<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1997
REGISTRATION NO. 333-25495
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MIDCOM COMMUNICATIONS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
WASHINGTON 91-1438806
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
1111 THIRD AVENUE
SEATTLE, WA 98101
(206) 628-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEVEN P. GOLDMAN
GENERAL COUNSEL
MIDCOM COMMUNICATIONS INC.
1111 THIRD AVENUE
SEATTLE, WA 98101
(206) 628-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
THOMAS S. HODGE
MICHAEL A. SKINNER
HELLER EHRMAN WHITE & MCAULIFFE
6100 COLUMBIA CENTER, 701 FIFTH AVENUE
SEATTLE, WASHINGTON 98104
(206) 447-0900
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the only securities being offered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, AS AMENDED, THE
PROSPECTUS INCLUDED AS A PART OF THIS REGISTRATION STATEMENT ALSO RELATES TO
SECURITIES OF THE REGISTRANT COVERED BY AN EARLIER REGISTRATION STATEMENT ON
FORM S-1, FILE NO. 333-16681, DECLARED EFFECTIVE BY THE COMMISSION ON APRIL 8,
1997, AND THIS REGISTRATION STATEMENT IS DEEMED TO CONSTITUTE POST-EFFECTIVE
AMENDMENT NO. 1 TO THE EARLIER REGISTRATION STATEMENT.
THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED.
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PROSPECTUS
1,651,826 SHARES
MIDCOM COMMUNICATIONS INC.
COMMON STOCK
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
This Prospectus relates to the public offer and sale of up to 1,651,826
shares (the "Securities") of common stock, par value $.0001 per share (the
"Common Stock"), of MIDCOM Communications Inc. ("Midcom" or the "Company") which
were privately offered by the Company in a series of unrelated transactions and
which may be offered from time to time for the account of the holders thereof
named herein (the "Selling Securityholders"). See "Selling Securityholders" and
"Plan of Distribution." Information concerning the Selling Securityholders may
change from time to time, which changes will be set forth in an accompanying
Prospectus Supplement.
The Common Stock is traded on the Nasdaq National Market ("Nasdaq") under
the symbol "MCCI." The closing sale price of the Common Stock reported on Nasdaq
on April 28, 1997 was $7.00 per share.
The Company has been advised by the Selling Securityholders that the
Selling Securityholders, acting as principals for their own account, directly or
through agents, dealers or underwriters to be designated from time to time, may
sell the Securities from time to time on terms to be determined at the time of
sale through customary brokerage channels, negotiated transactions or a
combination of these methods at fixed prices that may be changed, at market
prices then prevailing or at negotiated prices then obtainable. To the extent
required, the number of Securities to be sold, the names of the Selling
Securityholders, the purchase price, the public offering price, the name of any
agent, dealer or underwriter, the amount of any offering expenses, any
applicable commissions or discounts and any other material information with
respect to a particular offer will be set forth in an accompanying Prospectus
Supplement or, if appropriate, a post-effective amendment to the Registration
Statement of which this Prospectus is a part. Each of the Selling
Securityholders reserves the right to accept and, together with its agents from
time to time, to reject in whole or in part any proposed purchase of the
Securities to be made directly or through agents. The aggregate proceeds to the
Selling Securityholders from the sale of the Securities offered by the Selling
Securityholders hereby will be the purchase price of such Securities less any
discounts or commissions. The Company will receive no portion of the proceeds
from the sale of the Securities offered hereby and will bear certain expenses
incident to their registration. See "Plan of Distribution."
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus, and if given or
made, such information or representation must not be relied upon as having been
authorized by the Company. This Prospectus shall not constitute an offer to sell
or a solicitation of an offer to buy, nor shall there be any sale of, any of the
Securities to any person in any jurisdiction in which such an offer,
solicitation or sale would be unlawful. Neither the delivery of this Prospectus
nor any sale made hereunder shall under any circumstances create any implication
that the information contained herein is correct as of any time subsequent to
the date hereof.
------------------------
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy materials and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
materials and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Common Stock is
quoted on the Nasdaq National Market. Such reports, proxy materials and other
information may also be inspected at the National Association of Securities
Dealers, Inc., at 1735 K Street, N.W. Washington, D.C. 20006. In addition, the
Commission maintains a World Wide Web site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits thereto, certain parts of which have been omitted in
accordance with the rules and regulations of the Commission. Statements
contained in this Prospectus as to the contents of any contracts or other
documents referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit or incorporated by reference into the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Securities offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. Copies of the Registration Statement and the exhibits and schedules
thereto may be inspected, without charge, at the offices of the Commission or
obtained upon payment of prescribed rates from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus (a) the
Company's Annual Report on Form 10-K for the year ended December 31, 1996; and
(b) the description of the Company's Common Stock set forth in that certain
Registration Statement on Form 8-A, dated May 22, 1995, all of which have been
filed with the Commission pursuant to the Exchange Act.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Securities hereby
shall be deemed to be incorporated by reference into this Prospectus and to be a
part hereof from the date of filing such reports and documents. Any statement
included or incorporated herein shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, on the written or oral request of such
person, a copy of the other documents incorporated herein by reference, other
than exhibits to such documents unless they are specifically incorporated by
reference into such documents. Requests for such copies should be directed to
the Company's General Counsel at1111 Third Avenue, Suite 1600, Seattle,
Washington 98101, telephone (206) 628-8000.
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<PAGE> 4
THE COMPANY
MIDCOM Communications Inc. provides long distance voice and data
telecommunications services. As primarily a nonfacilities-based reseller, Midcom
principally utilizes the network switching and transport facilities of Tier I
long distance carriers, such as Sprint Corporation ("Sprint"), WorldCom, Inc.
("WorldCom") and AT&T Corp. ("AT&T"), to provide a broad array of integrated
long distance telecommunications services on a seamless and highly reliable
basis. Midcom's service offerings include basic "1 plus" and "800" long distance
service, frame relay data transmission service, wireless service, dedicated
private lines between customer locations and enhanced telecommunications
services such as facsimile broadcast services and conference calling.
Midcom focuses on serving small to medium-sized businesses. The Company
believes that the larger long distance carriers, such as AT&T, Sprint, WorldCom
and MCI Communications Corporation ("MCI"), tend to focus their sales and
customer support efforts on residential and large commercial customers and do
not routinely provide significant pricing discounts for small to medium-sized
businesses. By purchasing large usage volumes from the facilities-based carriers
at wholesale prices, Midcom seeks to offer its customers more favorable pricing
than they could obtain from such carriers directly. In addition, the Company
believes that businesses in this market segment do not typically have in-house
telecommunications expertise and therefore require more assistance with the
assessment and management of their telecommunications requirements. As a result,
the Company believes that it is able to differentiate its service offerings from
the larger carriers in this market segment on the basis of price, breadth of
service offerings, customer service and support and the ability to provide
customized solutions to the telecommunications requirements of its customers.
Midcom believes that the Telecommunications Act of 1996 (the
"Telecommunications Act") will substantially expand its market opportunities.
The Telecommunications Act removes substantial legal barriers to competitive
entry into the local telecommunications market and directs incumbent local
exchange carriers to allow competing telecommunications service providers such
as the Company to interconnect their facilities with the local exchange
networks, to lease network components on an unbundled basis and to resell local
telecommunications services. According to Federal Communications Commission
("FCC") and other industry estimates, in 1995 long distance providers reported
revenue of $72.4 billion while local telecommunications providers reported
revenue of $102.9 billion.
Midcom was incorporated in the State of Washington in 1989. Its executive
offices are located at 1111 Third Avenue, Seattle, Washington 98101, and its
telephone number is (206) 628-8000.
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FORWARD-LOOKING STATEMENTS AND
THE PRIVATE SECURITIES LITIGATION REFORM ACT
Statements included or incorporated by reference herein concerning
expectations for the future constitute forward-looking statements which are
subject to a number of known and unknown risks, uncertainties and other factors
which might cause actual results to differ materially from those expressed or
implied by such forward-looking statements. Forward-looking statements included
or incorporated by reference herein include, but are not limited to, those
concerning anticipated growth in sales, services-per-customer ratio and
profitability; deployment of a network of high capacity local and long distance
switching facilities; introduction of local and other additional
telecommunications services; geographic expansion; increases in sales, customer
service and other personnel; improvements in customer service; sales through new
sales channels; adequacy of available sources of working capital to implement
strategies; negotiation of more favorable carrier supply contacts; and
expectations for growth in the telecommunications industry. Relevant risks and
uncertainties include, but are not limited to, unanticipated actions by
competitors, regulatory or other obstacles which restrict the Company's ability
to implement local or other services, greater than expected costs to open new
offices, install switching equipment or execute other aspects of the Company's
growth strategy, greater than expected customer attrition, inability to hire and
retain key personnel, unfavorable determinations of pending lawsuits or other
disputes, inability to obtain more favorable pricing and other terms from
suppliers, inability to secure additional sources of working capital if and when
needed, inability to manage growth or integrate acquired operations and
regulatory changes. Additional risks and uncertainties include those described
in "Risk Factors" below and those described from time to time in the Company's
other filings with the Commission, press releases and other communications.
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RISK FACTORS
Prospective investors are strongly cautioned that an investment in the
Securities offered hereby involves a very high degree of risk. The Company's
ability to halt the deterioration of its results of operations and financial
condition and successfully implement its operating strategy is subject to an
unusual number of material risks and uncertainties. Prospective investors should
not dismiss as "boilerplate" or "customary" disclosure the risk factors set
forth below. The contingencies and other risks discussed below could affect the
Company in ways not presently anticipated by its management and thereby impair
its ability to continue as a going concern and materially affect the value of
its debt and equity securities, including the Securities offered hereby. A
careful review and understanding of each of the risk factors set forth below, as
well as the other information contained in this Prospectus, is essential for an
investor seeking to make an informed investment decision with respect to the
Securities. The risk factors set forth below should be read in conjunction with
the more detailed discussion of the Company's business which appears in the
Company's reports filed with the Commission.
ABILITY TO CONTINUE AS A GOING CONCERN;
NEED FOR ADDITIONAL WORKING CAPITAL
As a result of Midcom's rapid growth, substantial operating losses, billing
and collection cycle, acquisition strategy and other factors, the Company has
required substantial external working capital. In addition to funds required for
day to day operations, the Company's principal working capital requirements
include capital expenditures (including those associated with the proposed
installation of new switching facilities), interest and principal payable under
the Company's 8 1/4% Convertible Subordinated Notes due 2003 ("the Notes") and
other contingencies and obligations. The Notes will mature on August 15, 2003.
Interest on the Notes is due semi-annually on February 15 and August 15 of each
year, in the aggregate amount of approximately $4.0 million for each payment.
The report of the Company's independent auditors with respect to the Company's
1996 Consolidated Financial Statements set forth in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 states that the Company's
recurring operating losses and shareholders' deficit raise substantial doubt
about the Company's ability to continue as a going concern. Similar going
concern disclosure is contained in the auditor's report with respect to the
Company's 1995 Consolidated Financial Statements. The Company's 1996
Consolidated Financial Statements were prepared assuming the Company will
continue as a going concern and do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets and
liabilities that may result from this uncertainty.
The Company's available sources of working capital at April 28, 1997
consisted of cash flow from operations and approximately $9.0 million in cash
and short-term, investment grade, interest-bearing securities, which represented
the remaining net proceeds from the sale of the Notes (the "Private Placement").
Prior to completion of the Private Placement in August 1996, the Company had for
several months experienced a severe working capital short-fall which required
the Company to seek extended payment terms from certain of its suppliers, delay
payments to many of its suppliers and other vendors, delay or cancel purchases
and take other steps to conserve operating capital. Also, for several months
prior to the completion of the Private Placement, the Company was in default of
certain financial and other covenants under the Company's then-existing
revolving credit facility (the "Transamerica Credit Facility"), although the
lenders continued to permit borrowings under that facility. The existence of
defaults under the Transamerica Credit Facility also constituted defaults under
certain of the Company's capital leases. For these reasons, the auditor's report
with respect to the Company's 1995 Consolidated Financial Statements included
the going concern disclosure referred to above. In connection with the
completion of the Private Placement and the application of the net proceeds
therefrom to the repayment in full of all borrowings under the Transamerica
Credit Facility, the lenders waived all then-existing defaults and amended the
financial covenants under the facility to levels forecasted to be consistent
with Midcom's revised business plan. However, the decline in revenue and related
gross profit in the last two quarters of 1996, due in significant part to the
unanticipated loss of revenue from a customer base which is the subject of a
dispute, caused the Company again to be in default of certain financial
covenants under the Transamerica Credit Facility. Due to the existence of these
defaults and an insufficient borrowing base to satisfy a $20.0 million minimum
excess
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availability requirement, no borrowings were available to the Company under the
Transamerica Credit Facility and the lenders terminated the facility in January
1997.
In February 1997, the Company entered into a new revolving credit agreement
with Foothill Capital Corporation (the "Foothill Credit Facility") which will
permit borrowings of up to $30.0 million (subject to borrowing base limitations)
secured by substantially all of the assets of the Company. Borrowings under the
Foothill Credit Facility will not be available until satisfaction of a number of
conditions, consisting primarily of final documentation of security
arrangements, which is expected to occur by the end of May 1997. In addition, in
February 1997 the Company entered into a lease facility under which
approximately $13.0 million is available for acquisition of capital equipment,
which the Company expects to use primarily to finance the purchase of high
capacity switching equipment.
As of April 28, 1997, the Company estimated that it will require between
$40.0 million and $50.0 million in order to fund operating losses, working
capital requirements and capital expenditures during the remainder of 1997. The
Company believes that it will be able to satisfy the conditions to borrowing
under the Foothill Credit Facility by the end of May 1997. Assuming borrowings
become and remain available under the Foothill Credit Facility and the Company
achieves anticipated revenue growth, the Company believes that the remaining
proceeds from the Private Placement together with funds available under the
Foothill Credit Facility, leasing facilities and cash flow from operations will
be sufficient to fund the Company's expected working capital requirements.
However, the exact amount and timing of these working capital requirements and
the Company's ability to continue as a going concern will be determined by
numerous factors, including the level of, and gross margin on, future sales, the
outcome of outstanding contingencies and disputes such as pending lawsuits,
payment terms achieved by the Company and the timing of capital expenditures.
Furthermore, there can be no assurance that borrowings under the Foothill Credit
Facility will become and remain available or that this facility together with
the Company's other anticipated sources of working capital will be sufficient to
implement the Company's operating strategy or meet the Company's other working
capital requirements. If (i) the Company experiences greater than anticipated
capital requirements, (ii) the Company is determined to be liable for, or
otherwise agrees to settle or compromise, any material claim against it, (iii)
the Company is unable to make borrowings under any of its credit facilities for
any reason, (iv) the implementation of the Company's operating strategy fails to
produce the anticipated revenue growth and cash flows or (v) additional working
capital is required for any other reason, the Company will be required to
refinance all or a portion of its existing debt or obtain additional equity or
debt financing. There can be no assurance that any such refinancing would be
possible or that the Company would be able to obtain additional equity or debt
financing, if and when needed, on terms that the Company finds acceptable. Any
additional equity or debt financing may involve substantial dilution to the
interests of the Company's shareholders and the holders of the Notes. If the
Company is unable to obtain sufficient funds to satisfy its cash requirements,
it will be forced to curtail operations, dispose of assets or seek extended
payment terms from its vendors. There can be no assurance that the Company would
be able to reduce expenses or successfully complete other steps necessary to
continue as a going concern. Such events would materially and adversely affect
the value of the Company's debt and equity securities.
RECENT LOSSES AND ANTICIPATED FUTURE LOSSES
The Company has experienced significant losses since its inception. Net
losses for 1994, 1995 and 1996 were approximately $3.0 million, $33.4 million
and $97.3 million, respectively. The execution of the Company's restructuring,
network and marketing strategy will require the Company to substantially
increase its investment in sales, marketing, capital equipment, systems
development and other areas. The Company expects that a substantial portion of
these expenditures will be made before the Company realizes a significant
increase in revenue or an improvement in gross margin. The Company therefore
expects that, during at least the first three quarters of 1997, operating costs
will increase both in actual dollars and as a percentage of revenue and net
losses will continue.
SUBSTANTIAL LEVERAGE
The Company is highly leveraged. As of December 31, 1996, the Company's
total indebtedness and shareholders' deficit was $112.1 million and $69.3
million, respectively. The Company's ability to make
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scheduled payments of the principal of, or interest on, its indebtedness will
depend on its future performance, which is subject to economic, financial,
competitive and other factors beyond its control.
MATERIAL WEAKNESSES IN INTERNAL FINANCIAL CONTROLS
In connection with the audit of Midcom's 1995 Consolidated Financial
Statements, Midcom's independent auditors identified two conditions which were
characterized as material weaknesses in its internal financial controls. One
material weakness identified by the auditors was the failure of the accounting
and finance systems to provide accurate information necessary to monitor the
Company's financial position, results of operations and liquidity, as
demonstrated by the restatement of the Company's third quarter results and the
difficulties in completing the 1995 year-end audit which resulted in numerous
material adjustments to preliminary fourth quarter results (see "-- Restatement
of Financial Results"). Factors identified as contributing to this weakness and
requiring immediate attention included insufficient staffing and systems to
accommodate significant growth from acquisitions, transitional difficulties
associated with major new information and billing systems, inadequate
communication between senior management and the finance department and demands
associated with the Company's initial public offering. The second material
weakness identified by the auditors was the Company's process of estimating
unbilled receivables. With respect to this material weakness, the auditors
recommended that the Company review and revise, as necessary, all policies and
procedures with regard to its reconciliation of unbilled receivables with actual
billings to ensure that all unbilled amounts at a reporting date represent
properly recorded revenue. As a result of operational and other changes
implemented by the Company, on March 13, 1997 the Company's independent auditors
reported to the Company's Audit Committee that the material weaknesses
identified in connection with the 1995 audit have been corrected. However, in
light of the volume of financial data to be processed, the reliance upon timely
receipt of call data records from suppliers, the anticipated rate of growth of
the Company, the demands on key financial personnel, the potential for turnover
in key finance and accounting positions, the challenges associated with the
integration of acquired businesses and other factors, there can be no assurance
that the Company will not encounter other internal control weaknesses.
RESTATEMENT OF FINANCIAL RESULTS
It is the Company's practice, which is common in the long distance
industry, to include in reported revenue and accounts receivable an amount for
unbilled calls equal to an estimate of the amount that will be billed and
collected for calls occurring in that reporting period. During 1995, the Company
converted its customer billing function for those calls for which it provides
direct billing to a new billing system. The Company experienced difficulties in
implementing the new billing system which caused an increased number of calls to
be billed later than expected by the Company. Also, in the process of
reconciling unbilled accounts as of December 31, 1995 with amounts ultimately
billed, the Company discovered that certain reports generated by its new
information management system that were used for recognizing unbilled revenue
for the third quarter of 1995 failed to fully reflect all discounts that were
properly included in the bills subsequently sent to the Company's customers.
Primarily as a result of this failure, reported revenue was overstated for the
third quarter of 1995 and the Company's Quarterly Report on Form 10-Q for that
period had to be amended to restate reported results. In addition, the Company
had previously been required to restate its financial statements for the year
ended December 31, 1994 after determining that revenue and accounts receivable
had been overstated by approximately $1.8 million net of reserves as a result of
using historical averages of unbilled calls as the basis for its revenue
estimates, a practice that the Company discontinued in the first quarter of
1995. In light of the volume of financial data to be processed, the reliance
upon timely receipt of call data records from suppliers, the anticipated rate of
growth of the Company, the demands on key financial personnel, the potential for
turnover in key finance and accounting positions, the challenges associated with
the integration of acquired businesses and other factors, there can be no
assurance that the Company will not encounter additional billing delays or other
difficulties in future financial reporting.
DISPUTES AND LITIGATION
The Company, its Vice Chairman of the Board of Directors and largest
shareholder, the Company's former President, Chief Executive Officer and a
director, and the Company's former Chief Financial Officer
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are named as defendants in a securities action filed in the U.S. District Court
for the Western District of Washington (the "Complaint"). The Complaint was
filed on behalf of a class of purchasers of the Company's Common Stock during
the period beginning on July 6, 1995, the date of the Company's initial public
offering, and ending on March 4, 1996 (the "Class Period"). An amended complaint
(the "Amended Complaint") was filed on July 8, 1996. In November 1996, the Court
granted defendants' motion to dismiss plaintiff's Amended Complaint without
prejudice and plaintiffs refiled a second amended complaint (the "Second Amended
Complaint") on December 19, 1996 with limited changes or amendments. The Second
Amended Complaint alleges, among other things, that the registration statement
and prospectus relating to the Company's initial public offering contained false
and misleading statements concerning the Company's billing software and
financial condition. The Second Amended Complaint further alleges that,
throughout the Class Period, the defendants inflated the price of the Common
Stock by intentionally or recklessly making material misrepresentations or
omissions which deceived the public about the Company's financial condition and
prospects. The Second Amended Complaint alleges claims under the Securities Act
and the Exchange Act as well as various state laws, and seeks damages in an
unstated amount. In January 1997, the defendants filed a motion to dismiss the
Second Amended Complaint claiming a failure by plaintiffs to plead with
particularity and a failure to plead facts establishing scienter, both as
required under the Exchange Act, and the failure to establish tracing to the
prospectus relating to the Company's initial public offering, as required under
the Securities Act. In April 1997, the Company's Board of Directors approved the
terms of a proposed settlement of this lawsuit, pursuant to which the Company's
insurer will provide a $1.0 million payment and the Company will issue
approximately 420,000 shares of Common Stock, subject to possible adjustments.
The settlement is subject to court approval, which is expected to occur in the
second half of 1997.
The Company was informed in May 1996 that the Commission was conducting an
informal inquiry regarding the Company. The Company has voluntarily provided the
documents requested by the Commission. In addition, the Commission has requested
the Company's cooperation in interviewing certain current and former Company
personnel and the Company is in the process of scheduling such interviews.
However, the Company has not been informed whether the Commission intends to
commence formal action against the Company or any of its affiliates. The Company
is, therefore, unable to predict the ultimate outcome of the investigation. In
the event that the Commission elects to initiate a formal enforcement
proceeding, the Company and certain of its current and/or former officers could
be subject to civil or criminal sanctions including monetary penalties and
injunctive measures. Any such enforcement proceeding could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, by virtue of its rapid growth, past acquisition activities and
large volume of business with suppliers, the Company is involved in litigation
or disputes with sellers of acquired operations, suppliers and other third
parties.
Although the Company intends to defend all litigation or other disputes
vigorously, it is unable to predict the nature or timing of any resolution of
such matters. If the Company is determined to be liable for, or otherwise agrees
to settle or compromise, any claim, it would most likely be required to make a
payment in the form of cash, indebtedness or equity securities. Depending on the
size, type and timing of any such payment, it could materially impair the
Company's limited capital resources or significantly dilute the Company's
existing shareholders. See "-- Ability to Continue as a Going Concern; Need for
Additional Working Capital." In addition, litigation, investigations and
disputes could result in substantial legal costs to the Company and divert
management's attention from the other business affairs of the Company for
substantial periods of time.
MINIMUM VOLUME COMMITMENTS AND SHORTFALLS
Midcom purchases from facilities-based carriers the long distance
telecommunications services that it provides to its customers. The Company has
entered into multiple-year supply contracts with Sprint, WorldCom and AT&T and
from time to time acquires access to telecommunications services on a short-term
basis from a number of other suppliers. To obtain favorable forward pricing from
certain of its suppliers, the Company has committed to purchase minimum volumes
of a variety of long distance services during stated periods whether or not such
volumes are used. In the past, Midcom has fallen short of its minimum volume
8
<PAGE> 10
commitments with certain carriers and has renegotiated the commitment. There can
be no assurance that the Company will not incur additional shortfalls in the
future or that it will be able to successfully renegotiate, or otherwise obtain
relief from, its minimum volume commitments in the future. If future shortfalls
occur, the Company may be required to make substantial payments without
associated revenue from customers or the supplier may terminate service and
commence formal action against the Company. Such payments are not presently
contemplated in the Company's capital budgets and would have a material adverse
effect on the Company's business, financial condition and results of operation.
Because of Midcom's commitments to purchase fixed volumes of use from
certain of its suppliers at predetermined rates, the Company could be adversely
affected if a supplier were to lower the rates it makes available to the
Company's target market without a corresponding reduction in the Company's
rates. Similarly, the Company could be adversely affected if its suppliers fail
to adjust their overall pricing, including prices to the Company, in response to
price reductions of other major carriers.
ABILITY TO IMPLEMENT NETWORK STRATEGY AND ENTER LOCAL MARKETS
A key element of the Company's operating strategy is the deployment of
dedicated switching facilities and the transition from primarily a
nonfacilities-based reseller of long distance and other telecommunications
services to a switch-based provider of integrated telecommunications services.
The Company's ability to implement its network strategy may be impaired by
technical, operational or other difficulties encountered in the installation or
operation of the Company's sophisticated high capacity switching equipment. In
addition, the Company's ability to enter into the local telecommunications
market may be impaired by certain logistical challenges. Prior to selling local
services to its customers, the Company must complete a number of operational,
marketing and regulatory tasks, including the negotiation of interconnection
agreements with local circuit providers, the development of a billing,
provisioning and customer service capability and the creation of a local
marketing, pricing and sales strategy.
ABILITY TO MANAGE GROWTH
The Company intends to pursue substantial growth in connection with the
implementation of its operating strategy. This growth will place significant
demands on the Company's management and systems of financial and internal
controls and will require an increase in the capacity, efficiency and accuracy
of its billing and customer support systems. Moreover, this growth will require
an increase in the number of the Company's personnel, particularly sales,
customer service and technical personnel. The market for such personnel is
highly competitive and there can be no assurance that the Company will be able
to attract the personnel required by its operating strategy. Further, the
Company will be required to expand, train, motivate and manage its employee
base. This will require an increase in the level of responsibility for both
existing and new management personnel. There can be no assurance that the
management skills and systems currently in place, or to be implemented in
connection with the Company's operating strategy, will be adequate or that the
Company will be able to assimilate its new employees successfully. Finally, the
Company has experienced a high level of turnover in its sales force. The Company
believes that this turnover is primarily attributable to the intense competition
for, and the mobility of, qualified sales personnel endemic to the reseller
segment of the telecommunications industry. Although one objective of the
Company's operating strategy is to decrease the level of turnover in its sales
force, there can be no assurance that this objective will be achieved. The
Company's failure to attract and retain sufficient qualified personnel, to
train, motivate and manage such personnel or to otherwise manage its growth
could impair its ability to implement its operating strategy and could have a
material adverse effect on its business, financial condition and results of
operations.
DEPENDENCE UPON MANAGEMENT TEAM
Midcom's ability to implement its operating strategy is highly dependent
upon its ability to retain its senior management team. These individuals are
generally in high demand and are often subject to competing employment
opportunities. Midcom believes that it will need to retain key management
personnel to meet the demands of its business. The loss of William H. Oberlin,
the Company's President and Chief Executive Officer and one of the Company's
directors, or the other key members of the management team could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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<PAGE> 11
CUSTOMER ATTRITION
Midcom's revenue is affected by customer attrition, a problem inherent in
the long distance industry. The customer attrition experienced by the Company is
attributable to a variety of factors, including the Company's termination of
customers for non-payment and the marketing and sales initiatives of the
Company's competitors such as, among other things, national advertising
campaigns, telemarketing programs and the use of cash or other incentives. In
particular, the Company commonly experiences high initial customer attrition
from acquired customer bases as these customers are transitioned to the
Company's services and systems. Although one of the objectives of the Company's
operating strategy is to reduce customer attrition, there can be no assurance
that this attrition will not remain at current levels or increase. Failure to
reduce customer attrition could have a material adverse effect on the Company's
business, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE
The telecommunications industry is characterized by rapidly evolving
technology. Midcom believes that its success will increasingly depend on its
ability to offer, on a timely basis, new services based on evolving technologies
and industry standards. Midcom intends to increase its efforts to develop new
services; however, there can be no assurance that the Company will have the
ability or resources to develop such new services, that new technologies
required for such services will be available to the Company on favorable terms
or that such services and technologies will enjoy market acceptance. Further,
there can be no assurance that the Company's competitors will not develop
products or services that are technologically superior to those used by the
Company or that achieve greater market acceptance. The development of any such
superior technology by the Company's competitors, or the inability of the
Company to successfully respond to such a development, could render Midcom's
existing products or services obsolete and could have a material adverse effect
on the Company's business, financial condition and results of operations.
ABILITY TO INTEGRATE ACQUIRED OPERATIONS
Midcom experienced rapid growth through the end of 1995. A significant
portion of this growth, particularly in 1995, was attributable to acquisitions
of customer bases and of other telecommunications service providers. For a
number of reasons, the Company was not able to consolidate and integrate the
sales and marketing, customer support, billing systems and other functions of
certain of these acquired operations as quickly as anticipated. The Company may
experience difficulties in the integration and consolidation of customer bases
or operations acquired in the future. Pending such integration and
consolidation, it may be necessary for the Company to maintain separate billing
systems and other functions of the acquired operation, which could cause
inefficiencies, add to operational complexity and expense, increase the risk of
billing delays and financial reporting difficulties, increase customer attrition
and impair the Company's efforts to cross-sell the products and services of the
acquired operation. If the Company acquires customer bases or other operations
in the future, difficulties encountered in integrating and consolidating such
operations could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE UPON INTEGRITY OF CALL DATA RECORDS
Midcom depends on the timeliness and accuracy of call data records provided
to it by facilities-based carriers supplying telecommunications services, and
there can be no assurance that accurate information will consistently be
provided by the carriers on a timely basis. Failure of the Company to receive
prompt and accurate call data records from its suppliers will impair the
Company's ability to bill its customers on a timely basis. Such billing delays
could impair the Company's ability to collect amounts owed by its customers. Due
to the multitude of billing rates and discounts which suppliers must apply to
the calls completed by the Company's customers, and due to routine logistical
issues such as the addition or termination of customers, the Company regularly
has disagreements with its suppliers concerning the amounts invoiced for its
customers' traffic. The Company pays its suppliers according to its own
calculation of the amounts owed as recorded on the computer tapes provided by
its suppliers. The Company's computations of amounts owed are frequently less
than the amount shown on the suppliers' invoices. Accordingly, the suppliers may
consider the
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<PAGE> 12
Company to be in arrears in its payments until the amount in dispute is
resolved. Although these disputes have generally been resolved on terms
favorable to the Company, there can be no assurance that this will continue to
be the case. Future disputes which are not resolved favorably to the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE UPON FACILITIES-BASED CARRIERS
Midcom does not currently own a transmission network and, accordingly,
depends to a large extent on Sprint, WorldCom, AT&T and other facilities-based
carriers for actual transmission of customer calls and other services. Further,
the Company, like all other long distance providers, is dependent upon local
exchange carriers for call origination (carrying the call from the customer's
location to the long distance network of the interexchange carrier selected to
carry the call) and termination (carrying the call off the interexchange
carrier's network to the call's destination). The Company's ability to maintain
and expand its business depends, in part, on its ability to obtain
telecommunication services on favorable terms from facilities-based carriers and
the cooperation of both interexchange and local exchange carriers in initiating
and terminating service for its customers in a timely manner. FCC policy
currently requires all common carriers, including interexchange carriers, to
make their services available for resale and to refrain from imposing
unreasonable restrictions on such resale. Further, the Telecommunications Act
requires all incumbent local exchange carriers both to offer their services for
resale at wholesale rates and to allow access to unbundled network elements at
cost-based rates. The incumbent local exchange carriers are also required by the
Telecommunications Act to provide all interexchange carriers, including the
Company, with equal access for the origination and termination of long distance
calls. If any of these requirements were eliminated, the adverse impact on the
Company could be substantial. Access charges represent a substantial portion of
the Company's current cost of service. The FCC, however, has undertaken to
reform its universal service and access charge rules by May 1997, in order to
rework the current universal service subsidy system and to move access charges
toward the economic cost of originating and terminating long distance traffic.
The level at which the FCC sets access charges and universal service
contributions could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, implementation of a new
access charge structure and repricing of local transport could place many
interexchange carriers, including the Company, at a significant cost
disadvantage relative to larger competitors. The FCC has also imposed on
facilities-based interexchange carriers the obligation to track the
payphone-originated tollfree and access code calls which they carry and to
compensate payphone service providers for such calls, initially on a per-phone,
and, commencing in October 1997, on a per-call basis, in amounts reflective of
soon to be deregulated local coin rates.
TERMINATION OF SERVICE UNDER CARRIER SUPPLY CONTRACTS
In the past, the Company has, from time to time, been substantially in
arrears of its payment obligations to AT&T and other suppliers. Although the
Company is generally entitled to be given notice of defaults and an opportunity
to cure under the terms of its agreements with its interexchange suppliers
before such service can be terminated, and although the Company has the ability
to transfer its customers' traffic from one supplier to another, provisioning a
customer that is not serviced by a Midcom switch to an alternate supplier takes
several days. Accordingly, if a major supplier were to decline to continue to
carry the Company's traffic, due to non-payment or otherwise, without sufficient
notice for the Company to make alternate arrangements, there is a possibility
that the customers serviced by that supplier would be temporarily without "1
plus" long distance calling which could have a material adverse effect on the
Company's business, financial condition and results of operation.
COMPETITION
The long distance telecommunications industry is highly competitive. A
number of the Company's current and potential competitors have substantially
greater financial, technical, marketing and other resources than the Company,
and there can be no assurance that the Company will be competitive in this
environment. The Company's ability to compete may also be impaired by its
leveraged capital structure and limited capital resources.
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<PAGE> 13
The long distance telecommunications industry is significantly influenced
by the marketing and pricing activities of the major industry participants,
including AT&T, MCI, Sprint and WorldCom. While the Company believes that AT&T,
MCI and Sprint historically have chosen not to concentrate their direct sales
efforts on small to medium-sized businesses, these carriers control
approximately 85% of that market. Moreover, AT&T, MCI and Sprint have recently
introduced new service and pricing options that are attractive to smaller
commercial users, and there can be no assurance that they will not market to
these customers more aggressively in the future. AT&T and, as an interim
measure, the structurally separate interexchange affiliates of the seven
regional Bell operating companies have recently been reclassified as non-
dominant carriers and, accordingly, have the same flexibility as the Company in
meeting competition by modifying rates and service offerings without pricing
constraints or extended waiting periods. These reclassifications may make it
more difficult for the Company to compete for long distance customers. In
addition, a significant number of large regional long distance carriers and new
entrants in the industry compete directly with the Company by concentrating
their marketing and direct sales efforts on small to medium-sized commercial
users. Activities by competitors including, among other things, national
advertising campaigns, telemarketing programs and the use of cash or other forms
of incentives, contribute to significant customer attrition in the long distance
industry.
The Company contracts for call transmission over networks operated by
suppliers who may also be the Company's competitors. Both the interexchange
carriers and local exchange carriers providing transmission services for the
Company have access to information concerning the Company's customers for which
they provide the actual call transmission. Because these carriers are potential
competitors of the Company, they could use information about the Company's
customers, such as their calling volume and patterns of use, to their advantage
in attempts to gain such customers' business. In addition, the Company's future
success will depend, in part, on its ability to continue to buy transmission
services and access from these carriers at a significant discount below the
rates these carriers otherwise make available to the Company's targeted
customers.
Regulatory trends have had, and may have in the future, a significant
impact on competition in the telecommunications industry. As the result of the
Telecommunications Act, the regional Bell operating companies are now permitted
to provide, and are providing or have announced their intention to provide, long
distance service originating (or in the case of "800" service, terminating)
outside their local service areas or offered in conjunction with other ancillary
services, including wireless services. Following application to and upon a
finding by the FCC that a regional Bell operating company faces facilities-based
competition and has satisfied a congressionally-mandated "competitive checklist"
of interconnection and access obligations, it will also be permitted to provide
long distance service within its local service area. The entry of these well-
capitalized and well-known entities into the long distance service market could
significantly alter the competitive environment in which the Company operates.
The Telecommunications Act also removes most legal barriers to competitive
entry into the local telecommunications market and directs incumbent local
exchange carriers to allow competing telecommunications service providers such
as the Company to interconnect their facilities with the local exchange network,
to lease network components on an unbundled basis and to resell local
telecommunications services. Moreover, the Telecommunications Act seeks to
facilitate the development of local telecommunications competition by requiring
incumbent local exchange carriers, among other things, to allow end users to
retain their telephone numbers when changing service providers and to place
short-haul toll calls without dialing lengthy access codes. In response to these
regulatory changes, AT&T, MCI and many of the Company's other long distance
competitors have announced plans to enter the local telecommunications market.
While the Telecommunications Act opens new markets to the Company, the
nature and value of the resultant business opportunities will be dependent in
large part upon subsequent regulatory interpretation of the statute's
requirements. While the FCC has promulgated rules implementing the local
competition provisions of the Telecommunications Act, these rules have been
appealed and key provisions have been "stayed" pending the outcome of the
appeals. Various state regulatory authorities are currently in the process of
implementing the remaining FCC rules. The Company anticipates that incumbent
local exchange carriers will actively resist competitive entry into the local
telecommunications market and will seek to undermine the
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<PAGE> 14
operations and the service offerings of competitive providers, leaving carriers
such as the Company which are dependent on incumbent local exchange carriers for
network services vulnerable to anti-competitive abuses. No assurance can be
given that the local competition provision of the Telecommunications Act will be
implemented and enforced by federal and state regulators in a manner which will
permit the Company to successfully compete in the local telecommunications
market or that subsequent legislative and/or judicial actions will not adversely
impact the Company's ability to do so. Moreover, federal and state regulators
are likely to provide incumbent local exchange carriers with increased pricing
flexibility for their services as competition in the local market increases. If
incumbent local exchange carriers are allowed by regulators to lower their rates
substantially, engage in aggressive volume and term discount pricing practices
for their customers, charge excessive fees for network interconnection or access
to unbundled network elements or decline to make services available for resale
at discounted wholesale rates, the ability of the Company to compete in the
provision of local service could be materially and adversely affected.
REGULATION
Federal and state regulations, regulatory actions and court decisions have
had, and may have in the future, negative effects on the Company and its ability
to compete. The Company is subject to regulation by the FCC and by various state
public service or public utility commissions as a non-dominant or resale
provider of long distance services. The Company is required to file tariffs
specifying the rates, terms and conditions of its international services with
the FCC and is required to file tariffs or obtain other approvals in most of the
states in which it operates. Neither the FCC nor the relevant state utility
commissions currently regulate the Company's profit levels, but they often
reserve the authority to do so. The large majority of states require long
distance service providers to apply for authority to provide telecommunications
services and to make filings regarding their activities. The multiplicity of
state regulations makes full compliance with all such regulations a challenge
for multistate providers such as the Company. There can be no assurance that
future regulatory, judicial and legislative changes or other activities will not
have a material adverse effect on the Company or that regulators or third
parties will not raise material issues with regard to the Company's compliance
with applicable laws and regulations.
Pursuant to the terms of the 1984 court decree which required AT&T to
divest its local exchange operations, the regional Bell operating companies were
prohibited from providing long distance telecommunications service between
certain defined geographic areas, known as Local Access Transport Areas or
"LATAs." However, the Telecommunications Act allows for immediate provision by
the regional Bell operating companies of long distance service outside their
respective local telephone service areas as well as long distance service
bundled with wireless, enhanced and certain other services. The
Telecommunications Act also provides a mechanism for eventual entry by the
regional Bell operating companies into the long distance market within their
respective local service areas. The competition faced by the Company will
increase significantly as the regional Bell operating companies expand their
provision of inter-LATA services.
As a result of a 1994 court decision, the Company became obligated to
provide detailed rate schedules in all of its federal tariffs, and the Company
could possibly be liable for damages for following an FCC policy which did not
require the Company to file such detailed schedules of its domestic charges in
the past. The FCC's policy, which would have implemented mandatory detariffing
by August 1997, has now been stayed pending determination of the issue by the
federal district court in Washington, D.C. Also, AT&T and, as an interim
measure, the structurally separate interexchange affiliates of the regional Bell
operating companies have recently been reclassified as non-dominant carriers
and, accordingly, have the same flexibility as the Company in meeting
competition by modifying rates and service offerings without pricing constraints
or extended waiting periods. The reclassifications may make it more difficult
for the Company to compete for long distance customers.
When the Company enters the local telecommunications market, it will be
subject to regulation by various state public service and public utility
commissions, often as a facilities-based provider. Virtually all states require
local exchange providers to be certified prior to initiating service and to
maintain on file with the state commissions detailed tariffs specifying rates,
as well as terms and conditions, of service. The Company will be subject to a
higher level of regulatory oversight as a local exchange provider than it has
been as a long
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<PAGE> 15
distance carrier. Among other things, the Company will be subject to a variety
of additional service quality and consumer protection requirements, as well as
requirements to provide emergency, handicapped and subsidized services. The
states also impose additional reporting and prior approval requirements on local
service providers. The multiplicity and volume of state regulations governing
the provision of local service make full compliance with all such regulations
even more of a challenge for multistate providers such as the Company than
compliance with state regulations governing the provision of long distance
service. As with the Company's provision of long distance service, there can be
no assurance that future regulatory, judicial and legislative changes or other
activities will not have a material adverse effect on the Company's provision of
local exchange service or that regulators or third parties will not raise
material issues with regard to the Company's compliance with laws and
regulations applicable to its provision of such service.
REPURCHASE OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
In the event of a Change of Control (as defined herein), each holder of
Notes has the right to require that the Company repurchase the Notes in whole or
in part at a redemption price equal to 101% of the principal amount thereof,
plus accrued interest, if any, to the date of repurchase. If a Change of Control
were to occur, there can be no assurance that the Company would have sufficient
funds to pay such redemption price for all Notes tendered by the holders
thereof. If the Company is required to pay such redemption price, such payment
could have a material adverse effect on the Company's liquidity, results of
operations and financial condition. Moreover, the Company's repurchase
obligation could have the effect of delaying, deferring or preventing a change
of control of the Company and could limit the price that certain investors might
be willing to pay in the future for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
As of April 28, 1997, there were 15,224,921 outstanding shares of Common
Stock. Of these shares, approximately 8,200,000 shares were "restricted
securities" subject to restrictions set forth in Rule 144 promulgated under the
Securities Act, substantially all of which may be sold under Rule 144.
As of April 28, 1997, the Company had reserved for issuance 4,090,309
shares of Common Stock under its stock option and purchase plans. Under the
Company's stock option plans, options to purchase 3,898,074 shares of Common
Stock were outstanding and options to purchase 371,202 shares of Common Stock
were exercisable. At April 28, 1997, warrants to purchase 176,500 shares of
Common Stock were outstanding. In addition, in the third quarter of 1996, the
Company completed a private placement of $97.7 million in aggregate principal
amount of 8 1/4% Convertible Subordinated Notes due 2003 (the "Notes"). The
Notes are convertible into shares of Common Stock at the option of the holder
thereof at any time prior to maturity, unless previously redeemed, at the
initial conversion price of $14.0875 per share, subject to adjustment in certain
events. If the Notes outstanding as of April 28, 1997 were fully converted, the
Company would be obligated to issue to the holders thereof an aggregate of
6,938,279 shares of Common Stock (not including an indeterminate number of
shares that may be issued in connection with certain anti-dilution and other
provisions). In addition, as of April 30, 1997 the Company had reached a
tentative agreement to settle pending litigation pursuant to which the Company
would issue approximately 420,000 shares of Common Stock, subject to possible
increase or decrease based on the trading price of the Common Stock for a period
preceding the effective date of the settlement.
The Company has voluntarily filed the Registration Statement of which this
Prospectus is a part to register under the Securities Act the public offer and
sale of the Securities. The Company intends to maintain the effectiveness of the
Registration Statement of which this Prospectus is a part until approximately
April 1998. In addition, the Company has filed a Registration Statement (file
no. 333-25503) to register the public offer and sale of the Notes and the shares
of Common Stock issuable upon conversion of the Notes (the "Conversion Shares").
The Registration Statement was declared effective by the Commission on April 8,
1997. The Company is required to maintain the effectiveness of the Registration
Statement for a period of three years from the completion of the private
placement of the Notes or, if shorter, when (i) all the Notes and Conversion
Shares have been sold pursuant to the Registration Statement or (ii) the date on
which there
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<PAGE> 16
ceases to be outstanding any Notes or Conversion Shares. See "Selling
Securityholders" and "Plan of Distribution."
Sales of substantial amounts of Common Stock in the public market under
Rule 144, pursuant to the exercise of registration rights or otherwise, and even
the potential for such sales, may have a material adverse effect on the
prevailing market price of the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
CONTROL BY PRINCIPAL SHAREHOLDERS
At April 28, 1997, Midcom's directors and executive officers beneficially
owned or had the power to vote approximately 43% of the Common Stock. Although
such shareholders will not have the ability to control matters requiring
shareholder approval, they may have the ability to influence the affairs and
management of the Company and the elections of directors. This may have the
effect of delaying, deferring or preventing a change in control of the Company
and could limit the price that certain investors might be willing to pay in the
future for the Common Stock.
ANTI-TAKEOVER CONSIDERATIONS
The Company is subject to the anti-takeover provisions of Chapter 23B.17 of
the Washington Business Corporation Act (the "WBCA") which prohibits, subject to
certain exceptions, a merger, sale of assets or liquidation of a corporation
involving a 20% shareholder unless determined to be at a fair price or approved
by disinterested directors or two-thirds of the disinterested shareholders. In
addition, Chapter 23B.19 of the WBCA prohibits a corporation registered under
the Exchange Act from engaging in certain significant transactions with a 10%
shareholder. Significant transactions include, among others, a merger with or
disposition of assets to the 10% shareholder. Further, the Company's Amended and
Restated Articles of Incorporation (the "Articles") require super-majority
shareholder approval of certain business combinations and provide for a
classified Board of Directors with staggered, three-year terms. Also, the
Company has the authority to issue up to 10 million shares of preferred stock in
one or more series and to fix the preferences and other rights thereof without
any further vote or action by the Company's shareholders. The issuance of
preferred stock, together with the effect of other anti-takeover provisions in
the Articles and under the WBCA, may have the effect of delaying, deferring or
preventing a change in control of the Company and could limit the price that
certain investors might be willing to pay in the future for the Common Stock.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been, and is likely to continue to
be, volatile. There can be no assurance that the market price of the Common
Stock will not fluctuate significantly from its current level. The market price
of the Common Stock could be subject to significant fluctuations in response to
a number of factors, such as actual or anticipated variations in the Company's
quarterly operating results, the introduction of new products by the Company or
its competitors, changes in other conditions or trends in the Company's
industry, changes in governmental regulations, changes in securities analysts'
estimates of the Company's, or its competitors' or industry's, future
performance or general market conditions. In addition, stock markets have
experienced extreme price and volume volatility in recent years, which has had a
substantial effect on the market prices of securities of many smaller public
companies for reasons frequently unrelated to the operating performance of such
companies. These broad market fluctuations may have a material adverse effect on
the market price of the Common Stock.
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LIMITATIONS ON DIVIDENDS
Since its incorporation in 1989, the Company has not declared or paid cash
dividends on its Common Stock, and the Company anticipates that any future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends. In addition,
the terms of the Foothill Credit Facility prohibit the payment of cash dividends
without the consent of the Company's lenders.
USE OF PROCEEDS
The Securities are offered by the Selling Securityholders and, accordingly,
the Company will not receive any of the proceeds from the sales thereof.
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<PAGE> 18
SELLING SECURITYHOLDERS
The following table sets forth the name of each Selling Securityholder, the
aggregate number of shares of Common Stock beneficially owned by each Selling
Securityholder as of the date hereof and the aggregate number of shares of
Common Stock that each Selling Securityholder may offer and sell pursuant to
this Prospectus. Because the Selling Securityholders may sell all or a portion
of the Securities at any time and from time to time after the date hereof, no
estimate can be made of the number of shares of Common Stock that each Selling
Securityholder may retain upon completion of the offering pursuant to this
Prospectus. Information concerning the Selling Securityholders may change from
time to time and, to the extent required, will be set forth in an accompanying
Prospectus supplement or, if appropriate, a post-effective amendment to the
Registration Statement of which this Prospectus is a part. To the Company's
knowledge, none of the Selling Securityholders has, or has had within the last
three years, any material relationship with the Company except as set forth in
"Certain Transactions" below. The following table and the disclosure concerning
material relationships between the Selling Securityholders and the Company is
based upon information furnished to the Company by or on behalf of the Selling
Securityholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE OFFERED FOR THE
NAME OF SELLING SECURITYHOLDER PRIOR TO THIS OFFERING SELLING SECURITYHOLDERS' ACCOUNT
- --------------------------------------------- ------------------------- --------------------------------
<S> <C> <C>
Richard and Patricia Stroup.................. 106,256 106,256
Steven Tomsic................................ 23,925(1) 23,625
Interbank Investments, LLC(2)................ 35,875 35,875
Fidelity Communications Corporation.......... 18,536 18,536
Robert Brody................................. 83,005 83,005
Arlene Brody................................. 17,739 17,739
Claude Bernstein............................. 16,864 16,864
Melody Bernstein............................. 27,494 27,494
David Wiegand................................ 603,250(3) 453,250
Theodore Berns............................... 50,000 50,000
Donald Dean.................................. 50,000 50,000
WorldCom, Inc................................ 50,000 50,000
First Union Corporation...................... 640,478 640,478
The Robinson-Humphrey Company, Inc........... 7,641 7,641
Richard John................................. 81,693 81,693
--------- ---------
TOTAL.............................. 1,802,126 1,651,826
========= =========
</TABLE>
- ---------------
(1) Includes 23,625 shares subject to a fully vested warrant as well as 300
shares acquired by the Selling Securityholder in open market transactions
which are not being offered for the Selling Securityholder's account
pursuant to this Prospectus.
(2) Represents shares subject to fully vested warrants.
(3) Includes 150,000 shares subject to a fully vested stock option which are not
being offered for the Selling Securityholder's account pursuant to this
Prospectus.
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<PAGE> 19
CERTAIN TRANSACTIONS
In December 1994, the Company acquired all of the outstanding shares of
stock of PacNet, Inc. in consideration for cash and 130,000 shares of Common
Stock (113,750 shares after giving effect to the Company's reverse stock split
in April 1995) valued at $11.43 per share which were issued to Richard and
Patricia Stroup. The Company has committed to register these shares under the
Securities Act under certain circumstances. In connection with the acquisition,
the Company entered into an employment agreement with Mr. Stroup pursuant to
which the Company granted to Mr. Stroup an option for the purchase of 60,000
shares of Common Stock (54,750 shares after giving effect to the Company's
reverse stock split in April 1995) at an exercise price of $5.71 per share. Mr.
Stroup has exercised the option in full and has sold the shares issued upon such
exercise. From December 1994 to July 15, 1995, Mr. Stroup served as the
President and General Manager of PacNet. From July 15, 1995 to January 1996, he
served as the Company's Senior Vice President of Network Operation. Patricia
Stroup served as the Controller of PacNet, Inc. from December 1994 until July
30, 1995 and as the Company's Manager of Provisioning and Customer Service from
July 30, 1995 until September 1995.
In connection with the Company's acquisition of a portion of the customer
base of Telnet Communications Inc. in March 1993, each of Steven Tomsic, Kevin
Narans and Darren Narans entered into a non-compete agreement with the Company
in consideration for a promissory note and cash payments with the right to
receive shares of Common Stock in lieu of such cash payments. In April 1995, the
non-compete agreements were amended and the Company issued to each of Steven
Tomsic, Kevin Narans and Darren Narans an amended promissory note and a warrant
to purchase up to 23,625, 23,625 and 12,250 shares of Common Stock, respectively
(an aggregate of up to 59,500 shares of Common Stock) at an exercise price of
$7.44 per share, which price is subject to adjustment to prevent dilution. Each
of the amended promissory notes is due March 28, 1999, provided that the holder
thereof has the right to demand payment of up to 25% of the face value thereof
in any 30 day period and to demand payment in full in the event of a default by
the Company or the exercise in full of the warrant granted thereto. Interest on
each of the amended promissory notes is 2% over a defined prime rate and is
payable monthly. Each of the warrants is fully exercisable and expires on March
28, 1999. The Company has committed to register the shares of Common Stock
issuable upon exercise of the warrants (but not the warrants) under the
Securities Act under certain circumstances. As of March 31, 1997, there was an
aggregate of approximately $680,000 outstanding under the amended promissory
notes and none of the warrants had been exercised. In April 1996, Kevin Narans
and Darren Narans transferred their warrants to Interbank Investments LLC, in
which each holds a one-third interest.
In July 1995, the Company purchased the customer base of Communications
Services of America, Inc. ("CSA") in exchange for an aggregate of 20,893 shares
of Common Stock issued to CSA plus certain additional consideration. These
shares were subsequently assigned to Fidelity Communications Corporation, an
affiliate of CSA. In January and April 1997, the Company issued 10,522 and
18,536 additional shares of Common Stock, respectively, as required under the
acquisition documents to compensate for the decrease in the value of the Common
Stock since the closing of the acquisition. The Company has committed to
register the shares of Common Stock issued in connection with the acquisition
under the Securities Act under certain circumstances.
In November 1995, the Company acquired by merger all of the outstanding
shares of capital stock of Fairfield County Telephone Corporation ("Fairfield")
in exchange for 37,777, 6,666, 14,814 and 14,814 shares (74,071 shares in the
aggregate) of Common Stock issued to Robert Brody, Arlene Brody, Claude
Bernstein and Melody Bernstein, respectively, who were at that time the
shareholders of Fairfield. An additional 24,691 shares were issued in connection
with the acquisition and deposited into escrow and are subject to redemption by
the Company upon the occurrence of certain events. In January and April 1997,
the Company issued an aggregate of 38,711 and 59,632 additional shares of Common
Stock, respectively, to the foregoing individuals, on a pro rata basis, as
required by the acquisition documents to compensate for the decrease in the
value of the Common Stock since the closing of the acquisition. The Company has
committed to register the shares of Common Stock issued in connection with the
acquisition under the Securities Act under certain circumstances.
18
<PAGE> 20
Robert Brody and Claude Bernstein own 60% and 40%, respectively, of Fairtel
Inc. ("Fairtel"). Fairtel is a distributor for Midcom and receives commissions
for its sales of Midcom's long distance services.
In September 1995, the Company acquired by merger all of the outstanding
capital stock of Adval, Inc. ("Adval") in exchange for 90,000, 90,000 and 45,000
shares (225,000 shares in the aggregate) of Common Stock issued to Theodore
Berns, Donald Dean and WorldCom, Inc., respectively, who were at the time the
shareholders of Adval. An additional 25,000 shares were issued in connection
with the acquisition and deposited into escrow and were subsequently released to
each of the foregoing shareholders on a pro rata basis. Both Theodore Berns and
Donald Dean have subsequently sold 50,000 shares of the Common Stock they
acquired in connection with the Company's acquisition of Adval. The Company has
committed to register the shares of Common Stock issued in connection with the
acquisition under the Securities Act under certain circumstances.
Donald Dean served as the Executive Vice President of Adval from September
1995 until May 1996.
The Company has entered into a carrier supply agreement with WorldCom
pursuant to which WorldCom supplies the Company certain long distance
telecommunications services.
In December 1995, Midcom acquired ADNET Telemanagement, Inc. ("Adnet")
through a merger pursuant to which Adnet was merged with and into Midcom and all
of the outstanding shares of Adnet stock were converted into 453,250 shares of
Common Stock issued in the name of David Wiegand. The Company has committed to
register these shares under the Securities Act under certain circumstances. In
addition, Mr. Wiegand served as a vice president of the Company in charge of the
continuing operations of Adnet from the date of the merger until his resignation
in October 1996. In August 1996, David and Maria Wiegand filed a complaint
against the Company, the Company's former President and Chief Executive Officer,
and certain other defendants, alleging claims arising in connection with the
merger. In December 1996, the Wiegands and the Company entered into a Settlement
Agreement and Release with respect to this lawsuit. In connection with the
Settlement Agreement and Release, the Company, among other things, entered into
a consulting agreement with David Wiegand and granted to Mr. Wiegand a fully
vested stock option for the purchase of 150,000 shares of Common Stock at an
exercise price of $10.00 per share.
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 as a
director 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 the 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 purchase up to 640,484 shares of Common Stock
at an exercise price of $.0001 per share. In July 1995, First Union exercised
these 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.
In August 1994, the Company entered into a revolving credit agreement with
First Union National Bank of North Carolina ("First Union Bank"), a subsidiary
of First Union, providing for a line of credit of up to $25.0 million, for which
First Union Bank received a commitment fee of $43,750. In March 1995, this
facility was amended to increase the maximum amount of borrowings by $4.0
million to a total of $29.0 million, for which First Union Bank was paid an
additional commitment fee of $80,000. Mr. Perper, a director of the Company, is
also a Senior Vice President of First Union Bank. During 1995, the Company paid
interest of
19
<PAGE> 21
$2,021,055 to First Union Bank in connection with this revolving credit
facility. The revolving credit facility was paid in full and terminated on
November 8, 1995.
The Company engaged The Robinson-Humphrey Company, Inc.
("Robinson-Humphrey") as placement agent in connection with the issuance of the
Subordinated Notes, in consideration for a cash fee of $444,000 and a warrant to
purchase up to 20,177 shares of Common Stock at an exercise price of $.0001 per
share. In July 1995, the warrant was amended to entitle Robinson-Humphrey to
purchase up to 7,641 shares at an exercise price of $.0001 per share, and
Robinson-Humphrey exercised the warrant for a total of 7,641 shares of Common
Stock. The Company has committed to register these shares under the Securities
Act under certain circumstances. Robinson-Humphrey has certain preemptive rights
to purchase additional shares of Common Stock offered by the Company, subject to
a number of exceptions.
In November 1995, the Company engaged Robinson-Humphrey as placement agent
in connection with a proposed issuance of $50,000,000 in senior subordinated
debt, in consideration for a cash fee of $150,000. In addition, in 1996 the
Company engaged Robinson-Humphrey as financial advisor to the Company in
connection with a proposed acquisition of the Company which was not completed.
Robinson-Humphrey received no compensation from the Company in connection with
this engagement.
In August 1995, Midcom acquired Cel-Tech International Corp.("Cel-Tech")
through a merger pursuant to which Cel-Tech was merged with and into a
wholly-owned subsidiary of Midcom and all of the outstanding shares of Cel-Tech
were converted into 141,935 shares of Common Stock issued in the name of Richard
John. The Company has committed to register these shares under the Securities
Act under certain circumstances. In addition, Mr. Johns entered into a
consulting agreement with the Company providing for payment of a consulting fee
of $5,000 per month for a period of five years for part-time services to the
Company and Cel-Tech. In April 1996, Mr. Johns filed a complaint against the
Company, the Company's former President and Chief Executive Officer, the
Company's Vice Chairman and certain other defendants, seeking damages and
rescission of the merger. In March 1997, Mr. Johns and the defendants entered
into a Settlement Agreement and Release with respect to this lawsuit. In
connection with the Settlement Agreement and Release, the Company, among other
things, entered into a revised consulting arrangement providing for the
immediate payment of the consulting fee discounted to the present value, entered
into a revised registration rights agreement, issued an additional 9,457 shares
of Common Stock and agreed to issue up to 60,000 shares of Common Stock in the
future.
20
<PAGE> 22
PLAN OF DISTRIBUTION
The Selling Securityholders may sell all or a portion of the Securities
offered hereby from time to time while the Registration Statement of which this
Prospectus is a part remains effective. The Company has been advised by the
Selling Securityholders that the Securities may be sold on terms to be
determined at the time of such sale through customary brokerage channels,
negotiated transactions or a combination of these methods, at fixed prices that
may be changed, at market prices then prevailing or at negotiated prices then
obtainable. There is no assurance that the Selling Securityholders will sell any
or all of the Securities offered hereby. Each of the Selling Securityholders
reserves the right to accept and, together with its agents from time to time, to
reject in whole or in part any proposed purchase of the Securities to be made
directly or through agents. The Company will receive no portion of the proceeds
from the sale of the Securities offered hereby. The aggregate proceeds to the
Selling Securityholders from the sale of the Securities offered hereby will be
the purchase price of such Securities less any discounts or commissions.
The Company has been advised by the Selling Securityholders that the
Selling Securityholders, acting as principals for their own account, may sell
Securities from time to time directly to purchasers or through agents, dealers
or underwriters to be designated by the Selling Securityholders from time to
time who may receive compensation in the form of underwriting discounts,
commissions or concessions from the Selling Securityholders and the purchasers
of the Securities for whom they may act as agent. The Selling Securityholders
and any agents, broker-dealers or underwriters that participate with the Selling
Securityholders in the distribution of the Securities may be deemed to be
"underwriters" within the meaning of the Securities Act, in which event any
discounts, commissions or concessions received by such broker-dealers, agents or
underwriters and any profit on the resale of the Securities purchased by them
may be deemed to be underwriting discounts or commissions under the Securities
Act.
A Selling Securityholder may elect to engage a broker or dealer to effect
sales of the Securities in one or more of the following transactions: (a) block
trades in which the broker or dealer so engaged will attempt to sell the
Securities as agent but may position and resell a portion of the block as
principal to facilitate the transaction, (b) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus, and (c) ordinary brokerage transactions and transactions in which
the broker solicits purchasers. In effecting sales, brokers and dealers engaged
by a Selling Securityholder may arrange for other brokers or dealers to
participate. Broker-dealers may agree with the Selling Securityholders to sell a
specified number of such Securities at a stipulated price, and, to the extent
such broker-dealer is unable to do so acting as agent for a Selling
Securityholder, to purchase as principal any unsold Securities at the price
required to fulfill the broker-dealer commitment to such Selling Securityholder.
Broker-dealers who acquire Securities as principal may thereafter resell such
Securities from time to time in transactions (which may involve crosses and
block transactions and sales to and through other broker-dealers, including
transactions of the nature described above) in the over-the-counter market or
otherwise at prices and on terms then prevailing at the time of sale, at prices
then related to the then-current market price or in negotiated transactions and,
in connection with such resales, may pay to or receive from the purchasers of
such Securities commissions as described above. To the extent required, the
number of Securities to be sold, the names of the Selling Securityholders, the
purchase price, the public offering price, the name of any agent, dealer or
underwriter, the amount of any offering expenses, any applicable commissions or
discounts and any other material information with respect to a particular offer
will be set forth in an accompanying Prospectus Supplement or, if appropriate, a
post-effective amendment to the Registration Statement of which this Prospectus
is a part.
The Securities originally issued by the Company contained legends as to
their restricted transferability. These legends will not be necessary with
respect to any Securities sold pursuant to, and during the effectiveness of, the
Registration Statement of which this Prospectus is a part. Upon the transfer by
the Selling Securityholders of any of the Securities, new certificates
representing such Securities will be issued to the transferee, free of any such
legends.
Under the Exchange Act, any person engaged in the distribution of the
Securities may not simultaneously bid for or purchase securities of the same
class for a period of at least two business days prior to the commencement of
such distribution. In addition, and without limiting the foregoing, the Selling
Securi-
21
<PAGE> 23
tyholders will be subject to applicable provisions of the Exchange Act and the
rules and regulations thereunder, including without limitation the rules
contained in Regulation M, in connection with the transactions in the Securities
during the effectiveness of the Registration Statement of which this Prospectus
is a part. The foregoing may affect the marketability of the Common Stock and
any market making activities with respect to the Common Stock.
To comply with the securities laws of certain states, if applicable, the
Securities will be sold in such states only through registered or licensed
brokers or dealers. In addition, in certain states the Securities may not be
offered or sold unless they have been registered or qualified for sale in such
state or an exemption from the registration or qualification requirement is
available and is complied with.
Each of the Selling Securityholders has certain registration rights with
respect to the Securities owned by such Selling Securityholder. Notwithstanding
such rights, the Company has voluntarily filed the Registration Statement of
which this Prospectus is a part. The Company currently intends to maintain the
effectiveness of such Registration Statement for a period of one year or until
such earlier time as all the Securities have been sold pursuant hereto or are no
longer outstanding, although it is not required to do so. The Company will bear
all expenses relating to this registration, other than underwriting discounts
and commissions and fees and disbursements of counsel to the Selling
Securityholders.
EXPERTS
The consolidated financial statements and schedule of MIDCOM Communications
Inc. appearing in MIDCOM Communications Inc.'s Annual Report (Form 10-K) for the
year ended December 31, 1996 have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon (which contains an explanatory
paragraph with respect to the Company's ability to continue as a going concern
as discussed in Note 1 to the consolidated financial statements) included
therein and incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
22
<PAGE> 24
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY THE
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 3
Forward-looking Statements and the
Private Securities Litigation Reform
Act................................. 4
Risk Factors.......................... 5
Use of Proceeds....................... 16
Selling Securityholders............... 17
Certain Transactions.................. 18
Plan of Distribution.................. 21
Experts............................... 22
</TABLE>
======================================================
======================================================
1,651,826 SHARES
MIDCOM
COMMUNICATIONS INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
MAY 1, 1997
======================================================
<PAGE> 25
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the issuance and distribution of the securities being registered. All the
amounts shown are estimated, except the Securities and Exchange Commission
registration fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee........................ $162.00
NASD Filing Fee............................................................ 0
Nasdaq National Market(R) Listing Fee...................................... 0
Blue Sky Fees and Expenses (includes fees and expenses of counsel)......... 0
Transfer Agent and Registrar Fees.......................................... 0
Accounting Fees and Expenses............................................... 3,000
Legal Fees and Expenses.................................................... 10,000
Printing, Engraving and Delivery Expenses.................................. 10,000
Insurance Coverage Required for the Offering............................... 0
Miscellaneous.............................................................. 0
------
Total............................................................ $23,162
======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a corporation to indemnify its directors,
officers, employees and agents against certain liabilities they may incur in
such capacities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"), provided they acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation. The Registrant's Bylaws (Exhibit 3.2 hereto) require the Registrant
to indemnify its officers and directors to the fullest extent permitted by
Washington law.
Section 23B.08.320 of the WBCA authorizes a corporation to limit or
eliminate its directors' liability to the corporation or its shareholders for
monetary damages for breaches of fiduciary duties, other than for (1) acts or
omissions that involve intentional misconduct or a knowing violation of law, (2)
improper declaration of dividends, or (3) transactions from which a director
derives an improper personal benefit. The Registrant's Amended and Restated
Articles of Incorporation (Exhibit 3.1 hereto) contain provisions limiting the
liability of the directors to the Registrant and to its shareholders to the
fullest extent permitted by Washington law.
The above discussion of the WBCA and the Registrant's Bylaws and Amended
and Restated Articles of Incorporation is not intended to be exhaustive and is
qualified in its entirety by such statute, the Bylaws and the Amended and
Restated Articles of Incorporation, respectively.
The Registrant maintains officers' and directors' liability insurance on
its directors and officers.
II-1
<PAGE> 26
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K)* EXHIBIT DESCRIPTION
- ---------------- ---------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Bylaws.(2)
4.1 Form of Common Stock Certificate.(2)
4.2 See Exhibits numbered 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Bylaws of the Company defining the
rights of the holders of Common Stock.
4.3 Purchase Agreement dated August 15, 1996 among the Company, PaineWebber
Incorporated and Wheat, First Securities, Inc.(3)
4.4 Indenture dated as of August 22, 1996 between the Company and IBJ Schroder
Bank & Trust Company.(3)
4.5 Registration Rights Agreement dated as of August 22, 1996 by and among the
Company, PaineWebber Incorporated and Wheat, First Securities, Inc.(3)
**5.1 Opinion of Heller Ehrman White & McAuliffe.
**23.1 Consent of Ernst & Young LLP, Independent Auditors (see page II-5 hereto).
**23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-4 hereto).
</TABLE>
- ---------------
* Unless otherwise indicated, exhibit was previously filed herewith.
** Exhibit is filed herewith.
(1) Exhibit is incorporated by reference to an identically numbered exhibit to
the Company's Annual Report on Form 10-K for the year ended December 31,
1995.
(2) Exhibit is incorporated by reference to an identically numbered exhibit to
the Company's Registration Statement on Form S-1 (SEC File No. 33-90814).
(3) Exhibit is incorporated by reference to an identically numbered exhibit to
the Company's Registration Statement on Form S-1 (SEC File No. 333-14427).
ITEM 17. UNDERTAKINGS.
(a) Rule 415 Offering
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to include
any material information with respect to the plan of distribution not
previously disclosed in this Registration Statement or any material change
to such information in this Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities as that time shall be deemed
to be the initial bona fide offering thereof;
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-2
<PAGE> 27
(b) Filings Incorporating Subsequent Exchange Act Documents by Reference
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Indemnification for Liabilities
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-3
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Seattle, State of Washington, on April 30, 1997.
MIDCOM COMMUNICATIONS INC.
By: /s/ ROBERT J. CHAMBERLAIN
------------------------------------
Robert J. Chamberlain
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities indicated below on the 30th day of April, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------
<S> <C>
By: WILLIAM H. OBERLIN* President, Chief Executive Officer and
- --------------------------------------------- Director
William H. Oberlin (Principal Executive Officer)
By: /s/ ROBERT J. CHAMBERLAIN Executive Vice President and Chief Financial
- --------------------------------------------- Officer (Principal Accounting and
Robert J. Chamberlain Financial Officer)
By: JOHN M. ZRNO* Director
- ---------------------------------------------
John M. Zrno
By: PAUL H. PFLEGER* Director
- ---------------------------------------------
Paul H. Pfleger
By: JOHN M. OREHEK* Director
- ---------------------------------------------
John M. Orehek
By: SCOTT B. PERPER* Director
- ---------------------------------------------
Scott B. Perper
By: KARL D. GUELICH* Director
- ---------------------------------------------
Karl D. Guelich
By: MARVIN C. MOSES* Director
- ---------------------------------------------
Marvin C. Moses
By: DANIEL M. DENNIS* Director
- ---------------------------------------------
Daniel M. Dennis
*By: /s/ ROBERT J. CHAMBERLAIN
- ---------------------------------------------
Robert J. Chamberlain
Attorney-In-Fact
</TABLE>
II-4
<PAGE> 29
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of MIDCOM
Communications, Inc. for the registration of 1,652,212 shares of its common
stock and to the incorporation by reference therein of our reports dated March
21, 1997, with respect to the consolidated financial statements and schedule of
MIDCOM Communications, Inc. included in its Annual Report (Form 10-K) for the
year ended December 31, 1996, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
April 30, 1997
Seattle, Washington
II-5
<PAGE> 30
MIDCOM COMMUNICATIONS INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGINATION BY
(REFERENCED TO SEQUENTIAL
ITEM 601 OF NUMBERING
REGULATION S-K) EXHIBIT DESCRIPTION SYSTEM
- --------------- --------------------------------------------------------------- -------------
<C> <S> <C>
5.1 Opinion of Heller Ehrman White & McAuliffe.
</TABLE>
<PAGE> 1
[LETTERHEAD OF HELLER EHRMAN WHITE & McAULIFFE]
EXHIBIT 5.1
April 30, 1997
MIDCOM Communication Inc.
1111 Third Avenue
Seattle, Washington 98101
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
This opinion is furnished to MIDCOM Communications Inc., a Washington
corporation (the "Company"), in connection with the filing of a Registration
Statement on Form S-3 (the "Registration Statement") with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, relating to
the proposed public offer and sale by certain shareholders of the Company (the
"Selling Shareholders") of up to 1,652,212 shares (the "Shares") of the
Company's common stock, par value $.0001 per share (the "Common Stock").
We have based our opinion expressed herein and have relied upon our
review of the following records, documents, instruments and certificates:
(a) the Amended and Restated Articles of Incorporation of the
Company certified by the Secretary of State of Washington as
of April 9, 1997, and certified to us by an officer of the
Company as being complete and in full force and effect as of
the date of this opinion letter;
(b) the Bylaws of the Company certified to us by an officer of the
Company as being complete and in full force and effect as of
the date of this opinion letter;
(c) records certified to us by an officer of the Company as
constituting all records of proceedings and actions of the
board of directors and the shareholders of the Company and any
committees of the board of directors relating to the issuance
of the Shares; and
(d) a certificate of an officer of the Company regarding receipt
of full payment for all Shares.
In connection with the opinion expressed herein, we have, with your
consent, assumed the genuineness of all signatures, the legal capacity of all
natural persons, the completeness and the authenticity of all records,
documents, instruments and certificates submitted to us as originals, and the
exact conformity with the executed originals of all documents, records,
instruments and certificates submitted to us as copies.
Based upon the foregoing and our examination of such questions of law
as we have deemed necessary or appropriate for the purpose of this opinion
letter, and subject to the assumptions and qualifications expressed herein, it
is our opinion that the Shares are validly issued, fully paid and
non-assessable.
<PAGE> 2
MIDCOM Communications Inc.
April 30, 1997
Page 2
The opinion expressed herein as to the fully paid status of the Shares
is based solely on the representations set forth in the certificate identified
in item (d) above to the effect that the Company received in full the
consideration specified in resolutions authorizing the issuance of the Shares.
The opinion expressed herein is limited to the federal laws of the
United States of America and the laws of the State of Washington, and we
disclaim any opinion as to the laws of any other jurisdiction or as to the
enforceability or validity of a document or agreement if a court would apply
laws other than the laws of the State of Washington to govern and construe such
document or agreement. We further disclaim any opinion as to any statute, rule,
regulation, ordinance, order or other promulgation of any regional or local
governmental body or as to any related judicial or administrative opinion.
We expressly disclaim any obligation to advise you of any developments
in areas covered by this opinion that occur after the date of this opinion.
We hereby authorize and consent to the use of this opinion as Exhibit
5.1 to the Registration Statement.
Very truly yours,
HELLER EHRMAN WHITE & McAULIFFE
/s/ HELLER EHRMAN WHITE & McAULIFFE
