, as
described in the Indenture. Each holder, by accepting a Note, agrees to such
subordination and authorizes and directs the Trustee on its behalf to take such
action as may be necessary or appropriate to effectuate the subordination so
provided and appoints the Trustee as its attorney-in-fact for such purpose.
9. CONVERSION. The holder of any Note has the right,
exercisable at any time prior to the close of business (New York time) on the
date of the Note's maturity, to convert the principal amount thereof (or any
portion thereof that is an integral multiple of $1,000) into fully paid and
nonassessable whole shares of Common Stock at the initial Conversion Price of
$14.0875 per share, subject to adjustment under certain circumstances, except
that if a Note is called for redemption, the conversion right will terminate at
the close of business on the Business Day immediately preceding the date fixed
for redemption.
5
<PAGE> 68
To convert a Note, a holder must (1) complete and sign a
conversion notice substantially in the form set forth below, (2) surrender the
Note to a Conversion Agent, (3) furnish appropriate endorsements or transfer
documents if required by the Registrar or Conversion Agent and (4) pay any
transfer or similar tax, if required. The number of shares issuable upon
conversion of a Note is determined by dividing the principal amount of the Note
converted by the Conversion Price in effect on the Conversion Date. No
fractional shares will be issued upon conversion but a cash adjustment will be
made for any fractional interest.
Any Note or portion thereof surrendered for conversion after
the close of business on a Record Date for payment of interest and prior to the
opening of business on the next succeeding Interest Payment Date shall be
accompanied by payment, in funds acceptable to the Company, of an amount equal
to the interest thereon that is to be paid on such Interest Payment Date on the
principal amount being converted (unless any such Note or portion thereof being
converted shall have been called for redemption on a redemption date occurring
between the close of business on such Record Date and the opening of business
on such Interest Payment Date, in which case no such payment shall be
required); provided, however, that no such payment need be made if there shall
exist at the time of conversion a default in the payment of interest on the
Notes. An amount equal to such payment shall be paid by the Company on such
Interest Payment Date to the holder of such Notes at the close of business on
such Record Date; provided, however, that, if the Company shall default in the
payment of interest on such Interest Payment Date, such amount shall be paid to
the Person who made such required payment. Except as provided in the
Indenture, no payments or adjustments shall be made upon conversion on account
of accrued interest on the Notes or for any dividends or distributions on any
shares of Common Stock delivered upon the conversion of such Notes.
A Note in respect of which a holder has delivered an "Option
of Holder to Elect Purchase" form appearing below exercising the option of such
holder to require the Company to purchase such Note may be converted only if
the notice of exercise is withdrawn as provided above and in accordance with
the terms of the Indenture. The above description of conversion of the Notes
is qualified by reference to, and is subject in its entirety by, the more
complete description thereof contained in the Indenture.
In order to exercise the conversion privilege with respect to
any interest in a Global Note, the beneficial holder must complete the
appropriate instruction form for conversion pursuant to the Depositary's
book-entry conversion program and follow the other procedures set forth in such
program. Upon the conversion of a Global Note, the Trustee, or the Custodian
at the direction of the Trustee, shall make a notation on such Global Note as
to the reduction in the principal amount represented thereby.
10. REGISTRATION RIGHTS. The holder of this Note is
entitled to the benefits of a Registration Rights Agreement, dated as of August
22, 1996, among the Company and the Initial Purchasers (the "Registration
Rights Agreement"). Pursuant to the Registration Rights Agreement, the Company
has agreed for the benefit of the holders of the Notes that (i) it will, at its
cost, within 60 days after the closing of the sale of the Notes (the
"Closing"), file a shelf registration statement (the "Shelf Registration
Statement") with the Securities and Exchange Commission (the "SEC") with
respect to resales of the Notes and the Common Stock issuable upon conversion
thereof, (ii) such Shelf Registration Statement shall be declared effective by
the SEC within 150 days after the Closing, and (iii) subject to certain
exceptions, the Company will maintain such Shelf Registration Statement
continuously effective under the Securities Act until the third anniversary of
the date of the Closing or such earlier date as of which all the Notes or the
Common Stock issuable upon conversion thereof have been sold pursuant to such
Shelf Registration Statement. If (a) the Company fails to file the Shelf
Registration Statement required by the
6
<PAGE> 69
Registration Rights Agreement on or before the date specified above for such
filing, (b) such Shelf Registration Statement is not declared effective by the
SEC on or prior to the date specified above for such effectiveness, or (c) the
Shelf Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Notes
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (c) above a "Registration Default"),
then the Company will pay liquidated damages to each holder of Transfer
Restricted Securities, with respect to the first 90-day period immediately
following the occurrence of such Registration Default in an amount equal to
$0.05 per week per $1,000 principal amount of Notes constituting Transfer
Restricted Securities held by such holder ("Liquidated Damages"). The amount
of the Liquidated Damages will increase by an additional $0.05 per week per
$1,000 principal amount of Notes constituting Transfer Restricted Securities
with respect to each subsequent 90-day period until all Registration Defaults
have been cured, up to a maximum amount of Liquidated Damages of $0.25 per week
per $1,000 principal amount of Notes constituting Transfer Restricted
Securities. All accrued Liquidated Damages shall be paid by the Company on
each Interest Payment Date for which Liquidated Damages are owed to the holders
of Global Notes by wire transfer of immediately available funds or by federal
funds check and to holders of Certificated Notes registered as such as of the
preceding Record Date by mailing checks to their registered addresses.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
11. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in
registered form, without coupons, in denominations of $1,000 and integral
multiples of $1,000. The transfer of Notes may be registered, and Notes may be
exchanged, as provided in the Indenture. The Registrar may require a holder,
among other things, to furnish appropriate endorsements and transfer documents
and to pay any taxes and fees required by law or permitted by the Indenture.
The Registrar need not exchange or register the transfer of any Note or portion
of a Note selected for redemption (except the unredeemed portion of any Note
being redeemed in part). Also, it need not exchange or register the transfer
of any Note for a period of 15 days before a selection of Notes to be redeemed.
12. PERSONS DEEMED OWNERS. The registered holder of a
Note may be treated as its owner for all purposes.
13. UNCLAIMED MONEY. If money for the payment of
principal of, or interest or Liquidated Damages, if any, on the Notes remains
unclaimed for two years, the Trustee and the Paying Agent shall pay the money
back to the Company at its written request. After that, holders of Notes
entitled to the money must look to the Company for payment unless the
applicable abandoned property law designates another Person and, in either
case, all liability of the Trustee and the Paying Agent with respect to such
money shall cease.
14. DEFAULTS AND REMEDIES. The Notes shall have the
Events of Default as set forth in Section 8.01 of the Indenture. Subject to
certain limitations in the Indenture, if an Event of Default occurs and is
continuing, the Trustee by notice to the Company, or the holders of at least
25% in aggregate principal amount of the then outstanding Notes by notice to
the Company and the Trustee, may declare all the Notes to be due and payable
immediately, except that in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, all Notes shall become due and
payable immediately without further action or notice.
The holders of a majority in principal amount of the Notes
then outstanding by written notice to the Trustee may rescind an acceleration
and its consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
7
<PAGE> 70
the acceleration. Holders may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding Notes issued under the
Indenture may direct the Trustee in its exercise of any trust or power. The
Company must furnish annually compliance certificates to the Trustee. The
above description of Events of Default and remedies is qualified by reference
to, and subject in its entirety by, the more complete description thereof
contained in the Indenture.
15. AMENDMENTS, SUPPLEMENTS AND WAIVERS. Subject to
certain exceptions, the Indenture or the Notes may be amended or supplemented
with the consent of the holders of at least a majority in principal amount of
the then outstanding Notes (including consents obtained in connection with a
tender offer or exchange offer for Notes), and any existing default may be
waived with the consent of the holders of a majority in principal amount of the
then outstanding Notes. Without the consent of any holder, the Indenture or
the Notes may be amended to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to certificated Notes, to provide
for assumption of the Company's obligations to holders, to reduce the
Conversion Price, to make any change that does not adversely affect the rights
of any holder, to make any changes to or add to the covenants of the Company
for the benefit of holders, to qualify the Indenture under the TIA, or to
comply with the requirements of the SEC in order to maintain the qualification
of the Indenture under the TIA.
Without the consent of each holder affected, an amendment, supplement
or waiver of the Indenture or the Notes may not: (a) reduce the principal
amount of Notes whose holders must consent to an amendment, supplement or
waiver; (b) reduce the rate of or change the time for payment of interest on
any Notes; (c) reduce the principal of or change the fixed maturity of any Note
or alter the redemption provisions of Sections 5, 6 and 7 of the Notes; (d)
make the principal of, or premium, if any, or interest on, any Note payable in
money other than as provided for in the Indenture and in the Notes; (e) make
any change in the provisions of the Indenture relating to waivers of past
defaults or the rights of holders of Notes to receive payments of principal of,
premium, if any, or interest or Liquidated Damages (if any) on, the Notes; (f)
waive a default in the payment of principal of, or premium, if any, or interest
or Liquidated Damages (if any) on, the Notes (except a rescission of
acceleration of the Notes by the holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the Payment Default that resulted
from such acceleration); (g) waive a redemption payment with respect to any
Note (other than a payment required pursuant to section 4.07 of the Indenture);
(h) except as permitted by the Indenture, modify the provisions of the
Indenture relating to conversion or subordination of the Notes in a manner
adverse to the holders thereof; or (i) make any change in the amendment and
waiver provisions of the Indenture and the Notes.
16. TRUSTEE DEALINGS WITH THE COMPANY. The Trustee, in
its individual or any other capacity, may become the owner or pledgee of the
Notes and may otherwise deal with the Company or an Affiliate of the Company
with the same rights it would have, as if it were not Trustee, subject to
certain limitations provided for in the Indenture and in the TIA. Any Agent
may do the same with like rights.
17. NO RECOURSE AGAINST OTHERS. A director, officer,
employee or shareholder of the Company, as such, shall not have any liability
for any obligations of the Company under the Notes or the Indenture or for any
claim based on, in respect of or by reason of such obligations or their
creation. Each holder of the Notes by accepting a Note waives and releases all
such liability. The waiver and release are part of the consideration for the
issue of the Notes.
8
<PAGE> 71
18. GOVERNING LAW. THE INTERNAL LAWS OF THE STATE OF NEW
YORK SHALL GOVERN THE INDENTURE AND THE NOTES WITHOUT REGARD TO CONFLICT OF LAW
PROVISIONS THEREOF.
19. AUTHENTICATION. The Notes shall not be valid until
authenticated by the manual signature of an authorized signatory of the Trustee
or an authenticating agent.
20. ABBREVIATIONS. Customary abbreviations may be used
in the name of a holder or an assignee, such as: TEN COM (= tenants in common),
TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (=
Uniform Gifts to Minors Act).
21. CUSIP NUMBERS. Pursuant to a recommendation
promulgated by the Committee on Uniform Security Identification Procedures, the
Company has caused one or more CUSIP numbers to be printed on the Notes and the
Trustee may use CUSIP numbers in notices of redemption as a convenience to
Holders. No representation is made as to the accuracy of such numbers either
as printed on the Notes or as contained in any notice of redemption and
reliance may be placed only on the other identification numbers placed thereon.
The Company will furnish to any holder of the Notes upon
written request and without charge a copy of the Indenture and/or the
Registration Rights Agreement. Request may be made to:
MIDCOM Communications Inc.
1111 Third Avenue, Suite 1600
Seattle, Washington 98101
Telephone: (206) 628-8000
Facsimile: (206) 628-8295
Attention: General Counsel
[22. EXCHANGE FOR PERMANENT NOTE; LIMITATIONS. Until this
Regulation S Temporary Global Note is exchanged for Regulation S Permanent
Global Notes, the Holder hereof shall not be entitled to receive payments of
interest hereon; until so exchanged in full, this Regulation S Temporary Global
Note shall in all other respects be entitled to the same benefits as other
Notes under the Indenture.
This Regulation S Temporary Global Note is exchangeable in
whole or in part for one or more Regulation S Permanent Global Notes or Rule
144A Global Notes only (i) on or after the termination of the 40-day restricted
period (as defined in Regulation S) and (ii) upon presentation of certificates
(accompanied by an Opinion of Counsel, if applicable) required by Article II of
the Indenture. Upon exchange of this Regulation S Temporary Global Note for
one or more Regulation S Permanent Global Notes or Rule 144A Global Notes, the
Trustee shall cancel this Regulation S Temporary Global Note.](2)
- ---------------
(2) Applicable to Regulation S Temporary Notes only.
9
<PAGE> 72
ASSIGNMENT FORM
To assign this Note, fill in the form below:
(I) or (we) assign and transfer this Note to
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint _______________________________ agent to transfer this
Note on the books of the Company. The agent may substitute another to act for
him.
Your Signature:
--------------------------------------------------------
(Sign exactly as your name appears on the other
side of this Note)
Date:
--------------------
Signature Guarantee:(1)
------------------------------------------------
In connection with any transfer of any of the Notes evidenced by this
certificate occurring prior to the date that is three years after the later of
the date of original issuance of such Notes and the last date, if any, on which
such Notes were owned by the Company or any Affiliate of the Company, the
undersigned confirms that such Notes are being transferred:
CHECK ONE BOX BELOW
(1) [ ] to the Company; or
(2) [ ] pursuant to and in compliance with Rule 144A under
the Securities Act of 1933; or
(3) [ ] pursuant to and in compliance with Regulation S under
the Securities Act of 1933; or
- ---------------
(1) Signature must be guaranteed by a commercial bank, trust
company or member firm of the New York Stock Exchange.
10
<PAGE> 73
(4) [ ] to an "accredited investor" (as defined in Rule
501(a)(1), (2), (3), (4) or (7) under the Securities
Act of 1933 that has furnished to the Trustee a
signed letter containing certain representations and
agreements (the form of which letter can be obtained
from the Trustee); or
(5) [ ] pursuant to another available exemption from the
registration requirements of the Securities Act of
1933; or
(6) [ ] pursuant to an effective registration statement under
the Securities Act of 1933.
Unless one of the boxes is checked, the Trustee will refuse to
register any of the Notes evidenced by this certificate in the name of
any person other than the registered holder thereof; provided,
however, that if box (2), (3), (4) or (5) is checked, the Trustee may
require, prior to registering any such transfer of the Notes such
legal opinions, certifications and other information as the Company
has reasonably requested to confirm that such transfer is being made
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act of 1933, such as the
exemption provided by Rule 144 under such Act.
-----------------------------------
Signature
Signature Guarantee:(1)
- ----------------------------- -----------------------------------
Signature must be guaranteed Signature
TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing
this Note for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act
of 1933, and is aware that the sale to it is being made in reliance on Rule
144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has
determined not to request such information and that it is aware that the
transferor is relying upon the undersigned's foregoing representations in order
to claim the exemption from registration provided by Rule 144A.
Dated:
----------------------- -----------------------------------
NOTICE: To be executed by
an executive officer
- ---------------
(1) Signature must be guaranteed by a commercial bank, trust
company or member firm of the New York Stock Exchange.
11
<PAGE> 74
[TO BE ATTACHED TO GLOBAL NOTES]
SCHEDULE A
The initial principal amount of this Global Note shall be
$_______. The following increases or decreases in the principal amount of this
Global Note have been made:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Amount of increase
in Principal Signature of
Amount of this Principal Amount authorized
Global Note Amount of decrease of this Global signatory of
including upon in Principal Note following Trustee or
exercise of over- Amount of this such decrease or Securities
Date Made allotment option Global Note increase Custodian
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 75
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note or a portion thereof
repurchased by the Company pursuant to Section 4.07 of the Indenture, check the
box: [ ]
If the purchase is in part, indicate the portion (in
denominations of $1,000 or any integral multiple thereof) to be purchased:
_________________
Your Signature:
------------------------------------------
(Sign exactly as your name appears on the other side of this Note)
Date:
-------------------------
Signature Guarantee:(1)
---------------------------
- ---------------
(1) Signature must be guaranteed by a commercial bank, trust
company or member firm of the New York Stock Exchange.
13
<PAGE> 76
ELECTION TO CONVERT
To MIDCOM Communications Inc.:
The undersigned owner of this Note hereby irrevocably
exercises the option to convert this Note, or the portion below designated,
into Common Stock of MIDCOM Communications Inc. in accordance with the terms of
the Indenture referred to in this Note, and directs that the shares issuable
and deliverable upon conversion, together with any check in payment for
fractional shares, be issued in the name of and delivered to the undersigned,
unless a different name has been indicated in the assignment below. If shares
are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto.
Any holder of Notes, upon the exercise of its conversion
rights in accordance with the terms of the Indenture and the Note, agrees to be
bound by the terms of the Registration Rights Agreement relating to the Common
Stock issuable upon conversion of the Notes.
Date:
Convert in whole [ ]
Portions of Note to be converted ($1,000
or integral multiples thereof):
$________________
----------------------------------------
Signature (for conversion only)
-----------------------------------------
Please Print or Typewrite Name and
Address, Including Zip Code, and Social
Security or Other Identifying Number
-----------------------------------------
-----------------------------------------
-----------------------------------------
Signature Guarantee:(1)
--------------
- ---------------
(1) Signature must be guaranteed by a commercial bank, trust
company or member firm of the New York Stock Exchange.
14
<PAGE> 77
EXHIBIT B
FORM OF TRANSFER CERTIFICATE
FOR TRANSFER FROM
RULE 144A GLOBAL NOTE
TO REGULATION S GLOBAL NOTE
(Transfers pursuant to Section 2.06(a)(ii)
of the Indenture)
IBJ Schroder Bank & Trust Company, as Trustee
One State Street
New York, New York 10004
Attention: Corporate Trust Administration
Re: MIDCOM Communications Inc.
8 1/4% Convertible Subordinated Notes due 2003 (the "Notes")
Reference is hereby made to the Indenture dated as of August
22, 1996 (the "Indenture") between MIDCOM Communications Inc., as Issuer, and
IBJ Schroder Bank & Trust Company, as Trustee. Capitalized terms used but not
defined herein shall have the meanings given them in the Indenture.
This letter relates to U.S. $____________ aggregate principal
amount of Notes which are held in the form of the Rule 144A Global Note (CUSIP
No. 59563X AA 0) with the Depositary in the name of _______________________
[name of transferor] (the "Transferor") to effect the transfer of the Notes in
exchange for an equivalent beneficial interest in the Regulation S Global Note.
In connection with such request, the Transferor does hereby
certify that such transfer has been effected in accordance with the transfer
restrictions set forth in the Notes and (i) with respect to transfers made in
reliance on Regulation S, does certify that:
(1) the offer of the Notes was not made to a person in
the United States;
(2) the transaction was executed in, on or through the
facilities of a designated offshore securities market and neither the
Transferor nor any person acting on its behalf knows that the
transaction was pre-arranged with a buyer in the United States;
(3) no directed selling efforts have been made in
contravention of the requirements of Rule 903(b) or 904(b) of
Regulation S, as applicable; and
(4) the transaction is not part of a plan or scheme to
evade the registration requirements of the United States Securities
Act of 1933 (the "Securities Act");
(ii) with respect to transfers made in reliance on Rule 144 certify that the
Notes are being transferred in a transaction permitted by Rule 144 under the
Securities Act; and (iii) with respect to transfers made in reliance on Rule
144A, that such Notes are being transferred in accordance with Rule 144A under
the Securities Act to a transferee that the Transferor reasonably believes is
purchasing the Notes for its own account or an account with respect to which
the transferee
B-1
<PAGE> 78
exercises sole investment discretion and the transferee and any such account is
a "qualified institutional buyer" within the meaning of Rule 144A, in a
transaction meeting the requirements of Rule 144A and in accordance with
applicable securities laws of any state of the United States or any other
jurisdiction.
In addition, if the sale is made during a restricted period
and the provisions of Rule 903(c)(2) or (3) or Rule 904(c)(1) of Regulation S
are applicable thereto, we confirm that such sale has been made in accordance
with the applicable provisions of Rule 903(c)(2) or (3) or Rule 904(c)(1), as
the case may be.
You and the Company are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby. Terms used in this certificate
have the meanings set forth in Regulation S.
[Name of Transferor]
By:
--------------------------------
Name:
Title:
Date:
B-2
<PAGE> 79
EXHIBIT C
FORM OF TRANSFER CERTIFICATE FOR TRANSFER
FROM REGULATION S GLOBAL NOTE
TO RULE 144A GLOBAL NOTE
(Transfers pursuant to Section 2.06(a)(iii)
of the Indenture)
IBJ Schroder Bank & Trust Company, as Trustee
One State Street
New York, New York 10004
Attention: Corporate Trust Administration
Re: MIDCOM Communications Inc.
8 1/4% Convertible Subordinated Notes due 2003 (the "Notes")
Reference is hereby made to the Indenture dated as of August
22, 1996 (the "Indenture") between MIDCOM Communications Inc., as Issuer, and
IBJ Schroder Bank & Trust Company, as Trustee. Capitalized terms used but not
defined herein shall have the meanings given them in the Indenture.
This letter relates to U.S. $__________ aggregate principal
amount of Notes which are held in the form of the Regulation S Global Note with
the Depositary (CINS No. U59360 AA 2) in the name of ____________________ [name
of transferor] (the "Transferor") to effect the transfer of the Notes in
exchange for an equivalent beneficial interest in the Rule 144A Global Note.
In connection with such request, and in respect of such Notes
the Transferor does hereby certify that such Notes are being transferred in
accordance with (i) the transfer restrictions set forth in the Notes and (ii)
Rule 144A under the United States Securities Act of 1933 to a transferee that
the Transferor reasonably believes is purchasing the Notes for its own account
or an account with respect to which the transferee exercises sole investment
discretion and the transferee and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A, in a transaction meeting
the requirements of Rule 144A and in accordance with applicable securities laws
of any state of the United States or any other jurisdiction.
[Name of Transferor],
By:
--------------------------------
Name:
Title:
Dated:
C-1
<PAGE> 80
EXHIBIT D
FORM OF TRANSFER CERTIFICATE FOR TRANSFER
FROM GLOBAL NOTE OR CERTIFICATED
SECURITY TO CERTIFICATED SECURITY
(Transfers pursuant to Section 2.06(a)(iv)
or Section 2.06(a)(v) of the Indenture)
IBJ Schroder Bank & Trust Company, as Trustee
One State Street
New York, New York 10004
Attention: Corporate Trust Administration
Re: MIDCOM Communications Inc.
8 1/4% Convertible Subordinated Notes due 2003 (the "Notes")
Reference is hereby made to the Indenture dated as of August
22, 1996 (the "Indenture") between MIDCOM Communications Inc., as Issuer, and
IBJ Schroder Bank & Trust Company, as Trustee. Capitalized terms used but not
defined herein shall have the meanings given them in the Indenture.
This letter relates to U.S. $___________ aggregate principal
amount of Notes which are held [in the form of the [Rule 144A/Regulation S]
[Global] Note (CUSIP No. 59563X AA 0 (59563X AB 8)/CINS No. U59360 AA 2) with
the Depositary](1) in the name of ________________ [name of transferor] (the
"Transferor") to effect the transfer of the Notes.
In connection with such request, and in respect of such Notes,
the Transferor does hereby certify that such Notes are being transferred in
accordance with (i) the transfer restrictions set forth in the Notes and (ii)
to a transferee that the Transferor reasonably believes is an "accredited
investor" (as defined in Rule 501(a)(1), (2), (3), (4) or (7) of Regulation D
under the Securities Act of 1933) and is acquiring at least $100,000 principal
amount of Notes for its own account or for one or more accounts as to which the
transferee exercises sole investment discretion and (iii) in accordance with
applicable securities laws of any state of the United States or any other
jurisdiction.
[Name of Transferor],
By:
--------------------------------
Name:
Title:
Dated:
- ---------------
(1) Insert, if appropriate.
D-1
<PAGE> 81
EXHIBIT E
FORM OF ACCREDITED INVESTOR TRANSFEREE CERTIFICATE
(Transfers pursuant to Section 2.06(a)(iv) and Section 2.06(a)(vi))
IBJ Schroder Bank & Trust Company, as Trustee
One State Street
New York, New York 10004
Attention: Corporate Trust Administration
Re: MIDCOM Communications Inc.
8 1/4% Convertible Subordinated Notes due 2003 (the "Notes")
Reference is hereby made to the Indenture dated as of August
22, 1996 (the "Indenture") between MIDCOM Communications Inc., as Issuer, and
IBJ Schroder Bank & Trust Company, as Trustee. Capitalized terms used but not
defined herein shall have the meanings given them in the Indenture.
This letter relates to U.S. $____________ aggregate principal
amount of Notes which are held [in the form of the [Rule 144A/Regulation S]
Global Note (CUSIP No. 59563X AA 0 /CINS No. U59360 AA 2) with the
Depositary](1) in the name of _______________________ [name of transferor] (the
"Transferor") to effect the transfer of the Notes to the undersigned.
In connection with such request, and in respect of such Notes
we confirm that:
1. We understand that the Notes were originally offered in a
transaction not involving any public offering in the United States
within the meaning of the United States Securities Act of 1933, as
amended (the "Securities Act"), that the Notes have not been
registered under the Securities Act and that (A) the Notes may be
offered, resold, pledged or otherwise transferred only (i) to a person
who the seller reasonably believes is a "qualified institutional
buyer" (as defined in Rule 144A under the Securities Act) in a
transaction meeting the requirements of Rule 144A, in a transaction
meeting the requirements of Rule 144 under the Securities Act, outside
the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act or in accordance
with another exemption from the registration requirements of the
Securities Act (and based upon an opinion of counsel if the Company so
requests), (ii) to the Company or (iii) pursuant to an effective
registration statement, and, in each case, in accordance with any
applicable securities laws of any State of the United States or any
other applicable jurisdiction and (B) the purchaser will, and each
subsequent holder is required to, notify any subsequent purchaser from
it of the resale restrictions set forth in (A) above.
2. We are a corporation, partnership or other entity having
such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of an investment in the
Notes, and we are (or any account for which we are purchasing under
paragraph 4 below is) an accredited investor as defined in Rule
501(a)(1),
- ---------------
(1) Insert and modify, if appropriate.
E-1
<PAGE> 82
(2), (3), (4) or (7) under the Securities Act, able to bear the
economic risk of our proposed investment in the Notes.
3. We are acquiring the Notes for our own account (or for
accounts as to which we exercise sole investment discretion and have
authority to make, and do make, the statements contained in this
letter) and not with a view to any distribution of the Notes, subject,
nevertheless, to the understanding that the disposition of our
property shall at all times be and remain within our control.
4. We are, and each account (if any) for which we are
purchasing Notes is, purchasing Notes having an aggregate principal
amount of not less than $100,000.
5. We understand that (a) the Notes will be delivered to us
in registered form only and that the certificate delivered to us in
respect of the Notes will bear a legend substantially to the following
effect:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED
STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY
EVIDENCED HEREBY AND ANY SHARES OF COMMON STOCK ISSUED UPON CONVERSION HEREOF
MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE
SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON
THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED
BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES
FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY AND ANY SHARES OF COMMON
STOCK ISSUED UPON CONVERSION HEREOF MAY BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c)
OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH
ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND
BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE
COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH
CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND
EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE
SECURITY EVIDENCED HEREBY OR ANY COMMON STOCK ISSUED UPON CONVERSION HEREOF OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE."
and (b) such certificates will be reissued without the foregoing
legend only in accordance with the terms of the Indenture.
6. We agree that in the event that at some future time we
wish to dispose of any of the Notes, we will not do so unless:
E-2
<PAGE> 83
(a) the Notes are sold to the Company or any
Subsidiary thereof;
(b) the Notes are sold to a qualified
institutional buyer in compliance with Rule 144A under the
Securities Act;
(c) the Notes are sold to an accredited investor,
as defined in Rule 501(a)(1), (2), (3), (4) or (7) under the
Securities Act, acquiring at least $100,000 principal amount
of the Notes that, prior to such transfer, furnishes to the
Trustee a signed letter containing certain representations and
agreements relating to the restrictions on transfer of the
Notes (the form of which letter can be obtained from such
Trustee);
(d) the Notes are sold outside the United States
in compliance with Rule 903 or Rule 904 under the Securities
Act;
(e) the Notes are sold by us pursuant to Rule 144
under the Securities Act; or
(f) the Notes are sold pursuant to an effective
registration statement under the Securities Act.
Very truly yours,
[PURCHASER]
By:
--------------------------------
Name:
Title:
Dated:
E-3
<PAGE> 84
EXHIBIT F
FORM OF CERTIFICATE FOR TRANSFERS OF
REGULATION S TEMPORARY GLOBAL NOTE
FOR REGULATION S PERMANENT GLOBAL NOTE
(Transfers pursuant to Section 2.06(a)(v))
(Transferor)
[MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, BRUSSELS OFFICE AS
OPERATOR OF THE EUROCLEAR SYSTEM]
[CEDEL BANK, SOCIETE ANONYME]
Re: MIDCOM Communications Inc.
8 1/4% Convertible Subordinated Notes due 2003 (the "Notes")
Reference is hereby made to the Indenture dated as of August
22, 1996 (the "Indenture") between MIDCOM Communications Inc., as Issuer, and
IBJ Schroder Bank & Trust Company, as Trustee. Capitalized terms used but not
defined herein shall have the meanings given them in the Indenture.
This certificate relates to U.S. $____________ aggregate
principal amount of Notes which are held in the form of the Regulation S
Temporary Global Note (CINS No. U59360 AA 2) with the Depositary in the name of
________________________ [name of transferor] (the "Transferor") to effect the
transfer of the beneficial interest in such Regulation S Temporary Global Note
for a beneficial interest in an equivalent aggregate principal amount of the
Regulation S Permanent Global Note.
In connection with such request, and in respect of such Notes
we confirm that:
1. We are either not a U.S. person (as defined below) or we
have purchased our beneficial interest in the above referenced
Regulation S Temporary Global Note in a transaction that is exempt
from the registration requirements under the Securities Act.
2. We are delivering this certificate in connection with
obtaining a beneficial interest in the Regulation S Permanent Global
Note in exchange for our beneficial interest in the Regulation S
Temporary Global Note.
For purposes of this certificate, "U.S. person" means (i) any
individual resident in the United States, (ii) any partnership or corporation
organized or incorporated under the laws of the United States, (iii) any estate
of which an executor or administrator is a U.S. person (other than an estate
governed by foreign law and of which at least one executor or administrator is
a non-U.S. person who has sole or shared investment discretion with respect to
is assets), (iv) any trust of which any trustee is a U.S. person (other than a
trust of which at least one trustee is a non-U.S. person who has sole or shared
investment discretion with respect to its assets and no beneficiary of the
trust (and no settlor if the trust is revocable) is a U.S. person), (v) any
agency or branch of a foreign entity located in the United States, (vi) any
non-discretionary or similar account (other than an estate or trust) held by a
dealer or other fiduciary for the benefit or account
F-1
<PAGE> 85
of a U.S. person, (vii) any discretionary or similar account (other than an
estate or trust) held by a dealer or other fiduciary organized, incorporated or
(if an individual) resident in the United States (other than such an account
held for the benefit or account of a non-U.S. person), (viii) any partnership
or corporation organized or incorporated under the laws of a foreign
jurisdiction and formed by a U.S. person principally for the purpose of
investing in securities not registered under the Securities Act (unless it is
organized or incorporated, and owned, by accredited investors within the
meaning of Rule 501(a) under the Securities Act who are not natural persons,
estates or trusts); provided, however, that the term "U.S. person" shall not
include (A) a branch or agency of a U.S. person that is located and operating
outside the United States for valid business purposes as a locally regulated
branch or agency engaged in the banking or insurance business, (B) any employee
benefit plan established and administered in accordance with the law, customary
practices and documentation of a foreign country and (C) the international
organizations set forth in Section 902(o)(7) of Regulation S under the
Securities Act and any other similar international organizations, and their
agencies, affiliates and pension plans.
We irrevocably authorize you to produce this certificate or a copy
hereof to any interested party in any administrative or other proceedings with
respect to the matters covered by this certificate.
Very truly yours,
[TRANSFEROR]
By:
--------------------------------
Name:
Title:
To be completed by the account holder
as, or as agent for, the beneficial
owner(s) of the Notes to which this
Dated: certificate relates.
F-2
<PAGE> 86
EXHIBIT G
FORM OF CERTIFICATE FOR TRANSFERS OF
REGULATION S TEMPORARY GLOBAL NOTE
FOR REGULATION S PERMANENT GLOBAL NOTE
(Transfers pursuant to Section 2.06(a)(v))
(Euroclear or Cedel)
IBJ Schroder Bank & Trust Company, as Trustee
One State Street
New York, New York 10004
Attention: Corporate Trust Administration
Re: MIDCOM Communications Inc.
8 1/4% Convertible Subordinated Notes due 2003 (the "Notes")
Reference is hereby made to the Indenture dated as of August
22, 1996 (the "Indenture") between MIDCOM Communications Inc., as Issuer, and
IBJ Schroder Bank & Trust Company, as Trustee. Capitalized terms used but not
defined herein shall have the meanings given them in the Indenture.
This certificate relates to U.S. $____________ aggregate
principal amount of Notes which are held in the form of the Regulation S
Temporary Global Note (CINS No. U59360 AA 2) with the Depositary to effect the
transfer of the beneficial interest in such Regulation S Temporary Global Note
for a beneficial interest in an equivalent aggregate principal amount of the
Regulation S Permanent Global Note.
In connection with such request, this is to certify that,
based solely on certificates we have received in writing, by tested telex or by
electronic transmission from member organizations appearing in our records as
persons being entitled to a portion of the principal amount of the Regulation S
Temporary Global Note set forth above (our "Member Organizations")
substantially to the effect set forth in the Indenture, U.S. $_________
aggregate principal amount of the Notes is owned by persons that are not
citizens or residents of the United States, domestic partnerships, domestic
corporations or any estate or trust the income of which is subject to United
States federal income taxation regardless of its source or any other person
deemed a "U.S. person" under Regulation S under the Securities Act of 1933, as
amended.
We further certify (i) that we are not making available
herewith for exercise (or if relevant, exercise of any rights of collection of
any interest) any portion of the Regulation S Global Note excepted in such
certificates and (ii) that, as of the date hereof, we have not received any
notification from any of our Member Organizations to the effect that the
statements made by such Member Organizations with respect to any portion of the
part submitted herewith for exchange (or, if relevant, exercise or any rights
of collection of any interest) are no longer true and cannot be relied upon as
of the date hereof.
We understand that this certificate is required in connection with
certain laws, and, if applicable, certain securities laws of the United States.
In connection therewith, if administrative or legal proceedings are commenced
or threatened in connection with which this certificate is or
G-1
<PAGE> 87
would be relevant, we irrevocably authorize you to produce this certification
to any interested party in such proceedings.
Very truly yours,
[MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, BRUSSELS OFFICE AS
OPERATOR OF THE EUROCLEAR SYSTEM]
[CEDEL BANK, SOCIETE ANONYME]
By:
--------------------------------
Name:
Title:
Dated:
G-2
<PAGE> 88
EXHIBIT H
FORM OF CERTIFICATE FOR TRANSFERS OF
REGULATION S PERMANENT GLOBAL NOTE FOR
CERTIFICATED SECURITIES
(Transfers pursuant to Section 2.06(a)(v))
(Transferor)
IBJ Schroder Bank & Trust Company, as Trustee
One State Street
New York, New York 10004
Attention: Corporate Trust Administration
Re: MIDCOM Communications Inc.
8 1/4% Convertible Subordinated Notes due 2003 (the "Notes")
Reference is hereby made to the Indenture dated as of August
22, 1996 (the "Indenture") between MIDCOM Communications Inc., as Issuer, and
IBJ Schroder Bank & Trust Company, as Trustee. Capitalized terms used but not
defined herein shall have the meanings given them in the Indenture.
This certificate relates to U.S. $____________ aggregate
principal amount of Notes which are held in the form of the Regulation S
Permanent Global Note (CINS No. U59360 AA 2) with the Depositary in the name of
____________________________ [name of transferor] (the "Transferor") to effect
the transfer of the beneficial interest in such Regulation S Permanent Global
Note for a beneficial interest in an equivalent aggregate principal amount of
Certificated Securities.
In connection with such request, and in respect of such Notes
we confirm that:
1. We are either not a U.S. person (as defined below) or we
have purchased our beneficial interest in the above referenced
Regulation S Permanent Global Note in a transaction that is exempt
from the registration requirements under the Securities Act.
2. We are delivering this certificate in connection with
obtaining a beneficial interest in Certificated Notes in exchange for
our beneficial interest in the Regulation S Permanent Global Note.
For the purposes of this certificate, "U.S. person" means (i)
any individual resident in the United States, (ii) any partnership or
corporation organized or incorporated under the laws of the United States,
(iii) any estate of which an executor or administrator is a U.S. person (other
than an estate governed by foreign law and of which at least one executor or
administrator is a non-U.S. person who has sole or shared investment discretion
with respect to its assets), (iv) any trust of which any trustee is a U.S.
person (other than a trust of which at least one trustee is a non-U.S. person
who has sole or shared investment discretion with respect to its assets and no
beneficiary of the trust (and no settlor if the trust is revocable) is a U.S.
person), (v) any agency or branch of a foreign entity located in the United
States, (vi) any non-discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary for the benefit or account of a U.S.
person, (vii) any discretionary or similar account (other than an estate or
trust) held by a dealer or other fiduciary organized, incorporated or (if an
individual) resident in the United States (other than such an account held for
the benefit or account of a non-U.S. person), (viii) any
H-1
<PAGE> 89
partnership or corporation organized or incorporated under the laws of a
foreign jurisdiction and formed by a U.S. person principally for the purpose of
investing in securities not registered under the Securities Act (unless it is
organized or incorporated, and owned, by accredited investors within the
meaning of Rule 501(a) under the Securities Act who are not natural persons,
estates, or trusts); provided, however, that the term "U.S. person" shall not
include (A) a branch or agency of a U.S. person that is located and operating
outside the United States for valid business purposes as a locally regulated
branch or agency engaged in the banking or insurance business, (B) any employee
benefit plan established and administered in accordance with the law, customary
practices and documentation of a foreign country and (C) the international
organizations set forth in Section 902(o)(7) of Regulation S under the
Securities Act and any other similar international organizations, and their
agencies, affiliates and pension plans.
We irrevocably authorize you to produce this certificate or a copy
hereof to any interested party in any administrative or other proceedings with
respect to the matters covered by this certificate.
Very truly yours,
[TRANSFEROR]
By:
-----------------------------
Name:
Title:
To be completed by the account holder
as, or the agent for, the beneficial
owner(s) of the Convertible Notes to
Date: which this certificate relates.
H-2
<PAGE> 1
EXHIBIT 4.5
================================================================================
$85,000,000
8 1/4% Convertible Subordinated Notes due 2003
REGISTRATION RIGHTS AGREEMENT
Dated as of August 22, 1996
by and among
MIDCOM Communications Inc.
and
PaineWebber Incorporated
Wheat, First Securities, Inc.
================================================================================
<PAGE> 2
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and
entered into as of August 22, 1996 by and among MIDCOM Communications Inc., a
Washington corporation (the "Company"), and PaineWebber Incorporated and Wheat,
First Securities, Inc., as initial purchasers (the "Initial Purchasers").
The Company proposes to issue and sell to the Initial Purchasers (the
"Initial Placement") $85,000,000 aggregate principal amount (plus up to an
additional $12,750,000 principal amount to cover over-allotments, if any) of
its 8 1/4% Convertible Subordinated Notes due 2003 (the "Notes"), pursuant to
the terms of a Purchase Agreement, dated as of August 15, 1996 (the "Purchase
Agreement"). As an inducement to the Initial Purchasers to enter into the
Purchase Agreement, and in satisfaction of a condition to the Initial
Purchasers' obligations thereunder, the Company agrees with the Initial
Purchasers, (i) for the benefit of the Initial Purchasers and (ii) for the
benefit of the holders from time to time of the Transfer Restricted Securities
(as defined) whose names appear in the register maintained by the Company's
registrar in accordance with the provisions of the Indenture (as defined in
Section 1 hereof) (including the Initial Purchasers) (each of the foregoing a
"Holder," and collectively the "Holders"), as follows:
1. Definitions. Capitalized terms used herein without definition
shall have their respective meanings set forth in the Purchase Agreement. As
used in this Agreement, the following capitalized terms shall have the
following meanings:
"Affiliate" of any specified person means any other person which,
directly or indirectly, is in control of, is controlled by, or is under common
control with, such specified person. For purposes of this definition, control
of a person means the power, direct or indirect, to direct or cause the
direction of the management and policies of such person whether by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Business Day" means any day other than a Saturday, a Sunday or a day
on which banking institutions in the State of New York are not required to be
open.
"Closing Date" has the meaning set forth in the Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, $.0001 par value per share, of
the Company.
"Damages Payment Date" means each regular interest payment date with
respect to the Notes provided for in the Indenture and the Notes.
"Effectiveness Target Date" has the meaning set forth in Section 3(a)
hereto.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and the rules and regulations of the Commission promulgated
thereunder.
"Exchange Offer Registration Statement" has the meaning set forth in
Section 4 hereof.
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<PAGE> 3
"Holder" has the meaning set forth in the preamble hereto.
"Indenture" means the Indenture dated as of August 22, 1996, between
the Company and IBJ Schroder Bank & Trust Company, as trustee, pursuant to
which the Notes are to be issued, as the same may be amended, modified or
supplemented from time to time in accordance with the terms thereof.
"Initial Purchasers" has the meaning set forth in the preamble
hereto.
"Initial Placement" has the meaning set forth in the preamble hereto.
"Losses" has the meaning set forth in Section 9(d) hereof.
"Majority Holders" means the Holders of a majority of the aggregate
principal amount of securities registered under a Shelf Registration Statement
(provided that Holders of Common Stock issued upon conversion of Notes shall be
deemed to be Holders of the aggregate principal amount of Notes from which such
Common Stock was converted).
"Managing Underwriters" means the investment banker or investment
bankers and manager or managers that shall administer an Underwritten Offering
of the securities covered by the Shelf Registration Statement.
"New Notes" means debt securities of the Company identical in all
material respects to the Notes (except that the New Notes shall not be subject
to restrictions on transfer), which may be issued pursuant to Section 4 hereof.
"Notes" means the 8 1/4% Convertible Subordinated Notes due 2003 of
the Company.
"Offering Memorandum" has the meaning set forth in the Purchase
Agreement.
"Person" means any individual, partnership, corporation, limited
liability company, trust or unincorporated organization, or a government or
agency or political subdivision thereof.
"Prospectus" means the prospectus included in any Shelf Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of Transfer Restricted Securities, covered by
such Shelf Registration Statement, and all amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference into such Prospectus.
"Registration Default" has the meaning set forth in Section 5 hereto.
"Securities Act" means the Securities Act of 1933, as amended from
time to time, and the rules and regulations of the Commission promulgated
thereunder.
"Shelf Registration Period" has the meaning set forth in Section 3(b)
hereof.
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"Shelf Registration Statement" means a "shelf" registration statement
of the Company pursuant to the provisions of Section 3 hereof which covers the
Transfer Restricted Securities, on an appropriate form under Rule 415 under the
Securities Act, or any similar rule that may be adopted by the Commission,
amendments and supplements to such registration statement, including
post-effective amendments, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by reference
therein.
"Supplement Delay Period" means any period commencing on the date of
receipt by a Holder of Transfer Restricted Securities of any notice from the
Company of the existence of any fact or event of the kind described in Section
6(c)(2) hereof and ending on the date of receipt by such Holder of an amended
or supplemented Shelf Registration Statement or Prospectus, as contemplated by
Section 6(i) hereof, or the receipt by such Holder of written notice from the
Company (the "Advice") that the use of the Prospectus may be resumed, and
receipt of copies of any additional or supplemental filings that are
incorporated by reference in the Prospectus.
"Transfer Restricted Securities" means each Note and the Common Stock
issuable upon conversion thereof until (i) the date on which such Note or the
Common Stock issuable upon conversion thereof has been effectively registered
under the Securities Act and disposed of pursuant to an effective registration
statement or, with respect to any Note, exchanged for a New Note pursuant to
Section 4 hereof, (ii) the date on which such Note or the Common Stock issuable
upon conversion thereof is distributed to the public pursuant to Rule 144 under
the Securities Act (or any similar provision then in effect) or is saleable
pursuant to Rule 144(k) under the Securities Act and all legends thereon
relating to transfer restrictions have been removed, or (iii) the date on which
such Note or the Common Stock issuable upon conversion thereof ceases to be
outstanding.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended.
"Trustee" means the trustee with respect to the Notes under the
Indenture.
"Underwritten Offering" or "Underwritten Registration" means a
registration in which securities of the Company are sold to one or more
underwriters for reoffering to the public.
2. Securities Subject to This Agreement. The securities entitled
to the benefits of this Agreement are the Transfer Restricted Securities.
3. Shelf Registration.
(a) The Company shall, within 60 days after Closing Date, file with
the Commission and thereafter shall use its best efforts to cause to be
declared effective under the Securities Act by the 150th day after the Closing
Date (the "Effectiveness Target Date"), a Shelf Registration Statement relating
to the offer and sale of the Transfer Restricted Securities by the Holders from
time to time in accordance with the methods of distribution elected by such
Holders and set forth in such Shelf Registration Statement.
(b) The Company shall use its best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the Prospectus
forming a part thereof to be usable by Holders for a period of three years from
the Closing Date or such shorter period that will terminate when (i) all the
Transfer
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<PAGE> 5
Restricted Securities covered by the Shelf Registration Statement have been
sold pursuant to the Shelf Registration Statement, or (ii) the date on which
there ceases to be outstanding any Transfer Restricted Securities (in any such
case, such period being called the "Shelf Registration Period"). The Company
shall be deemed not to have used its best efforts to keep the Shelf
Registration Statement effective during the requisite period if it voluntarily
takes any action that would result in Holders of Transfer Restricted Securities
covered thereby not being able to offer and sell such securities during that
period, unless (i) such action is required by applicable law, (ii) such action
is taken by the Company in good faith and for valid business reasons (not
including avoidance of the Company's obligations hereunder), including the
acquisition or divestiture of assets, so long as the Company promptly
thereafter complies with the requirements of Section 6(i) hereof, if
applicable, or (iii) such action is taken because of any fact or circumstance
giving rise to a Supplement Delay Period.
(c) The Company shall prepare and file with the Commission such
amendments, including post-effective amendments, to the Shelf Registration
Statement as may be necessary to keep such Registration Statement continuously
effective for the applicable time period; cause the related Prospectus to be
supplemented by any required Prospectus supplement and as so supplemented to be
filed pursuant to Rule 424 (or any similar provisions then in force) under the
Securities Act; and comply with the provisions of the Securities Act and the
Exchange Act with respect to the disposition of all securities covered by such
Shelf Registration Statement during the applicable period in accordance with
the intended methods of disposition by the sellers thereof set forth in such
Shelf Registration Statement as so amended or in such Prospectus as so
supplemented.
4. Registered Exchange Offer. If the Company determines that it
is permissible to do so, in lieu of filing the Shelf Registration Statement or
maintaining the effectiveness of the Shelf Registration Statement as
contemplated herein, the Company, in its discretion, may file with the
Commission a registration statement on Form S-4 or other applicable form with
respect to the New Notes (the "Exchange Offer Registration Statement") and upon
the Exchange Offer Registration Statement becoming effective, offer the holders
of Notes the opportunity to exchange their Notes for an equal principal amount
of New Notes. Upon the effectiveness of an Exchange Offer Registration
Statement, the holders of Notes constituting Transfer Restricted Securities
shall not be entitled to include any such Notes in a Shelf Registration
Statement hereunder; provided, however, the effectiveness of an Exchange Offer
Registration Statement shall not affect the Company's obligations hereunder
with respect to any Holder's Common Stock constituting Transfer Restricted
Securities. Notwithstanding the foregoing, in no event shall the Company have
any obligation to file a registration statement with respect to, or to register
any Notes pursuant to, an Exchange Offer Registration Statement.
5. Liquidated Damages.
(a) Subject to Section 6(m), if (i) the Company fails to file the
Shelf Registration Statement required by Section 3 of this Agreement on or
before the date specified for such filing under Section 3(a) hereof, (ii) such
Shelf Registration Statement is not declared effective by the Commission on or
prior to the Effectiveness Target Date or (iii) the Shelf Registration
Statement is declared effective but thereafter ceases to be continuously
effective or usable in connection with resales of Transfer Restricted
Securities during the Shelf Registration Period (each such event referred to in
clauses (a) through (c) above a "Registration Default"), then the Company will
pay Liquidated Damages to each Holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $0.05 per week per $1,000 aggregate
principal amount of the
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<PAGE> 6
Transfer Restricted Securities held by such Holder. The amount of the
Liquidated Damages will increase by an additional $0.05 per week per $1,000
aggregate principal amount of the Transfer Restricted Securities held by each
Holder with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages of $0.25
per week per $1,000 aggregate principal amount of the Transfer Restricted
Securities held by each Holder. In no event shall the Company pay Liquidated
Damages in excess of such maximum amount set forth in the preceding sentence,
regardless of whether one or multiple Registration Defaults exist. A
Registration Default under clause (a) above shall be cured on the date that the
Shelf Registration Statement is filed with the Commission; a Registration
Default under clause (b) above shall be cured on the date that the Shelf
Registration Statement is declared effective by the Commission; and a
Registration Default under clause (c) above shall be cured on the date of the
Shelf Registration Statement is declared effective or usable. All accrued
Liquidated Damages will be paid by the Company on each Damages Payment Date in
cash. Such payment will be made to the Holder(s) of the Global Notes (as
defined in the Indenture) by wire transfer of immediately available funds or by
federal funds check and to Holders of Transfer Restricted Securities
represented by Certificated Notes, if any, by wire transfer to the accounts
specified by them or by mailing checks to their registered addresses if no such
accounts have been specified. Following the cure of all Registration Defaults,
the accrual of Liquidated Damages will cease. For purposes of this Section 5,
Notes which have been converted into shares of Common Stock constituting
Transfer Restricted Securities shall be deemed to bear the principal amount at
which such securities were converted.
(b) Upon the occurrence of any event contemplated by Section
6(c)(2)(v) hereof and delivery of the Advice relating to such occurrence, the
Company shall be entitled to suspend the use of the Shelf Registration
Statement for three Supplement Delay Periods of up to 30 days for each such
period during which no Registration Default shall be deemed to occur under
Section 5(a)(iii). Such periods may run consecutively if a separate Advice is
delivered to Holders prior to the expiration of the preceding 30-day Supplement
Delay Period; provided, however, that such periods may not exceed an aggregate
of 45 days in any twelve-month period. The Company shall use its reasonable
best efforts to cause the use of the Shelf Registration Statement to be resumed
as soon as reasonably practicable following the commencement of a Supplement
Delay Period. A Registration Default shall be deemed to have occurred if the
use of the Shelf Registration Statement may not be resumed immediately upon the
expiration of a Supplement Delay Period permitted under this Section 5(b) and
Liquidated Damages in respect thereof shall accrue from the beginning of such
Supplement Delay Period.
(c) The parties hereto agree that the Liquidated Damages provided
for in this Section 5 constitute a reasonable estimate of the damages that may
be incurred by Holders of Transfer Restricted Securities by reason of the
failure of the Shelf Registration Statement to be filed, declared effective or
maintained effective, as the case may be, in accordance with the provisions
hereof.
6. Registration Procedures. In connection with any Shelf
Registration Statement, the following provisions shall apply:
(a) The Company shall furnish to the Initial Purchasers, the
Holders, the Managing Underwriters, if any, and their respective counsel,
not less than five Business Days prior to the filing thereof with the
Commission, a copy of any Shelf Registration Statement and each amendment
thereof, and each amendment or supplement, if any, to the Prospectus
included therein, and shall
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<PAGE> 7
use its best efforts to reflect in each such document, when so filed with
the Commission, such comments as the Initial Purchasers and the Holders or
their counsel may reasonably propose.
(b) The Company shall use its best efforts to ensure that (i) any
Shelf Registration Statement and any amendment thereto and any Prospectus
forming part thereof and any amendment or supplement thereto complies in
all material respects with the Securities Act and the rules and
regulations thereunder, (ii) assuming any information provided by Holders
of Transfer Restricted Securities for inclusion in any Shelf Registration
Statement pursuant to Section 6(m) is true and correct, any Shelf
Registration Statement and any amendment or supplement thereto does not,
when it becomes effective, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) assuming
any information provided by Holders of Transfer Restricted Securities for
inclusion in any Shelf Registration Statement pursuant to Section 6(m) is
true and correct, any Prospectus forming part of any Shelf Registration
Statement, and any amendment or supplement to such Prospectus, does not
include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading.
(c) (1) The Company shall advise the Initial Purchasers, the
Holders of Transfer Restricted Securities named in the Shelf Registration
Statement and the Managing Underwriters, if any, and, if requested by the
Initial Purchasers, any such Holder or the Managing Underwriters, if any,
confirm such advice in writing, when a Shelf Registration Statement or any
amendment thereto has been filed with the Commission and when the Shelf
Registration Statement or any post-effective amendment thereto has become
effective.
(2) The Company shall advise the Initial Purchasers, the
Holders of Transfer Restricted Securities named in the Shelf Registration
Statement, the Managing Underwriters, if any, and their respective counsel
and, if requested by any such person, confirm such advice in writing:
(i) of any request by the Commission for amendments or
supplements to the Shelf Registration Statement or the Prospectus
included therein or for additional information;
(ii) of the initiation by the Commission of proceedings
relating to a stop order suspending the effectiveness of the Shelf
Registration Statement;
(iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Shelf Registration
Statement;
(iv) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the securities
included therein for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; and
(v) of the existence of any fact and the happening of any
event (including, without limitation, pending negotiations relating
to, or the consummation of, a transaction or the occurrence of any
event which would require additional disclosure of material
non-public information by the Company in the Shelf Registration
Statement as to which the Company has a bona fide business purpose
for preserving confidential or which renders the Company unable
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<PAGE> 8
to comply with Commission requirements) that, in the opinion of the
Company, makes untrue any statement of a material fact made in its
Shelf Registration Statement, the Prospectus or any amendment or
supplement thereto or any document incorporated by reference therein
or requires the making of any changes in the Shelf Registration
Statement or the Prospectus so that, as of such date, the statements
therein are not misleading and do not omit to state a material fact
required to be stated therein or necessary to make the statements
therein (in the case of the Prospectus, in light of the circumstances
under which they were made) not misleading.
Such Advice may be accompanied by an instruction to suspend the use of the
Prospectus until the requisite changes have been made.
(d) The Company shall use its best efforts to obtain the withdrawal
of any order suspending the effectiveness of the Shelf Registration
Statement, or the lifting of any suspension of the qualification (or
exemption from qualification) of the Transfer Restricted Securities for
sale in any jurisdiction, at the earliest possible time.
(e) The Company shall furnish to each selling Holder named in the
Shelf Registration Statement and each underwriter, if any, without charge,
at least one conformed copy of such Shelf Registration Statement and any
post-effective amendment thereto, including financial statements and
schedules. Upon written request, the Company shall furnish to each
selling Holder named in the Shelf Registration Statement and each
underwriter, if any, without charge, one copy of all exhibits to such
Shelf Registration Statement (including those incorporated by reference).
(f) The Company shall, during the Shelf Registration Period, deliver
to each Holder of Transfer Restricted Securities named in the Shelf
Registration Statement and each underwriter, if any, without charge, as
many copies of the Prospectus (including each preliminary Prospectus)
included in such Shelf Registration Statement and any amendment or
supplement thereto as such Holder or underwriters may reasonably request;
and, subject to any notice by the Company in accordance with Section 7(b),
the Company consents to the use of the Prospectus or any amendment or
supplement thereto by each of the selling Holders and such underwriters
for the purposes of offering and resale of the Transfer Restricted
Securities covered by the Prospectus or any amendment or supplement
thereto.
(g) Prior to the offering of Transfer Restricted Securities pursuant
to the Shelf Registration Statement, the Company shall use its best
efforts to register or qualify or cooperate with the Holders of Transfer
Restricted Securities named therein, the underwriters, if any, and their
respective counsel in connection with the registration or qualification
(or exemption from such registration or qualification) of such Transfer
Restricted Securities for offer and sale under the securities or blue sky
laws of such jurisdictions of the United States as any such Holders or
underwriters reasonably request in writing; keep each such registration or
qualification (or exemption therefrom) effective during the period the
Shelf Registration Statement is required to be kept effective and do any
and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Transfer Restricted Securities
covered by the Shelf Registration Statement; provided, however, that the
Company will not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action which
would subject it to general service of process or to taxation in any such
jurisdiction where it is not then so subject.
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<PAGE> 9
(h) The Company shall cooperate with the Holders of Transfer
Restricted Securities and underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Transfer Restricted
Securities to be sold pursuant to the Shelf Registration Statement, free
of any restrictive legends and in such denominations and registered in
such names as such Holders or underwriters may request in writing at least
two Business Days prior to sales of securities pursuant to such Shelf
Registration Statement.
(i) Upon the occurrence of any event contemplated by Section
6(c)(2)(v) hereof, subject to Section 5(b), the Company shall promptly
prepare a post-effective amendment to the Shelf Registration Statement or
an amendment or supplement to the related Prospectus or any document
incorporated therein by reference or file any other required document so
that as thereafter delivered to purchasers of the Transfer Restricted
Securities covered thereby, the Prospectus will not include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(j) Not later than the effective date of any such Shelf Registration
Statement hereunder, the Company shall cause to be provided CUSIP numbers
for the Transfer Restricted Securities registered under such Shelf
Registration Statement, and provide the Trustee with printed certificates
for such Transfer Restricted Securities where necessary, in a form
eligible for deposit with The Depository Trust Company.
(k) The Company shall use its best efforts to comply with all
applicable rules and regulations of the Commission and shall make
generally available to its security holders in a regular filing on Form
10-Q or Form 10-K an earnings statement satisfying the provisions of Rule
158 (which need not be audited) for the twelve-month period commencing
after effectiveness of the Shelf Registration Statement.
(l) The Company shall cause the Indenture to be qualified under the
Trust Indenture Act in a timely manner.
(m) The Company may require each Holder of Transfer Restricted
Securities to be sold pursuant to the Shelf Registration Statement to
furnish to the Company within 10 Business Days after written request for
such information has been made by the Company such customary information
regarding the Holder and the distribution of such securities as the
Company may from time to time reasonably require for inclusion in such
Shelf Registration Statement and such other information as may be
necessary or advisable in the reasonable opinion of the Company and its
counsel, in connection with such Shelf Registration Statement (and, with
respect to any Holder not previously identified by the Company in an
effective Shelf Registration Statement, such Holder shall notify the
Company in writing, not less than 5 Business Days prior to any sale by
such Holder under the Shelf Registration Statement of its name and the
number of Transfer Restricted Securities to be included in the Shelf
Registration Statement). No Holder of Transfer Restricted Securities
shall be entitled to the benefit of any Liquidated Damages under Section 5
of this Agreement or be entitled to use the Prospectus unless and until
such Holder shall have furnished the information required by this Section
6(m) and all such other information required to be disclosed in order to
make such information previously furnished to the Company by such Holder
not materially misleading.
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(n) The Company shall, if requested, promptly incorporate in the
Shelf Registration Statement or Prospectus, if necessary, pursuant to a
supplement or post-effective amendment to the Shelf Registration
Statement, such information as the Managing Underwriters, if any, or the
Majority Holders reasonably request to have included therein and shall
make all required filings of such Prospectus supplement or post-effective
amendment as soon as practicable after the Company is notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment.
(o) The Company shall enter into such agreements on terms reasonably
acceptable to the Company (including underwriting agreements) in form,
scope and substance as are customary in underwritten offerings, and take
all other reasonable actions necessary to facilitate the registration or
the disposition of the Transfer Restricted Securities included in the
Shelf Registration Statement.
(p) The Company shall (i) make reasonably available at reasonable
times for inspection by the Holders of Transfer Restricted Securities to
be registered thereunder, any underwriter participating in any disposition
pursuant to such Shelf Registration Statement, and any attorney,
accountant or other agent retained by the Holders or such underwriters, at
the office where normally kept during normal business hours, all financial
and other records, pertinent corporate documents and properties of the
Company and its subsidiaries, and cause the Company's officers, directors
and employees to supply all relevant information reasonably requested by
the Holders, underwriters, attorney, accountant or other agent in
connection with the Shelf Registration Statement as is customary for
similar due diligence examinations, provided, however, that such persons
shall first agree in writing with the Company that any information that is
reasonably and in good faith designated by the Company in writing as
confidential at the time of delivery of such information shall be kept
confidential by such persons; (ii) obtain opinions of counsel to the
Company and updates thereof (which counsel, if different from counsel to
the Company referred to in the Purchase Agreement, shall be reasonably
satisfactory to the Majority Holders of Transfer Restricted Securities to
be registered thereunder, the underwriters, if any, and their respective
counsel) addressed to each selling Holder covering such matters in form,
scope and substance as are customary in underwritten offerings; (iii)
obtain "cold comfort" letters (or, in the case of any person that does not
satisfy the conditions for receipt of a "cold comfort" letter specified in
Statement on Auditing Standards No. 72, an "agreed-upon procedures
letter") and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other independent
certified public accountants of any subsidiary of the Company or of any
business acquired by the Company for which financial statements and
financial data are, or are required to be, included in the Registration
Statement), addressed where reasonably practicable to each selling Holder
of Transfer Restricted Securities registered thereunder, and the
underwriters, if any, in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with primary
underwritten offerings; and (iv) deliver such documents and certificates
as may be reasonably requested by the Majority Holders and the Managing
Underwriters, if any, including those to evidence compliance with Section
6(i). The foregoing actions set forth in clauses (ii), (iii) and (iv) of
this Section 6(p) shall be performed at (A) the effectiveness of such
Shelf Registration Statement and each post-effective amendment thereto and
(B) each closing under any underwriting or similar agreement as and to the
extent required thereunder.
(q) The Company shall (i) list all Common Stock covered by such
Shelf Registration Statement on any securities exchange on which the
Common Stock is then listed or (ii) authorize for quotation
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<PAGE> 11
on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") or the National Market System of NASDAQ all Common Stock
covered by such Shelf Registration Statement if the Common Stock is then
so authorized for quotation.
7. Holders' Agreements. Each Holder of Transfer Restricted
Securities, by the acquisition of such Transfer Restricted Securities agrees:
(a) To furnish the information required to be furnished pursuant to
Section 6(m) hereof within the time periods set forth therein. The
Company may exclude from any Shelf Registration Statement the Transfer
Restricted Securities of any Holder who does not furnish such information.
Each Holder of Transfer Restricted Securities shall promptly furnish to
the Company all such information required to be disclosed in order to make
the information previously furnished to the Company by such Holder not
materially misleading.
(b) That upon receipt of a notice of the commencement of a
Supplement Delay Period, it will keep the fact of such notice
confidential, forthwith discontinue disposition of its Transfer Restricted
Securities, as the case may be, pursuant to the Shelf Registration
Statement, and will not deliver any Prospectus forming a part thereof
until receipt of the amended or supplemented Shelf Registration Statement
or Prospectus, as applicable, as contemplated by Section 6(i) hereof, or
until receipt of the Advice.
(c) If so directed by the Company in a notice of the commencement of
a Supplement Delay Period, each Holder of Transfer Restricted Securities,
as the case may be, will deliver to the Company (at the Company's expense)
all copies, other than permanent file copies then in such Holder's
possession, of the Prospectus covering the Transfer Restricted Securities,
as the case may be.
(d) Sales of such Transfer Restricted Securities pursuant to a Shelf
Registration Statement shall only be made in the manner set forth in such
currently effective Shelf Registration Statement.
8. Registration Expenses. The Company shall bear all expenses
incurred in connection with the performance of its obligations under Sections
2, 3, 5 and 6 hereof and will reimburse the Holders for the reasonable fees and
disbursements of one firm or counsel designated by the Majority Holders to act
as counsel for the Holders in connection therewith. Notwithstanding the
foregoing or anything in this Agreement to the contrary, each Holder shall pay
all underwriting discounts and commissions of any underwriters with respect to
any Transfer Restricted Securities sold by it.
9. Indemnification and Contribution.
(a) In connection with the Shelf Registration Statement, the Company
will indemnify and hold harmless each Holder of Transfer Restricted Securities
covered thereby, the directors, officers, employees and agents of each such
Holder and each person who controls any such Holder within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act from
and against any and all losses, claims, liabilities, expenses and damages,
joint or several (including any and all investigative, legal and other expenses
reasonably incurred in connection with, and any amount paid in settlement of,
any action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Securities Act, the Exchange Act or other
federal, state or foreign statutory law or regulation,
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<PAGE> 12
at common law or otherwise, insofar as such losses, claims, liabilities,
expenses and damages arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the Shelf Registration
Statement as originally filed or in any amendment thereof, or in any
preliminary Prospectus or Prospectus, or in any amendment thereof or supplement
thereto, or the omission or alleged omission to state in such documents a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, that (i) the Company will not be liable to
the extent that any such loss, claim, liability expense or damage arises out of
or is based on any such untrue statement or omission or alleged untrue
statement or omission made therein in reliance on and in conformity with
information relating to any Holder of Transfer Restricted Securities furnished
in writing to the Company by any such Holder expressly for inclusion therein
and (ii) the Company will not be liable to any Holder of Transfer Restricted
Securities under the indemnity agreement in this Section 9(a) with respect to
any preliminary Prospectus or a Prospectus that is subsequently amended or
supplemented to the extent that any such loss, claim, liability, expense or
damage of such Holder results solely from an untrue statement of a material
fact contained in, or the omission of a material fact from, the preliminary
Prospectus or Prospectus which untrue statement or omission was completely
corrected in the final Prospectus or the Prospectus as amended or supplemented,
as the case may be, if the Company shall sustain the burden of proving that
such Holder sold Transfer Restricted Securities to the person alleging such
loss, claim, liability, expense or damage without sending or giving, at or
prior to the written confirmation of such sale, a copy of the final Prospectus
or the Prospectus as amended or supplemented, as the case may be, if the
Company had previously furnished copies thereof to such Holder within a
reasonable amount of time prior to such sale or such confirmation. This
indemnity agreement will be in addition to any liability which the Company
might otherwise have.
The Company also agrees to indemnify or contribute to the losses,
claims, liabilities, expenses and damages, joint or several (including any and
all investigative, legal and other expenses reasonably incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claim asserted) of any underwriters of Transfer Restricted Securities
registered under the Shelf Registration Statement, their officers and directors
and each person who controls such underwriters on substantially the same basis
as that of the indemnification of the selling Holders provided in this Section
9(a) and shall, if requested by any Holder, enter into a customary underwriting
agreement reflecting such agreement, as provided in Section 6(o) hereof.
(b) Each Holder of Transfer Restricted Securities covered by the
Shelf Registration Statement will severally indemnify and hold harmless the
Company, each person who controls the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, each
director of the Company and each officer of the Company to the same extent as
the foregoing indemnity from the Company to each such Holder, but only insofar
as losses, claims, liabilities, expenses or damages arise out of or are based
on any untrue statement or omission or alleged untrue statement or omission
made in reliance on and in conformity with information relating to such Holder
furnished to the Company by or on behalf of such Holder expressly for use in
the Shelf Registration Statement as originally filed or in any amendment
thereof, or in any preliminary Prospectus or Prospectus, or in any amendment
thereof or supplement thereto. This indemnity agreement will be in addition to
any liability that such Holder might otherwise have.
(c) Any party that proposes to assert the right to be indemnified
under this Section 9 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 9, notify each
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<PAGE> 13
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party (i) will
not relieve it from any liability that it may have to any indemnified party
under the foregoing provisions of this Section 9 unless, and only to the extent
that, it did not otherwise learn of such action and such omission results in
the forfeiture of substantive rights or defenses by the indemnifying party and
(ii) will not, in any event relieve the indemnifying party from any obligations
to any indemnified party other than the indemnification obligations in Sections
9(a) and 9(b) hereof. If any such action is brought against any indemnified
party and it notifies the indemnifying party of its commencement, the
indemnifying party will be entitled to participate in and, to the extent that
it elects by delivering written notice to the indemnified party promptly after
receiving notice of the commencement of the action from the indemnified party,
jointly with any other indemnifying party similarly notified, to assume the
defense of the action, with counsel satisfactory to the indemnified party, and
after notice from the indemnifying party to the indemnified party of its
election to assume the defense, the indemnifying party will not be liable to
the indemnified party for any legal or other expenses except as provided below
and except for the reasonable costs of investigation subsequently incurred by
the indemnified party in connection with the defense. The indemnified party
will have the right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of such
indemnified party unless (1) the employment of counsel by the indemnified party
has been authorized in writing by the indemnifying party, (2) the indemnified
party has reasonably concluded (based on advice of counsel to the indemnified
party) that there may be legal defense available to it or other available
indemnified parties that are different from or in addition to those available
to the indemnifying party, (3) a conflict or potential conflict exists (based
on advice of counsel to the indemnified party) between the indemnified party
and the indemnifying party (in which case the indemnifying party will not have
the right to direct the defense of such action on behalf of the indemnified
party) or (4) the indemnifying party has not in fact employed counsel to assume
the defense of such action within a reasonable time after receiving notice of
the commencement of the action, in each of which cases the reasonable fees,
disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or parties. Such
firm shall be designated in writing by the Majority Holders in the case of
parties indemnified pursuant to Section 9(a) and by the Company, in the case of
parties indemnified pursuant to Section 9(b). All such fees, disbursements and
other charges will be reimbursed by the indemnifying party promptly as they are
incurred. No indemnifying party shall, without the prior written consent of
each indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding relating to
the matters contemplated by this Section 9 (whether or not any indemnified
party is a party thereto), unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising or that may arise out of such claim, action or proceeding.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 9 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company or the Holders of
Transfer Restricted Securities, or insufficient, the Company and such Holders
will contribute to the total losses, claims, liabilities, expenses and damages
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted, but after deducting any contribution received
by the Company from persons other than such Holders, such as persons who
control the Company within the meaning of the Securities Act or the
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<PAGE> 14
Exchange Act and officers and directors of the Company, who also may be liable
for contribution) (collectively, "Losses") to which the Company and any one or
more of such Holders of Transfer Restricted Securities may be subject in such
proportion as shall be appropriate to reflect the relative benefits received by
the Company on the one hand and such Holders on the other. The relative
benefits received by the Company shall be deemed to be equal to the sum of (x)
the total net proceeds from the Initial Placement (before deducting expenses)
as set forth on the cover page of the Offering Memorandum and (y) the total
amount of Liquidated Damages, if any, which the Company was not required to pay
as a result of registering the securities covered by the Shelf Registration
Statement which resulted in such Losses. Benefits received by the Initial
Purchasers shall be deemed to be equal to the total purchase discounts and
commissions as set forth on the cover page of the Offering Memorandum, and
benefits received by any other Holders shall be deemed to be equal to the value
of receiving Notes or Common Stock issuable upon conversion thereof, as
applicable, registered under the Securities Act. Benefits received by any
underwriter shall be deemed to be equal to the total underwriting discounts and
commissions, as set forth on the cover page of the Prospectus forming a part of
the Shelf Registration Statement which resulted in such Losses. If, but only
if, the allocation provided by the foregoing sentence is not permitted by
applicable law, the allocation of contribution shall be made in such proportion
as is appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company, on the one hand,
and the Holders, on the other, with respect to the statements or omissions
which resulted in such loss, claim, liability, expense or damage, or action in
respect thereof, as well as any other relevant equitable considerations with
respect to such offering. Such relative fault shall be determined by reference
to whether the untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Holders, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Holders agree that it would
not be just and equitable if contributions pursuant to this Section 9(d) were
to be determined by pro rata allocation (even if the Holders were treated as
one entity for such purpose) or by any other method of allocation which does
not take into account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of the loss, claim,
liability, expense or damage, or action in respect thereof, referred to above
in this Section 9(d) shall be deemed to include, for purpose of this Section
9(d), any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9(d), in no case shall any
Initial Purchaser or any subsequent Holder of any Transfer Restricted
Securities be responsible, in the aggregate, for any amount in excess of the
purchase discount or commission applicable to such Notes, as set forth on the
cover page of the Offering Memorandum, nor shall any underwriter be responsible
for any amount in excess of the underwriting discount or commission applicable
to the securities purchased by such underwriter under the Shelf Registration
Statement which resulted in such Losses. No person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Holders' obligations to contribute as
provided in this Section 9(d) are several and not joint. For purposes of this
Section 9(d), any person who controls the Company or a Holder within the
meaning of the Securities Act will have the same rights to contribution as that
party, and each officer or director of the Company or such Holder will have the
same rights to contribution, as the Company or such Holder, as applicable,
subject in each case to the provisions hereof. Any party entitled to
contribution promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 9(d), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may
13
<PAGE> 15
be sought from any other obligation it or they may have under this Section
9(d). No party will be liable for contribution with respect to any action or
claim settled without its written consent (which consent will not be
unreasonably withheld or delayed).
(e) The indemnity and contribution agreements contained in this
Section 9 will remain in full force and effect, regardless of any investigation
made by or on behalf of any Holder or the Company or any of the officers,
directors or controlling persons referred to in this Section 9, and will
survive the sale by a Holder of securities covered by the Shelf Registration
Statement.
10. Rules 144 and 144A. The Company shall use its best efforts to
file the reports required to be filed by it under the Securities Act and the
Exchange Act in a timely manner and, if at any time it is not required to file
such reports but in the past had been required to or did file such reports, it
will, upon the request of any holder of Transfer Restricted Securities, make
available other information as reasonably required by, and so long as necessary
to permit, sales of its Transfer Restricted Securities pursuant to Rule 144 and
Rule 144A. Notwithstanding the foregoing, nothing in this Section 10 shall be
deemed to require the Company to register any of its securities pursuant to the
Exchange Act.
11. Miscellaneous.
(a) Remedies. In the event of a breach by the Company of its
obligations under this Agreement, each Holder, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Agreement. The
Company agrees that monetary damages (including the Liquidated Damages
contemplated hereby) would not be adequate compensation for any loss incurred
by reason of a breach by it of the provisions of this Agreement and hereby
agrees to waive the defense in any action for specific performance that a
remedy at law would be adequate. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law; provided, that monetary
damages relating solely to a Registration Default shall be limited to the
amount of Liquidated Damages calculated in accordance with Section 5 hereof.
(b) No Inconsistent Agreements. The Company has not, as of the date
hereof, entered into, nor shall it, on or after the date hereof, enter into,
any agreement with respect to its securities that is inconsistent with the
rights granted to the Holders herein or otherwise conflicts with the provisions
hereof.
(c) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, qualified,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given, unless the Company has obtained the written
consent of the Holders of at least a majority of the then outstanding aggregate
principal amount of Transfer Restricted Securities; provided that, with respect
to any matter that directly or indirectly affects the rights of any Initial
Purchaser hereunder, the Company shall obtain the written consent of each such
Initial Purchaser against which such amendment, qualification, supplement,
waiver or consent is to be effective. Notwithstanding the foregoing (except
the foregoing proviso), a waiver or consent to departure from the provisions
hereof with respect to a matter that relates exclusively to the rights of
Holders whose securities are being sold pursuant to a Shelf Registration
Statement and that does not directly or indirectly affect the rights of other
Holders may be given by the Majority Holders, determined on the basis of Notes
being sold rather than registered under such Shelf Registration Statement.
14
<PAGE> 16
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered or
certified first-class mail, telex, telecopier, or air courier guaranteeing
overnight delivery:
(1) if to a Holder, at the most current address given by such
Holder to the Company in accordance with the provisions of this
Section 11(d), which address initially is, with respect to each
Holder, the address of such Holder maintained by the registrar under
the Indenture, with a copy in like manner to PaineWebber
Incorporated;
(2) if to the Initial Purchasers, initially at the address set
forth in the Purchase Agreement; and
(3) if to the Company, initially at its address set forth in
the Purchase Agreement.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next Business Day, if timely delivered to an air courier guaranteeing overnight
delivery.
The Initial Purchasers or the Company by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
(e) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties hereto, including, without the need for an express assignment or any
consent by the Company thereto, subsequent Holders of Transfer Restricted
Securities. The Company hereby agrees to extend the benefits of this Agreement
to any Holder of Transfer Restricted Securities and any such Holder may
specifically enforce the provisions of this Agreement as if an original party
hereto. The Company may not assign its rights or obligations hereunder without
the prior written consent of each Holder of Transfer Restricted Securities.
(f) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof. All
references made in this Agreement to "Section" and "paragraph" refer to such
Section or paragraph of this Agreement, unless expressly stated otherwise.
(h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE (WITHOUT
REFERENCE TO THE CONFLICT OF LAW RULES THEREOF).
(i) Submission to Jurisdiction. The Company hereby irrevocably
submits to the non-exclusive jurisdiction of any New York state court sitting
in the Borough of Manhattan in the City of New York or any federal court
sitting in the Borough of Manhattan in the City of New York in respect of any
suit, action or proceeding arising out of or relating to this Agreement, and
irrevocably accepts for itself and
15
<PAGE> 17
in respect of its property, generally and unconditionally, jurisdiction of the
aforesaid courts. The Company irrevocably waives, to the fullest extent it may
effectively do so under applicable law any objection that it may now or
hereafter have to the laying of the venue of any such suit, action or
proceeding brought in any such court and any claim that any such suit, action
or proceeding brought in any such court has been brought in an inconvenient
forum.
(j) Severability. In the event that any one of more of the
provisions contained herein, or the application thereof in any circumstances,
is held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in any way impaired
or affected thereby, it being intended that all of the rights and privileges of
the parties shall be enforceable to the fullest extent permitted by law.
(k) Attorneys' Fees. In any action or proceeding brought to enforce
any provision of this Agreement, or where any provision hereof is validly
asserted as a defense, the prevailing party, as determined by the court, shall
be entitled to recover its reasonable attorneys' fees in addition to any other
available remedy.
(l) Approval of Holders. Whenever the consent or approval of
holders of a specified percentage of Transfer Restricted Securities is required
hereunder, Transfer Restricted Securities held by the Company or its affiliates
(as such term is defined in Rule 405 under the Securities Act) shall not be
counted in determining whether such consent or approval was given by the
holders of such required percentage. For purposes of calculating the consent
or approval of holders of a majority of the then outstanding aggregate
principal amount of Transfer Restricted Securities, Transfer Restricted
Securities which have been converted into shares of Common Stock shall be
deemed to bear the principal amount at which such securities were converted.
(m) Entire Agreement. This Agreement is intended by the parties as
a final expression of their agreement relating to the registration under the
Securities Act of the Transfer Restricted Securities and is intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein and the
registration rights granted by the Company with respect to the Notes sold
pursuant to the Purchase Agreement and the Common Stock issuable upon
conversion of the Notes. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein, with respect to
the registration rights granted by the Company with respect to the Notes or the
Common Stock issuable upon conversion of the Notes. This Agreement supersedes
all prior agreements and understandings among the parties with respect to such
registration rights.
(n) Further Assurances. Each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all appropriate action, do or
cause to be done all things reasonably necessary, proper or advisable under
applicable law, and execute and deliver such documents and other papers, as may
be required to carry out the provisions of this Agreement and the other
documents contemplated hereby and consummate and make effective the
transactions contemplated hereby.
[signature page follows]
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<PAGE> 18
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
MIDCOM COMMUNICATIONS INC.
By: ROBERT J. CHAMBERLAIN
---------------------------------
Name: Robert J. Chamberlain
Title: Senior Vice President and
Chief Financial Officer
PaineWebber Incorporated
By:
-------------------------------
Name: William E. Fletcher
Title: First Vice President
Wheat, First Securities, Inc.
By:
-------------------------------
Name: Wayne L. Hunter
Title: Managing Director
S-1
<PAGE> 19
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
MIDCOM COMMUNICATIONS INC.
By:
---------------------------------
Name: Robert J. Chamberlain
Title: Senior Vice President and
Chief Financial Officer
PaineWebber Incorporated
By: WILLIAM E. FLETCHER
-------------------------------
Name: William E. Fletcher
Title: First Vice President
Wheat, First Securities, Inc.
By:
-------------------------------
Name: Wayne L. Hunter
Title: Managing Director
S-1
<PAGE> 20
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
MIDCOM COMMUNICATIONS INC.
By:
---------------------------------
Name: Robert J. Chamberlain
Title: Senior Vice President and
Chief Financial Officer
PaineWebber Incorporated
By:
-------------------------------
Name: William E. Fletcher
Title: First Vice President
Wheat, First Securities, Inc.
By: WAYNE L. HUNTER
-------------------------------
Name: Wayne L. Hunter
Title: Managing Director
S-1
