<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(AMENDMENT NO. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-26118
MIDCOM COMMUNICATIONS INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1438806
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
MIDCOM TOWER
1111 THIRD AVENUE
SEATTLE, WASHINGTON 98101
(206) 628-8000
(Address, including zip code, and telephone number, including area code of
principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.0001 (SYMBOL: "MCCI")
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of April 28, 1997, the aggregate market value of the Registrant's
Common Stock held by nonaffiliates of the Registrant was $69,332,410 based
on the closing sales price of the Registrant's Common Stock on the Nasdaq
National Market.
As of April 28, 1997, the number of shares of the Registrant's Common
Stock outstanding was 15,224,921.
Page 1 of 14 Pages
<PAGE> 2
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Directors and Executive Officers of the Registrant" under
Item 1 - Part 1 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
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").
2
<PAGE> 3
ITEM 11. EXECUTIVE COMPENSATION.
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 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.
3
<PAGE> 4
(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.
(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.
(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.
(8) Mr. Peterson resigned as an officer of the Company in May 1996.
Included in other compensation for 1996 are severance payments of
$10,000.
STOCK OPTION GRANTS
The following table sets forth further information regarding grants of
options to purchase Common Stock made by the Company pursuant to the Company's
1993 Stock Option Plan during the fiscal year ended December 31, 1996 to each
of the Named Executive Officers.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
PERCENT POTENTIAL REALIZABLE VALUE
NUMBER OF OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS EXERCISE MARKET STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO PRICE PER PRICE ON FOR OPTION TERM(4)
OPTIONS EMPLOYEES SHARE DATE OF EXPIRATION -----------------------------------
NAME GRANTED(#)(1) IN 1996 ($/SH)(2) GRANT($)(3) DATE 0%($) 5%($) 10%($)
- ---- ------------- ------- --------- --------- ---- ----- ----- ------
<S> <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
Jay T. Caldwell -- -- -- -- -- -- -- --
Robert J. Chamberlain 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
Robert L. Nitschke 25,000 0.76% 12.00 12.00 10/29/06 -- 188,668 478,123
</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
4
<PAGE> 5
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.
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.
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 -- -- 10,000 65,000 -- --
Robert J. Chamberlain -- -- 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.
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.
5
<PAGE> 6
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.
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.
6
<PAGE> 7
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.
From time to time, the Company has engaged in certain transactions with
members of the Board of Directors and the Compensation Committee. See "Item
13--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.
7
<PAGE> 8
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 telecommunication
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)
personal 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 28, 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 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 or 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
8
<PAGE> 9
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 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 are nontransferable other than by will or the laws of descent
and distribution. Notwithstanding a vesting schedule, the 1993 Stock Option
Plan provides for the immediate vesting of options upon the occurrence of
certain events: (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 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.
9
<PAGE> 10
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding
beneficial ownership of Midcom's Common Stock, as of April 28, 1997, 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 persons) . . . . . . 6,916,172(13) 43.2
- ---------------------------
</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 Common Stock outstanding as of April 28, 1997.
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 April 28, 1997 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. This table assumes that 846,723 shares of Common
Stock owned by Ashok Rao and 38,637 shares of Common Stock owned by
certain trusts established by Ashok Rao have been redeemed.
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<PAGE> 11
(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 28, 1997 and 31,943 shares of
Common Stock issuable upon conversion of $450,000 aggregate principal
of convertible notes held by Mr. Pfleger. See "Item 13 - 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 28, 1997 and 17,746 shares of Common Stock issuable upon
conversion of $250,000 aggregate principal of convertible notes held
by Mr. Orehek. See "Item 13 - 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 28, 1997 and 188,110 shares of Common Stock
issuable upon conversion of $2,650,000 aggregate principal of
convertible notes which are currently convertible held by a trust
established by Mr. Oberlin in which he has a beneficial interest. See
"Item 13 - Certain Relationships and Related Transactions."
(6) Includes 26,053 shares of Common Stock subject to options
exercisable within 60 days of April 28, 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.
Represents 13,937 shares of Common Stock subject to options
exercisable within 60 days of April 28, 1997.
(8) Represents 13,937 shares of Common Stock subject to options
exercisable within 60 days of April 28, 1997.
(9) Includes 50,737 shares of Common Stock subject to options exercisable
within 60 days of April 28, 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 "Item 13 - Certain Relationships and
Related Transactions."
(10) Includes 50,737 shares of Common Stock subject to options exercisable
within 60 days of April 28, 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 "Item 13 - Certain Relationships and
Related Transactions."
(11) Represents 10,000 shares of Common Stock subject to options
exercisable within 60 days of April 28, 1997.
(12) Represents 19,000 shares of Common Stock subject to options
exercisable within 60 days of April 28, 1997.
(13) Includes (i) 474,780 shares of Common Stock subject to options
exercisable within 60 days of April 28, 1997 and (ii) 283,938 shares
of Common Stock issuable upon conversion of $4,000,000 aggregate
principal of convertible notes.
11
<PAGE> 12
ITEM 13. 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 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 March 1996, the Company entered into a consulting agreement with
Karl D. Guelich, which was terminated in April 1996. In May 1996, the Company
entered into consulting agreements with Marvin Moses and John Zrno and an
employment agreement with Mr. Oberlin. See "Item 11 - Director Compensation"
and "Item 11 - Employment Agreement."
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<PAGE> 13
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 June 30, 1996,
no commissions have yet 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.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MIDCOM COMMUNICATIONS INC.
Dated: April 28, 1997 By: /s/ ROBERT J. CHAMBERLAIN
--------------------------
Robert J. Chamberlain,
Chief Financial Officer
14
