<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to section 13 or 15(d) of the Securities
---
Exchange Act of 1934 for the fiscal year ended December 31, 1995
or
___ Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
___________ to _____________
Commission File No. 0-17909
PHOENIX NETWORK, INC.
-----------------------------------------------------
(Exact Name of registrant as specified in its charter)
DELAWARE 84-0881154
------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
550 CALIFORNIA STREET, SAN FRANCISCO, CALIFORNIA 94104
-------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 399-3300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK $0.001 PAR VALUE American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
---
As of March 26, 1996, the aggregate market value of the voting stock held by
nonaffiliates of the Registrant was $38,621,885 (based on the closing sales
price as reported on the American Stock Exchange).
The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 17,339,037 at March 26, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information of Part III, Item 10 and all of Part III, Items 11, 12
and 13 are incorporated by reference from the Company's Definitive Proxy
Statement related to the Annual Meeting of Stockholders to be held
June 18, 1996.
<PAGE> 2
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the sections entitled
"Business", "Business - Risk Factors" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
Phoenix Network, Inc. ("Phoenix" or the "Company") is a
facilities based reseller of telecommunications services targeted primarily
towards small to medium-sized commercial accounts. The Company signs up
customers for long distance and other telecommunications services and places
them either on its own network or the network of the nation's largest
facilities based carriers, such as American Telephone and Telegraph ("AT&T"),
MCI Telecommunications Corporation ("MCI"), Sprint Communications ("Sprint"),
Frontier Communications ("Frontier", formerly Allnet), and WorldCom Inc.
("WorldCom", formerly Wiltel). In addition to securing transmission
facilities, the Company provides its customers with billing and customer
service. Phoenix currently services approximately 40,000 customers throughout
the United States. Customers typically decide to use Phoenix because Phoenix
can provide lower cost long distance transmission, while offering more
attentive customer service. In addition to basic long distance service,
Phoenix offers 800 numbers, calling cards, conference calling, debit cards,
private lines, dedicated circuits, international callback and internet access.
Phoenix additionally can provide its customers with customized management
reports which allow them to better manage their telecommunications costs.
INDUSTRY OVERVIEW
According to the Telecommunications Resellers Association, total long
distance revenues in the United States for 1994 amounted to $67 billion of
which AT&T, MCI and Sprint's combined portion was 84%. Resale revenues
accounted for approximately $11 billion of the total long distance revenues of
which the switchless resale portion was estimated to be $2 billion in 1994.
Competition for customers in the long distance market is divided primarily
among three types of organizations: facilities-based carriers, facilities-based
resellers and switchless resellers.
Facilities-based carriers are those companies, such as AT&T, that
provide service over their own long distance lines and switching equipment.
Facilities-based resellers utilize lines owned by third parties but operate
their own switching equipment. Switchless resellers, or rebillers, do not own
or lease any telephone equipment or participate in the call completion process.
The service provider for the customer of a rebiller is typically a
facilities-based carrier. That carrier provides the rebiller with a magnetic
tape of long distance usage of its customers who then receive an invoice
directly from the rebiller.
Switchless resellers differ from the facilities-based organizations in
that they have no investment in the facilities, equipment or employees
necessary to handle any portion of the call completion process. They are
similar to facilities-based organizations in that they have a direct customer
relationship and handle all their customers' provisioning, billing and
collection and other service needs.
Up until January of 1996, Phoenix Network had always been a switchless
reseller; however, with the acquisition of Automated Communications Inc.
("ACI") (See "Acquisition Strategy") Phoenix became a facilities-based
reseller. Phoenix now operates computer switching equipment in Colorado
Springs, CO., Minneapolis, MN., and Phoenix, AZ. In these regions its
2
<PAGE> 3
customers' calls will be routed over Phoenix's switches. In other parts of the
country, Phoenix continues to use the switching equipment and networks of the
facilities-based carriers.
SERVICES AND OPERATIONS
By using its own facilities and taking advantage of the contractual
arrangements with the underlying facilities-based carriers, Phoenix can offer
its customers substantially all of the long distance products and services
offered by the facilities-based carriers, but at rates generally lower than
those available directly from the carrier. These products and services
include: "Dial 1" outbound, inbound (800), dedicated circuits, private lines,
calling cards, conference calling, debit cards, and internet access. Phoenix
also provides customized management reports to help its customers better
understand and manage their telecommunications costs.
The Company's customers provide Phoenix with information regarding
their telephone numbers and locations which Phoenix processes either in its own
systems or within the systems of one of the facilities-based carriers,
depending on whether or not the traffic will be switched by Phoenix. The
carriers whose networks will be used by Phoenix establish customer records in
their databases. The carriers then send Phoenix, on a daily, weekly, or
monthly basis, information containing the long distance traffic of all
Phoenix's customers who are serviced by that carrier. Phoenix is obligated to
pay the carrier for such traffic at its pre-established contractual rates. The
Company processes the call detail information and provides its customers with a
monthly invoice for its long distance calls at rates established by Phoenix.
The customer then pays Phoenix directly.
The Company establishes its prices on the basis of cost and
competition. Phoenix customers generally report savings of up to 30% compared
to their previous service. The Company offers a written guarantee to its
customers to pay 110% of the difference between a customer's most recent
Phoenix invoice and what the customer would have spent on any program offered
by any of the three major long distance carriers. The Company uses computer
models and management reports that can determine the projected savings of a
potential customer, or the actual savings of a new customer.
The Company believes that prospective customers are looking for more
than cost savings from their long distance company. As competition increases
in the future, the Company believes that the successful companies will be those
that can provide a full range of telecommunications products and services,
serving as a "one-stop shop" for the customer who is increasingly confused with
the proliferation of products and technologies. In this vein, the Company is
aggressively developing competency in telecommunications related products such
as the internet, wireless, and frame relay.
The Company believes that long distance usage can be reduced with
strong management control. Management reports are a time saving service which
helps managers identify wasteful or unnecessary calling. Seven different
management reports are available for a Phoenix customer to use in the review of
monthly usage. Two of the reports identify and sort calls over a
customer-specified cost level or time length. A third report presents all
calls during non-business hours. A fourth report identifies the most
frequently called numbers. All four of these reports have threshold levels
that can be established individually by the customer. A fifth report builds a
matrix of calls showing day/evening/night vs.
intrastate/interstate/international usage. A sixth report summarizes usage by
area code. A seventh report identifies calls and usage by state and country.
All of these reports allow managers to better monitor changes in calling
patterns and identify potential waste or fraud in their long distance usage.
Four different call detail formats are available so the customer can
customize the way its call detail is presented. The formats include sorting by
chronological order, originating phone number, accounting code, and terminating
phone number. Additionally, the Company has the
3
<PAGE> 4
ability to write custom reports for a large individual user to replace
existing internal reports or provide new reports to that customer.
The Company places a strong emphasis on customer relations. Customer
relations representatives are available from 6:00 a.m. to 5:00 p.m. Pacific
Time by dialing a toll-free number to handle any customer inquiries regarding
their service. The Company believes superior customer service is a significant
factor in the choice of a long distance company by a prospective customer.
Customer relations representatives call existing customers on a routine basis
to survey their satisfaction with Phoenix's service. During 1994, Phoenix
reorganized its customer relations department into three person teams. Each
customer is assigned to one of the teams which is responsible for all the
service needs of that customer. Additionally, management plans to be able to
offer 24 hour, 7 day a week customer service in 1996. Management believes that
this effort should enable the company to enhance its customer retention.
MARKETING
The Company has historically relied on arrangements with third parties
to generate new customers for the Company's services. Such channels have
included independent sales distributors, private label affiliations and
telemarketing organizations. During 1992, the Company made a strategic
decision to expand its marketing channels and began to open sales offices as a
new distribution channel. From August 1992 through March 1994, the Company
opened eighteen sales offices throughout the country. Based on the relative
performance of the sales offices compared to their cost of operations, the
Company has closed certain offices in 1995. Currently, the company operates 10
sales offices in the following areas: San Francisco, Los Angeles, Orange
County, Seattle, Denver, Chicago, Minneapolis (2), Atlanta, and Tampa.
Approximately 50% of Phoenix's new business comes from its sales offices with
the remainder coming from its sales distributors, Master Agents and private
label affiliations.
Each sales office has a sales manager who directs the efforts of up to
10 sales representatives who meet face-to-face with prospective customers. The
Company employs approximately 30 telemarketers in one central location who set
appointments for the representatives in all offices which allows the
representatives to allocate their time more efficiently among qualified
prospects.
Independent sales distributors are individuals and marketing
organizations who market the Company's services directly to small and mid-
sized commercial accounts. The Company currently has approximately 70 active
distributors throughout the United States and other countries were the Company
provides callback services. Distributors are trained by Company employees to
market Phoenix's services to potential customers. The company provides them
with promotional materials and products and service updates on a frequent
basis. Distributors earn commissions based on the usage levels of customers
they have referred to the Company.
A Master Agent is a person or organization which has access to a
greater number of potential customers than does a distributor, either through
other business relationships or its connections with business decision-makers.
Master Agents typically earn higher commissions than distributors; however, in
return, they must commit to bring the Company a substantially greater volume of
business. Master Agents are much like strategic partners with the
Company--they invest significant time and money in order to have access to the
Company's best and most lucrative products.
Private label affiliations are arrangements with business
organizations ("Affiliates") wherein Phoenix's services are marketed to the
customers of the Affiliates through the Affiliates' own marketing channels.
Under these arrangements, Phoenix will register a name similar to the
Affiliate's business name and bill customers acquired through the Affiliate
under that name.
An example of private labeling is Phoenix's program with Office Depot,
Inc. Office Depot is a major retailer of office supplies and equipment with
approximately 400 stores across the country.
4
<PAGE> 5
Office Depot members can obtain Phoenix's services under the name Office Depot
Communications, a name under which Phoenix conducts business. Phoenix and
Office Depot develop marketing materials which are distributed to Office Depot
members through mailings and in-store booths which describe the discount long
distance service available to them. As with independent sales distributors,
Office Depot receives a commission based on revenues from Office Depot
Communications customers.
ACQUISITION STRATEGY
During the latter half of 1995, the Company embarked on an acquisition
strategy with the stated goal of acquiring companies which could either add new
products to the Company's product portfolio or whose customer base and sales
organization would represent a profitable investment. During the year, the
company acquired Bright Telecom, L.P. ("Bright"), a small international
call-back provider, Tele-Trend Communications, LLC ("Tele-Trend"), a Denver
based switchless reseller, and, in January 1996, Automated Communications, Inc.
("ACI"), a Denver facilities-based reseller. Bright gave the Company a new
product in a fast growing market to sell to all of its current and prospective
customers. The addition of Tele-Trend and ACI gave the Company a solid
concentration of Denver-base traffic which will all be routed over Phoenix's
Denver area switch. The acquisition of ACI gave the Company an entree into the
switch-based business. The company plans on continuing to exercise its
acquisition strategy throughout the remainder of 1996. The Company will
continue to look for acquisition candidates who improve the Company's cash flow
position and offer complementary products, strong sales organizations, and
regionally concentrated customer bases. The Company will consider both
switched and switchless candidates.
CORPORATE RELOCATION
As a result of the ACI acquisition, management has decided to relocate
the Company's corporate headquarters from its San Francisco location to ACI's
offices in Golden, Colorado. Based upon analyses comparing the relative
operating costs of the two locations, management believes that significant
operating cost savings in personnel and facilities costs are achievable through
the relocation. Management is currently negotiating the sublease of its leased
facilities in San Francisco to a third party for the remaining term of the
lease and has agreed to pay severance to its San Francisco employees who are
not relocating to Golden. The cost of the move is estimated to be between
$750,000 and $1,000,000 and will be expensed in the first and second quarters
of 1996. The Company plans to have the move completed by June 30, 1996.
VENDORS
The Company has contracts with AT&T, Sprint, MCI, Frontier, and
WorldCom for the provision of long distance telecommunications services for its
customers. The contracts range from two years to four years and contain
certain minimum usage requirements. In most cases, Phoenix, and all resellers,
are in direct competition with the facilities-based carriers for the right to
service the end user. Management believes that, given the highly competitive
nature of the industry, the carriers view resellers as a low cost, alternative
marketing channel which gives the carrier incremental minutes or traffic with
little marketing cost and minimal support cost.
COMPETITION
According to published research, AT&T, Sprint and MCI control
approximately 84% of the long distance market and there are between 800 and
1,000 resellers and rebillers that represent the remaining market share. From
time to time any of these entities may be able to provide a range of services
comparable to or more extensive than those available to the Company's customers
at rates competitive with the Company's fee structure. The same
volume-discount pricing that the Company utilizes is available to current and
potential competitors. Phoenix does not have proprietary contractual
arrangements in that regard. As a result, there are no substantial barriers to
the entry of additional competitors into the field. In addition, most
prospective Company customers are already receiving service directly from at
least one long distance carrier, and thus Phoenix must
5
<PAGE> 6
convince prospective customers to alter these relationships to generate new
business. Additionally, local exchange companies are subject to current
legislation which will allow them to compete in the long distance marketplace
in the near future.
The telecommunications industry is highly competitive and subject to
rapid technological and regulatory change. Many existing or potential
competitors of the Company have considerably greater resources than the
Company. There can be no assurance that the Company will be able to remain
competitive in this environment. Although current regulations allow easy entry
into the telecommunications market and there are many competitors, the Company
believes the market is large enough for many companies to engage in direct
competition while continuing to grow.
The Company believes the principal competitive factors in its business
include the cost, flexibility and quality of service, as well as the breadth of
telemanagement services offered. The Company believes it competes favorably
with respect to each of these factors among the commercial users that represent
its target market segment. Most importantly, the Company believes that since
it concentrates its resources on providing multiple products, personalized
service and customized billing and reporting, it has distinct advantages over
facilities-based carriers, resellers, and other rebillers that compete for
customers in the Company's target size range primarily on cost. In addition,
it would be difficult for the major national carriers to offer lower rates to
Phoenix's customers without also reducing the cost that the Company pays.
Since the Company is considered to be a large commercial account for the
carriers, it can benefit from lower rates and in turn lower the costs its
customers pay.
REGULATORY
As a reseller of long distance telecommunications services, Phoenix is
subject to many of the same regulatory requirements as facilities-based
interexchange carriers ("IXCs"). Phoenix is required be certified and to file
tariffs with the Federal Communications Commission and is subject to various
state laws and regulations, including certification requirements. Generally,
Phoenix must obtain and maintain certificates of public convenience and
necessity from regulatory authorities in most states where it offers service,
and in most of these jurisdictions it must also file and obtain prior
regulatory approval of tariffs for intrastate offerings. At the present time,
Phoenix can provide originating interstate and intrastate service to customers
in 47 states and the District of Columbia. Of the states in which Phoenix
provides originating service, 36 have public utility commissions that actively
assert regulatory oversight over the services offered by Phoenix.
There can be no assurance that the regulatory authorities in one or
more states or the FCC will not take action having an adverse effect on the
business or financial condition of the Company.
EMPLOYEES
As of December 31, 1995 the Company has 207 full-time and 10 part-time
employees. Of the full-time employees, 143 are engaged in sales and marketing,
35 in customer service, and the remainder in management, development, finance
and administrative capacities. None of the Company's employees are represented
by a labor union. The Company believes its relations with employees are good.
6
<PAGE> 7
EXECUTIVE OFFICERS OF THE REGISTRANT WHO ARE NOT DIRECTORS
JEFFREY L. BAILEY
Mr. Bailey, 43, 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.
J. REX BELL
Mr. Bell, 41, 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, 31, was promoted to Vice President of Corporate
Development in 1995. Since joining the company in July of 1992 he has held
various positions, the last of which was Director of Marketing. Mr. Beizer
holds an M.B.A. from Stanford University which he attended from 1990 through
1992. Mr. Beizer worked from 1987 through 1990 as a consultant for Braxton
Associates, a management consulting firm specializing in corporate strategy
after graduating from Harvard University.
PAUL CISSEL
Mr. Cissel, 39, was hired as 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 and between August 1992 and
October 1994, Mr. Cissel was a distributor for the Company. Mr. Cissel was the
founder and President of Communications and Business Solutions, a
communications management company, 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, Senior
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.
7
<PAGE> 8
RISK FACTORS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the sections entitled
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations". The following factors should be considered carefully
in evaluating the Company and its business.
HISTORY OF OPERATING LOSSES
The Company has sustained net losses of $2,796,000, $905,000 and
$1,335,000 for the years ended December 31, 1993, 1994 and 1995 respectively.
In building the Company's systems and organization necessary to handle its
expected future growth, the Company has invested heavily in the sales,
marketing and administrative areas. There can be no assurances that the
Company may not experience operating losses in the future. To finance its
operations, the Company has a line of credit facility of up to an aggregate of
$10,000,000 with a finance company, which is secured by the Company's
receivables. As of December 31, 1995, an aggregate of $10,000 was outstanding
under this line of credit. Additionally, the Company is relocating its
corporate offices to Golden, Colorado in the first half of 1996. Although
management believes that significant operating cost savings in personnel and
facilities costs are achievable through the relocation, the cost of the move is
estimated to be between $750,000 and $1,000,000 and such amounts will not be
recovered until future periods. As a result, the Company anticipates losses
for the first and second quarters of 1996. See "Business - Corporate
Relocation".
DEPENDENCE ON SERVICE PROVIDERS
The Company depends on a continuing and reliable supply of
telecommunications services from the facilities-based carriers. Because the
Company does not own sufficient switching or transmission facilities to offer a
complete network to carry its customers calls, it depends on these providers
for the telecommunications services used by its customers and to provide the
Company with the detailed information on which it bases its customer billings.
The Company's ability to expand its business depends both upon its ability to
select and retain reliable providers and on the willingness of such providers
to continue to make telecommunications services and billing information
available to Phoenix for its customers on favorable terms and in a timely
manner. See "Business - Vendors".
POTENTIAL ADVERSE EFFECTS OF RATE CHANGES
The Company bills its customers for the costs of the various
telecommunications services procured on their behalf. The total billing to
each customer is generally less than telephone charges for the same service
provided by the major carriers. The Company believes its lower customer bills
are an important factor in its ability to attract and retain customers.
Therefore, changes in the differential between direct dial telephone rates and
the cost of the bulk-rate telecommunications services procured by the Company
could have a significant effect on the Company. Although prices for both
direct dial and bulk-rate services have generally decreased in recent years,
the decreases have not affected both types of services equally at all times.
As a result, the differential between the costs of the two types of service can
increase or decrease from time to time. To the extent this differential
decreases, the savings the Company is able to obtain for its customers could
decrease and the Company could lose customers or face increased difficulty in
attracting new customers. If the Company elected to offset the effect of any
such decrease by lowering its rates, the Company's operating results could also
be adversely affected.
COMPETITION
An existing or potential Phoenix customer has numerous other choices
available for its telecommunications service needs, including obtaining
services directly from the same carriers
8
<PAGE> 9
whose services the Company offers. From time to time any of these entities may
be able to provide a range of services comparable to or more extensive than
those available to Phoenix customers at rates competitive with Phoenix's rates.
In addition, most prospective Phoenix customers are already receiving service
directly from at least one long distance carrier, and thus Phoenix must
convince prospective customers to alter these relationships to generate new
business. The Company competes with the principal long distance carriers,
AT&T, Sprint and MCI, as well as with the other providers of long distance
services, including Frontier and WorldCom. Additionally, as a result of
legislation enacted by the federal government in February 1996, the local
exchange companies will have the right to provide long distance service in the
near future. The telecommunications industry is highly competitive and subject
to rapid technological and regulatory change. Because the tariffs offered by
the major carriers for telecommunication services are not proprietary in
nature, there are no effective barriers to entry into the Company's line of
business. Because of the considerably greater resources of competitors of the
Company, there can be no assurance that Phoenix will be able to remain
competitive in the current telecommunications environment. See "Business --
Competition."
POSSIBLE ACQUISITIONS; NEED FOR ADDITIONAL CAPITAL
As part of its growth strategy, the Company intends to pursue
acquisitions of companies which could add profitable products or customer bases
(see Acquisition Strategy). With respect to any future acquisition, there can
be no assurance that the Company will be able to locate or acquire suitable
acquisition candidates, or that any companies or customer bases which are
acquired can be effectively and profitably integrated into the Company.
Additionally, although acquisitions will be made with the intent of enhancing
the Company's long-term profitability, they may negatively impact the Company's
operating results, particularly during the periods immediately following the
acquisition. To fund acquisitions, the Company may incur additional
indebtedness to banks and other financial institutions and may issue, in public
or private transactions, equity and debt securities. The availability and
terms of any such financing will depend on market and other conditions, and
there can be no assurance that such additional financing will be available on
terms acceptable to the Company, if at all.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has, in the past,
fluctuated substantially over time and may in the future be highly volatile.
Factors such as the announcements of rate changes for various carriers,
technological innovation or new products or service offerings by the Company or
its competitors, as well as market conditions in the telecommunications
industry generally and variations in the Company's operating results, could
cause the market price of the Common Stock to fluctuate substantially. Because
the public float for the Company's Common Stock is small, additional volatility
may be experienced.
CONTROL BY OFFICERS AND DIRECTORS
As of March 1, 1996, the Company's executive officers and directors
beneficially own or control approximately 33% of the outstanding shares of the
Company's Common Stock, on an as-if-converted basis. The votes represented by
the shares beneficially owned or controlled by the Company's executive officers
and directors could, if they were cast together, potentially control the
election of a majority of the Company's directors and the outcome of most
corporate actions requiring stockholder approval.
Investors who purchase Common Stock of the Company may be subject to
certain risks due to the concentrated ownership of the Common Stock of the
Company. Such risks include: (i) the shares beneficially owned or controlled
by the Company's executive officers and directors could, if they were cast
together, delay, defer or prevent a change in control of the Company, such as
an unsolicited takeover, which might be beneficial to the stockholders, and
(ii) due to the substantial ownership or control of outstanding shares by the
Company's executive officers and directors and
9
<PAGE> 10
the potential adverse impact of such substantial ownership or control on a
change in control of the Company, it is less likely that the prevailing market
price of the outstanding shares of the Company's Common Stock will reflect a
"premium for control" than would be the case if ownership of the outstanding
shares were less concentrated.
GOVERNMENTAL REGULATION
As a reseller of long distance telecommunications services, Phoenix is
subject to many of the same regulatory requirements as facilities-based
interexchange carriers. The intrastate long distance telecommunications
operations of Phoenix are also subject to various state laws and regulations,
including certification requirements. Generally, Phoenix must obtain and
maintain certificates of public convenience and necessity from regulatory
authorities in most states where it offers service, and in most of these
jurisdictions it must also file and obtain prior regulatory approval of tariffs
for intrastate offerings. There can be no assurance that the regulatory
authorities in one or more states or the FCC will not take action having an
adverse effect on the business or financial condition of the Company.
ITEM 2. PROPERTIES
As of December 31, 1995, Phoenix leases approximately 34,000 square
feet of office space in San Francisco, California under a lease agreement with
an unaffiliated third party expiring in 2000. The Company's monthly rental
obligation for its facilities is approximately $46,000. Additionally, the
Company leases sales offices in various cities from unaffiliated third parties
totaling approximately 28,700 square feet for terms of 1 to 3 years at total
monthly cost of approximately $36,700. The Company is relocating its San
Francisco office to Golden, Colorado in the first half of 1996. See "Business
- - Corporate Relocation".
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the American Stock Exchange
under the symbol "PHX". The following table reflects the range of high and low
closing sales prices for each period indicated.
<TABLE>
<CAPTION>
LOW HIGH
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
First quarter ended March 31, 1994 $3.25 $6.88
Second quarter ended June 30, 1994 $2.50 $4.00
Third quarter ended September 30, 1994 $3.06 $4.63
Fourth quarter ended December 31, 1994 $2.25 $4.13
YEAR ENDED DECEMBER 31, 1995
First quarter ended March 31, 1995 $1.88 $3.50
Second quarter ended June 30, 1995 $2.25 $3.13
Third quarter ended September 30, 1995 $2.44 $4.63
Fourth quarter ended December 31, 1995 $3.31 $4.44
</TABLE>
The closing sales price of the Company's Common Stock as reported by
the American Stock Exchange on March 26, 1996 was $3.56.
As of February 29, 1996, there were 1,159 stockholders of record of
the Company's Common Stock, including shares held in street name by various
brokerage firms.
The Company has not, since 1983, paid any dividends on its Common
Stock and the Company does not anticipate the payment of dividends on such
stock in the foreseeable future. In addition to any applicable state law
restrictions relating to the payment of dividends on its Common Stock, the
Company is restricted from paying dividends on Common Stock until all dividends
due on outstanding Preferred Stock have been paid. Since September 1993, the
Company is additionally restricted from paying any dividends on its Common or
Preferred stock without the consent of its finance company under the terms of
its line of credit agreement.
The Company had 101,750 shares of Series A Preferred Stock, 126,250
shares of Series B Preferred Stock and 1,176,056 shares of Series F Preferred
Stock outstanding at December 31, 1995 with a combined cumulative dividend
requirement of $1,263,650 per year. Additionally, the Company had 1,000,000
shares of Series C Preferred Stock and 333,333 shares of Series D Preferred
Stock outstanding at December 31, 1995 with non-cumulative dividend preferences
over Common Stock. As of December 31, 1995, the Series A, B, D and F shares,
with accumulated and unpaid dividends of $791,220 are convertible into
6,621,909 shares of Common Stock.
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for, and as
of the end of, the years ended December 31, 1995, 1994, 1993 and 1992, the
eight month period ended December 31, 1991 (the "Transition Period") and the
year April 30, 1991 have been derived from the consolidated financial
statements of the Company, which statements have been audited by Grant Thornton
LLP, independent certified public accountants. This data should be read in
conjunction with the consolidated financial statements, related notes and other
financial information included elsewhere herein.
<TABLE>
<CAPTION> Eight Year ended
Year ended months ended December 31,
April 30, December 31, ---------------------------------------------
1991 1991 1992 1993 1994 1995
--------- ------------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue $13,498 $13,927 $27,155 $40,350 $57,420 $58,755
Cost of revenue 9,921 10,840 20,155 29,261 40,007 40,376
------- ------- ------- ------- ------- -------
Gross margin 3,577 3,087 7,000 11,089 17,413 18,379
Expenses 4,538 4,017 7,659 13,737 17,796 18,525
------- ------- ------- ------- ------- -------
Operating loss (961) (930) (659) (2,648) (383) (146)
Other - net (3) (31) 5 (148) (399) (1,189)
-------- -------- ------- ------- ------- -------
Loss before cumulative
effect of accounting
change (964) (961) (654) (2,796) (782) (1,335)
Cumulative effect of
accounting change -- -- -- - (123) -
------- ------- ------- ------- ------- -------
Net loss $ (964) $ (961) $ (654) $(2,796) $ (905) $(1,335)
====== ======= ======= ======= ======= =======
Loss per common share:
Loss before cumulative
effect of accounting
change $(0.15) $ (0.15) $ (0.12) $ (0.33) $ (0.09) $ (0.15)
Cumulative effect of
accounting change - - - - (0.01) --
------- ------- ------- ------- ------- -------
Net loss $(0.15) $ (0.15) $ (0.12) $ (0.33) $ (0.10) $ (0.15)
====== ======= ======= ======= ======= =======
BALANCE SHEET DATA (at end
of period):
Working capital $ 301 $ 153 $ 983 $ 1,036 $ 297 $10,031
Total assets 4,786 6,081 9,310 14,125 13,790 30,368
Capital lease obligation
- noncurrent 66 45 17 -- -- --
Note payable
- noncurrent -- 50 -- -- -- --
Stockholders' equity 718 616 2,282 2,913 3,033 19,425
</TABLE>
There were no income taxes for any of the periods detailed above. The Company
has not, since 1983, declared or paid any dividends on its common stock.
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the sections entitled
"Business" and "Business - Risk Factors".
RESULTS OF OPERATIONS
The following table sets forth for the years indicated the
percentage of revenues represented by certain items in the Company's statement
of operations.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 72.5 69.7 68.7
----- ----- ------
Gross profit 27.5 30.3 31.3
Selling, general & administrative 32.8 29.9 29.7
Depreciation & amortization 1.2 1.1 1.8
----- ----- ------
Total expenses 34.0 31.0 31.5
----- ----- -----
Operating loss (6.6) (0.7) (0.3)
Other - net interest expense (0.3) (0.7) (0.3)
Other - loss on abandonment of assets -- -- (1.7)
Cumulative effect of change in
accounting principle -- (0.2) -
----- ----- ------
Net loss (6.9) (1.6) (2.3)
====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues increased by $17,071,000, or 42.3%, from 1993 to 1994. Billed
minutes increased 51% over the period during which time the average revenue per
minute declined by 5.8% as a result of the Company offering more competitive
rates. The average number of accounts per month utilizing the Company's
services increased 35.7% from 1993 to 1994 as a result of the Company's sales
and marketing efforts.
The Company's cost of revenues consists of amounts paid to the
carriers for transmission services for its customers. The rates the Company
pays for its customers' service vary depending on which underlying carrier is
used for service and the volume of traffic on such carriers. In 1994, the
Company's cost of revenue decreased to 69.7% from 72.5% in 1993. The decrease
resulted primarily from placing the majority of new customers in 1993 and 1994
under carrier contracts which have the most favorable rates for the Company
The rates the Company pays the carriers are based primarily upon contractual
arrangements with the carriers. A portion of the rates the Company pays for
services is based upon tariffs filed by the carriers under which the Company
qualifies for service. While the carriers are able to modify their tariff at
any time, the Company does not currently foresee any significant change in
rates in the near future. The Company is currently renegotiating several of
its carrier contracts and expects to receive even more favorable rates in
future periods. If that occurs, this should allow the Company to offer its
customers lower rates without adversely affecting its margins.
Selling, general and administrative expenses decreased as a percentage
of revenue to 29.9% in 1994 from 32.8% in 1993. In 1992, the Company began
opening direct sales offices in
13
<PAGE> 14
various cities throughout the country and at December 1993, there were twelve
offices in operation and by December 1994, there were eighteen offices. During
1993, the Company incurred operating expenses for these offices of $2,150,000,
or 5.3% of revenues, compared to $3,954,000 or 6.9% of revenues in 1994. In
the second quarter of 1994, the Company implemented certain cost reduction
programs and decided to defer the opening of any new sales office until such
time that the Company was operating profitably. Consequently, the Company did
not open any new sales offices in the second, third and fourth quarters of
1994. Commissions represent amounts paid to the Company's outside marketing
channels based primarily upon percentages of revenues collected by the Company
from customers acquired through such channels. The percentage amount of such
commissions varies depending on the channel and may be renegotiated from time
to time. Commission expense increased to 8.5% of revenues in 1994 compared to
7.2% of revenues in 1993. The increase in commission expense as a percentage
of revenue was due to up-front commissions incurred under a telemarketing
program in the last six months of 1993 which were amortized over a twelve month
period. The total commissions paid under this program were $2,179,000 of which
$415,000 was amortized in 1993 and $1,719,000 was amortized in 1994. Commission
expense for the Company's other marketing channels was 6.9% and 6.2% of related
revenues for 1993 and 1994, respectively.
Effective January 1, 1994, the Company changed its method of
accounting for deferred commissions from the straight-line basis to the sum of
the years digits method. Additionally, the Company changed its estimate of the
period benefited from two years to four years. After analyzing the Company's
historical customer retention patterns, management believes that the new method
more accurately matches the cost of acquiring a new customer with the
anticipated revenue stream from that customer. The cumulative effect of the
change from the straight line method to the sum of the years digits method
resulted in a charge to earnings of $123,000 in 1994. The change in the
estimated life from two to four years resulted in a decrease of $242,000 in
amortization expense for 1994.
Bad debt expense decreased as a percentage of revenue from 4.6% in
1993 to 3.3% in 1994 as a result of increases in the staffing of the Company's
credit and collection department and steps taken to strengthen the Company's
overall policies in that area.
Depreciation and amortization expense remained consistent between
periods at 1.2% and 1.1% for the years ended 1993 and 1994, respectively.
Net interest expense increased, as a percentage of revenue, from 0.3%
in 1993 to 0.7% in 1994 as a result of the Company's expanded use of its credit
facility in 1994. The Company increased its borrowing capacity in August 1993
from $1,500,000 to $7,000,000.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues increased by 2.3% to $58,755,000 in 1995 from $57,420,000 in
1994. Billed minutes increased by 9.8% between periods during which time the
average revenue per minute declined by 6.7%. In August 1995, the Company
acquired Bright, a San Francisco-based international call-back company and
Tele-Trend Communications, a switchless long distance reseller based in Denver.
In September 1995, the Company acquired selected customers from ISI
Telecommunications, Inc., a long distance switchless reseller. The customers
gained from these acquisitions accounted for approximately 10% of total billed
minutes for 1995. The decline in the average rate per minute was a result of
the acquired customer bases having generally lower rate per minute products
combined with the Company offering more competitively priced services.
In 1995, the Company's cost of revenue decreased to 68.7% from 69.7%
in 1994. The decrease resulted primarily from placing the majority of new
customers in 1994 and 1995 under carrier contracts which have the most
favorable rates for the Company. The rates the Company pays the carriers are
based primarily upon contractual arrangements with the carriers. A portion of
the rates the Company pays for services is based upon tariffs filed by the
carriers under which the
14
<PAGE> 15
Company qualifies for service. While the carriers are able to modify their
tariff at any time, the Company does not currently foresee any significant
change in rates in the near future.
SG&A expenses decreased slightly as a percentage of revenue to 29.7%
in 1995 from 29.9% in 1994. The operating expenses of Tele-Trend and Bright
were included in the Company's income statement from August through December
1995 which represented 0.9% of revenues for 1995. The various components of
SG&A remained consistent between periods as a percentage of revenue.
Depreciation and amortization increased as a percentage of revenue
from 1.1% in 1994 to 1.8% in 1995. During 1995, the Company's acquisitions
resulted in additions to intangible assets of approximately $6,200,000 in the
form of goodwill and customer bases. These assets are amortized over their
estimated useful lives and resulted in 1995 amortization of approximately
$527,000, or 0.9% of revenue for 1995. As a result of these acquisitions and
anticipated future acquisitions, management expects depreciation and
amortization expense will increase in the future, both in absolute dollars and
as a percentage of revenue in the future.
Net interest expense decreased as a percentage of revenue from 0.7% in
1994 to 0.3% in 1995. The decrease was due to the investment of the proceeds
from the Company's equity placements and a corresponding reduction in the
Company's borrowings under its credit facility prior to the use of the proceeds
for acquisition purposes.
Loss on abandonment of assets for 1995 primarily relates to the
Company's write off of software development costs in the fourth quarter of
1995. Through September 1995, the Company had invested approximately $948,000
in system development for a new billing system to replace the Company's current
system. In the fourth quarter of 1995, management began negotiations with a
vendor who could provide software similar in scope to that which the Company
was developing in-house. In order to minimize the risk of development and to
have access to a new system on a more timely basis, the Company has decided to
license the vendor's software for use by the Company. Accordingly, the cost of
the in-house development was written off in the fourth quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations for the year ended December 31, 1995
resulted in net negative cash flow of $1,820,000 compared to a net positive
cash flow of $1,143,000 for the prior year. Accounts receivable, net of the
allowance for doubtful accounts, and accounts payable, each increased at
December 31, 1995 compared to December 31, 1994, as a result of the
acquisitions described in Note B to the financial statements and as a result of
increased billings of the Company for the period. Billings for the fourth
quarter of 1995 were approximately $2,400,000 greater than billings for the
comparable quarter of 1994. Cash balances increased by $6,800,000 at December
31, 1995 compared to the previous year end as a result of the Company's private
placements of equity in 1995. As discussed in Note H to the financial
statements, the Company raised approximately $17,300,000 in cash from the
offerings, of which approximately $6,200,000 was utilized by the Company for
acquisitions in 1995 and the remaining amount was utilized for the paydown of
the Company's revolving credit facility and other working capital purposes.
The Company has a line of credit available through a finance company allowing
for borrowings of up to $10,000,000 based on the Company's trade receivable.
There was $10,000 outstanding under the line at December 31, 1995.
During 1995 the Company expended $381,000 for the acquisition of
furniture, equipment and data processing systems. Approximately $118,000 of
this amount was for the development of a new billing system to replace the
Company's current system. As described in Management's Discussion and Analysis
of the Results of Operations, management has decided to write off the cost of
this development in 1995 and is currently negotiating the licensing of an
existing billing software system with a vendor. The Company expects to spend up
to $3,000,000 to license the system and to acquire the necessary enhancements
and hardware to operate it. Management
15
<PAGE> 16
anticipates that the funds required to complete the project will be available
through the Company's working capital. The Company has no other material
capital expenditure commitments.
In January 1996, the Company acquired Automated Communications, Inc.,
a Golden, Colorado facilities-based reseller of long distance service.
Consideration for the acquisition 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 a long
term note of approximately $1,300,000. Management has decided to relocate the
Company's San Francisco facilities to ACI's offices in Golden in the first half
of 1996. Management estimates the cost of the relocation to be between
$750,000 and $1,000,000. See "Business - Corporate Relocation".
16
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Company and the related
report of independent accountants are included in this report beginning at page
F-1:
Report of Independent Certified Public Accountants
Balance Sheets
Statements of Operations
Statement of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
The information required by this Item concerning the Company's
directors is incorporated by reference from the section captioned "Proposal 1:
Election of Directors" contained in the Company's Definitive Proxy Statement
related to the Annual Meeting of Stockholders to be held June 18, 1996, to be
filed by the Company with Securities and Exchange Commission (the "Proxy
Statement").
IDENTIFICATION OF EXECUTIVE OFFICERS
The information required by this Item concerning the Company's
executive officers is set forth in Part I of this Report.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference
from the section captioned "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
from the section captioned "Executive Compensation," contained in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference
from the section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference
from the sections captioned "Certain Transactions" and "Executive Compensation"
contained in the Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this Annual Report on
Form 10-K:
(a) Financial Statements: The financial statements and schedule
filed as part of this report are set forth following page F-1
of this report.
(b) Reports on Form 8-K :
A Form 8-K reporting the acquisition by the Company of
Tele-Trend Communications, LLC, a Denver-based reseller of
long distance service was filed on September 12, 1995. An
Amended Form 8K reporting historical and pro forma financial
statements was filed on November 13, 1995.
18
<PAGE> 19
A Form 8-K reporting the acquisition by the Company of
Automated Communications, Inc., a Golden, Colorado
facilities-based reseller of long distance service was filed
on January 16, 1996.
(c) Exhibits
<TABLE>
<S> <C>
3.1 Restated Certificate of Incorporation of the
Company(1)
3.2 Bylaws of the Company(1)
3.3 Certificate of Designation of Preferences of Series A
Preferred Stock(3)
3.4 Certificate of Designation of Preferences of Series
B Preferred Stock(4)
3.5 Certificate of Designation of Preferences of Series
C Preferred Stock(8)
3.6 Certificate of Designation of Preferences of Series
D Preferred Stock(8)
3.7 Certificate of Designation of Preferences of Series
F Preferred Stock(13)
10.1 1989 Stock Option Plan(1)
10.2 Forms of option grant pursuant to the 1989 Stock
Option Plan(2)
10.3 1992 Non-Employee Directors' Stock Option Plan, as
Amended(8)
10.4 Form of option grant pursuant to the 1992 Non-Employee
Directors' Stock Option Plan(8)
10.5 Series A Preferred Stock Purchase Agreement dated
as of August 17, 1990(3)
10.6 Series B Preferred Stock Purchase Agreement dated
as of December 27, 1991 with List of Purchasers(4)
10.7 Series D Preferred Stock Purchase Agreement dated
as of December 15, 1992(8)
10.8 Letter Agreement between Thomas H. Bell and
Proactive Partners, L.P. dated December 26, 1991(4)
10.9 Sublease and Consent between the Company and Richard
Goldman & Co. relating to the premises at One
Maritime Plaza, San Francisco, CA.(3)
10.10 Consulting Agreement between the Company and Thomas
H. Bell dated March 25, 1992.(6)
10.11 Volume Purchase Agreement dated as of April 1, 1992
between the Company and Sprint Communications, L.P.(7)
10.12 Agreement dated as of June 1, 1992 between the
Company and Sprint Communications, L.P.(7)
10.13 Asset Purchase Agreement between the Company and BSN
dated effective as of September 1, 1992.(5)
10.14 Irrevocable Proxy executed by BSN dated September
29, 1992.(5)
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C>
10.15 Letter Agreement between the Company and Concord
dated September 29, 1992.(5)
10.16 Letter Agreement between the Company and Proactive
Partners, L.P. dated September 28, 1992.(5)
10.17 Letter Agreement between the Company and McGettigan,
Wick & Co., Inc. dated September 28, 1992.(5)
10.18 Letter Agreement between the Company and Belcaro
Bank dated September 29, 1992.(5)
10.19 Switched Services Rebiller Agreement between the
Company and WilTel, Inc. dated October 5, 1992.(9)
10.20 Switchless Reseller Services Agreement between the
Company and Allnet Communications Services, Inc.
dated July 24, 1992.(9)
10.21 Loan and Security Agreement between the Company and
Foothill Capital Corporation dated August 26, 1993
and Continuing Guarantee(10)
10.22 Office Lease Agreement with Itel Rail Corporation,
dated June 8, 1994(11)
10.23 Consulting Agreement between the Company and Robert
R. Curtis dated November 7, 1994(12)
10.24 Stockholders Agreement, dated October 20, 1995(13)
10.25 Series F Preferred Stock and Warrant Purchase
Agreement, Dated October 20, 1995(13)
11.1 Computation of earnings per share
18.1 Letter re change in accounting principles(12)
21.1 Subsidiaries of Phoenix Network, Inc.
23.1 Consent of Grant Thornton LLP
</TABLE>
20
<PAGE> 21
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS:
- 1989 Stock Option Plan(2)
- Form of option grant pursuant to the 1989 Stock Option Plan(2)
- 1992 Non-Employee Directors' Stock Option Plan(8)
- Form of option grant pursuant to the 1992 Non-Employee Directors'
Stock Option Plan(8)
- Consulting Agreement between the Company and Thomas H. Bell dated
March 25, 1992.(6)
- Consulting Agreement between the Company and Robert R. Curtis
dated November 7, 1994(12)
- -------------------
(1) Filed as an Exhibit to the Company's quarterly report on Form 10-Q for
the quarter ended October 31, 1990, and incorporated herein by
reference.
(2) Filed as an Exhibit to the Company's annual report on Form 10-K for
the fiscal year ended April 30, 1990, and incorporated herein by
reference.
(3) Filed as an Exhibit to the Company's quarterly report on Form 10-Q for
the quarter ended July 31, 1990 and incorporated herein by reference.
(4) Filed as an Exhibit to the Company's annual report on Form 10-K for
the transition period ended December 31, 1991 and incorporated herein
by reference.
(5) Filed as an Exhibit to the Company's current report on Form 8-K filed
with the SEC on October 14, 1992 and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1992 and incorporated herein by reference.
(7) Filed as an Exhibit to Amendment No. 1 on Form 8, amending the
Company's quarterly report on Form 10-Q for the quarter ended June 30,
1992 and incorporated herein by reference. Confidential treatment has
been requested for portions of this exhibit pursuant to a confidential
treatment request filed with the Securities and Exchange Commission on
August 19, 1992.
(8) Filed as an Exhibit to the Company's annual report on Form 10-K for
the year ended December 31, 1992 and incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Form 10-K/A, amending the
Company's annual report on Form 10-K for the year ended December 31,
1992 and incorporated herein by reference. Confidential treatment has
been requested for portions of this exhibit pursuant to a confidential
treatment request filed with the Securities and Exchange Commission on
May 21, 1993.
(10) Filed as an Exhibit to the Company's annual report on Form 10-K for
the year ended December 31, 1993 and incorporated herein by reference.
(11) Filed as an Exhibit to the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 1994 and incorporated herein by reference.
(12) Filed as an Exhibit to the Company's annual report on Form 10-K for
the year ended December 31, 1994 and incorporated herein by reference.
(13) Filed as an Exhibit to the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 1995 and incorporated herein by
reference.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PHOENIX NETWORK, INC.
By: /s/ Wallace M. Hammond
-----------------------------------
Wallace M. Hammond
Chief Executive Officer
Date: March 29, 1996
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Thomas H. Bell March 29, 1996
- ---------------------------------- Chairman of the
Thomas H. Bell Board and Director
/s/ Robert R. Curtis March 29, 1996
- ---------------------------------- Vice Chairman of the
Robert R. Curtis Board and Director
/s/ Wallace M. Hammond March 29, 1996
- ---------------------------------- President and Chief Executive
Wallace M. Hammond Officer (Principal Executive
Officer) and Director
/s/ Jeffrey L. Bailey March 29, 1996
- ---------------------------------- Senior Vice President,
Jeffrey L. Bailey Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ James W. Gallaway Director March 29, 1996
- ----------------------------------
James W. Gallaway
/s/ Merrill L. Magowan Director March 29, 1996
- ----------------------------------
Merrill L. Magowan
/s/ Myron A. Wick Director March 29, 1996
- ----------------------------------
Myron A. Wick, III
/s/ Sidney Kahn Director March 29, 1996
- ----------------------------------
Sidney Kahn
- ---------------------------------- Director March __, 1996
Max Thornhill
/s/ David Singleton Director March 29, 1996
- ----------------------------------
David Singleton
</TABLE>
22
<PAGE> 23
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
PHOENIX NETWORK, INC. AND SUBSIDIARIES
December 31, 1994 and 1995
<PAGE> 24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Phoenix Network, Inc.
We have audited the accompanying consolidated balance sheets of Phoenix
Network, Inc. (a Delaware Corporation) and Subsidiaries as of December 31, 1994
and 1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Phoenix Network, Inc. and Subsidiaries as of December 31, 1994 and 1995, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As explained in note C, the Company changed its method of accounting for
deferred commissions in 1994.
GRANT THORNTON LLP
San Francisco, California
March 28, 1996
<PAGE> 25
PHOENIX NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents ($326,431 restricted in 1994 and
$225,356 restricted in 1995) $ 1,209,999 $ 8,004,511
Accounts receivable, net of allowance for doubtful accounts
of $1,164,086 in 1994 and $1,287,753 in 1995 8,825,944 11,763,520
Deferred commissions 808,740 901,213
Other current assets 209,340 304,920
----------- -----------
Total current assets 11,054,023 20,974,164
Furniture, equipment and data processing systems - at cost,
less accumulated depreciation of $837,990 in 1994 and
$1,119,729 in 1995 1,430,467 743,463
Deferred commissions 789,726 2,076,008
Customer acquisition costs, less accumulated amortization of
$431,525 in 1994 and $1,005,262 in 1995 203,483 2,447,619
Goodwill, less accumulated amortization of $82,961 in 1995 - 3,903,109
Other assets 312,155 223,520
----------- -----------
$13,789,854 $30,367,883
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to finance companies $ 2,553,103 $ 41,468
Accounts payable 7,980,517 10,500,807
Accrued liabilities 223,601 400,918
----------- -----------
Total current liabilities 10,757,221 10,943,193
Stockholders' equity
Preferred stock - $.001 par value, authorized 5,000,000
shares, issued and outstanding 1,621,476 in 1994 and
2,737,389 in 1995, liquidation preference aggregating
$3,779,371 and $15,332,780 at December 31, 1994 and 1995 1,622 2,737
Common stock - $.001 par value, authorized 20,000,000
shares, issued 11,360,245 in 1994 and 14,459,658 in 1995 11,360 14,460
Additional paid-in capital 10,525,800 28,443,144
Accumulated deficit from May 1, 1989 (7,503,627) (9,033,129)
Treasury stock - 1,300 shares at cost (2,522) (2,522)
----------- -----------
3,032,633 19,424,690
----------- -----------
$13,789,854 $30,367,883
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE> 26
PHOENIX NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $40,349,599 $57,420,484 $58,755,334
Cost of revenues 29,260,515 40,007,052 40,376,589
----------- ----------- -----------
Gross profit 11,089,084 17,413,432 18,378,745
Selling, general and administrative
expenses 13,254,772 17,161,963 17,475,954
Depreciation and amortization 482,165 634,245 1,048,870
----------- ----------- -----------
13,736,937 17,796,208 18,524,824
----------- ----------- -----------
Operating loss (2,647,853) (382,776) (146,079)
Other income (expense)
Interest income 9,213 8,121 83,227
Interest expense (157,066) (407,065) (252,494)
Loss on abandonment of fixed assets - - (1,019,648)
----------- ----------- -----------
(147,853) (398,944) (1,188,915)
----------- ----------- -----------
Loss before cumulative effect of accounting
change (2,795,706) (781,720) (1,334,994)
Cumulative effect of change in amortization
of deferred commissions - (123,224) -
----------- ----------- -----------
Net loss $(2,795,706) $ (904,944) $(1,334,994)
=========== =========== ===========
Net loss attributable to common
shares:
Net loss $(2,795,706) $ (904,944) $(1,334,994)
Preferred dividends (267,419) (231,255) (594,381)
----------- ----------- -----------
$(3,063,125) $(1,136,199) $(1,929,375)
=========== =========== ===========
Loss per common share:
Loss before cumulative effect of accounting change $(0.33) $(0.09) $(.15)
Cumulative effect of accounting change - (0.01) -
----------- ----------- ------------
Net loss per common share $(0.33) $(0.10) $ (.15)
=========== =========== ===========
Weighted average common shares 9,423,072 11,100,958 12,613,992
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 27
PHOENIX NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three years ended December 31, 1995
<TABLE>
<CAPTION>
Additional Accumulated
Preferred Common paid-in deficit from Treasury
Stock Stock capital May 1, 1989 Stock
---------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 $1,978 $ 8,715 $ 5,948,824 $(3,675,350) $(2,522)
Exercise of stock options
and warrants - 691 690,337 - -
Conversion of preferred
stock into common stock (368) 482 13,619 (13,733) -
Issuance of common stock - 793 2,805,443 - -
Preferred dividends - - - (69,975) -
Net loss - - - (2,795,706) -
------ ------ ---------- ----------- -------
Balance at December 31, 1993 1,610 10,681 9,458,223 (6,554,764) (2,522)
Exercise of stock options - 401 465,018 - -
Conversion of preferred
stock into common stock (44) 278 43,685 (43,919) -
Issuance of preferred stock
upon conversion of debt 56 - 558,874 - -
Net loss - - - (904,944) -
------ ------ ---------- ----------- -------
Balance at December 31, 1994 1,622 11,360 10,525,800 (7,503,627) (2,522)
Exercise of stock options and
warrants - 391 523,691 - -
Conversion of preferred
stock into common stock (4) 24 7,200 (7,220) -
Issuance of common stock, net
of expenses - 2,685 6,314,779 - -
Issuance of preferred stock, net
of expenses, and conversion
of Series E to Series F 1,119 - 11,071,674 - -
Preferred dividends - - - (187,288) -
Net loss - - - (1,334,994) -
------ ------ ---------- ----------- -------
Balance at December 31, 1995 $2,737 $14,460 $28,443,144 $(9,033,129) (2,522)
====== ======= =========== =========== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE> 28
PHOENIX NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1993 1994 1995
----------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities
Cash received from customers $ 36,585,065 $ 54,971,948 $ 55,118,906
Interest received 9,213 8,121 83,227
Cash paid to suppliers and employees (42,827,891) (53,430,265) (56,770,205)
Interest paid (131,792) (407,065) (252,065)
------------ ------------ ------------
Net cash provided by (used in)
operating activities (6,365,405) 1,142,739 (1,820,137)
Cash flows from investing activities
Redemptions of certificates of deposit 140,000 - -
Purchases of furniture, equipment and
data processing systems (394,373) (882,933) (380,725)
Payments on notes receivable - stockholder 273,969 - -
Customer base acquisitions - - (1,553,238)
Business acquisitions, net of cash acquired - - (4,635,764)
Acquisitions of other assets (308,990) (123,528) -
------------ ------------ ------------
Net cash used in investing activities (289,394) (1,006,461) (6,569,727)
Cash flows from financing activities
Proceeds from issuance of common stock,
net of offering costs 2,806,236 - 6,317,464
Proceeds from issuance of preferred stock,
net of offering costs - - 11,072,793
Proceeds from note payable to stockholder 500,000 - -
Proceeds (payments) on note payable to
finance company 3,420,931 (867,828) (2,542,675)
Payments on capital lease obligation (28,425) (16,584) -
Preferred stock dividends (69,975) - (187,288)
Proceeds from exercise of stock options
and warrants 691,028 465,420 524,082
------------ ------------ ------------
Net cash provided by (used in) financing
activities 7,319,795 (418,992) 15,184,376
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 664,996 (282,714) 6,794,512
Cash and cash equivalents at beginning of year 827,717 1,492,713 1,209,999
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,492,713 $ 1,209,999 $ 8,004,511
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 29
PHOENIX NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Reconciliation of net loss to net cash provided by
(used in) operating activities:
Net loss $(2,795,706) $ (904,944) $(1,334,994)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Cumulative effect of change in
amortization of deferred commissions - 123,224 -
Provision for doubtful accounts 1,860,300 1,902,729 1,949,876
Loss on disposal of fixed assets - - 1,019,648
Depreciation 247,272 288,897 279,014
Amortization 234,893 345,348 769,856
Changes in assets and liabilities
Accounts receivable (3,764,534) (2,448,536) (3,636,428)
Deferred commissions (2,435,029) 713,839 (1,378,755)
Other current assets 33,798 133,377 (106,699)
Other assets (37,125) - -
Accounts payable and accrued
liabilities 290,726 988,805 618,345
------------ ------------ ------------
Net cash provided by (used in)
operating activities $(6,365,405) $ 1,142,739 $(1,820,137)
=========== =========== ===========
Non-cash financing and investing activities:
- -------------------------------------------
See statement of stockholders' equity and notes B and H.
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 30
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994 and 1995
NOTE A - DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES
Phoenix Network, Inc. ("Phoenix" or the "Company") was a switchless reseller
of long distance telecommunication services designed primarily for small to
medium sized commercial accounts located throughout the United States.
Effective January 1, 1996, as a result of the acquisition of Automated
Communications, Inc. ("ACI"), the Company became a facilities based reseller
(see note M). The Company provides its customers with long distance services
utilizing the networks of facilities-based carriers, such as American
Telephone & Telegraph Company, MCI Telecommunications Corporation, Sprint
Communications, L.P., ALC Communications Corporation, WorldCom, Inc.
(formerly Wiltel, Inc.) and others, who handle the actual call transmission
services. The carriers bill Phoenix at contractual rates for the combined
usage of Phoenix's customers utilizing their network. Phoenix then bills its
customers individually at rates established by Phoenix.
The following is a summary of the Company's significant accounting policies
applied in the preparation of the accompanying consolidated financial
statements.
o Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions are
eliminated in consolidation.
o Revenue Recognition
Revenue is recognized in the month in which the Company's customers
complete the telephone call.
o Cash and Cash Equivalents
The Company considers demand deposits, certificates of deposit and United
States Treasury bills purchased with a maturity of three months or less
as cash and cash equivalents. The carrying amount approximates fair
value because of the short maturity of these instruments.
o Deferred Commissions
Deferred commissions consist of direct commissions paid on a one time
basis to third parties upon the acquisition of new customers. Such
charges were amortized on a straight line basis over twelve to
twenty-four months, based on the future anticipated benefit, beginning
with the month following the month the customer's service is activated.
Effective January 1, 1994, the Company changed its method for amortizing
deferred commissions to the sum of the years digits method and changed
the period benefitted to a four year period (see note C).
F-7
<PAGE> 31
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993, 1994 and 1995
NOTE A - DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES (continued)
o Furniture, Equipment and Data Processing Systems
Depreciation of furniture and equipment is provided in amounts sufficient
to relate the cost of the depreciable assets to operations over their
estimated service lives, utilizing the straight-line method as follows:
<TABLE>
<S> <C>
Data processing systems 5 years
Billing system software 5 years
Furniture and fixtures 5 years
</TABLE>
o Customer Acquisition Costs
Customer acquisition costs represent the value of an acquired billing
base of customers and are amortized using the sum of the years digits and
straight-line methods over a four year period.
o Goodwill
Goodwill represents the excess of cost over the fair value of the net
assets acquired and is being amortized by the straight-line method over
20 years.
o Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements, as well as revenues and expenses during the
period. Significant estimates made by management include the allowance
for doubtful accounts, estimated carrier credits, and the amortization
periods related to acquired customers and goodwill. Actual results could
differ from those estimates.
o Income Taxes
Deferred income taxes are recognized for tax consequences of temporary
differences by applying current tax rates to differences between the
financial reporting and the tax basis of existing assets and liabilities.
o Reclassification
Prior year's financial statements have been reclassified to conform to
current year presentation.
F-8
<PAGE> 32
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993, 1994 and 1995
NOTE B - ACQUISITIONS
In August of 1995, the Company acquired in purchase transactions, the
customer bases and substantially all of the assets and liabilities of
Tele-Trend Communications, LLC ("Tele-Trend"), a Denver based switchless
reseller, and Bright Telecom L.P. ("Bright"), an international call-back
provider, for $4,369,317 and $356,388, respectively. The operations of
Tele-Trend and Bright are included from August 1, 1995.
Additionally, during 1995, the Company acquired three customer bases at a
cost of $2,078,238. At December 31, 1995, accounts payable includes $525,000
due for the purchase of one of the customer bases. The Company may be
required to make additional payments of up to $375,000, depending upon the
future performance of one of the bases.
NOTE C - ACCOUNTING CHANGES
Effective January 1, 1994, the Company changed its method of accounting for
deferred commissions from the straight-line basis to the sum of the years
digits method. Additionally, the Company changed their estimate of the
period benefitted from two years to four years. Management believes that
these changes more accurately match expense with the revenues generated by
the customer base. The cumulative effect of the change in accounting method
was to increase accumulated amortization at January 1, 1994 by approximately
$123,000. The pro forma effect of the change in method on periods prior to
1994 is not material. The effect of both changes was to reduce the 1994
amortization expense and loss before cumulative effect of change in
accounting by approximately $242,000 ($0.02 per common share).
NOTE D - FURNITURE, EQUIPMENT AND DATA PROCESSING SYSTEMS
Furniture, equipment and data processing systems consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1994 1995
---------- ------------
<S> <C> <C>
Data processing systems $ 862,674 $ 1,130,744
Billing system software 830,507 -
Furniture and fixtures 294,937 231,113
Other equipment 280,339 501,335
---------- -----------
2,268,457 1,863,192
Less accumulated depreciation (837,990) (1,119,729)
---------- -----------
$1,430,467 $ 743,463
========== ===========
</TABLE>
F-9
<PAGE> 33
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993, 1994 and 1995
NOTE D - FURNITURE, EQUIPMENT AND DATA PROCESSING SYSTEMS (continued)
The loss on abandonment of assets in 1995 primarily relates to a write-off of
software development costs. Management decided to minimize the risk of
development and to have access to a new system on a more timely basis and,
accordingly, has decided to license an existing billing system from a vendor.
The Company expects to spend up to $3,000,000 to license the system and to
acquire the necessary enhancements and hardware to operate it.
NOTE E - NOTES PAYABLE TO FINANCE COMPANY
In September 1995, the Company renewed its Loan and Security Agreement (the
"Agreement") with a finance company to make available to the Company a line
of credit of up to $10,000,000. The Company may borrow up to the lesser of
$10,000,000 or its borrowing base, which is defined as a percentage of its
eligible receivables. The term of the Agreement is three years, expiring
October 1998, with automatic renewal options. There are penalties for early
termination by the Company. Borrowings bear interest at 1.75% over the
"reference rate", as defined. In connection with the renewal, fees and
transaction costs of $80,972 were incurred, which are being amortized on a
straight-line basis over three years. The loan is collateralized by the
Company's accounts receivable, equipment, general intangibles and other
personal property assets. Among other provisions, the Company must maintain
certain minimum financial covenants, is prohibited from paying dividends
without the approval of the finance company, and is subject to limits on
capital expenditures.
At December 31, 1995, $10,428 was outstanding under the line and the interest
rate was 10.25%. The Company has a letter of credit totalling $500,000
outstanding for the benefit of a vendor to secure payments under the contract
terms. The amount of the letter of credit reduces the amount available on
the line of credit.
Average daily outstanding borrowing for the year ended December 31, 1995 was
$1,426,014 at a weighted average interest rate of 11.52%. The highest
month-end balance outstanding for the year ended December 31, 1995 was
$3,119,733.
The Company also assumed a $100,000 line of credit with a commercial bank in
conjunction with the acquisition of Tele-Trend. The line of credit bears
interest at a rate of the bank's prime rate plus 2.5%. Outstanding
borrowings at December 31, 1995 were $31,040 and the interest rate was 11%.
This line was paid off and expired in February 1996.
F-10
<PAGE> 34
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993, 1994 and 1995
NOTE F - LEASES
The Company has operating leases for office space and equipment which expire
on various dates through 2000, and which require that the Company pay certain
maintenance, insurance and other operating expenses. Rent expense for the
years ended December 31, 1993, 1994 and 1995, was $500,431, $750,308 and
$872,096, respectively.
Future minimum lease payments for years ending December 31, are as follows:
<TABLE>
<S> <C>
1996 $1,074,185
1997 907,425
1998 602,040
1999 566,592
2000 190,735
----------
Total $3,340,977
==========
</TABLE>
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company has contracts with its major vendors to provide
telecommunications services to its customers. The agreements cover the
pricing of the services and are for periods of three to four years. Among
other provisions, the agreements contain minimum usage requirements which
must be met to receive the contractual price and to avoid shortfall
penalties. The Company is currently in compliance with the contractual
requirements. Total future minimum usage commitments at December 31, 1995
are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, Commitment
------------ ------------
<S> <C>
1996 $44,100,000
1997 26,100,000
1998 900,000
-----------
Total $71,100,000
===========
</TABLE>
F-11
<PAGE> 35
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993, 1994 and 1995
NOTE H - CAPITAL STOCK
Preferred Stock
The Company's certificate of incorporation authorizes it to issue up to
5,000,000 shares of $.001 par value preferred stock. At December 31, 1995,
the Company's authorized preferred stock is allocated as follows:
<TABLE>
<CAPTION>
Authorized Issued and
Shares Outstanding
------------ -----------
<S> <C> <C>
Reserved shares:
Series A 300,000 101,750
Series B 200,000 126,250
Series C 1,000,000 1,000,000
Series D 666,666 333,333
Series F 1,200,000 1,176,056
Undesignated shares 1,633,334 -
--------- ---------
Total 5,000,000 2,737,389
========= =========
</TABLE>
In September 1990, the Company issued 155,500 shares of its Series A
Preferred Stock ("Series A") at $10 per share. The shares are entitled to 9%
cumulative dividends, voting rights and are convertible into common stock
subject to certain anti-dilution provisions. In connection with the offering
the Company also issued a warrant for 62,200 shares of common stock with an
exercise price of $2.50 per share to an investment banking firm, controlled
by an individual, who was subsequently elected to the Company's Board of
Directors. The warrant expires in February 1997. Net proceeds to the
Company, after offering costs of $116,054, were $1,438,987. During 1994,
16,000 shares of Series A were converted into 70,996 shares of common stock.
During 1995, 3,000 shares of Series A were converted into 14,449 shares of
common stock. At December 31, 1995, the outstanding Series A shares were
convertible into 420,431 shares of common stock.
In December 1991, the Company issued 95,000 shares of its Series B Preferred
Stock ("Series B") at $10 per share. The shares are entitled to 9% cumulative
dividends, voting rights and are convertible into shares of common stock
subject to certain anti-dilution provisions. Net proceeds to the Company
after offering costs of $46,209, were $903,790. In 1992 the Company completed
the sale of an additional 60,500 shares of the Series B shares at $10 per
share on the same terms. Net proceeds to the Company from the sales in
January and February 1992 were $588,075, after offering costs of $16,925. In
connection with the offering, the Company issued a warrant to an investment
banking firm, controlled by one of the Company's directors, for 69,750 shares
of common stock with an exercise price of $2.00 per share. The warrant
expires in February 1997. Of the total offering costs, the investment banking
firm, controlled by one of the Company's directors, received approximately
$56,000. During 1995, 1,250 shares of Series B were converted into 9,749
shares of common stock. At December 31, 1995, the outstanding Series B shares
are convertible into 841,709 shares of common stock.
F-12
<PAGE> 36
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993, 1994 and 1995
NOTE H - CAPITAL STOCK (continued)
In November 1992, the Company issued 1,000,000 shares of its Series C
Preferred Stock ("Series C") to one of its major vendors as collateral for
amounts due the vendor for services provided. If the Company defaults on
amounts owed the vendor, the vendor would have the right to convert its
preferred shares into the number of common shares, on a two for one basis,
that would have a market value equal to three times the vendor's most recent
invoice to the Company less $1,500,000. The Series C has a 4% non-cumulative
dividend preference over common stock; however, such dividends shall only be
paid following payment of dividends on other previously issued series of
preferred stock, and then only at the discretion of the Company's board of
directors. The preferred has no voting rights. The Series C shares have
been recorded at their par value of $1,000.
In December 1992, the Company issued 666,666 shares of its Series D Preferred
Stock at $1.50 per share. The shares are entitled to 6% non-cumulative
dividends, when and if declared by the Board of Directors and only after
payment of dividends on previously issued series of preferred stock. These
shares are non-voting and are convertible into common stock subject to
certain anti-dilution provisions. In connection with the offering, the
Company issued a warrant to an investment banking firm, controlled by one of
the Company's directors, for 22,000 shares of common stock with an exercise
price of $1.50 per share. The warrant expires in December 1997. Net
proceeds to the Company, after offering costs of $48,717 were $951,283.
Approximately $45,000 of the offering costs were paid to an investment
banking firm controlled by one of the Company's directors. In 1993, 333,333
Series D Preferred shares were converted into common shares on a one for one
basis. At December 31, 1995, the outstanding Series D Preferred shares are
convertible into 333,333 shares of common stock.
In September 1994, the Company issued 55,893 shares of Series E Preferred
Stock at $10 per share under an agreement to convert the note payable to
stockholder, with a principle balance of $500,000 and accrued interest of
$58,930. In connection with the issuance of the stock, the Company issued
the stockholder a five year warrant for 100,000 shares of the Company's
common stock which was canceled when the Series E shares were converted to
Series F Preferred Stock (see below).
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 $10
per share. Additionally, the holder of the Company's Series E Preferred
Stock exchanged their Series E shares, plus accumulated and unpaid dividends
of $47,467, for 60,639 shares of Series F Preferred Stock. The Series F
shares are entitled to 9% cumulative dividends, voting rights, demand
registration rights for the underlying common shares 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 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 shareholders have
the right to place two directors on the Company's board (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. At December 31, 1995, the outstanding Series F
Preferred shares are convertible into 4,704,224 shares of common stock.
F-13
<PAGE> 37
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993, 1994 and 1995
NOTE H - CAPITAL STOCK (continued)
The common shares reserved for issuance upon the conversion of Series A, B, C
and D Preferred Stock have been registered for resale with the Securities and
Exchange Commission.
At December 31, 1995, the Company had cumulative, unpaid dividends on Series
A, B and F Preferred Stock of $259,922 ($2.55 per share), $322,508 ($2.55 per
share) and $208,790 ($.18 per share), respectively.
Common Stock
In July 1993, the Company completed a private placement of 793,331 shares of
its common stock for cash at $3.75 per share. Net proceeds to the Company
after offering costs of $168,755 were $2,806,236. A five-year warrant to
purchase 53,333 shares of the Company's common stock at $3.75 per share was
issued to a third party in connection with the placement.
In May 1995, the Company closed a private placement of its common stock which
raised $727,519, net of offering costs of $119,481. The Company sold 385,000
units, at $2.20 per unit, in an off-shore financing pursuant to Regulation S
under the Securities Act of 1933. A unit consists of one share of common
stock and a five year warrant for one-half share of common stock. Two
warrants can be exercised to purchase one share of common stock at $2.20 per
share. In connection with the transaction, the placement agent was issued a
five year warrant to purchase 38,500 units at $2.42 per unit. The Company
closed another private placement of its common stock under Regulation S in
September 1995. In this transaction, the Company sold 2,300,000 shares of
common stock for $2.75 per share. Proceeds to the Company, net of offering
costs of $735,055 were $5,589,945.
Stock Options and Warrants
In 1987, the Company granted certain directors stock options to purchase up
to 900,000 shares of common stock at a price of $0.10 per share, expiring no
earlier than ten (10) years from the grant date. At December 31, 1995,
options for 500,000 shares remain outstanding.
The Company's 1989 Stock Option Plan authorizes the grant of incentive stock
options or supplemental stock options for up to 3,500,000 shares of common
stock. The exercise price of each incentive stock option shall be not less
than 100% of the fair market value of the stock 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 on
the date the option is granted.
In November 1992, the Board of Directors approved the 1992 Non-Employee
Directors' Stock Option Plan. Under the plan, 480,000 shares of common stock
have been reserved for issuance to non-employee directors of the Company.
Options are granted annually based upon length of service at fair market
value at date of grant.
F-14
<PAGE> 38
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993, 1994 and 1995
NOTE H - CAPITAL STOCK (continued)
Common shares under option are summarized below:
<TABLE>
<CAPTION>
Number Price
of shares per share
---------- ---------------
<S> <C> <C>
Outstanding at January 1, 1993 2,024,799 $0.10 to $3.12
Exercised (390,562) $1.00 to $5.94
Granted 2,144,564 $1.00 to $5.94
Canceled (1,433,429) $1.00 to $5.94
---------
Outstanding at December 31, 1993 2,345,372 $0.10 to $5.94
Exercised (400,983) $1.00 to $5.63
Granted 1,032,990 $2.50 to $6.38
Canceled (500,218) $1.00 to $6.88
---------
Outstanding at December 31, 1994 2,477,161 $0.10 to $6.88
Exercised (355,821) $1.00 to $3.94
Granted 813,900 $2.38 to $6.38
Canceled (101,317) $1.00 to $6.88
---------
Outstanding at December 31, 1995 2,833,923 $0.10 to $6.38
=========
Exercisable at December 31, 1994 1,151,093 $0.10 to $6.88
=========
Exercisable at December 31, 1995 1,737,069 $0.10 to $6.38
=========
Common shares subject to warrants are summarized below:
Number Price
of shares per share
--------- ---------------
Outstanding at January 1, 1993 453,950 $0.75 to $2.50
Exercised (300,000) $0.75
Granted 232,583 $3.25 to $7.00
---------
Outstanding at December 31, 1993 386,533 $1.50 to $7.00
Granted 125,000 $3.25
---------
Outstanding at December 31, 1994 511,533 $1.50 to $7.00
Exercised (34,675) $2.42
Granted 720,672 $2.42 to $3.00
Canceled (100,000) $3.25
---------
Outstanding at December 31, 1995 1,097,530 $1.50 to $7.00
=========
All warrants are exercisable at grant.
</TABLE>
F-15
<PAGE> 39
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993, 1994 and 1995
NOTE I - LOSS PER COMMON SHARE
Loss per common share is based upon the weighted average number of common and
dilutive common equivalent shares outstanding. Dividends paid or accrued but
not declared on the preferred stock are deducted in computing loss per common
share.
NOTE J - INCOME TAXES
Effective January 1, 1993, the Company adopted Financial Accounting Standard
No. 109 ("FAS 109"), Accounting for Income Taxes, which requires the use of
the liability method in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the current tax rates. Prior to the adoption of FAS 109,
income tax expense was determined using the deferred method. Deferred tax
expense was based on items of income and expense that were reported in
different years in the financial statements and tax returns and were measured
at the tax rate in effect in the year the difference originated. The effect
of this new standard did not have a significant impact on the financial
position or results of operations of the Company.
As of December 31, 1995, the Company has available to offset future Federal
taxable income, net operating loss carryforwards (NOL) of approximately
$9,000,000 which expire in varying amounts from 2002 through 2009.
The Company's effective income tax rate is different from the Federal
statutory income tax rate because of the following factors:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Federal tax rate applied to
loss before taxes (34.0)% (34.0)% (34.0)%
State tax rate applied to
allowable carryforward losses (3.6) (5.9) (5.9)
Valuation allowance of
deferred taxes 37.6 39.9 39.9
----- ----- -----
Effective tax rate - % - % - %
===== ===== =====
</TABLE>
F-16
<PAGE> 40
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993, 1994 and 1995
NOTE J - INCOME TAXES (continued)
Deferred Federal and state tax assets and valuation allowance are as follows:
<TABLE>
<CAPTION>
Deferred Assets
Year ended December 31,
-----------------------------
1994 1995
----------- ----------
<S> <C> <C>
Current
Allowance for bad debts $ 506,000 $ 560,000
Noncurrent
Non-current assets 115,000 257,000
Net operating loss carryforward 2,800,000 3,445,000
----------- -----------
2,915,000 3,702,000
----------- -----------
3,421,000 4,262,000
Valuation allowance (3,421,000) (4,262,000)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
The increase in the valuation allowance was approximately $2,776,000,
$645,000 and $841,000 for the years ended December 31, 1993, 1994 and 1995,
respectively.
NOTE K - TRANSACTION WITH BSN TELECOM COMPANY
On September 29, 1992, the Company and BSN Telecom Company ("BSN") entered
into an agreement (the "Agreement"), effective as of September 1, 1992,
whereby BSN agreed to transfer its rights to its long distance
telecommunications rebilling account base to the Company in exchange for
1,133,333 shares of the Company's common stock. Under the Agreement, BSN
received certain demand registration rights with respect to the shares which
were exercised in 1993 and gave the Board of Directors of Phoenix an
irrevocable proxy to vote all of the shares at all meetings of Phoenix's
stockholders. The proxy expired on November 30, 1993.
In connection with the transaction with BSN, CONCORD Services, Inc.
("Concord"), an affiliate of BSN, and Proactive Partners, L.P., an affiliate
of Phoenix, each purchased $500,000 of Series D Preferred Stock (see note H).
Additionally, Concord agreed to provide services to Phoenix in negotiating
future acquisitions and purchases of both switched and switchless long
distance companies under an exclusive agency agreement which expired on
December 31, 1993.
The Company has recorded the issuance of the 1,133,333 shares in exchange for
a customer base valued at $578,333 and other assets of $45,000.
F-17
<PAGE> 41
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993, 1994 and 1995
NOTE L - EMPLOYEE BENEFIT PLANS
On June 1, 1993, the Company established a 401(k) tax savings plan for all
employees. Employer and participant contributions to the plan become fully
vested and nonforfeitable. The plan is a defined contribution plan covering
all of its employees. Under this plan, employees with a minimum of one year
of qualified service can elect to participate by contributing a minimum of 1
percent of their gross earnings up to a maximum of 20 percent.
For those eligible plan participants, the Company will contribute an amount
equal to 100 percent of each participant's personal contribution up to an
annual maximum of $1,000. The Company's contributions to the 401(k) plan for
the year ending December 31, 1993, 1994 and 1995 were approximately $14,000,
$23,000 and $59,000 respectively.
NOTE M - SUBSEQUENT EVENTS
In January 1996, the Company created a wholly-owned subsidiary, Phoenix
Network Acquisition Corp. ("PAC"). Effective January 1, 1996, PAC entered
into an agreement to purchase all of the outstanding stock of ACI for
2,800,000 shares of the Company's stock valued at $10,500,000, payment of
$4,000,000 promissory note from ACI, which was assumed by PAC and a
promissory note of approximately $1,300,000. See note N for pro forma
information.
As a result of the ACI acquisition, management has decided to relocate the
Company's headquarters from San Francisco to Golden, Colorado. In connection
with the relocation, the Company will incur one time personnel and moving
costs estimated to be between $750,000 and $1,000,000.
F-18
<PAGE> 42
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993, 1994 and 1995
NOTE N - PRO FORMA INFORMATION
Effective August 1, 1995, the Company acquired Tele-Trend, and effective
January 1, 1996 acquired ACI. Assuming both of the acquisitions had occurred
on January 1, 1995, the following is the pro forma unaudited condensed
consolidated operations of the Company for the year ended December 31, 1995.
The results are not necessarily indicative of the results of operations that
might have occurred if the transactions had taken place at January 1, 1995,
or of the Company's results of operations for any future period.
<TABLE>
<S> <C>
Revenues $87,629,000
Cost of revenues 61,500,000
-----------
Gross profit 26,129,000
Selling, general and administrative 27,922,000
-----------
Loss from operations (1,793,000)
Other (916,000)
-----------
Net loss (2,709,000)
Preferred dividends (1,176,000)
-----------
Net loss attributable to common shares $(3,885,000)
===========
Net loss per common share $(0.25)
=====
Weighted average number of shares outstanding 15,414,000
===========
</TABLE>
The pro forma unaudited condensed consolidated balance sheet assuming the ACI
acquisition had taken place at December 31, 1995 is as follows:
<TABLE>
<S> <C>
Assets
------
Cash $ 4,006,000
Receivables 14,638,000
Other current assets 1,261,000
-----------
Total current assets 19,905,000
Goodwill 19,374,000
Other assets 10,350,000
-----------
$49,629,000
===========
Liabilities and Stockholders' Equity
------------------------------------
Notes payable $ 4,457,000
Accounts payable and accrued liabilities 15,247,000
-----------
Total current liabilities 19,704,000
Equity 29,925,000
-----------
$49,629,000
===========
</TABLE>
F-19
<PAGE> 43
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1993, 1994 and 1995
NOTE O - NEW PRONOUNCEMENTS
o Stock-Based Compensation
The Company has not elected early adoption of Financial Accounting
Standard No. 123 ("FAS 123"), Accounting for Stock-Based Compensation.
FAS 123 becomes effective beginning with the Company's first quarter of
1996. Upon adoption of FAS 123, the Company will continue to measure
compensation expense for its stock-based employee compensation plans using
the intrinsic value method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees, and will provide pro forma disclosures of
net income and earnings per share as if the fair value method prescribed
by FAS 123 had been applied in measuring compensation expense. For
options granted to non-employees after December 15, 1995, the Company will
be required to apply the fair value method prescribed by FAS 123. The
Company has not determined the future effect of adopting FAS 123 on the
consolidated financial position or operating results.
o Other Recent Pronouncements
In 1995, Financial Accounting Standards No. 121 ("FAS 121"), Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, was issued and is effective for fiscal years commencing after
December 15, 1995. The future adoption of FAS 121 is not expected to have
a material effect on the Company's consolidated financial position or
operating results.
F-20
<PAGE> 44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
Board of Directors
Phoenix Network, Inc.
In connection with our audit of the consolidated financial statements
of Phoenix Network, Inc. and Subsidiaries referred to in our report dated March
28, 1996, which is included in the Company's annual report on Form 10-K, we
have also audited Schedule II for the years ended December 31, 1993, 1994 and
1995. In our opinion, this schedule presents fairly, in all material respects,
the information required to be set forth therein.
GRANT THORNTON LLP
San Francisco, California
March 28, 1996
S-1
<PAGE> 45
PHOENIX NETWORK, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1993, 1994 and 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------------------------------------- ---------- ------------ ---------------- --------------
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Period Expenses Deductions (1) End of Period
- ------------------------------------- ----------- ------------ ---------------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
December 31, 1993 $ 903,044 $1,860,300 $1,850,473 $ 912,871
December 31, 1994 $ 912,871 $1,902,729 $1,651,514 $1,164,086
December 31, 1995 $1,164,086 $1,949,876 $1,826,209 $1,287,753
</TABLE>
(1) Write-offs of uncollectible accounts, net of recoveries.
S-2
<PAGE> 46
EXHIBIT INDEX
Exhibit 11.1 Computation of earnings per share.
Exhibit 21.1 Subsidiaries of Phoenix Network, Inc.
Exhibit 23.1 Consent of Grant Thornton LLP.
Exhibit 27 Financial Data Schedule.
<PAGE> 1
EXHIBIT 11.1
PHOENIX NETWORK, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
<TABLE>
1993 1994 1995
----------- ---------- -----------
<S> <C> <C> <C>
Primary:
Loss before cumulative effect of
accounting change $(2,795,706) $ (781,720) $(1,334,994)
Cumulative effect of accounting
change - (123,224) -
----------- ---------- -----------
Net loss (2,795,706) (904,944) (1,334,994)
Preferred stock dividend (267,419) (231,255) (594,381)
----------- ---------- -----------
$(3,063,125) $(1,136,199) $(1,929,375)
=========== =========== ===========
Weighted average number
of shares outstanding 9,423,072 11,100,958 12,613,992
=========== =========== ===========
Net loss per share $(0.33) $(0.10) $(.15)
====== ====== =====
Fully diluted:
Net loss $(2,795,706) $ (904,944) $(1,334,994)
=========== =========== ===========
Weighted average number
of shares outstanding:
Primary 9,423,072 11,100,958 12,613,992
Convertible preferred
stock conversion 1,866,886 1,671,705 3,420,820
Stock option conversion 1,832,543 1,522,293 1,303,992
----------- ---------- -----------
Total 13,122,501 14,294,956 17,338,804
=========== =========== ===========
Net loss per common share $(0.21) $(0.06) $(0.08)
====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF PHOENIX NETWORK, INC.
1. Phoenix Telcom, Inc. (a wholly-owned subsidiary)
2. Phoenix Network, Inc. of New Hampshire (a wholly-owned subsidiary)
3. Phoenix Network, Inc. Acquisition Corp. (a wholly-owned subsidiary)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Phoenix Network, Inc.
We have issued our reports dated March 28, 1996, accompanying the
consolidated financial statements and schedule included in the annual report of
Phoenix Network, Inc. on Form 10-K for the three years in the period ended
December 31, 1995. We hereby consent to the incorporation by reference of said
reports in the Registration Statements of Phoenix Network, Inc. on Form S-8
(File No. 33-35844 effective July 12, 1990) and Form S-3, as amended (File No.
33-70672 effective February 25, 1994).
GRANT THORNTON LLP
San Francisco, California
March 28, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,004,511
<SECURITIES> 0
<RECEIVABLES> 13,051,273
<ALLOWANCES> 1,287,753
<INVENTORY> 0
<CURRENT-ASSETS> 20,974,164
<PP&E> 1,863,192
<DEPRECIATION> 1,119,729
<TOTAL-ASSETS> 30,367,883
<CURRENT-LIABILITIES> 10,943,193
<BONDS> 0
0
2,737
<COMMON> 14,460
<OTHER-SE> 19,407,493
<TOTAL-LIABILITY-AND-EQUITY> 30,367,883
<SALES> 58,755,334
<TOTAL-REVENUES> 58,755,334
<CGS> 0
<TOTAL-COSTS> 40,376,589
<OTHER-EXPENSES> 16,574,948
<LOSS-PROVISION> 1,949,876
<INTEREST-EXPENSE> 169,267
<INCOME-PRETAX> (1,334,994)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,334,994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,334,994)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
