<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant (X)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
( ) Preliminary Proxy Statement
(X) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Phoenix Network, Inc.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box)
( ) $125 per Exchange Act Rules 0 11(c)(1)(ii), 14a 6(i)(1), 14a 6(i)(2) or
Item 22(a)(2) of Schedule 14A.
( ) $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
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2. Aggregate number of securities to which transaction applies:
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3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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4. Proposed maximum aggregate value of transaction:
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5. Total fee paid:
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(X) Fee paid previously with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1. Amount Previously Paid:
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2. Form, Schedule or Registration Statement No.:
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3. Filing Party:
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4. Date Filed:
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<PAGE> 2
PHOENIX NETWORK, INC.
1687 COLE BOULEVARD
GOLDEN, COLORADO 80401
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 26, 1996
TO THE STOCKHOLDERS OF PHOENIX NETWORK, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of PHOENIX
NETWORK, INC., a Delaware corporation (the "Company"), will be held on Thursday,
September 26, 1996 at 8:00 a.m. local time at 1687 Cole Boulevard, Golden,
Colorado 80401 for the following purposes:
1. To elect directors to serve for the ensuing year and until their
successors are elected.
2. To approve an amendment of the Company's Restated Certificate of
Incorporation to increase the number of shares of the Company's Common
Stock authorized for issuance from 30,000,000 to 50,000,000.
3. To approve an amendment of the Company's 1989 Stock Option Plan to
increase the number of shares of the Company's Common Stock that may be
sold pursuant to such Plan from 3,500,000 to 5,000,000.
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on August 28, 1996
as the record date for the determination of stockholders entitled to notice of
and to vote at this Annual Meeting and at any adjournment or postponement
thereof.
By Order of the Board of Directors
/s/ ERNEST J. PANASCI
ERNEST J. PANASCI
Secretary
Golden, Colorado
September 3, 1996
<PAGE> 3
PHOENIX NETWORK, INC.
1687 COLE BOULEVARD
GOLDEN, COLORADO 80401
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 26, 1996
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors (the
"Board") of Phoenix Network, Inc., a Delaware corporation ("Phoenix" or the
"Company"), for use at the Annual Meeting of Stockholders to be held on
September 26, 1996 at 8:00 a.m. (the "Annual Meeting"), or at any adjournment or
postponement thereof, for the purposes set forth herein and in the accompanying
Notice of Annual Meeting. The Annual Meeting will be held at 1687 Cole
Boulevard, Golden, Colorado. The Company intends to mail this proxy statement
and accompanying proxy card on or about September 3, 1996 to all stockholders
entitled to notice of or to vote at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to stockholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others to forward to such beneficial owners. The Company may reimburse persons
representing beneficial owners of Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular employees of the Company.
No additional compensation will be paid to directors, officers or other regular
employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock or any series of the Company's
Preferred Stock at the close of business on August 28, 1996 will be entitled to
notice of and/or to vote at the Annual Meeting. At the close of business on July
31, 1996, the Company had outstanding and entitled to vote 17,698,974 shares of
Common Stock, 101,125 shares of Series A Preferred Stock, 114,500 shares of
Series B Preferred Stock, 1,000,000 shares of the Series C Preferred Stock,
333,333 shares of Series D Preferred Stock, no shares of Series E Preferred
Stock and 1,176,056 shares of Series F Preferred Stock.
Each holder of record of Common Stock on such date will be entitled to one
vote for each share held on all matters to be voted upon at the Annual Meeting.
Each holder of one share of Series A, Series B, Series D and Series F Preferred
Stock shall be entitled to 4.132, 6.667, 1.000 and 4.000 votes, respectively, on
an as-if-converted to Common Stock basis. The Company's Series C Preferred Stock
is non-voting. On all matters described in this Proxy Statement, the Common
Stock and Series A, B, D and F Preferred Stock will vote together as a single
class, except that, by the terms of the Company's Restated Certificate of
Incorporation and the Company's Certificate of Designation of Preferences of the
Series F Preferred Stock, the holders of the Series F Preferred Stock, voting as
a class, are entitled to elect two (2) directors so long as at least 200,000
shares of the Series F Preferred Stock remains outstanding, or, if fewer than
200,000 but more than 75,000 shares of the Series F Preferred Stock remain
outstanding, the holders of the Series F Preferred Stock are entitled to elect
one (1) director (each, a "Series F Director"). The Company and the holders of
the Series F Preferred Stock have entered into a Stockholders Agreement
regarding the exercise of the right to elect
<PAGE> 4
Series F Directors and certain other matters, and, pursuant to such Stockholders
Agreement, the holders of the Series F Preferred Stock have granted their
irrevocable proxy to a representative (the "Series F Representative") to act on
their behalf with respect to election of the Series F Directors. At the present
time, Messrs. Max E. Thornhill and David Singleton are the Series F Directors.
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes. Broker non-votes will be counted towards
a quorum but, except with respect to Proposals 2 and 3, are not counted for any
purpose in determining whether a matter has been approved.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's principal executive office, 1687 Cole
Boulevard, Golden, Colorado 80401, a written notice of revocation or a duly
executed proxy bearing a later date, or it may be revoked by attending the
meeting and voting in person. Attendance at the meeting will not, by itself,
revoke a proxy.
STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented at the
Company's 1997 Annual Meeting of Stockholders must be received by the Company
not later than January 31, 1997, in order to be included in the proxy statement
and proxy relating to that Annual Meeting.
PROPOSAL 1
ELECTION OF DIRECTORS
There are seven nominees for the seven Board positions authorized in the
Company's By-laws. Each director to be elected would hold office until the next
Annual Meeting of Stockholders and until his successor has been duly elected and
qualified, or until such director's earlier death, resignation, disqualification
or removal. Other than Mr. McGettigan, each nominee listed below is currently a
director of the Company. All of the current directors, other than Messrs.
Singleton and Thornhill, were previously elected by the stockholders. Messrs.
Singleton and Thornhill were elected to the Board by the other directors to fill
new directorships created by an amendment to the Company's By-laws, effective as
of October 31, 1995, which expanded the size of the Board from seven to nine
members, in connection with the issuance of the Series F Preferred Stock.
Effective as of the date of the Annual Meeting, the size of the Board is being
reduced by amendment to the By-laws to seven members. Messrs. Robert R. Curtis
and Sidney Kahn are resigning from the Board effective as of the date of the
Annual Meeting, and no successors have been nominated to fill their positions.
The holders of the Company's Common Stock and Preferred Stock, other than
the Series C Preferred Stock, are entitled to elect five nominees to the Board
of Directors. The holders of the Series F Preferred Stock are entitled to elect
two nominees to the Board of Directors. Messrs. John David Singleton and Max E.
Thornhill are the nominees for the Series F Directors. The Series F
Representative, who holds proxies previously granted to him to vote all shares
of Series F Preferred Stock in the election of Series F Directors, has indicated
his intention to elect Messrs. Singleton and Thornhill to the Board of
Directors, and, if the Series F Representative does vote such shares as
indicated, the election of Messrs. Singleton and Thornhill to the Board is
assured.
Shares represented by executed proxies will be voted, if authority to do so
is not withheld, for the election of the nominees named below, other than
Messrs. Singleton and Thornhill. In the event that any nominee should be
unavailable for election as a result of an unexpected occurrence, such shares
will be voted for the election of such substitute nominee as management may
propose. Each person nominated for election has agreed to serve if elected and
management has no reason to believe that any nominee will be unable to serve.
2
<PAGE> 5
Directors are elected by the holders of a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of such directors.
MANAGEMENT RECOMMENDS A VOTE IN FAVOR OF
EACH NAMED NOMINEE
NOMINEES
The names and certain biographical data of the nominees are set forth
below:
<TABLE>
<CAPTION>
NAME AGE DIRECTOR SINCE
--------------------------------------------------------- --- --------------
<S> <C> <C>
Thomas H. Bell(1)(3)..................................... 48 1985
James W. Gallaway(2)..................................... 56 1988
Wallace M. Hammond....................................... 50 1994
Merrill L. Magowan(2)(3)................................. 57 1990
Charles C. McGettigan.................................... 51 NA(4)
John David Singleton(5).................................. 56 1995
Max E. Thornhill(5)...................................... 64 1995
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Nominating Committee.
(4) Mr. McGettigan was a member of the Board of Phoenix from November 1990 to
December 1991, but has not been a member of the Board since December 1991.
(5) Messrs. Singleton and Thornhill have been nominated or designated for
nomination for election to the Board by the Series F Representative. The
Series F Representative has indicated his intention to vote shares of Series
F Preferred Stock held by him or for which he holds proxies in favor of
electing Messrs. Singleton and Thornhill to the Board.
Thomas H. Bell
Mr. Bell is the founder of the Company. He has served as the Chairman of
the Board of Phoenix since its inception under the name Phoenix Telcom, Inc. in
1985, as the Company's Chief Executive Officer from 1985 to January 1992, and as
President of the Company from 1985 to September 1990. Mr. Bell is also an
independent consultant in the telecommunications industry.
James W. Gallaway
Mr. Gallaway has served as a director of the Company since July 1988. He
was a founder, director from 1984 to 1988, and Vice President from 1983 to 1986,
of Centex Telemanagement, Inc., a telecommunications company that resold local
telephone service. Since 1980, he has been President of Gallaway Enterprises,
Inc., a telecommunications company. From February 1988 through December 1994, he
served as a director and Vice President of StellarNet, Inc., an information
management company in the health care industry. Mr. Gallaway is a U.S. Marine
Corps Reserve (Retired) Colonel.
Wallace M. Hammond
Mr. Hammond joined the Company as Executive Vice President in February
1994. He was elected to the Company's Board of Directors and named President and
Chief Operating Officer of the Company in May 1994. Mr. Hammond was elected
Chief Executive Officer of the Company in December 1994. From 1992 to 1993, he
was President and Chief Executive Officer of ANSCO & Associates, a telephone
engineering and plant construction company. From 1979 to 1992, he was with
BellSouth Communication Systems, Inc., a
3
<PAGE> 6
nationwide division of BellSouth Corporation involved in the customer premises
equipment after-market, where he was promoted to Vice President-Operations in
1989.
Merrill L. Magowan
Mr. Magowan became a director of the Company in September 1990. Since 1982,
Mr. Magowan has been a principal of S F Associates, a California registered
investment advisory firm (formerly known as Magowan Dirickson Investment
Company). He is also currently a director of Nordeman Grimm (since 1975), an
executive search consulting firm. From 1968 to 1986, he was a director of
Safeway Stores, Inc., a retail grocery chain.
Charles C. McGettigan
Mr. McGettigan served as a director of the Company from November 1990
through December 1991. He was a co-founder (in 1991) and presently is a general
partner of Proactive Investment Managers, L.P., which is the general partner of
Proactive Partners, L.P., an investment partnership. Mr. McGettigan was a co-
founder (in 1988) and is a managing director of McGettigan, Wick & Co., Inc., an
investment banking firm. From 1984 to 1988, he was a Principal, Corporate
Finance, of Hambrecht & Quist, Incorporated. Prior to that, Mr. McGettigan was a
Senior Vice President of Dillon, Read & Co. Inc. He currently serves on the
Boards of Directors of digital dictation, inc.; I-Flow Corporation; Modtech,
Inc.; NDE Environmental Corporation; Onsite Energy, Inc.; PMR Corporation; Sonex
Research, Inc.; and Wray-Tech Instruments, Inc.
John David Singleton
Mr. Singleton has served as a director of the Company since October 1995.
He was a founding director of LDDS WorldCom, Inc., a long-distance
telecommunications company, and served as a director of that company from 1983
to 1992. He was a founding director, and currently serves as a director of, US
One. Mr. Singleton also serves as a director of Red Fox Environmental Services.
Mr. Singleton has worked in personal and small business financial planning for
25 years and currently manages a private portfolio.
Max E. Thornhill
Mr. Thornhill has served as a director of the Company since October 1995.
He was a founding director of LDDS WorldCom, Inc. and served as a director of
that company from 1983 to September 1993. He was a founding director, and
currently serves as a director of, US One. Mr. Thornhill is currently engaged in
real estate development and oil and gas exploration and production.
EXECUTIVE OFFICERS
Set forth below is information regarding the executive officers of the
Company as of July 31, 1996.
<TABLE>
<CAPTION>
NAME POSITION AGE
- --------------------------------- -------------------------------------------- ---
<S> <C> <C>
Wallace M. Hammond............... President and Chief Executive Officer 50
Jeffrey L. Bailey................ Senior Vice President and Chief Financial 43
Officer
J. Rex Bell...................... Vice President of Operations 41
Jon Beizer....................... Vice President of Corporate Development 31
Paul C. Cissel................... Vice President of Sales and Marketing 39
</TABLE>
BACKGROUND OF EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Jeffrey L. Bailey
Mr. Bailey has been Senior Vice President and Chief Financial Officer of
the Company since March 1990. He is a Certified Public Accountant and, from 1985
to 1990, was a Senior Manager with Grant Thornton LLP, an accounting and
management consulting firm. From 1975 to 1985 he was with Arthur Young & Company
(now, Ernst & Young, L.L.P.).
4
<PAGE> 7
J. Rex Bell
Mr. Bell has been Vice President of Operations of the Company since March
1991. From January 1990 to March 1991, he held the position of Director of
Marketing of the Company. Prior to joining the Company, Mr. Bell was a Senior
Telecommunications Consultant from 1984 to 1990 for two California consulting
firms, COMSUL, Ltd. and Robin & Dackerman, Inc. Between 1980 and 1984, he held
management positions with MCI Communications and Cable and Wireless, Ltd.
Jon Beizer
Mr. Beizer was promoted to Vice President of Corporate Development in 1995.
Since joining the Company in July 1992, he has held various positions, the last
of which was Director of Marketing. Mr. Beizer holds an M.B.A. from Stanford
University, where he attended from 1990 to 1992. Mr. Beizer worked from 1987
through 1990 as a consultant for Braxton Associates, a management consulting
firm specializing in corporate strategy.
Paul C. Cissel
Mr. Cissel was promoted to Vice President of Sales and Marketing in
November 1994. Between April 1994 and October 1994, Mr. Cissel served as the
manager of the Company's Boston sales office as an independent contractor. Mr.
Cissel was the founder and served as President of Communications and Business
Solutions, a communications management company and distributor of the Company's
products, between August 1992 and October 1994. Between May 1989 and June 1992,
Mr. Cissel served as President and Chief Executive Officer of Titan Software
Corporation, an electronics company that developed software and printed circuit
board test devices.
Thomas H. Bell, a director of the Company, and J. Rex Bell, the Company's
Vice President of Operations, are brothers. With the exception of that
relationship, there are no other family relationships among officers or
directors of the Company.
BOARD COMMITTEES AND MEETINGS
During the year ended December 31, 1995, the Board of Directors met or
acted by written consent in lieu of a meeting a total of 12 times. The Board has
appointed an Audit Committee, a Compensation Committee and a Nominating
Committee.
The Audit Committee meets with the Company's independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements. The Audit Committee also receives and considers the auditors'
comments as to controls, adequacy of staff and management performance and
procedures in connection with audit and financial controls. The Audit Committee
is composed of two directors, Messrs. Gallaway and Magowan, and met twice during
the year ended December 31, 1995.
The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants under
the Company's 1989 Stock Option Plan and performs all such other functions
regarding compensation as the Board may delegate. Prior to the Annual Meeting,
the Compensation Committee will have consisted of two directors: Messrs. Bell
and Myron A. Wick III. Effective as of the Annual Meeting, Mr. Wick will have
left the Board, and the Board has not yet selected a successor to Mr. Wick's
position on the Compensation Committee. The Compensation Committee met two times
during the year ended December 31, 1995.
The Nominating Committee interviews, evaluates, nominates and recommends
individuals for membership on the Company's Board of Directors and nominates
specific individuals to be elected as officers of the Company by the Board of
Directors. No procedure has been established for the consideration of nominees
recommended by stockholders. The Nominating Committee is composed of two
directors: Messrs. Magowan and Bell. It met once during the year ended December
31, 1995.
During the fiscal year ended December 31, 1995, each director attended at
least 75% of the aggregate of the meetings of the Board and of the committees on
which he served, held during the period for which he was a Board member, and, if
applicable, a committee member.
5
<PAGE> 8
PROPOSAL 2
APPROVAL OF INCREASE IN NUMBER
OF AUTHORIZED SHARES OF COMMON STOCK
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Company's Restated Certificate of Incorporation to increase the
Company's authorized number of shares of Common Stock from 30,000,000 shares to
50,000,000 shares.
The additional Common Stock to be authorized by adoption of the amendment
would have rights identical to the currently outstanding Common Stock of the
Company. Adoption of the proposed amendment and issuance of the Common Stock
would not affect the rights of the holders of currently outstanding Common Stock
and Preferred Stock of the Company, except for effects incidental to increasing
the number of shares of the Company's Common Stock outstanding, such as dilution
of the earnings per share and voting rights of current holders of the Company's
stock. If the amendment is adopted, it will become effective upon filing of a
Certificate of Amendment of the Company's Restated Certificate of Incorporation
with the Secretary of State of the State of Delaware.
In addition to the 17,698,974 shares of Common Stock outstanding at July
31, 1996, the Board has reserved 2,583,453 shares for issuance upon exercise of
options and rights granted under the Company's stock option plans, 500,000
shares for issuance upon exercise of options granted outside of the Company's
stock option plans, 6,218,739 shares of Common Stock upon conversion of
outstanding shares of Preferred Stock and 1,102,805 shares of Common Stock upon
exercise of outstanding warrants.
Although at present the Board of Directors has no plans to issue the
additional shares of Common Stock, it desires to have such shares available to
provide additional flexibility to use its capital stock for business and
financial purposes in the future. The additional shares may be used, without
further stockholder approval, for various purposes including, without
limitation, raising capital, providing equity incentives to employees, officers
or directors, establishing strategic relationships with other companies and
expanding the Company's business or product lines through the acquisition of
other businesses or products.
The additional shares of Common Stock that would become available for
issuance if the proposal were adopted could also be used by the Company to
oppose a hostile takeover attempt or delay or prevent changes in control or
management of the Company. Although this proposal to increase the authorized
Common Stock has been prompted by business and financial considerations and not
by the threat of any hostile takeover attempt (nor is the Board currently aware
of any such attempts directed at the Company), nevertheless, stockholders should
be aware that approval of this proposal could facilitate future efforts by the
Company to deter or prevent changes in control of the Company, including
transactions in which the stockholders might otherwise receive a premium for
their shares over the then-current market prices.
Stockholders are requested in this Proposal 2 to approve an increase in the
number of authorized shares of Common Stock of the Company. The affirmative vote
of the holders of a majority of the shares of the Common Stock, voting
separately as a class, and of the Common Stock and the Preferred Stock, voting
as a class, present in person or represented by proxy and entitled to vote at
the Annual Meeting, will be required to approve this amendment to the Company's
Restated Certificate of Incorporation. As a result, abstentions and broker
non-votes will have the same effect as negative votes.
6
<PAGE> 9
MANAGEMENT RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 2
PROPOSAL 3
APPROVAL OF INCREASE IN NUMBER
OF SHARES OF COMMON STOCK THAT MAY BE SOLD
PURSUANT TO THE COMPANY'S 1989 STOCK OPTION PLAN
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Company's 1989 Stock Option Plan (the "Plan") to increase the
number of shares of Common Stock that may be sold pursuant to options granted
under the Plan from 3,500,000 shares to 5,000,000 shares.
The purpose of the Plan is to provide a means by which selected key
employees and consultants of the Company may purchase Common Stock. The Company,
by means of the Plan, seeks to secure and retain the services of highly
qualified individuals to serve as employees or consultants of the Company, to
retain the services of persons presently employed by or serving as consultants
to the Company, and to provide incentives for such persons to exert maximum
efforts for the success of the Company.
If the amendment to the Plan is approved, the additional shares available
for sale pursuant to options issued under the Plan may be used, without further
stockholder approval, to provide equity incentives to eligible participants in
accordance with the Plan's purpose and terms. The amendment, if adopted, will
become effective immediately.
Only key employees, directors who are also key employees and consultants of
the Company and its affiliates are eligible to receive options under the Plan.
The Plan is administered by the Company's Board of Directors or, if the Board so
designates, a committee of the Board. The Board has designated a Compensation
Committee to administer the Plan, and its members at the present time are Thomas
H. Bell and Myron A. Wick III.
Options issued pursuant to the Plan may be "Incentive Stock Options" as
that term is defined in the Internal Revenue Code of 1986, as amended ("ISOs"),
or options not qualifying as ISOs ("Non-qualified Options"). For an option to
qualify as an ISO, at all times beginning on the date of the option grant and
ending three months before the option is exercised (one year if the optionee
becomes disabled), the optionee must have been an employee of Phoenix or a
parent or subsidiary of Phoenix. In addition, the exercise price of ISOs may not
be less than 100% of the fair market value of the Common Stock subject to such
options on the date of grant. By the terms of the Plan, the exercise price of
Non-qualified Options may not be less than 85% of the fair market value of the
Common Stock subject to such options on the date of grant. As of August 20,
1996, the closing price for shares of the Common Stock was $5.50.
Options are issued without cost to the participant at the time of grant.
ISOs may be granted to an eligible person under the Plan only if the aggregate
fair market value (determined at the time of grant) of Common Stock subject to
all ISOs which are exercisable for the first time by such optionee during any
calendar year under the Plan does not exceed $100,000.
Recipients of ISOs are not taxed at the time the options are granted. Upon
exercise, the holder of an ISO will not recognize income if he or she does not
transfer the stock subject to such ISO within two years after the date of the
option grant or one year after option exercise. If the employee holds such stock
for two years from the date of grant of the ISO and one year from the date the
ISO was exercised, and if the stock is held for the long-term capital gains
holding period, the employee will recognize long-term capital gain income in the
year of sale of the stock in the amount of the sale price less the exercise
price of the ISOs. In the event a holder of ISOs disposes of the stock received
upon exercise of such ISOs within two years of the date of grant of the ISOs or
within one year of the date of their exercise (a "Disqualifying Disposition"),
such holder will recognize compensation income in the year of such Disqualifying
Disposition equal to the fair market value of such stock over the exercise price
of such ISOs.
Recipients of Non-qualified Options also are not taxed at the time the
options are granted, but the holder of Non-qualified Options recognizes
compensation income upon exercise of the options equal to the fair market value
of the stock received upon exercise over the exercise price.
Upon exercise of Non-qualified Options, or upon a Disqualifying Disposition
of stock received pursuant to the exercise of ISOs, the Company is entitled to a
compensation deduction equal to the amount of the
7
<PAGE> 10
income includable on the holder's income tax return. The Company is not
otherwise entitled to any deductions with respect to ISOs or Non-qualified
Options.
The term of options granted under the Plan may not exceed 10 years, and,
unless a particular option specifies otherwise, options terminate three months
after termination of the optionee's employment or consulting relationship with
the Company or its affiliate. The terms of an option may, but need not, provide
that such option may be exercised at any time within 12 months following
termination on account of disability, or at any time within 18 months following
the death of an optionee. Options granted under the Plan may be subject to
vesting requirements, as determined by the administrator of the Plan.
As of July 31, 1996, the Board had issued total options under the Plan,
without regard to option exercises, for the purchase of 5,723,402(1) shares of
Common Stock, 3,800,126 of which were ISOs and 1,923,276 of which were
Non-qualified Options. The Company estimates that approximately 200 persons are
eligible to participate in the Plan. The following table sets forth the number
of options to purchase shares of Common Stock issued pursuant to the Plan for
certain persons and groups since the Plan's inception, without regard to option
exercises.
<TABLE>
<CAPTION>
NUMBER OF
NAME AND POSITION OR GROUP OPTIONS RECEIVED(2)(3)
--------------------------------------------------------- ----------------------
<S> <C>
Wallace M. Hammond....................................... 800,000
President, Chief Executive Officer,
Director and Nominee for Director
Robert R. Curtis......................................... 660,000
Director and Nominee for Director
Jeffrey L. Bailey........................................ 245,000
Senior Vice President and Chief Financial Officer
J. Rex Bell.............................................. 204,000
Vice President of Operations
Jon Beizer............................................... 192,000
Vice President of Corporate Development
Paul C. Cissel........................................... 175,000
Vice President of Sales and Marketing
Merrill L. Magowan....................................... 40,000
Director and Nominee for Director
James W. Gallaway........................................ 40,000
Director and Nominee for Director
Myron A. Wick III........................................ 28,000
Director
Thomas H. Bell........................................... 24,000
Director and Nominee for Director
Charles C. McGettigan.................................... 24,000
Nominee for Director
All current executive officers as a group................ 1,616,000
All current directors who are not executive officers as a
group.................................................. 792,000
</TABLE>
- ---------------
(1) Due to cancellations and expirations of options granted under the Plan,
options have been granted over the life of the Plan in excess of the number
of shares authorized for issuance under the Plan.
(2) The Company has no plans to issue any further options in any particular
amounts under the Plan, but will continue to issue options pursuant to the
Plan from time to time.
(3) No associate of any listed director, executive officer or nominee holds any
options issued under the Plan.
Stockholders are requested in this Proposal 3 to approve an amendment to
the Plan to increase the number of shares of Common Stock that may be sold
pursuant to options issued under the Plan. The affirmative vote of the holders
of a majority of the shares of the Common Stock and the Preferred Stock, voting
as a class, present in person or represented by proxy and entitled to vote at
the Annual Meeting, will be required to approve this amendment to the Plan. As a
result, abstentions and broker non-votes will have the same effect as negative
votes.
MANAGEMENT RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 3
8
<PAGE> 11
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock and the various series of Preferred Stock as of
July 31, 1996(1) by: (i) each director and nominee for director; (ii) each
executive officer named in the Summary Compensation Table; (iii) all executive
officers and directors of the Company as a group; and (iv) all those known by
the Company to be beneficial owners of more than five percent (5%) of any class
of its voting securities.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(2)
------------------------
NUMBER OF PERCENT OF
CLASS BENEFICIAL OWNER ADDRESS SHARES TOTAL
- ------------------- ------------------------------ ------------------------ --------- ----------
<S> <C> <C> <C> <C>
Common Stock Thomas H. Bell(3)(4) 1687 Cole Boulevard 3,238,056 17.75%
Golden, CO 80401
Common Stock Bell Non-Exempt Marital Trust 1687 Cole Boulevard 1,394,335 7.88%
Golden, CO 80401
Common Stock James W. Gallaway(3) 458,425 2.58%
Common Stock Jeffrey L. Bailey(3) 137,498 *
Common Stock Merrill L. Magowan(3) 120,445 *
Common Stock J. Rex Bell(3) 101,498 *
Common Stock Myron A. Wick III(3)(5)(7)(8) 1687 Cole Boulevard 1,915,287 9.85%
Golden, CO 80401
Common Stock Sidney Kahn(3) 1687 Cole Boulevard 85,947 *
Golden, CO 80401
Common Stock Robert R. Curtis(3)(9) 1687 Cole Boulevard 288,452 1.61%
Golden, CO 80401
Common Stock Wallace M. Hammond(3) 266,000 1.48%
Common Stock John David Singleton(3) 172,506 *
Common Stock Max E. Thornhill(3) 1687 Cole Boulevard 1,756,088 9.26%
Golden, CO 80401
Common Stock Paul C. Cissel(3) 72,112 *
Common Stock Judy Van Essen c/o 1687 Cole Boulevard 2,800,000 15.82%
Golden, CO 80401
Common Stock Jon D. Gruber(3)(5)(6) 50 Osgood Place 2,214,120 11.29%
San Francisco, CA 94133
Common Stock J. Patterson McBaine(3)(5)(6) 50 Osgood Place 2,191,224 11.18%
San Francisco, CA 94133
Common Stock Gruber & McBaine Capital 50 Osgood Place 2,172,092 11.08%
Management(3)(5)(6) San Francisco, CA 94133
Common Stock Charles C. McGettigan(3)(5)(7) 50 Osgood Place 1,822,878 9.40%
San Francisco, CA 94133
Common Stock Proactive Investment 50 Osgood Place 1,582,948 8.27%
Managers, L.P.(3)(5) San Francisco, CA 94133
Common Stock Proactive Partners, L.P.(3) 50 Osgood Place 1,510,672 7.92%
San Francisco, CA 94133
Common Stock All executive officers and 8,637,154 38.44%
directors as a group(10)
(13 persons)
Series A Preferred Merrill L. Magowan 1687 Cole Boulevard 10,000 9.89%
Golden, CO 80401
Series A Preferred Myron A. Wick III(11)(12) 1687 Cole Boulevard 20,000 19.78%
Golden, CO 80401
Series A Preferred Charles C. McGettigan(11) 50 Osgood Place 15,000 14.83%
San Francisco, CA 94133
Series A Preferred Jon D. Gruber(13) 50 Osgood Place 24,000 23.73%
San Francisco, CA 94133
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(2)
------------------------
NUMBER OF PERCENT OF
CLASS BENEFICIAL OWNER ADDRESS SHARES TOTAL
- ------------------- ------------------------------ ------------------------ --------- ----------
<S> <C> <C> <C> <C>
Series A Preferred J. Patterson McBaine(13) 50 Osgood Place 21,000 20.77%
San Francisco, CA 94133
Series A Preferred McGettigan, Wick Investments 50 Osgood Place 15,000 14.83%
San Francisco, CA 94133
Series A Preferred Lagunitas Partners, L.P. 50 Osgood Place 20,000 19.78%
San Francisco, CA 94133
Series A Preferred Benjamin F. Dillingham 1508 Smith Road 5,000 5.07%
Yuba City, CA 95993-7005
Series A Preferred Elizabeth D. Wick 444 South Beach Road 10,000 10.14%
Hobe Sound, FL 33455
Series A Preferred Walter D. Wick Trust c/o Winston Partners 5,000 5.07%
225 W. Washington St.,
# 1600
Chicago, IL 60606
Series A Preferred Myron A. Wick III Trust c/o Winston Partners 5,000 5.07%
225 W. Washington St.,
# 1600
Chicago, IL 60606
Series A Preferred Penelope DeYoung Trust c/o Winston Partners 5,000 5.07%
225 W. Washington St.,
# 1600
Chicago, IL 60606
Series A Preferred Jupiter Partners c/o John M. Bryan 10,000 10.14%
600 Montgomery St. 35th
Floor
San Francisco, CA 94111
Series A Preferred All executive officers and 30,000 29.67%
directors as a group (13
persons)
Series B Preferred Proactive Partners, L.P. 50 Osgood Place 50,000 43.67%
San Francisco, CA 94133
Series B Preferred Fremont Proactive Partners, 50 Osgood Place 7,500 6.55%
L.P. San Francisco, CA 94133
Series B Preferred Lagunitas Partners, L.P. 50 Osgood Place 35,000 30.57%
San Francisco, CA 94133
Series B Preferred BMA, Inc. 2001 Kirby Avenue 10,000 8.73%
Houston, TX 77019
Series B Preferred Myron A. Wick III(14) 1687 Cole Boulevard 57,500 50.22%
Golden, CO 80401
Series B Preferred Charles C. McGettigan(14) 50 Osgood Place 57,500 50.22%
San Francisco, CA 94133
Series B Preferred All executive officers and 57,500 50.22%
directors as a group (13
persons)
Series D Preferred Proactive Partners, L.P. 50 Osgood Place 333,333 100.00%
San Francisco, CA 94133
Series D Preferred Myron A. Wick III(15) 1687 Cole Boulevard 333,333 100.00%
Golden, CO 80401
Series D Preferred Charles C. McGettigan(15) 50 Osgood Place 333,333 100.00%
San Francisco, CA 94133
Series D Preferred All executive officers and 333,333 100.00%
directors as a group (13
persons)
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(2)
------------------------
NUMBER OF PERCENT OF
CLASS BENEFICIAL OWNER ADDRESS SHARES TOTAL
- ------------------- ------------------------------ ------------------------ --------- ----------
<S> <C> <C> <C> <C>
Series F Preferred Proactive Partners, L.P. 50 Osgood Place 126,456 10.75%
San Francisco, CA 94133
Series F Preferred Myron A. Wick III(16) 1687 Cole Boulevard 131,518 11.18%
Golden, CO 80401
Series F Preferred Charles C. McGettigan(16) 50 Osgood Place 131,518 11.18%
San Francisco, CA 94133
Series F Preferred John David Singleton 30,095 2.56%
Series F Preferred Max E. Thornhill 1687 Cole Boulevard 285,000 24.23%
Golden, CO 80401
Series F Preferred All executive officers and 446,613 37.98%
directors as a group (13
persons)
</TABLE>
- ---------------
(1) In addition to 17,698,974 shares of Common Stock, at July 31, 1996, the
Company had 2,725,014 shares of Preferred Stock outstanding, of which
101,125 were shares of Series A Preferred Stock, 114,500 were shares of
Series B Preferred Stock, 1,000,000 were shares of Series C Preferred
Stock, 333,333 were shares of Series D Preferred Stock and 1,176,056 were
shares of Series F Preferred Stock. The Series C Preferred Stock is
nonvoting, except as required by law. The Series A Preferred Stock, Series
B Preferred Stock, Series D Preferred Stock and Series F Preferred Stock
vote together with the Common Stock as a single class on an as-if-converted
to Common Stock basis, except as required by law, the Company's Restated
Certificate of Incorporation or the Company's Certificates of Designation
of Preferences of Series A, Series B, Series D and Series F Preferred
Stock.
(2) This table is based upon information supplied by executive officers,
directors and principal stockholders and Schedules 13D and 13G filed with
the Securities and Exchange Commission (the "Commission"). Unless otherwise
indicated in the footnotes to this table and subject to community property
laws where applicable, each of the stockholders named in this table has
sole voting and investment power with respect to the shares indicated as
beneficially owned. Beneficial ownership of less than 1% of a class of
stock is indicated with an asterisk.
(3) Includes shares of Common Stock which certain executive officers,
directors, nominees for director and principal stockholders of the Company
have the right to acquire within 60 days after the date of this table
pursuant to outstanding options and warrants as follows: Thomas H. Bell,
545,000 shares; James W. Gallaway, 87,875 shares; Jeffrey L. Bailey,
137,498 shares; Merrill L. Magowan, 79,125 shares; J. Rex Bell, 101,498
shares; Myron A. Wick III, 428,557 shares; Robert R. Curtis, 255,312
shares; Sidney Kahn, 9,447 shares; Wallace M. Hammond, 250,000 shares; John
David Singleton, 14,126 shares; Max Thornhill, 116,088 shares; Paul C.
Cissel, 70,312 shares; Charles C. McGettigan, 384,807 shares; Jon D.
Gruber, 219,008 shares; J. Patterson McBaine, 219,008 shares; Gruber &
McBaine Capital Management, 219,008 shares and Proactive Investment
Managers, L.P., 206,857 shares. Also includes shares of Common Stock which
certain executive officers, directors, nominees for director and principal
stockholders of the Company have the right to acquire within 60 days after
the date of this table pursuant to conversion of outstanding Series A, B, D
and F Preferred Stock as follows (on an as-if-converted to Common Stock
basis): Merrill L. Magowan, 41,320 shares; Myron A. Wick III, 1,325,398
shares; Robert R. Curtis, 20,730 shares; John David Singleton, 481,520
shares; Max Thornhill, 4,560,000 shares; Jon D. Gruber, 1,696,779 shares;
J. Patterson McBaine, 1,684,383 shares; Gruber & McBaine Capital
Management, 1,680,251 shares; Charles C. McGettigan, 1,304,738 shares and
Proactive Investment Managers, L.P., 1,242,758 shares.
(4) Includes 1,394,335 shares of Common Stock beneficially held in the name of
the Bell Non-Exempt Marital Trust of which Thomas H. Bell is a trustee.
(5) Includes 1,582,947 shares of Common Stock which the following entities
either own or have the right to acquire within 60 days after the date of
this table upon conversion of Series A, B, D or F Preferred Stock or
exercise of warrants held as follows: 1,510,672 shares held by Proactive
Partners, L.P., a California limited partnership ("PP"), the general
partner of which is Proactive Investment Managers, L.P., a California
limited partnership ("PIM"), of which Messrs. Gruber, McBaine, McGettigan
and Wick are
11
<PAGE> 14
general partners; and 72,275 shares held by Fremont Proactive Partners,
L.P., a California limited partnership ("FPP"), of which PIM is also the
general partner.
(6) Includes 589,132 shares of Common Stock which the following entities either
own or have the right to acquire within 60 days after the date of this
table upon conversion of Series A, B, D or F Preferred Stock or exercise of
warrants held as follows: 30,500 shares held by Gruber & McBaine Capital
Management, a California corporation ("GMCM"), of which Messrs. Gruber and
McBaine are the sole directors; 548,644 held by Lagunitas Partners L.P., a
California limited partnership, of which Messrs. Gruber and McBaine and
GMCM are general partners; 5,000 shares held by GMJ Investments, L.P., a
California limited partnership, of which Messrs. Gruber and McBaine and
GMCM are general partners; and 5,000 shares held by Lagunitas
International, a Cayman Islands Limited Partnership, of which GMCM is a
general partner.
(7) Includes 153,950 shares of Common Stock which could be acquired within 60
days of the date of this table upon exercise of warrants or conversion of
Series A Preferred Stock held by McGettigan, Wick & Co., Inc., a merchant
banking fund of which Messrs. McGettigan and Wick are Managing Directors,
and 61,980 shares which could be acquired within 60 days of this table upon
conversion of Series A Preferred Stock held by McGettigan, Wick
Investments, a partnership of which Messrs. McGettigan and Wick are general
partners.
(8) Includes 48,659 shares of Common Stock which is owned or could be acquired
within 60 days of the date of this table upon conversion of Series A
Preferred Stock held by the Myron A. Wick III Trust for which Mr. Wick is
the trustee.
(9) Includes 5,000 shares held by Mr. Curtis for the benefit of his minor
children.
(10) Includes 7,846,079 shares of Common Stock which such persons have the right
to acquire within 60 days after the date of this table upon conversion of
Series A, B, D or F Preferred Stock and pursuant to outstanding options and
warrants.
(11) Includes 15,000 shares of Series A Preferred Stock which is owned by
McGettigan, Wick Investments, a partnership of which Messrs. McGettigan and
Wick are general partners.
(12) Includes 5,000 shares of Series A Preferred Stock which is owned by the
Myron A. Wick III Trust for which Mr. Wick is the trustee.
(13) Includes 20,000 shares of Series A Preferred Stock owned by Lagunitas
Partners L.P.
(14) Includes 50,000 shares of Series B Preferred Stock owned by PP and 7,500
shares of Series B Preferred Stock owned by FPP. Messrs. Wick and
McGettigan are general partners of PIM, which is the general partner of PP
and FPP.
(15) Includes 333,333 shares of Series D Preferred Stock owned by PP. Messrs.
Wick and McGettigan are general partners of PIM, which is the general
partner of PP and FPP.
(16) Includes 126,456 shares of Series F Preferred Stock owned by PP and 5,062
shares of Series F Preferred Stock owned by FPP. Messrs. Wick and
McGettigan are general partners of PIM, which is the general partner of PP
and FPP.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent (10%) of a registered class of the Company's equity
securities, to file with the Commission initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. Officers, directors and greater than ten percent (10%) stockholders are
required by Commission regulation to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and representations that no other reports were
required, during the fiscal year ended December 31, 1995, all Section 16(a)
filing requirements applicable to its officers, directors and greater than ten
percent (10%) beneficial owners were complied with.
12
<PAGE> 15
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
No cash fees are paid to directors for serving on the Board. The members of
the Board are, however, eligible for reimbursement for their expenses incurred
in connection with attendance at Board meetings in accordance with Company
policy.
Each non-employee director of the Company also receives stock option grants
under the 1992 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"). Only directors of the Company who are not employees of the Company or
any of its affiliates (a "non-employee director") are eligible to receive
options under the Directors' Plan. Options granted under the Directors' Plan are
intended by the Company not to qualify as ISOs.
Option grants under the Directors' Plan are non-discretionary. Each person
who is elected or appointed after January 4, 1993 to be a non-employee director
of the Company is automatically granted under the Directors' Plan an option to
purchase 10,000 shares of Common Stock of the Company. In addition, on the first
business day of each year thereafter, each non-employee director of the Company
is automatically granted under the Directors' Plan an option to purchase shares
of Common Stock (rounded to the nearest 100 shares) of the Company equal to the
Proration Factor (as hereinafter defined) multiplied by the sum of (i) 10,000
shares of Common Stock of the Company and (ii) 2,500 shares of Common Stock of
the Company multiplied by the number of full years such non-employee director
has served in such capacity. The "Proration Factor" is a fraction, the numerator
of which is the number of calendar days during the preceding year on which such
person served as a non-employee director and the denominator of which is 365. No
other options will be granted under the Directors' Plan. The exercise price of
an option granted under the Directors' Plan is equal to the fair market value of
the Common Stock subject to the option on the date of grant. The number of
options granted under the Directors' Plan is subject to certain anti-dilution
protections in favor of the non-employee directors, and options granted under
the Directors' Plan expire ten years from the date of grant. Options granted
under the Directors' Plan vest and become exercisable at the rate of
one-sixteenth of the shares subject to such options per quarter for sixteen
quarters following the date of grant. During 1995, options for 96,000 shares of
Common Stock were granted to non-employee directors with exercise prices ranging
from $2.375 to $3.625 per share. None of these options has been exercised as of
the date hereof.
Under the terms of a consulting agreement between the Company and Robert R.
Curtis, a current director of the Company, the Company paid Mr. Curtis during
1995 twelve equal monthly payments of $15,000 each, to pay accrued vacation and
medical leave benefits (without regard to usual limitations), to reimburse Mr.
Curtis for legal costs reasonably incurred negotiating his change in status from
employee to consultant with the Company, and to fully vest any options on
Company stock held at December 31, 1994. In exchange, Mr. Curtis held himself
available during 1995 to serve as a consultant to the Company, performing such
services as the Company reasonably requested.
COMPENSATION OF EXECUTIVE OFFICERS
Summary of Compensation
The following table shows, for the fiscal years ended December 31, 1995,
1994 and 1993, compensation awarded or paid to, or earned by, the Company's
Chief Executive Officer, former Chief Executive Officer and each of the four
other most highly compensated executive officers at December 31, 1995 whose
total annual salary and bonus was in excess of $100,000 for the year ended
December 31, 1995 (the "Named Executive Officers"):
13
<PAGE> 16
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
SALARY(1) BONUS OPTIONS/(2) COMPENSATION(4)
NAME AND PRINCIPAL POSITION YEAR ($) ($) SARS (#) ($)
- ------------------------------------ ---- --------- ------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Mr. Wallace M. Hammond(3)........... 1995 203,511 67,451 300,000 2,320
President and Chief Executive
Officer 1994 127,885 300,000(2)
Mr. Jeffrey L. Bailey............... 1995 129,219 15,193 50,000 2,320
Senior Vice President and 1994 120,573 500
Chief Financial Officer 1993 109,838 145,000(2) 700
Mr. Paul C. Cissel(3)............... 1995 125,001 25,000 20,438
Vice President of Sales and
Marketing 1994 28,646 150,000
Mr. J. Rex Bell..................... 1995 117,657 15,193 50,000 2,320
Senior Vice President of Operations 1994 109,585
1993 99,159 104,000(2)
</TABLE>
- ---------------
(1) Includes amounts earned but deferred at the election of the executives. As
permitted by Commission rules, no amounts are shown for certain perquisites,
as such amounts do not exceed the lesser of 10% of bonus plus salary or
$50,000.
(2) Repriced options treated as new grants. The Company has not issued any stock
appreciation rights (SARs).
(3) Mr. Hammond and Mr. Cissel were not employed by the Company before 1994,
thus only 1995 and 1994 compensation is disclosed. The amounts disclosed
include compensation commencing in February 1994 for Mr. Hammond, when he
joined the Company as Executive Vice President, and include compensation
commencing in November 1994 for Mr. Cissel, when he was hired as Vice
President of Sales and Marketing. Mr. Hammond was elected President and
Chief Operating Officer of the Company in May 1994 and Chief Executive
Officer in December 1994.
(4) In each case where a figure is listed, All Other Compensation includes $500
in matching Section 401(k) plan contributions made by the Company. The
balance of the amount reported for each officer other than Mr. Cissel
represents a reimbursement of parking expenses. The balance of the amount
reported for Mr. Cissel represents commission payments of $19,218 and
reimbursement of parking expenses of $220.
Employment Agreements
Effective January 1, 1996, the Company and Mr. Hammond entered into a new
employment agreement with a term beginning January 1, 1996 and ending December
31, 1998 which superseded the previous employment agreement between the Company
and Mr. Hammond. The new employment agreement provides for a salary of $250,000
during 1996, $275,000 during 1997 and $300,000 during 1998 in exchange for Mr.
Hammond's services to the Company as President and Chief Executive Officer. The
agreement further provides for an option grant of 200,000 shares of the
Company's Common Stock vesting at the rate of 12,500 shares per calendar quarter
and an annual bonus equal to 1% of the Company's earnings before interest,
taxes, depreciation and amortization. Under terms of the employment agreement,
should an acquisition of the Company or a similar corporate event result in the
termination of Mr. Hammond's employment with the Company, any unvested options
held by Mr. Hammond will immediately vest. In the event Mr. Hammond is
terminated without cause, the Company has agreed he is to receive a severance
amount equal to 18 months' salary and bonus. In the event of an acquisition of
the Company or a similar corporate event resulting in the termination of his
employment with the Company, the Company has agreed to pay Mr. Hammond a
severance amount equal to the salary he would have received had he remained
employed for the entire term of the employment agreement. In either a
termination of Mr. Hammond's employment without cause or the termination of his
employment in the event of an acquisition of the Company (or similar corporate
event), the Company has agreed to pay Mr. Hammond's reasonable relocation
expenses, not to exceed $20,000.
14
<PAGE> 17
Effective January 1, 1995, the Company and Mr. Bailey entered into an
employment agreement for the 1995 calendar year providing for an annual salary
at least $127,200 and, in the event of an acquisition of the Company or a
similar corporate event which results in the termination by the Company or its
successor of Mr. Bailey's employment, the immediate vesting of all unvested
shares of the Company's stock subject to options held by Mr. Bailey and the
payment of a severance benefit in the amount of $127,200. In exchange for the
terms contained in the employment agreement, Mr. Bailey agreed to render
services to the Company as its Senior Vice President and Chief Financial
Officer. The Company has also agreed to pay on a quarterly basis a bonus equal
to 1% of the Company's pre-tax profit for that quarter. In the event Mr.
Bailey's employment is terminated without cause, the Company has agreed to pay
him the greater of one-half his annual salary or the balance of his annual
salary due under the employment agreement.
Effective January 1, 1995, the Company and Mr. Rex Bell entered into an
employment agreement for the 1995 calendar year providing for an annual salary
at least $116,600, and, in the event of an acquisition of the Company or a
similar corporate event resulting in the termination by the Company or its
successor of Mr. Rex Bell's employment, the immediate vesting of all unvested
shares of the Company's stock subject to options held by Mr. Rex Bell and the
payment of a severance benefit in the amount of $116,600. In exchange for the
terms contained in the employment agreement, Mr. Rex Bell has agreed to render
services to the Company as its Senior Vice President of Operations. The Company
has also agreed to pay Mr. Bell, on a quarterly basis, a bonus equal to 1% of
the Company's pre-tax profit for that quarter. In the event Mr. Bell's
employment is terminated without cause, the Company has agreed to pay him the
greater of one-half his annual salary or the balance of his annual salary due
under the employment agreement.
Effective October 10, 1994, the Company and Mr. Cissel entered into an
employment agreement with a term ending October 9, 1995. In exchange for the
terms contained in the employment agreement, Mr. Cissel agreed to render
services to the Company as its Vice President of Sales and Marketing. Under the
employment agreement, Mr. Cissel is to be paid a salary at an annual rate of
$125,000 and a monthly bonus equal to 1% of new customer billings. Mr. Cissel
also received an option to purchase 150,000 shares of the Company's Common
Stock, which shares vest at the rate of 9,375 shares per quarter, subject to
immediate vesting upon an acquisition of the Company or similar corporate event
resulting in the termination of Mr. Cissel's employment. The Company further
agreed to reimburse up to $20,000 of rental expenses incurred by Mr. Cissel
prior to his establishing a permanent residence in San Francisco, California.
Should Mr. Cissel's employment with the Company be terminated without cause
during the term of the employment agreement, the Company has agreed to pay him
the greater of one-quarter of his annual salary under the employment agreement
or the balance of salary due to him had employment continued for the remainder
of its term.
Stock Option Grants and Exercises
The Company grants options to its executive officers under its 1989 Stock
Option Plan (the "1989 Plan"). As of July 31, 1996, options to purchase a total
of 2,233,053 shares had been granted and were outstanding under the 1989 Plan
and no shares remained available for future grant thereunder.
15
<PAGE> 18
The following tables show for the fiscal year ended December 31, 1995,
certain information regarding options granted to, exercised by, and held at year
end by the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT
-------------------------------------------------- ASSUMED ANNUAL
PERCENTAGE RATES OF STOCK
NUMBER OF OF TOTAL PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION
OPTIONS EMPLOYEES OR BASE TERM(2)
GRANTED IN FISCAL PRICE EXPIRATION -----------------
NAME (#) 1995(1) ($/SH) DATE 5%($) 10%($)
----------------------------- ---------- ----------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Wallace M. Hammond........... 200,000 27.9% 2.375 3/23/99 105,252 227,402
100,000 13.9% 3.125 3/23/99 60,110 128,394
Jeffrey L. Bailey............ 25,000 3.5% 2.375 3/23/99 13,156 28,425
25,000 3.5% 3.125 3/23/99 15,027 32,098
Paul C. Cissel............... 25,000 3.5% 3.125 3/23/99 15,027 32,098
J. Rex Bell.................. 25,000 3.5% 2.375 3/23/99 13,156 28,425
25,000 3.5% 3.125 3/23/99 15,027 32,098
</TABLE>
- ---------------
(1) Based on options to purchase 717,400 shares of the Company's Common Stock
granted in 1995.
(2) The potential realizable value is based on the term of the option at its
time of grant (4.1 years for the option to purchase 200,000 shares of the
Company's Common Stock granted to Mr. Hammond and for the initial options
for 25,000 shares granted to Mr. Bailey and Mr. Bell and 3.6 years for the
option to purchase 100,000 shares of the Company's Common Stock granted to
Mr. Hammond and for the second options for 25,000 shares granted to Mr.
Bailey, Mr. Cissel and Mr. Bell). The potential realizable value is
calculated by assuming that the stock price on the date of grant
appreciates at the indicated annual rate, compounded annually for the
entire term of the option, and that the option is exercised and the
underlying shares of the Company's Common Stock are sold on the last day of
the option's term for the appreciated stock price. These amounts represent
certain assumed rates of appreciation only, in accordance with the rules of
the SEC, and do not reflect the Company's estimate or projection of future
stock price performance. Actual gains, if any, are dependent on the actual
future performance of the Company's Common Stock and no gain to the
optionee is possible unless the stock price increases over the option term,
which will benefit all stockholders.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1995, AND
VALUE OF OPTIONS AT END OF FISCAL YEAR 1995
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES AT END OF AT END OF
ACQUIRED VALUE FISCAL 1995(#) FISCAL 1995($)(2)
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($)(1) UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------ ----------- -------- --------------- -----------------
<S> <C> <C> <C> <C>
Jeffrey L. Bailey......................... -- -- 129,693/45,307 330,682/41,193
J. Rex Bell............................... -- -- 94,123/44,877 237,310/40,065
Wallace M. Hammond........................ -- -- 175,000/425,000 197,656/439,844
Paul C. Cissel............................ -- -- 48,437/126,563 3,711/18,164
</TABLE>
- ---------------
(1) Value realized is based on the fair market value of the Company's Common
Stock on the date of exercise minus the exercise price, without taking into
account any taxes which may be payable in connection with the transaction,
and does not necessarily indicate that the optionee sold such stock.
(2) Fair market value of the Company's Common Stock at December 31, 1995
($3.625) minus the exercise price of the options.
16
<PAGE> 19
COMPENSATION COMMITTEE REPORT(1)
The Compensation Committee presently consists of Messrs. Thomas Bell and
Wick, both of whom are non-employee directors. The Committee is responsible for
setting the Company's policies governing employee compensation, administering
the Company's employee benefit plans and determining the compensation of the
Company's executive officers. The Committee annually evaluates the performance,
and determines the compensation, of the Chief Executive Officer and the other
executive officers of the Company based upon a mix of the achievement of
corporate goals, individual performance and comparisons with comparable
companies. The Chief Executive Officer and other executive officers are not
present during the discussion of their compensation.
The Committee attempts to design compensation policies that will attract
and retain the highest quality executives and will reward them for the Company's
progress towards its long-term goal of increasing corporate revenue and
attaining profitability in line with averages for companies within the
telecommunications industry. A variety of factors, both personal and corporate,
are considered in evaluating the Company's executive officers and making our
compensation decisions. These include the compensation paid by comparable
companies to individuals in comparable positions, the individual contributions
of each officer to the Company, and, most importantly, the progress of the
Company towards its long-term objectives. As the Company has progressed the
measures of this progress have changed, and are expected to continue to change.
The Compensation Committee has determined that the stock options granted
under the Company's 1989 Stock Option Plan, as amended, with an exercise price
at least equal to the fair market value of the Company's Common Stock on the
date of grant shall be treated as "performance-based compensation." Compensation
recognized by an Executive Officer as a result of the exercise of such a stock
option will be deductible by the Company.
EXECUTIVE OFFICER COMPENSATION
The Company's executive officer compensation program is comprised of base
salary, annual cash incentive compensation in the form of a bonus and long-term
incentive compensation in the form of stock option grants at current market
prices.
Base Salary
In establishing base salaries, the Committee first considers a number of
surveys of compensation levels at comparably-sized companies in comparable
industries, including companies in the telecommunications industries. The
companies included in the surveys are not necessarily the same as the companies
included in the market indices included in the performance graph in this Proxy
Statement.
Based on the data generated in the surveys, the Committee then sets a
target base salary level applicable to all executive officers. The Committee
then considers the level of responsibility, experience and contributions of each
executive officer. The Committee then sets each officer's base salary taking
into account the target salary and the Committee's evaluation of individual
performance.
Annual Cash Incentive Bonus
There were no formal cash incentive bonus programs in place for executive
officers during 1994 or 1995. Under the terms of the employment agreements
described above in "Compensation of Executive Officers," certain officers are
entitled to receive bonuses based on the Company's operating results. As a
result of the Company achieving profitable operating results in the third and
fourth quarter of 1994, executive officers
- ---------------
(1) The material in this report is not "soliciting material," is not deemed
filed with the SEC and is not to be incorporated by reference in any filing
of the Company under the Securities Act of 1933, as amended (the "1933
Act") or the Securities Exchange Act of 1934, as amended (the "1934 Act"),
whether made before or after the date hereof and irrespective of any
general incorporation language in any such filing.
17
<PAGE> 20
received a total of $60,000 in discretionary cash bonuses in 1995 related to the
Company's 1994 performance. As a result of the Company achieving profitable
operating results in first, second and third quarters of 1995, executive
officers received a total of $24,439 in cash bonuses in 1995 relating to the
Company's 1995 performance.
Stock Option Grants
The Company grants stock options to its executive officers in order to
provide long-term incentives to executive officers and align executive officer
and stockholder long-term interests by creating a direct link between executive
compensation and stockholder return. Stock options are granted at an option
price equal to the fair market value of the Company's Common Stock on the date
of grant. In order to facilitate long-term incentives through the option grants,
options are generally subject to ratable vesting over four years and are
exercisable through March 1999.
Executive officer awards are subjectively determined by the Committee after
considering stock option grant data taken from the compensation surveys referred
to above, as well as the level of responsibility, experience and contributions
of each executive officer. In determining the size of individual grants, the
Committee also considers the number of shares subject to options previously
granted to each executive officer, including the number of such shares that have
vested and that remain unvested.
CHIEF EXECUTIVE OFFICER COMPENSATION
Based upon a review of Mr. Hammond's performance as President and Chief
Operating Officer of the Company from May 1994, his past performance as
Executive Vice President of the Company and his former role as President and
Chief Executive Officer of ANSCO & Associates, a telephone engineering and plant
construction company from 1992 to 1993, and a review of other candidates, the
Company's Board of Directors offered and Mr. Hammond accepted the position of
Chief Executive Officer of the Company in December 1994. In determining Mr.
Hammond's compensation package for 1995, the Company also relied on a report
prepared by an independent executive compensation consulting firm which examined
compensation packages of Chief Executive Officers and Presidents of comparable
companies.
OPTION REPRICING
The Compensation Committee has from time to time approved the repricing of
option grants to employees, including executive officers, based upon the
Committee's determination of the value of the employee's contribution to the
Company. The intent of these repricings has been to align the option exercise
price with the fair market value of the underlying Common Stock as determined by
the marketplace.
Thomas H. Bell
Myron A. Wick III
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Agreement with Thomas H. Bell
Thomas H. Bell, who is Chairman of the Board and a member of the Company's
Compensation Committee, was the Chief Executive Officer of the Company from
inception through January 1992 and of its predecessor from inception to 1989.
Mr. Bell was the Company's President from inception through September 1990 and
the President of its predecessor from 1985 to 1989. Under the terms of an
agreement between the Company and Mr. Bell, Mr. Bell is enrolled in the
Company's health benefits plan and the Company pays Mr. Bell's premiums which
amounted to $14,731 in 1995.
18
<PAGE> 21
PERFORMANCE MEASUREMENT COMPARISON(1)
The following chart shows the CRSP Total Return Index for (i) the Company's
Common Stock, (ii) Nasdaq Stock Market (US Companies) and (iii) Nasdaq
Telecommunications Stocks. All values assume reinvestment of the full amount of
all dividends.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN ON INVESTMENT(2)(3)
<TABLE>
<CAPTION>
NASDAQ TELE-
MEASUREMENT PERIOD PHOENIX NET- NASDAQ STOCK COMMUNICA-
(FISCAL YEAR COVERED) WORK, INC. MARKET TIONS STOCK
<S> <C> <C> <C>
12/31/90 100 100 100
12/31/91 139 160.5 137.9
12/31/92 61 186.8 169.4
12/31/93 366.1 214.5 261.2
12/31/94 128.8 209.7 215.9
12/31/95 196.6 296.6 250.1
</TABLE>
- ---------------
(1) This Section is not "soliciting material," is not deemed filed with the SEC
and is not to be incorporated by reference in any filing of the Company
under the 1933 Act or the 1934 Act whether made before or after the date
hereof and irrespective of any general incorporation language in any such
filing.
(2) The CRSP Total Return on investment (change in month end stock price plus
reinvested dividends) for the Company, the CRSP Total Return for The NASDAQ
Stock Market (US Companies) and the CRSP Total Return Index for NASDAQ
Telecommunications Stocks based on December 31, 1990 = 100.
(3) The Company's Common Stock was traded in the over-the-counter market from
the Company's initial public offering in 1983 and was quoted on the NASDAQ
system under the Symbol "PHXN" from October 24, 1989 through October 4,
1993. On October 5, 1993, the Company changed its listing to the American
Stock Exchange and began trading under the symbol "PHX". For purposes of the
above chart, the index for all series was set at 100 as of December 31,
1990.
19
<PAGE> 22
CERTAIN TRANSACTIONS
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnity agreements with certain officers and
directors which provide, among other things, that the Company will indemnify
such officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings to which he is or may be made a party
by reason of his position as a director, officer or other agent of the Company,
and otherwise to the fullest extent permitted under Delaware law and the
Company's By-laws.
CHANGE OF CONTROL SEVERANCE PLAN
The Board of Directors has adopted a plan which is intended to provide
eligible employees with severance benefits in the event of the sale of the
Company or any similar corporate event which results in the employee's
involuntary termination of employment with the Company within a year after the
sale of the Company or similar corporate event. The amount of the severance
benefit is determined by the employee's position, title and level of
compensation, and generally will not exceed 4-6 months of compensation at the
rates in effect at the time of termination. Under the plan, stock options held
by terminated employees will accelerate and become fully vested and exercisable
as of the employee's termination. The plan does not cover temporary employees or
employees who have negotiated individual severance agreements with the Company.
CBS AGREEMENT
On October 31, 1994, the Company entered into a letter agreement with
Communication and Business Solutions, Inc. ("CBS") and Paul C. Cissel in which
the parties agreed that the Company would purchase certain assets of CBS
associated with its customer base in exchange for payment of $330,000 in 12
equal monthly installments beginning in December of 1994. Under the letter
agreement, the purchase price was subject to adjustment based on the performance
of the purchased customer base. In 1995, payments totaling $327,500 were made in
respect of such agreement.
AGREEMENT WITH MR. CURTIS
Effective November 7, 1994, the Company and Mr. Curtis, a current director
of the Company, entered into a consulting agreement under which Mr. Curtis
agreed to resign as Chief Executive Officer of the Company, effective January 1,
1995, in order to provide consulting services to the Company during 1995. In
exchange for such agreement and services, the Company paid Mr. Curtis during
1995 twelve equal monthly payments of $15,000 each, to pay accrued vacation and
medical leave benefits (without regard to usual limitations), to reimburse Mr.
Curtis for legal costs reasonably incurred negotiating his change in status with
the Company, and to fully vest any options for Company Common Stock held by Mr.
Curtis at December 31, 1994.
ISSUANCE OF WARRANT
In August 1995, in exchange for services rendered in connection with the
Series F Preferred Stock financing, the Company issued to McGettigan, Wick &
Co., Inc. a warrant for 62,200 shares of the Company's Common Stock exercisable
until February 15, 1997 at a per share price of $2.50, payable in cash or upon
cancellation of Company indebtedness. McGettigan, Wick & Co., Inc. is a merchant
banking fund whose Managing Directors, Messrs. McGettigan and Wick, and their
affiliates, are greater than 5% stockholders in the Company. Mr. Wick is
presently a director of the Company, and Mr. McGettigan is a nominee for
director.
ACQUISITION OF AUTOMATED COMMUNICATIONS, INC.
In January 1996, the Company acquired from Ms. Judy Van Essen all of the
outstanding shares of Automated Communications, Inc., a Golden, Colorado
facilities-based reseller of long distance service.
20
<PAGE> 23
Consideration for the transaction was in the form of $4,000,000 in cash,
2,800,000 shares of the Company's Common Stock valued at $10,500,000 and the
issuance of a long-term note in the amount of $1,300,000. As a result of the
transaction and her acquisition of 2,800,000 shares of the Company's Common
Stock, Ms. Van Essen held 15.82% of the Common Stock of the Company as of July
31, 1996.
PRIVATE PLACEMENT OF UNITS
On April 28, 1995, the Company sold 385,000 units at $2.20 per unit for
$847,000 in an offshore transaction pursuant to Regulation S of the Securities
Act of 1933, as amended. Each unit was comprised of one share of the Company's
Common Stock and a Warrant, exercisable until April 18, 2000, which when
combined with another Warrant, entitles the holder to purchase a share of Common
Stock for $2.20. Co-placement agents for the financing were Oakes Fitzwilliams &
Co. Limited and McGettigan, Wick & Co., Inc. Messrs. Wick and McGettigan,
principals of McGettigan, Wick & Co., Inc. are a current director and a nominee
for director, respectively, of the Company. The co-placement agents received a
cash fee for their services in the financing equal to 10% of the proceeds of the
financing and a five-year warrant for 38,500 units at $2.64 per unit.
PREFERRED STOCK FINANCINGS
During the period July 1995 through October 1995, the Company raised
approximately $11,024,207, net of offering costs of $129,963, through a private
placement of 1,115,417 shares of its Series F Preferred Stock at a purchase
price of $10.00 per share. Additionally, the holder of the Company's Series E
Preferred Stock exchanged its shares of Series E Preferred Stock, plus
accumulated and unpaid dividends of $47,467, for 60,639 shares of Series F
Preferred Stock. The Series E Preferred Stock was held by Proactive Partners,
L.P. ("Proactive"), a beneficial owner of greater than 5% of the Company's
Common Stock. Mr. Wick, a current director of the Company, and Mr. McGettigan, a
nominee for director, are general partners of Proactive Investment Managers,
L.P., the general partner of Proactive.
In addition to the conversion of the outstanding Series E Preferred Stock
into Series F Preferred Stock, Proactive, Lagunitas Partners, L.P. ("Lagunitas")
and Fremont Proactive Partners, L.P. ("Fremont") also purchased 65,817, 30,377
and 5,062 shares of Series F Preferred Stock, respectively. Proactive, Lagunitas
and Fremont and their affiliates are beneficial owners of greater than 5% of the
Company's Common Stock. Mr. Wick, a current director of the Company, and Mr.
McGettigan, a nominee for director, are general partners of Proactive Investment
Managers, L.P., the general partner of Proactive, Lagunitas and Fremont. The
shares of Series F Preferred Stock are entitled to 9% cumulative dividends,
voting rights, demand registration rights for the underlying shares of Common
Stock after six months and are convertible initially into 4,704,224 shares of
Common Stock, subject to anti-dilution provisions. The holders of the Series F
Preferred Stock also received warrants for the purchase of 470,422 shares of
Common Stock with an exercise price of $3.00 per share which expire in October
2000. The Series F Preferred stockholders generally have the right to place two
directors on the Company's Board of Directors (the "Series F Directors") and the
Company is subject to certain covenants requiring it to obtain the consent of
the Series F Directors for certain transactions including mergers, acquisitions
and incurring additional indebtedness in excess of $20,000,000. Currently, the
Series F Directors are Messrs. Singleton and Thornhill, who were 0.97% and 9.26%
beneficial owners of the Company's Common Stock as of July 31, 1996, and who
acquired their interests in the Company as a result of the Series F Preferred
Stock financing and through purchases of Common Stock. As of July 31, 1996, the
outstanding shares of Series F Preferred Stock were convertible into 4,704,224
shares of Common Stock.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected Grant Thornton, L.L.P. as the Company's
independent auditors for the fiscal year ending December 31, 1996. Grant
Thornton, L.L.P. has audited the Company's financial statements since 1989.
Representatives of Grant Thornton, L.L.P. are expected to be present at the
Annual
21
<PAGE> 24
Meeting, will have an opportunity to make a statement if they so desire and will
be available to respond to appropriate questions.
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
/s/ ERNEST J. PANASCI
ERNEST J. PANASCI
Secretary
September 3, 1996
A copy of the Company's Annual Report to the Commission on Form 10-K for
the fiscal year ended December 31, 1995, as amended by Amendments No. 1 and No.
2 thereto on Form 10-K/A, is available without charge upon written request to:
Corporate Secretary, Phoenix Network, Inc.,1687 Cole Boulevard, Golden,
Colorado 80401.
22
<PAGE> 25
APPENDIX A
PHOENIX NETWORK, INC.
1989 STOCK OPTION PLAN
ADOPTED MARCH 23, 1989 AND
AS AMENDED THROUGH MARCH 25, 1993
1. PURPOSE.
(A) The purpose of the Plan is to provide a means by which selected key
employees and directors (if eligible under paragraph 4) of and consultants to
Phoenix Network, Inc., a Colorado corporation (the "Company"), and its
Affiliates, as defined in subparagraph l(b), may be given an opportunity to
purchase stock of the Company.
(B) The word "Affiliate" as used in the Plan means any parent corporation
or subsidiary corporation of the Company, as those terms are defined in Sections
425(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
from time to time (the "Code").
(C) The Company, by means of the Plan, seeks to retain the services of
persons now employed by or serving as consultants or directors to the Company,
to secure and retain the services of persons capable of filling such positions,
and to provide incentives for such persons to exert maximum efforts for the
success of the Company.
(D) The Company intends that the options issued under the Plan shall, in
the discretion of the Board of Directors of the Company (the "Board") or any
committee to which responsibility for administration of the Plan has been
delegated pursuant to subparagraph 2(c), be either incentive stock options as
that term is used in Section 422A of the Code ("Incentive Stock Options"), or
options which do not qualify as incentive stock options ("Supplemental Stock
Options"). All options shall be separately designated Incentive Stock Options or
Supplemental Stock Options at the time of grant, and in such form as issued
pursuant to paragraph 5, and a separate certificate or certificates shall be
issued for shares purchased on exercise of each type of option. An option
designated as a Supplemental Stock Option shall not be treated as an incentive
stock option.
2. ADMINISTRATION.
(A) The Plan shall be administered by the Board unless and until the Board
delegates administration to a committee, as provided in subparagraph 2(c).
(B) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible under
the Plan shall be granted options; when and how the option shall be
granted; whether the option will be an Incentive Stock Option or a
Supplemental Stock Option; the provisions of each option granted (which
need not be identical), including the time or times during the term of each
option within which all or portions of such option may be exercised; and
the number of shares for which an option shall be granted to each such
person.
(2) To construe and interpret the Plan and options granted under it,
and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any option agreement,
in a manner and to the extent it shall deem necessary or expedient to make
the Plan fully effective.
(3) To amend the Plan as provided in paragraph 10.
(4) Generally, to exercise such powers and to perform such acts as the
Board deems necessary or expedient to promote the best interests of the
Company.
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<PAGE> 26
(C) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members (the "Committee"), all of the members
of which Committee shall be disinterested persons, if required and as defined by
the provisions of subparagraph 2(d). If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board, subject, however, to
such resolutions, not inconsistent with the provisions of the Plan, as may be
adopted from time to time by the Board. The Board may abolish the Committee at
any time and revest in the Board the administration of the Plan. Additionally,
prior to the date of the first registration of an equity security of the Company
under Section 12 of the Securities Exchange Act of 1934, as amended, and
notwithstanding anything to the contrary contained herein, the Board may
delegate administration of the Plan to any person or persons and the term
"Committee" shall apply to any person or persons to whom such authority has been
delegated.
(D) The term "disinterested person," as used in this Plan, shall mean a
director: (i) who was not during the one (1) year prior to service as an
administrator of the Plan granted or awarded equity securities pursuant to the
Plan or any other plan of the Company or any of its affiliates entitling the
participants therein to acquire equity securities of the Company or any of its
affiliates except as permitted by Rule 16b-3(c)(2)(i) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") ("Rule
16b-3(c)(2)(i)"); or (ii) who is otherwise considered to be a "disinterested
person" in accordance with Rule 16b-3(c)(2)(i), or any other applicable rules,
regulations or interpretations of the Securities and Exchange Commission. Any
such person shall otherwise comply with the requirements of Rule 16b-3
promulgated under the Exchange Act.
(E) Any requirement that an administrator of the Plan be a "disinterested
person" shall not apply if the Board or the Committee expressly declares that
such requirement shall not apply.
3. SHARES SUBJECT TO THE PLAN.
(A) Subject to the provisions of paragraph 9 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to options granted under
the Plan shall not exceed in the aggregate three million (3,000 000) shares of
the Company's common stock. If any option granted under the Plan shall for any
reason expire or otherwise terminate without having been exercised in full, the
stock not purchased under such option shall again become available for the Plan.
(B) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
(C) An Incentive Stock Option may be granted to an eligible person under
the Plan only if the aggregate fair market value (determined at the time the
option is granted) of the stock with respect to which incentive stock options
(as defined in the Code) granted after 1986 are exercisable for the first time
by such optionee during any calendar year under all incentive stock option plans
of the Company and its Affiliate does not exceed one hundred thousand dollars
($100,000). Should it be determined that an option granted under the Plan
exceeds such maximum for any reason other than the failure of a good faith
attempt to value the stock subject to the option, such option shall be
considered a Supplemental Stock Option to the extent, but only to the extent, of
such excess; provided, however, that should it be determined that an entire
option or any portion thereof does not quality for treatment as an incentive
stock option by reason of exceeding such maximum, such option or the applicable
portion shall be considered a Supplemental Stock Option.
4. ELIGIBILITY.
(A) Incentive Stock Options may be granted only to key employees (including
officers) of the Company or its Affiliates. A director of the Company shall not
be eligible to receive Incentive Stock Options unless such director is also a
key employee of the Company or any Affiliate. Supplemental Stock Options may be
granted only to key employees (including officers) of, directors of or
consultants to the Company or its Affiliates.
(B) A director shall in no event be eligible for the benefits of the Plan
unless at the time discretion is exercised in the selection of the director as a
person to whom options may be granted, or in the determination
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<PAGE> 27
of the number of shares which may be covered by options granted to the director:
(i) the Board has delegated its discretionary authority over the Plan to a
Committee which consists solely of "disinterested persons" as defined in
subparagraph 2(d); or (ii) the Plan otherwise complies with the requirements of
Rule 16b-3 promulgated under the Exchange Act, as from time to time in effect.
The Board shall otherwise comply with the requirements of Rule 16b-3 promulgated
under the Exchange Act, as from time to time in effect. This subparagraph 4(b)
shall not apply if the Board or Committee expressly declares that such
requirement shall not apply.
(C) No person shall be eligible for the grant of an option under the Plan
if, at the time of grant, such person owns (or is deemed to own pursuant to
Section 425(d) of the Code) stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or of any of
its Affiliates unless the exercise price of such option is at least one hundred
ten percent (110%) of the fair market value of such stock at the date of grant
and the term of the option does not exceed five (5) years from the date of
grant.
5. OPTION PROVISIONS.
Each option shall be in such form and shall contain such terms and
conditions as the Board or the Committee shall deem appropriate. The provisions
of separate options need not be identical, but each option shall include
(through incorporation of provisions hereof by reference in the option or
otherwise) the substance of each of the following provisions:
(A) The term of any option shall not be greater than ten (10) years from
the date it was granted.
(B) The exercise price of each Incentive Stock Option shall be not less
than one hundred percent (100%) of the fair market value of the stock subject to
the option on the date the option is granted. The exercise price of each
Supplemental Stock Option shall be not less than eighty-five percent (85 %) of
the fair market value of the stock subject to the option on the date the option
is granted.
(C) The purchase price of stock acquired pursuant to an option shall be
paid, to the extent permitted by applicable statutes and regulations, either (i)
in cash at the time the option is exercise, or (ii) at the discretion of the
Board or the Committee, either at the time of the grant or exercise of the
option, (A) by delivery to the Company of other common stock of the Company, (B)
according to a deferred payment or other arrangement (which may include, without
limiting the generality of the foregoing, the use of other common stock of the
Company) with the person to whom the option is granted or to whom the option is
transferred pursuant to subparagraph 5(d), or (C) in any other form of legal
consideration that may be acceptable to the Board or the Committee.
In the case of any deferred payment arrangement, interest shall be payable
at least annually and shall be charged at the minimum rate of interest necessary
to avoid the treatment as interest, under any applicable provisions of the Code,
of any amounts other than amounts stated to be interest under the deferred
payment arrangement.
(D) An option shall not be transferable except by will or by the laws of
descent and distribution, and shall be exercisable during the lifetime of the
person to whom the. option is granted only by such person.
(E) The total number of shares of stock subject to an option may, but need
not, be allotted in periodic installments (which may, but need not, be equal).
From time to time during each of such installment periods, the option may be
exercised with respect to some or all of the shares allotted to that period,
and/or with respect to some or all of the shares allotted to any prior period as
to which the option was not fully exercised. During the remainder of the term of
the option (if its term extends beyond the end of the installment periods), the
option may be exercised from time to time with respect to any shares then
remaining subject to the option. The provisions of this subparagraph 5(e) are
subject to any option provisions governing the minimum number of shares as to
which any option may be exercised.
(F) The Company may require any optionee, or any person to whom an option
is transferred under subparagraph 5(d), as a condition of exercising any such
option, (1) to give written assurances satisfactory to
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<PAGE> 28
the Company as to the optionee's knowledge and experience in financial and
business matters and/or to employ a purchaser representative reasonably
satisfactory to the Company who is knowledgeable and experienced in financial
and business matters, and that he or she is capable of evaluating, alone or
together with the purchaser representative, the merits and risks of exercising
the option; and (2) to give written assurances satisfactory to the Company
stating that such person is acquiring the stock subject to the option for such
person's own account and not with any present intention of selling or otherwise
distributing the stock. These requirements, and any assurances given pursuant to
such requirements, shall be inoperative if (i) the issuance of the shares upon
the exercise of the option has been registered under a then currently effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), or (ii) as to any particular requirement, a determination is
made by counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities laws.
(G) An option shall terminate shall terminate three (3) months after
termination of the optionee's employment or relationship as a consultant or
director with the Company or an Affiliate, unless (i) such termination is due to
such person's permanent and total disability, within the meaning of Section
422A(c)(7) of the Code, in which case the option may, but need not, provide that
it may be exercised at any time within one (1) year following such termination
of employment or relationship as a consultant or director; or (ii) the optionee
dies while in the employ of or while serving as a consultant or director to the
Company or an Affiliate, or within not more than three (3) months after
termination of such relationship, in which case the option may, but need not,
provide that it may be exercised at any time within eighteen (18) months
following the death of the optionee by the person or persons to whom the
optionee's rights under such option pass by will or by the laws of descent and
distribution; or (iii) the option by its terms specifies either (a) that it
shall terminate sooner than three (3) months after termination of the optionee's
employment or relationship as a consultant or director, or (b) that it may be
exercised more than three (3) months after termination of the relationship with
the Company or an Affiliate. This subparagraph 5(g) shall not be construed to
extend the term of any option or to permit anyone to exercise the option after
expiration of its term, nor shall it be construed to increase the number of
shares as to which any option is exercisable from the amount exercisable on the
date of termination of the optionee's employment or relationship as a consultant
or director.
(H) The option may, but need not, include a provision whereby the optionee
may elect at any time during the term of his or her employment or relationship
as a consultant or director with the Company or any Affiliate to exercise the
option as to any part or all of the shares subject to the option prior to the
stated vesting date of the option or of any installment or installments
specified in the option. Any shares so purchased from any unvested installment
or option may be subject to a repurchase right in favor of the Company or to any
other restriction the Board or the Committee determines to be appropriate.
(I) To the extent provided by the terms of an option, the optionee may
satisfy any federal, state or local tax withholding obligation relating to the
exercise of such option by any of the following means or by a combination of
such means: (1) tendering a cash payment; (2) authorizing the Company to
withhold from the shares of the Common Stock otherwise issuable to the
participant as a result of the exercise of the stock option a number of shares
having a fair market value less than or equal to the amount of the withholding
tax obligation; or (3) delivering to the Company owned and unencumbered shares
of the Common Stock having a fair market value less than or equal to the amount
of the withholding tax obligation.
6. COVENANTS OF THE COMPANY.
(A) During the terms of the options granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such options.
(B) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the options granted under the
Plan; provided, however, that this undertaking shall not require the Company to
register under the Securities Act either the Plan, any option granted under the
Plan or any stock issued or issuable pursuant to any such option. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful
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<PAGE> 29
issuance and sale of stock under the Plan, the Company shall be relieved from
any liability for failure to issue and sell stock upon exercise of such options
unless and until such authority is obtained.
7. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted under the Plan
shall constitute general funds of the Company.
8. MISCELLANEOUS.
(A) The Board or the Committee shall have the power to accelerate the time
during which an option may be exercised or the time during which an option or
any part thereof will vest pursuant to subparagraph 5(e), notwithstanding the
provisions in the option stating the time during which it may be exercised or
the time during which it will vest.
(B) Neither an optionee nor any person to whom an option is transferred
under subparagraph 5(d) shall be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to such option unless
and until such person has satisfied all requirements for exercise of the option
pursuant to its terms.
(C) Throughout the term of any option granted pursuant to the Plan, the
Company shall make available to the holder of such option, not later than one
hundred twenty (120) days after the close of each of the Company's fiscal years
during the option term, upon request, such financial and other information
regarding the Company as comprises the annual report to the shareholders of the
Company provided for in the bylaws of the Company.
(D) Nothing in the Plan or any instrument executed or option granted
pursuant thereto shall confer upon any eligible employee or optionee any right
to continue in the employ of the Company or any Affiliate (or to continue acting
as a consultant or director) or shall affect the right of the Company or any
Affiliate to terminate the employment or consulting relationship or directorship
of any eligible employee or optionee with or without cause.
9. ADJUSTMENTS UPON CHANGES IN STOCK.
(A) If any change is made in the stock subject to the Plan, or subject to
any option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or otherwise), the Plan and outstanding
options will be appropriately adjusted in the class(es) and maximum number of
shares subject to the Plan and the class(es) and number of shares and price per
share of stock subject to outstanding options.
(B) In the event of: (1) a merger or consolidation in which the Company is
not the surviving corporation or (2) a reverse merger in which the Company is
the surviving corporation but the shares of the Company's common stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or otherwise
then to the extent permitted by applicable law: (i) any surviving corporation
shall assume any options outstanding under the Plan or shall substitute similar
options for those outstanding under the Plan, or (ii) such options shall
continue in full force and effect. In the event any surviving corporation
refuses to assume or continue such options, or to substitute similar options for
those outstanding under the Plan, then, with respect to options held by persons
then performing services as employees or as consultants or directors for the
Company as the case may be, the time at which such options may first be
exercised shall be accelerated and the options terminated if not exercised prior
to such event. In the event of a dissolution or liquidation of the Company, any
options outstanding under the plan shall terminate if not exercised prior to
such event.
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<PAGE> 30
10. AMENDMENT OF THE PLAN.
(A) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 9 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(1) Increase the number of shares reserved for options under the Plan;
(2) Modify the requirements as to eligibility for participation in the
Plan (to the extent such modification requires stockholder approval in
order for the Plan to satisfy the requirements of Section 422 of the Code);
or
(3) Modify the Plan in any other way if such modification requires
stockholder approval in order for the Plan to satisfy the requirements of
Section 422 of the Code or to comply with the requirements of Rule 16b-3.
(B) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide optionees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to incentive stock options
and/or to bring the Plan and/or incentive stock options granted under it into
compliance therewith.
(C) Rights and obligations under any option granted before amendment of the
Plan shall not be altered or impaired by any amendment of the Plan unless (i)
the Company requests the consent of the person to whom the option was granted
and (ii) such person consents in writing.
11. TERMINATION OR SUSPENSION OF THE PLAN.
(A) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate ten (10) years from the date the Plan is
adopted by the Board or approved by the shareholders of the Company, whichever
is earlier. No options may be granted under the Plan while the Plan is suspended
or after it is terminated.
(B) Rights and obligations under any option granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except with the consent of the person to whom the option was granted.
12. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no options
granted under the Plan shall be exercised unless and until the Plan has been
approved by the vote of the holders of a majority of the outstanding shares of
the Company entitled to vote, or by the written consent of the holders of the
outstanding shares of the Company entitled to vote to the extent necessary under
applicable laws to obtain incentive stock option treatment under Section 422A of
the Code.
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<PAGE> 31
PHOENIX NETWORK, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 26, 1996
The undersigned hereby appoints Wallace M. Hammond and Jeffrey L. Bailey,
and each of them, as attorneys and proxies of the undersigned, with full power
of substitution, to vote all of the shares of stock of Phoenix Network, Inc.
which the undersigned may be entitled to vote at the Annual Meeting of
Stockholders of Phoenix Network, Inc. to be held at 1687 Cole Boulevard,
Golden, Colorado 80401, on Thursday, September 26, 1996 at 8:00 a.m., and at
any and all continuations and adjournments thereof, with all powers that the
undersigned would possess if personally present, upon and in respect of the
following materials and in accordance with the following instructions, with
discretionary authority as to any and all other matters that may properly come
before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
ALL NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2 AND 3, AS MORE
SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE
INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW.
Proposal 1: To elect directors to hold office until the next Annual Meeting of
Stockholders and until their successors are elected.
<TABLE>
<S> <C>
( ) FOR all nominees listed below ( ) WITHHOLD AUTHORITY to vote for all
(except as marked to the contrary below). nominees listed below.
</TABLE>
Nominees: Thomas H. Bell, James W. Gallaway, Wallace M. Hammond, Merrill L.
Magowan and Charles C. McGettigan
To withhold authority to vote for any nominee(s), write the name(s) of such
nominee(s) below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSAL 2.
Proposal 2: To approve an amendment of the Company's Restated Certificate of
Incorporation to increase the number of shares of the Company's
Common Stock authorized for issuance from 30,000,000 to 50,000,000.
( ) FOR ( ) AGAINST ( ) ABSTAIN
- --------------------------------------------------------------------------------
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSAL 3.
Proposal 3: To approve an amendment of the Company's 1989 Stock Option Plan to
increase the number of shares of the Company's Common Stock that
may be sold pursuant to such Plan from 3,500,000 to 5,000,000.
( ) FOR ( ) AGAINST ( ) ABSTAIN
- --------------------------------------------------------------------------------
Please sign exactly as your name appears
in stockholder records. If the stock is
registered in the names of two or more
persons, each should sign. Executors,
administrators, trustees, guardians and
attorneys-in-fact should add their titles. If
signer is a corporation, please give full
corporate name and have a duly authorized
officer sign, stating title. If signee is a
partnership, please sign in partnership name
by authorized person.
Dated: ____________, 1996
----------------------------------------------
----------------------------------------------
Signature(s)
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
<PAGE> 32
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN
PERSON. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS
POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING. A RETURN
ENVELOPE (WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES) IS
ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY
STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE NOTE, HOWEVER,
THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE
AND YOU WISH TO VOTE AT THE MEETING, YOU MUST BRING TO THE MEETING A
LETTER FROM THE BROKER, BANK OR OTHER NOMINEE CONFIRMING YOUR BENEFICIAL
OWNERSHIP OF THE SHARES. ADDITIONALLY, IN ORDER TO VOTE AT THE MEETING,
YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
