<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Midcom Communications Inc.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
[MIDCOM LOGO]
May 7, 1997
Dear Fellow Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders (the
"Annual Meeting") of MIDCOM Communications Inc. ("Midcom"), which will be held
on June 12, 1997, at 11:00 a.m., local time, at the Southfield Marriott, 27033
Northwestern Highway, Southfield, Michigan.
At the Annual Meeting, you will be asked to elect two directors to Midcom's
Board of Directors and to approve the adoption of the 1997 Stock Option Plan.
Please read the enclosed proxy material carefully. Your vote is important.
Midcom appreciates your considering and acting on the proposals presented.
MIDCOM'S BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF
THE TWO NOMINEES FOR DIRECTOR AND FOR THE APPROVAL OF THE ADOPTION OF THE 1997
STOCK OPTION PLAN.
Whether or not you plan to attend the Annual Meeting, please complete, sign
and date the enclosed proxy card and return it promptly in the enclosed
postage-prepaid envelope. If you attend the Annual Meeting, you may vote in
person if you wish, even though you previously have returned your proxy card.
Sincerely,
/s/ WILLIAM H. OBERLIN
-------------------------------------
WILLIAM H. OBERLIN
President and Chief Executive Officer
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD.
<PAGE> 3
MIDCOM COMMUNICATIONS INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 12, 1997
TO THE SHAREHOLDERS OF MIDCOM COMMUNICATIONS INC.:
Notice is hereby given that the Annual Meeting of Shareholders (the "Annual
Meeting") of MIDCOM Communications Inc., a Washington corporation ("Midcom"),
will be held on June 12, 1997, at 11:00 a.m., local time, at the Southfield
Marriott, 27033 Northwestern Highway, Southfield, Michigan, for the following
purposes:
1. To elect two directors to hold office for a three-year term.
2. To approve the adoption of the Midcom 1997 Stock Option Plan.
3. To transact such other business as may properly come before the
Annual Meeting or any adjournments or postponements thereof.
Only holders of record of Midcom's Common Stock at the closing of business
on April 29, 1997, the record date for the Annual Meeting, are entitled to
notice of and to vote at the Annual Meeting and any adjournments or
postponements thereof.
By Order of the Board of Directors
/s/ STEPHEN P. GOLDMAN
----------------------------------
STEVEN P. GOLDMAN
Assistant Secretary
Seattle, Washington
May 7, 1997
YOUR VOTE IS IMPORTANT
Whether or not you expect to attend the meeting in person, we urge you to
sign, date and return the accompanying proxy at your earliest convenience. This
will ensure the presence of a quorum at the meeting. PROMPTLY RETURNING A SIGNED
AND DATED PROXY WILL SAVE THE COMPANY THE EXTRA EXPENSE OF ADDITIONAL
SOLICITATIONS. An addressed, postage paid envelope is provided for that purpose.
Sending in your proxy will not prevent you from voting your shares at the
meeting if you desire to do so, as the proxy is revocable at your option in the
manner stated in the accompanying proxy statement.
<PAGE> 4
MIDCOM COMMUNICATIONS INC.
1111 THIRD AVENUE
SEATTLE, WASHINGTON 98101
------------------------
PROXY STATEMENT
------------------------
INFORMATION REGARDING PROXIES
This Proxy Statement and the accompanying form of proxy are furnished in
connection with the solicitation of proxies by the Board of Directors of MIDCOM
Communications Inc. ("Midcom" or the "Company") for use at the Annual Meeting of
Shareholders to be held on June 12, 1997, and at any adjournment thereof (the
"Annual Meeting"). Only shareholders of record on the books of the Company at
the close of business on April 29, 1997 (the "Record Date") will be entitled to
notice of and to vote at the Annual Meeting. It is anticipated that these proxy
solicitation materials and a copy of the Company's 1996 Annual Report to
Shareholders will be first sent to shareholders on or about May 13, 1997.
A proxy card is enclosed for your use. YOU ARE REQUESTED ON BEHALF OF THE
COMPANY'S BOARD OF DIRECTORS TO SIGN, DATE AND RETURN THE PROXY CARD IN THE
ACCOMPANYING ENVELOPE, which is postage-paid if mailed in the United States or
Canada. If the accompanying form of proxy is properly executed and returned, the
shares represented thereby will be voted in accordance with the instructions
specified thereon. In the absence of instructions to the contrary, such shares
will be voted for all nominees for election to the Board of Directors listed in
this Proxy Statement and for the other the proposals described in this Proxy
Statement. Any shareholder executing a proxy has the power to revoke it at any
time prior to the voting thereof on any matter (without, however, affecting any
vote taken prior to such revocation) by delivering written notice to Steven P.
Goldman, Vice President, Assistant Secretary and General Counsel of the Company,
by executing and delivering to the Company another proxy dated as of a later
date or by voting in person at the Annual Meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS
The only outstanding voting securities of the Company are shares of common
stock, par value $.0001 per share (the "Common Stock"), each of which is
entitled to one vote. As of the Record Date, there were 15,224,921 shares of
Common Stock issued and outstanding. The presence in person or by proxy of
holders of record of a majority of the outstanding shares of Common Stock is
required to constitute a quorum for the transaction of business at the Annual
Meeting.
Under Washington law and the Company's Amended and Restated Articles of
Incorporation (the "Articles") and Bylaws, if a quorum is present, (1) the
nominees for election to the Board of Directors who receive the greatest number
of affirmative votes cast for the election of directors shall be elected
directors and (2) the proposal to approve the adoption of the Company's 1997
Stock Option Plan will be approved if it receives the affirmative vote of the
holders of a majority of the shares of Common Stock present in person or
represented by proxy at the meeting, and entitled to vote on such proposal.
Abstentions and broker non-votes will be considered represented at the Annual
Meeting for the purpose of calculating a quorum and will have no effect on the
election of directors. However, an abstention from voting on the 1997 Stock
Option Plan proposal will have the practical effect of a vote "against" such
proposal because it is one less vote in favor of such proposals. Broker
non-votes will have no effect on such proposal other than to reduce the number
of "FOR" votes necessary to approve such matters since such non-votes are not
considered "shares entitled to vote" on such proposals. Proxies and ballots will
be received and tabulated by ChaseMellon Shareholder Services, an independent
business entity not affiliated with the Company.
The Common Stock is traded on the Nasdaq National Market under the symbol
MCCI. The last sale price for the Common Stock as reported by Nasdaq on May 6,
1997, was $7.00 per share.
<PAGE> 5
The following table sets forth certain information regarding beneficial
ownership of Midcom's Common Stock, as of the Record Date, with respect to (i)
each shareholder known by the Company to be the beneficial owner of more than
five percent of the outstanding Common Stock; (ii) each director of Midcom;
(iii) the Named Executive Officers; and (iv) all current 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.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND NATURE OF OUTSTANDING
NAME AND ADDRESS BENEFICIAL OWNERSHIP SHARES(1)
- -------------------------------------------------------------- -------------------- -----------
<S> <C> <C>
Black Creek Limited Partnership............................... 5,703,657(2) 37.4%
(Paul Pfleger)
1201 Third Avenue
Suite 5400
Seattle, WA 98101
Madrona Ridge Limited Partnership............................. 2,178,839(3) 14.3
(John M. Orehek)
1201 Third Avenue
Suite 5400
Seattle, WA 98101
US Online Communications L.L.C. .............................. 1,666,667(4) 10.9
1201 Third Avenue
Suite 5400
Seattle, WA 98101
William H. Oberlin............................................ 431,055(5) 2.8
Jay T. Caldwell............................................... 26,085(6) *
Scott B. Perper............................................... 23,937(7) *
Karl D. Guelich............................................... 14,162(8) *
John M. Zrno.................................................. 79,130(9) *
Marvin C. Moses............................................... 68,483(10) *
Daniel M. Dennis.............................................. 0 *
Robert L. Nitschke............................................ 10,000(11) *
Robert J. Chamberlain......................................... 19,000(12) *
Eric G. Peterson.............................................. 0 *
All Executive Officers and Directors as a Group (13 6,916,172(13) 45.4
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 15,224,921
shares of Common Stock outstanding as of the Record Date. Beneficial
ownership is determined in accordance with the Rules of the Commission, and
includes voting and investment power with respect the shares of Common
Stock. Shares of Common Stock subject to options, warrants or other
securities which are currently exercisable or exercisable within 60 days of
the Record Date as well as shares of Common Stock issuable upon conversion
of convertible notes are deemed outstanding when computing the percentage
of the person holding such options, but are not deemed outstanding when
computing the percentage of any other person.
(2) Paul Pfleger 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. Includes 1,666,667 shares of
Common Stock held by US Online Communications L.L.C. (formerly
Communications Access L.L.C.) with respect to which Mr. Pfleger shares
voting and investment power. See footnote (4) below. Also includes 13,937
shares of Common Stock subject to options exercisable within 60 days of
April 29, 1997 and 31,943 shares of Common Stock issuable upon conversion
of $450,000
2
<PAGE> 6
aggregate principal of convertible notes held by Mr. Pfleger. See "Proposal
1 -- Election of Directors -- Certain Relationships and Related Transactions."
(3) John M. 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. Includes 1,666,667 shares held by US Online
Communications L.L.C. with respect to which Mr. Orehek shares voting and
investment power. See footnote (4) below. Also includes 13,937 shares of
Common Stock subject to options exercisable within 60 days of April 29,
1997 and 17,746 shares of Common Stock issuable upon conversion of $250,000
aggregate principal of convertible notes held by Mr. Orehek. See "Proposal
1 -- Election of Directors -- Certain Relationships and Related
Transactions."
(4) Mr. Pfleger and Mr. Orehek are managers of US Online Communications L.L.C.
and share voting and investment power over the shares held by this entity.
(5) Includes 242,945 shares of Common Stock subject to options exercisable
within 60 days of April 29, 1997 and 188,110 shares of Common Stock
issuable upon conversion of $2,650,000 aggregate principal of convertible
notes held by a trust established by Mr. Oberlin in which he has a
beneficial interest. See "Proposal 1 -- Election of Directors -- Certain
Relationships and Related Transactions."
(6) Includes 26,053 shares of Common Stock subject to options exercisable
within 60 days of April 29, 1997.
(7) 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. Includes 13,937 shares of Common
Stock subject to options exercisable within 60 days of April 29, 1997.
(8) Includes 13,937 shares of Common Stock subject to options exercisable
within 60 days of April 29, 1997.
(9) Includes 50,737 shares of Common Stock subject to options exercisable
within 60 days of April 29, 1997 and 28,393 shares of Common Stock issuable
upon conversion of $400,000 aggregate principal of convertible notes held
by a trust established by Mr. Zrno in which he has a beneficial interest.
See "Proposal 1 -- Election of Directors -- Certain Relationships and
Related Transactions."
(10) Includes 50,737 shares of Common Stock subject to options exercisable
within 60 days of April 29, 1997 and 17,746 shares of Common Stock issuable
upon conversion of $250,000 aggregate principal of convertible notes held
by a trust established by Mr. Moses in which he has a beneficial interest.
See "Proposal 1 -- Election of Directors -- Certain Relationships and
Related Transactions."
(11) Represents 10,000 shares of Common Stock subject to options exercisable
within 60 days of April 29, 1997.
(12) Represents 19,000 shares of Common Stock subject to options exercisable
within 60 days of April 29, 1997.
(13) Includes (i) 474,780 shares of Common Stock subject to options exercisable
within 60 days of April 29, 1997 and (ii) 283,938 shares of Common Stock
issuable upon conversion of $4,000,000 aggregate principal of convertible
notes.
PROPOSAL 1 -- ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of eight (8)
directors classified into three classes. Class I directors are Karl D. Guelich
and Scott B. Perper, Class II directors are Daniel M. Dennis, Marvin C. Moses
and John M. Orehek and Class III directors are William H. Oberlin, Paul H.
Pfleger and John M. Zrno. At the Annual Meeting, the shareholders will vote on
the election of two Class I directors for a three-year term expiring at the
Annual Meeting of shareholders in 2000. At present, Class II directors will hold
office until the Company's 1998 annual shareholder meeting, and Class III
directors will hold office until the Company's 1999 annual shareholders meeting.
All directors hold office until the annual meeting of shareholders at which
their terms expire and the election and qualification of their successors.
3
<PAGE> 7
The Board of Directors has nominated Karl D. Guelich and Scott B. Perper
for re-election to the Board as the Class I directors. Although the Board of
Directors anticipates that Messrs. Guelich and Perper will be available to serve
as directors of the Company, should any one or more of them not accept the
nomination, or otherwise be unwilling or unable to serve, it is intended that
proxies will be voted for election of substitute nominee or nominees designated
by the Board of Directors.
VOTE REQUIRED FOR ELECTION; RECOMMENDATION OF THE BOARD OF DIRECTORS
The two Class I nominees receiving the highest number of votes cast for the
election of directors shall be elected Class I directors. THE BOARD OF DIRECTORS
RECOMMENDS A VOTE FOR EACH OF MESSRS. GUELICH AND PERPER. Unless otherwise
instructed, it is the intention of the persons named in the accompanying form of
proxy to vote shares represented by properly executed proxies for all nominees
named below.
BIOGRAPHICAL INFORMATION
Mr. Karl D. Guelich, 54, 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.
Mr. Guelich serves on the Company's Audit Committee.
Mr. Scott B. Perper, 41, 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 Partners, the private
equity and mezzanine investment arm of First Union Corporation, since February
1989. Mr. Perper serves on the Company's Compensation Committee.
Mr. Daniel M. Dennis, 49, 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 resigned from MCI effective August 1996. Mr. Dennis
serves on the Company's Audit Committee.
Mr. Marvin C. Moses, 52, 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 of Frontier
Corporation 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 Communication Corporation ("ALC"), a long distance
telecommunications service provider, from October 1988 and September 1989,
respectively, until its merger with Frontier Corporation in August 1995. Mr.
Moses serves on the Company's Audit Committee.
Mr. John M. Orehek, 42, has served as a director of the Company since
January 1993. 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. Mr. Orehek serves on the
Company's Audit Committee and Compensation Committee.
Mr. William H. Oberlin, 52, 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 from August 1995 to November 1995 and was Executive Vice President,
Chief Operating Officer and a director of ALC from October 1988, July 1990 and
July 1993, respectively, until its merger with Frontier Corporation in August
1995.
Mr. Paul Pfleger, 61, has been Vice Chairman of the Company's Board of
Directors since December 1996. In addition, he served as the Chairman of the
Company's Board of Directors from the Company's
4
<PAGE> 8
formation in 1989 until December 1996, and he served as acting President and
Chief Executive Officer of the Company from April 1996 to May 1996. Mr. Pfleger
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, a real estate management company,
since 1984 and has been its President since April 1993. Pursuant to a
shareholder's agreement (the "Shareholder's Agreement") among Ashok Rao, a
former officer of the Company, trusts for benefit of family members of Mr. Rao
and limited partnerships controlled by Messrs. Pfleger and Orehek, the parties
thereto have agreed to vote their shares to elect Mr. Pfleger to the Board of
Directors. The Shareholders' Agreement expires on June 7, 1999. See "-- Certain
Relationships and Related Transactions."
Mr. John M. Zrno, 58, has served as the Chairman of the Company's Board of
Directors since December 1996. In addition, he 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, a long
distance telecommunications provider, and was President, Chief Executive Officer
and a director of ALC from August 1988 until its merger with Frontier
Corporation in August 1995.
BOARD AND COMMITTEE MEETINGS
During the fiscal year ended December 31, 1996, there were 12 meetings and
16 actions by consent in lieu of a meeting of the Board of Directors. Each of
the incumbent directors attended at least seventy-five percent (75%) of the
meetings of the Board of Directors and committees of the Board of Directors on
which he served during his term of service on the Board during 1996.
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 Members of the Audit Committee are Messrs. Orehek,
Guelich and Moses. 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 employee benefit plans. The members of
the Compensation Committee are Messrs. Orehek, Perper and Dennis. The Company
does not have a nominating committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, certain officers and persons
who own more than ten percent (10%) of the Company's outstanding Common Stock
("Reporting Persons") to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Reporting Persons
are required by Commission regulations to furnish the Company with copies of all
Section 16(a) reports.
To the Company's knowledge, based solely on its review of copies of all
such reports furnished to the Company and written representations that no other
reports were required, all Section 16(a) filing requirements applicable to its
officers and directors were complied with except that Messrs. Moses, Oberlin and
Zrno failed to report on a timely basis on Form 4 their purchases of the
Company's 8 1/4% Convertible Subordinated Notes due 2003 from the Company, and
Messrs. Pfleger, Guelich and Orehek failed to report on a timely basis on Form 4
grants of options received under the Company's Amended and Restated 1993 Stock
Option Plan (the "1993 Stock Option Plan").
EXECUTIVE COMPENSATION
The following table shows compensation paid by the Company for services
rendered during its fiscal years ended December 31, 1994, 1995 and 1996 to (a)
all individuals serving as the Company's Chief Executive Officer during the
fiscal year ended December 31, 1996, (b) the four most highly compensated
individuals (other than any individual described under item (a) above) who were
serving as executive officers of the
5
<PAGE> 9
Company at December 31, 1996 and whose total annual salary and bonus for the
fiscal year ended December 31, 1996 exceeded $100,000; and (c) two additional
individuals who would have been included under item (b) above but for the fact
that the individual was not serving as an executive officer of the Company at
December 31, 1996 (collectively, the "Named Executive Officers").
SUMMARY ANNUAL COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------
SECURITIES
YEAR ENDED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION DECEMBER 31 SALARY BONUS OPTIONS(#)(1) COMPENSATION(2)
- ----------------------------------- ------------ -------- ------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
William H. Oberlin(3).............. 1996 $182,531 $ -- 1,214,724 $ 6,343
President and Chief Executive
Officer
Ashok Rao(4)....................... 1996 142,143 -- -- 154,886
President and Chief 1995 292,500 -- 3,000 7,830
Executive Officer 1994 300,000 -- 278,775 3,762
Robert N. Nitschke(5).............. 1996 147,270 -- 25,000 17,218
Executive Vice President, 1995 33,987 -- 50,000 128
Operations
Robert J. Chamberlain(6)........... 1996 84,344 -- 75,000 37,379
Executive Vice President, Chief
Financial Officer, Treasurer and
Asst. Secretary
Jay T. Caldwell(7)................. 1996 98,781 81,612 -- 3,157
Senior Vice President, 1995 97,500 -- 15,750 3,207
Revenue Management 1994 100,000 -- 5,478 17,289
Eric G. Peterson(8)................ 1996 118,036 -- -- 13,959
Executive Vice President 1995 117,000 -- 1,000 4,105
and Treasurer 1994 118,667 -- 1,663 4,521
</TABLE>
- ---------------
(1) The 1994 amounts include immediately exercisable options granted in March
1995 in lieu of cash bonuses for 1994 to Messrs. Rao, Caldwell and Peterson
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) Unless otherwise noted, amounts included under other compensation are for
payments under the Company's 401(k) Plan and payments for term life
insurance premiums.
(3) Mr. Oberlin joined the Company in May 1996 and was paid during 1996 at an
annual rate of $300,000.
(4) Mr. Rao resigned as an officer of the Company in April 1996. Included in
other compensation for 1996 are severance payments of $151,015.
(5) Included in other compensation for 1996 is a reimbursement of $13,643 for
relocation and moving expenses. In connection with the Company's relocation
of its headquarters from Washington to Michigan, Mr. Nitschke has announced
his intention to resign as an officer of the Company at an undetermined date
in the future.
(6) Mr. Chamberlain joined the Company in April 1996 and was paid during 1996 at
an annual rate of $120,000. Included in other compensation for 1996 are
consulting payments of $34,896. In connection with the Company's relocation
of its headquarters from Washington to Michigan, Mr. Chamberlain has
announced his intention to resign as an officer of the Company at an
undetermined date in the future.
(7) Mr. Caldwell resigned as an officer of the Company in April 1997. The bonus
paid in 1996 for performance in 1995 consisted of a one-time payment in an
amount determined by the Company's board of directors, in its discretion.
Included in other compensation for 1994 is a reimbursement of $15,000 for
relocation and moving expenses.
6
<PAGE> 10
(8) Mr. Peterson resigned as an officer of the Company in May 1996. Included in
other compensation for 1996 are severance payments of $10,000.
STOCK OPTION GRANTS
The following table sets forth further information regarding grants of
options to purchase Common Stock made by the Company pursuant to the Company's
1993 Stock Option Plan during the fiscal year ended December 31, 1996 to each of
the Named Executive Officers.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
NUMBER OF PERCENT POTENTIAL REALIZABLE VALUE
SECURITIES OF TOTAL AT ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS EXERCISE MARKET STOCK PRICE APPRECIATION
OPTIONS GRANTED TO PRICE PER PRICE ON FOR OPTION TERM(4)
GRANTED EMPLOYEES SHARE DATE OF EXPIRATION -----------------------------------
NAME (#)(1) IN 1996 ($/SH)(2) GRANT($)(3) DATE 0%($) 5%($) 10%($)
- ---------------------- ---------- ---------- ---------- ----------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William H. Oberlin.... 1,214,724 36.92% $ 8.00 $ 8.00 05/25/06 $ -- $6,111,467 $15,487,658
Ashok Rao(5).......... -- -- -- -- -- -- -- --
Robert L.
Nitschke(6)......... 25,000 0.76% 12.00 12.00 10/29/06 -- 188,668 478,123
Robert J.
Chamberlain(6)...... 5,000 0.15% 7.00 8.00 04/23/06 5,000 30,156 68,750
70,000 2.13% 8.00 14.25 06/07/06 437,500 1,064,822 2,027,258
Jay T. Caldwell(5).... -- -- -- -- -- -- -- --
Eric G. Peterson(5)... -- -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) Generally under the Company's 1993 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. The option for the purchase of 5,000 shares
granted to Mr. Chamberlain was fully vested at the time of grant. The
vesting of options may be accelerated at the discretion of the administrator
of the 1993 Stock Option Plan and will accelerate upon the occurrence of
certain events resulting in a change in control of the Company. See "-- 1993
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 in accordance with the terms of the
1993 Stock Option Plan.
(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 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 during April and May 1996, respectively.
Mr. Caldwell resigned effective April 1997.
(6) In connection with the Company's relocation of its headquarters from
Washington to Michigan, Messrs. Nitschke and Chamberlain have announced
their intention to resign as officers of the Company at an undetermined date
in the future.
The following table sets forth certain information as of December 31, 1996
regarding options to purchase Common Stock held as of December 31, 1996 by each
of the Named Executive Officers as well as the exercise of such options during
the fiscal year ended December 31, 1996. In addition, the following table
reports the values for in-the-money options, which values represent the positive
spread between the exercise price of such options and the fair market value of
the Company's Common Stock as of December 31, 1996.
7
<PAGE> 11
AGGREGATED 1996 YEAR-END OPTIONS
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT AT DECEMBER 31,
SHARES DECEMBER 31, 1996(#) 1996($)(2)
ACQUIRED ON VALUE ------------------------------ ---------------------------
EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE
----------- ----------- ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William H. Oberlin......... -- $ -- -- 1,214,724 $ -- $ 607,362
Ashok Rao(3)............... 122,535 891,151 -- -- -- --
Robert N. Nitschke(4)...... -- -- 10,000 65,000 -- --
Robert J. Chamberlain(4)... -- -- 5,000 70,000 7,500 35,000
Jay T. Caldwell(3)......... -- -- 19,928 18,800 59,306 18,506
Eric G. Peterson(3)........ 89,163 965,200 1,000 -- -- --
</TABLE>
- ---------------
(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 31, 1996, which was $8.50, 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 during April and May 1996, respectively.
Mr. Caldwell resigned effective April 1997.
(4) In connection with the Company's relocation of its headquarters from
Washington to Michigan, Messrs. Nitschke and Chamberlain have announced
their intention to resign as officers of the Company at an undetermined date
in the future.
DIRECTOR COMPENSATION
At the time of the Company's initial public offering on July 6, 1995, the
1993 Stock Option Plan provided for the automatic grant of a Nonqualified Option
(as defined herein) to purchase 8,750 shares of Common Stock to all non-employee
directors of the Company (with certain exclusions that were eliminated as of
November 1995) 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 years after the date of grant. On July 25, 1996, the Board approved an
amendment to the 1993 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 1993 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 then serving on the Board
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
1993 Stock Option Plan prior to its amendment. The vesting schedule of these
additional option grants began on November 9, 1995 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 1993 Stock Option Plan, which approval
was obtained at the annual meeting of the Company's shareholders held in October
1996.
On March 15, 1996, the Company entered into a consulting agreement with
Karl D. Guelich whereby Mr. Guelich assisted 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.
8
<PAGE> 12
Effective May 1996, the Company 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 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 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, in connection with the consulting agreements, the Company
has granted 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 1993 Stock Option Plan. The options 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. 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.
EMPLOYMENT AGREEMENT
Effective May 1996, the Company entered into an employment agreement with
William H. Oberlin, the Company's President and Chief Executive Officer. The
agreement 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.
In addition, the agreement requires that, on or before August 30, 1996, the
Board of Directors formulate and adopt a bonus plan for the year ending December
31, 1996. See "-- Report of the Compensation Committee on Annual
Compensation -- President and Chief Executive Officer Compensation." 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 1993 Stock
Option Plan. The options 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 1993 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1996, the Compensation Committee
of the Board of Directors consisted of Messrs. Orehek, Perper and Dennis. None
of these individuals has served at any time as an officer or employee of the
Company.
9
<PAGE> 13
From time to time, the Company has engaged in certain transactions with
members of the Board of Directors and the Compensation Committee. See
"-- Certain Relationships and Related Transactions."
REPORT OF THE COMPENSATION COMMITTEE ON ANNUAL COMPENSATION
The Compensation Committee is composed entirely of non-employee, outside
directors and it reviews and approves executive officer salaries and bonuses
upon recommendations made by the President and Chief Executive Officer, and
administers certain of the Company's compensation plans. The Compensation
Committee believes that compensation of its executive officers should be
substantially related to the performance of the Company, with performance to be
measured by objective considerations such as revenue growth, earnings before
income tax, depreciation and amortization, earnings per share and stock price of
the Company, as well as other subjective considerations.
The compensation package provided to executive officers consists primarily
of (i) base salary, (ii) bonus and (iii) long-term incentives in the form of
stock options.
Base Salary. In 1996, it was the goal of the Committee that the
combination of base salary and incentive bonus paid to the executive officers of
the Company be comparable to cash remuneration paid to executives performing
similar duties for companies of comparable size in the telecommunications
industry. Although generally available data on the compensation of executive
officers in the Pacific Northwest is considered, the experience of the Chief
Executive Officer and the members of the Committee and their knowledge of the
community and industry practice was the primary basis for this determination.
Base salaries for executive officers other than the President and Chief
Executive Officer are determined annually by the President and Chief Executive
Officer, and reviewed by the Committee. In determining salary adjustments for
executive officers, the President and Chief Executive Officer and the Committee
consider (i) the individual officer's historical performance against corporate
and individual goals and the scope of his or her job responsibilities, (ii)
compensation packages provided to executives performing similar duties for
companies of comparable size in the Pacific Northwest, (iii) the rate of
inflation, (iv) salary adjustments to be awarded to other executive officers of
the Company, and (v) other subjective factors.
Bonus. Prior to 1996, bonuses were determined annually by the President
and Chief Executive Officer, and reviewed by the Committee. Except for a
one-time bonus paid to an officer in 1996 (see "-- Executive
Compensation -- Summary Annual Compensation Table"), no bonuses were paid in
1995 or 1996 with respect to performance in 1994 or 1995, respectively. On
January 10, 1997, the Board of Directors approved the 1997 Executive Bonus Plan
(the "Bonus Plan"). The Bonus Plan establishes three factors to be considered by
the Compensation Committee to determine the amount of bonuses paid to the
executive officers of the Company. These factors are total revenue, gross
margin, and total sales, general and administrative expenses as a percentage of
total revenue.
Stock Option Plans. The Compensation Committee is the sole administrator
of the 1993 Stock Option Plan. Options to purchase the Company's Common Stock
may be granted under the 1993 Stock Option Plan in an effort to align the
interest of management with those of shareholders and provide a reward for
long-term performance. Historically, options granted by the Company have been
granted with an exercise price equal to the market price of the Company's stock
on the date of grant. Accordingly, options generally will have value to the
holder only if the Company's stock price increases. Outstanding options
generally become exercisable at a rate of twenty percent (20%) per year. Options
are granted from time to time to executive officers and other management and
supervisory personnel based on recommendations of the President and Chief
Executive Officer, with the size of grants generally falling within
predetermined ranges tied to job grade. At April 29, 1997, shares issuable upon
exercise of outstanding options as a percentage of the outstanding shares
(assuming options are exercised) of Common Stock was 20%.
President and Chief Executive Officer Compensation. Pursuant to the
employment agreement between the Company and William H. Oberlin, the Company's
President and Chief Executive Officer (see "-- Employment Agreement"), entered
into at the time of his initial engagement by the Company, Mr. Oberlin is
entitled to receive a monthly base salary of $25,000 per month, as well as
certain other
10
<PAGE> 14
compensation, subject to annual review by the Board of Directors. In addition,
the agreement requires that, on or before August 30, 1996, the Board of
Directors formulate and adopt a bonus plan for the year ending December 31,
1996. However, the parties have instead agreed to permit Mr. Oberlin to add an
amount equal to his base salary of $175,000 paid in 1996 to the basis used in
1997 or 1998, as Mr. Oberlin may elect, for purposes of calculating his bonus to
be paid in 1998 or 1999, as the case may be. The agreement further provides that
for each calendar year starting January 1, 1997, the Board of Directors is to
establish a bonus formula structured to pay out one hundred percent of Mr.
Oberlin's base salary if the Company meets certain quantitative and qualitative
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 of
falls short of such targets. The Board of Directors has not yet established the
quantitative and qualitative measurements upon which the 1997 and 1998 bonuses
are to be determined.
Limit on Tax Deduction for Executive Compensation. Beginning in 1994, the
federal income tax deduction for certain non-performance based compensation paid
to the chief executive officer and the four other most highly compensated
officers of publicly held corporations is limited $1 million per officer per
fiscal year. The Committee's present intention is to seek to comply with the
requirements to permit the compensation paid to the Company's officers to be
deductible, unless the Committee feels that required changes would not be in the
best interest of the Company or it shareholders.
COMPENSATION COMMITTEE
John M. Orehek
Scott B. Perper
Daniel M. Dennis
CERTAIN RELATIONSHIPS AND RELATED 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 of the Company's Common
Stock at an exercise price of $.0001 per share. In July 1995, First Union
exercised its Warrants for a total of 640,484 shares of Common Stock. The
Company has committed to register the public offer and sale of these shares
under the Securities Act under certain circumstances. First Union has certain
preemptive rights to purchase additional shares of Common Stock offered by the
Company, subject to a number of exceptions. 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.
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, 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
11
<PAGE> 15
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.
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 and pursuant to his employment
agreement he is entitled to severance payments of $25,000 per month for 24
months from April 1996. In addition, pursuant to the terms of a 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"). The purchase price has been determined by arbitration to be
$6.80/share. The purchase price is payable in 36 equal monthly installments
commencing on May 15, 1997 and will bear interest at a rate of 8% per annum from
April 18, 1996. 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 $2.9 million out of the proceeds
received by Mr. Rao from the redemption of the Rao Shares.
In May of 1996, the Company entered into consulting agreements with Karl D.
Guelich, Marvin Moses and John Zrno and an employment agreement with Mr.
Oberlin. See "-- Director Compensation" and "-- Employment Agreement." Mr.
Guelich's consulting agreement was terminated.
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. Moses is a director of Tie Mr.
Pfleger and Mr. Orehek together own 95.2% of Tie. Through December 31, 1996, no
commissions had been paid to Tie pursuant to this agreement.
On August 22 and September 6, 1996, the Company sold $97,743,000 aggregate
principal amount of 8 1/4% Convertible Subordinated Notes due 2003 (the "Notes")
in a private placement (the "Note Placement"). William H. Oberlin, John M. Zrno,
Marvin C. Moses, Paul H. Pfleger and John M. Orehek purchased Notes from the
Company in the Note Placement and 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. Zrno is Chairman of the Company's Board of Directors. Mr. Pfleger
is Vice Chairman of the Company's Board of Directors. Messrs. Moses and Orehek
are directors. The foregoing individuals purchased and own the Notes on the same
terms, and subject to the same conditions, applicable to all other holders of
the Notes acquired in the Note Placement.
1993 STOCK OPTION PLAN
Pursuant to the 1993 Stock Option Plan, Nonqualified Options are
automatically granted to non-employee directors of the Company, with certain
exceptions, as described in "-- Director Compensation" above.
Pursuant to the 1993 Stock Option Plan, the Company may grant options to
purchase shares of Common Stock which are intended to 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 1993 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 1993 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, and
the exercise price of Incentive
12
<PAGE> 16
Options granted to persons who own more than ten percent (10%) of the Common
Stock must be equal to or greater than one hundred ten percent (110%) of the
fair market value of the Common Stock on the date of grant.
Unless otherwise provided by the Plan Administrator, options granted under
the 1993 Stock Option Plan ("Options") 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 (10%) of the
Common Stock are exercisable only for a period of five years from the date of
grant. Options may not be transferred other than by will or by applicable laws
of descent and distribution except that options may be transferred to a trust
established solely for the benefit of the immediate family members of the option
holder or to one or more partnerships of which the only partners are members of
the option holder's immediate family provided no consideration is paid in
connection with such transfers and subject to certain additional conditions.
Notwithstanding a vesting schedule, the 1993 Stock Option Plan provides for the
immediate vesting of options upon the occurrence of certain events. In general,
such events include (i) the commencement of a tender or exchange offer for
Common Stock unless by its terms the offeror would be the beneficial owner of
less than 30% of the shares of Common Stock then outstanding, (ii) a merger,
consolidation, reorganization or other transaction pursuant to which the persons
holding shares of Common Stock immediately prior to the transaction have
immediately following the transaction less than 50% of the combined voting power
of the outstanding voting equity securities of the surviving entity, (iii) any
liquidation or dissolution of the Company or the sale or other disposition of
all or substantially all of the assets of the Company or (iv) the accumulation
by any person (with certain exceptions) of beneficial ownership of securities of
the Company representing 30% or more of the combined voting power of the then
outstanding voting securities 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.
As of March 31, 1997, the Company had reserved for issuance 4,091,745
shares of Common Stock under the 1993 Stock Option Plan subject to adjustment
for stock splits and similar changes in the Company's capitalization. As of
March 31, 1997, Options to purchase an aggregate of 3,888,234 shares of Common
Stock were outstanding under the 1993 Stock Option Plan and a total of 203,421
shares of Common Stock remained available for grant. As of March 31, 1997,
outstanding Options were exercisable at prices ranging from $2.29 to $18.50 per
share. Shares subject to Options that have lapsed or terminated may again be
subject to options granted under the 1993 Stock Option Plan.
MIDCOM STOCK PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total returns on the
Company's Common Stock against the cumulative total return for The Nasdaq Stock
Market -- U.S. Index and The Nasdaq Telecommunications Index. The graph assumes
an investment of $100 on July 7, 1995, the date of the Company's Common Stock
began trading on the Nasdaq National Market, in the Company's Common Stock, The
Nasdaq Stock Market -- U.S. Index and The Nasdaq Telecommunications Index.
Cumulative total return assumes reinvestment of dividends. The performance shown
is not necessarily indicative of future performance.
13
<PAGE> 17
18-MONTH CUMULATIVE TOTAL RETURN OF
MIDCOM COMMON STOCK COMPARED TO THE NASDAQ STOCK MARKET -- U.S. INDEX
AND THE NASDAQ TELECOMMUNICATIONS INDEX
<TABLE>
<CAPTION>
MIDCOM
MEASUREMENT PERIOD COMMUNICATIONS NASDAQ STOCK NASDAQ
(FISCAL YEAR COVERED) INC.|MCCI MARKETUS|INAS TELECOMMUNICATIONS|INAT
<S> <C> <C> <C>
7/7/95 100 100 100
DEC-95 166 109 109
DEC-96 77 134 112
</TABLE>
PROPOSAL 2 -- APPROVAL OF THE ADOPTION OF THE 1997 STOCK OPTION PLAN
BACKGROUND
The Board of Directors adopted the 1997 Stock Option Plan (the "1997 Stock
Option Plan") on April 30, 1997, subject to shareholder approval of such
adoption. A total of 950,000 shares of Common Stock are proposed to be reserved
for issuance under this plan. The 1997 Stock Option Plan is in addition to, and
not a replacement of, the 1993 Stock Option Plan described above. See "Proposal
1 -- Election of Directors -- 1993 Stock Option Plan." The purposes of the 1997
Stock Option Plan are to retain the services of valued key employees and
consultants of the Company and to encourage such persons to acquire a greater
proprietary interest in the Company. Shares subject to options granted under the
1997 Stock Option Plan that have lapsed or terminated may again be subject to
options granted thereunder.
SUMMARY OF 1997 STOCK OPTION PLAN
The following is a brief description of the material provisions of the 1997
Stock Option Plan and is qualified in its entirety by the full text of the 1997
Stock Option Plan which is attached to this Proxy Statement as Appendix I.
Pursuant to the 1997 Stock Option Plan, the Company may grant options to
purchase shares of Common Stock which are intended to qualify as "incentive
stock options" within the meaning of Section 422 of the Code ("Incentive
Options") or which do not so qualify ("Nonqualified Options"). The Compensation
Committee of the Board of Directors will be the Plan Administrator for the 1997
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 1997 Stock Option Plan, including the
exercise price, provided that the exercise price for all options granted
pursuant to the 1997 Stock Option Plan must be equal to or greater than the fair
market value of the
14
<PAGE> 18
Common Stock on the date of grant. No person may receive Incentive Options which
provide for exercise for the first time during any calendar year of Incentive
Options with an aggregate market value (determined at the date of the grant) in
excess of $100,000.
Option granted pursuant to the Company's stock option plans must vest
before they may be exercised. Unless otherwise provided by the Plan
Administrator, options granted under the 1997 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. The 1997 Stock Option Plan permits the Plan Administrator to
accelerate the vesting of options at such times as shall be determined by the
Plan Administrator in its sole discretion. In addition, the 1997 Stock Option
Plan provides for the immediate vesting of options upon the occurrence of
certain events. In general, such events include (i) the commencement of a tender
or exchange offer for Common Stock unless by its terms the offeror would be the
beneficial owner of less than 30% of the shares of Common Stock then
outstanding; (ii) a merger, consolidation, reorganization or other transaction
pursuant to which the persons holding shares of Common Stock immediately prior
to the transaction have immediately following the transaction less than 50% of
the combined voting power of the outstanding voting equity securities of the
surviving entity; (iii) any liquidation or dissolution of the Company or the
sale or other disposition of all or substantially all of the assets of the
Company; or (iv) the accumulation by any person (with certain exceptions) of
beneficial ownership of securities of the Company representing 30% or more of
the combined voting power of the then outstanding voting securities 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.
Options granted pursuant to the 1997 Stock Option Plan terminate, with certain
exceptions as permitted by the plan, upon the occurrence of the first of the
following events: (i) the expiration of the term of the option as designated by
the Plan Administrator at the time the option is granted (which shall not exceed
ten years in the case of Incentive Options); (ii) immediately upon termination
for cause; (iii) the expiration of 90 days from the date of the option holder's
termination of employment or contractual relationship with the Company for any
reason other than death, disability or termination for cause; or (iv) one year
after the death or disability of the option holder. Incentive Options granted to
persons who own more than 10% of the Company's outstanding Common Stock are
exercisable only for a period of five years from the date of grant. Options
granted under the 1997 Stock Option Plan may not be transferred other than by
will or by applicable laws of descent and distribution except that options may
be transferred to a trust established solely for the benefit of the immediate
family members of the option holder or to one or more partnerships of which the
only partners are members of the option holder's immediate family provided no
consideration is paid in connection with such transfers and subject to certain
additional conditions.
In addition to payment of the exercise price in cash, upon approval of the
Plan Administrator, an option holder may pay the exercise price by delivering to
the Company shares of Common Stock previously held by such option holder or by
complying with any other payment mechanism approved by the Plan Administrator
from time to time.
Incentive Options may be granted by the Plan Administrator until the tenth
anniversary of the adoption of the 1997 Stock Option Plan. Nonqualified Options
may be granted under the 1997 Stock Option Plan until it is terminated by the
Plan Administrator in its sole discretion.
The adoption of the 1997 Stock Option Plan will simply provide an
additional pool of options available for grant to eligible persons in the future
and is not required or intended to supply or "cover" outstanding awards to any
person. As such, no "New Plan Benefits" had been granted as of the date of this
Proxy Statement and future awards under the 1997 Stock Option Plan are not yet
determinable.
Pursuant to the Company's 1997 Stock Option Plan and to the extent a
director of the Company has not been granted an option to purchase shares of
Common Stock under the 1993 Stock Option Plan's automatic grant provisions,
non-employee directors of the Company are each automatically granted a
Nonqualified
15
<PAGE> 19
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 Plan Administrator may amend the 1997 Stock Option Plan at any time;
provided, however, that any amendment to increase the number of shares as to
which Options may be granted or to decrease the exercise price below the price
provided in the 1997 Stock Option Plan requires shareholder approval. No other
amendments to the 1997 Stock Option Plan require shareholder approval except to
the extent (i) required by applicable laws, regulations or rules or (ii) the
Plan Administrator otherwise concludes that shareholder approval is desirable.
No amendment may, however, affect the rights of the holder of any option, except
with that holder's consent.
VOTE REQUIRED FOR APPROVAL; RECOMMENDATIONS OF THE BOARD OF DIRECTORS
The affirmative vote of at least a majority of shares of Common Stock
present in person or represented by proxy at the Annual Meeting and entitled to
vote on the proposal is required for approval of the adoption of the 1997 Stock
Option Plan. THE COMPANY'S BOARD OF DIRECTORS HAS APPROVED ADOPTION OF THE 1997
STOCK OPTION PLAN AND RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE
ADOPTION OF THE 1997 STOCK OPTION PLAN. Unless otherwise instructed, it is the
intention of the persons named in the accompanying form of proxy to vote shares
represented by properly executed proxies in favor of Proposal 2.
FEDERAL INCOME TAX EFFECTS OF 1997 STOCK OPTION PLAN PARTICIPATION
The following summary of federal income tax consequences is based upon
existing statutes, regulations, and interpretations thereof. Because the
applicable rules are complex and because income tax consequences may vary
depending upon the particular circumstances of each optionee, no attempt has
been made to outline the tax consequences to any particular optionee. Each
optionee should consult his or her own tax advisor concerning federal (and any
foreign, state, or local) income tax consequences of participation in the 1997
Stock Option Plan. This proxy does not purport to describe foreign, state, or
local income tax consequences, which may differ from United States federal
income tax consequences.
INCENTIVE STOCK OPTIONS
Award; Exercise. Incentive Options granted under the 1997 Stock Option
Plan are intended to constitute "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended ("Code"). Incentive
Options may be granted only to employees of the Company. An optionee will not
have taxable income upon either the grant or exercise of an Incentive Option.
However, the excess of the fair market value of the shares purchased upon
exercise over the option exercise price (the "Option Spread") will be includable
in the optionee's "alternative minimum taxable income" ("AMTI") for purposes of
the alternative minimum tax. The Option Spread will generally be measured on the
date of exercise and will be includable in AMTI in the year of exercise; special
rules regarding the amount and timing of AMTI inclusion may apply for shares
subject to a "substantial risk of forfeiture" (including restrictions to comply
with certain requirements for "pooling-of-interests" accounting and, in the case
of Reporting Persons, certain limitations on resale of shares imposed under
Section 16(b) of the Exchange Act).
Sale of Option Shares. If an optionee holds the shares acquired upon
exercise of an Incentive Option ("ISO Stock") for at least two years from the
date the Incentive Option was granted and for at least one year from the date
the Incentive Option was exercised (together the "Holding Period"), any gain
from a sale of the ISO Stock, other than to the Company, should be taxable as
capital gain. If an optionee disposes of ISO Stock before the end of the Holding
Period (a "Disqualifying Disposition"), the amount of the Option Spread at the
date of exercise (or, if less, the amount of gain realized upon the sale) will
be taxable as ordinary income. Such income will be subject to information
reporting requirements. Gain from a Disqualifying Disposition in excess of the
amount required to be recognized as ordinary income will be capital gain.
Special rules may
16
<PAGE> 20
apply regarding the date the Option Spread is measured for ISO Stock purchased
subject to "substantial risk of forfeiture."
Exercise With Stock. If an optionee pays the Incentive Option exercise
price with shares of the Company acquired under an Incentive Option or a
qualified employee stock purchase plan ("Statutory Option Stock") the tender of
shares will be a Disqualifying Disposition of the Statutory Option Stock if the
Holding Period respecting those shares has not been satisfied. If the Holding
Period with respect to the Statutory Option Stock is satisfied, or if the shares
were not Statutory Option Stock, then any appreciation in the surrendered shares
will not be taxable upon surrender. Shares acquired upon exercise that are equal
in value to the fair market value of the shares surrendered in payment are
treated as if they had been substituted for the surrendered shares, taking as
their basis and holding period (except for purposes of determining whether a
Disqualifying Disposition of the acquired shares has occurred) the basis and
holding period that the optionee had in the surrendered shares (the basis of
these shares would be increased by the amount, if any, of taxable income
generated by a Disqualifying Disposition of ISO Stock upon exercise). The
remaining shares of stock will have a zero basis, unless the optionee has
taxable income or pays cash upon exercise.
NONQUALIFIED STOCK OPTIONS
Award; Exercise. An optionee does not have taxable income due to the grant
of a Nonqualified Option under the 1997 Stock Option Plan. Upon exercise of the
Nonqualified Option, the optionee will have taxable ordinary income equal to the
excess of the fair market value of the shares purchased over the Nonqualified
Option exercise price (the "Option Spread"). The optionee's tax basis in the
shares will be equal to the fair market value of such shares on the date of
exercise, and the holding period will also begin on that date. In general,
shares acquired by exercise of Nonqualified Options granted under the 1997 Stock
Option Plan will not be subject to a "substantial risk of forfeiture," which
includes a right of the Company to repurchase shares at their purchase price,
restriction of sale of the shares by the Section 16(b) of the Exchange Act, and
restriction of sale of the shares to comply with certain requirements for
"pooling-of-interests" accounting. If shares are subject to such a restriction
and the optionee files an election under Code Section 83(b) ("Section 83(b)
Election") within 30 days after the date of purchase, the optionee will
generally have the tax treatment described above. If the shares are subject to a
substantial risk of forfeiture and no Section 83(b) Election is filed, the
optionee will not be taxable upon exercise, but instead will have ordinary
income, on the date the restrictions lapse, in an amount equal to the Option
Spread as of the date of lapse; in addition, the optionee's holding period will
begin on the date of lapse.
Regardless of whether the shares are subject to a substantial risk of
forfeiture, the amount of ordinary income taxable to an optionee who is an
employee at the time of grant will constitute "supplemental wages" subject to
withholding of income and employment taxes by the Company.
Sale of Option Shares. Upon sale, other than to the Company, of shares
acquired under a Nonqualified Option, an optionee generally will have a capital
gain or loss to the extent of the difference between the sale price and the
optionee's tax basis in the shares. Such gain or loss will be long-term if the
optionee has held the shares for more than one year.
Exercise with Stock. If an optionee tenders Common Stock to pay all or
part of the exercise price of a Nonqualified Option, the optionee will not have
a taxable gain or deductible loss on the surrendered shares. Instead, shares
acquired upon exercise that are equal in value to the fair market value of the
shares surrendered in payment are treated as if they had been substituted for
the surrendered shares, taking as their basis and holding period the basis and
holding period that the optionee had in the surrendered shares. The fair market
value of the additional shares will be treated as taxable compensation for
services and such shares will have a basis equal to their fair market value. The
holding period for the additional shares will begin on the date of exercise.
Special rules apply if the stock received upon exercise is subject to a
substantial risk of forfeiture.
ALTERNATIVE METHODS OF PAYMENT OF TAX WITHHOLDING OBLIGATIONS
The Plan Administrator, in its sole discretion, may permit an optionee to
pay the federal, state and local withholding and employment taxes due upon
option exercise by any means. If an optionee is permitted to
17
<PAGE> 21
tender shares in satisfaction of an income tax withholding obligation described
above, the surrendered shares will be treated as redeemed by the Company at
their then-fair-market value. It is possible, although the Company believes it
unlikely, that election by an optionee to have shares of Common Stock withheld
in satisfaction of the optionee's withholding tax obligation upon exercise of a
Nonqualified Option may result in dividend income to the optionee. Optionees
should consult their personal tax advisors before tendering shares in
satisfaction of a withholding obligation.
SALE OF STOCK TO THE COMPANY
If stock is sold to the Company rather than to a third party, the sale may
not produce capital gain or loss. A sale of shares to the Company will
constitute a redemption of such shares, which could be taxable as a dividend
unless the redemption is "not essentially equivalent to a dividend" within the
meaning of the Code.
SPECIAL FEDERAL INCOME TAX CONSIDERATION DUE TO SHORT SWING PROFIT RULE
As noted above, the potential liability of Section 16 Reporting Persons to
repay "short-swing" profits from the resale of shares acquired upon option
exercise constitutes a "substantial risk of forfeiture" within the meaning of
the above-described rules, which is treated as lapsing at such time as the
potential liability under Section 16 lapses or six months after the date of
grant, whichever is earlier. Section 16 Reporting Persons who would be required
by Section 16 to repay profits from the immediate resale of option stock should
consider filing a Section 83(b) Election at the time they exercise options in
order to avoid deferral of the date that they are deemed to acquire shares for
federal income tax purposes.
INDEPENDENT AUDITORS
Representatives of Ernst & Young LLP, the Company's principal independent
accounting firm, are expected to be present in person or telephonically at the
Annual Meeting and have the opportunity to make a statement if they so desire
and to respond to appropriate questions.
OTHER BUSINESS
Management knows of no other business which will be presented for action at
the Annual Meeting. If any other business requiring a vote of the shareholders
should come before the meeting the persons designated as your proxies will vote
or refrain from voting in accordance with their best judgment.
PROPOSALS BY SHAREHOLDERS
In order to be eligible for inclusion in the proxy materials of the Company
for the next Annual Meeting of Shareholders, any shareholder proposals to be
presented at such meeting must be received by the Company no later than January
13, 1998. Such proposals must be mailed to the Company's executive offices at
26899 Northwestern Highway, Southfield, MI 48034, Attn: General Counsel. Any
such proposal shall be subject to the requirements of the proxy rules under the
Exchange Act.
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<PAGE> 22
SOLICITATION OF PROXIES
This solicitation is made on behalf of the Board of Directors of the
Company. Proxies may be solicited by officers, directors and employees of the
Company, none of whom will receive any additional compensation for their
services. In addition, the Company may engage an outside proxy solicitation firm
to render proxy solicitation services and, if so, will pay a fee for such
services. Solicitations of proxies may be made personally, or by mail,
telephone, telegraph, telephone facsimile, electronic mail, messenger or by
other means.
The Company may pay persons holding shares of Common Stock in their names
or in the names of nominees, but not owning such shares beneficially, such as
brokerage houses, banks and other fiduciaries, for the expense of forwarding
soliciting materials to their principals. All of the costs of solicitation of
proxies will be paid by the Company.
By Order of the Board of Directors
/s/ STEVEN P. GOLDMAN
-------------------------------
STEVEN P. GOLDMAN
Assistant Secretary
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<PAGE> 24
APPENDIX I
MIDCOM COMMUNICATIONS INC.
1997 STOCK OPTION PLAN
This 1997 Stock Option Plan (the "Plan") provides for the grant of options
to acquire shares of Common Stock, $.0001 par value (the "Common Stock"), of
MIDCOM COMMUNICATIONS INC., a Washington corporation (the "Company"). Stock
options granted under this Plan that qualify under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), are referred to in this Plan as
"Incentive Stock Options." Both Incentive Stock Options and stock options that
do not qualify under Section 422 of the Code ("Non-Qualified Stock Options")
granted under this Plan are referred to as "Options."
1. PURPOSES.
The purposes of this Plan are to retain the services of valued key
employees and consultants of the Company and such other persons as the Plan
Administrator shall select in accordance with Section 3 below, to encourage such
persons to acquire a greater proprietary interest in the Company, thereby
strengthening their incentive to achieve the objectives of the shareholders of
the Company, and to serve as an aid and inducement in the hiring of new
employees, consultants and other persons selected by the Plan Administrator.
2. ADMINISTRATION.
2.1 This Plan shall be administered by the Board of Directors of the
Company (the "Board"). If the Board so desires, the Plan shall be administered
by a committee designated by the Board, which committee (the "Committee") may be
an executive, compensation or other committee, including a separate committee
especially created for this purpose. The Board shall consider whether a director
is (a) an "outside director" as defined in the regulations promulgated under
Section 162(m) of the Code and (b) a "non-employee director" as defined in Rule
16b-3 (as amended from time to time) promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or any successor rule or
regulatory requirement, when appointing any such Committee and shall appoint
solely two or more individuals who qualify as "outside directors" if the Board
intends for compensation attributable to Options to be "qualified
performance-based compensation" as defined in the regulations promulgated under
Section 162(m) of the Code. The Committee shall have the powers and authority
vested in the Board hereunder (including the power and authority to interpret
any provision of this Plan or of any Option). The members of any such Committee
shall serve at the pleasure of the Board. A majority of the members of the
Committee shall constitute a quorum, and all actions of the Committee shall be
taken by a majority of the members present. Any action may be taken by a written
instrument signed by all of the members of the Committee and any action so taken
shall be fully effective as if it had been taken at a meeting. The Board, or any
committee thereof appointed to administer the Plan, is referred to herein as the
"Plan Administrator."
2.2 Subject to the provisions of this Plan, and with a view to effecting
its purpose, the Plan Administrator shall have sole authority, in its absolute
discretion, to (a) construe and interpret this Plan; (b) define the terms used
in this Plan; (c) prescribe, amend and rescind rules and regulations relating to
this Plan; (d) correct any defect, supply any omission or reconcile any
inconsistency in this Plan; (e) grant Options under this Plan; (f) determine the
individuals to whom Options shall be granted and whether the Option is an
Incentive Stock Option or a Non-Qualified Stock Option; (g) determine the time
or times at which options shall be granted under this Plan; (h) determine the
number of shares of Common Stock subject to each Option, the exercise price of
each Option, the duration of each Option and the times at which each Option
shall become exercisable; (i) determine all other terms and conditions of
Options; and (j) make all other determinations necessary or advisable for the
administration of this Plan. All decisions, determinations and interpretations
made by the Plan Administrator shall be binding and conclusive on all
participants in this Plan and on their legal representatives, heirs and
beneficiaries.
<PAGE> 25
2.3 The Plan Administrator may delegate to one or more executive officers
of the Company (collectively, the "Executive Officer") the authority to grant
Options under this Plan to employees of the Company who, at the time of grant,
are not Section 16 Insiders (as defined below) nor a "covered employee" within
the meaning of Section 162(m)(3) of the Code ("Non-Insiders"), and in connection
therewith the authority to determine: (a) whether the Option in an Incentive
Stock Option or a Non-qualified Stock Option; (b) the number of shares of Common
Stock subject to such Option; (c) the duration of the Option; (d) the vesting
schedule for determining the times at which such Option shall become
exercisable; and (e) all other terms and conditions of such Options. The
exercise price for any Option granted by action of an executive officer pursuant
to such delegation of authority shall not be less than the Fair Market Value (as
defined below) per share of the Common Stock on the Date of Grant (as defined in
Section 5.2). Unless expressly approved in advance by the Board or the
Committee, such delegation of authority shall not include the authority to
accelerate the vesting, extend the period for exercise or otherwise alter the
terms of outstanding Options. The Executive Officer shall promptly provide a
report to the Plan Administrator of each person to whom an Option has been
granted under this Section 2 and the material terms and conditions of the
Option. "Fair Market Value" on any day means, if the Common Stock is publicly
traded, the last sales price (or, if no last sales price is reported, the
average of the high bid and low asked prices) for a share of Common Stock on the
next preceding trading day as reported by the principal exchange on which the
Common Stock is listed, or, if the Common Stock is publicly traded but not
listed on an exchange, as reported by The Nasdaq Stock Market, or if such prices
or quotations are not reported by The Nasdaq Stock Market, as reported by any
other available source of prices or quotations selected by the Plan
Administrator. If the Common Stock is not publicly traded, or if the Fair Market
Value is not determinable by any of the foregoing means, the Fair Market Value
on any day shall be determined in good faith by the Plan Administrator on the
basis of such considerations as the Plan Administrator deems appropriate. The
term "Plan Administrator" when used in any provision of this Plan other than
Sections 2, 5.12, 5.14 and 13 shall be deemed to refer to the Board or the
Committee, as the case may be, and the Executive Officer who has been authorized
to grant Options pursuant hereto, insofar as such provision may be applied to
Non-Insiders and Options granted to Non-Insiders. For purposes of this Plan, the
term "Section 16 Insiders" shall refer to those persons who are subject to the
ownership reporting requirements of Section 16(a) of the Exchange Act with
respect to the Common Stock.
3. ELIGIBILITY.
3.1 Incentive stock options may be granted to any individual who, at the
time the Option is granted, is an employee of the Company or any Related
Corporation (as defined below), including employees who are directors of the
Company ("Employees"). Non-Qualified Stock Options may be granted to Employees
and to such other persons who are not Employees, including directors of the
Company, as the Plan Administrator shall select. Options may be granted in
substitution for outstanding Options of another corporation in connection with
the merger, consolidation, acquisition of property or stock or other
reorganization between such other corporation and the Company or any subsidiary
of the Company. Options also may be granted in exchange or substitution for
outstanding options. Any person to whom an Option is granted under this Plan is
referred to as an "Optionee."
3.2 To the extent a director of the Company has not been granted an option
to purchase shares of Common Stock upon election to the Board pursuant to
Section 3 of the Company's 1993 Stock Option Plan and provided that shares of
Common Stock remain available for issuance pursuant to Options granted under
this Plan, each director of the Company who at the time of his or her election
to the Board is not also an employee of the Company or of any Related
Corporation shall, concurrent with his or her election to the Board (the
"Election Date"), automatically receive a Non-Qualified Stock Option to purchase
50,000 shares of Common Stock, subject to adjustment as set forth in Section
5.13 below, at an exercise price equal to the Fair Market Value of the Common
Stock on the Election Date. Each Option granted pursuant to this paragraph shall
become exercisable at a rate of twenty percent (20%) for each year of service
commencing on the Election Date, and such option shall expire, unless otherwise
terminated pursuant to Section 5.8, ten (10) years from the Election Date.
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<PAGE> 26
3.3 No person shall be granted Options to purchase more than 1,500,000
shares of Common Stock (subject to adjustment as set forth in Section 5.13
hereof) in any three (3) year period. Such limitation shall be applied in a
manner consistent with, and only to the extent required for compliance with, the
exclusion from the limitation on deductibility of compensation under Section
162(m) of the Code.
3.4 As used in this Plan, the term "Related Corporation," when referring
to a subsidiary corporation, shall mean any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company if, at the time
of the granting of the Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock of one of the
other corporations in such chain. When referring to a parent corporation, the
term "Related Corporation" shall mean any corporation (other than the Company)
in an unbroken chain of corporations ending with the Company if, at the time of
granting of the Option, each of the corporations other than the Company owns
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock of one of the other corporations in such chain.
4. STOCK.
The Plan Administrator is authorized to grant Options to acquire up to a
total of Nine Hundred Fifty Thousand (950,000) shares of the Company's
authorized but unissued Common Stock. The number of shares with respect to which
Options may be granted hereunder is subject to adjustment as set forth in
Section 5.13 hereof. In the event that any outstanding Option expires or is
terminated for any reason, the shares of Common Stock allocable to the
unexercised portion of such Option may again be subject to an Option to the same
Optionee or to a different person eligible under Section 3 of this Plan;
provided, however, that any canceled Options will be counted against the maximum
number of shares with respect to which Options may be granted to any particular
person as set forth in Section 3.3.
5. TERMS AND CONDITIONS OF OPTIONS.
Each Option granted under this Plan shall be evidenced by a written
agreement approved by the Plan Administrator (the "Agreement"). Agreements may
contain such additional provisions, not inconsistent with this Plan, as the Plan
Administrator in its discretion may deem advisable. All Options also shall
comply with the following requirements:
5.1 Number of Shares and Type of Option. Each Agreement shall state the
number of shares of Common Stock to which it pertains and whether the Option is
intended to be an Incentive Stock Option or a Non-Qualified Stock Option. In the
absence of action to the contrary by the Plan Administrator in connection with
the grant of an Option, all Options shall be Non-Qualified Stock Options. The
aggregate Fair Market Value (determined at the Date of Grant, as defined below)
of the stock with respect to which Incentive Stock Options are exercisable for
the first time by the Optionee and any incentive stock options granted to the
Optionee under any other stock option plan of the Company, any Related
Corporation or any predecessor corporation which are exercisable for the first
time by the Optionee during any calendar year shall not exceed $100,000, or such
other limit as may be prescribed by the Code. If (a) an Optionee holds one or
more Incentive Stock Options under this Plan (and/or any incentive stock options
under any other stock option plan of the Company, any Related Corporation or any
predecessor corporation), and (b) the aggregate Fair Market Value of the shares
of Common Stock with respect to which, during any calendar year, such Options
become exercisable for the first time exceeds $100,000 (said value to be
determined as provided above), then such Option or Options are intended to
qualify under Section 422 of the Code with respect to the maximum number of such
shares as can, in light of the foregoing limitation, be so qualified, with the
shares so qualified to be the shares subject to the Option or Options earliest
granted to the Optionee. If an Option that would otherwise qualify as an
Incentive Stock Option becomes exercisable for the first time in any calendar
year for shares of Common Stock that would cause such aggregate Fair Market
Value to exceed $100,000, then the portion of the Option in respect of such
shares shall be deemed to be a Non-Qualified Stock Option.
5.2 Date of Grant. Each Agreement shall state the date the Plan
Administrator has deemed to be the effective date of the option for purposes of
this Plan (the "Date of Grant").
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<PAGE> 27
5.3 Option Price. Each Agreement shall state the price per share of
Common Stock at which it is exercisable. The exercise price shall not be less
than the Fair Market Value per share of the Common Stock at the Date of Grant as
determined by the Plan Administrator in good faith; provided further, that with
respect to Incentive Stock Options granted to greater-than-10 percent (>10%)
shareholders of the Company (as determined with reference to Section 424(d) of
the Code) (a "Ten Percent Shareholder"), the exercise price per share shall not
be less than 110 percent (110%) of the Fair Market Value per share of Common
Stock at the Date of Grant; and, provided further, that Options granted in
substitution for outstanding options of another corporation in connection with
the merger, consolidation, acquisition of property or stock or other
reorganization involving such other corporation and the Company or any
subsidiary of the Company may be granted with an exercise price equal to the
exercise price for the substituted option of the other corporation, subject to
any adjustment consistent with the terms of the transaction pursuant to which
the substitution is to occur.
5.4 Duration of Options. At the time of the grant of the Option, the Plan
Administrator shall designate, subject to paragraph 5.7 below, the expiration
date of the Option, which date shall not be later than 10 years from the Date of
Grant in the case of Incentive Stock Options; provided, that the expiration date
of any Incentive Stock Option granted to a 10 Percent Shareholder of the Company
shall not be later than five years from the Date of Grant. In the absence of
action to the contrary by the Plan Administrator in connection with the grant of
a particular Option, and except in the case of Incentive Stock Options as
described above, all Options granted under this Plan shall expire ten (10) years
from the Date of Grant.
5.5 Vesting Schedule. No Option shall be exercisable until it has vested.
The vesting schedule for each Option shall be specified by the Plan
Administrator at the time of grant of the Option in its sole discretion;
provided, that if no vesting schedule is specified at the time of grant, the
Option shall vest according to the following schedule, which may be waived or
modified by the Plan Administrator at any time:
<TABLE>
<CAPTION>
NUMBER OF YEARS PERCENTAGE OF TOTAL
FOLLOWING DATE OF GRANT OPTION VESTED
---------------------------------------------------- -------------------
<S> <C>
One.......................................... 20%
Two.......................................... 40%
Three........................................ 60%
Four......................................... 80%
Five......................................... 100%
</TABLE>
The Plan Administrator may specify a vesting schedule for all or any
portion of an Option based on the achievement of performance objectives
established in advance of the commencement by the Optionee of services related
to the achievement of the performance objectives. Performance objectives may be
expressed in terms of one or more of the following: return on equity, return on
assets, share price, market share, sales, earnings per share, costs, net
earnings, net worth, inventories, cash and cash equivalents, gross margin or the
Company's performance relative to its internal business plan. Performance
objectives may be in respect of the performance of the Company as a whole
(whether on a consolidated or unconsolidated basis), a Related Corporation, or a
subdivision, operating unit, product or product line of the foregoing.
Performance objectives may be absolute or relative and may be expressed in terms
of a progression or a range. An Option which is exercisable (in whole or in
part) upon the achievement of one or more performance objectives may be
exercised only following written notice to the Optionee and the Company by the
Plan Administrator that the performance objective has been achieved.
5.6 Acceleration of Vesting. The vesting of one or more outstanding
Options may be accelerated by the Plan Administrator at such times and in such
amounts as it shall determine in its sole discretion. The vesting of Options
also shall be accelerated under the circumstances described in Subsections 5.1.2
and 5.14 below.
5.7 Term of Option.
5.7.1 Vested Options shall terminate, to the extent not previously
exercised, upon the occurrence of the first of the following events: (i)
the expiration of the Option, as designated by the Plan Administrator
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<PAGE> 28
in accordance with Section 5.4 above; (ii) the date of the Optionee's
termination of employment or contractual relationship with the Company or
any Related Corporation for cause (as determined in the sole discretion of
the Plan Administrator); (iii) the expiration of 90 days from the date of
an Optionee's termination of employment or contractual relationship with
the Company or any Related Corporation for any whatsoever other than cause,
death or Disability (as defined below) unless, in the case of a Non-
Qualified Option, the exercise period is extended by the Plan
Administrator, in its sole discretion; or (iii) the expiration of one year
from (A) the date of death of the optionee or (B) cessation of an
Optionee's employment or contractual relationship by reason of Disability
(as defined below) unless, in the case of a Non-Qualified Stock Option, the
exercise period is extended by the Plan Administrator, in its sole
discretion. If an Optionee's employment or contractual relationship is
terminated by death, any option held by the Optionee shall be exercisable
only by the person or persons to whom such Optionee's rights under such
Option shall pass by the Optionee's will or by the laws of descent and
distribution of the state or county of the Optionee's domicile at the time
of death. In the case of termination of the Optionee's employment or
services for cause, the Option shall automatically terminate upon first
delivery by the Company of any reason for such termination and the Optionee
shall have no right to purchase any shares of pursuant to such Option,
unless the Plan Administrator determines otherwise. If an Optionee's
employment or services with the Company are suspended pending an
investigation of whether the Optionee shall be terminated for cause, all of
the Optionee's rights under any Option likewise shall be suspended during
the period of investigation. For purposes of the Plan, unless otherwise
defined in the Agreement, "Disability" shall mean any physical, mental or
other health condition which substantially impairs the Optionee's ability
to perform her or his assigned duties for one hundred twenty (120) days or
more in any two hundred forty (240) day period or that can be expected to
result in death. The Plan Administrator shall determine whether an Optionee
has incurred a Disability on the basis of medical evidence acceptable to
the Plan Administrator. Upon making a determination of Disability, the Plan
Administrator shall, for purposes of the Plan, determine the date of an
Optionee's termination of employment or contractual relationship.
5.7.2 Unless accelerated in accordance with Section 5.6 above and
Section 5.14 below, unvested Options shall terminate immediately upon
termination of employment of the Optionee by the Company for any reason
whatsoever, including death or Disability. If, in the case of an Incentive
Stock Option, an Optionee's relationship with the Company changes (e.g.,
from an Employee to a non-Employee, such as a consultant), such change
shall not constitute a termination of an Optionee's employment with the
Company but rather the Optionee's Incentive Stock Option shall
automatically be converted into a Non-Qualified Stock Option if the Plan
Administrator so determines.
5.7.3 For purposes of this Plan, transfer of employment between or
among the Company and/or any Related Corporation shall not be deemed to
constitute a termination of employment with the Company or any Related
Corporations. For purposes of this subsection with respect to Incentive
Stock Options, employment shall be deemed to continue while the Optionee is
on military leave, sick leave or other bona fide leave of absence (as
determined by the Plan Administrator). The foregoing notwithstanding,
employment shall not be deemed to continue beyond the first ninety (90)
days of such leave, unless the Optionee's re-employment rights are
guaranteed by statute or by contract.
5.8 Exercise of Options. Options shall be exercisable, either all or in
part, at any time after vesting, until termination. If less than all of the
shares included in the vested portion of any Option are purchased, the remainder
may be purchased at any subsequent time prior to the expiration of the option
term. No portion of any Option for less than 100 shares (as adjusted pursuant to
Section 5.13 below) may be exercised; provided, that if the vested portion of
any Option is less than 100 shares, it may be exercised with respect to all
shares for which it is vested. Only whole shares may be issued pursuant to an
Option, and to the extent that an Option covers less than one (1) share, it is
unexercisable. Options or portions thereof may be exercised by giving written
notice to the Company, which notice shall specify the number of shares to be
purchased, and be accompanied by payment in the amount of the aggregate exercise
price for the Common Stock so purchased, which payment shall be in the form
specified in Section 5.9 below. The Company shall not be obligated to issue,
transfer or deliver a certificate of Common Stock to any Optionee, or to his
personal representative, until
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<PAGE> 29
the aggregate exercise price has been paid for all shares for which the option
shall have been exercised and adequate provision has been made by the Optionee
for satisfaction of any tax withholding obligations associated with such
exercise. During the lifetime of an Optionee, Options are exercisable only by
the Optionee.
5.9 Payment upon Exercise of Option. Upon the exercise of any Option, the
aggregate exercise price shall be paid to the Company in cash or any other form
acceptable to the Company. In addition, upon approval of the Plan Administrator,
an Optionee may pay for all or any portion of the aggregate exercise price by
delivering to the Company shares of Common Stock previously held by such
Optionee, or by complying with any other payment mechanism approved by the Plan
Administrator from time to time. The shares of Common Stock received or withheld
by the Company as payment for shares of Common Stock purchased upon the exercise
of Options shall have a Fair Market Value at the date of exercise (as determined
by the Plan Administrator) equal to the aggregate exercise price (or portion
thereof) to be paid by the Optionee upon such exercise.
5.10 Rights as a Shareholder. An Optionee shall have no rights as a
shareholder with respect to any shares covered by an Option until such Optionee
becomes a record holder of such shares, irrespective of whether such optionee
has given notice of exercise. Subject to the provisions of Sections 5.13 hereof,
no rights shall accrue to an Optionee and no adjustments shall be made on
account of dividends (ordinary or extraordinary, whether in cash, securities or
other property) or distributions or other rights declared on, or created in, the
Common Stock for which the record date is prior to the date the Optionee becomes
a record holder of the shares of Common Stock covered by the Option, even if
such Optionee has given notice of exercise.
5.11 Transfer of Option. Unless otherwise specified in the Agreement or
by the Plan Administrator, Options granted under this Plan and the rights and
privileges conferred by this Plan may not be transferred, assigned, pledged or
hypothecated in any manner (whether by operation of law or otherwise) other than
by will or by applicable laws of descent and distribution, and shall not be
subject to execution, attachment or similar process. Upon any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of any Option or of
any right or privilege conferred by this Plan contrary to the provisions hereof,
or upon the sale, levy or any attachment or similar process upon the rights and
privileges conferred by this Plan, such Option shall thereupon terminate and
become null and void, provided, however, that, nothing contained in this Section
5.11 shall preclude an Optionee, upon written notice to the Administrator, from
transferring an option held by the Optionee or to be granted to the Optionee to
(i) a trust or series of trusts which are established solely for the benefit of
the immediate family members of the Optionee, or (ii) a partnership or
partnerships of which the only partners are members of the Optionee's immediate
family, provided further a) there be no consideration for such transfer or
transfers, b) the original Optionee shall remain subject to withholding taxes
upon exercise, c) any subsequent transfer of the options transferred to such
family trust, series of trusts, or family partnership shall be prohibited except
that such trust or partnership may make subsequent transfers to immediate family
members of the Optionee consistent with this provision or by will or by the
applicable laws of descent and distribution, and d) the events of termination of
employment or contractual relationship set forth in subsection 5.7 shall
continue to apply with respect to the original transferor-Optionee, following
which any option shall be exercisable by the transferee or transferees only to
the extent and for the periods specified elsewhere in this Section 5 or in the
option grant.
5.12 Securities Regulation and Tax Withholding.
5.12.1 Shares shall not be issued with respect to an Option unless the
exercise of such Option and the issuance and delivery of such shares shall
comply with all relevant provisions of law, including, without limitation,
any applicable state securities laws, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations thereunder and the
requirements of any stock exchange upon which such shares may then be
listed, and such issuance shall be further subject to the approval of
counsel for the Company with respect to such compliance, including the
availability of an exemption from registration for the issuance and sale of
such shares. The inability of the Company to obtain from any regulatory
body the authority deemed by the Company to be necessary for the lawful
issuance and
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<PAGE> 30
sale of any shares under this Plan, or the unavailability of an exemption
from registration for the issuance and sale of any shares under this Plan,
shall relieve the Company of any liability with respect to the non-issuance
or sale of such shares.
As a condition to the exercise of an Option, the Plan Administrator
may require the optionee to represent and warrant in writing at the time of
such exercise that the shares are being purchased only for investment and
without any then-present intention to sell or distribute such shares. At
the option of the Plan Administrator, a stop-transfer order against such
shares may be placed on the stock books and records of the Company, and a
legend indicating that the stock may not be pledged, sold or otherwise
transferred unless an opinion of counsel is provided stating that such
transfer is not in violation of any applicable law or regulation, may be
stamped on the certificates representing such shares in order to assure an
exemption from registration. The Plan Administrator also may require such
other documentation as may from time to time be necessary to comply with
federal and state securities laws. THE COMPANY HAS NO OBLIGATION TO
UNDERTAKE REGISTRATION OF OPTIONS OR THE SHARES OF STOCK ISSUABLE UPON THE
EXERCISE OF OPTIONS.
5.12.2 The Optionee shall pay to the Company by certified or cashier's
check, promptly upon exercise of the Option or, if later, the date that the
amount of such obligations becomes determinable, all applicable federal,
state, local and foreign withholding taxes that the Plan Administrator, in
its sole discretion, determines to result from the exercise of the Option
or from a transfer or other disposition of shares of Common Stock acquired
upon exercise of the Option or otherwise related to the Option or shares of
Common Stock acquired upon exercise of the Option. Upon approval of the
Plan Administrator, such Optionee may satisfy such obligation by complying
with one or more of the following alternatives selected by the Plan
Administrator:
(A) by delivering to the Company whole shares of Common Stock then
owned by such Optionee, or by the Company withholding whole shares of
Common Stock otherwise issuable to the Optionee upon exercise of the
Option, which shares of Common Stock received or withheld shall have a
Fair Market Value on the date of exercise (as determined by the Plan
Administrator in good faith) equal to the tax obligation to be paid by
such Optionee upon such exercise;
(B) by any combination of the foregoing methods of payment; or
(C) by complying with any other payment mechanism as may be
permitted for the issuance of equity securities under applicable
securities and other laws and approved by the Plan Administrator from
time to time.
5.12.3 The issuance, transfer or delivery of certificates of Common
Stock pursuant to the exercise of Options may be delayed, at the discretion
of the Plan Administrator, until the Plan Administrator is satisfied that
the applicable requirements of the federal and state securities laws and
the withholding provisions of the Code have been met.
5.13 Stock Dividend, Reorganization or Liquidation.
5.13.1 If (i) the Company shall at any time be involved in a
transaction described in Section 424(a) of the Code (or any successor
provision) or any "corporate transaction" described in the regulations
promulgated thereunder; (ii) the Company shall declare a dividend payable
in, or shall subdivide or combine, its Common Stock or (iii) any other
event with substantially the same effect shall occur, the Plan
Administrator shall, with respect to each outstanding Option,
proportionately adjust the number of shares of Common Stock subject to such
Option and/or the exercise price per share so as to preserve the rights of
the Optionee substantially proportionate to the rights of the Optionee
prior to such event, and to the extent that such action shall include an
increase or decrease in the number of shares of Common Stock subject to
outstanding Options, the number of shares available under Section 4 of this
Plan and the number of shares of Common Stock underlying Options to be
granted pursuant to Section 3.2 hereof shall automatically be increased or
decreased, as the case may be, proportionately, without further action on
the part of the Plan Administrator, the Company, the Company's
shareholders, or any Optionee.
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<PAGE> 31
5.13.2 If the Company shall at any time declare an extraordinary
dividend with respect to the Common Stock, whether payable in cash or other
property, the Plan Administrator may, in the exercise of its sole
discretion and with respect to each outstanding Option, proportionately
adjust the number of shares of Common Stock subject to such Option and/or
adjust the exercise price per share so as to preserve the rights of the
Optionee substantially proportionate to the rights of the Optionee prior to
such event, and to the extent that such action shall include an increase or
decrease in the number of shares of Common Stock subject to outstanding
Options, the number of shares available under Section 4 of this Plan and
the number of shares of Common Stock underlying Options to be granted
pursuant to Section 3.2 hereof shall automatically be increased or
decreased, as the case may be, proportionately, without further action on
the part of the Plan Administrator, the Company, the Company's
shareholders, or any Optionee.
5.13.3 If the Company is liquidated or dissolved, the Plan
Administrator may allow the Optionees of any outstanding Options to
exercise all or any part of the unvested portion of the Options held by
them; provided, however, that such Options must be exercised prior to the
effective date of such liquidation or dissolution. If the Optionees do not
exercise their Options prior to such effective date, each outstanding
Option shall terminate as of the effective date of the liquidation or
dissolution.
5.13.4 The foregoing adjustments in the shares subject to Options
shall be made by the Plan Administrator, or by any successor administrator
of this Plan, or by the applicable terms of any assumption or substitution
document.
5.13.5 The grant of an Option shall not affect in any way the right or
power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, to merge,
consolidate or dissolve, to liquidate or to sell or transfer all or any
part of its business or assets.
5.14 Change of Control.
5.14.1 Any and all options granted under this Plan at the time of
occurrence of any of the events described in Subparagraphs (A) and (B)
below (an "Eligible Option") shall become immediately vested and fully
exercisable upon the occurrence of the following events:
(A) The date that a tender or exchange offer for Common Stock by
any Person (other than the Company, any subsidiary of the Company, any
employee benefit plan of the Company or of any subsidiary of the
Company, or any Person or entity organized, appointed or established by
the Company for or pursuant to the terms of any such employee benefit
plan) is first published or sent or given within the meaning of Rule
14d-2 under the Exchange Act (including any extensions or renewals of
such offer), unless by the terms of such offer the offeror, upon
consummation thereof, would be the Beneficial Owner of less than thirty
percent (30%) of the shares of Common Stock then outstanding;
(B) The day on which the shareholders of the Company (or, if later,
approval by the shareholders of any Person) duly approve 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 into securities of any Person, or
cash, or property, or a combination of any of the foregoing; provided,
however, options which are converted into options to purchase shares of
Exchange Stock are subject to the provisions of Section 5.14.2 below.
5.14.2 If the shareholders of the Company receive shares of capital
stock of another Person ("Exchange Stock") in exchange for or in place of
shares of Common Stock in any transaction involving any merger,
consolidation, reorganization or other transaction providing for the
conversion or exchange of all or substantially all outstanding shares of
Common Stock into Exchange Stock, then at the closing of such transaction
all Options granted hereunder shall be converted into options to purchase
shares of Exchange Stock Option. The number of shares of Exchange Stock
issuable upon exercise of an Exchange Stock Option and the exercise price
therefor shall be determined by the Plan Administrator by adjusting the
number of shares of Common Stock issuable upon exercise of the Option
converted into such Exchange Stock Option, and the exercise price therefor,
in the same proportion as used for determining
8
<PAGE> 32
the shares of Exchange Stock received by holders of Common Stock in
connections with a transaction described in this Section 5.14.2. All
Exchange Stock Options shall be fully vested and immediately exercisable.
5.14.3 For the purpose of this Section 5.14: "Person" shall include
any individual, firm, corporation, partnership or other entity; (ii)
"Affiliate" and "Associate" shall have the meanings assigned to them in
Rule 12b-2 under the Exchange Act; and (iii) "Beneficial Owner" shall have
the meaning assigned to it in Rule 16a-1 under the Exchange Act.
6. EFFECTIVE DATE; TERM.
This Plan shall be effective at the time specified in the resolutions of
the Board adopting this Plan (the "Effective Date"). Incentive Stock Options may
be granted by the Plan Administrator from time to time thereafter until the
tenth anniversary of the Effective Date. Non-Qualified Stock Options may be
granted under this Plan until it is terminated by the Plan Administrator in its
sole discretion. Termination of this Plan shall not terminate any Option granted
prior to such termination. Issuance of Incentive Stock Options under this Plan
within twelve (12) months after the Effective Date shall be subject to the
approval of this Plan by the shareholders of the Company at a duly held meeting
of shareholders at which a majority of all outstanding voting stock of the
Company is represented in person or by proxy. The approval required shall be a
majority of the votes cast on the proposal to approve this Plan. Such approval
may also be provided pursuant to a written consent in lieu of such meeting. No
Incentive Stock Option granted hereunder shall be exercisable until this
approval requirement has been satisfied. If this requirement is not satisfied
within twelve (12) months after the Effective Date, then, notwithstanding any
contrary provision in this Plan (a) no Incentive Stock Options may thereafter be
granted under this Plan, and (b) each Incentive Stock Option granted under this
Plan prior thereto shall automatically be deemed to be a Non-Qualified Stock
Option (except to the extent the Agreement evidencing the Option expressly
provides otherwise).
7. NO OBLIGATIONS TO EXERCISE OPTION.
The grant of an Option shall impose no obligation upon the optionee to
exercise such Option.
8. NO RIGHT TO OPTIONS OR TO EMPLOYMENT.
Whether or not any Options are to be granted under this Plan shall be
exclusively within the discretion of the Plan Administrator, and nothing
contained in this Plan shall be construed as giving any person any right to
participate under this Plan. The grant of an Option shall in no way constitute
any form of agreement or understanding binding on the Company or any Related
Company, express or implied, that the Company or any Related Company will employ
or contract with an Optionee for any length of time, nor shall it interfere in
any way with the Company's or, where applicable, a Related Company's right to
terminate Optionee's employment at any time, which right is hereby reserved.
9. APPLICATION OF FUNDS.
The proceeds received by the Company from the sale of Common Stock issued
upon the exercise of Options shall be used for general corporate purposes,
unless otherwise directed by the Board.
10. INDEMNIFICATION OF PLAN ADMINISTRATOR.
In addition to all other rights of indemnification they may have as members
of the Board, members of the Plan Administrator shall be indemnified by the
Company for all reasonable expenses and liabilities of any type or nature,
including attorneys' fees, incurred in connection with any action, suit or
proceeding to which they or any of them are a party by reason of, or in
connection with, this Plan or any Option granted under this Plan, and against
all amounts paid by them in settlement thereof (provided that such settlement is
approved by independent legal counsel selected by the Company), except to the
extent that such expenses relate to matters for which it is adjudged that such
Plan Administrator member is liable for willful misconduct; provided, that
within fifteen (15) days after the institution of any such action, suit or
proceeding, the Plan Administrator
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<PAGE> 33
member involved therein shall, in writing, notify the Company of such action,
suit or proceeding, so that the Company may have the opportunity to make
appropriate arrangements to prosecute or defend the same.
11. SEPARABILITY.
With respect to Incentive Stock Options, if this Plan does not contain any
provision required to be included herein under Section 422 of the Code, such
provision shall be deemed to be incorporated herein with the same force and
effect as if such provision had been set out in full herein; provided, however,
that to the extent any Option that is intended to qualify as an Incentive Stock
Option cannot so qualify, the Option, to that extent, shall be deemed to be a
Non-Qualified Stock Option for all purposes of this Plan.
12. NON-EXCLUSIVITY OF THIS PLAN.
Neither the adoption of this Plan by the Board nor the submission of this
Plan to the shareholders of the Company for approval shall be construed as
creating any limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and the awarding of stock and cash otherwise than
pursuant to this Plan, and such arrangements may be either generally applicable
or applicable only in specific cases.
13. AMENDMENT OF PLAN.
The Plan Administrator may, at any time, modify, amend or terminate this
Plan and Options granted under this Plan, including, without limitation, such
modifications or amendments as are necessary to maintain compliance with
applicable statutes, rules or regulations; provided however, that any amendment
that increases the number of shares as to which Options may be granted or
reduces the exercise price below the price provided in the Plan shall be subject
to the approval by the affirmative vote of the holders of a majority of the
securities of the Company present, or represented, and entitled to vote thereon
at a meeting duly held in accordance with applicable law; provided, further,
that no amendment with respect to an outstanding Option which has the effect of
reducing the benefits afforded to the Optionee shall be made over the objection
of such Optionee. The Plan Administrator may condition the effectiveness of any
amendment on the receipt of shareholder approval at such time and in such manner
as the Plan Administrator may consider necessary for the Company to comply with
or to avail the Company, the Optionees or both of the benefits of any
securities, tax, market listing or other administrative or regulatory
requirement which the Plan Administrator determines to be desirable. Without
limiting the generality of the foregoing, the Plan Administrator may modify
grants to persons who are eligible to receive Options under this Plan who are
foreign nationals or employed outside the United States to recognize differences
in local law, tax policy or custom.
Date of Approval by Board of Directors of the Company: April
30, 1997
/s/ PAUL P. SENIO
--------------------------------------
PAUL P. SENIO, Corporate Secretary
Date of Approval by Shareholders of Company: June , 1997.
--------------------------------------
PAUL P. SENIO, Corporate Secretary
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<PAGE> 34
PROXY
MIDCOM COMMUNICATIONS INC.
----------------------------------------------
ANNUAL MEETING OF SHAREHOLDERS - JUNE 12, 1997
----------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints William H. Oberlin and Steven P.
Goldman, and each of them, as Proxies, each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote as designated
below, all the shares of Common Stock of MIDCOM Communications Inc. held of
record by the undersigned on April 29, 1997, at the annual meeting of
shareholders to be held on June 12, 1997, or at any adjournment or postponement
thereof.
(Continued and to be signed on reverse side.)
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 35
<TABLE>
<S> <C> <C> <C>
FOR WITHHOLD
all nominees listed AUTHORITY
below (except as marked to vote for all
1. Election of Class I Directors to the contrary below) nominees listed below. 3. In their discretion, the
holders of this proxy are
[ ] [ ] authorized to vote upon such
Instruction: To withhold authority other business as may properly
to vote for any individual nominee, come before the meeting.
strike a line through the nominee's
name in the list below. Please sign and date below.
Karl D. Guelich and Scott B. Perper This Proxy, when properly
executed, will be voted in the
manner herein directed by the
undersigned shareholder. If
no specification is made,
this Proxy will be voted FOR
the election of all nominees
for director listed in
Proposal 1 and FOR Proposal 2.
FOR WITHHOLD ABSTAIN
2. Proposal to ratify and approve the [ ] [ ] [ ] The undersigned hereby revokes
adoption of the MIDCOM 1997 Stock Option any proxy or proxies heretofore
Plan. given for such shares and
ratifies all that the above-
named proxies or their
substitutes may lawfully do by
virtue hereof.
Please mark, sign, date and
return the Proxy Card promptly
using the enclosed envelope.
</TABLE>
Signature(s) Dated , 1997
----------------------------- ------------------
Please sign as name appears above. When shares are held by joint tenants, both
should sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such. If a corporation, please sign in
corporate name by authorized officer. If a partnership, please sign in
partnership name by authorized person.
- ------------------------------------------------------------------------------
FOLD AND DETACH HERE
