<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 22, 1996
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PHOENIX NETWORK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 84-0881154
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1687 COLE BOULEVARD
GOLDEN, CO 80401
(303) 232-4333
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
WALLACE M. HAMMOND
PRESIDENT
PHOENIX NETWORK, INC.
1687 COLE BOULEVARD
GOLDEN, CO 80401
(303) 232-4333
(Name, address, including zip code,
and telephone number, including
area code, of agent for service)
With Copies to:
<TABLE>
<S> <C>
ERNEST J. PANASCI, ESQ. PATRICK A. POHLEN, ESQ.
KEVIN G. O'CONNELL, ESQ. COOLEY GODWARD CASTRO
FREEBORN & PETERS HUDDLESON & TATUM
950 17TH STREET, SUITE 2600 5 PALO ALTO SQUARE
DENVER, COLORADO 80202 3000 EL CAMINO REAL
(303) 628-4200 PALO ALTO, CALIFORNIA 94306
(303) 628-4240 (FAX) (415) 843-5000
(415) 857-0663 (FAX)
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon the
Effective Time of the Merger, as defined in the Proxy Statement/Prospectus
included herein.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instructions G, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================
AMOUNT AGGREGATE
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value..... 2,738,421 $3.97 $10,871,532 $3,749
==================================================================================================
</TABLE>
(1) Based on the maximum number of shares of the Registrant's Common Stock to be
issued in connection with the Merger.
(2) Estimated pursuant to Rule 457(f)(1) solely for purposes of calculating the
registration fee based on the market value of the securities to be received
by Registrant as determined on August 19, 1996.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
PHOENIX NETWORK, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER LOCATIONS IN PROSPECTUS
- -------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................... Cover Page of Registration
Statement; Cross Reference
Sheet; Outside Front Cover Page
of Proxy Statement/Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Table of Contents; Available
Information; Incorporation by
Reference
3. Risk Factors, Ratio of Earnings to Fixed Charges
and other Information............................ Summary; Risk Factors;
Comparative Per Share Data;
Selected Financial Data --
Phoenix; Pro Forma Condensed
Consolidated Financial
Information
4. Terms of the Transaction........................... Summary; The Merger
5. Pro Forma Financial Information.................... Comparative Per Share Data; Pro
Forma Condensed Consolidated
Financial Information
6. Material Contacts with the Company Being
Acquired......................................... Background to the Merger
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters.... *
8. Interests of Named Experts and Counsel............. Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... *
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants........ *
11. Incorporation of Certain Information by
Reference........................................ *
12. Information with Respect to S-2 or S-3
Registrants...................................... Summary; Risk Factors; Selected
Financial Data -- Phoenix;
Information Concerning Phoenix
13. Incorporation of Certain Information by
Reference........................................ Incorporation by Reference
14. Information with Respect to Registrants Other Than
S-2 or S-3 Registrants........................... *
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies.......... *
16. Information with Respect to S-2 or S-3 Companies... Summary; Risk Factors; Selected
Financial Data -- AmeriConnect;
Information Concerning
AmeriConnect; Incorporation by
Reference
17. Information with Respect to Companies Other Than
S-2 or S-3 Companies............................. *
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations
are to be Solicited.............................. Outside Front Cover Page of Proxy
Statement/Prospectus; Available
Information; Summary; Special
Meeting; The Merger
19. Information if Proxies, consents or Authorizations
are not to be Solicited or in an Exchange
Offer............................................ *
</TABLE>
- ---------------
* Inapplicable
<PAGE> 3
AMERICONNECT, INC.
6750 WEST 93RD STREET, SUITE 110
OVERLAND PARK, KANSAS 66212
, 1996
To the Stockholders of AmeriConnect, Inc.:
You are cordially invited to attend a Special Meeting of Stockholders of
AmeriConnect, Inc. to be held at a.m. on , 1996, at
, , Overland Park, Kansas.
As described in the enclosed Proxy Statement/Prospectus, at the Special
Meeting you will be asked to consider and vote upon a proposal to approve and
adopt an Amended and Restated Agreement and Plan of Merger (the "Merger
Agreement") among Phoenix Network, Inc. ("Phoenix"), Phoenix Merger Corp., a
wholly owned subsidiary of Phoenix ("Sub"), and AmeriConnect, Inc.
("AmeriConnect") dated as of June 14, 1996. Under the Merger Agreement, Sub will
merge with and into AmeriConnect (the "Merger") and AmeriConnect will become a
wholly owned subsidiary of Phoenix. In the Merger, each outstanding share of
AmeriConnect Common Stock and AmeriConnect Class A Common Stock will be
converted into the right to receive, other than shares as to which appraisal
rights are perfected, shares of Phoenix Common Stock. See "THE
MERGER -- Conversion of AmeriConnect Stock" in the accompanying Proxy
Statement/Prospectus.
Your Board of Directors has determined that the Merger is in the best
interests of AmeriConnect and its stockholders and has unanimously approved the
Merger Agreement. THE BOARD RECOMMENDS THAT YOU VOTE "FOR" APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT.
Consummation of the Merger is subject to certain conditions, including
approval and adoption of the Merger Agreement by the affirmative vote of at
least a majority of the votes eligible to be cast at the Special Meeting by the
holders of AmeriConnect Common Stock and AmeriConnect Class A Common Stock,
voting together as a single class. Each share of AmeriConnect Common Stock is
entitled to one vote, and each share of AmeriConnect Class A Common Stock is
entitled to five votes.
You are urged to read the accompanying Proxy Statement/Prospectus which
provides you with a description of the terms of the proposed Merger. A copy of
the Merger Agreement is included as Appendix A to the enclosed Proxy
Statement/Prospectus.
It is very important that your shares be represented at the Special
Meeting. Whether or not you plan to attend the Special Meeting, you are
requested to complete, date, sign and return the proxy card in the enclosed
postage-paid envelope. Failure to return a properly executed proxy card or vote
at the Special Meeting would have the same effect as a vote against the Merger
Agreement. Please do not send in your stock certificates at this time. In the
event the Merger is consummated, you will be sent a letter of transmittal for
that purpose promptly thereafter.
Sincerely,
Robert R. Kaemmer
Chairman, Chief Executive Officer and President
<PAGE> 4
AMERICONNECT, INC.
6750 WEST 93RD STREET, SUITE 110
OVERLAND PARK, KANSAS 66212
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1996
To the Stockholders of AmeriConnect, Inc.
Notice is hereby given that a Special Meeting of the Stockholders (the
"Special Meeting") of AmeriConnect, Inc. ("AmeriConnect") will be held at
, , on , 1996, at
a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an
Amended and Restated Agreement and Plan of Merger (the "Merger Agreement")
among Phoenix Network, Inc. ("Phoenix"), Phoenix Merger Corp., a wholly
owned subsidiary of Phoenix ("Sub"), and AmeriConnect, Inc.
("AmeriConnect"), pursuant to which Sub will merge with and into
AmeriConnect (the "Merger") and AmeriConnect will become a wholly owned
subsidiary of Phoenix, all as more fully described in the accompanying
Proxy Statement/Prospectus.
2. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
Only stockholders of record at the close of business on , 1996
are entitled to notice of and to vote on all matters at the Special Meeting and
any adjournments thereof.
The accompanying Proxy Statement/Prospectus describes the Merger Agreement,
the proposed Merger and the actions to be taken in connection with the Merger.
To ensure that your vote will be counted, please complete, date and sign the
enclosed proxy card and return it promptly in the enclosed postage-paid
envelope, whether or not you plan to attend the Special Meeting. You may revoke
your proxy in the manner described in the accompanying Proxy
Statement/Prospectus at any time before it is voted at the Special Meeting.
In the event that there are not sufficient votes to approve the Merger
Agreement, it is expected that the Special Meeting will be postponed or
adjourned in order to permit further solicitation of proxies by AmeriConnect.
If the Merger is consummated, holders of AmeriConnect Common Stock and
AmeriConnect Class A Common Stock who deliver a written demand for appraisal of
their shares prior to the Special Meeting, or at the Special Meeting but before
the vote, who do not vote in favor of approval of the Merger Agreement and who
otherwise comply with the requirements of Section 262 of the Delaware General
Corporation Law will be entitled to statutory appraisal rights.
By Order of the Board of Directors
------------------------------------
Secretary
Overland Park, Kansas
, 1996
<PAGE> 5
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT.
THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF THE VOTES ELIGIBLE TO BE CAST AT
THE SPECIAL MEETING BY THE HOLDERS OF AMERICONNECT COMMON STOCK AND AMERICONNECT
CLASS A COMMON STOCK, VOTING TOGETHER AS A SINGLE CLASS, IS REQUIRED TO APPROVE
AND ADOPT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. EACH
SHARE OF AMERICONNECT COMMON STOCK IS ENTITLED TO ONE VOTE, AND EACH SHARE OF
AMERICONNECT CLASS A COMMON STOCK IS ENTITLED TO FIVE VOTES. WE URGE YOU TO SIGN
AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN
TO ATTEND THE MEETING IN PERSON. YOU MAY REVOKE THE PROXY AT ANY TIME PRIOR TO
ITS EXERCISE IN THE MANNER DESCRIBED IN THE ATTACHED PROXY STATEMENT/PROSPECTUS.
ANY STOCKHOLDER PRESENT AT THE SPECIAL MEETING, INCLUDING ANY ADJOURNMENT OR
POSTPONEMENT THEREOF, MAY REVOKE SUCH HOLDER'S PROXY AND VOTE PERSONALLY ON THE
MERGER AGREEMENT AND THE MERGER AT THE SPECIAL MEETING.
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME.
<PAGE> 6
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 22, 1996
AMERICONNECT, INC.
PROXY STATEMENT
------------------------
PHOENIX NETWORK, INC.
PROSPECTUS
This AmeriConnect, Inc. Proxy Statement and Phoenix Network, Inc.
Prospectus ("Proxy Statement/Prospectus") relates to the proposed merger (the
"Merger") of Phoenix Merger Corp., a Delaware corporation ("Sub"), which is a
wholly-owned subsidiary of Phoenix Network, Inc., a Delaware corporation
("Phoenix"), with and into AmeriConnect, Inc., a Delaware corporation
("AmeriConnect"), pursuant to an Amended and Restated Agreement and Plan of
Merger, dated as of June 14, 1996 (the "Merger Agreement"). As a result of the
Merger, AmeriConnect will become a wholly-owned subsidiary of Phoenix. At the
effective time of the Merger (the "Effective Time"), each outstanding share of
Common Stock, par value $.01 per share, of AmeriConnect ("AmeriConnect Common
Stock"), and each outstanding share of Class A Common Stock, par value $.00001
per share, of AmeriConnect ("AmeriConnect Class A Stock" and, together with the
AmeriConnect Common Stock, the "AmeriConnect Stock"), other than shares as to
which appraisal rights are perfected, will be converted into shares of Common
Stock, par value $.001 per share, of Phoenix ("Phoenix Common Stock"), except
that cash will be paid in lieu of fractional shares of Phoenix Common Stock and
all shares of AmeriConnect Stock owned by AmeriConnect or any of its
subsidiaries will be canceled. See "THE MERGER -- Conversion of AmeriConnect
Stock."
AmeriConnect is soliciting proxies from holders of its Common Stock and
Class A Common Stock ("AmeriConnect Stockholders") for use at the special
meeting of AmeriConnect Stockholders, scheduled to be held on ,
1996, or any adjournment or postponement thereof (the "Special Meeting"), to
consider the approval and adoption of the Merger Agreement and the transactions
contemplated thereby.
This Proxy Statement/Prospectus constitutes both the proxy statement of
AmeriConnect relating to the solicitation of proxies by AmeriConnect's Board of
Directors for use at the Special Meeting, and the prospectus of Phoenix with
respect to up to 2,738,421 shares of Phoenix Common Stock to be issued in the
Merger in exchange for outstanding shares of AmeriConnect Stock. This Proxy
Statement/Prospectus and the enclosed form of proxy are first being sent to
AmeriConnect Stockholders on or about , 1996.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY AMERICONNECT STOCKHOLDERS IN EVALUATING THE
PROPOSAL TO BE VOTED ON AT THE SPECIAL MEETING AND IN EVALUATING AN INVESTMENT
IN PHOENIX COMMON STOCK.
------------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1996
<PAGE> 7
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT/PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY STATEMENT/
PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF
AN OFFER OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES PURSUANT TO
THIS PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH OR
INCORPORATED HEREIN BY REFERENCE OR IN THE AFFAIRS OF PHOENIX OR AMERICONNECT
SINCE THE DATE OF THIS PROXY STATEMENT/PROSPECTUS. ALL INFORMATION REGARDING
AMERICONNECT IN THIS PROXY STATEMENT/PROSPECTUS HAS BEEN SUPPLIED BY
AMERICONNECT, AND ALL INFORMATION REGARDING PHOENIX AND SUB HAS BEEN SUPPLIED
BY PHOENIX.
AVAILABLE INFORMATION
Phoenix and AmeriConnect are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Copies of such reports,
proxy statements and other information can be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and at the following Regional Offices of
the SEC: CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. Phoenix
Common Stock is listed and traded on the American Stock Exchange (the "AMEX").
Reports, proxy statements and other information concerning Phoenix may be
inspected at the offices of the AMEX, 86 Trinity Place, New York, New York
10006. AmeriConnect Stock is not listed on an exchange. Price information for
AmeriConnect Common Stock may be obtained from the NASDAQ Bulletin Board, which
is a quotation service.
Phoenix has filed with the SEC a registration statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of Phoenix Common Stock to be issued pursuant to the Merger Agreement.
This Proxy Statement/Prospectus does not contain all the information set forth
in the Registration Statement, certain portions of which have been omitted
pursuant to the rules and regulations of the SEC. Such additional information
may be obtained from the SEC's principal office in Washington, D.C. The SEC
maintains a Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
INCORPORATION BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE
UPON REQUEST FROM, IN THE CASE OF PHOENIX, SECRETARY, 1687 COLE BOULEVARD,
GOLDEN, COLORADO 80401, TELEPHONE NUMBER (303) 232-4333, AND, IN THE CASE OF
AMERICONNECT, SECRETARY, 6750 W. 93RD STREET, SUITE 110, OVERLAND PARK, KANSAS
66212, TELEPHONE NUMBER (913) 341-8888. IN ORDER TO ENSURE TIMELY DELIVERY OF
THESE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY , 1996.
2
<PAGE> 8
Phoenix and AmeriConnect will provide without charge to each person,
including any beneficial owner of AmeriConnect Stock to whom a copy of this
Proxy Statement/Prospectus has been delivered, upon the written or oral request
of any such person, a copy of any and all of the documents referred to below
which have been or may be incorporated herein by reference, other than exhibits
to such documents, unless such exhibits are specifically incorporated herein by
reference. Requests for such documents should be directed to the persons
indicated in the immediately preceding paragraph.
The following documents previously filed by Phoenix with the SEC pursuant
to the Exchange Act are incorporated herein by reference:
(a) Phoenix's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, as amended on Form 10-K/A;
(b) Phoenix's Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1996 and June 30, 1996;
(c) Phoenix's Current Report on Form 8-K dated January 31, 1996, as
amended on April 1, 1996.
The following documents previously filed by AmeriConnect with the SEC
pursuant to the Exchange Act are incorporated herein by reference:
(a) AmeriConnect's Annual Report on Form 10-KSB for the year ended
December 31, 1995;
(b) AmeriConnect's Quarterly Reports on Form 10-QSB for the fiscal
quarters ended March 31, 1996 and June 30, 1996;
(c) AmeriConnect's Current Reports on Form 8-K dated January 17, 1996,
March 18, 1996 and June 20, 1996.
All documents filed by Phoenix or AmeriConnect pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the
date the Merger becomes effective shall be deemed to be incorporated herein by
reference and to be a part hereof from the date of filing of such documents.
Statements contained in this Proxy Statement/Prospectus or in any document
incorporated into this Proxy Statement/Prospectus by reference as to the
contents of any contract or other document referred to herein or therein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement or
such other document, each such statement being qualified in all respects by such
reference.
Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Proxy Statement/Prospectus to the extent that a statement
contained herein or in any other subsequently filed document that is deemed to
be incorporated herein by reference modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement/Prospectus.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below.
Reference is made to the particular discussions set forth under "THE
MERGER -- Recommendation of the AmeriConnect Board and AmeriConnect's Reasons
for the Merger" and "-- Phoenix's Reasons for the Merger." In connection with
forward-looking statements which appear in these disclosures, AmeriConnect
Stockholders should carefully review the factors set forth in this Proxy
Statement/Prospectus under "RISK FACTORS -- No Assurance of Achieving Potential
Benefits of the Merger" and "-- Possible Acquisitions; Need for Additional
Capital."
3
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY............................................................................... 6
General............................................................................. 6
The Companies....................................................................... 6
Special Meeting..................................................................... 7
The Merger.......................................................................... 7
The Merger Agreement................................................................ 10
Regulatory Approvals................................................................ 11
Accounting Treatment................................................................ 11
Appraisal Rights.................................................................... 11
Interests of Certain Persons in the Merger.......................................... 11
Operations after the Merger......................................................... 11
Comparative Market Prices and Dividends............................................. 11
Risk Factors........................................................................ 12
SUMMARY FINANCIAL DATA................................................................ 13
Phoenix Historical Consolidated Financial Data...................................... 13
AmeriConnect Historical Consolidated Financial Data................................. 14
Pro Forma Condensed Consolidated Financial Information.............................. 15
Comparative Per Share Data.......................................................... 16
RISK FACTORS.......................................................................... 17
Risks Relating to the Merger........................................................ 17
Risks Relating to Phoenix........................................................... 17
SPECIAL MEETING....................................................................... 20
Purpose of the Meeting.............................................................. 20
Date, Time and Place; Record Date................................................... 20
Voting Rights; Vote Required for Approval........................................... 20
Proxies............................................................................. 20
THE MERGER............................................................................ 21
General............................................................................. 21
Background of the Merger............................................................ 22
Recommendation of the AmeriConnect Board and AmeriConnect's Reasons for the
Merger........................................................................... 25
Opinion of Financial Advisor........................................................ 26
Phoenix's Reasons for the Merger.................................................... 29
Conversion of AmeriConnect Stock.................................................... 29
Exchange of Stock Certificates...................................................... 31
No Fractional Shares................................................................ 31
Treatment of AmeriConnect Stock Options............................................. 32
Closing; Effective Time............................................................. 32
Certain Federal Income Tax Consequences of the Merger............................... 32
The Merger Agreement................................................................ 33
Regulatory Filings and Approvals.................................................... 38
Restrictions on Sales of Shares by Affiliates....................................... 38
Accounting Treatment................................................................ 39
Listing on Stock Exchange........................................................... 39
Appraisal Rights.................................................................... 39
Interests of Certain Persons in the Merger.......................................... 42
Operations After the Merger......................................................... 43
Deregistration of AmeriConnect Common Stock After the Merger........................ 43
INFORMATION CONCERNING PHOENIX........................................................ 43
INFORMATION CONCERNING AMERICONNECT................................................... 43
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION........................... 44
</TABLE>
4
<PAGE> 10
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS................................. 45
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET........................................ 46
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS............................. 47
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.............. 50
DESCRIPTION OF THE PHOENIX CAPITAL STOCK.............................................. 52
General............................................................................. 52
Phoenix Common Stock................................................................ 52
Phoenix Preferred Stock............................................................. 52
Dividends........................................................................... 53
Priorities as to Dividends and Proceeds in Liquidation.............................. 54
Proceeds in Liquidation............................................................. 54
Redemption.......................................................................... 54
DESCRIPTION OF THE AMERICONNECT CAPITAL STOCK......................................... 55
General............................................................................. 55
AmeriConnect Common Stock........................................................... 55
AmeriConnect Class A Stock.......................................................... 55
COMPARISON OF RIGHTS OF HOLDERS OF AMERICONNECT STOCK AND PHOENIX COMMON STOCK........ 56
LEGAL OPINIONS........................................................................ 56
EXPERTS............................................................................... 57
SOLICITATION OF PROXIES............................................................... 57
Appendix A -- Amended and Restated Agreement and Plan of Merger among Phoenix Network,
Inc., Phoenix Merger Corp. and AmeriConnect, Inc., dated as of June 14,
1996.
Appendix B -- Fairness Opinion of George K. Baum & Company.
Appendix C -- Section 262 of the Delaware General Corporation Law.
Appendix D -- Phoenix Annual Report on Form 10-K for the year ended December 31, 1995,
as amended on Form 10-K/A.
Appendix E -- Phoenix Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
Appendix F -- AmeriConnect Annual Report on Form 10-KSB for the year ended December
31, 1995.
Appendix G -- AmeriConnect Proxy Statement for the 1996 Annual Meeting of
Stockholders.
Appendix H -- AmeriConnect Quarterly Report on Form 10-QSB for the quarter ended June
30, 1996.
</TABLE>
5
<PAGE> 11
SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Proxy Statement/Prospectus. This summary is not
intended to be complete and is qualified in its entirety by the detailed
information appearing elsewhere in this Proxy Statement/Prospectus or
incorporated herein by reference. AmeriConnect Stockholders are urged to review
this entire Proxy Statement/Prospectus carefully, including the Appendices
hereto and such other documents. Capitalized terms used and not otherwise
defined in this summary have the meanings given to them elsewhere herein.
This Proxy Statement/Prospectus contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth in the
section entitled "RISK FACTORS" as well as those discussed in reports filed with
the SEC by Phoenix or AmeriConnect.
GENERAL
This Proxy Statement/Prospectus relates to the Merger of Phoenix Merger
Corp., a Delaware corporation ("Sub"), which is a wholly-owned subsidiary of
Phoenix Network, Inc., a Delaware corporation ("Phoenix"), with and into
AmeriConnect, Inc., a Delaware corporation ("AmeriConnect"), pursuant to the
Merger Agreement a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference. As a result of the
Merger, AmeriConnect will become a wholly-owned subsidiary of Phoenix. At the
effective time of the Merger (the "Effective Time"), each outstanding share of
Common Stock, par value $.01 per share, of AmeriConnect ("AmeriConnect Common
Stock"), and each outstanding share of Class A Common Stock, par value $.00001
per share, of AmeriConnect ("AmeriConnect Class A Stock" and, together with the
AmeriConnect Common Stock, the "AmeriConnect Stock"), other than shares as to
which appraisal rights are perfected, will be converted into shares of Common
Stock, par value $.001 per share, of Phoenix ("Phoenix Common Stock"), except
that cash will be paid in lieu of fractional shares of Phoenix Common Stock and
all shares of AmeriConnect Stock owned by AmeriConnect or any of its
subsidiaries will be canceled. See "THE MERGER -- Conversion of AmeriConnect
Stock."
THE COMPANIES
Phoenix. Phoenix is a facilities-based reseller of telecommunications
services which sells to 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 on the network of the nation's largest
facilities based carriers. 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
has its principal offices at 1687 Cole Boulevard, Golden, Colorado 80401, and
its telephone number is (303) 232-4333.
AmeriConnect. AmeriConnect is a switchless reseller of long distance
telecommunications services which sells such services to individuals and small
to medium-sized businesses. AmeriConnect does not own or lease any telephone
equipment or participate in the call completion process. AmeriConnect places its
customers on the long distance networks of facilities-based, interexchange
carriers, which provide the actual call transmission services. These
interexchange carriers bill AmeriConnect at contractual rates for the combined
usage of AmeriConnect's customers utilizing such carriers' networks.
AmeriConnect is responsible for payments to its carriers without regard to
whether payment is made by AmeriConnect's customers. AmeriConnect bills its
customers individually at rates established by AmeriConnect. AmeriConnect was
incorporated in Delaware under the name Amerifax on June 28, 1988 and changed
its name to AmeriConnect on June 7, 1994. AmeriConnect has its principal offices
at 6750 W. 93rd Street, Suite 110, Overland Park, Kansas 66212, and its
telephone number is (913) 341-8888.
Sub. Sub is a newly formed Delaware corporation and a wholly-owned
subsidiary of Phoenix that has not, to date, conducted any activities other than
those incident to its formation, its execution of the Merger Agreement, its
participation in the preparation of this Proxy Statement/Prospectus and other
actions taken in contemplation of the consummation of the Merger. As a result of
the Merger, Sub will merge with and into
6
<PAGE> 12
AmeriConnect at the Effective Time and thereafter the separate existence and
corporate organization of Sub shall cease. Sub has its principal offices at 1687
Cole Boulevard, Golden, Colorado 80401, and its telephone number is (303)
232-4333.
SPECIAL MEETING
General. At the Special Meeting, AmeriConnect Stockholders will be asked to
consider and vote upon the proposal to approve and adopt the Merger Agreement
and the transactions contemplated thereby. The Special Meeting is scheduled to
be held at , local time, on , 1996, at ,
, , , . The Board of Directors of
AmeriConnect (the "AmeriConnect Board") has fixed the close of business on
, 1996 as the record date (the "Record Date") for the determination of
AmeriConnect Stockholders entitled to notice of and to vote at the Special
Meeting. See "SPECIAL MEETING -- Purpose of the Meeting" and "-- Date, Time and
Place; Record Date."
Required Vote. Under the Delaware General Corporation Law (the "DGCL") and
the Certificate of Incorporation of AmeriConnect, as amended (the "AmeriConnect
Certificate of Incorporation"), the affirmative vote of at least a majority of
the votes eligible to be cast at the Special Meeting by AmeriConnect
Stockholders, voting together as a single class, is required to approve and
adopt the Merger Agreement and the transactions contemplated thereby. Each share
of AmeriConnect Common Stock is entitled to one vote, and each share of
AmeriConnect Class A Stock is entitled to five votes. On the Record Date, there
were shares of AmeriConnect Common Stock and shares of
AmeriConnect Class A Stock outstanding and entitled to vote. As of the Record
Date, AmeriConnect's directors, executive officers and their affiliates as a
group held shares representing percent of the votes entitled to be cast by
holders of AmeriConnect Stock at the Special Meeting. See "SPECIAL
MEETING -- Voting Rights; Vote Required for Approval."
Proxies. To ensure that your vote will be counted, please complete, date
and sign the enclosed proxy card and return it promptly in the enclosed
postage-paid envelope, whether or not you plan to attend the Special Meeting.
Any AmeriConnect Stockholder who executes and returns a proxy card may revoke
such proxy at any time before it is voted by (i) notifying in writing the
Corporate Secretary of AmeriConnect at 6750 W. 93rd Street, Suite 110, Overland
Park, Kansas 66212, (ii) granting a subsequent proxy, or (iii) appearing in
person and voting at the Special Meeting. Attendance at the Special Meeting will
not in and of itself constitute revocation of a proxy. See "SPECIAL
MEETING -- Proxies."
Under the DGCL and the Certificate of Incorporation of Phoenix, as amended,
no stockholder vote is required by Phoenix stockholders. Phoenix, as the sole
stockholder of Sub, has voted all of the outstanding shares of capital stock of
Sub for adoption and approval of the Merger Agreement and the transactions
contemplated thereby.
THE MERGER
General. Under the terms of the Merger Agreement, Sub will be merged with
and into AmeriConnect, which will result in AmeriConnect, as the surviving
corporation (the "Surviving Corporation") of the Merger, becoming a wholly owned
subsidiary of Phoenix.
Recommendation of AmeriConnect Board; AmeriConnect's Reasons for the
Merger. The AmeriConnect Board, by unanimous vote, has determined that the
Merger is in the best interests of AmeriConnect Stockholders and recommends that
AmeriConnect Stockholders vote in favor of the Merger Agreement. The decision of
the AmeriConnect Board to enter into the Merger Agreement and to recommend that
AmeriConnect Stockholders vote in favor of the Merger Agreement is based upon
its evaluation of a number of factors including, among others, the oral opinion
(subsequently confirmed in writing) of George K. Baum & Company ("Baum &
Company"), AmeriConnect's investment banker in connection with the Merger, that
the consideration to be received by the holders of AmeriConnect Common Stock
(the "AmeriConnect Common Stockholders") in the Merger is fair to such holders
from a financial point of view. See "THE MERGER -- Background of the Merger,"
"-- Recommendations of the AmeriConnect Board and AmeriConnect's Reasons for the
Merger," and "-- Opinion of Financial Advisor."
7
<PAGE> 13
THE AMERICONNECT BOARD APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY AND RECOMMENDS THAT AMERICONNECT STOCKHOLDERS VOTE "FOR"
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY. SEE "THE MERGER -- RECOMMENDATION OF THE AMERICONNECT BOARD AND
AMERICONNECT'S REASONS FOR THE MERGER."
Opinion of Financial Advisor. On June 14, 1996, Baum & Company informed the
AmeriConnect Board of its oral opinion (subsequently confirmed in writing) to
the effect that, as of such date, the consideration to be received by
AmeriConnect Common Stockholders in the Merger is fair to such holders from a
financial point of view. The full text of the written opinion of Baum & Company,
dated the date of this Proxy Statement/Prospectus, which sets forth assumptions
made, factors considered and limitations on the review undertaken by Baum &
Company, is included as Appendix B to this Proxy Statement/Prospectus.
AmeriConnect Stockholders are urged to read such opinion carefully in its
entirety. See "THE MERGER -- Opinion of Financial Advisor."
Conversion of AmeriConnect Stock. In connection with the Merger, each
outstanding share of AmeriConnect Stock, other than shares as to which appraisal
rights have been perfected, will, without action on the part of the holder
thereof, be canceled and converted into the right to receive the Conversion
Number of shares of Phoenix Common Stock. "Conversion Number" shall mean the
number equal to the quotient obtained by dividing (1) the quotient obtained by
dividing the Merger Consideration by the Closing Phoenix Common Stock Price by
(2) the sum of (a) the number of shares of AmeriConnect Stock outstanding
immediately prior to the Effective Time and (b) the number of shares of
AmeriConnect Stock underlying all options for AmeriConnect Stock outstanding
immediately prior to the Effective Time. "Merger Consideration" shall mean an
amount equal to $15,130,119 minus (i) the Stockholders' Equity Adjustment Amount
and (ii) all severance payments to be made by AmeriConnect to the officers and
directors of AmeriConnect because of the Merger Agreement and the transactions
contemplated thereby, to the extent such payments are not already reflected in
the AmeriConnect Balance Sheet. "Closing Phoenix Common Stock Price" shall mean
(i) $5.25 if the closing price of a share of Phoenix Common Stock on the
American Stock Exchange on the day immediately preceding the Closing (the
"Closing Bid Price") is equal to or greater than $4.50 and equal to or less than
$6.00, (ii) if the Closing Bid Price is less than $4.50, $5.25 minus 50% of the
amount the Closing Bid Price is less than $4.50, or (iii) if the Closing Bid
Price is more than $6.00, $5.25 plus 50% of the amount the Closing Bid Price is
greater than $6.00. "Stockholders' Equity Adjustment Amount" shall be equal to
the amount, if any, by which the Stockholders' Equity Amount is less than
$250,000. "Stockholders' Equity Amount" shall mean an amount equal to the number
that results from (1) the stockholders' equity of AmeriConnect as determined
from AmeriConnect's balance sheet, prepared in accordance with generally
accepted accounting principles ("GAAP"), as of the close of business on the last
day of the month preceding the Closing Date (the "AmeriConnect Balance Sheet"),
plus (2) the Sprint Adjustment Amount, minus (3) all Transaction Expenses that
accrue or are paid after the date of the AmeriConnect Balance Sheet, and minus
(4) all liabilities of AmeriConnect to Sprint Communications Company L.P.
("Sprint") in respect of shortfall amounts as of the date of the AmeriConnect
Balance Sheet; provided, that, in the event that such sum exceeds $250,000, the
Stockholders' Equity Amount shall mean an amount equal to $250,000. "Sprint
Adjustment Amount" shall mean an amount equal to any billing credits which
AmeriConnect or Phoenix on behalf of AmeriConnect is entitled to receive from
Sprint prior to the AmeriConnect Balance Sheet that are not otherwise reflected
in the AmeriConnect Balance Sheet. "Transaction Expenses" shall mean accounting
fees and expenses, attorney fees and expenses, and investment banking fees and
expenses of Baum & Company paid or accrued for by AmeriConnect with regard to
the negotiation and execution of the Merger Agreement and the consummation of
the transactions set forth therein. See "THE MERGER -- Conversion of
AmeriConnect Stock."
Exchange of Stock Certificates. As soon as reasonably practicable after the
Effective Time, (the "Exchange Agent") will mail transmittal
instructions and a form of letter of transmittal to each holder of record of
certificates representing shares of AmeriConnect Stock (the "AmeriConnect
Certificates"). The transmittal instructions will describe the procedures for
surrendering AmeriConnect Certificates in exchange for certificates representing
shares of Phoenix Common Stock (the "Phoenix Certificates"). AmeriConnect
Stockholders should not submit their AmeriConnect Certificates for exchange
unless and until they have
8
<PAGE> 14
received the transmittal instructions and a form of letter of transmittal from
the Exchange Agent. When an AmeriConnect Stockholder delivers his or her
AmeriConnect Certificates to the Exchange Agent with a properly executed letter
of transmittal and any other required documents, such AmeriConnect Certificates
will be canceled and the AmeriConnect Stockholder will receive Phoenix
Certificates representing the number of full shares of Phoenix Common Stock to
which the AmeriConnect Stockholder is entitled under the Merger Agreement and
payment in cash in lieu of any fractional shares of Phoenix Common Stock. See
"THE MERGER -- Exchange of Stock Certificates."
HOLDERS OF AMERICONNECT STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING
AMERICONNECT STOCK WITH THE ENCLOSED PROXY CARD. IF THE TRANSACTION IS APPROVED,
A LETTER OF TRANSMITTAL AND TRANSMITTAL INSTRUCTIONS WILL BE MAILED AFTER THE
EFFECTIVE TIME TO EACH PERSON WHO WAS A HOLDER OF OUTSTANDING AMERICONNECT STOCK
IMMEDIATELY PRIOR TO THE EFFECTIVE TIME. AMERICONNECT STOCKHOLDERS SHOULD SEND
CERTIFICATES REPRESENTING AMERICONNECT STOCK TO THE EXCHANGE AGENT ONLY AFTER
THEY RECEIVE, AND IN ACCORDANCE WITH, THE TRANSMITTAL INSTRUCTIONS.
No Fractional Shares. No certificates for fractional shares of Phoenix
Common Stock will be issued upon the surrender for exchange of AmeriConnect
Certificates. Instead, holders of AmeriConnect Stock immediately prior to the
Effective Time who would otherwise have been entitled to a fraction of a share
of Phoenix Common Stock upon surrender of AmeriConnect Certificates for exchange
will, upon surrender of AmeriConnect Certificates, be entitled to receive a cash
payment. Such cash payment will be equal to a pro rata portion of the proceeds
of a sale in the public market (as soon as practicable after the Effective Time)
of shares of Phoenix Common Stock representing the aggregate of all such
fractional shares. See "THE MERGER -- No Fractional Shares."
Treatment of AmeriConnect Stock Options. At the Effective Time, each
outstanding option to purchase shares of AmeriConnect Common Stock
("AmeriConnect Stock Options") under the AmeriConnect 1988 and 1994 Stock Option
Plans (collectively, the "AmeriConnect Stock Option Plans") will, in accordance
with the terms of such plans, become fully exercisable. At the Effective Time,
all then outstanding AmeriConnect Stock Options will be assumed by Phoenix. Each
such option will be converted into an option to purchase Phoenix Common Stock (a
"Phoenix Stock Option"), under which the number of shares underlying the Phoenix
Stock Option will be determined by multiplying the number of shares of
AmeriConnect Common Stock underlying such AmeriConnect Stock Option immediately
prior to the Effective Time by the Conversion Number and rounding down to the
nearest whole number, and the exercise price per share of Phoenix Common Stock
at which the Phoenix Stock Option shall be exercisable will be determined by
dividing the exercise price per share of the AmeriConnect Common Stock subject
to such AmeriConnect Stock Option immediately prior to the Effective Time by the
Conversion Number and rounding up to the nearest whole cent. Each such Phoenix
Stock Option will be assumed at the Effective Time by Phoenix on the same terms
and subject to the same conditions as in effect immediately prior to the
Effective Time, subject to such equitable adjustments as may be necessary to
reflect the Merger. See "THE MERGER -- Treatment of AmeriConnect Stock Options."
Certain Federal Income Tax Consequences of the Merger. It is a condition to
the consummation of the Merger that AmeriConnect and Phoenix receive an opinion
of Freeborn & Peters, counsel to Phoenix, to the effect that, based upon
reasonable assumptions and conditions, (i) the Merger will be a reorganization
for Federal income tax purposes under Sections 368 of the Internal Revenue Code
of 1986, as amended, (ii) Phoenix, Sub and AmeriConnect will be parties to that
reorganization and (iii) no AmeriConnect Stockholder will recognize gain or loss
as the result of the receipt by such stockholder of Phoenix Common Stock solely
in exchange for shares of AmeriConnect Stock surrendered in the Merger. Holders
of AmeriConnect Stock may recognize taxable income or loss by reason of cash
received in lieu of fractional shares. AmeriConnect's obligation to complete the
Merger is subject to the tax opinion not being withdrawn or modified in any
material respect. See "THE MERGER -- Certain Federal Income Tax Consequences of
the Merger."
9
<PAGE> 15
THE MERGER AGREEMENT
Conditions to the Merger. The obligations of AmeriConnect and Phoenix to
consummate the Merger are subject to the fulfillment or waiver of certain
conditions, including, among others: (i) the approval by AmeriConnect
Stockholders; (ii) the effectiveness of the Registration Statement and the
absence of any stop order suspending the effectiveness thereof and no proceeding
for that purpose having been initiated by the SEC; (iii) the listing of the
Phoenix Common Stock issuable and reserved for issuance in connection with the
Merger on the AMEX, subject only to official notice of issuance; (iv) the
receipt of all material governmental authorizations, consents, orders or
approvals; (v) the absence of any temporary restraining order, preliminary or
permanent injunction or other order that prevents the consummation of the
Merger; and (vi) the exercise of appraisal rights shall not have been made by
the holders of more than nine percent of the outstanding AmeriConnect Stock. See
"THE MERGER -- The Merger Agreement -- Conditions to the Merger."
Termination. The Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval by AmeriConnect Stockholders, (i) by mutual consent of Phoenix and
AmeriConnect, (ii) by either Phoenix or AmeriConnect if any permanent injunction
or other order of a court or other competent governmental entity preventing the
consummation of the Merger shall have become final and non-appealable, (iii) by
either Phoenix or AmeriConnect if there has been a material breach on the part
of the other party of any representation, warranty, covenant or agreement set
forth in the Merger Agreement which has not been cured prior to the earlier of
(A) fifteen business days following receipt by the breaching party of notice of
such breach and (B) the Closing Date, (iv) by either Phoenix or AmeriConnect
after November 30, 1996, if the Merger shall not have been consummated on or
before such date, subject to certain exceptions, (v) by either Phoenix or
AmeriConnect if the required approval of AmeriConnect Stockholders is not
obtained upon a vote held at the duly held meeting of such stockholders, (vi) by
AmeriConnect if the AmeriConnect Board, in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders imposed by law and upon
written advice from counsel, determines that such termination is required by
reason of an offer or proposal which constitutes or may reasonably be expected
to lead to the acquisition of all or a significant part of the business and
properties, or the acquisition of at least a majority of the outstanding
securities whether by purchase, merger, purchase of assets, tender offer,
exchange offer, business combination or otherwise of AmeriConnect (a "Third
Party Transaction") or (vii) by Phoenix if (A) the AmeriConnect Board shall
withdraw, modify or change its recommendation of this Agreement or the Merger in
a manner adverse to Phoenix or shall have resolved to do any of the foregoing;
(B) the AmeriConnect Board shall have recommended to AmeriConnect Stockholders a
Third Party Transaction; (C) a tender offer or exchange offer for 15% or more of
the outstanding shares of capital stock of AmeriConnect is commenced and the
AmeriConnect Board, within 10 business days after such tender offer or exchange
offer is commenced, either fails to recommend against acceptance of such tender
offer or exchange offer by its stockholders or takes no position with respect to
the acceptance of such tender offer or exchange offer by its stockholders; or
(D) after June 14, 1996, any person (other than Mr. Robert R. Kaemmer) shall
have acquired beneficial ownership of or the right to acquire beneficial
ownership of or any "group" (as such term is defined in Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder) shall have
been formed which beneficially owns, or has the right to acquire beneficial
ownership of, 15% or more of the then outstanding shares of AmeriConnect Stock
(other than those beneficial owners of 15 percent or more of the outstanding
Company Stock as of June 14, 1996 or an affiliate thereof or Phoenix or an
affiliate thereof). See "THE MERGER -- The Merger Agreement -- Termination."
Termination Fee and Expense Reimbursement. AmeriConnect is required to pay
Phoenix a termination fee of $250,000 in certain circumstances. In addition,
upon a willful breach by either AmeriConnect or Phoenix of any of its
representations, warranties, covenants or agreements set forth in the Merger
Agreement, AmeriConnect or Phoenix, whichever shall be the party at fault, shall
be liable (among other things) to reimburse the terminating party or parties for
all legal, accounting, printing, and other out-of-pocket expenses reasonably
incurred by the terminating party or parties in connection with the Merger
Agreement and the transactions contemplated thereby. See "THE MERGER -- The
Merger Agreement -- Expenses, Expense Reimbursement and Termination Fee."
10
<PAGE> 16
Amendment. Subject to compliance with applicable law, the Merger Agreement
may be amended at any time prior to or after its approval by AmeriConnect
Stockholders by a written agreement executed by Phoenix and AmeriConnect. See
"THE MERGER -- The Merger Agreement -- Amendment and Waiver."
REGULATORY APPROVALS
The Merger is subject to the receipt of all regulatory approvals without
which either Phoenix or AmeriConnect would suffer a material adverse effect,
including approvals of the Public Utilities Commissions, Public Service
Commissions and other comparable regulatory agencies of several states
(collectively, the "PUCs"). See "THE MERGER -- The Merger
Agreement -- Conditions to the Merger" and "-- Regulatory Filings and
Approvals."
ACCOUNTING TREATMENT
The Merger is intended to be accounted for as a "pooling of interests"
under generally accepted accounting principles. It is a condition to the
consummation of the Merger that Phoenix shall have received from Grant Thornton
LLP, the independent auditors for Phoenix, an opinion that the Merger will be
treated as a "pooling of interests." See "THE MERGER -- Accounting Treatment."
APPRAISAL RIGHTS
Under the DGCL, holders of AmeriConnect Stock who, prior to the Special
Meeting, properly demand appraisal and do not vote in favor of the Merger have
the right under certain circumstances, if the Merger is nonetheless consummated,
to require the Surviving Corporation to purchase their shares for their "fair
value." To exercise such appraisal rights, such stockholders must comply with
all applicable procedural requirements. See "THE MERGER -- Appraisal Rights" and
Appendix C -- Section 262 of the Delaware General Corporation Law. Holders of
Phoenix Common Stock and Phoenix Preferred Stock will not be entitled to
appraisal rights in connection with the merger of Sub into AmeriConnect because
Phoenix is not a direct party to the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the AmeriConnect Board with respect to
the Merger Agreement and the transactions contemplated thereby, AmeriConnect
Stockholders should be aware that certain members of AmeriConnect's management
and the AmeriConnect Board have certain interests in the Merger that are in
addition to their interests generally as AmeriConnect Stockholders. Phoenix has
also agreed to indemnify, and maintain directors' and officers' liability
insurance covering, the AmeriConnect Board and officers following the Merger.
See "RISK FACTORS" and "THE MERGER -- Interests of Certain Persons in the
Merger."
OPERATIONS AFTER THE MERGER
After the Merger, Phoenix and AmeriConnect will continue to engage in their
respective businesses. The current Board of Directors and executive officers of
Phoenix will remain unchanged after the Merger. The current Board of Directors
and executive officers of AmeriConnect will resign at the Effective Time and at
and immediately following the Effective Time, the directors and officers of the
Surviving Corporation will be Wallace M. Hammond and Jeffrey L. Bailey. It is
currently anticipated that each of Phoenix and AmeriConnect will continue to
operate at its current facilities.
COMPARATIVE MARKET PRICES AND DIVIDENDS
Phoenix Common Stock is listed on the AMEX under the Symbol "PHX." Price
information for AmeriConnect Common Stock may be obtained from the NASDAQ
Bulletin Board. There has never been an established public trading market for
the AmeriConnect Class A Common Stock. Neither Phoenix nor AmeriConnect has ever
declared or paid any dividends on their respective Common Stock.
11
<PAGE> 17
On January 16, 1996, the last trading day before the public announcement of
the proposed Merger, the reported AMEX Composite Transactions closing price of
the Phoenix Common Stock was $4.00 per share and the last average of the asked
and bid prices of a share of AmeriConnect Common Stock as reported on the NASDAQ
Bulletin Board was $.83. On , 1996, the most recent practicable date
prior to the printing of this Proxy Statement/Prospectus, the reported AMEX
Composite Transactions closing price of the Phoenix Common Stock was $
per share and the last average of the asked and bid prices of a share of
AmeriConnect Common Stock as reported on the NASDAQ Bulletin Board was
$ . See "COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION."
The payment of future dividends on Phoenix Common Stock will be a business
decision to be made by the Board of Directors of Phoenix from time to time based
upon the results of operations and financial condition of Phoenix and such other
factors as the Phoenix Board of Directors considers relevant.
RISK FACTORS
The Merger involves certain risk factors that should be carefully
considered by the AmeriConnect Stockholders. See "RISK FACTORS."
12
<PAGE> 18
SUMMARY FINANCIAL DATA
PHOENIX HISTORICAL CONSOLIDATED FINANCIAL DATA
The summary condensed consolidated financial data presented below as of and
for the years ended December 31, 1995, 1994, 1993 and 1992, and for the eight
month period ended December 31, 1991 and the year April 30, 1991 have been
derived from the consolidated financial statements of Phoenix, which have been
audited by Grant Thornton LLP, independent certified public accountants. The
financial data for the three months ended March 31, 1996 are derived from
unaudited consolidated financial statements of Phoenix, which in the opinion of
management, reflect all accruals, consisting only of normal, recurring accruals,
necessary for a fair presentation of the financial position and results of
operations of Phoenix as of and for these periods. This data should be read in
conjunction with the financial statements of Phoenix included elsewhere in this
Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED MONTHS ENDED YEAR ENDED DECEMBER 31, QUARTER ENDED
APRIL 30, DECEMBER 31, ---------------------------------------- MARCH 31,
1991 1991 1992 1993 1994 1995(1) 1996(2)
---------- ------------ ------- ------- ------- ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Revenue........................... $13,498 $13,927 $27,155 $40,350 $57,420 $58,755 $23,072
Cost of revenue................... 9,921 10,840 20,155 29,261 40,007 40,376 16,617
------- ------- ------- ------- ------- ------- -------
Gross margin...................... 3,577 3,087 7,000 11,089 17,413 18,379 6,455
Expenses.......................... 4,538 4,017 7,659 13,737 17,796 18,525 7,715
------- ------- ------- ------- ------- ------- -------
Operating income (loss)........... (961) (930) (659) (2,648) (383) (146) (1,260)
Other -- net...................... (3) (31) 5 (148) (399) (1,189) (37)
------- ------- ------- ------- ------- ------- -------
Earnings (loss) before cumulative
effect of accounting change..... (964) (961) (654) (2,796) (782) (1,335) (1,297)
Cumulative effect of accounting
change.......................... -- -- -- -- (123) --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss)............... $ (964) $ (961) $ (654) $(2,796) $ (905) $(1,335) $(1,297)
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per common share:
Earnings (loss) before cumulative
effect of accounting change..... $ (0.15) $ (0.15) $ (0.12) $ (0.33) $ (0.09) $ (0.15) $ (0.09)
Cumulative effect of accounting
change.......................... -- -- -- -- (0.01) -- --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss)............... $ (0.15) $ (0.15) $ (0.12) $ (0.33) $ (0.10) $ (0.15) $ (0.09)
Weighted average common shares
used in per share calculation... 7,241 7,269 7,876 9,423 11,101 12,614 17,343
BALANCE SHEET DATA
Working capital................... $ 301 $ 153 $ 983 $ 1,036 $ 297 $10,031 $ 1,434
Total assets...................... 4,786 6,081 9,310 14,125 13,790 30,368 49,350
Total long term debt, net of
current maturities.............. 66 95 17 -- -- -- 1,183
Stockholders' equity.............. 718 616 2,282 2,913 3,033 19,425 28,628
</TABLE>
- ---------------
(1) In August of 1995, Phoenix acquired the customer bases of and substantially
all of the assets and liabilities of Tele-Trend Communications, LLC and
Bright Telecom, L.P. Additionally, during 1995, three additional customer
bases were acquired.
(2) Effective as of January 1, 1996, Phoenix acquired all of the outstanding
stock of Automated Communications, Inc.
13
<PAGE> 19
AMERICONNECT HISTORICAL CONSOLIDATED FINANCIAL DATA
The summary condensed consolidated financial data presented below as of and
for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 have been
derived from the consolidated financial statements of AmeriConnect, which have
been audited by Grant Thornton LLP, independent certified public accountants.
The financial data for the three months ended March 31, 1996 are derived from
unaudited consolidated financial statements of AmeriConnect, which in the
opinion of management, reflect all accruals, consisting only of normal,
recurring accruals, necessary for a fair presentation of the financial position
and results of operations of AmeriConnect as of and for these periods. This data
should be read in conjunction with the financial statements of AmeriConnect
included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED
-------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------ ------- ------- ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Revenue.......................... $ 5,612 $9,347 $13,556 $16,984 $17,100 $ 4,265
Cost of revenue.................. 4,579 7,197 10,120 12,642 13,399 3,202
------- ------ ------- ------- ------- ------
Gross margin..................... 1,033 2,150 3,436 4,342 3,701 1,063
Expenses......................... 2,231 2,034 2,653 3,957 4,924 1,209
------- ------ ------- ------- ------- ------
Operating income (loss).......... (1,198) 116 783 385 (1,223) (146)
Other -- net..................... (680) (17) (29) 53 5 (10)
------- ------ ------- ------- ------- ------
Earnings (loss) before income
taxes.......................... (1,878) 99 754 438 (1,218) (156)
Income taxes..................... -- -- (494) 16 500 --
------- ------ ------- ------- ------- ------
Net earnings (loss).............. $(1,878) $ 99 $ 1,248 $ 422 $(1,718) $ (156)
======= ====== ======= ======= ======= ======
Earnings (loss) per common and
common equivalent share........ $ (0.35) $ 0.02 $ 0.20 $ 0.06 $ (0.23) $ (0.02)
Weighted average common and
common equivalent shares used
in per share calculation....... 5,370 5,688 6,355 6,868 7,551 7,434
BALANCE SHEET DATA
Working capital.................. $ (712) $ (613) $ 443 $ 1,111 $ (391) $ (534)
Total assets..................... 1,468 2,030 3,192 3,778 2,660 2,720
Total long term debt, net of
current maturities............. 5 11 7 28 8 9
Stockholders' equity (deficit)... (642) (543) 755 1,479 (237) (389)
</TABLE>
14
<PAGE> 20
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following summary pro forma condensed consolidated financial
information presents the Merger as a pooling of interests as if it had been
consummated, with respect to the statements of earnings, at the beginning of the
periods presented or, with respect to the balance sheet data, as of the date
presented.
SUMMARY PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED
------------------------------------------ MARCH 31,
1993 1994 1995 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Revenue....................................... $ 53,905 $ 74,405 $104,729 $27,336
Cost of revenue............................... 39,381 52,649 74,899 19,819
-------- -------- -------- --------
Gross margin.................................. 14,524 21,756 29,830 7,517
Expenses...................................... 16,390 21,753 32,846 8,924
-------- -------- -------- --------
Operating income (loss)....................... (1,866) 3 (3,016) (1,407)
Other -- net.................................. (177) (346) 109 (48)
Loss on abandonment of fixed assets........... (1,020)
-------- -------- -------- --------
Earnings (loss) before income taxes and
cumulative effect of accounting change...... (2,043) (343) (3,927) (1,455)
Income taxes.................................. 494 (16) (500)
-------- -------- -------- --------
Earnings (loss) before cumulative effect of
accounting change........................... (1,549) (359) (4,427) (1,455)
Cumulative effect of change in amortization of
deferred commissions........................ (123)
-------- -------- -------- --------
Net earnings (loss)........................... $ (1,549) $ (482) $ (4,427) $(1,455)
Earnings (loss) per common and common
equivalent
share(1).................................... $ (0.15) $ (0.05) $ (0.31) $ (0.09)
Weighted average common and common equivalent
shares used in per share calculation(1)..... 11,775 13,642 18,208 20,093
BALANCE SHEET DATA
Working capital............................... $ 891
Total assets.................................. 52,069
Total long term debt, net of current
maturities.................................. 1,183
Stockholders' equity.......................... 28,239
Book value per common share(2)................ 0.63
</TABLE>
- ---------------
(1) The pro forma loss per share is based on the weighted average number of
common shares and common share equivalents of Phoenix and AmeriConnect for
each year assuming a Conversion Number of 0.37 shares of Phoenix Common
Stock for each share of AmeriConnect Stock. The actual Conversion Number may
differ depending on the closing price of Phoenix Common Stock at the time of
the Merger. See "THE MERGER -- Conversion of AmeriConnect Stock" for a
discussion of the determination of the Conversion Number.
(2) Pro forma book value per share at March 31, 1996 for Phoenix was computed by
adding approximately 2,736,000 shares, of Phoenix Common Stock expected to
be issued in the Merger (assuming a Conversion Number of 0.37 shares of
Phoenix Common Stock for each share of AmeriConnect Stock) to the actual
number of shares of Phoenix Common Stock outstanding (approximately
17,345,000 at March 31, 1996) and dividing this number into the pro forma
consolidated stockholders' equity. The actual number of shares of Phoenix
Common Stock issuable in the Merger may vary in accordance with the terms of
the Merger Agreement. See "THE MERGER -- Conversion of AmeriConnect Stock"
for a discussion of the determination of the Conversion Number.
15
<PAGE> 21
COMPARATIVE PER SHARE DATA
Set forth below are historical earnings (losses) per share and book value
per share data of Phoenix and AmeriConnect and unaudited pro forma consolidated
per share data of Phoenix and AmeriConnect. The following information is derived
from, and should be read in conjunction with, the unaudited pro forma condensed
consolidated financial data, the separate historical consolidated financial
statements of Phoenix and AmeriConnect and other financial information appearing
elsewhere and incorporated by reference in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, QUARTER ENDED
-------------------------- MARCH 31,
1993 1994 1995 1996
------ ------ ------ -------------
<S> <C> <C> <C> <C>
PHOENIX COMMON STOCK(1)
Loss per common share:
Historical.......................................... $(0.33) $(0.10) $(0.15) $ (0.09)
Pro forma consolidated(2)........................... (0.15) (0.05) (0.31) (0.09)
Book value per common share
Historical.......................................... $(0.03) $(0.07) $ 0.28 $ 0.75
Pro forma consolidated(3)........................... 0.23 0.63
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, QUARTER ENDED
-------------------------- MARCH 31,
1993 1994 1995 1996
------ ------ ------ -------------
<S> <C> <C> <C> <C>
AMERICONNECT COMMON STOCK(1)
Earnings (loss) per common share:
Historical.......................................... $ 0.20 $ 0.06 $(0.23) $ (0.02)
Pro forma consolidated(4)........................... (0.06) (0.02) (0.11) (0.03)
Book value per common share
Historical.......................................... $ 0.13 $ 0.22 $(0.03) $ (0.06)
Pro forma consolidated(4)........................... 0.08 0.23
</TABLE>
- ---------------
(1) Neither Phoenix nor AmeriConnect declared dividends on common stock during
the above fiscal periods.
(2) The pro forma loss per share for Phoenix is based upon the weighted average
number of common shares and common equivalent shares of Phoenix and
AmeriConnect for each year assuming a Conversion Number of 0.37 shares of
Phoenix Common Stock for each share of AmeriConnect Stock. The actual
Conversion Number may differ depending on the closing price of Phoenix
Common Stock at the time of the Merger. See "THE MERGER -- Conversion of
AmeriConnect Stock" for a discussion of the determination of the Conversion
Number.
(3) Pro forma book value per share at December 31, 1995 and March 31, 1996 for
Phoenix was computed by adding approximately 2,560,000 and 2,736,000 shares,
respectively, of Phoenix Common Stock expected to be issued in the Merger
(assuming a Conversion Number of 0.37 shares of Phoenix Common Stock for
each share of AmeriConnect Stock) to the actual number of shares of Phoenix
Common Stock outstanding (approximately 14,458,000 at December 31, 1995 and
17,345,000 at March 31, 1996) and dividing this number into the pro forma
consolidated stockholders' equity. The actual number of shares of Phoenix
Common Stock issuable in the Merger may vary in accordance with the terms of
the Merger Agreement. See "THE MERGER -- Conversion of AmeriConnect Stock"
for a discussion of the determination of the Conversion Number.
(4) Equivalent pro forma consolidated per common and common equivalent share
information for AmeriConnect was computed by multiplying the pro forma
consolidated per share information for Phoenix by an assumed Conversion
Number of 0.37. The actual Conversion Number may differ depending on the
closing price of the Phoenix Common Stock at the time of the Merger.
16
<PAGE> 22
RISK FACTORS
In addition to other information in this Proxy Statement/Prospectus, the
following factors should be considered carefully in evaluating the proposal to
be voted on at the Special Meeting and in evaluating an investment in Phoenix
Common Stock.
This Proxy Statement/Prospectus contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below as
well as those discussed in reports filed with the SEC by Phoenix or
AmeriConnect.
RISKS RELATING TO THE MERGER
No Assurance of Achieving Potential Benefits of the Merger. Phoenix and
AmeriConnect have entered into the Merger Agreement with the expectation that
the Merger will result in certain benefits for the combined entities. Achieving
the anticipated benefits of the Merger will depend in part on the realization of
efficiencies and other synergies upon the integration of the operations of
Phoenix and AmeriConnect and maintaining Phoenix's planned growth strategy. The
difficulties of such integration may be increased by the necessity of
coordinating geographically separated organizations. The integration of certain
operations following the Merger will require the dedication of management
resources which may temporarily distract attention from the day to day business
of the combined companies. There can be no assurance that Phoenix's growth
strategy can be successfully integrated or achieved in an effective and
efficient manner, or that the perceived benefits of the Merger will be realized.
Failure to effectively accomplish the integration of the two companies'
operations could have an adverse effect on Phoenix's results of operations and
financial condition. In addition, there can be no assurance that AmeriConnect
Stockholders would not achieve greater returns on investment if AmeriConnect
were to remain an independent company.
Expenses of Merger and Restructuring. The negotiation and consummation of
the Merger are expected to result in expenses of approximately $800,000,
including nonrecurring expenses associated with combining and integrating the
two companies operations and the fees of financial advisors, attorneys and
accountants. Additional expenses may be incurred relating to the integration of
the businesses of Phoenix and AmeriConnect. Costs associated with the Merger
will affect the profitability of the combined companies adversely in the fiscal
quarters ended June 30, 1996 and ending September 30, 1996 and December 31, 1996
and, with respect to certain costs, in future quarters as such costs are
incurred.
RISKS RELATING TO PHOENIX
History of Operating Losses. Phoenix 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 Phoenix's systems and organization necessary
to handle its expected future growth, Phoenix has invested heavily in the sales,
marketing and administrative areas. There can be no assurances that Phoenix may
not experience operating losses in the future. To finance its operations,
Phoenix has a line of credit facility of up to an aggregate of $10,000,000 with
a finance company, which is secured by Phoenix's receivables. As of December 31,
1995, an aggregate of $10,000 was outstanding under this line of credit.
Additionally, Phoenix relocated 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 was approximately $1,000,000 and such amount will not be
recovered until future periods. The cost of the move contributed significantly
to the losses incurred by Phoenix for the fiscal quarters ended March 31, 1996
and June 30, 1996.
Dependence on Service Providers. Phoenix depends on a continuing and
reliable supply of telecommunications services from the facilities-based
carriers. Because Phoenix does not own or lease sufficient switching or
transmission facilities to offer a complete network to carry its customers
calls, Phoenix depends on other facilities-based carriers to supply
telecommunications services for its customers and to provide it with the
detailed information on which it bases customer billings. Phoenix'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
17
<PAGE> 23
make telecommunications services and billing information available to Phoenix
for its customers on favorable terms and in a timely manner.
Development of Virtual Switched Network Platform. To supplement its
existing owned and operated switches, Phoenix has entered into agreements with
two other companies to secure long term access to their telecommunications
facilities, specifically a nationwide system of high capacity switches (which is
currently being deployed) and a nationwide private line network. There can be no
assurance that the benefits that Phoenix expects to realize from the deployment
of this virtual switched network platform will actually be achieved.
Potential Adverse Effects of Rate Changes. Phoenix bills its customers for
the various telecommunications services procured on their behalf. The total
billing to each customer is generally less than the charges the customer would
incur to secure the same service from one of the major facilities-based
carriers. Phoenix 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 Phoenix could have a significant effect
on Phoenix. 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 Phoenix is able to obtain
for its customers could decrease and Phoenix could lose customers or face
increased difficulty in attracting new customers. If Phoenix elected to offset
the effect of any such decrease by lowering its rates, Phoenix's operating
results could also be adversely affected.
Competition. The telecommunications services industry is highly competitive
and is significantly influenced by the marketing and pricing decisions of the
larger industry participants. It is characterized by low barriers to entry (e.g.
the major facilities-based carriers' bulk rate tariffs are offered to a wide
range of potential market entrants), intense competition for customers and high
customer churn rates. Competition on the basis of price, service offerings, and
customer service is expected to increase. An existing or potential Phoenix
customer has numerous other choices available for its telecommunications service
needs, including other resellers and the same facilities-based carriers from
which Phoenix procures bulk-rate services. From time to time any of these other
providers 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.
Phoenix competes with the principal long distance carriers, AT&T
Corporation, MCI Communications Corp., Sprint Corporation as well as with the
other providers of long distance services, including Frontier Communications (a
subsidiary of Frontier Corporation), and Worldcom, Inc. Additionally, as a
result of the Congress' recent enactment of the Telecommunications Act of 1996,
the nation's largest local telephone companies (i.e. the Regional Bell Operating
Companies and the GTE operation companies), energy utilities, and other entities
will also be allowed to provide long distance service in the near future subject
to various regulatory requirements and safeguards.
Because many of Phoenix's current and potential competitors are
substantially larger and possess considerably greater financial, technical, and
marketing resources than Phoenix, there can be no assurance that Phoenix will be
able to remain competitive in the evolving telecommunications services market.
Technological Change. The telecommunications services industry is
significantly affected by increasingly rapid and substantial changes in
telecommunications and information technologies. There can be no assurance that
Phoenix will be able to secure access to new technologies on a timely basis or
on satisfactory terms or otherwise stay abreast of technological changes.
Possible Acquisitions; Need for Additional Capital. As part of its growth
strategy, Phoenix intends to pursue acquisitions of companies which could add
profitable products or customer bases. With respect to any future acquisition,
there can be no assurance that Phoenix 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
18
<PAGE> 24
integrated into Phoenix. Additionally, although acquisitions will be made with
the intent of enhancing Phoenix's long-term profitability, they may negatively
impact Phoenix's operating results, particularly during the periods immediately
following the acquisition. To fund acquisitions, Phoenix may incur additional
indebtedness to banks and other financial institutions and may issue, in public
or private transactions, equity and debt securities. If additional funds are
raised by issuing equity securities substantial dilution to Phoenix stockholders
may result. 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 Phoenix, if at all.
Possible Volatility of Stock Price. The market price of Phoenix'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 Phoenix or its competitors, as well as market conditions in the
telecommunications industry generally and variations in Phoenix's operating
results, could cause the market price of Phoenix's Common Stock to fluctuate
substantially. Because the public float for Phoenix's Common Stock is small,
additional volatility may be experienced.
Control by Officers and Directors. As of , 1996, Phoenix's
executive officers and directors beneficially own or control approximately
% of the outstanding shares of Phoenix's Common Stock, on an
as-if-converted basis. After the Merger, Phoenix's executive officers and
directors will beneficially own or control approximately % of the
outstanding shares of Phoenix's Common Stock, on an as-if-converted basis. The
votes represented by the shares beneficially owned or controlled by Phoenix's
executive officers and directors could, if they were cast together, potentially
control the election of a majority of Phoenix's directors and the outcome of
most corporate actions requiring stockholder approval.
Investors who purchase Phoenix's Common Stock may be subject to certain
risks due to the concentrated ownership of Phoenix's Common Stock. Such risks
include: (i) the shares beneficially owned or controlled by Phoenix's executive
officers and directors could, if they were cast together, delay, defer or
prevent a change in control of Phoenix, 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 Phoenix's executive officers and
directors and the potential adverse impact of such substantial ownership or
control on a change in control of Phoenix, it is less likely that the prevailing
market price of the outstanding shares of Phoenix'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 Federal Communications Commission (the
"FCC") will not take action having an adverse effect on the business or
financial condition of Phoenix.
19
<PAGE> 25
SPECIAL MEETING
PURPOSE OF THE MEETING
At the Special Meeting AmeriConnect Stockholders will be asked to consider
and vote upon a proposal to approve and adopt the Merger Agreement, pursuant to
which, among other things (i) Sub will merge with and into AmeriConnect, (ii)
AmeriConnect will become a wholly-owned subsidiary of Phoenix, (iii) each share
of AmeriConnect Stock issued and outstanding immediately prior to the Effective
Time, other than shares held by holders who properly exercise and perfect
stockholder appraisal rights under Delaware law ("Dissenting Holders"), will be
converted into the right to receive the Conversion Number of shares of Phoenix
Common Stock, except that cash will be paid in lieu of fractional shares of
Phoenix Common Stock and all shares of AmeriConnect Stock owned by AmeriConnect,
Phoenix or any of their wholly-owned subsidiaries will be canceled and (iv) all
outstanding options for AmeriConnect Stock will be converted into options for
Phoenix Common Stock at prices and share numbers to be adjusted on the basis of
the Conversion Number.
DATE, TIME AND PLACE; RECORD DATE
The Special Meeting is scheduled to be held at , local time, on
, 1996, at ,
, Overland Park, Kansas. The AmeriConnect Board has fixed the
close of business on , 1996 as the Record Date for the determination
of AmeriConnect Stockholders entitled to notice of and to vote at the Special
Meeting. On , 1996, there were shares of AmeriConnect
Common Stock and shares of AmeriConnect Class A Stock issued and
outstanding. Each share of AmeriConnect Common Stock is entitled to one vote,
and each share of AmeriConnect Class A Stock is entitled to five votes.
VOTING RIGHTS; VOTE REQUIRED FOR APPROVAL
Holders of record of AmeriConnect Common Stock and AmeriConnect Class A
Stock on the Record Date are entitled to one vote and five votes, respectively,
per share on the proposal to be presented to stockholders at the Special
Meeting. The presence, either in person or by proxy, of a majority of the votes
of the outstanding shares of AmeriConnect Stock entitled to vote at the Special
Meeting is necessary to constitute a quorum at the Special Meeting.
The affirmative vote of at least a majority of the votes eligible to be
cast at the Special Meeting by the holders of AmeriConnect Stock, voting
together as a single class, is required under the DGCL and the AmeriConnect
Certificate of Incorporation, to approve and adopt the Merger Agreement and the
transactions contemplated thereby.
As of the Record Date, AmeriConnect's directors, executive officers and
their affiliates as a group held shares representing percent of the votes
entitled to be cast by holders of AmeriConnect Stock at the Special Meeting.
PROXIES
If a stockholder attends the Special Meeting, he or she may vote by ballot.
However, many AmeriConnect Stockholders may be unable to attend the Special
Meeting. Therefore, the AmeriConnect Board is soliciting proxies so that each
holder of AmeriConnect Stock on the Record Date has the opportunity to vote on
the proposal to be considered at the Special Meeting. When a proxy card is
returned properly signed and dated, the shares represented thereby will be voted
in accordance with the instructions on the proxy card. If a stockholder does not
return a signed proxy card, his or her shares will not be voted and, thus, will
have the effect of a vote against the Merger Agreement and the transactions
contemplated thereby. Stockholders are urged to mark the box on the proxy card
to indicate how their shares are to be voted. If a stockholder returns a signed
proxy card but does not indicate how his or her shares are to be voted, the
shares represented by the proxy card will be voted FOR approval and adoption of
the Merger Agreement and the transactions contemplated thereby. A properly
executed proxy marked "ABSTAIN," although counted for purposes of
20
<PAGE> 26
determining whether there is a quorum, will not be voted. Accordingly, since the
affirmative vote of a majority of the votes eligible to be cast at the Special
Meeting by the AmeriConnect Stockholders, voting together as a single class is
required for approval of the Merger Agreement, a proxy marked "ABSTAIN" will
have the effect of a vote against the Merger Agreement. Shares represented by
broker non-votes (i.e., shares held by brokers or nominees which are represented
at a meeting but with respect to which the broker or nominee is not empowered to
vote on a particular proposal) although counted for purposes of determining
whether there is a quorum at the Special Meeting, will not be counted for any
purpose in determining whether the Merger Agreement has been approved. The proxy
card also confers discretionary authority on the individuals appointed by the
AmeriConnect Board and named on the proxy card to vote the shares represented
thereby on any other matter that is properly presented for action at the Special
Meeting.
Any AmeriConnect Stockholder who executes and returns a proxy card may
revoke such proxy at any time before it is voted by (i) notifying in writing the
Corporate Secretary of AmeriConnect at 6750 W. 93rd Street, Suite 110, Overland
Park, Kansas 66212, (ii) granting a subsequent proxy, or (iii) appearing in
person and voting at the Special Meeting. Attendance at the Special Meeting will
not in and of itself constitute revocation of a proxy.
It is not expected that any matter not referred to herein will be presented
for action at the Special Meeting. If any other matters are properly brought
before the Special Meeting, the persons named in the proxy will have discretion
to vote on such matters in accordance with their best judgment. The grant of a
proxy will also confer discretionary authority on the persons named in the proxy
as proxy appointees to vote in accordance with their best judgment on matters
incident to the conduct of the Special Meeting.
THE AMERICONNECT BOARD APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY AND RECOMMENDS THAT AMERICONNECT STOCKHOLDERS VOTE "FOR"
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY. SEE "THE MERGER -- RECOMMENDATIONS OF THE BOARDS OF
DIRECTORS AND REASONS FOR THE MERGER."
Under the DGCL and the Certificate of Incorporation of Phoenix, no
stockholder vote is required by Phoenix stockholders. Phoenix, as the sole
stockholder of Sub, has voted all of the outstanding shares of capital stock of
Sub for adoption and approval of the Merger Agreement and the transactions
contemplated thereby.
THE MERGER
GENERAL
This section of the Proxy Statement/Prospectus is a brief summary of
certain aspects of the Merger. This summary does not purport to be complete and
is qualified in its entirety by reference to the Merger Agreement, which is
attached to this Proxy Statement/Prospectus as Appendix A and is incorporated
herein by reference. AmeriConnect Stockholders are urged to review the entire
Merger Agreement carefully.
At the Effective Time, Sub will be merged with and into AmeriConnect, and
Sub will cease to exist as a separate corporation. AmeriConnect will be the
surviving corporation in the Merger and will continue as a wholly-owned
subsidiary of Phoenix. At the Effective Time, each outstanding share of
AmeriConnect Stock, other than those shares held by Dissenting Holders,
AmeriConnect, any subsidiary of AmeriConnect, Phoenix, Sub or any subsidiary of
Phoenix, will, without action on the part of the holder thereof, be canceled and
converted into the right to receive the Conversion Number of shares of Phoenix
Common Stock. Holders of AmeriConnect Stock will receive cash in lieu of any
fractional shares of Phoenix Common Stock to which such holders would otherwise
be entitled. At the Effective Time, all then outstanding AmeriConnect Stock
Options will be assumed by Phoenix. Each AmeriConnect Stock Option shall be
converted into a Phoenix Stock Option, under which the number of shares
underlying the Phoenix Stock Option shall be determined by multiplying the
number of shares of AmeriConnect Common Stock underlying such AmeriConnect Stock
Option immediately prior to the Effective Time by the Conversion Number and
rounding down to the nearest whole number, and the exercise price per share of
Phoenix Common Stock at which the Phoenix Stock Option
21
<PAGE> 27
shall be exercisable shall be determined by dividing the exercise price per
share of the AmeriConnect Common Stock subject to such AmeriConnect Stock Option
immediately prior to the Effective Time by the Conversion Number and rounding up
to the nearest whole cent. Each such Phoenix Stock Option shall be assumed at
the Effective Time by Phoenix on the same terms and subject to the same
conditions as in effect immediately prior to the Effective Time, subject to such
equitable adjustments as may be necessary to reflect the Merger.
BACKGROUND OF THE MERGER
Introduction. At various meetings from June through August 1995,
AmeriConnect's senior management ("AmeriConnect Management") discussed at length
with the AmeriConnect Board its view of the current and future state of the long
distance telecommunications industry, and AmeriConnect's strategic position and
prospects within such industry. These meetings included discussions regarding
the possibility of AmeriConnect engaging in a strategic transaction, including
the possible sale of AmeriConnect. AmeriConnect Management discussed its view
that AmeriConnect's relatively small size would hinder AmeriConnect's efforts to
compete effectively in its existing markets and to participate in rapidly
growing domestic and international long distance telecommunications markets.
AmeriConnect Management believed this competitive disadvantage was likely to
increase in the future, given the ongoing consolidation in the long distance
telecommunications industry and its resulting view of the increasing need for a
large-scale national or international presence to compete more effectively.
AmeriConnect Management also stated its view that a long-term trend away from a
monopoly position in the local exchange telephone markets (as evidenced by
expansion of alternative access carriers and the entry of cable television
operators into competition with local exchange telephone carriers) would
unfavorably impact smaller, independent long distance telecommunications
companies, such as AmeriConnect, disproportionately as compared to larger long
distance telecommunications companies.
AmeriConnect Management also expressed its view that AmeriConnect had
desirable properties which could attract favorable prices based on the
consolidation trends in the long distance telecommunications industry and the
price level of recent transactions. AmeriConnect Management stated that various
factors, including the increasing competitiveness of the local exchange
telephone markets, the development of fiber optic, wireless and other
alternative technologies, and the current approach of some state regulatory
authorities in moving slowly toward adoption of incentive regulation that would
reward increased operating efficiencies, might cause the value of AmeriConnect's
own properties to decline in the future.
Under these circumstances, AmeriConnect Management suggested that the
interests of AmeriConnect Stockholders might best be served by some form of
strategic transaction, including the possible sale of AmeriConnect. The
AmeriConnect Board discussed assessments made by AmeriConnect Management and
also considered the possible countervailing risks of consummating, or even
seriously considering or pursuing, any such transaction, including diversion of
AmeriConnect Management resources; disruption of AmeriConnect's businesses which
might be caused by uncertainty regarding AmeriConnect's future among employees,
regulatory authorities and others; and the possible adverse impact upon
employees, customers and the communities served by AmeriConnect.
The AmeriConnect Board Decision to Explore Strategic Alternatives. After
further consideration of the discussions with AmeriConnect Management, at a
meeting held on September 13, 1995, the AmeriConnect Board authorized
AmeriConnect Management to retain Baum & Company to explore AmeriConnect's
strategic alternatives and prepare an assessment of the financial and other
aspects of such alternatives.
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<PAGE> 28
During the several weeks following September 13, 1995 AmeriConnect
Management met with Baum & Company and discussed the following:
- The long distance telecommunications industry in general and
AmeriConnect's business in particular;
- The consolidation trends in the long distance telecommunications industry
and the factors resulting in such consolidation, which factors included
(i) rapidly changing technology and (ii) a regulatory environment which
promotes competition by other telecommunications companies;
- The enhanced importance of economies of scale as a result of these
consolidation trends;
- The viability of AmeriConnect initiating its own acquisition strategy to
build economies of scale to compete more effectively in the long distance
telecommunications industry and the impediments associated with such
strategy, including (i) AmeriConnect's declining financial condition
which placed a constraint on its ability to make meaningful acquisitions
in a time frame responsive to competitive conditions, (ii) the degree of
competition for quality acquisitions from other long distance
telecommunications companies which possess greater size and financial
resources than AmeriConnect, and (iii) the risks associated with
AmeriConnect's inexperience in completing and integrating acquisitions;
- Prices paid in certain recent acquisitions of long distance resellers
which indicated that values paid for companies similar to AmeriConnect
were higher than AmeriConnect's current public trading values (as
reflected by the trading ranges of AmeriConnect Common Stock) and concern
about whether such prices could be maintained in light of the developing
regulatory and competitive environments;
- The trading range of AmeriConnect Common Stock which, during the
immediately preceding 52-week period, had a high bid price of $1.25 and a
low bid price of $.313 which prices were below expected values, as
described above;
- The anticipated degree of interest of various potential purchasers of
AmeriConnect and the financial implications of possible transactions on
such potential purchasers;
- Alternative forms of possible transactions which might be undertaken and
the benefits and risks associated with each of them; and
- Various procedures which might be used to explore the available
alternatives.
AmeriConnect Management reviewed these discussions with the AmeriConnect
Board.
After these discussions Baum & Company prepared an analysis of the long
distance telecommunications industry that it delivered to AmeriConnect
Management on November 6, 1995. The analysis focused on AmeriConnect's position
within the long distance telecommunications industry and various strategic
transactions designed to improve such position. AmeriConnect Management reviewed
the analysis with the AmeriConnect Board. The AmeriConnect Board determined to
explore a potential sale of AmeriConnect. The AmeriConnect Board considered
whether it would be appropriate to engage in such an exploration of alternatives
in a publicly announced process, but concluded that proceeding on a confidential
basis was an appropriate way to assure that any ultimate transaction or
transactions would represent the best available alternative for AmeriConnect
Stockholders.
Receipt of Proposals and Indications of Interest; Discussions with
Potential Acquirors. Over the next several weeks, pursuant to the AmeriConnect
Board's authorization, Baum & Company initiated discussions with, and received
inquiries from, various companies which either had expressed interest in or were
likely to have an interest in acquiring AmeriConnect or engaging in other
possible transactions with AmeriConnect. Based upon contacts with potential
purchasers, three parties expressed interest in acquiring AmeriConnect.
After the execution of confidentiality agreements, information was made
available to each potential purchaser regarding AmeriConnect's operations. Two
companies engaged in due diligence reviews of information at AmeriConnect's
Overland Park headquarters.
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<PAGE> 29
During the period from December 27, 1995 to January 12, 1996, AmeriConnect
received written proposals or indications of interest from each of these three
prospective buyers. Each proposal was non-binding upon the submitting party and
was subject to additional due diligence.
In the long distance resale industry it is common that prices paid to
acquire a company or business are quoted as a multiple of monthly revenue.
However, each of the written proposals received by AmeriConnect defined monthly
revenue differently in terms of revenue eligibility and the time period over
which monthly revenue was measured. The following table summarizes the salient
terms of each written proposal:
<TABLE>
<CAPTION>
MONTHLY REVENUE PURCHASE PRICE TERMS
--------------------------------------------------------------
MONTHLY
FORM OF ACCOUNTING ELIGIBLE MEASUREMENT REVENUE
COMPANY CONSIDERATION TREATMENT REVENUE BASE PERIOD ESTIMATES MULTIPLE
- ---------- ------------- -------------- --------------- ---------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Phoenix Phoenix Pooling Total Revenue Average of $1,389,000 11.0x
Common Stock August 1, 1995
Through October
31, 1995
Company A Company A Pooling Net Toll Usage Mutually Agreed $1,300,000 10.0x
Common Stock Revenue for Billing Period
Accounts less (August- October
than 60 days was verbally
past due discussed)
Company B Company B Not Addressed Total Revenue Average of $1,365,000 7.5x
Common Stock January 1, 1996
Through March
31, 1996 with
Seasonal
Adjustment
Factor
<CAPTION>
ESTIMATED
CONSIDERATION
(BEFORE TRANSACTION
COMPANY FEES AND EXPENSES)
- ---------- --------------------
<S> <C>
Phoenix $ 15,279,000
Company A $ 13,000,000
Company B $ 10,237,500
</TABLE>
Discussion of Alternatives. At an AmeriConnect Board meeting on January 15,
1996, Baum & Company discussed with the AmeriConnect Board the various
alternatives available to AmeriConnect based upon the results of the process
described above. The principal alternatives discussed were as follows.
First, Baum & Company discussed with the AmeriConnect Board the possibility
that AmeriConnect would undertake no significant transaction, but instead
continue its operations as it had done prior to commencing the process of
exploring strategic alternatives. As described in greater detail under
"-- Opinion of Financial Advisor -- Analysis of Stock Trading," Baum & Company
indicated that AmeriConnect Common Stock's historical trading prices reflected a
declining trend from an all-time high bid price in 1994 of $1.25 to a bid price
which was at or below $.50 since August 2, 1995.
Second, Baum & Company discussed with the AmeriConnect Board the
possibility of a transaction with Company A. Company A's proposal was considered
by the AmeriConnect Board and was determined to be inferior to the Phoenix
proposal due to lower estimated consideration (approximately 15% below the
Phoenix proposal), Company A's significantly smaller overall size as compared to
Phoenix, and Company A's weaker stock performance over the prior one year
period.
Third, Baum & Company discussed with the AmeriConnect Board the possibility
of a transaction with Company B. Company B's proposal was considered by the
AmeriConnect Board and was determined to be inferior to the Phoenix proposal due
to lower estimated consideration (approximately 33% below the Phoenix proposal)
and Company B's short and volatile trading history as a public company.
Fourth, Baum & Company discussed with the AmeriConnect Board the
possibility of a transaction with Phoenix. The AmeriConnect Board favored the
Phoenix proposal as it represented the greatest consideration to AmeriConnect
Stockholders. The AmeriConnect Board also considered Phoenix's favorable
operating trends which included consistent quarterly margin improvements and
recent revenue growth accomplished
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<PAGE> 30
through strategic acquisitions. Additionally, the AmeriConnect Board considered
Phoenix's stock price performance over the prior one year period. Phoenix Common
Stock increased in price approximately 45% over this period.
After discussing each of the principal alternatives, the AmeriConnect Board
decided to explore a potential transaction with Phoenix because such transaction
was likely to produce the highest immediate value and the most substantial
longer-term appreciation in value for the AmeriConnect Stockholders and,
therefore, represented the best available alternative.
Letter of Intent. The AmeriConnect Board authorized AmeriConnect Management
to negotiate and execute a letter of intent with respect to the proposed
transaction with Phoenix. AmeriConnect Management negotiated and executed a
letter of intent on January 15, 1996.
Preparation of Definitive Merger Agreement. Immediately after the execution
of the letter of intent, the parties began to negotiate the Merger Agreement.
Over the next several months the parties negotiated the Merger Agreement.
Final Approval of Phoenix Merger; Execution of Definitive Merger Agreement.
On June 6, 1996, the AmeriConnect Board unanimously approved the Merger and the
execution of the Merger Agreement. The Merger Agreement was signed by both
parties on June 14, 1996. The Merger Agreement was announced on June 17, 1996
prior to the opening of trading on the AMEX.
RECOMMENDATION OF THE AMERICONNECT BOARD AND AMERICONNECT'S REASONS FOR THE
MERGER
The AmeriConnect Board believes that the Merger is fair to and in the best
interests of AmeriConnect and the AmeriConnect Stockholders. Accordingly, the
AmeriConnect Board has unanimously approved the Merger Agreement and the
transactions contemplated thereby and recommends that AmeriConnect Stockholders
vote for approval and adoption of the Merger Agreement and the transactions
contemplated thereby.
The recommendation of the Merger by the AmeriConnect Board is the result of
the extensive process of exploring strategic alternatives for AmeriConnect and
the AmeriConnect Stockholders which is described above under "--Background of
the Merger." As a result of that process, the AmeriConnect Board believes that
the Merger is the best available alternative for the AmeriConnect Stockholders.
The AmeriConnect Board believes that the Merger offers AmeriConnect and the
AmeriConnect Stockholders an opportunity to participate in a combined enterprise
which has significantly greater business and financial resources and long-term
growth potential than AmeriConnect standing alone. The AmeriConnect Board
believes that the Merger offers significant opportunities for efficiencies and
economies as the operations of AmeriConnect and Phoenix are integrated and will
result in an organization with added competitive strength required by the
increased consolidation of the telecommunications industry. The AmeriConnect
Board believes that the combined enterprise will be able to provide customers
with quality service and will be better positioned to take advantage of new
opportunities and to meet competitive challenges.
In making its determination with respect to the Merger, the AmeriConnect
Board considered the following factors: (i) information relating to the
business, assets, management, competitive position and prospects of AmeriConnect
and Phoenix, including the prospects of AmeriConnect if it were to continue as
an independent company, (ii) the financial condition, cash flows and results of
operations of AmeriConnect and Phoenix, both on an historical and on a
prospective basis, (iii) historical market prices and trading information with
respect to the AmeriConnect Common Stock and the Phoenix Common Stock, (iv) the
percentage of equity in Phoenix received by AmeriConnect Stockholders in
relation to the relative contribution of Phoenix and AmeriConnect, (v) the
increased need for capital resources to remain competitive and the improved
access to capital markets which will result from the Merger enabling those needs
to be met, (vi) the potential efficiencies, elimination of redundancies,
economies of scale and other synergies that may be realized as a result of the
combination of AmeriConnect's and Phoenix's operations, (vii) the results of the
solicitation of offers to purchase AmeriConnect in connection with the
evaluation of the best available alternative for AmeriConnect Stockholders,
(viii) the terms of the Merger Agreement, (ix) the written opinion of Baum &
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<PAGE> 31
Company, a copy of which is included as Appendix B to this Proxy
Statement/Prospectus, (x) the structure of the Merger, which will permit holders
of AmeriConnect Stock to have their shares converted into Phoenix Common Stock
on a "tax-free" basis, and (xi) significant enhancement of the strategic and
market position of the combined companies substantially beyond that achievable
by AmeriConnect alone. See "-- Opinion of Financial Advisor" and "-- Background
of the Merger" above.
THE AMERICONNECT BOARD RECOMMENDS THAT AMERICONNECT STOCKHOLDERS VOTE "FOR"
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
OPINION OF FINANCIAL ADVISOR
Baum & Company delivered to the AmeriConnect Board its oral opinion on June
14, 1996 and subsequently delivered its written opinion dated July 31, 1996 in
the form customary for such firm with respect to transactions of this type. The
opinion dated July 31, 1996 is substantially identical to the opinion of such
firm dated the date of this Proxy Statement/Prospectus and attached hereto as
described below. This opinion is to the effect that, as of its date and based
upon and subject to certain matters as stated in the written opinion, the
Conversion Number provided for in the Merger Agreement is fair from a financial
point of view to the AmeriConnect Common Stockholders. No limitations were
placed on Baum & Company by the AmeriConnect Board with respect to the
investigation made or the procedures followed in preparing and rendering its
opinion. The full text of the written opinion of Baum & Company, dated the date
of this Proxy Statement/Prospectus, is attached as Appendix B to this Proxy
Statement/Prospectus and is incorporated herein by reference. AmeriConnect
Stockholders are urged to read such opinion in its entirety for assumptions
made, matters considered, the scope and limitations of the review undertaken and
the procedures followed by Baum & Company.
In connection with its opinion, Baum & Company reviewed, among other things
(i) the Merger Agreement, (ii) Annual Reports to AmeriConnect Stockholders and
stockholders of Phoenix and Annual Reports on Form 10-KSB and Form 10-K,
respectively, for AmeriConnect and Phoenix for the five fiscal years ended
December 31, 1995, (iii) certain interim reports to AmeriConnect Stockholders
and stockholders of Phoenix and Quarterly Reports on Form 10-QSB and Form 10-Q,
respectively, for each of AmeriConnect and Phoenix, (iv) certain other
communications from AmeriConnect to its stockholders and Phoenix to its
stockholders, and (v) certain internal financial analyses and forecasts for
AmeriConnect and Phoenix prepared by their respective managements, including
estimates as to the magnitude and timing of the potential cost savings projected
by management of each of AmeriConnect and Phoenix for the consolidated
companies. Baum & Company also held discussions with members of the senior
management of AmeriConnect and Phoenix regarding their respective past and
current business operations, financial condition and future prospects of their
respective companies and their views of the long-term benefits of the proposed
business combination of AmeriConnect and Phoenix. In addition, Baum & Company
reviewed the reported price and trading activity for the AmeriConnect Common
Stock and the Phoenix Common Stock, respectively, compared certain financial and
stock market information for AmeriConnect and Phoenix with similar information
for certain other companies the securities of which are publicly traded,
reviewed the financial terms of certain recent business combinations in the
telecommunications industry specifically and in other industries generally, and
performed such other studies and analyses as Baum & Company considered
appropriate.
The following is a summary of the financial analyses utilized by Baum &
Company in arriving at its opinion:
Assumed Merger Consideration. The analysis utilized below assumes that the
total merger consideration, payable in shares of Phoenix Common Stock, is
$15,130,119 (derived from 11.0 times AmeriConnect's average monthly revenues for
the period from August 1, 1995 through October 31, 1995), minus certain
accounting adjustments and subject to certain market price variations based on
the Closing Bid Price of Phoenix Common Stock. See "SUMMARY -- The Merger."
Assuming accounting adjustments of approximately $0.10 per share of AmeriConnect
Stock and a $4.50 Closing Bid Price for Phoenix Common Stock which results in a
Conversion Number of approximately 0.37, the merger consideration to
AmeriConnect
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<PAGE> 32
Stockholders would be approximately $1.65 per share of AmeriConnect Stock
("Assumed Merger Consideration"), payable in Phoenix Common Stock. The assumed
accounting adjustment of $0.10 per share of AmeriConnect Stock is based on
AmeriConnect Management's estimates. There can be no assurance that the actual
accounting adjustments applicable to the Merger will approximate AmeriConnect
Management's estimates or that the Closing Bid Price will approximate $4.50, and
the actual merger consideration may be substantially different from the Assumed
Merger Consideration.
Analysis of Stock Trading. Baum & Company analyzed the history of trading
prices of the AmeriConnect Common Stock using (i) yearly price ranges for 1989
and 1990 from the 1990 and 1991 Fact Book published by the National Association
of Securities Dealers, Inc.; (ii) quarterly high and low bid prices for the
years of 1991, 1992 and 1993, from AmeriConnect's Annual Reports; and (iii)
daily pricing data information from Bloomberg Financial Markets ("Bloomberg")
and OneSource Information Services, Inc. ("OneSource") from January 1, 1994
through January 15, 1996, the date of the letter of intent between AmeriConnect
and Phoenix. The Bloomberg and OneSource quotations represent prices quoted
between dealers rather than actual transactions, and do not include retail
markups, markdowns, or commissions.
From its initial public offering through January 15, 1996 the highest "bid"
price (the price that a market maker would pay) for a share of AmeriConnect
Common Stock never exceeded $1.25 per share (before retail markdowns or
commissions). The Assumed Merger Consideration offer of approximately $1.65 per
share of AmeriConnect Stock represents a 32% premium over the $1.25 bid price.
On January 15, 1996, the closing bid price for a share of AmeriConnect Common
Stock was $0.281 (before retail markdowns or commissions). The Assumed Merger
Consideration of approximately $1.65 per share of AmeriConnect Stock represents
a 487% premium over the $0.281 price. On January 15, 1996, the "ask" price for a
share of Common Stock was $0.438 (before retail markups or commissions). The
Assumed Merger Consideration of approximately $1.65 per share of AmeriConnect
Stock represents a 277% premium over this $0.438 price.
Analysis of Comparable Public Companies. Baum & Company separately analyzed
market capitalization and market equity multiples of seven long distance
resellers (the "Comparable Companies"): EqualNet Holding Corporation; Frontier
Corporation; LCI International, Inc.; MIDCOM Communications Inc.; Network Long
Distance, Inc.; Phoenix Network, Inc.; and U.S. Long Distance Corporation. Using
publicly available information, Baum & Company compared the earnings and other
financial data and information regarding AmeriConnect to corresponding financial
data and information regarding the Comparable Companies. Such data and ratios
included the last twelve months, price/earnings ratios, price/earnings ratios
based on estimated current fiscal year earnings (as reported in available
publications), ratios of market capitalization to book value, and total company
value as a multiple of net monthly revenues.
In preparing the Comparable Companies analysis, Baum & Company used a
multiple of monthly revenues, because AmeriConnect does not have positive
earnings or equity value. Monthly revenues multiples were based on reported
results for the year ended December 31, 1995. Monthly revenues multiples for the
Comparable Companies ranged from 7.55 to 27.35, with a median of 13.93.
AmeriConnect's monthly revenues multiple for the year ended December 31, 1995
was (i) 1.47 times the January 15, 1996 low bid price; (ii) 2.29 times the
January 15, 1996 highest ask price; (iii) 10.61 times the total merger
consideration before accounting adjustments, and market price variations based
on the Closing Bid Price of Phoenix Common Stock; and (iv) 8.62 times the
Assumed Merger Consideration of approximately $1.65 per share of AmeriConnect
Stock. Although the Comparable Companies participate in the long distance
reselling market, each of the Comparable Companies is significantly larger in
terms of revenue than AmeriConnect. Additionally, none of the Comparable
Companies has the same mix of business or marketing area as AmeriConnect and
none are identical to AmeriConnect.
Acquisition Transaction Analysis. In addition to the financial analysis
discussed above, Baum & Company reviewed the consideration paid and monthly
revenues multiples in acquisitions of other long distance resellers of similar
size. To the extent publicly available, Baum & Company reviewed mergers and
acquisitions effective between February 1993 and January 1996. The closest in
time frame and transaction size were (i) Network Long Distance, Inc.'s
acquisition of ValueTel, Inc. ("ValueTel") in October of 1995 for
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<PAGE> 33
$10,040,000; and (ii) Phoenix's acquisition of Automated Communications, Inc.
("ACI") in January of 1996 for $19,750,000.
As noted above, the Assumed Merger Consideration of approximately $1.65 per
share of AmeriConnect Stock represents a multiple of 8.62 of AmeriConnect's 1995
monthly revenues. The consideration paid in the ValueTel transaction represented
a multiple of 10.5 of monthly revenues, plus accounts receivable. ValueTel's
monthly revenues were narrowly defined, and were net of a bad debt factor. The
consideration paid in the ACI transaction represented a multiple of 10.25 of
monthly revenues. In contrast to the Merger Agreement, the agreements in the
ValueTel and ACI transactions provided for one or more post-closing adjustments
for such items as customer attrition and uncollected accounts receivable. In
addition, unlike AmeriConnect, ACI sold tangible assets, such as switching
equipment, along with intangible assets such as customer base. Finally, unlike
the shares of Phoenix Common Stock being issued to holders of shares of
AmeriConnect Stock, the shares of stock issued in both the ValueTel and the ACI
transactions were subject to restrictions on transfer under applicable federal
securities laws, which reduced the overall value of the consideration paid.
No business or transaction used for comparison purposes is identical to
AmeriConnect or the Merger. Accordingly, an analysis of the results of
comparisons of AmeriConnect to other companies is not entirely mathematical;
rather it involves complex considerations and judgements concerning differences
in financial and operating characteristics and other factors that could affect
the public trading or acquisition value of the companies or the transactions to
which AmeriConnect or the Merger is being compared.
In connection with its opinion dated the date of this Proxy
Statement/Prospectus, Baum & Company performed certain procedures to update
certain analyses made in connection with the delivery of its opinion and
reviewed with the managements of Phoenix and AmeriConnect the assumptions on
which such analyses were based. The results of such analyses were substantially
the same as those described above as having been arrived at in connection with
the July 31, 1996 opinion of Baum & Company.
The summary set forth above does not purport to be a complete description
of the analyses performed by Baum & Company. The preparation of a fairness
opinion is a complex process, and is not necessarily susceptible to partial
analysis or summary description. Selecting portions of Baum & Company's analyses
or any of the factors considered by them without considering all factors and the
analysis as a whole could create an incomplete view of the process underlying
its opinion. The analyses were considered in the context of general business,
market and economic conditions existing at the time, many of which are beyond
the control of AmeriConnect or Phoenix. The analyses performed by Baum & Company
are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, such analyses do not purport to be appraisals or necessarily reflect
the prices at which businesses or securities may be sold. In performing their
analyses, Baum & Company relied upon certain assumptions of potential operating
efficiencies, financial synergies and other items arising out of the Merger,
which were provided by the managements of Phoenix and AmeriConnect without
independent verification thereof by Baum & Company.
In connection with its review, Baum & Company assumed and relied upon,
without independent verification, the accuracy and completeness of the financial
and other information reviewed by it. With respect to financial forecasts and
estimates, Baum & Company assumed that they were reasonably prepared on bases
reflecting the best currently available information and judgments concerning the
respective future financial performances of AmeriConnect and Phoenix. The
opinion of Baum & Company was necessarily based on economic, market and other
conditions as in effect on, and the information made available to them as of,
the date of its opinion. In addition, Baum & Company did not perform an
independent evaluation or appraisal of the assets and liabilities of either
AmeriConnect or Phoenix or any of their subsidiaries and was not furnished with
any such evaluation or appraisal.
Baum & Company is an investment banking firm engaged in the evaluation of
businesses and their securities in connection with mergers and acquisitions,
negotiated primary and secondary underwritings, private placements and
valuations for corporate and other purposes. AmeriConnect selected Baum &
Company as its financial advisor based upon Baum & Company's familiarity with
AmeriConnect and with the
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<PAGE> 34
industries in which AmeriConnect operates and its experience, ability and
reputation with respect to mergers and acquisitions.
Pursuant to the terms of the engagement letters between AmeriConnect and
Baum & Company, AmeriConnect has agreed to pay Baum & Company a fixed fee equal
to $25,000 for its written opinion included as Appendix B to this Proxy
Statement/Prospectus and a financial advisory fee of approximately $240,000 of
which the majority is contingent upon consummation of the Merger. AmeriConnect
has also agreed to reimburse Baum & Company for its reasonable out-of-pocket
expenses, including reasonable fees and disbursements of counsel, and to
indemnify Baum & Company against certain expenses and liabilities incurred in
connection with its engagement, including liabilities which may arise under
Federal securities laws. Baum & Company will not be additionally compensated for
any solicitation of proxies by such firm on behalf of AmeriConnect.
Baum & Company, as a full-service securities firm, may from time to time
effect transactions for its own accounts or the accounts of customers, and hold
positions in securities or options on securities of AmeriConnect and Phoenix. As
of the date of this Proxy Statement/Prospectus, Baum & Company held
shares of Phoenix Common Stock for its own accounts and shares of
AmeriConnect Common Stock.
PHOENIX'S REASONS FOR THE MERGER
After reviewing the proposed merger, the Phoenix Board believes that the
Merger is in the best interest of Phoenix and its stockholders. The Phoenix
Board believes that the Merger will create an enterprise with prospects better
than those facing Phoenix as a stand-alone company.
The Phoenix Board believes that ongoing consolidation in the long distance
resale industry and the recent enactment of federal telecommunications reform
legislation are intensifying the competitive pressure on long distance
resellers. The Phoenix Board expects that larger companies, such as the combined
enterprise, will increasingly be in a better competitive position than smaller
companies. Larger companies should be able to secure switching, transmission,
and other essential capabilities at better prices, realize other economies of
scale in areas such as customer service, gain improved access to capital
sources, and more easily offer telecommunications services in addition to long
distance.
Moreover, the Phoenix Board believes that the Merger will also result in
near-term benefits such as enhancing the gross margins on AmeriConnect's
existing traffic base.
In making its assessment of the Merger, the Phoenix Board considered the
following factors: (i) the business, assets, management, competitive position,
and prospects of Phoenix and AmeriConnect, including the prospects of Phoenix if
it did not combine with AmeriConnect; (ii) the financial condition, cash flows,
and results of operations of Phoenix and AmeriConnect, on both a historical and
a prospective basis; (iii) historical market prices and trading information with
respect to the Phoenix Common Stock and AmeriConnect Common Stock; (iv) the
percentage of equity in Phoenix received by AmeriConnect Stockholders in
relation to the relative contribution of Phoenix and AmeriConnect to the
combined enterprise; (v) the benefits, strategic and otherwise, of the
combination of Phoenix and AmeriConnect in the context of the consolidation of
the long distance industry, (vi) the efficiencies, economies of scale, and other
synergies that may be realized as a result of the combination of Phoenix and
AmeriConnect; (vii) other possible combinations and acquisitions that Phoenix
has considered; (viii) the terms of the Merger Agreement; and (ix) the structure
of the Merger, which should allow the transaction to qualify as a "pooling of
interests" for accounting and financial reporting purposes.
CONVERSION OF AMERICONNECT STOCK
At the Effective Time, each outstanding share of AmeriConnect Stock will,
without action on the part of the holder thereof, be canceled and converted into
the right to receive the Conversion Number of shares of Phoenix Common Stock.
"Conversion Number" shall mean the number equal to the quotient obtained by
dividing (1) the quotient obtained by dividing the Merger Consideration by the
Closing Phoenix Common
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<PAGE> 35
Stock Price by (2) the sum of (a) the number of shares of AmeriConnect Stock
outstanding immediately prior to the Effective Time and (b) the number of shares
of AmeriConnect Stock underlying all options for AmeriConnect Stock outstanding
immediately prior to the Effective Time. "Merger Consideration" shall mean an
amount equal to $15,130,119 minus (i) the Stockholders' Equity Adjustment Amount
and (ii) all severance payments to be made by AmeriConnect to the officers and
directors of the AmeriConnect because of the Merger Agreement and the
transactions contemplated thereby, to the extent such payments are not already
reflected in the AmeriConnect Balance Sheet. "Closing Phoenix Common Stock
Price" shall mean (i) $5.25 if the closing price of a share of Phoenix Common
Stock on the American Stock Exchange on the day immediately preceding the
Closing (the "Closing Bid Price") is equal to or greater than $4.50 and equal to
or less than $6.00, (ii) if the Closing Bid Price is less than $4.50, $5.25
minus 50% of the amount the Closing Bid Price is less than $4.50, or (iii) if
the Closing Bid Price is more than $6.00, $5.25 plus 50% of the amount the
Closing Bid Price is greater than $6.00. "Stockholders' Equity Adjustment
Amount" shall be equal to the amount, if any, by which the Stockholders' Equity
Amount is less than $250,000. "Stockholders' Equity Amount" shall mean an amount
equal to the number that results from (1) the stockholders' equity of
AmeriConnect as determined from AmeriConnect's balance sheet, prepared in
accordance with generally accepted accounting principles ("GAAP"), as of the
close of business on the last day of the month preceding the Closing Date (the
"AmeriConnect Balance Sheet"), plus (2) the Sprint Adjustment Amount, minus (3)
all Transaction Expenses that accrue or are paid after the date of the
AmeriConnect Balance Sheet, and minus (4) all liabilities of AmeriConnect to
Sprint Communications Company L.P. ("Sprint") in respect of shortfall amounts as
of the date of the AmeriConnect Balance Sheet; provided, that, in the event that
such sum exceeds $250,000, the Stockholders' Equity Amount shall mean an amount
equal to $250,000. "Sprint Adjustment Amount" shall mean an amount equal to any
billing credits which AmeriConnect or Phoenix on behalf of AmeriConnect is
entitled to receive from Sprint prior to the AmeriConnect Balance Sheet that are
not otherwise reflected in the AmeriConnect Balance Sheet. "Transaction
Expenses" shall mean accounting fees and expenses, attorney fees and expenses,
and investment banking fees and expenses of Baum & Company paid or accrued for
by AmeriConnect with regard to the negotiation and execution of the Merger
Agreement and the consummation of the transactions set forth therein.
Each share of AmeriConnect Stock held by a Dissenting Holder will not be
converted into shares of Phoenix Common Stock, but instead will be purchased by
the Surviving Corporation for its "fair value." "Fair value" will be determined
in accordance with Delaware law. See "--Appraisal Rights."
Each share of AmeriConnect Stock held by AmeriConnect, any subsidiary of
AmeriConnect, Phoenix, Sub or any subsidiary of Phoenix will be automatically
canceled at the Effective Time.
No certificates for fractional shares of Phoenix Common Stock will be
issued upon the surrender for exchange of AmeriConnect Certificates. Instead,
holders of AmeriConnect Stock immediately prior to the Effective Time who would
otherwise have been entitled to a fraction of a share of Phoenix Common Stock
upon surrender of AmeriConnect Certificates for exchange will, upon surrender of
AmeriConnect Certificates, be entitled to receive a cash payment. Such cash
payment will be equal to a pro rata portion of the proceeds of a sale in the
public market (as soon as practicable after the Effective Time) of shares of
Phoenix Common Stock representing the aggregate of all such fractional shares.
See "-- No Fractional Shares."
None of the outstanding shares of Phoenix Common Stock or Phoenix Preferred
Stock will be converted or otherwise modified in the Merger. All of such shares
will continue to be outstanding capital stock of Phoenix after the Effective
Time, subject to the redemption, retirement or conversion of shares of Phoenix
Preferred Stock from time to time in accordance with their respective terms. In
addition, none of the outstanding options to purchase shares of Phoenix Common
Stock will be converted or otherwise modified in the Merger.
A description of the relative rights, privileges and preferences of the
Phoenix Common Stock and the Phoenix Preferred Stock, including certain material
differences between the rights of holders of Phoenix Common Stock and
AmeriConnect Stock, is set forth under "DESCRIPTION OF THE PHOENIX CAPITAL
STOCK," "DESCRIPTION OF THE AMERICONNECT CAPITAL STOCK" and "COM-
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PARISON OF RIGHTS OF HOLDERS OF AMERICONNECT STOCK AND PHOENIX COMMON STOCK."
EXCHANGE OF STOCK CERTIFICATES
From and after the Effective Time, holders of AmeriConnect Stock
immediately prior to the Effective Time, other than Dissenting Holders
("AmeriConnect Exchanging Stockholders"), will be entitled to receive the
Conversion Number of shares of Phoenix Common Stock in exchange for each share
of AmeriConnect Stock held. No fractional shares of Phoenix Common Stock will be
issued. See "-- No Fractional Shares." As soon as reasonably practicable after
the Effective Time, the Exchange Agent will mail transmittal instructions and a
form of letter of transmittal to each AmeriConnect Exchanging Stockholder. The
transmittal instructions will describe the procedures for surrendering
AmeriConnect Certificates in exchange for Phoenix Certificates. AmeriConnect
Exchanging Stockholders should not submit their AmeriConnect Certificates for
exchange unless and until they have received the transmittal instructions and a
form of letter of transmittal from the Exchange Agent.
When an AmeriConnect Exchanging Stockholder delivers his or her
AmeriConnect Certificates to the Exchange Agent along with a properly executed
letter of transmittal and any other required documents, such AmeriConnect
Certificates will be canceled and the AmeriConnect Exchanging Stockholder will
receive Phoenix Certificates representing the number of full shares of Phoenix
Common Stock to which the AmeriConnect Exchanging Stockholder is entitled under
the Merger Agreement and payment in cash in lieu of any fractional shares of
Phoenix Common Stock. If any Phoenix Certificate is to be issued in a name other
than that in which the corresponding AmeriConnect Certificate is registered, it
is a condition to the exchange of the AmeriConnect Certificate that the
AmeriConnect Exchanging Stockholder comply with applicable transfer requirements
and pay any applicable transfer or other taxes.
AmeriConnect Exchanging Stockholders will not be entitled to receive any
dividends or other distributions on the Phoenix Common Stock until the Merger
has been consummated and they have exchanged their AmeriConnect Certificates for
Phoenix Certificates. Subject to applicable laws, such dividends and
distributions which have a record date after the Effective Time, if any, will be
accumulated and, at the time an AmeriConnect Exchanging Stockholder surrenders
his or her AmeriConnect Certificates to the Exchange Agent, all accrued and
unpaid dividends and distributions, together with any cash payments in lieu of
fractional shares of Phoenix Common Stock, will be paid without interest.
Shares of stock represented by AmeriConnect Certificates remaining
unsurrendered, together with dividends and cash in lieu of fractional shares
remaining unclaimed, as of the date which is twelve months after the Effective
Time will be delivered to Phoenix, upon demand, and any AmeriConnect
Stockholders who have not previously claimed Phoenix Certificates or cash which
they are otherwise entitled to receive as a result of the Merger, will
thereafter look only to Phoenix for payment. Neither the Exchange Agent nor any
party to the Merger Agreement will be liable to any AmeriConnect Exchanging
Stockholder for any shares of Phoenix Common Stock, dividends or distributions
thereon or cash payable in lieu of fractional shares delivered to state
authorities pursuant to applicable escheat or other similar laws.
HOLDERS OF AMERICONNECT STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING
AMERICONNECT STOCK WITH THE ENCLOSED PROXY CARD. IF THE TRANSACTION IS APPROVED,
A LETTER OF TRANSMITTAL AND TRANSMITTAL INSTRUCTIONS WILL BE MAILED AFTER THE
EFFECTIVE TIME TO EACH PERSON WHO WAS A HOLDER OF OUTSTANDING AMERICONNECT STOCK
IMMEDIATELY PRIOR TO THE EFFECTIVE TIME. AMERICONNECT STOCKHOLDERS SHOULD SEND
CERTIFICATES REPRESENTING AMERICONNECT STOCK TO THE EXCHANGE AGENT ONLY AFTER
THEY RECEIVE, AND IN ACCORDANCE WITH, THE TRANSMITTAL INSTRUCTIONS.
NO FRACTIONAL SHARES
No certificates for fractional shares of Phoenix Common Stock will be
issued upon the surrender for exchange of AmeriConnect Certificates in the
Merger. No Phoenix Common Stock dividend, stock split or
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interest will be paid with respect to any fractional share of Phoenix Common
Stock, and such fractional interests will not entitle the owner thereof to vote
or to any of the other rights of a holder of Phoenix Common Stock. Instead, each
AmeriConnect Exchanging Stockholder who would otherwise have been entitled to a
fraction of a share of Phoenix Common Stock upon surrender of AmeriConnect
Certificates for exchange will, upon surrender of AmeriConnect Certificates, be
entitled to receive from the Exchange Agent a cash payment. Such cash payment
will be equal to a pro rata portion of the proceeds of a sale in the public
market (by the Exchange Agent as soon as practicable after the Effective Time)
of shares of Phoenix Common Stock representing the aggregate of all such
fractional shares.
TREATMENT OF AMERICONNECT STOCK OPTIONS
At the Effective Time, each outstanding AmeriConnect Stock Option under the
AmeriConnect Stock Option Plans will, in accordance with the terms of such
plans, become fully exercisable. At the Effective Time, all then outstanding
AmeriConnect Stock Options will be assumed by Phoenix. Each such option will be
converted into a Phoenix Stock Option, under which the number of shares
underlying the Phoenix Stock Option will be determined by multiplying the number
of shares of AmeriConnect Common Stock underlying such AmeriConnect Stock Option
immediately prior to the Effective Time by the Conversion Number and rounding
down to the nearest whole number, and the exercise price per share of Phoenix
Common Stock at which the Phoenix Stock Option shall be exercisable will be
determined by dividing the exercise price per share of the AmeriConnect Common
Stock subject to such AmeriConnect Stock Option immediately prior to the
Effective Time by the Conversion Number and rounding up to the nearest whole
cent. Each such Phoenix Stock Option will be assumed at the Effective Time by
Phoenix on the same terms and subject to the same conditions as in effect
immediately prior to the Effective Time, subject to such equitable adjustments
as may be necessary to reflect the Merger.
CLOSING; EFFECTIVE TIME
The closing of the transactions contemplated by the Merger Agreement (the
"Closing") will take place no later than the second business day immediately
following the date on which all conditions set forth in the Merger Agreement are
satisfied or waived, or at such other time as Phoenix and AmeriConnect agree.
The Merger will become effective upon the filing of the Certificate of Merger
with the Secretary of State of the State of Delaware as required by Delaware law
or at such time as is provided in the Certificate of Merger. Such filing will be
made as soon as practicable on or after the Closing.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the principal federal income tax
consequences of the Merger to holders of AmeriConnect Stock (held as capital
assets) and does not purport to be a complete analysis or listing of all
potential tax effects relevant to a decision whether to vote in favor of
approval of the Merger Agreement. The discussion does not reflect the particular
tax position of any holder of AmeriConnect Stock and does not address the tax
consequences that may be relevant to holders with special tax status, including
but not limited to financial institutions, dealers in securities, holders that
are not citizens or residents of the United States, tax-exempt entities and
holders that acquired AmeriConnect Stock upon the exercise of employee stock
options or otherwise as compensation. Moreover, the discussion does not address
any consequences arising under the laws of any state, locality or foreign
jurisdiction. Finally, the tax consequence to holders of stock options are not
discussed. The discussion is based on the Code, Treasury Regulations thereunder
and administrative rulings and court decisions as of the date hereof. All of the
foregoing are subject to change and any such change could affect the continuing
validity of this discussion. HOLDERS OF AMERICONNECT STOCK ARE URGED TO CONSULT
WITH THEIR OWN TAX ADVISORS REGARDING TAX CONSEQUENCES OF THE MERGER TO THEM,
INCLUDING THE EFFECTS OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
A condition to the closing of the Merger is that Freeborn & Peters, counsel
to Phoenix, deliver to Phoenix and AmeriConnect an opinion to the effect that:
(i) the Merger will constitute a reorganization within the meaning of Section
368 of the Code, (ii) Phoenix , Sub and AmeriConnect will each be a party to the
reorganization within the meaning of Section 368 of the Code, and (iii) no
income, gain or loss will be
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recognized for federal income tax purposes by AmeriConnect Stockholders upon the
exchange in the Merger of AmeriConnect Stock solely for Phoenix Common Stock
(except to the extent of any cash received in lieu of fractional shares or upon
exercise of appraisal rights). Such opinion will assume that the Merger will
take place as described in the Merger Agreement and that certain factual matters
with respect to Phoenix, Sub and AmeriConnect, respectively, described in
certain representation letters addressed to such counsel, will be true and
correct as of the Effective Time. Based upon the advice of Freeborn & Peters,
AmeriConnect believes that the Merger will qualify as a reorganization.
Accordingly, the federal income tax consequences to AmeriConnect Stockholders
would include the following:
(i) no gain or loss will be recognized by AmeriConnect Stockholders
upon receipt of Phoenix Common Stock in exchange for their AmeriConnect
Stock, except that a holder who receives cash in lieu of a fractional share
of Phoenix Common Stock will be treated as having received a cash
distribution, unless the receipt effects a substantially disproportionate
redemption of stock within the meaning of Code Section 302 in which case
the cash receipt will give rise to capital gain or loss and such gain or
loss will constitute long-term capital gain or loss if, as of the Effective
Time, such AmeriConnect Stock is held as a capital asset and has been held
for more than one year;
(ii) a holder of AmeriConnect Stock who receives cash pursuant to the
exercise of appraisal rights under the DGCL will recognize taxable gain or
loss. Provided the shares were held as a capital asset at the Effective
Time and the exercise of appraisal rights under the DGCL effects a
substantially disproportionate redemption of stock within the meaning of
Code Section 302 such gain or loss will constitute capital gain or loss,
and such gain or loss will be long term capital gain or loss if the holding
period for such shares was greater than one year;
(iii) the tax basis of Phoenix Common Stock received by the holders of
AmeriConnect Stock will be the same as the tax basis of such holders in
AmeriConnect Stock exchanged therefor reduced by any amount allocable to a
fractional share interest for which cash is received; and
(iv) the holding period of Phoenix Common Stock in the hands of
AmeriConnect Stockholders will include the holding period of such
stockholder's AmeriConnect Stock exchanged therefor, provided that such
AmeriConnect Stock is held as a capital asset at the Effective Time.
THE MERGER AGREEMENT
The Merger Agreement, a copy of which is attached as Appendix A to this
Proxy Statement/Prospectus and is incorporated herein by reference, provides
that, upon the terms and subject to the conditions of the Merger Agreement, at
the Effective Time, each outstanding share of AmeriConnect Stock, other than
those shares held by Dissenting Holders, AmeriConnect, any subsidiary of
AmeriConnect, Phoenix, Sub or any subsidiary of Phoenix, will, without action on
the part of the holder thereof, be canceled and converted into the right to
receive the Conversion Number of shares of Phoenix Common Stock.
At the Effective Time, each issued and outstanding share of the common
stock of Sub will be converted into one share of common stock, $.001 par value,
of the surviving corporation, all of which will be held by Phoenix.
None of the outstanding shares of Phoenix Common Stock or Phoenix Preferred
Stock will be converted or otherwise modified in the Merger and all of such
shares will continue to be outstanding capital stock of Phoenix after the
Effective Time.
Representations and Warranties. The Merger Agreement contains various
representations and warranties relating to, among other things, (i) each of
Phoenix's and AmeriConnect's and certain of their respective subsidiaries'
organization and similar corporate matters, (ii) each of Phoenix's and
AmeriConnect's capital structure and the ownership of Sub by Phoenix, (iii) the
authorization, execution, delivery, performance and enforceability of the Merger
Agreement and related matters, (iv) required consents or approvals and
violations of any instruments or laws, (v) the documents and reports filed by
each of Phoenix and AmeriConnect with the SEC and the accuracy of the
information contained therein, (vi) the absence of material undisclosed
liabilities, (vii) the absence of certain events or changes, (viii) compliance
with laws and
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the absence of investigations or reviews by governmental entities, (ix) taxes,
(x) litigation, (xi) certain accounting matters, (xii) the accuracy of the
information provided by Phoenix and AmeriConnect with respect to the
Registration Statement on Form S-4 filed by Phoenix in connection with the
shares of Phoenix Common Stock to be issued pursuant to the Merger Agreement
(the "Registration Statement") and this Proxy Statement/Prospectus, (xiii)
brokers, (xiv) environmental matters, (xv) the accuracy of corporate records,
(xvi) labor matters, (xvii) retirement and other employee plans and matters
relating to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), (xviii) intellectual property, and (xix) the stockholder vote
required to approve the Merger. Phoenix also made representations with respect
to the conduct of Sub's activities, authorization for the issuance of Phoenix
Common Stock in connection with the Merger, lack of ownership by Phoenix and Sub
of AmeriConnect Stock and lack of present intention of Phoenix to liquidate or
dissolve AmeriConnect. The respective representations and warranties of Phoenix,
Sub and AmeriConnect will terminate at the Effective Time.
Certain Covenants. Pursuant to the Merger Agreement, Phoenix and
AmeriConnect have agreed that, during the period from the date of the Merger
Agreement until the Effective Time, except as permitted by the Merger Agreement
or to the extent the other party shall otherwise consent, each of AmeriConnect,
its subsidiaries and Phoenix, among other things, (i) will not amend or propose
to amend its Certificate of Incorporation or Bylaws, (ii) will not make any
change in any of the accounting principles or practices used by it except as
required by the SEC or the Financial Accounting Standards Board, (iii) will not
take any action which would prevent qualification of the Merger as a
reorganization within the meaning of Sections 368 of the Code or the Merger to
be accounted for as a "pooling of interests" for financial accounting purposes,
(iv) will not adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other reorganization,
(v) will not take any action that would be reasonably likely to result in any of
its or, in the case of Phoenix, Sub's representations and warranties being
materially inaccurate, and (vi) will take all commercially reasonable steps
necessary or desirable and proceed diligently and in good faith to satisfy each
of the conditions to the Merger applicable to such party. Each of Phoenix, Sub
and AmeriConnect has agreed to take, or cause to be taken, all reasonable
actions necessary to comply promptly with all legal requirements which may be
imposed on it with respect to the Merger, including furnishing all information
required in connection with the necessary approvals, if any, of the FCC and the
PUCs and in connection with approvals of or filing with any other governmental
agency and will take all reasonable actions necessary to obtain any consent,
authorization, order or approval of, or any exemption by, any governmental
entity or private third party required to be obtained or made by Phoenix, Sub or
AmeriConnect or any of their subsidiaries in connection with the Merger or the
taking of any action contemplated by the Merger Agreement.
In addition, pursuant to the Merger Agreement, AmeriConnect and its
subsidiaries have agreed that, during the period from the date of the Merger
Agreement until the Effective Time, except as permitted by the Merger Agreement
or to the extent Phoenix shall otherwise consent, each of AmeriConnect and its
subsidiaries, among other things, (i) will carry on its business in the ordinary
course consistent with past practice and use all reasonable efforts to preserve
its relationships with customers, suppliers and others having business dealings
with them, (ii) will not declare, set aside or pay any dividends on or make
other distributions in respect of any of its capital stock, split, combine or
reclassify any shares of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or repurchase, redeem or otherwise acquire any
shares of capital stock or any securities convertible into, or any rights,
warrants, calls, subscriptions or options to acquire, shares of capital stock of
such party, (iii) will not issue, deliver or sell, or authorize or propose the
issuance of any additional shares, or any options or rights to acquire
additional shares, of capital stock, subject to certain exceptions, (iv) will
not acquire or dispose of any assets or businesses other than in the ordinary
course of business, (v) will not incur or guarantee any indebtedness other than
in the ordinary course of business consistent with prior practice, (vi) will not
enter into, adopt, amend or terminate any Employee Plan or any agreement,
arrangement, plan or policy between AmeriConnect and one or more of its
directors, officers, employees or independent contractors or, except in the
ordinary course of business and consistent with past practice, increase in any
manner the compensation or fringe benefits of any director, officer, employee or
independent contractor, (vii) will not, except to the extent any such policy is
replaced with comparable coverage, allow any insurance policy naming
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it as a beneficiary or a loss payable payee to be terminated other than in the
ordinary course of business consistent with past practice.
No Solicitation of Other Transactions. The Merger Agreement provides that
AmeriConnect and its subsidiaries will not (i) solicit or otherwise encourage
any offer or proposal which constitutes or may reasonably be expected to lead to
the acquisition of all or a significant part of the business and properties, or
the acquisition of at least a majority of the outstanding securities of
AmeriConnect (other than by Phoenix or Sub) (a "Third Party Transaction"), or
(ii) except as otherwise provided below, negotiate or discuss with, or provide
any information with respect to, or otherwise cooperate in any way in connection
with, or assist or participate in, facilitate or encourage, any effort or
attempt to effect or seek to effect, a Third Party Transaction with respect to
AmeriConnect. AmeriConnect also has agreed not to permit its officers,
directors, legal or financial advisors, agents or affiliates, to engage in such
activities on AmeriConnect's behalf. The AmeriConnect Board may, without
violating its covenant not to solicit or encourage Third Party Transactions, (i)
furnish information to, or enter into discussions or negotiations with, any
person or entity that makes an unsolicited written bona fide proposal to effect
a third Party Transaction with respect to AmeriConnect if the AmeriConnect Board
in its reasonable judgment, based on written advice from its outside legal
counsel, determines that the failure to do so would violate the fiduciary
obligations of the AmeriConnect Board under applicable law, provided that prior
to furnishing such information to, or entering into discussions or negotiations
with, such person or entity, AmeriConnect shall enter into a confidentiality
agreement in customary form on terms comparable to the confidentiality agreement
entered into between AmeriConnect and Phoenix with such person or entity prior
to entering into furnishing such information to, or entering into discussions or
negotiations with, such person or entity, or (ii) to the extent applicable,
comply with Rule 14e-2 promulgated under the Exchange Act with regard to a Third
Party Transaction with respect to AmeriConnect. Prior to the Effective Time,
AmeriConnect must promptly communicate to Phoenix the terms of any proposal
which it may receive in respect of any Third Party Transaction with respect to
AmeriConnect and must keep Phoenix informed as to the status of any actions,
including negotiations or discussions, taken with respect to such a Third Party
Transaction.
Conditions to the Merger. The respective obligations of Phoenix and
AmeriConnect to effect the Merger are subject to a number of conditions,
including among others (i) the Merger Agreement and the transactions
contemplated thereby shall have been approved and adopted by AmeriConnect
Stockholders, (ii) the opinions of Phoenix's and AmeriConnect's respective
financial advisors to the effect that the Conversion Number is fair from a
financial point of view to their respective stockholders shall have been
received by Phoenix and AmeriConnect, (iii) the shares of Phoenix Common Stock
issuable in the Merger shall have been authorized for listing on the AMEX upon
official notice of issuance, (iv) the Registration Statement shall have become
effective and shall not be the subject of any stop order or proceedings seeking
a stop order, (v) the opinion of Grant Thornton LLP that the business
combination to be effected by the Merger will be treated as a "pooling of
interests" under applicable accounting standards shall have been received by
Phoenix, (vi) the opinion of Freeborn & Peters to the effect that the Merger
will be treated for Federal income tax purposes as a reorganization within the
meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code shall have been
received by Phoenix and AmeriConnect, (vii) the absence of any preliminary or
permanent injunction or other order by any court of competent jurisdiction or
other legal restraint or prohibition that prevents the consummation of the
Merger, and (viii) all authorizations, consents, orders and approvals or
declarations or filings with, or expiration of waiting periods imposed by, any
governmental entity, without which one or both parties would suffer a material
adverse effect, shall have been filed, completed or obtained.
In addition to the conditions set forth above, the obligations of
AmeriConnect to effect the Merger are subject to, among others, the following
conditions: (i) the obligations required to be performed by Phoenix and Sub
under the Merger Agreement shall have been performed in all material respects,
(ii) the representations and warranties of Phoenix and Sub set forth in the
Merger Agreement shall be true and correct in all material respects as of the
date of the Merger Agreement and (except to the extent such representations and
warranties speak specifically as of an earlier date) the Closing Date, and (iii)
Phoenix shall not have experienced an event, or series of events, that
individually or in the aggregate has a material
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adverse effect on the business, operations, properties, assets, liabilities,
condition (financial or otherwise), prospects or results of operations of
Phoenix and its subsidiaries taken as a whole.
In addition to the conditions set forth in the first paragraph of this
subsection, the obligations of Phoenix and Sub to effect the Merger are subject
to, among others, the following conditions: (i) the obligations required to be
performed by AmeriConnect under the Merger Agreement shall have been performed
in all material respects, (ii) the representations and warranties of
AmeriConnect set forth in the Merger Agreement shall be true and correct in all
material respects as of the date of the Merger Agreement and (except to the
extent such representations and warranties speak specifically as of an earlier
date) the Closing Date, (iii) the receipt of agreements signed by all
AmeriConnect affiliates (see "-- Restrictions on Sales by Affiliates"), (iv)
AmeriConnect shall not have experienced an event, or series of events, that
individually or in the aggregate has a material adverse effect on the business,
operations, properties, assets, liabilities, condition (financial or otherwise),
prospects or results of operations of AmeriConnect and its subsidiaries taken as
a whole, and (v) the exercise of appraisal rights by the holders of no more than
9% of the outstanding AmeriConnect Stock.
Termination. The Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval by AmeriConnect Stockholders (i) by mutual consent of Phoenix and
AmeriConnect, (ii) by either Phoenix or AmeriConnect if any permanent injunction
or other order of a court or other competent governmental entity preventing the
consummation of the Merger shall have become final and non-appealable, (iii) by
either Phoenix or AmeriConnect if there has been a material breach on the part
of the other party of any representation, warranty, covenant or agreement set
forth in the Merger Agreement which has not been cured prior to the earlier of
(A) fifteen business days following receipt by the breaching party of notice of
such breach and (B) the Closing Date, (iv) by either Phoenix or AmeriConnect
after November 30, 1996, if the Merger shall not have been consummated on or
before such date, subject to certain exceptions, (v) by either Phoenix or
AmeriConnect if the required approval of AmeriConnect Stockholders is not
obtained upon a vote held at the duly held meeting of such stockholders, (vi) by
AmeriConnect if the AmeriConnect Board, in the exercise of its good faith
judgment as to its fiduciary duties to its stockholders imposed by law and upon
written advice from counsel, determines that such termination is required by
reason of a Third Party Transaction, or (vii) by Phoenix if (A) the AmeriConnect
Board shall withdraw, modify or change its recommendation of the Merger
Agreement or the Merger in a manner adverse to Phoenix or shall have resolved to
do any of the foregoing; (B) the AmeriConnect Board shall have recommended to
AmeriConnect Stockholders a Third Party Transaction; (C) a tender offer or
exchange offer for 15% or more of the outstanding shares of capital stock of
AmeriConnect is commenced and the AmeriConnect Board, within 10 business days
after such tender offer or exchange offer is commenced, either fails to
recommend against acceptance of such tender offer or exchange offer by its
stockholders or takes no position with respect to the acceptance of such tender
offer or exchange offer by its stockholders; or (D) after the date hereof, any
person (other than Mr. Robert R. Kaemmer) shall have acquired beneficial
ownership of or the right to acquire beneficial ownership of or any "group" (as
such term is defined in Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder) shall have been formed which beneficially
owns, or has the right to acquire beneficial ownership of, 15% or more of the
then outstanding shares of Company Stock (other than those beneficial owners of
15 percent or more of the outstanding AmeriConnect Stock as of the date hereof
or an affiliate thereof or Phoenix or an affiliate thereof).
In the event of termination of the Merger Agreement by either Phoenix or
AmeriConnect as described above, the Merger Agreement shall become null and void
and there will be no liability or obligation on the part of Phoenix,
AmeriConnect or Sub or their respective officers, directors or stockholders
except as set forth in certain provisions of the Merger Agreement, including the
payment of fees and expense reimbursement described under "-- Expenses, Expense
Reimbursement and Termination Fee."
Expenses, Expense Reimbursement and Termination Fee. Upon a willful breach
by either Phoenix or AmeriConnect of any of its representations, warranties,
covenants or agreements set forth in the Merger Agreement, Phoenix or
AmeriConnect, whichever shall be the party at fault, shall be liable (among
other things) to reimburse the terminating party or parties for all legal,
accounting, printing, and other out-of-pocket
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expenses reasonably incurred by the terminating party or parties in connection
with the Merger Agreement and the transactions contemplated thereby.
Upon the occurrence of the events described below and termination of the
Merger Agreement, AmeriConnect will pay to Phoenix a fee equal to $250,000. Such
payment is in addition to any required payment of expenses described above.
AmeriConnect's obligation to make such payment is triggered upon the occurrence
of any of the following events: (i) termination by Phoenix and (a) such
termination is the result of a willful breach of any covenant, agreement,
representation or warranty contained in the Merger Agreement by AmeriConnect,
(b) there exists a Third Party Transaction at the time of such termination and
(c) within one year of such termination the Company enters into a definitive
agreement for the Third Party Transaction described in (b) above or the Third
Party Transaction described in (b) above is consummated, (ii) termination by
either AmeriConnect or Phoenix and the Merger is not approved by AmeriConnect
Stockholders in circumstances where (a) an offer or proposal to effect a Third
Party Transaction with or for AmeriConnect or its subsidiaries has been publicly
announced that is financially superior to the Merger and reasonably capable of
being financed or (b) any person or group (other than Phoenix or any of its
affiliates or Robert R. Kaemmer) becomes the beneficial owner of at least 15% of
the outstanding shares of AmeriConnect Stock or any person or group commences,
or publicly announces an intention to commence, a tender or exchange offer for
at least 15% of the outstanding shares of AmeriConnect Stock that is financially
superior to the Merger and reasonably capable of being financed, (iii)
termination by AmeriConnect and the AmeriConnect Board, in the exercise of its
good faith judgment as to its fiduciary duties to its stockholders imposed by
law and upon written advice from counsel, determines that such termination is
required by reason of a Third Party Transaction, (iv) termination by Phoenix and
the AmeriConnect Board shall have withdrawn, modified or changed its
recommendation of the Merger Agreement or the Merger in a manner adverse to
Phoenix or shall have resolved to do any of the foregoing and, at the time of
such termination, there exists a Third Party Transaction or within one year of
such termination AmeriConnect enters into a definitive agreement for a Third
Party Transaction or a Third Party Transaction is consummated or (v) termination
by Phoenix and (a) the AmeriConnect Board shall have recommended to AmeriConnect
Stockholders a Third Party Transaction; (b) a tender offer or exchange offer for
15% or more of the outstanding shares of capital stock of AmeriConnect is
commenced and the AmeriConnect Board, within 10 business days after such tender
offer or exchange offer is commenced, either fails to recommend against
acceptance of such tender offer or exchange offer by its stockholders or takes
no position with respect to the acceptance of such tender offer or exchange
offer by its stockholders; or (c) after the date of the Merger Agreement, any
person (other than Mr. Robert R. Kaemmer) shall have acquired beneficial
ownership of or the right to acquire beneficial ownership of or any "group" (as
such term is defined in Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder) shall have been formed which beneficially
owns, or has the right to acquire beneficial ownership of, 15% or more of the
then outstanding shares of AmeriConnect Stock (other than those beneficial
owners of 15 percent or more of the outstanding AmeriConnect Stock as of the
date of the Merger Agreement or an affiliate thereof or Parent or an affiliate
thereof). The AmeriConnect Board believes that the termination fee and expense
reimbursement will not impose a significant deterrent to a competing acquisition
proposal.
Indemnification and Insurance. The Merger Agreement provides that, after
the Effective Time, Phoenix and the Surviving Corporation will maintain all
rights to indemnification existing on the date of the Merger Agreement in favor
of the present and former directors and officers of AmeriConnect and that the
Certificate of Incorporation and Bylaws of the Surviving Corporation will not be
amended to reduce or limit such rights. In addition, the Surviving Corporation
will indemnify to the fullest extent possible under its Certificates of
Incorporation, its Bylaws and applicable law the present and former directors of
AmeriConnect against all losses, damages, liabilities or claims made against
them arising from their service in such capacities prior to and including the
Effective Time, to at least the same extent as such persons are currently
required to be indemnified pursuant to AmeriConnect's Certificate of
Incorporation and Bylaws. The Merger Agreement further provides that, with
respect to matters occurring prior to the Effective Time, the Surviving
Corporation will cause to be maintained in effect for three years from the
Effective Time, directors' and officers' liability insurance providing at least
the same coverage with respect to AmeriConnect's present and former officers and
directors as the policies maintained by or on behalf of AmeriConnect on the date
of the Merger Agreement,
37
<PAGE> 43
and containing terms and conditions which are substantially similar thereto, to
the extent such insurance is currently available on commercially reasonable
terms with respect to such matters.
Benefit Plans and Stock Options. Upon stockholder approval of the Merger,
at the Effective Time, all then outstanding AmeriConnect Stock Options will be
assumed by Phoenix. Each AmeriConnect Stock Option shall be converted into a
Phoenix Stock Option, under which the number of shares underlying the Phoenix
Stock Option shall be determined by multiplying the number of shares of
AmeriConnect Common Stock underlying such AmeriConnect Stock Option immediately
prior to the Effective Time by the Conversion Number and rounding down to the
nearest whole number, and the exercise price per share of Phoenix Common Stock
at which the Phoenix Stock Option shall be exercisable shall be determined by
dividing the exercise price per share of the AmeriConnect Common Stock subject
to such AmeriConnect Stock Option immediately prior to the Effective Time by the
Conversion Number and rounding up to the nearest whole cent. Each such Phoenix
Stock Option shall be assumed at the Effective Time by Phoenix on the same terms
and subject to the same conditions as in effect immediately prior to the
Effective Time, subject to such equitable adjustments as may be necessary to
reflect the Merger. Employees of AmeriConnect who remain employed by
AmeriConnect after the Effective Time will be eligible to participate in the
Phoenix Employee Plans that are available to similarly situated Phoenix
employees.
Amendment and Waiver. At any time prior to the Effective Time, Phoenix and
AmeriConnect may, by written agreement, (i) extend the time for the performance
of any of the obligations or other acts of the parties, (ii) waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement or in any schedule or document delivered pursuant to the Merger
Agreement and (iii) waive compliance with any of the covenants or agreements
contained in the Merger Agreement.
At any time prior to the Effective Time, by action of their respective
boards of directors, the parties to the Merger Agreement may, by written
agreement, before or after stockholder approval, amend or supplement any of the
provisions of the Merger Agreement, provided, however, that after the Merger
Agreement has been adopted by stockholders, no amendment or supplement shall be
made which is required by law to have the further approval of stockholders
unless such approval is received.
REGULATORY FILINGS AND APPROVALS
The regulatory filings described below have been or will be made by Phoenix
and AmeriConnect in connection with the Merger. Although Phoenix and
AmeriConnect believe that such approvals will be obtained, there can be no
assurance that this will be the case or that such approvals will be obtained in
a timely manner. In addition, such approvals may be conditioned or otherwise
encumbered or adverse consequences not envisioned by the parties may result to
Phoenix or AmeriConnect in the event of adverse action or inaction by
governmental entities.
Notification, consent or approval of the PUCs pursuant to state laws and
regulations is required in connection with the Merger in some of the states in
which Phoenix and AmeriConnect have operations. Phoenix and AmeriConnect have
made certain required filings and are in the process of making additional
filings with the PUCs.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES
The shares of Phoenix Common Stock to be issued in the Merger will have
been registered under the Securities Act. Such shares will be freely
transferable under the Securities Act, except for shares issued to any person
who may be deemed to be an affiliate (as such term is defined for purposes of
Rule 145 under the Securities Act, an "Affiliate") of AmeriConnect or Phoenix at
the time of the Special Meeting. Affiliates may not sell their shares of Phoenix
Common Stock acquired in connection with the Merger except pursuant to (i) an
effective registration statement under the Securities Act covering such shares,
(ii) paragraph (d) of Rule 145 in the case of persons who were Affiliates of
AmeriConnect at the time of the Special Meeting, or (iii) any other applicable
exemption under the Securities Act (such as Rule 144 under the Securities Act in
the case of persons who are or become Affiliates of Phoenix). Persons who may be
deemed Affiliates of Phoenix or AmeriConnect generally include individuals or
entities that control, are controlled by, or are under
38
<PAGE> 44
common control with, Phoenix or AmeriConnect and may include certain officers
and directors, as well as principal stockholders of Phoenix or AmeriConnect.
SEC guidelines indicate further that the "pooling-of-interests" method of
accounting generally will not be challenged on the basis of sales of shares by
Affiliates of the acquiring or acquired company if the Affiliates do not dispose
of any of the shares of the acquiring or acquired company that the Affiliates
own or shares of a corporation they receive in connection with a merger during
the period beginning 30 days before the merger and ending when financial results
covering at least 30 days of post-merger operations of the combined enterprise
have been published. AmeriConnect has agreed to use its best efforts to procure
written agreements ("Affiliate Agreements") from persons identified by
AmeriConnect as Affiliates of AmeriConnect containing appropriate
representations and covenants intended to ensure compliance with the Securities
Act and to preserve the ability to account for the Merger as a "pooling of
interests." It is a condition to Phoenix's obligations to consummate the Merger
that Phoenix shall have received such Affiliate Agreements.
ACCOUNTING TREATMENT
The transactions contemplated by the Merger Agreement are expected to
qualify as a "pooling of interests" for accounting and financial reporting
purposes. Under this method of accounting, the recorded assets and liabilities
of Phoenix and AmeriConnect will be carried forward to the combined companies at
their recorded amounts; income of the combined companies will include income of
Phoenix and AmeriConnect for the entire fiscal year in which the Merger occurs;
and the reported income of the separate corporations for prior periods will be
combined and restated as income of the combined companies. The obligations of
Phoenix and AmeriConnect to consummate the Merger are subject to the condition
that Phoenix shall have received from Grant Thornton LLP, the independent
auditors for Phoenix, an opinion that the Merger will be treated as a "pooling
of interests" under applicable financial accounting standards. See "-- The
Merger Agreement -- Conditions to the Merger" and "Unaudited Pro Forma Combined
Condensed Financial Information."
LISTING ON STOCK EXCHANGE
Phoenix has agreed to use all reasonable efforts to list on the AMEX the
shares of Phoenix Common Stock to be issued in connection with the Merger and
the shares required to be reserved for issuance in connection with the Merger.
The obligations of the parties to the Merger Agreement to consummate the Merger
are subject to authorization for listing by the AMEX upon official notice of
issuance of such shares. See "--The Merger Agreement -- Conditions to the
Merger."
APPRAISAL RIGHTS
Under Section 262 of the DGCL ("Section 262"), holders of AmeriConnect
Stock are entitled to appraisal rights in connection with the Merger.
If the Merger is consummated, holders of AmeriConnect Stock who hold such
shares of record on the date of making a written demand for appraisal as
described below, continuously hold such shares through the Effective Time and
otherwise comply fully with the procedures prescribed in Section 262 will be
entitled to a judicial determination of the "fair value" of their shares
(exclusive of any element of value arising from the accomplishment or
expectation of the Merger) and to receive from the Surviving Corporation payment
of such fair value in cash.
Shares of AmeriConnect Stock which are outstanding immediately prior to the
Effective Time with respect to which appraisal shall have been properly demanded
in accordance with Section 262 shall not be converted into the right to receive
shares of Phoenix Common Stock in the Merger at or after the Effective Time
unless and until the holder of such shares withdraws his or her demand for such
appraisal or becomes ineligible for such appraisal.
Under Section 262, not less than 20 days prior to the Special Meeting,
AmeriConnect is required to notify each stockholder eligible for appraisal
rights of the availability of such appraisal rights. This Proxy
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<PAGE> 45
Statement/Prospectus constitutes notice to holders of AmeriConnect Stock that
appraisal rights are available to them.
The following is a brief summary of the statutory procedures to be followed
by a holder of AmeriConnect Stock in order to perfect appraisal rights under the
DGCL. This summary is not intended to be complete and is qualified in its
entirety by reference to Section 262 which is attached hereto as Appendix C and
is incorporated herein by reference. Any AmeriConnect Stockholder considering
demanding appraisal of shares owned is advised to read the full text of Section
262 contained in Appendix C and to consult legal counsel.
If any AmeriConnect Stockholder elects to exercise such stockholder's
appraisal rights, such stockholder must satisfy each of the following
conditions:
(i) A written demand for appraisal of shares of AmeriConnect Stock
must be delivered to AmeriConnect by any holder thereof seeking appraisal
before the taking of the vote on the Merger at the Special Meeting. Such
demand must reasonably inform AmeriConnect that the stockholder intends
thereby to demand appraisal of his shares. Merely voting against, or
failing to vote in favor of, the approval of the Merger Agreement and the
Merger will not constitute a demand for appraisal within the meaning of
Section 262.
(ii) Stockholders electing to exercise their appraisal rights under
Section 262 must not vote for approval of the Merger. A failure to vote
will satisfy this condition. If, however, a stockholder votes for approval
and adoption of the Merger Agreement and the Merger or returns a signed
proxy but does not specify a vote against the approval of the Merger, or a
direction to abstain, the proxy will be voted for the approval of the
Merger, which will have the effect of waiving such stockholder's appraisal
rights.
(iii) Such stockholder must continually hold such shares from the date
of the making of the demand through the Effective Time of the Merger.
(iv) A demand for appraisal must be executed by or for the
AmeriConnect Stockholder of record, fully and correctly, as such
stockholder's name appears on the stock certificates. If AmeriConnect Stock
is owned of record in a fiduciary capacity, such as by a trustee, guardian
or custodian, such demand must be executed by the fiduciary. If
AmeriConnect Stock is owned of record by more than one person, as in a
joint tenancy or tenancy in common, such demand must be executed by all
joint owners. An authorized agent, including an agent for two or more joint
owners, may execute the demand for appraisal for a stockholder of record,
so long as the agent identifies the record owner and expressly discloses
the fact that, in exercising the demand, such agent is acting as agent for
the record owner.
A record owner who holds AmeriConnect Stock as a nominee for others may
exercise appraisal rights with respect to the shares held for all or fewer than
all beneficial owners of shares of AmeriConnect Stock as to which the holder is
the record owner. In such case, the written demand must set forth the number of
shares covered by such demand. Where the number of shares is not expressly
stated, the demand will be presumed to cover all shares of AmeriConnect Stock
outstanding in the name of such record owner. Beneficial owners who are not
record owners and who intend to exercise appraisal rights should instruct the
record owner to comply strictly with the statutory requirements with respect to
the delivery of written demand for appraisal. A demand for appraisal submitted
by a beneficial owner who is not the record owner will not be honored.
If any AmeriConnect Stockholder fails to comply with any of the conditions
of Section 262 and the Merger becomes effective, such stockholder will be
entitled to receive the consideration provided for in the Merger Agreement, but
will have no appraisal rights with respect to such stockholder's AmeriConnect
Stock.
A holder of AmeriConnect Stock who elects to exercise appraisal rights must
mail or deliver the written demand for appraisal to: AmeriConnect, Inc., 6750 W.
93rd St., Suite 110, Overland Park, Kansas, 66212, Attention: Corporate
Secretary. The written demand for appraisal should specify the stockholder's
name and mailing address and the number of shares of AmeriConnect Stock covered
by the demand, and should state that the stockholder is thereby demanding
appraisal in accordance with Section 262.
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<PAGE> 46
Within ten days after the Effective Time, AmeriConnect must provide notice
as to the date of effectiveness of the Merger to each AmeriConnect Stockholder
who has duly and timely delivered demands for appraisal and otherwise complied
with Section 262 (a "Dissenting Holder").
Within 120 days after the Effective Time, any Dissenting Holder is
entitled, upon written request, to receive from AmeriConnect a statement setting
forth the aggregate number of shares not voted in favor of the Merger and with
respect to which demands for appraisal have been received by AmeriConnect, and
the number of holders of such shares. Such statement must be mailed within ten
days after the written request therefor has been received by AmeriConnect.
Within 120 days after the Effective Time, AmeriConnect or any Dissenting
Holder may file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of each share of AmeriConnect Stock. If a
petition for an appraisal is timely filed, after a hearing on such petition, the
Delaware Court of Chancery will determine which holders of AmeriConnect Stock
are entitled to appraisal rights and thereafter will appraise the shares of
AmeriConnect Stock owned by such stockholders, determining the fair value of
such shares, exclusive of any element of value arising from the accomplishment
or expectation of the Merger, together with a fair rate of interest to be paid,
if any, upon the amount determined to be fair value.
In determining fair value, the Delaware Court of Chancery is to take into
account all relevant factors. In Weinberger v. UOP, Inc., et al., the Delaware
Supreme Court discussed the factors that could be considered in determining fair
value in an appraisal proceeding, stating that "proof of value by any techniques
or methods which are generally considered acceptable in the financial community
and otherwise admissible in court" should be considered and that "[f]air price
obviously requires consideration of all relevant factors involving the value of
a company." The Delaware Supreme Court stated that in making this determination
of fair value, the Delaware Court of Chancery and the appraiser may consider
"all factors and elements which reasonably might enter into the fixing of
value," including "market value, asset value, dividends, earnings prospects, the
nature of the enterprise and any other factors which were known or which could
be ascertained as of the date of merger and which throw any light on future
prospects of the merged corporation . . . ." The Delaware Supreme Court has
construed Section 262 to mean that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the date
of the merger and not the product of speculation, may be considered." However,
the court noted that Section 262 provides that fair value is to be determined
"exclusive of any element of value arising from the accomplishment or
expectation of the merger."
Holders of AmeriConnect Stock considering whether to seek appraisal should
bear in mind that the fair value of their AmeriConnect Stock determined under
Section 262 could be more than, the same as or less than the value of the
consideration to be paid pursuant to the Merger, and that an opinion of an
investment banking firm as to fairness from a financial point of view is not
necessarily an opinion as to fair value under Section 262 of the DGCL.
The cost of the appraisal proceeding may be determined by the Delaware
Court of Chancery and assessed upon the parties as the Delaware Court of
Chancery deems equitable in the circumstances. Upon application of a Dissenting
Holder, the Delaware Court of Chancery may order that all or a portion of the
expenses incurred by any Dissenting Holder in connection with the appraisal
proceeding, including without limitation, reasonable attorneys' fees and the
fees and expenses of experts, be charged pro rata against the value of all
shares entitled to appraisal. In the absence of such a determination or
assessment, each party bears its own expenses.
A Dissenting Holder who has duly demanded appraisal in compliance with
Section 262 will not, after the Effective Time, be entitled to vote for any
purpose the AmeriConnect Stock subject to such demand or to receive payment of
dividends or other distributions on such AmeriConnect Stock except for dividends
or other distributions payable to stockholders of record at a date prior to the
Effective Time.
At any time within 60 days after the Effective Time, any Dissenting Holder
may withdraw his or her demand for appraisal and accept the consideration to be
paid under the Merger Agreement without interest. After this period, a
Dissenting Holder may withdraw his or her demand for appraisal only with the
consent of AmeriConnect. If no petition for appraisal is filed with the Delaware
Court of Chancery within 120 days after
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<PAGE> 47
the Effective Time of the Merger, Dissenting Holders' rights to appraisal shall
cease and they shall be entitled to receive the consideration to be paid under
the Merger Agreement without interest. Inasmuch as AmeriConnect has no
obligation or intention to file such a petition, any holder of AmeriConnect
Stock who desires such a petition to be filed is advised to file it on a timely
basis. No petition timely filed in the Delaware Court of Chancery demanding
appraisal shall be dismissed as to any AmeriConnect Stockholder without the
approval of the Delaware Court of Chancery, and such approval may be conditioned
upon such terms as the Delaware Court of Chancery deems just.
Failure to take any required step in connection with the exercise of
appraisal rights may result in the termination or waiver of such rights.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the AmeriConnect Board with respect to
the Merger Agreement and the transactions contemplated thereby, stockholders
should be aware that certain members of AmeriConnect's Management and the
AmeriConnect Board have certain interests in the Merger that are in addition to
the interests of AmeriConnect Stockholders generally. The AmeriConnect Board was
aware of these interests and considered them, among other matters, in approving
the Merger Agreement and the transactions contemplated thereby.
Salary and Benefit Matters. Mr. Kaemmer is party to an employment agreement
with AmeriConnect dated January 1, 1995, with a term expiring December 31, 1997
(as more fully described in AmeriConnect's Annual Report on Form 10-KSB for the
year ending December 31, 1995). The employment agreement provides for specified
salary, bonus, retirement and other benefits and entitles him to certain
benefits upon any termination of his employment by AmeriConnect (other than for
cause). In the event Mr. Kaemmer's employment agreement is terminated on grounds
other than his permanent disability or for cause, Mr. Kaemmer will be entitled
to two year's salary (currently $132,000 annually) and the proportionate amount
of any bonus and other compensation, payments and benefits which would otherwise
have been received by him with respect to the year in which termination occurs
(currently estimated to be $6,900). In addition, the employment agreement
includes provisions permitting Mr. Kaemmer voluntarily to terminate the
agreement without cause following approval by AmeriConnect Stockholders of a
merger, such as the Merger, in which AmeriConnect Stockholders would own less
than 80% of the total voting power represented by the voting securities of the
Surviving Corporation. In the event that Mr. Kaemmer terminates his employment
agreement under such circumstances, he would be entitled to receive two years'
salary and the amount of any bonus and other compensation, payments and benefits
which would otherwise have been received by him with respect to the year in
which such notice is given.
Mr. Kaemmer and Janet M. Flynn, each a director of AmeriConnect, also own
AmeriConnect Stock Options. AmeriConnect Stock Options outstanding at the
Effective Time will be automatically converted in the Merger into Phoenix Stock
Options at prices to be adjusted on the basis of the Conversion Number. See
" -- The Merger Agreement -- Benefit Plans and Stock Options." As of
, 1996, the directors and executive officers of AmeriConnect
collectively owned AmeriConnect Stock Options then exercisable for
shares of AmeriConnect Common Stock at a weighted average exercise price of
$ per share. In addition, as of such date, the directors and executive
officers of AmeriConnect as a group, together with their respective affiliates,
owned shares, representing % of the outstanding shares, of
AmeriConnect Stock and having % of the votes entitled to be cast by holders
of AmeriConnect Stock at the Special Meeting.
Indemnification and Insurance. The Merger Agreement provides that, after
the Effective Time, Phoenix and the Surviving Corporation will maintain all
rights to indemnification existing on the date of the Merger Agreement in favor
of the present and former directors and officers of AmeriConnect and that the
Certificate of Incorporation and Bylaws of the Surviving Corporation will not be
amended to reduce or limit such rights. In addition, the Surviving Corporation
will indemnify to the fullest extent possible under its Certificate of
Incorporation, its Bylaws and applicable law the present and former directors of
AmeriConnect against all losses, damages, liabilities or claims made against
them arising from their service in such capacities prior to
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<PAGE> 48
and including the Effective Time, to at least the same extent as such persons
are currently required to be indemnified pursuant to AmeriConnect's Certificate
of Incorporation and Bylaws. The Merger Agreement further provides that, with
respect to matters occurring prior to the Effective Time, the Surviving
Corporation will cause to be maintained in effect for three years from the
Effective Time, directors' and officers' liability insurance providing at least
the same coverage with respect to AmeriConnect's present and former officers and
directors as the policies maintained by or on behalf of AmeriConnect on the date
of the Merger Agreement, and containing terms and conditions which are
substantially similar thereto, to the extent such insurance is currently
available on commercially reasonable terms with respect to such matters.
OPERATIONS AFTER THE MERGER
General. At the Effective Time, Sub will be merged with and into
AmeriConnect, and AmeriConnect, as the surviving corporation in the Merger, will
become a wholly-owned subsidiary of Phoenix.
In the course of integrating operations of the two companies, it is
anticipated that substantial savings will be achieved through economies of scale
and the elimination of certain jobs and duplicative facilities. Estimated annual
savings of approximately $2,500,000 on a pretax basis are expected to result
from these efforts within one year after the Merger. The costs of integrating
operations are expected to result in a significant, non-recurring charge to the
combined companies' results of operations after consummation of the proposed
Merger; however, the actual amount of such charge cannot be determined until the
operational and transition plans are completed. See "RISK FACTORS -- Expenses of
Merger and Restructuring."
Directors and Officers. In accordance with the Merger Agreement, at and
immediately following the Effective Time, the directors and officers of the
Surviving Corporation will be Wallace M. Hammond and Jeffrey L. Bailey.
DEREGISTRATION OF AMERICONNECT COMMON STOCK AFTER THE MERGER
If the Merger is consummated, the AmeriConnect Common Stock will be
deregistered under the Exchange Act.
INFORMATION CONCERNING PHOENIX
Phoenix is a facilities-based reseller of telecommunications services which
sells to 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 on the network of the nation's largest
facilities based carriers. 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. At
December 31, 1995, Phoenix and its subsidiaries had approximately 217 employees,
total assets of approximately $30.4 million and revenues of approximately $58.8
million for the year then ended.
Additional information concerning Phoenix and its subsidiaries is contained
in Phoenix's Annual Report on Form 10-K for the year ended December 31, 1995, as
amended on Form 10-K/A, and its Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1996, which are included as Appendix D and Appendix E,
respectively, to this Proxy Statement/Prospectus. Such documents and certain
other documents are also incorporated by reference herein. See "AVAILABLE
INFORMATION" and "INCORPORATION BY REFERENCE."
INFORMATION CONCERNING AMERICONNECT
AmeriConnect is a switchless reseller of long distance telecommunications
services which sells such services to individuals and small to medium sized
businesses. AmeriConnect does not own or lease any telephone equipment or
participate in the call completion process. AmeriConnect places its customers on
the long distance networks of facilities-based, interexchange carriers, which
provide the actual call transmission services. These interexchange carriers bill
AmeriConnect at contractual rates for the combined usage of AmeriConnect's
customers utilizing such carriers' networks. AmeriConnect is responsible for
payments to its
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<PAGE> 49
carriers without regard to whether payment is made by AmeriConnect's customers.
AmeriConnect bills its customers individually at rates established by
AmeriConnect. At December 31, 1995, AmeriConnect had approximately 32 employees,
total assets of approximately $2.7 million and revenues of approximately $17.1
million for the year then ended.
Additional information concerning AmeriConnect and its subsidiaries is
contained in AmeriConnect's Annual Report on Form 10-KSB for the year ended
December 31, 1995, its Proxy Statement for the 1996 Annual Meeting of
Stockholders and its Quarterly Report on Form 10-QSB for the period ended June
30, 1996, which are included as Appendix F, Appendix G and Appendix H,
respectively, to this Proxy Statement/Prospectus. Such documents and certain
other documents are also incorporated by reference herein. See "AVAILABLE
INFORMATION" and "INCORPORATION BY REFERENCE."
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Phoenix Common Stock is listed on the AMEX under the symbol "PHX". Price
information for AmeriConnect Common Stock may be obtained from the NASDAQ
Bulletin Board. There has never been an established public trading market for
the AmeriConnect Class A Common Stock.
The table below sets forth, for the calendar quarters indicated, the
reported high and low sales prices of Phoenix Common Stock as reported on the
AMEX and the reported high and low bid prices of AmeriConnect Common Stock as
reported on the NASDAQ Bulletin Board, respectively. Phoenix and AmeriConnect
have never declared or paid any dividends.
<TABLE>
<CAPTION>
PHOENIX COMMON AMERICONNECT
STOCK COMMON STOCK
--------------- ---------------
HIGH LOW HIGH LOW
----- ----- ------ ----
<S> <C> <C> <C> <C>
1994
First Quarter........................................... 6 7/8 3 1/4 15/16 1/4
Second Quarter.......................................... 4 2 1/2 1 1/8 1/8
Third Quarter........................................... 4 5/8 3 1/16 1 3/16
Fourth Quarter.......................................... 4 1/8 2 1/4 1 1/4 3/16
1995
First Quarter........................................... 3 1/2 1 7/8 9/16 3/8
Second Quarter.......................................... 3 1/8 2 1/4 7/16 5/16
Third Quarter........................................... 4 5/8 2 7/16 3/8 1/4
Fourth Quarter.......................................... 4 7/16 3 5/16 1/2 3/8
1996
First Quarter........................................... 4 3 1/4 1 3/8 1/4
Second Quarter.......................................... 6 1/8 2 7/8 1 11/16 7/8
Third Quarter (through , 1996)..............
</TABLE>
- ---------------
On January 16, 1996, the last full trading day prior to the public
announcement of the proposed Merger, the reported American Stock Exchange
Composite Transactions closing price of the Phoenix Common Stock was $4.00 per
share and the last average of the asked and bid prices of a share of
AmeriConnect Common Stock as reported on the NASDAQ Bulletin Board was $.83. On
, 1996, the most recent practicable date prior to the printing of
this Proxy Statement/Prospectus, the reported American Stock Exchange Composite
Transactions closing price of the Phoenix Common Stock was $ per share
and the last average of the asked and bid prices of a share of AmeriConnect
Common Stock as reported on the NASDAQ Bulletin Board was $ . Holders
of Phoenix Common Stock and AmeriConnect Common Stock are urged to obtain
current market quotations prior to making any decision with respect to the
Merger.
The payment of future dividends on Phoenix Common Stock will be a business
decision to be made by the Board of Directors of Phoenix from time to time based
upon the results of operations and financial condition of Phoenix and such other
factors as the Phoenix Board of Directors considers relevant.
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<PAGE> 50
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma condensed consolidated balance sheet of
Phoenix and AmeriConnect as of March 31, 1996 reflects the historical
consolidated balance sheets as of March 31, 1996 adjusted to give effect to the
proposed merger of the two companies, which will be accounted for using the
pooling of interests method. Following are unaudited pro forma condensed
consolidated statements of operations for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996. The unaudited
pro forma statements of operations for the years ended December 31, 1993 and
1994 and the three months ended March 31, 1996 adjust the historical
consolidated statements of operations for the periods then ended to give effect
to the proposed merger. The unaudited pro forma statements of operations for the
year ended December 31, 1995 and the three months ended March 31, 1995 adjust
the historical consolidated statement of operations for the proposed merger as
well as for the August 1995 acquisition of the assets of Tele-Trend
Communications, LLC (see Phoenix Form 8-K/A dated November 9, 1995) and for the
January 1, 1996 acquisition of Automated Communications, Inc. (see Phoenix Form
8-K/A dated January 16, 1996) by Phoenix. The pro forma condensed consolidated
data should be read in conjunction with the historical consolidated financial
statements of Phoenix, Tele-Trend Communications, LLC (see Phoenix Form 8-K
dated November 9, 1995), Automated Communications, Inc. (see Phoenix Form 8-K/A
dated January 16, 1996) and AmeriConnect and are not necessarily indicative of
the results of operations that might have occurred if the proposed merger had
taken place at January 1, 1993 and the Tele-Trend Communications, LLC and
Automated Communications, Inc. acquisitions had taken place at January 1, 1995,
or of the results of operations for any future period.
45
<PAGE> 51
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PHOENIX(1) AMERICONNECT(2) ADJUSTMENTS(3) PRO FORMA
---------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents........ $ 2,036,776 $ 147,202 $ 2,183,978
Restricted cash.................. 225,356 225,356
Accounts receivable, net......... 16,596,873 2,190,400 18,787,273
Deferred commissions............. 1,507,918 109,142 1,617,060
Other current assets............. 605,872 119,724 725,596
------------ ----------- -------- ------------
Total current assets..... 20,972,795 2,566,468 23,539,263
Furniture, equipment and data
processing systems, net.......... 2,913,808 133,625 3,047,433
Deferred commissions............... 1,220,901 1,220,901
Customer acquisition costs, less
accumulated amortization......... 4,278,864 4,278,864
Goodwill, less accumulated
amortization..................... 18,986,201 18,986,201
Other assets....................... 977,126 19,528 996,654
------------ ----------- -------- ------------
$ 49,349,695 $ 2,719,621 $ 52,069,316
============ =========== ======== ============
Current Liabilities
Notes payable.................... $ 3,155,299 $ 3,155,299
Accounts payable................. 16,383,247 $ 3,109,108 19,492,355
------------ ----------- -------- ------------
Total current
liabilities............ 19,538,546 3,109,108 22,647,654
Notes payable...................... 1,182,650 1,182,650
Stockholders' equity
Preferred stock.................. 2,727 2,727
Class A common stock............. 66 $ (66) --
Common stock..................... 17,345 65,186 (65,186) 20,082
2,737
Additional paid-in capital....... 38,967,204 3,647,094 60,652 42,674,950
Treasury stock -- class A........ (60) 60 --
Treasury stock................... (2,522) (1,803) 1,803 (2,522)
Accumulated deficit.............. (10,356,255) (4,099,970) (14,456,225)
------------ ----------- -------- ------------
Total stockholders' equity......... $ 28,628,499 $ (389,487) $ -- $ 28,239,012
------------ ----------- -------- ------------
$ 49,349,695 $ 2,719,621 $ -- $ 52,069,316
============ =========== ======== ============
</TABLE>
See Notes to Pro Forma Unaudited Condensed Consolidated Financial Statements
46
<PAGE> 52
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
1993 1994
------------------------------------------- -------------------------------------------
PHOENIX(4) AMERICONNECT(5) PRO FORMA PHOENIX(4) AMERICONNECT(5) PRO FORMA
----------- --------------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $40,349,599 $13,555,729 $53,905,328 $57,420,484 $16,984,324 $74,404,808
Cost of revenues................. 29,260,515 10,120,141 39,380,656 40,007,052 12,642,307 52,649,359
----------- ----------- ----------- ----------- ----------- -----------
Gross profit..................... 11,089,084 3,435,588 14,524,672 17,413,432 4,342,017 21,755,449
Selling, general and
administrative expenses........ 13,736,937 2,652,897 16,389,834 17,796,208 3,956,772 21,752,980
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations.... (2,647,853) 782,691 (1,865,162) (382,776) 385,245 2,469
Other income (expense) net....... (147,853) (28,984) (176,837) (398,944) 52,740 (346,204)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes
and cumulative effect of
accounting change.............. (2,795,706) 753,707 (2,041,999) (781,720) 437,985 (343,735)
Income taxes..................... -- 493,900 493,900 (16,405) (16,405)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative
effect of accounting change.... (2,795,706) 1,247,607 (1,548,099) (781,720) 421,580 (360,140)
Cumulative effect of change in
amortization of deferred
commissions.................... -- -- (123,224) (123,224)
----------- ----------- ----------- ----------- ----------- -----------
Net Income (loss)................ (2,795,706) 1,247,607 (1,548,099) (904,944) 421,580 (483,364)
Preferred dividends.............. (267,419) (267,419) (231,255) (231,255)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) attributable to
common shares.................. $(3,063,125) $ 1,247,607 $(1,815,518) $(1,136,199) $ 421,580 $ (714,619)
=========== =========== =========== =========== =========== ===========
Loss per common share:
Income (loss) before cumulative
effect of accounting
change....................... $ (0.33) $ 0.20 $ (0.15) $ (0.09) $ 0.06 $ (0.05)
Cumulative effect of accounting
change....................... -- (0.01)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per common
share.......................... $ (0.33) $ 0.20 $ (0.15) $ (0.10) $ 0.06 $ (0.05)
=========== =========== =========== =========== =========== ===========
Weighted average common
shares....................... 9,423,072 6,355,427 11,774,580 11,100,958 6,868,221 13,642,200
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Pro Forma Unaudited Condensed Consolidated Financial Statements
47
<PAGE> 53
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
AUTOMATED TELE-TREND
PRO FORMA COMMUNICATIONS, COMMUNICATIONS,
PHOENIX(4) AMERICONNECT(5) POOLED INC.(6) INC.(7)
----------- --------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues......................... $58,755,334 $17,099,635 $75,854,969 $24,004,326 $ 4,869,273
Cost of revenues................. 40,376,589 13,399,190 53,775,779 17,280,906 3,958,251
----------- ----------- ----------- ----------- ----------
Gross profit..................... 18,378,745 3,700,445 22,079,190 6,723,420 911,022
Selling, general and
administrative expenses........ 18,524,824 4,923,941 23,448,765 8,354,841 948,905
----------- ----------- ----------- ----------- ----------
Operating loss................... (146,079) (1,223,496) (1,369,575) (1,631,421) (37,883)
Other income (expense)........... (169,267) 4,986 (164,281) (53,893) (27,061)
Loss on abandonment of
fixed assets................... (1,019,648) (1,019,648)
----------- ----------- ----------- ----------- ----------
Income (loss) before
income taxes................... (1,334,994) (1,218,510) (2,553,504) (1,685,314) (64,944)
Income taxes..................... -- (500,000) (500,000) -- 3,217
----------- ----------- ----------- ----------- ----------
Net loss......................... (1,334,994) (1,718,510) (3,053,504) (1,685,314) (61,727)
Preferred dividends.............. (594,381) (594,381)
----------- ----------- ----------- ----------- ----------
Net loss attributable to
common shares.................. $(1,929,375) $(1,718,510) $(3,647,885) $(1,685,314) $ (61,727)
=========== =========== =========== =========== ==========
Net loss per common share........ $ (0.15) $ (0.23) $ (0.24)
=========== =========== ===========
Weighted average common
shares......................... 12,613,992 7,550,710 15,407,755
=========== =========== ===========
PRO FORMA
ADJUSTMENTS(8) PRO FORMA
-------------- ------------
<S> <C> <C>
Revenues......................... $104,728,568
Cost of revenues................. $ (115,545) 74,899,391
--------- ------------
Gross profit..................... 115,545 29,829,177
Selling, general and
administrative expenses........ 93,428 32,845,939
--------- ------------
Operating loss................... 22,117 (3,016,762)
Other income (expense)........... 354,074 108,839
Loss on abandonment of
fixed assets................... (1,019,648)
--------- ------------
Income (loss) before
income taxes................... 376,191 (3,927,571)
Income taxes..................... (3,217) (500,000)
--------- ------------
Net loss......................... 372,974 (4,427,571)
Preferred dividends.............. (581,184) (1,175,565)
--------- ------------
Net loss attributable to
common shares.................. $ (208,210) $ (5,603,136)
========= ============
Net loss per common share........ $ (0.31)
============
Weighted average common
shares......................... 2,800,000 18,207,755
========= ============
</TABLE>
See Notes to Pro Forma Unaudited Condensed Consolidated Financial Statements
48
<PAGE> 54
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
MARCH 31, 1995
-------------------------------------------------------------------------------------------------
AUTOMATED TELE-TREND
PRO FORMA COMMUNICATIONS, COMMUNICATIONS, PRO FORMA
PHOENIX(9) AMERICONNECT(10) POOLED INC.(11) INC.(12) ADJUSTMENTS(B)
----------- ---------------- ----------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $14,194,221 $ 4,526,973 $18,721,194 $ 7,041,748 $ 2,201,439
Cost of revenues.............. 9,708,228 3,444,446 13,152,674 4,719,468 1,797,676 $ (49,519)
----------- ------------ ----------- ----------- ----------- ------------
Gross profit.................. 4,485,993 1,082,527 5,568,520 2,322,280 403,763 49,519
Selling, general and
administrative expenses..... 4,269,011 1,042,770 5,311,781 1,957,376 361,336 (344,521)
----------- ------------ ----------- ----------- ----------- ------------
Operating income (loss)....... 216,982 39,757 256,739 364,904 42,427 394,040
Other income (expense)........ (88,979) 5,020 (83,959) (11,937) (12,462) 130,008
----------- ------------ ----------- ----------- ----------- ------------
Net income (loss)............. 128,003 44,777 172,780 352,967 29,965 524,048
Preferred dividends........... (63,190) (63,190) (249,079)
----------- ------------ ----------- ----------- ----------- ------------
$ 64,813 $ 44,777 $ 109,590 $ 352,967 $ 29,965 $ 274,969
=========== ============ =========== =========== =========== ============
Net income (loss) per common
share....................... $ 0.01 $ 0.01 $ 0.01
=========== ============ ===========
Weighted average common
shares...................... 12,545,702 6,370,650 14,902,842 2,800,000
=========== ============ =========== ============
<CAPTION>
MARCH 31, 1996
--------------------------------------------
PRO FORMA PHOENIX(9) AMERICONNECT(10) PRO FORMA
----------- ----------- ---------------- -----------
<S> <<C> <C> <C> <C>
Revenues...................... $27,964,381 $23,071,710 $ 4,264,602 $27,336,312
Cost of revenues.............. 19,620,299 16,616,602 3,202,346 19,818,948
----------- ----------- ------------ -----------
Gross profit.................. 8,344,082 6,455,108 1,062,256 7,517,364
Selling, general and
administrative expenses..... 7,285,972 7,715,095 1,208,779 8,923,874
----------- ----------- ------------ -----------
Operating income (loss)....... 1,058,110 (1,259,987) (146,523) (1,406,510)
Other income (expense)........ 21,650 (37,467) (10,422) (47,889)
----------- ----------- ------------ -----------
Net income (loss)............. 1,079,760 (1,297,454) (156,945) (1,454,399)
Preferred dividends........... (312,269) (312,803) (312,803)
----------- ----------- ------------ -----------
$ 767,491 $(1,610,257) $ (156,945) $(1,767,202)
=========== =========== ============ ===========
Net income (loss) per common
share....................... $ 0.04 $ (0.09) $ (0.02) $ (0.09)
=========== =========== ============ ===========
Weighted average common
shares...................... 17,702,842 17,342,928 7,433,676 20,093,388
=========== =========== ============ ===========
</TABLE>
See Notes to Pro Forma Unaudited Condensed Consolidated Financial Statements
49
<PAGE> 55
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(1) Derived from the historical consolidated balance sheet of Phoenix as
included in Form 10-Q for the quarter ended March 31, 1996.
(2) Derived from the historical balance sheet of AmeriConnect as included in
Form 10-QSB for the quarter ended March 31, 1996.
(3) The pro forma adjustments to the historical balance sheets reflect the
proposed merger between Phoenix and AmeriConnect. The merger is being
accounted for using the pooling of interests method. The adjustments
reflect the issuance of 2,736,882 shares of Phoenix common stock valued at
$14,368,832 in exchange for all of the outstanding stock of AmeriConnect as
of that date. In connection with this transaction, the shares held in
treasury by AmeriConnect were canceled and retired.
(4) Derived from the historical consolidated statement of operations of Phoenix
as included in Form 10-K.
(5) Derived from the historical consolidated statement of operations of
AmeriConnect as included in Form 10-KSB.
(6) Derived from the historical consolidated statement of operations of
Automated Communications, Inc. for the year ended December 31, 1995.
(7) Derived from the historical consolidated statement of operations of
Tele-Trend Communications, LLC for the seven months ended July 31, 1995.
(8) The adjustments to the historical statements of operations reflect the
following:
The amortization of the customer bases acquired and goodwill in both
acquisitions. The customer bases are being amortized over a four year life
using the sum-of-the-years digits method. Goodwill is being amortized over
20 years using the straight line method. Pro forma additional amortization
is $503,392 for the three months ended March 31, 1995, and $1,821,893 for
the year ended December 31, 1995.
In connection with the acquisition of Automated Communications, Inc., a
$4,000,000, 6% note to the sole shareholder was retired and a 9% note for
$1,310,056 will be issued. Interest expense has been reduced by $30,434 for
the three months ended March 31, 1995, and $121,735 for the year ended
December 31, 1995.
As a result of the acquisition of Automated Communications, Inc., the
Company relocated its headquarters and most of its operations to Automated
Communications, Inc.'s facilities in Golden, Colorado. The relocation will
result in substantial reductions in rental and other facilities costs.
General and administrative costs have been reduced by $120,000 for the
three months ended March 31, 1995, and $480,000 for the year ended December
31, 1995, to reflect the savings.
Phoenix reduced selling, general and administrative expenses by $270,000
for the three months ended March 31, 1995, and $1,080,000 for the year
ended December 31, 1995 due to the elimination of certain positions as a
direct result of the acquisition of Automated Communications, Inc.
The Tele-Trend Communications, LLC acquisition was financed by Phoenix
through the short-term issuance of 1,106,700 shares of 9% Convertible
Series F preferred shares at $10 per share. Phoenix also used the net
proceeds to retire all of the outstanding debt and the balance was
invested. Interest has been adjusted by $99,574 for the three months ended
March 31, 1995, and $232,339 for the year ended December 31, 1995 and
preferred dividends by $249,079 for the three months ended March 31, 1995,
and $581,184 for the year ended December 31, 1995.
The adjustments also reflect the additional carrier discounts in the amount
of $49,519 for the three months ended March 31, 1995, and $115,545 for the
year ended December 31, 1995, available under Phoenix's agreements which
reduces the cost of revenues acquired from Tele-Trend Communications, LLC.
Phoenix also reduced selling, general and administrative expenses by
$72,199 for the three months
50
<PAGE> 56
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
ended March 31, 1995, and $168,465 for the year ended December 31, 1995,
due to the elimination of certain positions at Tele-Trend Communications
LLC as a direct result of the acquisition.
(9) Derived from the historical condensed consolidated statement of operations
of Phoenix as included in March 31, 1996 Form 10-Q.
(10) Derived from the historical consolidated statement of operations of
AmeriConnect as included in March 31, 1996 Form 10-QSB.
(11) Derived from the historical statement of operations of Automated
Communications, Inc. for the quarter ended March 31, 1995.
(12) Derived from the historical statement of operations of Tele-Trend
Communications, LLC, for the quarter ended March 31, 1996.
51
<PAGE> 57
DESCRIPTION OF THE PHOENIX CAPITAL STOCK
GENERAL
The authorized capital stock of Phoenix consists of 30,000,000 shares of
Phoenix Common Stock, par value $0.001 per share, and 5,000,000 shares of
Phoenix Preferred Stock, par value $0.001 per share. The Phoenix Board has
authorized 300,000 shares of Series A Preferred Stock ("Series A"), 200,000
shares of Series B Preferred Stock ("Series B"), 1,000,000 shares of Series C
Preferred Stock ("Series C"), 666,666 shares of Series D Preferred Stock
("Series D"), 200,000 shares of Series E Preferred Stock ("Series E"), and
1,200,000 shares of Series F Preferred Stock ("Series F"). At the close of
business on , 1996, there were issued and outstanding shares of
Phoenix Common Stock, shares of Series A,
shares of Series B, shares of Series C, shares of Series D,
shares of Series E, and shares of Series F .
PHOENIX COMMON STOCK
Subject to the restrictions summarized below, holders of Phoenix Common
Stock are entitled to dividends when, as and if declared by the Phoenix Board,
out of funds legally available for that purpose. Before any dividends on Phoenix
Common Stock may be paid or declared and set apart for payment, full cumulative
dividends on the Series A, Series B, Series E and Series F, along with
non-cumulative dividends on Series C and Series D, must be paid or declared and
set apart for payment. Under the terms of Phoenix's line of credit facility,
Phoenix may not declare or pay any dividends (in cash or in stock) on any class
of its capital stock without first obtaining the written consent of the lender.
Holders of shares of Phoenix Common Stock are entitled to one vote per
share on all matters submitted to a vote of stockholders. Stockholders do not
have cumulative voting rights. In the event of any liquidation, dissolution or
winding up of Phoenix, the holders of Phoenix Common Stock are entitled to share
equally and ratably in any assets remaining after the payment of all debts and
liabilities, subject to the prior rights, if any, of the holders of Phoenix
Preferred Stock. Holders of Phoenix Common Stock have no preemptive or other
subscription or conversion rights. Phoenix Common Stock is not subject to
redemption and the outstanding shares are, and the shares issued in connection
with the Merger will be, fully paid and nonassessable.
Phoenix Common Stock is listed on the AMEX under the symbol "PHX." The
transfer agent and registrar for Phoenix Common Stock is Chemical Mellon
Shareholders Services L.L.C.
PHOENIX PREFERRED STOCK
The Phoenix Preferred Stock may be issued in one or more series as may be
determined from time to time by the Phoenix Board. The Phoenix Board has
authority, without a vote or other action by the stockholders, to fix the
dividend rights, dividend rates, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), redemption price or
prices, and the liquidation preferences of any wholly unissued series of Phoenix
Preferred Stock, and the number of shares constituting any such series. The
Phoenix Board is also authorized to adjust the number of shares of any series,
but not below the number of outstanding shares of such series.
The consent of the holders of a majority of the outstanding shares of
Series A, Series B, Series C and Series D, and the consent of the holders of
two-thirds of the outstanding shares of Series F is required to amend the
provisions of the Certificate of Incorporation applicable to the series voting.
In addition, the following number of shares must be outstanding before Phoenix
may make any adverse change to the rights and preferences for such series
provided in the Certificate of Incorporation or Phoenix Bylaws: Series A,
100,000; Series B, 100,000; Series C, 50,000; Series D, 100,000. In the case of
Phoenix Series F Preferred Stock, and so long as at least 200,000 shares of such
series remain outstanding, the consent of two-thirds in interest of the
outstanding shares, voting together as a single class, shall be required before
Phoenix may alter any provision of the Phoenix Certificate of Incorporation or
Phoenix Bylaws that would have an adverse effect on the rights of the holders of
Phoenix Preferred Stock. The rights and preferences in the Phoenix Certificate
of Incorporation do not require such approval by holders of Series E in the case
of such adverse changes to provisions affecting that series.
52
<PAGE> 58
Voting Rights. Holders of Series A, Series B, Series D, Series E, and
Series F are entitled to one vote per share on all matters submitted to a vote
of stockholders. Other than as described above the holders of Phoenix Preferred
Stock vote together with the Phoenix Common Stock as a single class. The holders
of each share of Phoenix Preferred Stock, other than holders of shares of Series
C, are entitled to the number of votes equal to the number of shares of Common
Stock into which the shares of Preferred Stock may be converted, as described
below. Holders of Series C have no voting rights.
So long as at least 200,000 shares of Series F Phoenix Preferred Stock
remain outstanding, holders of the series, voting as a class, are entitled to
elect two directors of Phoenix. At such time as there are no longer 200,000
shares of Series F Phoenix Preferred Stock outstanding, but at least 75,000
shares outstanding, the holders of outstanding shares of such series, voting as
a class, are entitled to elect one director.
Conversion into Phoenix Common Stock. The holders of shares of Series A may
convert each of their shares into four shares of Phoenix Common Stock, subject
to adjustment based on the declaration of dividends and issuance of certain
shares of Phoenix Common Stock. Such adjustments to the number of shares to be
issued are to be made only if the consideration for each of certain newly-issued
shares, immediately prior to such issuance, is below $2.50.
The holders of shares of Series B may convert each of their shares into
five shares of Phoenix Common Stock, subject to adjustment based on the
declaration of dividends and issuance of certain shares of Phoenix Common Stock.
Such adjustments to the number of shares to be issued are to be made only if the
consideration for each of certain newly-issued shares, immediately prior to such
issuance, is below $2.00.
The holders of shares of Series C may convert each of their shares into
Phoenix Common Stock equal to the number obtained by dividing the original
issuance price per share (plus all declared but unpaid dividends on each share)
by one half of the original issuance price per share of Series C. The original
issuance price per share of Series C, as well as other terms of the conversion,
are provided for in an agreement between Phoenix and Sprint Communications
Company L.P. (the "Sprint Agreement"), a copy of which is available from
Phoenix.
The holders of shares of Series D may convert each of their shares into one
share of Phoenix Common Stock, subject to adjustment based on the declaration of
dividends and issuance of certain shares of Phoenix Common Stock. Such
adjustments to the number of shares to be issued are to be made only if the
consideration for each of certain newly-issued shares, immediately prior to such
issuance, is below $1.50.
The holders of shares of Series E may convert each of their shares into
5.714 shares of Phoenix Common Stock, subject to adjustment based on the
declaration of dividends and issuance of certain shares of Phoenix Common Stock.
Such adjustments to the number of shares to be issued are to be made only if the
consideration for each of certain newly-issued shares, immediately prior to such
issuance, is below $1.75.
The holders of shares of Series F may convert each of their shares into
four shares of Phoenix Common Stock, subject to adjustment based on the
declaration of dividends and issuance of certain shares of Phoenix Common Stock.
Such adjustments to the number of shares to be issued are to be made only if the
consideration for each of certain newly-issued shares, immediately prior to such
issuance, is below $2.50. In addition, upon the vote or consent of holders of at
least two-thirds in interest of Series F, all of the shares of Series F shall be
convertible into Phoenix Common Stock, with each share convertible into four
shares of Phoenix Common Stock, subject to adjustment based on the declaration
of dividends and issuance of certain shares of Phoenix Common Stock.
The conversion formula for each series of Phoenix Preferred Stock is
subject to customary antidilution provisions.
DIVIDENDS
The holders of shares of Phoenix Preferred Stock are entitled to the
following cumulative annual dividend: Series A, $.90 per share; Series B, $.90
per share; Series E, $.90 per share; Series F, 9% per share. The holders of
Series C are entitled to a noncumulative annual dividend of 4% of the original
issuance price
53
<PAGE> 59
determined in accordance with the Sprint Agreement. The holders of shares of
Series D are entitled to a non-cumulative annual dividend of $.90 per share,
which does not accrue unless declared by the Phoenix Board. In the case of
Series F, at the option of Phoenix, dividends may be paid in shares of Phoenix
Common Stock, in lieu of cash. The number of shares of stock to be issued as
part of such dividend will equal the number necessary so that the fair market
value of all such shares equals the cash dividend otherwise payable. The fair
market value is determined by the trading price of the stock or, in the absence
of an established trading market, as determined in good faith by the Phoenix
Board.
PRIORITIES AS TO DIVIDENDS AND PROCEEDS IN LIQUIDATION
Series A, Series B and Series F are senior in priority, regarding dividend
rights and rights in liquidation, to Series C and Series D and Phoenix Common
Stock. Series C is senior in priority regarding dividend rights and rights in
liquidation to Series D and Phoenix Common Stock. Series D is senior in priority
regarding dividend rights and rights in liquidation to Phoenix Common Stock.
Series E is senior in priority regarding dividend rights to Phoenix Common Stock
and is junior to Series F. The rights of holders of Series E in liquidation are
senior in priority to Phoenix Common Stock. Series F is senior in priority to
any other class or series of capital stock which does not expressly provide for
any ranking as to dividends, liquidation, dissolution or winding up.
PROCEEDS IN LIQUIDATION
In the event of any liquidation, dissolution or winding up of Phoenix, the
holders of the following series of Phoenix Preferred Stock shall be entitled to
the following distributions out of the assets of Phoenix available for
distribution to stockholders, on a per share basis:
Series A and Series B: $10.00 (as adjusted for combinations,
consolidations, stock distributions or stock dividends regarding such
shares) plus all accrued but unpaid dividends thereon.
Series C: the par value of Series C (as adjusted for combinations,
consolidations, stock distributions or stock dividends regarding such
shares) plus all accrued but unpaid dividends.
Series D: the original issue price of Series D (initially $1.50) (as
adjusted for combinations, consolidations, stock distributions or stock
dividends regarding such shares) plus all accrued but unpaid dividends.
Series E: $10.00 (as adjusted for combinations, consolidations, stock
distributions or stock dividend regarding such shares) plus all accrued but
unpaid dividends.
Series F: $10.00 (as adjusted for combinations, consolidations, stock
distributions or stock dividend regarding such shares) plus all accrued but
unpaid dividends.
REDEMPTION
The Series A may be redeemed by Phoenix if (i) the market price of the
outstanding Phoenix Common Stock has, for at least 20 consecutive trading days,
been at least twice the amount of the conversion price applicable to such series
(as specified above), and (ii) the managing underwriter of a registered public
offering of Phoenix Common Stock agrees to register and offer at least one half
of the shares of Phoenix Common Stock issued to the holders of such series in a
conversion into Phoenix Common Stock. The Series B and Series E may be redeemed
by Phoenix if (i) the market price of the outstanding Phoenix Common Stock has,
for at least 20 consecutive trading days, been at least twice the amount of the
conversion price applicable to such series (as specified above), and (ii) the
Phoenix Common Stock may be traded on a public market or sold pursuant to Rule
144. The Series F may be redeemed by Phoenix if the market price of the
outstanding Phoenix Common Stock has, for at least 20 consecutive trading days,
been at least twice the amount of the conversion price applicable to such series
(as specified above). If a holder of Series F does not respond to the notice of
redemption, then such holder's shares shall be deemed voluntarily converted into
Phoenix Common Stock.
54
<PAGE> 60
The redemption price for the shares of each series is $10.00 plus all
accrued but unpaid dividends on each share of the series being redeemed.
The Series C and Series D Phoenix Preferred Stock are not redeemable by
Phoenix or any holder.
DESCRIPTION OF THE AMERICONNECT CAPITAL STOCK
GENERAL
The authorized capital stock of AmeriConnect consists of 20,000,000 shares
of AmeriConnect Common Stock, par value $.01 per share, and 10,000,000 shares of
AmeriConnect Class A Stock, par value $.00001 per share. The following summary
of the terms of AmeriConnect Stock does not purport to be complete and is
qualified in its entirety by reference to the terms set forth in the
AmeriConnect Certificate of Incorporation. For a discussion of the material
differences between the rights of the holders of the AmeriConnect Stock and the
rights of the holders of Phoenix Common Stock, see "Comparison of Rights of
Holders of AmeriConnect Stock and Phoenix Common Stock."
AMERICONNECT COMMON STOCK
The outstanding AmeriConnect Common Stock is fully paid and nonassessable
and is not entitled to preemptive rights or subscription rights.
AmeriConnect Common Stock is not listed on an exchange, but price
information for such stock may be obtained from the NASDAQ Bulletin Board, which
is a quotation service.
Holders of outstanding shares of AmeriConnect Common Stock are entitled to
share ratably in dividends, according to the number of shares held by each
holder, from sources legally available therefor as, if and when declared by the
AmeriConnect Board. In the case of liquidation resulting in the distribution of
assets to AmeriConnect Stockholders, the assets will be paid or distributed to
the holders of AmeriConnect Common Stock ratably according to the number of
shares held by each. The transfer agent and registrar for AmeriConnect Common
Stock is American Stock Transfer and Trust Company.
Holders of AmeriConnect Common Stock possess voting power for all purposes
and are entitled at each stockholders' meeting of AmeriConnect, as to each
matter to be voted upon, to cast one (1) vote, in person or by proxy, for each
share of AmeriConnect Common Stock registered in their names on the stock
transfer books of AmeriConnect. Holders of AmeriConnect Common Stock are not
entitled to cumulative voting rights in the election of directors.
AMERICONNECT CLASS A STOCK
The holders of AmeriConnect Class A Stock are entitled to the same rights
and privileges, and share equally in the distribution of any funds which the
AmeriConnect Board may declare, set aside or pay out as dividends. Such stock
also shares equally in the distribution of any and all dividends and in the
distribution of assets in the event of liquidation and is alike in all respects
to the AmeriConnect Common Stock, except that holders of AmeriConnect Class A
Stock are entitled at each stockholders' meeting of AmeriConnect, as to each
matter to be voted upon, to cast five votes, in person or by proxy, for each
share of AmeriConnect Class A Stock registered in their names on the stock
transfer books of AmeriConnect.
In addition, AmeriConnect Class A Stock is convertible into AmeriConnect
Common Stock, share for share, at the option of the holder and upon the
surrender of the certificates to AmeriConnect. Also, any sale, exchange,
delivery, assignment, bequest or other transfer, voluntary or involuntary, of
AmeriConnect Class A Stock to anyone other than a record holder of AmeriConnect
Class A Stock automatically converts the AmeriConnect Class A Stock into
AmeriConnect Common Stock.
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COMPARISON OF RIGHTS OF HOLDERS OF AMERICONNECT STOCK
AND PHOENIX COMMON STOCK
The following is a summary of material differences between the rights of
holders of Phoenix Common Stock and holders of AmeriConnect Stock. As each of
Phoenix and AmeriConnect is organized under and subject to the laws of Delaware,
these differences arise from various provisions of the respective Certificates
of Incorporation and Bylaws of Phoenix and AmeriConnect.
The Phoenix Certificate of Incorporation and AmeriConnect Certificate of
Incorporation each provide that a director shall not be liable to the respective
corporation or its stockholders for monetary damages for breach of his fiduciary
duty. The AmeriConnect Certificate of Incorporation provides that any repeal or
modification of the limits on director liability in the AmeriConnect Certificate
of Incorporation by the stockholders shall not adversely affect any right or
protection of a director existing at the time of such repeal or modification.
The AmeriConnect Certificate of Incorporation provides that, in cases of
the settlement of the claims of creditors or stockholders bringing suit, if a
three-fourths majority in value of the creditors or class of creditors, or
three-fourths of the stockholders, or class of stockholders, agree to any
compromise, such compromise shall be binding on all creditors or stockholders.
The Phoenix Bylaws provide for a special meeting of stockholders upon the
written request of stockholders holding 10% of the voting power of all
stockholders. The AmeriConnect Bylaws provide for special meeting of
stockholders upon the written request of stockholders holding 20% of the
outstanding shares of AmeriConnect Common Stock.
The Phoenix Bylaws provide for seven directors. The AmeriConnect Bylaws
provide for a variable number of directors (which number shall be not less than
three), which may be fixed by a vote of a majority of the entire AmeriConnect
Board.
The AmeriConnect Bylaws provide that a director may be removed by a
majority vote of the AmeriConnect Board, in addition to a majority of the votes
of stockholders. The Phoenix Bylaws provide for the removal solely by a special
meeting of stockholders holding a majority of the outstanding shares entitled to
vote at an election of the Phoenix Board.
The Phoenix Bylaws provide that they may be amended by the Phoenix
stockholders or the Phoenix Board. However, the Phoenix Board may not amend the
Phoenix Bylaws fixing the qualifications, classifications, term of office or
compensation of directors. The AmeriConnect Bylaws may be amended by the
AmeriConnect Board or by the AmeriConnect Stockholders at AmeriConnect's annual
meeting.
The foregoing summary does not purport to be a complete statement of the
rights of holders of Phoenix Common Stock and AmeriConnect Stock under, and is
qualified in its entirety by reference, to Delaware law and the respective
Certificates of Incorporation and Bylaws of Phoenix and AmeriConnect.
LEGAL OPINIONS
The validity of the shares of Phoenix Common Stock to be issued in
connection with the Merger will be passed upon for Phoenix by Freeborn & Peters,
Denver, Colorado.
Freeborn & Peters, counsel for Phoenix, has delivered an opinion concerning
Federal income tax consequences of the Merger.
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EXPERTS
The consolidated financial statements and related schedules of Phoenix at
December 31, 1995 and 1994, and for each of the three years in the period ended
December 31, 1995, included in Phoenix's Annual Report on Form 10-K for the year
ended December 31, 1995, which is incorporated by reference in this Proxy
Statement/Prospectus, have been audited by Grant Thornton LLP, independent
certified public accountants, as set forth in their reports thereon included
therein and incorporated herein by reference in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of AmeriConnect have been audited by
Grant Thornton LLP, independent certified public accountants, as indicated in
their reports with respect thereto, and are included in AmeriConnect's report on
Form 10-KSB, for the year ended December 31, 1995, and incorporated herein by
reference, in reliance upon the authority of such firm as experts in accounting
and auditing.
SOLICITATION OF PROXIES
The cost of solicitation of proxies will be paid by AmeriConnect, except
that such costs shall be paid by Phoenix if the Merger Agreement is terminated
by AmeriConnect because of a willful breach by Phoenix of any of its
representations, warranties, covenants or agreements set forth in the Merger
Agreement. In addition to solicitation by mail, proxies may be solicited in
person by directors, officers and employees of AmeriConnect or AmeriConnect's
financial advisors, without additional compensation, and by telephone, telegram,
teletype, facsimile or similar method. AmeriConnect will reimburse brokers,
fiduciaries, custodians and other nominees for reasonable out-of-pocket expenses
incurred in sending this Proxy Statement/Prospectus and other proxy materials
to, and obtaining instructions relating to such materials from, beneficial
owners of stock.
AmeriConnect will also reimburse custodians, nominees and fiduciaries for
forwarding proxies and proxy materials to the beneficial owners of its stock in
accordance with regulations of the SEC and the NASD.
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APPENDIX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of June 14, 1996
by and among PHOENIX NETWORK, INC., a Delaware corporation ("Parent"), Phoenix
Merger Corp., a Delaware corporation ("Sub"), and AmeriConnect, Inc., a Delaware
corporation (the "Company").
WHEREAS, the authorized capital stock of Parent consists of 5,000,000
shares of Preferred Stock, $.001 par value ("Parent Preferred Stock"), and
30,000,000 shares of Common Stock, $.001 par value ("Parent Common Stock");
WHEREAS, the authorized capital stock of Sub consists of 100 shares of
Common Stock, $.001 par value ("Sub Common Stock");
WHEREAS, all of the issued and outstanding shares of Sub Common Stock are
owned by Parent;
WHEREAS, the authorized capital stock of the Company consists of 20,000,000
shares of Common Stock, par value $.01 per share ("Company Common Stock"), and
10,000,000 shares of Class A Common Stock, par value $.00001 per share (the
"Company Class A Common Stock" and, together with the Company Common Stock, the
"Company Stock");
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
deem it advisable and in the best interests of their respective stockholders
that Sub shall merge with and into the Company upon the terms and subject to the
conditions of this Agreement;
WHEREAS, for financial accounting purposes, it is a condition to the
Closing that the merger be accounted for as a "pooling of interests;"
WHEREAS, the parties intend that such merger be treated as a reorganization
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended (the "Code"); and
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein contained, the parties hereto agree as set forth
below:
1. THE MERGER AND EFFECTIVE TIME.
1.01. The Merger. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time (as defined in Section 1.02 hereof), the
separate existence and corporate organization of Sub shall cease and the Sub
shall be merged with and into the Company (the "Merger"), which shall be (and is
hereinafter sometimes referred to as) the "Surviving Corporation." The corporate
existence of the Company with all its rights, privileges, powers and franchises
shall continue unaffected and unimpaired by the Merger, and as the Surviving
Corporation it shall be governed by the laws of the State of Delaware and
succeed to all rights, privileges, powers, franchises, assets, liabilities and
obligations of Sub in accordance with the Delaware General Corporation Law (the
"DGCL"). The Merger shall have the effects specified in the DGCL.
1.02. The Effective Time of the Merger. Upon the terms and subject to the
conditions of this Agreement, the Merger shall become effective at the time (the
"Effective Time") of filing with the Secretary of State of the State of Delaware
of a certificate of merger (the "Certificate of Merger") in such form as is
required by, and executed in accordance with, the applicable provisions of the
DGCL, or at such later time as may be agreed to by Parent and the Company and
specified in the Certificate of Merger. The parties will cause the Certificate
of Merger to be filed with the Secretary of State of the State of Delaware as
soon as practicable on or after the Closing Date (as defined in Section 1.03).
1.03. Closing. The closing of the Merger (the "Closing") will take place at
10:00 a.m. local time, on a date specified by the parties, but in no event later
than two business days after the satisfaction or, if permissible, waiver of the
conditions set forth in Articles 7, 8 and 9 hereof (the date and time of the
Closing
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being hereinafter referred to as the "Closing Date"), at the offices of Freeborn
& Peters, 950 Seventeenth Street, Suite 2600, Denver, Colorado 80202, unless
another time or place is agreed to by the parties hereto.
2. CERTIFICATE OF INCORPORATION; BY-LAWS; DIRECTORS AND OFFICERS.
2.01. Certificate of Incorporation. The Certificate of Incorporation of the
Company, as in effect immediately prior to the Effective Time, shall be amended
at the Effective Time to change Article Fourth thereof to read in full as
follows: "FOURTH: The total number of shares which the Corporation shall be
authorized to issue is 100 shares of common stock, $.001 par value."
From and after the Effective Time, said Certificate of Incorporation, as so
amended, shall continue as the Certificate of Incorporation of the Surviving
Corporation, until amended as provided by law.
2.02. By-laws. The By-laws of the Company, as in effect at the Effective
Time, shall continue to be the Bylaws of the Surviving Corporation, until
altered, amended or repealed in accordance with law, the Certificate of
Incorporation of the Surviving Corporation or said By-laws.
2.03. Directors and Officers. The directors of the Surviving Corporation at
and immediately following the Effective Time shall be Wallace M. Hammond and
Jeffrey Bailey, to serve in accordance with the By-laws of the Surviving
Corporation. The officers of the Surviving Corporation at and immediately
following the Effective Time shall be Wallace M. Hammond and Jeffrey Bailey, to
serve in accordance with the By-laws of the Surviving Corporation.
3. CONVERSION AND EXCHANGE OF SHARES.
The manner and basis of converting at the Effective Time Company Stock into
Parent Common Stock and the exchange of certificates therefor shall be as set
forth herein.
3.01. Conversion of Shares. (i) Each share of Sub Common Stock issued and
outstanding as of the Effective Time shall, by virtue of the Merger and without
any action on the part of Parent, the sole stockholder of Sub, be converted into
one share of legally and validly issued, fully paid and nonassessable common
stock, $.001 par value, of the Surviving Corporation. Each stock certificate of
Sub evidencing ownership of Sub Common Stock shall by virtue of the Merger
evidence ownership of common stock of the Surviving Corporation.
(ii) Each share of Company Stock held in the treasury of the Company and
each share of Company Stock owned by any Subsidiary (as defined in Section 4.03
below) of the Company immediately prior to the Effective Time shall be canceled
and retired and shall cease to exist and no Parent Common Stock or other
consideration shall be delivered in exchange for such shares.
(iii) Subject to Section 3.05, each share of Company Stock issued and
outstanding as of the Effective Time (except shares of Company Stock canceled as
provided in (ii) above and shares held by a Company Appraisal Rights Stockholder
(as hereinafter defined) who has perfected his or her appraisal rights as set
forth in Section 3.01 (v)) shall, by virtue of the Merger and without any action
on the part of the holder thereof, be converted into the right to receive the
Conversion Number of fully paid and nonassessable shares of Parent Common Stock.
For purposes of this Section 3.01(iii), the following terms shall have the
following meanings:
(A) "Conversion Number" shall mean the number equal to the quotient
obtained by dividing (1) the quotient obtained by dividing the Merger
Consideration (as hereinafter defined) by the Closing Parent Common Stock
Price by (2) the sum of (a) the number of shares of Company Stock
outstanding immediately prior to the Effective Time and (b) the number of
shares of Company Stock underlying Company Options (as hereinafter defined)
outstanding immediately prior to the Effective Time;
(B) "Merger Consideration" shall mean an amount equal to $15,130,119
minus (i) the Stockholders' Equity Adjustment Amount and (ii) all severance
payments to be made by the Company to the officers and directors of the
Company because of this Agreement and the transactions contemplated hereby,
to the extent such payments are not already reflected in the Company's
Balance Sheet (as hereinafter defined);
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(C) "Closing Parent Common Stock Price" shall mean (i) $5.25 if the
closing price of a share of Parent Common Stock on the American Stock
Exchange on the day immediately preceding the Closing (the "Closing Bid
Price") is equal to or greater than $4.50 and equal to or less than $6.00,
(ii) if the Closing Bid Price is less than $4.50, $5.25 minus 50% of the
amount the Closing Bid Price is less than $4.50, or (iii) if the Closing
Bid Price is more than $6.00, $5.25 plus 50% of the amount the Closing Bid
Price is greater than $6.00.
(D) "Stockholders' Equity Adjustment Amount" shall be equal to the
amount, if any, by which the Stockholders' Equity Amount is less than
$250,000;
(E) "Stockholders' Equity Amount" shall mean an amount equal to the
number that results from (1) the stockholders' equity of the Company as
determined from the Company's balance sheet, prepared in accordance with
GAAP, as of the close of business on the last day of the month preceding
the Closing Date (the "Company's Balance Sheet"), plus (2) the Sprint
Adjustment Amount, minus (3) all Transaction Expenses that accrue or are
paid after the date of the Company's Balance Sheet, and minus (4) all
liabilities of the Company to Sprint Communications Company L.P. ("Sprint")
in respect of shortfall amounts as of the date of the Company's Balance
Sheet; provided, that, in the event that such sum exceeds $250,000, the
Stockholders' Equity Amount shall mean an amount equal to $250,000;
(F) "Sprint Adjustment Amount" shall mean an amount equal to any
billing credits which the Company or the Parent on behalf of the Company is
entitled to receive from Sprint prior to the Company's Balance Sheet that
are not otherwise reflected in the Company's Balance Sheet;
(G) "Transaction Expenses" shall mean accounting fees and expenses,
attorney fees and expenses, and investment banking fees and expenses of
George K. Baum & Company paid or accrued for by the Company with regard to
the negotiation and execution of this Agreement and the consummation of the
transactions set forth herein.
(iv) Any holder of Company Stock that, as of the Effective Time, has taken
all steps necessary to perfect his or her appraisal rights pursuant to Section
262 of the DGCL (a "Company Appraisal Rights Stockholder") and who subsequently
withdraws or loses its appraisal rights after the Effective Time, shall be
deemed for purposes of the Merger to have consented to the Merger and shall
receive the consideration set forth in Section 3.01(iii).
(v) Any Company Appraisal Rights Stockholder that has effectively perfected
his or her appraisal rights pursuant to Section 262 of the DGCL shall receive
all cash for his or her Company Stock in an amount determined in accordance with
the provisions of Section 262 of the DGCL.
(vi) In the event of any stock split, combination, reclassification,
recapitalization, exchange, stock dividend or other distribution payable in
Parent Common Stock with respect to shares of Parent Common Stock (or if a
record date with respect to any of the foregoing should occur) during the period
between the date of this Agreement and the Effective Time, then the Conversion
Number will be appropriately adjusted to reflect such stock split, combination,
reclassification, recapitalization, exchange, stock dividend or other
distribution.
3.02. Exchange of Certificates. (i) As of the Effective Time, Parent shall
deposit with such bank or trust company designated by Parent and reasonably
acceptable to the Company (the "Exchange Agent"), for the benefit of the holders
of shares of Company Stock, for exchange in accordance with this Article 3,
through the Exchange Agent, certificates representing the shares of Parent
Common Stock (such shares of Parent Common Stock, together with any dividends or
distributions with respect thereto being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Section 3.01 in exchange for outstanding
shares of Company Stock. The Exchange Agent shall, pursuant to irrevocable
instructions, deliver the Parent Common Stock contemplated to be issued pursuant
to Section 3.01 out of the Exchange Fund. The Exchange Fund shall not be used
for any other purpose. Parent Common Stock into which Company Stock shall be
converted pursuant to the Merger shall be deemed to have been issued at the
Effective Time.
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(ii) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of Company Stock (the "Certificates") whose shares were
converted pursuant to Section 3.01 into the right to receive shares of Parent
Common Stock (A) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Parent and the Company may
reasonably specify) and (B) instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing shares of Parent
Common Stock. Upon surrender of a Certificate for cancellation to the Exchange
Agent, together with such letter of transmittal, duly executed, and such other
documents as Parent or the Exchange Agent shall reasonably request, the holder
of such Certificate shall be entitled to receive promptly in exchange therefor a
certificate representing that number of shares (rounded down to the nearest
whole number) of Parent Common Stock which such holder has the right to receive
pursuant to the provisions of this Article 3 (together with any dividends or
distributions with respect thereto pursuant to Section 3.03 and any cash in lieu
of fractional shares of Parent Common Stock pursuant to Section 3.05), and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Company Stock which is not registered in the transfer
records of the Company, a certificate representing the proper number of shares
of Parent Common Stock may be issued to a transferee if the Certificate
representing such Company Stock is presented to the Exchange Agent, accompanied
by all documents required to evidence and effect such transfer and by evidence
that any applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 3.02, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender the certificate representing shares of Parent Common Stock and cash in
lieu of any fractional shares of Parent Common Stock as contemplated by this
Section 3.02 and Section 3.05, respectively. The Exchange Agent shall not be
entitled to vote or exercise any rights of ownership with respect to the Parent
Common Stock held by it from time to time hereunder, except that it shall
receive and hold all dividends or other distributions paid or distributed with
respect thereto for the account of persons entitled thereto.
3.03. Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby, and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to Section 3.05, unless and
until the holder of such Certificate shall surrender such Certificate in
accordance with Section 3.02. Subject to the effect of applicable laws,
following surrender of any such Certificate, there shall be paid to the record
holder of the certificates representing whole shares of Parent Common Stock
issued in exchange therefor, without interest, (i) at the time of such
surrender, the amount of any cash payable in lieu of a fractional share of
Parent Common Stock to which such holder is entitled pursuant to Section 3.05
and the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Parent
Common Stock, and (ii) at the appropriate payment date, the amount of dividends
or the distributions with a record date on or after the Effective Time but prior
to surrender and a payment date subsequent to surrender payable with respect to
such whole shares of Parent Common Stock. Subject to applicable law, no holder
of an unsurrendered Certificate shall be entitled, until the surrender of such
Certificate to vote the shares of Parent Common Stock into which his Company
Stock shall have been converted.
3.04. No Further Ownership Rights in Company Stock. All shares of Parent
Common Stock issued upon the surrender for exchange of shares of Company Stock
in accordance with the terms hereof (including any cash paid pursuant to Section
3.03 or 3.05) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Stock, subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have been
declared or made by the Company on such shares of Company Stock in accordance
with the terms of this Agreement or prior to the date hereof and which remain
unpaid at the Effective Time, and, on and after the Effective Time, there shall
be no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of Company Stock which were outstanding
immediately prior to the
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Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Article 3.
3.05. No Fractional Shares. (i) No certificates or scrip representing
fractional shares of Parent Common Stock shall be issued in the Merger upon the
surrender for exchange of Certificates pursuant to Section 3.02 and such
fractional interests shall not entitle the owner thereof to vote or to any
rights as a security holder of Parent.
(ii) All fractional shares of Parent Common Stock that a holder of Company
Stock would otherwise be entitled to receive as a result of the Merger (the
"Excess Shares") shall be aggregated by the Exchange Agent and sold on the
American Stock Exchange ("AMEX") through one or more member firms of the AMEX
and shall be executed in round lots to the extent practicable. Until the net
proceeds of such sale or sales have been distributed to the holders of Company
Stock, the Exchange Agent will hold such proceeds in trust for the holders of
Company Stock (the "Common Shares Trust"). Parent shall pay all commissions,
transfer taxes and other out-of-pocket transaction costs, including the expenses
and compensation of the Exchange Agent, incurred in connection with such sale of
the Excess Shares. The Exchange Agent shall determine the portion of the Common
Shares Trust to which each holder of Company Stock shall be entitled, if any, by
multiplying the amount of the aggregate net proceeds comprising the Common
Shares Trust by a fraction, the numerator of which is the amount of the
fractional share interest to which such holder of Company Stock is entitled and
the denominator of which is the aggregate amount of fractional share interests
to which all holders of Company Stock are entitled.
(iii) As soon as practicable after the determination of the amount of cash,
if any, to be paid to holders of Company Stock in lieu of any fractional share
interests, the Exchange Agent shall mail such amounts to such holders of Company
Stock; provided, that no such amount shall be paid to any holder of Company
Stock prior to the surrender by such holder of the Certificate formerly
representing such holder's Company Stock.
3.06. Termination of Exchange Fund. Any portion of the Exchange Fund and
the Common Shares Trust which remains undistributed to the stockholders of the
Company as of the date which is twelve months after the Effective Time shall be
delivered to Parent, upon demand, and any stockholders of the Company who have
not theretofore complied with this Article 3 shall thereafter look only to
Parent for payment of their claim for Parent Common Stock, any cash in lieu of
fractional shares of Parent Common Stock pursuant to Section 3.05 and any
dividends or distributions with respect to Parent Common Stock pursuant to
Section 3.03.
3.07. No Liability. None of Parent, the Surviving Corporation or the
Exchange Agent shall be liable to any holder of shares of Company Stock or
Parent Common Stock, as the case may be, for such shares (or dividends or
distributions with respect thereto) or cash from the Common Shares Trust
delivered to a state abandoned property administrator or other public official
pursuant to any applicable abandoned property, escheat or similar law.
3.08. Lost Certificates. In the event any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed, the Exchange Agent
will issue in exchange for such lost, stolen or destroyed Certificate the shares
of Parent Common Stock (and any dividends or distributions with respect thereto
and any cash pursuant to Section 3.05) deliverable in respect thereof as
determined in accordance with Section 3.02. When authorizing such payment in
exchange for any lost, stolen or destroyed Certificate, the person to whom the
Parent Common Stock is to be issued shall, as a condition precedent to the
issuance thereof, give Parent a bond satisfactory to Parent in such sum as it
may direct or otherwise indemnify Parent in a manner satisfactory to Parent
against any claim that may be made against Parent or the Surviving Corporation
with respect to the Certificate alleged to have been lost, stolen or destroyed.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as disclosed in the schedule of exceptions (the "Company Schedule of
Exceptions") attached hereto and made a part hereof, the Company represents and
warrants to Parent and Sub as follows:
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4.01. Organization. The Company and each of its Subsidiaries (as defined in
Section 4.03) is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, has requisite power
and authority to carry on its business now being conducted and to own or lease
and operate the assets and properties now owned or leased and operated by it,
except where the failure to be so organized, existing and in good standing or to
have such power and authority would not individually or in the aggregate have a
material adverse effect on the business, operations, properties, assets,
liabilities, condition (financial or otherwise), prospects or results of
operations of the Company and its Subsidiaries, taken as a whole (a "Company
Material Adverse Effect"). Each of the Company and its Subsidiaries is duly
qualified or licensed to do business and in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
where the failure to be so duly qualified or licensed and in good standing would
not, individually or in the aggregate, have a Company Material Adverse Effect.
4.02. Capitalization. As of the date hereof, the authorized capital stock
of the Company consists of 20,000,000 shares of Company Common Stock and
10,000,000 shares of Company Class A Common Stock. As of the close of business
on June 6, 1996, (i) 6,339,361 shares of Company Common Stock were issued and
outstanding, (ii) 592,033 shares of Company Class A Common Stock were issued and
outstanding, (iii) 180,250 shares of Company Common Stock were held by the
Company in its treasury and (iv) 5,970,000 shares of Company Class A Common
Stock were held in its treasury. All the outstanding shares of Company Stock
are, and all shares of Company Stock which will be outstanding at the Effective
Time will be, duly authorized and validly issued, fully paid and nonassessable,
are not and will not be subject to or issued in violation of any preemptive
rights. All outstanding Company Options (as hereinafter defined), granted by the
Company have been duly granted in accordance with the terms of the Company Stock
Option Plans (as hereinafter defined). The Company Stock Option Plans that have
been adopted in accordance with the DGCL, and the Company's Certificate of
Incorporation and By-laws, by the board of directors and the stockholders of the
Company. The Company has reserved sufficient shares of Company Common Stock for
issuance upon the exercise of outstanding Company Options. No bonds, debentures,
notes or other indebtedness having general voting rights (or convertible into
securities having such rights) of the Company are issued or outstanding. There
are no outstanding contractual obligations of the Company to repurchase, redeem
or otherwise acquire any shares of capital stock of the Company and, except as
contemplated by this Agreement, there are not now, and at the Effective Time
there will not be, any voting trusts or other agreements or understandings to
which the Company is a party or is bound which will limit in any way the
solicitation of proxies by or on behalf of the Company from, or the casting of
votes by, the stockholders of the Company with respect to the Merger. As of June
6, 1996, 470,500 shares of Company Common Stock were reserved for issuance upon
the exercise of stock options outstanding as of the date hereof (the "Company
Options") under the Company's 1988 Stock Option Plan (the "1988 Plan") and the
Company's 1994 Stock Option Plan (the "1994 Plan" and, together with the 1988
Plan, the "Company Stock Option Plans"). Except for the Company Options, there
are no options, calls, subscriptions, warrants, rights, agreements or
commitments of any character obligating the Company to issue shares of its
capital stock or to register shares of its capital stock under the Securities
Act of 1933, as amended (the "Securities Act"), or any other applicable
securities laws.
4.03. Subsidiaries. Section 4.03 of the Company Schedule of Exceptions sets
forth the name of each Subsidiary (as defined below) of the Company, the percent
of outstanding voting stock or other equity interest of such Subsidiary held
directly or indirectly by the Company, the jurisdiction of such Subsidiary's
organization and the other jurisdictions in which such Subsidiary is qualified
to do business. The Company owns, directly or indirectly, free and clear of all
covenants, conditions, restrictions, voting trust arrangements, voting
agreements, liens, charges, encumbrances, options and adverse claims and rights
of any kind whatsoever, and has the unrestricted power to dispose of and vote,
all of the outstanding capital stock or other equity interest held by it of each
Subsidiary. Except as disclosed in Section 4.03 of the Company Schedule of
Exceptions, there are no outstanding options, warrants or other rights to
subscribe for or purchase from the Company or any Subsidiary, or any plans,
contracts or commitments providing for the issuance of, or the granting of
rights to acquire (i) any capital stock of or other ownership interest in any
Subsidiary or (ii) any securities convertible into or exchangeable for any
capital stock of or other ownership interests in any
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Subsidiary. All of the outstanding shares of each class of capital stock of each
Subsidiary have been validly issued, are fully paid and non-assessable and were
not issued in violation of any preemptive rights. Except for the Subsidiaries,
neither the Company nor any Subsidiary of the Company owns greater than a twenty
percent (20%) equity interest, directly or indirectly, in any corporation,
partnership, joint venture, business, trust or other entity, other than any
investments owned by Company Employee Plans. As used in this Agreement, the term
"Subsidiary" means, with respect to any party, any corporation or other
organization, whether incorporated or unincorporated, of which (A) such party or
any other Subsidiary of such party is a general partner (excluding partnerships
the general partnership interests of which held by such party or any Subsidiary
of such party do not have a majority of the voting interest in such
partnerships) or (B) at least a majority of the securities or other interests
having by their terms ordinary voting power to elect a majority of the board of
directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or controlled
by such party or by any one or more of such party's Subsidiaries, or by such
party and one or more of its Subsidiaries.
4.04. Authority. The Company has the requisite power and authority to
execute and deliver this Agreement and all other agreements and documents
contemplated hereby and, subject, with respect to consummation of the Merger, to
approval of this Agreement and the Merger by the stockholders of the Company in
accordance with the DGCL and the Company's Certificate of Incorporation, to
perform its obligations hereunder. The execution, delivery and performance of
this Agreement and all other agreements and documents contemplated hereby and
the consummation of the Merger and of the other transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of the
Company, subject, with respect to consummation of the Merger, to approval of
this Agreement and the Merger by the stockholders of the Company in accordance
with the DGCL and the Company's Certificate of Incorporation. This Agreement has
been duly executed and delivered by the Company and, subject, with respect to
consummation of the Merger, to the approval of this Agreement and the Merger by
the stockholders of the Company in accordance with the DGCL and the Company's
Certificate of Incorporation, and, assuming this Agreement constitutes the valid
and binding obligation of Parent and Sub, constitutes the valid and binding
obligations of the Company, enforceable against the Company in accordance with
its terms, except as may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally, and subject to general principles of equity.
4.05. Consents and Approvals; No Violations. Except for (i) filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Act, the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
promulgated thereunder, (ii) filings as may be required under any state
securities or blue sky laws, (iii) any filing of a premerger notification report
by the Company required under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), and the expiration of the applicable
waiting period, (iv) the filing and recordation of the Certificate of Merger as
required by the DGCL, (v) such filings, authorizations, orders and approvals
(the "FCC Approvals") as may be required under the Communications Act of 1934,
as amended (the "Communications Act"), and (vi) the necessary approvals, if any,
of the state public utilities commissions or similar state regulatory bodies
("PUCs") having jurisdiction over the Company or any of its Subsidiaries (the
"Company PUC Approvals"), pursuant to applicable state laws or regulations, no
filing with or notice to, and no permit, authorization, consent or approval of,
any court or tribunal or administrative, governmental or regulatory body, agency
or authority (a "Governmental Entity") is necessary for the execution and
delivery by the Company of this Agreement or the consummation by the Company of
the transactions contemplated hereby, except where the failure to obtain such
permits, authorizations, consents or approvals or to make such filings or give
such notice would not have a Company Material Adverse Effect. Subject, with
respect to consummation of the Merger, to the approval of this Agreement and the
Merger by the stockholders of the Company in accordance with the DGCL and the
Company's Certificate of Incorporation, neither the execution, delivery and
performance of this Agreement by the Company nor the consummation by the Company
of the transactions contemplated hereby will (a) conflict with or result in any
breach of any provision of the respective Certificates of Incorporation or
By-laws of the Company or of any of its Subsidiaries, (b) result in a violation
or breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration) under, or
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result in the creation of a lien or other encumbrance on any properties or
assets of the Company or any of its Subsidiaries under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease, license,
contract, agreement or other instrument or obligation to which the Company or
any of its Subsidiaries is a party or by which any of them or any of their
respective properties or assets may be bound or (c) violate any order, writ,
injunction, decree, law, statute, rule or regulation applicable to the Company
or any of its Subsidiaries or any of their respective properties or assets,
except where a waiver with respect thereto has been or will, prior to Closing,
be obtained or except in the case of (b) or (c) for violations, breaches or
defaults which would not, individually or in the aggregate, have a Company
Material Adverse Effect.
4.06. No Default. Except as set forth in Section 4.06 of the Company
Schedule of Exceptions, none of the Company or any of its Subsidiaries is in
default or violation (and no event has occurred which with or without due notice
or the lapse of time or both would constitute a default or violation) of any
term, condition or provision of (i) its Certificate of Incorporation or By-laws
(or similar governing documents), (ii) any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument or obligation to which
the Company or any of its Subsidiaries is now a party or by which any of them or
any of their respective properties or assets may be bound or (iii) any order,
writ, injunction, decree, law, statute, rule or regulation applicable to the
Company, any of its Subsidiaries or any of their respective properties or
assets, except in the case of (ii) or (iii) for violations, breaches or defaults
that would not, individually or in the aggregate, have a Company Material
Adverse Effect.
4.07. SEC Reports and Financial Statements. The Company has heretofore
delivered to Parent true and complete copies of all reports, registration
statements, definitive proxy statements and other documents (in each case,
together with all amendments thereto) filed by the Company with the Securities
and Exchange Commission (the "Commission") since January 1, 1992 (such reports,
registration statements, definitive proxy statements and other documents,
together with any amendments thereto, are sometimes collectively referred to as
the "Company Commission Filings"). As of their respective dates, each of the
Company Commission Filings complied as to form in all material respects with the
applicable requirements of the Securities Act, the Exchange Act and the rules
and regulations thereunder applicable to the Company Commission filings and none
of the Company Commission Filings when filed contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. When filed with the Commission, the
financial statements included in the Company Commission Filings complied as to
form in all material respects with the applicable rules and regulations of the
Commission under the Securities Act and the Exchange Act with respect thereto
and were prepared in accordance with generally accepted accounting principles
("GAAP") (as in effect from time to time) applied, except as noted in the
immediately succeeding sentence, on a consistent basis during the periods
involved, and such financial statements fairly present in accordance with the
applicable requirements of GAAP the consolidated financial position of the
Company and its consolidated Subsidiaries as of the dates thereof and the
consolidated results of their operations and their consolidated cash flows for
the periods then ended, subject, in the case of the unaudited interim financial
statements, to normal, recurring year-end audit adjustments. As disclosed in the
Company Commission Filings, effective January 1, 1993, the Company changed its
method of accounting for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
4.08. Absence of Undisclosed Liabilities. Except as and to the extent
disclosed in the Company Commission Filings filed prior to the date hereof,
there are no liabilities or obligations of the Company or any of its
Subsidiaries of any nature, whether or not accrued, contingent or otherwise,
that would be required by GAAP to be reflected on a consolidated balance sheet
of the Company and its Subsidiaries (including the notes thereto), other than
(i) liabilities disclosed in the Company Commission Filings, (ii) liabilities
incurred since December 31, 1995 in the ordinary course of business and which
would not have, individually or in the aggregate, a Company Material Adverse
Effect, (iii) liabilities set forth in Section 4.08 of the Company Schedule of
Exceptions, and (iv) liabilities under this Agreement.
4.09. Conduct of Business -- Events Subsequent to December 31, 1995. Except
as set forth in Section 4.09 of the Company Schedule of Exceptions, subsequent
to December 31, 1995, there has not been any
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event that would have a Company Material Adverse Effect. Without limiting the
generality of the foregoing, except as set forth in Section 4.09 of the Company
Schedule of Exceptions, since that date there has not been:
(1) any increase in compensation payable to, or any employment, bonus
or compensation agreement entered into with, any employee or consultant of
the Company, other than in the ordinary course of business consistent with
past practices;
(2) any loan to, or other transaction with, any of the Company's
directors, officers, and employees by the Company outside the ordinary
course of business;
(3) any amendment to the Certificate of Incorporation or By-Laws of
the Company, or any split, combination or reclassification of the Company's
securities, or any declaration, setting aside or payment of any dividend or
other distribution;
(4) any declaration, setting aside or payment of any dividends or
distributions in respect of the shares of its capital stock or any
issuance, sale, transfer or any commitment to issue, sell or transfer by
the Company or a Subsidiary (other than dividends by a Subsidiary to the
Company), any shares of its capital stock, or any redemption, purchase or
other acquisition of any of their respective securities, other than
pursuant to the exercise of options pursuant to the Company Stock Option
Plans.
(5) any grant of Company Options.
(6) any material transactions between the Company or any of its
Subsidiaries on the one hand, and any (i) officer or director of the
Company or any of its Subsidiaries, (ii) record or beneficial owner of five
percent or more of the voting securities of the Company or (iii) affiliate
of any such officer, director or beneficial owner, on the other hand, other
than payment of compensation for services rendered to the Company or any of
its Subsidiaries.
4.10. Compliance With Law. The Company and its Subsidiaries hold, and are
in compliance in all material respects with, all licenses, permits and
authorizations necessary for the lawful conduct of their respective businesses,
and are not in violation of any applicable Federal, state, local or foreign
statutes, laws, ordinances, rules and regulations except such licenses, permits
and authorizations the lack of which, and for violations of which, individually
or in the aggregate, would not have a Company Material Adverse Effect or impair
the Company's ability to consummate the Merger and the other transactions
contemplated by this Agreement.
4.11. Tax Matters. For the purpose of this Section 4.11, "Taxes" means any
federal, state, county, local or foreign taxes, charges, fees, levies, or other
assessments, including, without limitation, all income, excise, alternative
minimum, sales and use, ad valorem, transfer, gains, profits, excise, franchise,
real and personal property, gross receipt, capital stock, production, business
and occupation, disability, employment, payroll, license, estimated, stamp,
custom duties, severance or withholding taxes or charges imposed by any
governmental entity, and includes any interest and penalties thereon or
additions thereto and "Tax Return" means any report, return or other information
supplied or required to be supplied to a governmental entity with respect to
Taxes. Except as set forth in Section 4.11 of the Company Schedule of
Exceptions: (i) as of the Closing Date the Company and each of its Subsidiaries
will have filed all Tax Returns required to be filed by applicable law and all
Tax Returns were in all respects (and, as to Tax Returns not filed as of the
date hereof, will be) true, complete and correct and filed on a timely basis,
(ii) the Company and each of its Subsidiaries have, within the time and in the
manner prescribed by law, paid (and until the Closing Date will pay within the
time and in the manner prescribed by law) all Taxes that are due and payable;
(iii) the Company and each of its Subsidiaries have established (and until the
Closing Date will maintain) on their books and records reserves adequate to pay
all Taxes not yet due and payable in accordance with GAAP which are reflected in
the financial statements delivered to Parent pursuant to Section 4.07 (the
"Company Financial Statements") to the extent required; (iv) there are no Tax
liens upon the assets of the Company or any of its Subsidiaries except liens for
Taxes not yet due; (v) the Company and each of its Subsidiaries have complied
(and until the Closing Date will comply) in all respects with the provisions of
the Code relating to the payment and withholding of Taxes, including, without
limitation, the withholding and reporting requirements under Code
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Sections 1441 through 1464, 3401 through 3606, and 6041 and 6049, as well as
similar provisions under any other laws, and have, within the time and in the
manner prescribed by law, withheld from employee wages and paid over to the
proper governmental authorities all amounts required; (vi) neither the Company
nor any of its Subsidiaries has requested any extension of time within which to
file any Tax Return, which Tax Return has not since been filed; (vii) neither
the Company nor any of its Subsidiaries has executed any outstanding waivers or
comparable consents regarding the application of the statute of limitations with
respect to any Taxes or Tax Returns for which the statute of limitations has not
yet expired; (viii) no deficiency for any Taxes has been proposed, asserted or
assessed against the Company or any of its Subsidiaries that has not been
resolved and paid in full; (ix) no audits or other administrative proceedings or
court proceedings are presently in progress or pending (or, to the best of the
knowledge of the Company or any of its Subsidiaries, threatened) with regard to
any Taxes or Tax Returns of the Company or any of its Subsidiaries; (x) neither
the Company nor any of its Subsidiaries has received a Tax Ruling (as defined
below) or entered into a Closing Agreement (as defined below) with any taxing
authority that would have a continuing adverse effect after the Effective Time
("Tax Ruling" shall mean a written ruling of a taxing authority relating to
Taxes and "Closing Agreement" shall mean a written and legally binding agreement
with a taxing authority relating to Taxes); (xi) the Company and its
Subsidiaries have made available to Parent complete and accurate copies of all
Tax Returns, and any amendments thereto, filed by the Company or any of its
Subsidiaries for all taxable years ending on or prior to the Effective Time;
(xii) no agreements relating to allocating or sharing of Taxes exist among the
Company and any of its Subsidiaries.
4.12. Properties; Leases; Tangible Assets. Except as set forth in Section
4.12 of the Company Schedule of Exceptions, the Company (and its respective
Subsidiaries) owns and has good and marketable title to or, in the case of
leased properties, a good and valid leasehold interest in, all of its Material
Assets (as hereinafter defined), free and clear of all liens or other
encumbrances ("Liens") except (i) those liens set forth on Schedule 4.12, (ii)
those Material Assets disposed of in the ordinary course of business after
December 31, 1995 and (iii) Material Assets, the loss of which would not result
in a Company Material Adverse Effect. The Company enjoys peaceful and
undisturbed possession of its premises and is not in breach of any provisions of
the leases related thereto. For purposes of this Section 4.12, the term Material
Assets shall mean (i) in the case of a tangible asset the Company holds title
to, any single asset having a book value reflected on the consolidated balance
sheet of the Company annual report on Form 10-K for the year ended December 31,
1995 of $10,000 or more, and (ii) in the case of a tangible leased asset, any
single asset whose underlying lease has a term greater than one year and such
asset had an initial cost of $10,000 or more.
4.13. Litigation. Except as disclosed in the Company Commission Filings
filed prior to the date hereof, or in Section 4.13 of the Company Schedule of
Exceptions, there is no suit, claim, action, proceeding or investigation pending
or, to the knowledge of the Company, threatened against the Company or any of
its Subsidiaries or any of their respective properties or assets before any
Governmental Entity which, if decided adversely, individually or in the
aggregate, could have a Company Material Adverse Effect or would prevent or
delay the consummation of the transactions contemplated by this Agreement.
Except as disclosed in the Company Commission Filings filed prior to the date
hereof, or in Schedule 4.13 of the Company Schedule of Exceptions, neither the
Company nor any of its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, individually or in the aggregate, in the future
could result in a Company Material Adverse Effect or would prevent or delay the
consummation of the transactions contemplated hereby.
4.14. Pooling of Interests. To the knowledge of the Company, the Company
has not taken or failed to take any action which (without giving effect to any
action taken or agreed to be taken by Parent, Sub or any of their respective
Affiliates) would prevent the accounting for the Merger as a pooling of
interests in accordance with Accounting Principles Board Opinion No. 16, the
interpretive releases issued pursuant thereto, and the pronouncements of the
Commission.
4.15. Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by the Company for inclusion or incorporation by
reference in (i) the S-4 (as hereinafter defined) will, at the time the S-4 is
filed with the Commission and at the time it becomes effective under the
Securities Act or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and (ii) the Proxy
Statement
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(as hereinafter defined), will at the date mailed to stockholders of the Company
and at the times of any meetings of stockholders to be held in connection with
the Merger (each a "Stockholders' Meeting") and at the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder.
4.16. Brokers. No broker, finder or investment banker (other than George K.
Baum & Company with respect to its investment banking services, including its
fairness opinion regarding the transactions contemplated hereby) is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company or any of its Subsidiaries.
4.17. Environmental Matters. Except as described in Section 4.17 of the
Company's Schedule of Exceptions hereto, to the Company's knowledge: (a) the
Company and its Subsidiaries and all of the facilities and properties owned or
operated by the Company and its Subsidiaries as of the date hereof are in
compliance with all applicable Environmental Laws and are not subject to any
outstanding or threatened Environmental Actions; (b) none of the properties or
facilities owned or operated by the Company and its Subsidiaries as of the date
hereof has been used by the Company and its Subsidiaries for the generation,
storage, manufacture, use, transportation, disposal or treatment of Hazardous
Materials other than in compliance with applicable Environmental Laws or except
where the failure to so comply would not reasonably be likely to have a Company
Material Adverse Effect; (c) there has been no Hazardous Discharge by the
Company or any of its Subsidiaries on or from any of the properties or
facilities owned or operated by the Company as of the date hereof, except in
compliance with applicable Environmental Laws; and (d) there are no threatened
or outstanding Environmental Actions against the Company or any of its
Subsidiaries or the owners of any facilities that may have received Hazardous
Materials from the Company or any of its Subsidiaries.
A. "Hazardous Discharge" shall mean any releasing, spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, disposing or dumping of any Hazardous Materials into the soil,
surface waters or ground waters at any of the properties or facilities
owned or operated by the Company as of the date hereof.
B. "Hazardous Materials" shall mean any chemical, substance, material,
object, condition, waste or combination thereof which is or may be
hazardous to human health or safety or to the environment due to its
radioactivity, ignitability, corrosivity, reactivity, explosiveness,
toxicity, carcinogenicity, infectiousness or other harmful or potentially
harmful properties or effects, including, without limitation, all of those
chemicals, substances, materials, objects, conditions, wastes or
combinations thereof which are now listed, defined or regulated in any
manner by any Environmental Law.
C. "Environmental Actions" shall mean any complaint, summons,
citation, notice, directive, order, claim, litigation, investigation,
proceeding, or judgment from any federal, state, local or municipal agency,
department, bureau, office or other authority or any third party applicable
to any of the properties owned or operated by the Company as of the date
hereof and involving any violation of any applicable Environmental Laws.
D. "Environmental Law" shall mean any and all laws, statutes,
ordinances, rules, regulations, judgments, orders, decrees, permits,
concessions, grants, agreements, licenses, or other governmental
restrictions or requirements regulating Hazardous Materials or relating to
health, safety, the environment or the release of Hazardous Materials into
the environment, now in effect.
4.18. Corporate Records. The minute books of the Company accurately reflect
all actions taken to this date by the stockholders, board of directors and
committees of the board of directors of the Company and contain true and
complete copies of the Certificate of Incorporation, By-laws and all amendments
thereto.
4.19. Accounting Records. The Company and its Subsidiaries maintain
accounting records which fairly and validly reflect, in all material respects,
their transactions and maintain accounting controls sufficient to
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provide reasonable assurances that such transactions are, in all material
respects, (i) executed in accordance with management's general or specific
authorization, and (ii) recorded as necessary to permit the preparation of
financial statements in conformity with GAAP.
4.20. Labor Matters. Neither the Company nor any of its Subsidiaries is a
party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization. There is no
unfair labor practice or labor arbitration proceeding pending or, to the
knowledge of the Company, threatened against the Company or its Subsidiaries
relating to their business, except for any such proceedings which would not have
a Company Material Adverse Effect.
4.21. ERISA. Except for the Company Employee Plans identified in Section
4.21 of the Company Schedule of Exceptions, neither the Company nor any of its
Subsidiaries maintains nor contributes to any Employee Plan. "Employee Plan(s)"
shall mean and include any pension, retirement, profit-sharing, severance,
deferred compensation, bonus or other incentive plan, stock option or stock
purchase plan, medical, retiree medical, vision, dental or other health plan, or
life insurance plan, or any other employee benefit plan, program, employment
agreement, arrangement, agreement or understanding, including, without
limitation, any "employee benefit plan" as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") that
provides benefits to any current or former employees, officers or directors of
the Company or any of its Subsidiaries. The Company has made available to Parent
true, correct and complete copies of all Employee Plans, summary plan
descriptions thereof, and all trust agreements or funding agreements including
insurance contracts and all amendments thereto and the most recently filed IRS
determination letter application and the most recently filed IRS Forms 5500.
Except as disclosed in Section 4.21 of the Company Schedule of Exceptions, with
respect to such Employee Plans in respect of the Company or any of its
Subsidiaries: (i) each Employee Plan that is a "welfare benefit plan" (as
defined in Section 3(1) of ERISA) is either unfunded or funded through insurance
contracts; (ii) neither the Company nor any of its Subsidiaries is in material
default under any Employee Plan, and all such Employee Plans have been
maintained in material compliance with all applicable provisions of all
applicable statutes, rules or regulations (including, without limitation, ERISA
and the Code); (iii) as to each Employee Plan for which an Annual Report,
including schedules, or comparable report, is required to be filed under ERISA
or the Code or any analogous legislation, each such Annual Report has been
filed, no material liabilities with respect to such plan existed on the date of
any such Annual Report except as disclosed therein, and no material adverse
change has occurred with respect to the financial data covered by such Annual
Report since the date thereof; (iv) the execution of this Agreement and
performance of the transactions contemplated hereby (either alone or together
with any other event) will not result in any payment (whether of severance pay
or otherwise) becoming due from the Company (or any of its Subsidiaries), Sub or
Parent to any employees of the Company; (v) each such Employee Plan that is a
"pension plan," as defined in Section 3(2)of ERISA, is, to the Company's best
knowledge, tax-qualified under Section 401(a) of the Code; (vi) neither the
Company nor any Subsidiary has maintained, contributed to or been required to
contribute to, at any time, any Employee Plan which is subject to the minimum
funding standards under Section 412 of the Code or which is subject to Title IV
of ERISA, or under which more than one employer makes contributions (within the
meaning of Section 4064(a) of ERISA); (vii) none of the Employee Plans provides
for or promises retiree medical, disability or life insurance benefits to any
current or former officer, director or employee of the Company or any of its
Subsidiaries; (viii) there has been no prohibited transaction (within the
meaning of Section 406 of ERISA or Section 4975 of the Code) with respect to any
Employee Plan which could subject the Company, any of the Subsidiaries or any
Employee Plans (or their trusts, trustees or administrators) to any material tax
or penalty imposed under Section 4975 of the Code or Section 502(i) of ERISA;
and (ix) no complete or partial termination has occurred within the five years
preceding the date hereof with respect to any Employee Plan.
4.22. Intellectual Property. Except as disclosed in Section 4.22 of the
Company Schedule of Exceptions, to the knowledge of the Company, the Company has
not received any written notice alleging any interference, infringement,
misappropriation, or violation of any intellectual property rights of third
parties (including any claim that the Company must license or refrain from using
any intellectual property rights of any third party). Except as disclosed in
Section 4.22 of the Company Schedule of Exceptions, to the knowledge (including
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employees with responsibility for intellectual property matters) of the Company,
no third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any intellectual property rights of the
Company.
4.23. Disclosure. Any information furnished by or on behalf of the Company
to Parent in writing pursuant to this Agreement and any information contained in
the Company Schedule of Exceptions, does not and will not contain any untrue
statement of material fact and does not and will not omit to state any material
fact necessary to make any statement, in light of the circumstances under which
such statement is made, not misleading.
4.24. Vote Required. The affirmative vote of a majority of the outstanding
shares of Company Stock entitled to vote thereon, voting as a single class, is
the only vote of the holders of any class or series of the Company's capital
stock necessary to approve this Agreement and the Merger.
4.25. Contract Defaults. Except as set forth in Section 4.25 of the
Company's Schedule of Exceptions, the Company is not in default in any respect
under the terms of any outstanding material contract, agreement, lease or other
commitment which is material to the business, operation, properties or assets,
or the condition, financial or otherwise, of the Company, and no event has
occurred which with notice or lapse of time, or both, may be or become an event
of default under any such material contract, agreement, lease or other
commitment.
5. REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB.
Except as disclosed in the schedule of exceptions (the "Parent Schedule of
Exceptions") attached hereto and made a part hereof, Parent and Sub each hereby
represent and warrant to the Company as follows:
5.01. Organization. The Parent and each of its Subsidiaries (including the
Sub) is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization, has requisite power and
authority to carry on its business now being conducted and to own or lease and
operate the assets and properties now owned or leased and operated by it, except
where the failure to be so organized, existing and in good standing or to have
such power and authority would not individually or in the aggregate have a
material adverse effect on the business, operations, properties, assets,
liabilities, condition (financial or otherwise), prospects or results of
operations of Parent and its Subsidiaries taken as a whole (a "Parent Material
Adverse Effect"). The Parent and each of its Subsidiaries (including the Sub) is
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the property owned, leased or operated by it or the nature
of the business conducted by it makes such qualification or licensing necessary,
except where the failure to be so duly qualified or licensed and in good
standing would not, individually or in the aggregate, have a Parent Material
Adverse Effect.
5.02. Capitalization. As of the date hereof, the authorized capital stock
of Parent consists of 5,000,000 shares of Parent Preferred Stock and 30,000,000
shares of Parent Common Stock. As of the close of business on June 6, 1996, (i)
101,100 shares of Parent Series A Preferred Stock were issued and outstanding,
(ii) 114,500 shares of Parent Series B Preferred Stock were issued and
outstanding, (iii) 1,000,000 shares of Parent Series C Preferred Stock were
issued and outstanding, (iv) 333,333 shares of Parent Series D Preferred Stock
were issued and outstanding, (v) no shares of Parent Series E Preferred Stock
were issued and outstanding, (vi) 1,176,056 shares of Parent Series F Preferred
Stock were issued and outstanding, (vii) 17,650,852 shares of Parent Common
Stock were issued and outstanding, (viii) no shares of Parent Preferred Stock
were held by Parent in its treasury and (ix) 1,300 shares of Parent Common Stock
were held in its treasury. All the outstanding shares of Parent Common Stock
are, and all shares of Parent Common Stock which will be outstanding at the
Effective Time will be, duly authorized and validly issued, fully paid and
nonassessable, are not and will not be subject to or issued in violation of any
preemptive rights. All the outstanding shares of Parent Preferred Stock are, and
all shares of Parent Preferred Stock which will be outstanding at the Effective
Time will be, duly authorized and validly issued, fully paid and nonassessable,
are not and will not be subject to or issued in violation of any preemptive
rights. All outstanding Parent Options (as hereinafter defined) granted by the
Parent have been duly granted in accordance with the terms of the Parent Stock
Option Plans (as hereinafter defined). The Parent Stock Option Plans have been
adopted in
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accordance with the DGCL, and the Parent's Certificate of Incorporation and
By-laws, by the board of directors and the stockholders of the Parent. The
Parent has reserved sufficient shares of Parent Common Stock for issuance upon
the exercise of outstanding Parent Options. No bonds, debentures, notes or other
indebtedness having general voting rights (or convertible into securities having
such rights) of the Parent are issued or outstanding. There are no outstanding
contractual obligations of the Parent to repurchase, redeem or otherwise acquire
any shares of capital stock of the Parent. As of the date hereof, 2,928,123
shares of Parent Common Stock were reserved for issuance upon the exercise of
stock options outstanding as of the date hereof (the "Parent Options") under,
one grant to an individual (the "Individual Grant"), the Parent's 1989 Stock
Option Plan (the "1989 Plan") and the Company's 1992 Non-Employee Directors
Stock Option Plan (the "1992 Plan" and, together with the Individual Grant and
the 1989 Plan, the "Parent Stock Option Plans"). As of the date hereof,
1,107,205 shares of Parent Common Stock were reserved for issuance upon the
exercise of warrants outstanding as of the date hereof (the "Parent Warrants").
Except as set forth in Section 5.02 of the Schedule of Exceptions, other than
the Parent Options, Parent Warrants and Parent Preferred Stock, there are no
options, calls, subscriptions, warrants, rights, agreements or commitments of
any character obligating the Parent to issue shares of its capital stock or to
register shares of its capital stock under the Securities Act, or any other
applicable securities laws.
As of the date hereof, the authorized capital stock of Sub consists of 100
shares of Sub Common Stock, all of which have been duly authorized and validly
issued, and are fully paid and nonassessable, and owned, of record and
beneficially, by Parent.
5.03. Subsidiaries. Section 5.03 of the Schedule of Exceptions sets forth
the name of each Subsidiary (as defined below) of Parent, the percent of
outstanding voting stock or other equity interest of such Subsidiary held
directly or indirectly by Parent, the jurisdiction of such Subsidiary's
organization and the other jurisdictions in which such Subsidiary is qualified
to do business. Parent owns, directly or indirectly, free and clear of all
covenants, conditions, restrictions, voting trust arrangements, voting
agreements, liens, charges, encumbrances, options and adverse claims and rights
of any kind whatsoever, and has the unrestricted power to dispose of and vote,
all of the outstanding capital stock or other equity interest held by it of each
Subsidiary. Except as disclosed in Section 5.03 of the Parent Schedule of
Exceptions, there are no outstanding options, warrants or other rights to
subscribe for or purchase from Parent or any Subsidiary, or any plans, contracts
or commitments providing for the issuance of, or the granting of rights to
acquire (i) any capital stock of or other ownership interest in any Subsidiary
or (ii) any securities convertible into or exchangeable for any capital stock of
or other ownership interests in any Subsidiary. All of the outstanding shares of
each class of capital stock of each Subsidiary have been validly issued, are
fully paid and non-assessable and were not issued in violation of any preemptive
rights. Except for the Subsidiaries, neither Parent nor any Subsidiary of Parent
owns greater than a twenty percent (20%) equity interest, directly or
indirectly, in any corporation, partnership, joint venture, business, trust or
other entity, other than any investments owned by Parent Employee Plans.
5.04. Authority. Each of Parent and Sub has the requisite power and
authority to execute and deliver this Agreement and all other agreements and
documents contemplated hereby and to perform its obligations hereunder. The
execution, delivery and performance of this Agreement and all other agreements
and documents contemplated hereby and the consummation of the Merger and of the
other transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Parent and Sub (including by Parent as
the sole stockholder of Sub). This Agreement has been duly executed and
delivered by each of Parent and Sub and assuming this Agreement constitutes the
valid and binding obligation of the Company, constitutes the valid and binding
obligations of each of Parent and Sub, enforceable against them in accordance
with their respective terms, except as may be limited by or subject to any
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally, and subject to general
principles of equity.
5.05. Consents and Approvals; No Violations. Except for (i) filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Act, the Exchange Act, and the
rules and regulations promulgated thereunder, (ii) filings as may be required
under any state securities or blue sky laws, (iii) any filing of a premerger
notification report by Parent required under the HSR
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Act and the expiration of the applicable waiting period, (iv) the filing and
recordation of the Certificate of Merger as required by the DGCL, (v) the FCC
Approvals and (vi) the necessary approvals, if any, of the PUCs having
jurisdiction over the Parent or any of its Subsidiaries (the "Parent PUC
Approvals" and, together with the Company PUC Approvals, the "PUC Approvals"),
pursuant to applicable state laws or regulations, no filing with or notice to,
and no permit, authorization, consent or approval of, any Governmental Entity is
necessary for the execution and delivery by Parent and Sub of this Agreement or
the consummation by Parent and Sub of the transactions contemplated hereby,
except where the failure to obtain such permits, authorizations, consents or
approvals or to make such filings or give such notice would not have a Parent
Material Adverse Effect. Neither the execution, delivery and performance of this
Agreement by Parent and Sub, nor the consummation by Parent and Sub of the
transactions contemplated hereby will (a) conflict with or result in any breach
of any provision of the respective Certificate of Incorporation or By-laws of
Parent or of any of its Subsidiaries, (b) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, amendment, cancellation or acceleration)
under, or result in the creation of a lien or other encumbrance on any property
or asset of Parent or any of its Subsidiaries under any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, lease, license, contract,
agreement or other instrument or obligation to which Parent or any of its
Subsidiaries is a party or by which any of them or any of their respective
properties or assets may be bound or (c) violate any order, writ, injunction,
decree, law, statute, rule or regulation applicable to Parent or any of its
Subsidiaries or any of their respective properties or assets, except in the case
of (b) and (c) for violations, breaches or defaults which would not,
individually or in the aggregate, have a Parent Material Adverse Effect.
5.06. SEC Reports and Financial Statements. Parent has heretofore delivered
to the Company true and complete copies of all reports, registration statements,
definitive proxy statements and other documents (in each case, together with all
amendments thereto) filed by Parent with the Commission since January 1, 1992
(such reports, registration statements, definitive proxy statements and other
documents, together with any amendments thereto, are sometimes collectively
referred to as the "Parent Commission Filings"). As of their respective dates,
each of the Parent Commission Filings complied as to form in all material
respects with the applicable requirements of the Securities Act, the Exchange
Act and the rules and regulations thereunder applicable to the Parent Commission
Filings, and none of the Parent Commission Filings when filed contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. When filed with
the Commission, the financial statements included in the Parent Commission
Filings complied as to form in all material respects with the applicable rules
and regulations of the Commission under the Securities Act and the Exchange Act
with respect thereto and were prepared in accordance with GAAP (as in effect
from time to time) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Rule 10-01 of Regulation S-X of the
Commission), and such financial statements fairly present in accordance with the
applicable requirements of GAAP the consolidated financial position of Parent
and its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and their consolidated cash flows for the periods
then ended, subject, in the case of the unaudited interim financial statements,
to normal, recurring year-end audit adjustments.
5.07. Absence of Undisclosed Liabilities. Except as and to the extent
disclosed in the Parent Commission Filings filed prior to the date hereof, there
are no liabilities or obligations of Parent or any of its Subsidiaries of any
nature, whether or not accrued, contingent or otherwise, that would be required
by GAAP to be reflected on a consolidated balance sheet of Parent and its
Subsidiaries (including the notes thereto), other than (i) liabilities disclosed
in the Parent Commission Filings, (ii) liabilities incurred since December 31,
1995, in the ordinary course of business and which would not have, individually
or in the aggregate, a Parent Material Adverse Effect and (iii) liabilities
under this Agreement.
5.08. Absence of Certain Changes or Events. Except as set forth in Section
5.08 of the Parent Schedule of Exceptions, Parent has since December 31, 1995
conducted its business only in the ordinary course and there has not been any
event that would have a Parent Material Adverse Effect.
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5.09. Litigation. Except as disclosed in the Parent Commission Filings
filed prior to the date hereof, or in Section 5.09 of the Company Schedule of
Exceptions, there is no suit, claim, action, proceeding or investigation pending
or, to the knowledge of Parent, threatened against Parent or any of its
Subsidiaries or any of their respective properties or assets before any
Governmental Entity which, if decided adversely, individually or in the
aggregate, could result in a Parent Material Adverse Effect or would prevent or
delay the consummation of the transactions contemplated by this Agreement.
Except as disclosed in the Parent Commission Filings filed prior to the date
hereof, or in Section 5.09 of the Company Schedule of Exceptions, neither Parent
nor any of its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, individually or in the aggregate, in the future
could result in a Parent Material Adverse Effect or would prevent or delay the
consummation of the transactions contemplated hereby.
5.10. Pooling of Interests. To the knowledge of Parent, Parent has not
taken or failed to take any action which (without giving effect to any action
taken or agreed to be taken by the Company or any of its Affiliates) would
prevent the accounting for the Merger as a pooling of interests in accordance
with Accounting Principles Board Opinion No. 16, the interpretive releases
issued pursuant thereto, and the pronouncements of the Commission.
5.11. Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by Parent or Sub for inclusion or incorporation by
reference in (i) the S-4 (as hereinafter defined) will, at the time the S-4 is
filed with the Commission and at the time it becomes effective under the
Securities Act or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and (ii) the Proxy
Statement will, at the date mailed to stockholders of the Company and at the
times of any Stockholders' Meeting and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The S-4, insofar as
it relates to Parent, Sub or Subsidiaries of Parent or other information
supplied by Parent or Sub for inclusion therein, will comply as to form in all
material respects with the provisions of the Securities Act and the rules and
regulations thereunder.
5.12. Brokers. No broker, finder or investment banker (other than Hoak
Securities Corporation with respect to its investment banking services,
including its fairness opinion regarding the transactions contemplated hereby)
is entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Parent or any of its Subsidiaries.
5.13. Interim Operations of Sub. Sub was formed solely for the purpose of
engaging in the transactions contemplated hereby and has not engaged in any
business activities or conducted any operations other than in connection with
the transactions contemplated hereby.
5.14. Company Stock Ownership. Neither Parent nor any of its Subsidiaries
owns any shares of Company Stock or any securities convertible into Company
Stock.
5.15. Authorization for Parent Common Stock. Prior to the Effective Time,
Parent will have taken all necessary action to permit it to issue the number of
shares of Parent Common Stock required to be issued pursuant to the terms of
this Agreement. Shares of Parent Common Stock issued pursuant to the terms of
this Agreement will, when issued, be validly issued, fully paid and
nonassessable and no person will have any preemptive right of subscription or
purchase in respect thereof. Such shares of Parent Common Stock will, when
issued, be registered under the Securities Act and the Exchange Act and be
registered or exempt from registration under any applicable state securities
laws and will, when issued, be listed on the AMEX, subject to official notice of
issuance.
5.16. Continued Existence of the Company. Parent has no present intention
or any intention in the foreseeable future after the Closing to liquidate or
otherwise cause the dissolution of the Company.
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6. CERTAIN UNDERSTANDINGS AND AGREEMENTS.
6.01. Conduct of Business by the Company Pending the Merger. Except as set
forth in Section 6.01 of the Company's Schedule of Exceptions, during the period
from the date of this Agreement and continuing until the Effective Time, the
Company agrees as to itself and its Subsidiaries that (except as expressly
contemplated or permitted by this Agreement or to the extent that Parent shall
otherwise consent):
(i) The Company and its Subsidiaries shall carry on their respective
businesses in the ordinary course consistent with past practice and use all
reasonable efforts to (a) preserve intact their present business
organizations, (b) maintain in effect all licenses, permits and
authorizations the failure of which to maintain would have a Company
Material Adverse Effect, (c) keep available the services of their present
officers and employees and (d) preserve their relationships with customers,
suppliers and others having business dealings with them.
(ii) Neither the Company nor any of its Subsidiaries shall, nor shall
any of them propose to, (A) declare, set aside or pay any dividends on or
make other distributions in respect of any of its capital stock, except for
dividends by a wholly owned Subsidiary of the Company or of such
Subsidiary, (B) split, combine or reclassify any shares of its capital
stock or issue or authorize or propose the issuance of any other securities
in respect of, in lieu of or in substitution for shares of its capital
stock, or (C) repurchase, redeem or otherwise acquire, or permit any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock or any securities convertible into, or any rights, warrants,
calls, subscriptions or options to acquire, shares of capital stock of such
party or any of its Subsidiaries.
(iii) Neither the Company nor any of its Subsidiaries shall issue,
deliver or sell, or authorize or propose the issuance, delivery or sale of,
any shares of its capital stock of any class, or any securities convertible
into, or any rights, warrants, calls, subscriptions or options to acquire,
any such shares or convertible securities, other than (A) the issuance of
shares of Company Common Stock upon the exercise of Company Options in
accordance with their present terms, and (B) issuances by a wholly owned
Subsidiary of its capital stock to the Company or one of its Subsidiaries.
(iv) The Company shall not amend or propose to amend its Certificate
of Incorporation or By-laws.
(v) Neither the Company nor any of its Subsidiaries shall acquire or
agree to acquire by merging or consolidating with, or by purchasing a
substantial equity interest in or substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof or otherwise
acquire or agree to acquire any assets, in each case which are material,
individually or in the aggregate, to the Company and its Subsidiaries,
taken as a whole, except in the ordinary course of business.
(vi) Neither the Company nor any of its Subsidiaries shall sell,
lease, license, encumber or otherwise dispose of, or agree to sell, lease,
license, encumber or otherwise dispose of, any of its assets which are
material, individually or in the aggregate, to the Company and its
Subsidiaries taken as a whole, other than in the ordinary course of
business consistent with past practice.
(vii) Neither the Company nor any of its Subsidiaries shall incur any
indebtedness for borrowed money or guarantee any such indebtedness or issue
or sell any debt securities or warrants or rights to acquire any debt
securities of the Company or any of its Subsidiaries or guarantee any debt
securities of others, other than in each case in the ordinary course of
business consistent with prior practice.
(viii) The Company shall not make any change in any of the accounting
principles or practices used by it except as required by the Commission or
the Financial Accounting Standards Board.
(ix) Neither the Company nor any of its Subsidiaries shall (A) enter
into, adopt, amend (except as may be required by law) or terminate any
Employee Plan or any agreement, arrangement, plan or policy between the
Company and one or more of its directors, officers, employees or
independent contractors or (B) except in the ordinary course of business
and consistent with past practice, increase in any manner the compensation
or fringe benefits (including but not limited to severance benefits) of any
director, officer, employee or independent contractor or pay any benefit
not required by any plan and arrangement
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as in effect as of the date hereof (including, without limitation, the
granting of stock appreciation rights or performance awards) or enter into
any contract, agreement, commitment or arrangement to do any of the
foregoing.
(x) The Company shall not take any action which would prevent (A)
qualification of the Merger as a reorganization within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code or (B) the Merger to be
accounted for as a "pooling of interests" for financial accounting
purposes.
(xi) The Company shall, upon Parent's reasonable request, confer with
Parent to report on operational matters.
(xii) Neither the Company nor any of its Subsidiaries will, except to
the extent any such policy is replaced with comparable coverage, allow or
permit any insurance policy naming it as beneficiary or a loss payable
payee to be canceled or terminated other than in the ordinary course of
business consistent with past practice.
(xiii) Neither the Company nor any of its Subsidiaries will adopt a
plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of
the Company or any of its Subsidiaries.
(xiv) Neither the Company nor any of its Subsidiaries shall take any
action that would be reasonably likely to result in any of the Company's
representations and warranties set forth in this Agreement not being true
in all material respects or agree in writing or otherwise to take any of
the actions specified in this Section 6.01.
(xv) Subject to the terms and conditions of this Agreement, the
Company shall take all commercially reasonable steps necessary or desirable
and proceed diligently and in good faith to satisfy each of the conditions
to the Merger set forth in Articles 7 and 8 and will not take or fail to
take any action that could reasonably be expected to result in the
nonfulfillment of any such condition.
6.02. Conduct of Business by Parent Pending the Merger. During the period
from the date of this Agreement and continuing until the Effective Time, Parent
agrees that (except as expressly contemplated or permitted by this Agreement or
to the extent that Company shall otherwise consent):
(i) Parent shall not amend or propose to amend its Certificate of
Incorporation or By-laws.
(ii) Parent shall not make any change in any of the accounting
principles or practices used by it except as required by the Commission or
the Financial Accounting Standards Board.
(iii) Parent shall not take any action which would prevent (A)
qualification of the Merger as a reorganization within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code or (B) the Merger to be
accounted for as a "pooling of interests" for financial accounting
purposes.
(iv) Parent will not adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or
other reorganization.
(v) Parent shall not take any action that would be reasonably likely
to result in any of Parent's or Sub's representations and warranties set
forth in this Agreement not being true in all material respects or agree in
writing or otherwise to take any of the actions specified in this Section
6.02.
(vi) Subject to the terms and conditions of this Agreement, Parent
shall take all commercially reasonable steps necessary or desirable and
proceed diligently and in good faith to satisfy each of the conditions to
the Merger set forth in Articles 7 and 9 and will not take or fail to take
any action that could reasonably be expected to result in the
nonfulfillment of any such condition.
6.3. Conduct of Business of Sub. During the period from the date of this
Agreement to the Effective Time, Sub shall not engage in any activities of any
nature except as provided in or contemplated by this Agreement.
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6.04. No Solicitation, Etc. From the date hereof through the Effective Time
or the termination of this Agreement in accordance with the terms hereof, the
Company and each of its Subsidiaries shall not, and shall cause each of their
officers, directors, employees, agents, legal and financial advisors and
affiliates not to solicit, or otherwise encourage (including by way of
furnishing information or assistance), initiate, endorse or enter into
substantive discussions or any agreement or agreement in principal, announce any
intention to do any of the foregoing, with respect to any offer or proposal
which constitutes or may reasonably be expected to lead to the acquisition of
all or a significant part of the business and properties, or the acquisition of
at least a majority of the outstanding securities whether by purchase, merger,
purchase of assets, tender offer, exchange offer, business combination or
otherwise (a "Third Party Transaction"), of the Company (other than by Parent or
Sub). Except to the extent permitted by the immediately succeeding sentence,
prior to the Effective Time, the Company and its Subsidiaries shall not, and
shall cause each of their officers, directors, legal and financial advisors,
agents and affiliates not to, directly or indirectly, participate in any
negotiations or discussions regarding, or furnish any information with respect
to, or otherwise cooperate in any way in connection with, or assist or
participate in, facilitate or encourage, any effort or attempt to effect or seek
to effect, a Third Party Transaction with respect to the Company. Nothing in
this Section 6.04 shall prohibit the board of directors of the Company from (i)
furnishing information to, or entering into discussions or negotiations with,
any person or entity that makes an unsolicited written bona fide proposal to
effect a Third Party Transaction with respect to the Company if the board of
directors in its reasonable judgment, based on written advice from its outside
legal counsel, determines that the failure to do so would violate the fiduciary
obligations of the board of directors under applicable law, provided that prior
to furnishing such information to, or entering into discussions or negotiations
with, such person or entity, the Company shall enter into a confidentiality
agreement in customary form on terms comparable to the confidentiality agreement
entered into between the Company and Parent (a "Confidentiality Agreement"); or
(ii) to the extent applicable, complying with Rule 14e-2 promulgated under the
Exchange Act with regard to a Third Party Transaction with respect to the
Company. The Company represents it is not currently involved in any existing
discussions or negotiations with any party with respect to a Third Party
Transaction with respect to the Company. Prior to the Effective Time, the
Company will promptly communicate to Parent the terms of any proposal which it
may receive in respect of any Third Party Transaction with respect to the
Company and will keep Parent informed as to the status of any actions, including
negotiations or discussions taken pursuant to this Section 6.04.
6.05. Registration Statement; Proxy Statement. (a) As promptly as
practicable after the execution of this Agreement, the Company shall prepare and
file with the Commission a proxy statement in definitive form relating to the
Company's Stockholders' Meeting (the "Proxy Statement") and Parent shall prepare
and file with the Commission a registration statement on Form S-4 (the
registration statement together with the amendments thereto being the "S-4"), in
connection with the registration under the Securities Act of the Parent Common
Stock and the other transactions contemplated by this Agreement, containing the
Proxy Statement. The Parent will use all reasonable efforts to have or cause the
S-4 to become effective under the Securities Act as promptly as practicable, and
shall take any reasonable action required to be taken under any applicable state
securities or "blue sky" laws in connection with the issuance of shares of
Parent Common Stock in the Merger. Each of Parent and the Company shall furnish
all information concerning it and the holders of its capital stock as the other
may reasonably request in connection with such actions. As promptly as
practicable after the S-4 shall have become effective, the Company shall mail
the Proxy Statement to its stockholders. The Proxy Statement shall include the
recommendation of the Company's board of directors in favor of the Merger,
unless otherwise required by the applicable fiduciary duties of the directors of
the Company as advised in writing by outside legal counsel.
(b) If at any time prior to the Effective Time any event or circumstances
relating to the Company, Parent or any of their respective Subsidiaries, or its
or their respective officers or directors, should be discovered by the Company
or Parent which should be set forth in an amendment to the S-4 or a supplement
to the Proxy Statement, such party shall promptly inform the other.
6.06. Access. Upon reasonable notice, the Company and Parent shall each
(and shall cause each of their respective Subsidiaries to) afford to the
officers, employees, accountants, counsel and other representatives of
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the other, access, during normal business hours during the period prior to the
Effective Time, to all its properties, books, contracts, commitments and records
and, during such period, each of the Company and Parent shall (and shall cause
each of their respective Subsidiaries to) furnish promptly to the other (a) a
copy of each report, schedule, registration statement and other document filed
with the Commission or received by it during such period pursuant to the
requirements of the Federal securities laws and (b) all other information
concerning its business, properties and personnel as such other party may
reasonably request. Each of the Company and Parent agree that it will not, and
will cause its respective representatives not to, use any information obtained
pursuant to this Section 6.06 for any purpose unrelated to the consummation of
the transactions contemplated by this Agreement. The Confidentiality Agreement
dated December 22, 1995 (the "Company Confidentiality Agreement"), by and
between the Company and Parent, shall apply with respect to information
furnished by the Company or its Subsidiaries and the Company's representatives
thereunder or hereunder and any other activities contemplated thereby. The
Confidentiality Agreement dated December 22, 1995 (the "Parent Confidentiality
Agreement"), by and between the Company and Parent, shall apply to information
furnished by Parent or its Subsidiaries and Parent representatives thereunder or
hereunder any other activities contemplated thereby. The parties agree that this
Agreement and the transactions contemplated hereby shall not constitute a
violation of either the Company Confidentiality Agreement or the Parent
Confidentiality Agreement.
6.07. Meeting of Stockholders. The Company shall take all action necessary,
in accordance with applicable law and the Companys' Certificate of Incorporation
and By-laws to convene the Stockholders' Meeting as promptly as practicable to
consider and vote upon this Agreement and the Merger. Subject to the third
sentence of Section 6.04, the Company shall use all reasonable efforts to
solicit from its stockholders proxies in favor of the adoption and approval of
this Agreement and to take all other action necessary to secure the vote of
stockholders required by law to effect the Merger. The Company and Parent shall
coordinate and cooperate with respect to the timing of such Stockholders'
Meeting and shall use all reasonable efforts to hold such Stockholders' Meeting
as soon as practicable after the date hereof. Parent shall (i) cause Sub
promptly to submit this Agreement and the transactions contemplated hereby for
approval and adoption by Parent as its sole stockholder by written consent, (ii)
authorize and cause an officer of Parent to vote Parent's shares of Sub for
adoption and approval of this Agreement and the transactions contemplated
hereby, and (iii) take all additional actions as the sole stockholder of Sub
necessary to adopt and approve this Agreement and the transactions contemplated
hereby.
6.08. Legal Requirements to Merger; Consents. Each of the Company, Parent
and Sub will take, or cause to be taken, all reasonable actions necessary to
comply promptly with all legal requirements which may be imposed on it with
respect to the Merger (including furnishing all information required under the
HSR Act, in connection with the FCC Approvals and the PUC Approvals and in
connection with approvals of or filing with any other Governmental Entity) and
will promptly cooperate with and furnish information to each other in connection
with any such requirements imposed upon any of them or any of their Subsidiaries
in connection with the Merger. Each of the Company, Parent and Sub will, and
will cause its Subsidiaries to, take all reasonable actions necessary to obtain
(and will cooperate with each other in obtaining) any consent, authorization,
order or approval of, or any exemption by, any Governmental Entity or private
third party, required to be obtained or made by Parent, Sub or the Company or
any of their Subsidiaries in connection with the Merger or the taking of any
action contemplated by this Agreement.
6.09. Affiliates. At least 30 days prior to the Closing Date, the Company
shall deliver to Parent a letter identifying all persons who are, at the time
this Agreement is submitted for approval to the stockholders of the Company,
"affiliates" of the Company (each a "Rule 145 Affiliate") for purposes of Rule
145 under the Securities Act ("Rule 145"). The Company shall use its best
efforts to cause each such person to deliver to Parent on or prior to the
Closing Date a written agreement, in form and substance reasonably satisfactory
to the Company and Parent and their respective counsel, to the effect that such
person will not offer to sell, sell or otherwise dispose of any shares of Parent
Common Stock issued in the Merger, except pursuant to an effective registration
statement, in compliance with Rule 145, as amended from time to time, or in a
transaction which, in the opinion of legal counsel, which opinion shall be
satisfactory to Parent, is exempt from the registration requirements of the
Securities Act.
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6.10. Authorization for Shares and Stock Exchange Listing. Prior to the
Effective Time, Parent shall have taken all action necessary to permit it to
issue the number of shares of Parent Common Stock required to be issued pursuant
to Section 3.01. Parent shall use all reasonable efforts to cause the shares of
Parent Common Stock to be issued in the Merger to be approved for listing on the
AMEX, subject to official notice of issuance, prior to the Closing Date.
6.11. Company Stock Plans and Benefits. At the Effective Time, all then
outstanding Company Options shall, by virtue of the Merger and without any
further action on the part of the Company or the holder of any such Company
Options, be assumed by Parent in such manner that Parent (A) is a corporation
"assuming a stock option in a transaction to which Section 424(a) of the Code
applies," or (B) to the extent that Section 424(a) of the Code does not apply to
any such Company Options, would be such a corporation were Section 424(a)
applicable to such Company Options. Each outstanding Company Option assumed by
Parent under any Company employee stock option plan or arrangement shall be
converted into a Parent stock option (a "Parent Stock Option"), under which the
number of shares underlying the Parent Stock Option shall be determined by
multiplying the number of shares of Company Common Stock underlying such Company
Option immediately prior to the Effective Time by the Conversion Number and
rounding down to the nearest whole number, and the exercise price per share of
Parent Common Stock at which the Parent Stock Option shall be exercisable shall
be determined by dividing the exercise price per share of the Company Common
Stock subject to such Company Option immediately prior to the Effective Time by
the Conversion Number and rounding up to the nearest whole cent. Each such
Parent Stock Option shall be assumed at the Effective Time by Parent on the same
terms and subject to the same conditions as in effect immediately prior to the
Effective Time, subject to such equitable adjustments as may be necessary to
reflect the Merger. Parent and the Company shall take or cause to be taken any
and all action necessary or appropriate to implement the adjustments
contemplated by this Section 6.11. Employees of the Company who remain employed
by the Company after the Effective Time shall be eligible to participate in the
Parent Employee Plans that are available to similarly situated Parent employees.
6.12. Mutual Efforts; Further Assurances. Each of the parties hereto agrees
to use all commercially reasonable efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or advisable
to cause the fulfillment of the conditions to such party's obligations
hereunder. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement or to vest
the Surviving Corporation with full title to all properties, assets, rights,
approvals, immunities and franchises of the Company or Sub, the proper officers
and directors of each party to this Agreement shall take all such necessary
action.
6.13. Expenses. Except as otherwise provided in Sections 10.3 and 10.4, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expense.
6.14. Public Statements. The parties shall consult with each other prior to
issuing any public announcement or statement with respect to this Agreement or
the transactions contemplated hereby and shall not issue any such public
announcement or statement prior to such consultation, except that any party may
issue such a public announcement or statement prior to such consultation if and
to the extent required by law or any listing agreement with a national
securities exchange, in which case such party shall use all reasonable efforts
to consult with the other parties prior to issuing such public announcement or
statement.
6.15. Certification of Stockholder Vote. At or prior to the Closing, the
Company shall deliver to Parent a certificate of the Company's Secretary setting
forth the number of shares of Company Stock voted in favor of adoption of this
Agreement and the consummation of the Merger and the number of such shares voted
against adoption of this Agreement and consummation of the Merger.
6.16. Notification of Certain Matters. Each party shall give the other
prompt notice of (i) the occurrence, or non-occurrence, of any event the
occurrence, or non-occurrence, of which would be likely to cause (A) any
representation or warranty contained in this Agreement to be untrue or
inaccurate or (B) any covenant, condition or agreement contained in this
Agreement not to be complied with or satisfied and (ii) any failure of the
Company or Parent, as the case may be, to comply with or satisfy any covenant,
condition or agreement to
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be complied with or satisfied by it hereunder; provided, that the delivery of
any notice pursuant to this Section 6.16 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
6.17. Indemnification and Insurance. (i) The Surviving Corporation and
Parent agree that the Surviving Corporation shall maintain all rights to
indemnification (including with respect to the advancement of expenses incurred
in the defense of any action or suit) existing on the date of this Agreement in
favor of the present and former directors and officers of the Company as
provided in the Company's Certificate of Incorporation and By-laws or otherwise,
in each case in effect on the date of this Agreement, and that the Certificate
of Incorporation and By-laws of the Surviving Corporation shall not be amended
to reduce or limit the rights of indemnity afforded to the present and former
directors and officers of the Company, or the ability of the Surviving
Corporation to indemnify them, nor to hinder, delay or make more difficult the
exercises of such rights of indemnity or the ability to indemnify.
(ii) The Surviving Corporation will indemnify to the fullest extent
possible under its Certificate of Incorporation, its By-laws and applicable law
the present and former directors and officers of the Company against all losses,
damages, liabilities or claims made against them arising from their service in
such capacities prior to and including the Effective Time, to at least the same
extent as such persons are currently required to be indemnified pursuant to the
Company's Certificate of Incorporation and By-laws. The Company (or after the
Effective Time, the Surviving Corporation) will pay expenses in advance of the
final disposition of any such action or proceeding to each present or former
director or officer to the full extent permitted by law. Without limiting the
foregoing, in the event any such claim, action, suit, proceeding or
investigation is brought against any present or former director or officer of
the Company (whether arising before or after the Effective Time), (i) the
present and former directors and officers of the Company may retain counsel
satisfactory to them and the Company (or them and the Surviving Corporation
after the Effective Time) and the Company (or after the Effective Time, the
Surviving Corporation) shall pay all fees and expenses of such counsel for such
indemnified parties promptly as statements therefor are received; and (ii) the
Company (or after the Effective Time, the Surviving Corporation) will use all
reasonable efforts to assist in the vigorous defense of any such matter,
provided that neither the Company nor the Surviving Corporation shall be liable
for any settlement effected without its written consent, which consent shall not
be unreasonably withheld. Any former or present director or officer of the
Company wishing to claim indemnification under this Section 6.17, upon learning
of any such claim, action, suit, proceeding or investigation, shall promptly
notify the Company or the Surviving Corporation of the existence of such claim,
action, suit, proceeding or investigation (but the failure to so notify shall
not relieve a party from any liability which it may have under this Section 6.17
except to the extent such failure prejudices such party). The present and former
directors and officers of the Company as a group may retain only one law firm to
represent them with respect to each such matter unless there is, under
applicable standards of professional conduct, a conflict on any significant
issue between the positions of any two or more of such indemnified parties.
(iii) The Surviving Corporation shall cause to be maintained in effect for
a period ending not sooner than the third anniversary of the Effective Time, at
no expense to the beneficiaries thereof, directors' and officers' liability
insurance providing at least the same coverage with respect to the Company's
present and former officers and directors as the current policies maintained by
or on behalf of the Company, and containing terms and conditions which are
substantially similar, with respect to matters occurring prior to the Effective
Time (to the extent such insurance is currently available on commercially
reasonable terms with respect to such matters).
(iv) In the event the Surviving Corporation or any of its successors or
assigns (A) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (B) transfers all or substantially all of its properties and assets to
any person, then and in each such case, proper provisions shall be made so that
the successors and assigns of the Surviving Corporation shall assume the
obligations of the Surviving Corporation set forth in this Section 6.17.
(v) The provisions of this Section 6.17 are intended to be for the benefit
of, and shall be enforceable by, each indemnified party and his or her heirs and
representatives.
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6.18. Production of Documents by the Company Pending the Merger. During the
period from the date of this Agreement and continuing until the Effective Time,
the Company agrees as to itself and its Subsidiaries that it shall furnish to
Parent the following documents as soon as the documents are available:
(i) profit and loss statements and balance sheets as of the end of
each month;
(ii) weekly ANI (LEC Code) reports;
(iii) invoices from Sprint with respect to the following: Master
Summary (Carrier Transport), Product Summaries (Carrier
Transport), Private Line and Enhanced 800;
(iv) invoices from Wiltel Inc. with respect to switched, dedicated
and private line service;
(v) weekly accounts status reports;
(vi) monthly accounts receivable summary aging report; and
(vii) monthly payroll reports.
6.19. Tax and Accounting Treatment. The parties intend, and shall use their
best efforts to cause, the transactions contemplated hereby to qualify as a
"reorganization" as defined in Sections 368(a)(1)(A) and 368(a)(2)(E) of the
Code, or other applicable provisions of the Code, and to be eligible for pooling
of interests accounting treatment. The Company and Parent shall use their best
efforts to cause each affiliate of the Company and Parent, as applicable, to
deliver to the Company and Parent, prior to 30 days before the Merger, an
executed affiliate's agreement in substantially the form of Exhibit A-1 (for
affiliates of Parent) or Exhibit A-2 (for affiliates of the Company) hereto.
6.20. Rule 145. Parent will file the reports required to be filed by it
under the Securities Act and the Exchange Act and the rules and regulations
thereunder and will take such further action as any Rule 145 Affiliate may
reasonably request, all to the extent required from time to time to enable such
Rule 145 Affiliate to sell Parent Common Stock without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 145,
as such Rule may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the Commission. Upon the request of any Rule 145
Affiliate, Parent will deliver to such Rule 145 Affiliate a written statement as
to whether it has complied with such requirements.
7. CONDITIONS TO OBLIGATIONS OF EACH PARTY.
The obligations of each party to effect the Merger shall be subject to the
fulfillment, at or prior to the Effective Time, of the following conditions:
7.01. Approval of Stockholders. This Agreement shall have been adopted
by such vote or votes of the stockholders of the Company as shall be
required by the DGCL and the Certificate of Incorporation and By-laws of
the Company.
7.02. Fairness Opinions. The opinions of Hoak Securities Corporation
and George K. Baum & Company to the effect that the Conversion Number is
fair from a financial point of view to the stockholders of Parent and the
Company, respectively, shall have been received by Parent and the Company,
respectively, and such firms shall not have withdrawn such fairness
opinions prior to or on the Closing Date.
7.03. AMEX Approval. The shares of Parent Common Stock issuable
pursuant to the Merger and such other shares of Parent Common Stock
required to be reserved for issuance in connection with the Merger or upon
exercise of Company Options shall have been authorized for listing on the
AMEX, upon official notice of issuance.
7.04. No Stop Order. The S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order. The offer and sale of the Parent
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Common Stock to be issued in connection herewith shall have been approved
under relevant state securities or blue sky laws.
7.05. Pooling Letters. Parent shall have received from Grant Thornton
LLP an opinion that the Merger will be treated as a "pooling of interests"
under applicable financial accounting standards.
7.06. Tax Opinion. The Company and Parent shall have received the
opinion of Freeborn & Peters satisfactory in form and substance to the
Company and Parent dated the Closing Date to the effect that, based upon
reasonable assumptions and conditions, (1) the Merger will be treated for
Federal income tax purposes as a reorganization within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, (2) Parent, Sub and the
Company will be parties to that reorganization and (3) no stockholder of
the Company will recognize gain or loss as the result of the receipt by
such stockholder of Parent Common Stock solely in exchange for shares of
Company Stock surrendered in the Merger; such firm shall have consented to
the filing of such opinion as an exhibit to the S-4 and to the reference to
such firm in the S-4, and such firm shall have reconfirmed such opinion in
writing as of the Closing Date. The Company and Parent shall have received
such evidence as each may reasonably require that all assumptions or
conditions to such opinion are valid or have been satisfied.
7.07. No Action or Proceeding. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the Merger shall be in effect;
provided, however, that prior to invoking this condition, each party shall
use all reasonable efforts to have any such decree, ruling, injunction or
order vacated, except as otherwise contemplated by this Agreement.
7.08. Other Approvals. Other than the filing provided for by Section
1.02, all authorizations, consents, orders or approvals of, or declarations
or filings with, or expirations of waiting periods imposed by, any
Governmental Entity (including those described in Sections 4.05 and 5.05)
the failure to obtain which would have a Company Material Adverse Effect or
a Parent Material Adverse Effect, as the case may be (including all filings
under the HSR Act and the expiration of all waiting periods thereunder),
shall have been filed, occurred or been obtained. Parent shall have
received all state securities laws or "blue sky" permits and authorizations
necessary to issue Parent Common Stock pursuant to the terms of the Merger.
8. CONDITIONS TO OBLIGATIONS OF PARENT AND SUB.
The obligation of Parent and the obligation of Sub to effect the Merger
shall be subject to the fulfillment, at or prior to the Effective Time, of the
following additional conditions:
8.01. Representations and Warranties True on the Closing Date. The
representations and warranties of the Company set forth in this Agreement
shall be true and correct in all material respects, in each case as of the
date of this Agreement, and (except to the extent such representations and
warranties speak specifically as of an earlier date) as of the Closing Date
as though made on and as of the Closing Date, except as otherwise
contemplated by this Agreement.
8.02. The Company's Performance. The Company shall have performed, in
all material respects, all obligations required to be performed by it under
this Agreement on or before the Closing Date.
8.03. Officers' Certificate. On or before the Closing Date, the
Company shall have delivered to Parent a certificate signed by an officer
of the Company to the effects of Sections 8.01 and 8.02.
8.04. Authority. All action required to be taken by, or on the part
of, the Company to authorize the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby
and thereby shall have been duly and validly taken by the board of
directors and stockholders of the Company.
8.05. Opinion of Counsel. Parent shall have been furnished with an
opinion substantially in the form of Exhibit B hereto of Cooley Godward
Castro Huddleson & Tatum, counsel to the Company, dated the Closing Date.
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8.06. Affiliate Letters. Parent shall have received from each person
named in the letter referred to in Section 6.09 an executed copy of an
agreement substantially in the form contemplated thereby.
8.07. Comfort Letters. Parent shall have received a comfort letter
from Grant Thornton LLP, dated the date on which the S-4 shall become
effective and the Closing Date and addressed to Parent, in each case
satisfactory to Parent and customary in form and substance for such letters
delivered in connection with registration statements similar to the S-4 and
transactions similar to those contemplated by this Agreement.
8.08. No Company Material Adverse Effect. Except for the execution of
this Agreement and the consummation of the transactions contemplated
hereby, since the date hereof there shall not have occurred any Company
Material Adverse Effect.
8.09. Company Stockholder Exercise of Appraisal Rights. The holders of
no more than nine percent (9%) of the outstanding Company Stock shall have
exercised their appraisal rights under Section 262 of the DGCL.
9. CONDITIONS TO OBLIGATIONS OF THE COMPANY.
The obligation of the Company to effect the Merger shall be subject to the
fulfillment, at or prior to the Effective Time, of the following additional
conditions:
9.01. Representations and Warranties True on the Closing Date. The
representations and warranties of Parent and Sub set forth in this
Agreement shall be true and correct in all material respects, in each case
as of the date of this Agreement and (except to the extent such
representations and warranties speak specifically as of an earlier date) as
of the Closing Date as though made on and as of the Closing Date, except as
otherwise contemplated by this Agreement.
9.02. Parent's and Sub's Performance. Parent and Sub shall have
performed in all material respects all obligations required to be performed
by them under this Agreement on or before the Closing Date.
9.03. Officers' Certificate. On or before the Closing Date, Parent and
Sub shall have delivered to the Company certificates signed by an officer
of Parent and Sub, respectively, to the effects of Sections 9.01 and 9.02.
9.04. Authority. All action required to be taken by, or on the part
of, Parent and Sub to authorize the execution, delivery and performance of
this Agreement and the consummation of the transaction contemplated by this
Agreement shall have been duly and validly taken by the Boards of Directors
of Parent and Sub, respectively, and by the sole stockholder of Sub.
9.05. Opinion of Parent Counsel. The Company shall have been furnished
with an opinion or opinions substantially in the form of Exhibit C hereto
of Freeborn & Peters, counsel to Parent, dated the Closing Date.
9.06. Comfort Letters. The Company shall have received a comfort
letter from Grant Thornton LLP, dated the date on which the S-4 shall
become effective and the Closing Date and addressed to the Company, in each
case satisfactory to the Company and customary in form and substance for
such letters delivered in connection with registration statements similar
to the S-4 and transactions similar to those contemplated by this
Agreement.
9.07. No Parent Material Adverse Effect. Except for the execution of
this Agreement and the consummation of the transactions contemplated
hereby, since the date hereof there shall not have occurred any Parent
Material Adverse Effect.
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10. TERMINATION.
10.01. Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval and adoption of this Agreement by the stockholders of the Company:
(i) by mutual consent of Parent and the Company;
(ii) by either Parent or the Company if any permanent injunction or
other order of a court or other competent Governmental Entity preventing
the consummation of the Merger shall have become final and non-appealable;
(iii) by either Parent or the Company, if there shall have been a
material breach of any representation, warranty, covenant or agreement on
the part of the Company or on the part of Parent or Sub, as applicable,
which breach shall not have been cured prior to the earlier of (A) fifteen
business days following receipt by the breaching party of notice of such
breach and (B) the Closing Date;
(iv) by either Parent or the Company if the Merger shall not have been
consummated before November 30, 1996; provided, that the right to terminate
this Agreement under this Section 10.01(iv) shall not be available to any
party who has materially breached its representations, warranties,
covenants, or agreements under this Agreement and such material breach has
been the cause of or resulted in the failure of the Merger to occur on or
before such date; and provided, further, that if any condition to this
Agreement shall fail to be satisfied by reason of the existence of an
injunction or order of any court or Governmental Entity resulting from an
action or proceeding commenced by any party which is not a Governmental
Entity, then at the request of either party the deadline date referred to
above shall be extended for a reasonable period of time, not in excess of
120 days, to permit the parties to have such injunction vacated or order
reversed;
(v) by either Parent or the Company if this Agreement and the Merger
fail to receive the requisite vote for approval and adoption by the
stockholders of the Company at the Stockholders' Meeting;
(vi) by the Company if its board of directors, in the exercise of its
good faith judgment as to its fiduciary duties to its stockholders imposed
by law and upon written advice from counsel, determines that such
termination is required by reason of a Third Party Transaction; or
(vii) by Parent if (A) the board of directors of the Company shall
withdraw, modify or change its recommendation of this Agreement or the
Merger in a manner adverse to Parent or shall have resolved to do any of
the foregoing; (B) the board of directors of the Company shall have
recommended to the stockholders of the Company a Third Party Transaction;
(C) a tender offer or exchange offer for 15% or more of the outstanding
shares of capital stock of the Company is commenced and the board of
directors of the Company, within 10 business days after such tender offer
or exchange offer is commenced, either fails to recommend against
acceptance of such tender offer or exchange offer by its stockholders or
takes no position with respect to the acceptance of such tender offer or
exchange offer by its stockholders; or (D) after the date hereof, any
person (other than Mr. Robert R. Kaemmer) shall have acquired beneficial
ownership of or the right to acquire beneficial ownership of or any "group"
(as such term is defined in Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder) shall have been formed which
beneficially owns, or has the right to acquire beneficial ownership of, 15%
or more of the then outstanding shares of Company Stock (other than those
beneficial owners of 15 percent or more of the outstanding Company Stock as
of the date hereof or an affiliate thereof or Parent or an affiliate
thereof).
10.02. Effect of Termination. In the event of a termination of this
Agreement by either the Company or Parent as provided in Section 10.01, this
Agreement shall forthwith become void and there shall be no liability or
obligation on the part of Parent, Sub or the Company or their respective
officers, directors or stockholders, except to the extent provided in the
second, third and fourth sentences of Section 6.06 and in (ii) Sections 10.03
and 10.04.
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10.03. Liability of the Parties. Upon a willful breach by a party hereto of
any of its representations, warranties, covenants or agreements set forth in
this Agreement, Parent or the Company, whichever shall be the party at fault,
shall be liable (among other things) to reimburse the terminating party or
parties for all legal, accounting, printing, and other out-of-pocket expenses
reasonably incurred by the terminating party or parties in connection with this
Agreement and the transactions contemplated hereby. Except as set forth in
Sections 10.02 and 10.04, upon any other termination, no party shall have any
liability or obligation under this Agreement and each party shall bear the
expenses incurred by it, except that the filing fees and expenses paid to
Governmental Entities under Federal or other applicable securities laws shall be
borne equally by the Company and Parent.
10.04. Termination Fee. Notwithstanding anything in this Agreement to the
contrary and in addition to any payments required pursuant to Section 10.03, in
the event that:
(a) Parent terminates this Agreement pursuant to Section 10.01(iii) or
(iv) above and (A) such termination is the result of a willful breach of
any covenant, agreement, representation or warranty contained herein by the
Company, (B) there exists a Third Party Transaction at the time of such
termination and (C) within one year of such termination the Company enters
into a definitive agreement for the Third Party Transaction described in
(B) above or the Third Party Transaction described in (B) above is
consummated; or
(b) the Company or Parent terminates this Agreement pursuant to
Section 10.01(v) above and such termination is due to the fact that this
Agreement and the Merger shall not have been approved by the requisite vote
of the Company's stockholders as provided in Section 7.01 in circumstances
where (a) an offer or proposal to effect a Third Party Transaction with or
for the Company or its Subsidiaries has been publicly announced that is
financially superior to the Merger and reasonably capable of being financed
(as determined in each case in good faith by the Company's board of
directors after consultation with the Company's financial advisors) or (b)
after the date hereof any person or group (as defined in Section 13(d)(3)
of the Exchange Act) (other than Parent or any of its affiliates or Mr.
Robert R. Kaemmer) shall have become the beneficial owner (as defined in
Rule 13d-3 promulgated under the exchange Act) of at least 15 percent of
the outstanding shares of Company Stock or any person or group shall have
commenced, or shall have publicly announced an intention to commence, a
tender or exchange offer for at least 15 percent of the outstanding shares
of Company Stock that is financially superior to the Merger and reasonably
capable of being financed (as determined in each case in good faith by the
Company's board of directors after consultation with the Company's
financial advisors); or
(c) the Company terminates this Agreement pursuant to Section
10.01(vi) above; or
(d) Parent terminates this Agreement pursuant to Section 10.01(vii)(A)
above and, at the time of such termination, there exists a Third Party
Transaction or within one year of such termination the Company enters into
a definitive agreement for a Third Party Transaction or a Third Party
Transaction is consummated; or
(e) Parent terminates this Agreement pursuant to Section
10.01(vii)(B), (C) or (D) above,
then the Company shall promptly but in no event later than two days after the
first of such events shall occur, pay Parent a fee equal to $250,000 which
amount shall be payable forthwith without any demand therefor, in immediately
available funds. The parties hereto agree that such fee and payment of expenses
set forth in Section 10.03 shall be liquidated damages, are reasonable in light
of the difficulty in determining the precise level of damages which would be
incurred under such circumstances and the payment thereof shall constitute the
sole remedy of Parent for the termination of this Agreement by the Company under
the circumstances described in this Section 10.04.
11. MISCELLANEOUS.
11.01. Nonsurvival of Representations, Warranties and Agreements. None of
the representations, warranties, covenants and agreements in this Agreement (or
the exhibits and schedules hereto) or in any instrument delivered pursuant to
this Agreement shall survive the Effective Time, except for the agreements
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contained in Article 3, the last sentence of Section 6.11, Sections 6.12, 6.13,
6.17, 6.20 and Article 11, and the agreements of the Rule 145 Affiliates of the
Company delivered pursuant to Sections 6.09 and 6.19. The Company
Confidentiality Agreement and Parent Confidentiality Agreement shall survive the
execution and delivery of this Agreement, and the provisions of the Company
Confidentiality Agreement and the Parent Confidentiality Agreement shall apply
to all information and material developed by any party hereunder.
11.02. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be (i) delivered personally, (ii) mailed
by postage prepaid, certified mail or registered mail, return receipt requested,
(iii) delivered by prepaid, overnight courier of recognized national standing,
such as Federal Express, or (iv) sent by facsimile transmission with written
confirmation of receipt requested, in any such case, addressed as follows:
If to Parent or Sub:
Phoenix Network, Inc.
1687 Cole Boulevard
Golden, CO 80401
Attention: Wallace M. Hammond
Telephone No.: (303) 232-4333
Telecopy No.: (303) 232-1250
With a copy to:
Freeborn & Peters
950 Seventeenth Street
Suite 2600
Denver, CO 80202
Attention: Ernest J. Panasci, Esq.
Telephone No.: (303) 628-4200
Telecopy No.: (303) 628-4240
If to the Company:
AmeriConnect, Inc.
6750 W. 93rd Street
Suite 110
Overland Park, KS 66212
Attention: Robert R. Kaemmer
Telephone No.: (913) 341-8888
Telecopy No.: (913) 341-2132
With a copy to:
Cooley Godward Castro Huddleson & Tatum
5 Palo Alto Square, Suite 400
Palo Alto, CA 94306
Attention: Patrick A. Pohlen, Esq.
Telephone No.: (415) 843-5000
Telecopy No.: (415) 857-0663
Such notices, requests, demands and other communications shall be deemed
made as of the date of actual delivery to the addressee thereof, which (x) in
the case of notice mailed return receipt requested, shall be the date of
delivery shown on the return receipt (y) in the case of notice delivered by
prepaid, overnight courier, shall be the date of delivery reflected on the
sender's invoice from such courier, and (z) in the case of notice sent by
facsimile transmission, shall be the date of such transmission.
11.03. Assignability and Parties in Interest; Third Party Beneficiaries.
Neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other parties, except that
Sub may
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assign, subject to the reasonable approval of the Company, any or all of its
rights, interests and obligations hereunder to Parent or to any wholly owned
Subsidiary of Parent. Subject to the immediately preceding sentence, this
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective successors and assigns; except as provided in Section 6.17
nothing in this Agreement is intended to confer, expressly or by implication,
upon any other person any rights or remedies under or by reason of this
Agreement.
11.04. Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of Colorado without
regard to any principles of conflicts of laws.
11.05. Counterparts. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
11.06. Publicity. In addition to the provisions of Section 6.14 above, the
Company and Parent agree that press releases and other announcements with
respect to the Merger shall be subject to mutual agreement to the maximum extent
feasible that is consistent with their respective legal obligations to
disseminate material information to their stockholders and the public.
11.07. Complete Agreement. This Agreement, the exhibits hereto and the
schedules and documents delivered pursuant hereto or referred to herein contain
the entire agreement between the parties hereto with respect to the transactions
contemplated herein and therein and supersede all previous negotiations,
commitments and writings.
11.08. Specific Performance. Each of the parties hereto acknowledges and
agrees that the other party or parties hereto would be irreparably damaged in
the event any of the covenants or agreements contained in this Agreement are not
performed in accordance with their specific terms or are otherwise breached.
Accordingly, each of the parties hereto agrees that each of them shall be
entitled, without bond or other security, to an injunction or injunctions to
prevent breaches of the covenants or agreements contained in this Agreement and
to enforce specifically this Agreement and the covenants and agreements
contained herein in any action instituted in any court of the United States or
any state thereof having subject matter jurisdiction, in addition to any other
remedy to which such party may be entitled at law or in equity.
11.09. Modifications, Amendments and Waivers. At any time prior to the
Effective Time, the parties hereto may, by written agreement, (i) extend the
time for the performance of any of the obligations or other acts of the parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained in this Agreement or in any schedule or document delivered pursuant
hereto and (iii) waive compliance with any of the covenants or agreements
contained in this Agreement. At any time prior to the Effective Time, by action
of their respective boards of directors, the parties hereto may, by written
agreement, before or after stockholder approval, amend or supplement any of the
provisions of this Agreement, provided, however, that after this Agreement has
been adopted by stockholders, no amendment or supplement shall be made which is
required by law to have the further approval of stockholders unless such
amendment or supplement is approved by stockholders. Any written instrument or
agreement referred to in this Section 11.09 shall be validly and sufficiently
authorized for the purposes of this Agreement if signed, on behalf of the
Company, Parent and Sub, by persons authorized to sign this Agreement. This
Agreement may not be amended, waived or extended except by an instrument in
writing signed on behalf of each of the parties hereto.
11.10. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
11.11. Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11.12. Obligation of Parent. Whenever this Agreement requires Sub to take
any action, such requirement shall be deemed to include an undertaking on the
part of Parent to cause Sub to take such action.
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11.13. Certain Definitions. (A) As used in this Agreement, an "Affiliate"
of any person means any other person directly or indirectly controlling or
controlled by or under direct or indirect common control with such person. For
the purposes of this definition, "control", when used with respect to any person
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such person, whether through the
ownership of voting securities, by contract or otherwise; the terms
"controlling" and "controlled" have meanings correlative to the foregoing; and
the term "person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof; and (B) where
any representation and warranty contained in this Agreement is expressly
qualified by reference to the "knowledge" of a party, such term shall be limited
to the actual knowledge of the executive officers and directors of the party
making the representation and warranty.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be executed by their respective duly authorized officers as of the date first
above written.
PHOENIX NETWORK, INC.
By: /s/ WALLACE M. HAMMOND
------------------------------------
Name: Wallace M. Hammond
Title: President & CEO
PHOENIX MERGER CORP.
By: /s/ WALLACE M. HAMMOND
------------------------------------
Name: Wallace M. Hammond
Title: President & CEO
AMERICONNECT, INC.
By: /s/ ROBERT R. KAEMMER
------------------------------------
Name: Robert R. Kaemmer
Title: Chairman of the Board,
President & CEO
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<PAGE> 94
APPENDIX B
[GEORGE K. BAUM & COMPANY LETTERHEAD]
, 1996
Board of Directors
AmeriConnect, Inc.
c/o Mr. Robert Kaemmer
Chairman, CEO and President
6750 West 93rd Street, Suite 110
Overland Park, KS 66212
Dear Directors:
You have asked us to render our opinion as to the fairness, from a
financial point of view, to the holders of Common Stock, pair value, $.01 per
share, of AmeriConnect, Inc. (the "Company Common Stock") of the consideration
to be received by such stockholders in connection with the proposed merger
("Merger") of Phoenix Merger Corp. ("Sub"), a wholly owned subsidiary of Phoenix
Network, Inc. ("Parent"), with and into AmeriConnect, Inc. ("AmeriConnect")
pursuant to the terms and conditions of the Amended and Restated Agreement and
Plan of Merger, dated as of June 14, 1996 ("Merger Agreement") between Sub,
Parent and AmeriConnect. Capitalized terms used herein which are not defined
herein, shall have the meanings set forth in the Merger Agreement.
We understand that in connection with the Merger, each outstanding share of
Company Common Stock will be converted into the right to receive the Conversion
Number of fully paid and nonassessable shares of Common Stock, par value $.001
per share, of Parent ("Parent Common Stock"). "Conversion Number" shall mean the
number equal to the quotient obtained by dividing (1) the quotient obtained by
dividing the Merger Consideration by the Closing Parent Common Stock Price by
(2) the sum of (a) the number of shares of Company Common Stock outstanding
immediately prior to the Effective Time and (b) the number of shares of Company
Common Stock underlying all options for Company Common Stock outstanding
immediately prior to the Effective Time. "Merger Consideration" shall mean an
amount equal to $15,130,119 minus (i) the Stockholders' Equity Adjustment Amount
and (ii) all severance payments to be made by AmeriConnect to the officers and
directors of the AmeriConnect because of the Merger Agreement and the
transactions contemplated thereby, to the extent such payments are not already
reflected in the AmeriConnect Balance Sheet. "Closing Parent Common Stock Price"
shall mean (i) $5.25 if the closing price of a share of Parent Common Stock on
the American Stock Exchange on the day immediately preceding the Closing (the
"Closing Bid Price") is equal to or greater than $4.50 and equal to or less than
$6.00, (ii) if the Closing Bid Price is less than $4.50, $5.25 minus 50% of the
amount the Closing Bid Price is less than $4.50, or (iii) if the Closing Bid
Price is more than $6.00, $5.25 plus 50% of the amount the Closing Bid Price is
greater than $6.00. "Stockholders' Equity Adjustment Amount" shall be equal to
the amount, if any, by which the Stockholders' Equity Amount is less than
$250,000. "Stockholders' Equity Amount" shall mean an amount equal to the number
that results (1) the stockholders' equity of AmeriConnect as determined from
AmeriConnect's balance sheet, prepared in accordance with generally accepted
accounting principles ("GAAP"), of the close of business on the last day of the
month preceding the Closing Date (the "AmeriConnect Balance Sheet"), plus (2)
the Sprint Adjustment Amount, minus (3) all transaction Expenses that accrue or
are paid after the date of the AmeriConnect Balance Sheet, and minus (4) all
liabilities of AmeriConnect to Sprint Communications Company L.P. ("Sprint") in
respect of shortfall amounts as of the date of the AmeriConnect Balance Sheet;
provided, that, in the event that such sum exceeds $250,000, the Stockholders'
Equity Amount shall mean an amount equal to $250,000. "Sprint Adjustment Amount"
shall mean an amount equal to any billing credits which AmeriConnect or Parent
on behalf of AmeriConnect is entitled to receive from Sprint prior to the
AmeriConnect Balance Sheet that are
B-1
<PAGE> 95
not otherwise reflected in the AmeriConnect Balance Sheet. "Transaction
Expenses" shall mean accounting fees and expenses, attorney fees and expenses,
and investment banking fees and expenses of George K. Baum & Company paid or
accrued for by AmeriConnect with regard to the negotiation and execution of the
Merger Agreement and the consummation of the transactions set forth therein. For
purposes of this opinion, we have assumed that the Merger will qualify as a
tax-free reorganization under the United States Internal Revenue Code for the
stockholders of AmeriConnect and that the Merger will be accounted for as a
pooling of interests.
In rendering our opinion, George K. Baum & Company ("Baum & Company")
reviewed, among other things (i) the Merger Agreement, (ii) Annual Reports to
the stockholders of AmeriConnect and stockholders of Parent and Annual reports
on Form 10-KSB and Form 10-K, respectively, for AmeriConnect and Parent for the
five fiscal years ended December 31, 1995, (iii) interim Quarterly Reports to
stockholders of AmeriConnect and stockholders of Parent on Form 10-QSB and Form
10-Q, respectively, for each of AmeriConnect and Parent for the first quarter of
1996, (iv) proxy statements for annual meetings of stockholders for the last
five years and certain other communications from AmeriConnect to its
stockholders and Parent to its stockholders, and (v) certain internal financial
analyses and forecasts for AmeriConnect and Parent prepared by their respective
managements, including estimates as to the magnitude and timing of the potential
cost savings projected by management of each of AmeriConnect and Parent for the
consolidated companies. Baum & Company also held discussions with members of the
senior management of AmeriConnect and Parent regarding their respective past and
current business operations, financial condition and future prospects of their
respective companies and their views of the long-term benefits of the proposed
business combination of AmeriConnect and Parent. In addition, Baum & Company
reviewed the reported price and trading activity for the Company Common Stock
and the Parent Common Stock, respectively, compared certain financial and stock
market information for AmeriConnect and Parent with similar information for
certain other companies the securities of which are publicly traded, reviewed
the financial terms of certain recent business combinations in the long-distance
resellers specifically and in other industries generally, and performed such
other studies and analyses as Baum & Company considered appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of all of the financial and other information used by
us as the basis of our opinion. It should be noted that this opinion is based,
in part, on economic, market and other conditions as in effect on, and
information made available to us prior to the date of this letter, and does not
represent an opinion as to what value Company Common stock actually will have if
and when the Merger is consummated. Such actual value could be affected by
changes in such market conditions, general economic conditions and other factors
which generally influence the price of securities. Furthermore, any valuation of
securities is only an approximation, subject to uncertainties and contingencies
all of which are difficult to predict and beyond the control of the firm
preparing such valuation.
Baum & Company, as part of its investment banking business, is regularly
engaged in the evaluation of businesses and securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and for corporate planning and other purposes. In
the ordinary course of our business, we may, from time to time, effect
transactions for the accounts of our customers in securities of AmeriConnect and
receive customary compensation in connection therewith. Prior to AmeriConnect's
engagement of Baum & Company on September 21, 1995, to render financial advisory
and investment banking services to AmeriConnect, we had not previously been
engaged to provide investment banking services to AmeriConnect.
It is understood that this opinion may be included in any proxy statement
or written communication distributed to holders of Company Common Stock in
connection with the Merger; provided that this opinion, any summary of this
opinion, any excerpt of this opinion, and any reference to our services to
AmeriConnect may be used in such proxy statement or otherwise only with our
prior written approval.
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<PAGE> 96
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that, as of the date of this
letter, the consideration to be received for the Company Common Stock by the
holders of the Company Common Stock is fair from a financial point of view to
such holders.
Respectfully submitted,
/s/ GEORGE K. BAUM & COMPANY
----------------------------------
GEORGE K. BAUM & COMPANY
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<PAGE> 97
APPENDIX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SEC. 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to the provisions of
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with the provisions of subsection (d) of this Section and
who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to sec. 228 of this Chapter shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this Section. As
used in this Section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of a non-stock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a non-stock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251, 252, 254, 257, 258, 263 or 264 of this
Chapter;
(1) provided, however, that no appraisal rights under this Section shall be
available for the shares of any class or series of stock which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsections (f) or (g) of Section 251 of this
Chapter.
(2) Notwithstanding the provisions of subsection (b)(1) of this Section,
appraisal rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this Chapter to accept for such
stock anything except (i) shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository receipts in respect
thereof; (ii) shares of stock of any other corporation or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. or held
of record by more than 2,000 holders; (iii) cash in lieu of fractional shares or
fractional depository receipts described in the foregoing clauses (i) and (ii);
or (iv) any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares, or fractional depository receipts described in the
foregoing clauses (i), (ii) and (iii) of this subsection.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this Chapter is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this Section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this Section, including those set forth in subsections (d) and
(e), shall apply as nearly as is practicable.
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(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this Section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
Section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger of
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with the
provisions of this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation
has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this Chapter, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or within
10 days thereafter, shall notify each of the stockholders entitled to
appraisal rights of the effective date of the merger or consolidation and
that appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
Section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder
who has complied with the provisions of subsections (a) and (d) hereof and
who is otherwise entitled to appraisal rights, may file a petition in the
Court of Chancery demanding a determination of the value of the stock of
all such stockholders. Notwithstanding the foregoing, at any time within 60
days after the effective date of the merger or consolidation, any
stockholder shall have the right to withdraw his demand for appraisal and
to accept the terms offered upon the merger or consolidation. Within 120
days after the effective date of the merger or consolidation, any
stockholder who has complied with requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a
statement setting forth the aggregate number of shares not voted in favor
of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after his written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d)
hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of
a copy there of shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such as duly verified list. The Register
in Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall
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also be given by one or more publications at least one week before the day
of the hearing, in a newspaper of general circulation published in the City
of Wilmington, Delaware or such publications as the Court deems advisable.
The forms of the notices by mail and by publication shall be approved by
the Court, and the costs thereof shall be borne by the surviving or
resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with the provisions of this Section and who
have become entitled to appraisal rights. The Court may require the
stockholders who have demanded an appraisal for their shares and who hold
stock represented by certificates to submit their certificates of stock to
the Register in Chancery for notation thereon of the pendency of the
appraisal proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of
the proceeding. Upon application by the surviving or resulting corporation
or by any stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this Section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this Section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and
in the case of holders of shares represented by certificates upon the
surrender to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court of
Chancery may be enforced, whether such surviving or resulting corporation
be a corporation of this State or of any other state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all of the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in
subsection (d) of this Section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the
stock (except dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal
shall be filed within the time provided in subsection (e) of this Section,
or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of his demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e)
of this Section or thereafter with the written approval of the corporation,
then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of
Chancery shall be dismissed as to any stockholder without the approval of
the Court, and such approval may be conditioned upon such terms as the
Court deems just.
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(l) The shares of the surviving or resulting corporation into which
the shares of such objecting stockholders would have been converted had
they assented to the merger or consolidation shall have the status of
authorized and unissued shares of the surviving or resulting corporation.
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APPENDIX D
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------------------------------------------------------
<S> <C>
Common Stock $0.001 Par Value American Stock Exchange
</TABLE>
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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<PAGE> 102
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 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.
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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 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
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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 midsized 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. 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
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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 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
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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.
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
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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.
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.
D-7
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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 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.
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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 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.
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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.
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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 MONTHS ENDED YEAR ENDED DECEMBER 31,
APRIL 30, DECEMBER 31, -------------------------------------------
1991 1991 1992 1993 1994 1995
---------- ------------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
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.
D-11
<PAGE> 112
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 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
D-12
<PAGE> 113
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
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
D-13
<PAGE> 114
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 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".
D-14
<PAGE> 115
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.
D-15
<PAGE> 116
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 8-K reporting
historical and pro forma financial statements was filed on November 13,
1995.
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>
<C> <S>
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)
</TABLE>
D-16
<PAGE> 117
<TABLE>
<C> <S>
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)
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
</TABLE>
D-17
<PAGE> 118
<TABLE>
<C> <S>
18.1 -- Letter re change in accounting principles(12)
21.1 -- Subsidiaries of Phoenix Network, Inc.
23.1 -- Consent of Grant Thornton LLP
</TABLE>
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.
D-18
<PAGE> 119
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
- --------------------------------------------- ------------------------------ ---------------
<C> <S> <C>
/s/ THOMAS H. BELL Chairman of the Board March 29, 1996
- --------------------------------------------- and Director
Thomas H. Bell
/s/ ROBERT R. CURTIS Vice Chairman of the Board and March 29, 1996
- --------------------------------------------- Director
Robert R. Curtis
/s/ WALLACE M. HAMMOND President and Chief Executive March 29, 1996
- --------------------------------------------- Officer (Principal Executive
Wallace M. Hammond Officer) and Director
/s/ JEFFREY L. BAILEY Senior Vice President, Chief March 29, 1996
- --------------------------------------------- Financial Officer (Principal
Jeffrey L. Bailey 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>
D-19
<PAGE> 120
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15 (D)
OF THE SECURITIES ACT OF 1934
FOR THE YEAR ENDED
DECEMBER 31, 1994
---------------------
PHOENIX NETWORK, INC.
---------------------
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT PAGE NUMBER
- ---------- ----------------------------------------------------------------------- -----------
<C> <S> <C>
11.1 -- Computation of earnings per share.
21.1 -- Subsidiaries of Phoenix Network, Inc.
23.1 -- Consent of Grant Thornton LLP.
</TABLE>
D-20
<PAGE> 121
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)
D-21
<PAGE> 122
EXHIBIT 11.1
PHOENIX NETWORK, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
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>
D-22
<PAGE> 123
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
PHOENIX NETWORK, INC. AND SUBSIDIARIES
DECEMBER 31, 1994 AND 1995
D-23
<PAGE> 124
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.
/s/ GRANT THORNTON LLP
- ---------------------------------
GRANT THORNTON LLP
San Francisco, California
March 28, 1996
D-24
<PAGE> 125
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.
D-25
<PAGE> 126
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.
D-26
<PAGE> 127
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.
D-27
<PAGE> 128
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.
D-28
<PAGE> 129
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)
=========== =========== ===========
</TABLE>
Non-cash financing and investing activities:
See statement of stockholders' equity and notes B and H.
The accompanying notes are an integral part of these statements.
D-29
<PAGE> 130
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.
- Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions are eliminated
in consolidation.
- Revenue Recognition
Revenue is recognized in the month in which the Company's customers
complete the telephone call.
- 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.
- 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).
- 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>
- 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.
D-30
<PAGE> 131
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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.
- 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.
- 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.
- Reclassification
Prior year's financial statements have been reclassified to conform to
current year presentation.
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).
D-31
<PAGE> 132
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
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.
D-32
<PAGE> 133
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
D-33
<PAGE> 134
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
D-34
<PAGE> 135
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
D-35
<PAGE> 136
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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
==========
</TABLE>
Common shares subject to warrants are summarized below:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
---------- ---------------
<S> <C> <C>
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
===========
</TABLE>
All warrants are exercisable at grant.
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
D-36
<PAGE> 137
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
D-37
<PAGE> 138
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
D-38
<PAGE> 139
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
NOTE O -- NEW PRONOUNCEMENTS
- 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
D-39
<PAGE> 140
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
- 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.
D-40
<PAGE> 141
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.
/s/ GRANT THORNTON LLP
- --------------------------------
GRANT THORNTON LLP
San Francisco, California
March 28, 1996
D-41
<PAGE> 142
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.
D-42
<PAGE> 143
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(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
/ / 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, 11TH FLOOR, 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:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------------------------------------------------------
<S> <C>
Common Stock $0.001 Par Value American Stock Exchange
</TABLE>
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 17,399,037 at March 26, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
D-43
<PAGE> 144
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS.
The names of the directors and certain information about them are set forth
below:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE
--------------------------------------------------------------------- --- --------
<S> <C> <C>
Thomas H. Bell(1)(3)................................................. 48 1985
Robert R. Curtis..................................................... 49 1992
James W. Gallaway(2)................................................. 56 1988
Wallace M. Hammond................................................... 50 1994
Sidney Kahn.......................................................... 59 1994
Merrill L. Magowan(2)(3)............................................. 57 1990
John David Singleton................................................. 56 1995
Max E. Thornhill..................................................... 64 1995
Myron A. Wick III(1)................................................. 52 1992
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Nominating Committee.
THOMAS H. BELL
Mr. Bell is the founder of the Company and has served as Chairman of the
Board of Phoenix since the inception of Phoenix Telcom, Inc. in 1985 and served
as Chief Executive Officer of the Company from 1985 to January 1992. Mr. Bell
served as President of the Company from 1985 to September 1990. Mr. Bell is also
an independent consultant in the telecommunications industry.
ROBERT R. CURTIS
Mr. Curtis has served as a Director of the Company since May 1992 and was
elected as Vice Chairman, effective January 1995. Mr. Curtis previously served
as Chief Executive Officer of the Company between January 1992 and December
1994. He was a consultant to the Company from September through December of
1991. Mr. Curtis is the Chief Executive Officer of Robert Curtis & Co., Inc., a
private investment and management advisory firm founded in 1985. Through that
firm he has served as a General Partner in Primo's Espresso Americana, a
specialty retail coffee business, from 1992 to the present, and served as Chief
Executive Officer of WEA International, Inc., a worldwide educational and
training and development business, from 1985 to 1990. Mr. Curtis was the
Managing Partner of CCG International, Inc., a management consulting firm in
Toronto, Canada from 1989 to 1991, when he sold his interest in that firm.
JAMES W. GALLAWAY
Mr. Gallaway became a director of the Company in July 1988. He is a founder
and former director of Centex Telemanagement, Inc. ("Centex"). He was a director
of Centex from 1984 to 1988 and a Vice President from 1983 to 1986. Since 1980
he has been President of Gallaway Enterprises, Inc., a telecommunications
company. From February 1988 through December 1994, he served as a director and
Vice President of StellarNet, Inc., an information management company in the
health care industry. Mr. Gallaway is a U.S. Marine Corps Reserve (Retired)
Colonel.
WALLACE M. HAMMOND
Mr. Hammond was hired as the Executive Vice President of the Company in
February 1994. He was elected to the Company's Board of Directors and named
President and Chief Operating Officer of the
D-44
<PAGE> 145
Company in May of 1994. Mr. Hammond was elected Chief Executive Officer in
December 1994. From 1992 to 1993, he was President and Chief Executive Officer
of ANSCO & Associates, a telephone engineering and plant construction company.
From 1979 to 1992, he was with BellSouth Communication Systems, Inc., a
nationwide division of BellSouth Corporation involved in the customer premises
equipment after-market, where he was promoted to Vice President -- Operations in
1989.
SIDNEY KAHN
Mr. Kahn was elected to the Board of Directors in May of 1994. Mr. Kahn is
a private investor and venture capitalist. Between 1966 and 1977 Mr. Kahn was a
Managing Director of Lehman Brothers, an investment banking firm, and between
1978 and 1987 he was a senior officer of E.F. Hutton Company, an investment
brokerage firm.
MERRILL L. MAGOWAN
Mr. Magowan became a Director of the Company in September 1990. Since 1982,
Mr. Magowan has been a principal of S F Associates, a California registered
investment advisory firm (formerly known as Magowan Dirickson Investment
Company). He is also currently a director of Nordeman Grimm (since 1975), an
executive search consulting firm. From 1968 to 1986 he was a director of Safeway
Stores, Inc.
JOHN DAVID SINGLETON
Mr. Singleton has served as a director of the Company since October 1995.
He was founding director of LDDS WorldCom, Inc. and served as director from 1983
to 1992. He serves on the board of Red Fox Environmental Services in Lafayette,
LA. He was a founding director of US One where he is also still serving. Mr.
Singleton worked in personal and small business financial planning for 25 years
and currently manages a private portfolio.
MAX E. THORNHILL
Mr. Thornhill, 63, has served as a director of the Company since October
1995. He was founding director of LDDS WorldCom, Inc. and served as a director
from 1983 to September 1993. He was a founding director of US One where he is
still serving. Mr. Thornhill is engaged in real estate development and oil and
gas exploration and production.
MYRON A. WICK III
Mr. Wick became a director of the Company in January 1992. Mr. Wick is
currently a managing director and founder of McGettigan, Wick & Co., Inc., a
merchant banking fund formed in 1988 and a general partner of the general
partner of Proactive Partners, L.P., an investment partnership formed in 1991.
Mr. Wick is a director of Children's Discovery Centers, Inc., Digital Dictation,
Inc., Modtech, Inc. and NDE Environmental, Inc., and Chairman of the Board of
Directors of Sonics Research Corporation and Wray-Tech Instruments, Inc. From
1985 to 1988 Mr. Wick was Chief Operating Officer of California Biotechnology,
Inc. (recently renamed Scios Nova Inc.), a biotechnology company.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Offices, directors and greater than
ten percent stockholders are required by Commission regulation to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and representations that no other reports were
required, during the fiscal year ended December 31, 1995, all Section 16(a)
filing requirements applicable to its officers, directors and greater than ten
percent
D-45
<PAGE> 146
beneficial owners were complied with, except that one report covering an
aggregate of two transactions was filed late by Mr. Kahn.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
No cash fees are paid to directors for serving on the Board. The members of
the Board are, however, eligible for reimbursement for their expenses incurred
in connection with attendance at Board meetings in accordance with Company
policy.
Each non-employee director of the Company also receives stock option grants
under the 1992 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"). Only non-employee directors of the Company or an affiliate of such
directors (as defined in the Code) are eligible to receive options under the
Directors' Plan. Options granted under the Directors' Plan are intended by the
Company not to qualify as incentive stock options under the Code.
Option grants under the Directors' Plan are non-discretionary. Each person
who is elected or appointed on or after January 4, 1993 to be a non-employee
director of the Company is automatically granted under the Directors' Plan an
option to purchase 10,000 shares of Common Stock of the Company. On the first
business day of each year, commencing on January 3, 1994, each non-employee
director of the Company is automatically granted under the Directors' Plan an
option to purchase shares of Common Stock (rounded to the nearest 100 shares) of
the Company equal to the Proration Factor (as hereinafter defined) multiplied by
the sum of (i) 10,000 shares of Common Stock of the Company and (ii) 2,500
shares of Common Stock of the Company multiplied by the number of full years
such non-employee director has served in such capacity. The "Proration Factor"
equals a fraction the numerator of which is the number of calendar days during
the preceding year on which such person served as a non-employee director and
the denominator of which is 365. No other options may be granted at any time
under the Directors' Plan. The exercise price of options granted under the
Directors' Plan is equal to the fair market value of the Common Stock subject to
the option on the date of the option grant. Options granted under the Directors'
Plan vest at the rate of one-sixteenth per quarter for sixteen quarters
following the date of the grant. The term of options granted under the
Directors' Plan is ten years.
D-46
<PAGE> 147
COMPENSATION OF EXECUTIVE OFFICERS
Summary of Compensation
The following table shows for the fiscal years ending December 31, 1995,
1994 and 1993, compensation awarded or paid to, or earned by the Company's Chief
Executive Officer and each other officers at December 31, 1995 who received
total annual salary and bonus in excess of $100,000 for the year ended December
31, 1995 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL SALARY(1) BONUS OPTIONS/(2) ALL OTHER
POSITION YEAR ($) ($) SARS (#) COMPENSATION(4)($)
----------------------------- ---- --------- ------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
Mr. Wallace M. Hammond(3).... 1995 203,511 67,451 300,000 2,320
President and Chief 1994 127,885 300,000(2)
Executive Officer
Mr. Jeffrey L. Bailey........ 1995 129,219 15,193 50,000 2,320
Senior Vice President and 1994 120,573 500
Chief Financial Officer 1993 109,838 145,000(2) 700
Mr. Paul C. Cissel(3)........ 1995 125,001 25,000 20,438
Vice President of Sales and 1994 28,646 150,000
Marketing
Mr. J. Rex Bell.............. 1995 117,657 15,193 50,000 2,320
Senior Vice President 1994 109,585
of Operations 1993 99,159 104,000(2)
</TABLE>
- ---------------
(1) Includes amounts earned but deferred at the election of the executives. As
permitted by Commission rules, no amounts are shown for 1993 or 1994 or with
respect to 1995 for certain perquisites, where such amounts do not exceed
the lesser of 10% of bonus plus salary or $50,000.
(2) Repriced options treated as new grants. The Company has no stock
appreciation rights (SARs).
(3) Mr. Hammond and Mr. Cissel were not employed by the Company before 1994,
thus only 1995 and 1994 compensation is disclosed. The amounts disclosed
include compensation commencing in February 1994 for Mr. Hammond, when he
joined the Company as Executive Vice President, and include compensation
commencing in November 1994 for Mr. Cissel, when he joined the Company as
Vice President of Sales and Marketing. Mr. Hammond was elected President and
Chief Operating Officer of the Company in May 1994 and Chief Executive
Officer in December 1994.
(4) In each case, All Other Compensation includes $500 in matching Section
401(k) plan contributions made by the Company in 1994 and $1,000 in 1995.
The balance of the amount reported for each officer except Mr. Cissel
represents a reimbursement of parking expenses. The balance of the amount
reported for Mr. Cissel represents commission payments of $19,218 and
reimbursement of parking expenses of $220.
Employment Agreements
Effective January 1, 1995, the Company and Mr. Hammond entered into an
employment agreement with a term beginning January 1, 1995 and ending December
31, 1997 which provides for a salary of at least $200,000 for 1995, $225,000 for
1996 and $250,000 for 1997. The agreement further provides for an option grant
of 200,000 shares of the Company's Common Stock vesting at the rate of 12,500
shares per calendar quarter and a bonus, payable quarterly, equal to 2% of the
Company's pre-tax profits. Under terms of the employment agreement, should an
acquisition of the Company or similar corporate event and the termination
D-47
<PAGE> 148
of Mr. Hammond's employment with the Company occur, any unvested shares of stock
subject to options held by Mr. Hammond will immediately vest. In the event Mr.
Hammond is terminated without cause, the Company has agreed he is to receive a
severance amount equal to 12 months' salary. In the event of an acquisition of
the Company or similar event, the Company has agreed to pay Mr. Hammond a
severance amount equal to 24 months salary. In either a termination of Mr.
Hammond's employment without cause or the termination of his employment in the
event of the acquisition of the Company or a similar corporate event, the
Company has agreed to pay Mr. Hammond's reasonable relocation expenses, not to
exceed $20,000.
Effective January 1, 1995, the Company and Mr. Bailey entered into an
employment agreement for the 1995 calendar year providing for an annual salary
at least $127,200, the immediate vesting, in the event of an acquisition of the
Company or similar corporate event resulting in the termination by the Company
of Mr. Bailey's employment, of all unvested shares of the Company's stock
subject to options held by Mr. Bailey, and a severance payment of $127,200 in
the event Mr. Bailey's employment is terminated as a result of an acquisition of
the Company or similar corporate event. The Company has also agreed to pay on a
quarterly basis a bonus equal to 1% of the Company's pre-tax profit for that
quarter. In the event Mr. Bailey's employment is terminated without cause, the
Company has agreed to pay the greater of one-half the annual salary or the
balance of the annual salary due under the employment agreement.
Effective January 1, 1995, the Company and Mr. Rex Bell entered into an
employment agreement for the 1995 calendar year providing for an annual salary
at least $116,600, the immediate vesting, in the event of an acquisition of the
Company or similar corporate event resulting in the termination by the Company
of Mr. Rex Bell's employment, of all unvested shares of the Company's stock
subject to options held by Mr. Rex Bell, and a severance payment of $116,600 in
the event Mr. Rex Bell's employment is terminated as a result of an acquisition
of the Company or similar corporate event. The Company has also agreed to pay on
a quarterly basis a bonus equal to 1% of the Company's pre-tax profit for that
quarter. In the event Mr. Rex Bell's employment is terminated without cause, the
Company has agreed to pay the greater of one-half the annual salary or the
balance of the annual salary due under the employment agreement.
Effective October 10, 1994, the Company and Mr. Cissel entered into an
employment agreement with a term ending October 9, 1995. Under the employment
agreement, Mr. Cissel is to be paid a salary at an annual rate of $125,000 and a
monthly bonus equal to 1% of new customer billings. Mr. Cissel also received an
option to purchase 150,000 shares of the Company Common Stock, which shares vest
at the rate of 9,375 shares per quarter, subject to immediate vesting upon an
acquisition of the Company or similar corporate event resulting in the
termination of Mr. Cissel's employment. The Company has agreed to reimburse up
to $20,000 of rental expenses incurred by Mr. Cissel prior to his establishing a
permanent residence in San Francisco, California. Should Mr. Cissel's employment
with the Company be terminated without cause during the term of the employment
agreement, the Company has agreed to pay him the greater of one-quarter of the
annual salary due under the employment agreement or the balance of the salary
due had employment continued for the term of the employment agreement.
Stock Option Grants and Exercises
The Company grants options to its executive officers under its 1989 Stock
Option Plan (the "1989 Plan"). As of April 1, 1996, options to purchase a total
of 2,079,423 shares had been granted and were outstanding under the Plan and no
shares remained available for grant thereunder.
D-48
<PAGE> 149
The following tables show for the fiscal year ended December 31, 1995,
certain information regarding options granted to, exercised by, and held at year
end by the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------- REALIZABLE VALUE AT
PERCENTAGE ASSUMED ANNUAL
NUMBER OF OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION
OPTIONS EMPLOYEES OR BASE EXPIRA- FOR OPTION TERM(2)
GRANTED IN FISCAL PRICE TION -------------------
NAME (#) 1995(1) ($/SH) DATE 5% ($) 10% ($)
- ----------------------------- ---------- ---------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Wallace M. Hammond........... 200,000 27.9 2.375 3/23/99 105,252 227,402
100,000 13.9 3.125 3/23/99 60,110 128,394
Jeffrey L. Bailey............ 25,000 3.5 2.375 3/23/99 13,156 28,425
25,000 3.5 3.125 3/23/99 15,027 32,098
Paul C. Cissel............... 25,000 3.5 3.125 3/23/99 15,027 32,098
J. Rex Bell.................. 25,000 3.5 2.375 3/23/99 13,156 28,425
25,000 3.5 3.125 3/23/99 15,027 32,098
</TABLE>
- ---------------
(1) Based on options to purchase 717,400 shares of the Company's Common Stock
granted in 1995.
(2) The potential realizable value is based on the term of the option at its
time of grant (4.1 years for the option for 200,000 shares granted to Mr.
Hammond and for the initial options for 25,000 shares granted to Mr. Bailey
and Mr. Bell and 3.6 years for the option for 100,000 shares granted to Mr.
Hammond and for the second options for 25,000 shares granted to Mr. Bailey,
Mr. Cissel, Mr. Cissel and Mr. Bell). It is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option and that the option is
exercised and sold on the last day of its term for the appreciated stock
price. No gain to the optionee is possible unless the stock price increases
over the option term, which will benefit all stockholders.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1995 AND
VALUE OF OPTIONS AT END OF FISCAL YEAR 1995
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS
OPTIONS/SARS AT END OF
SHARES AT END OF FISCAL 1995
ACQUIRED VALUE FISCAL 1995 (#) ($)(2)
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($)(1) UNEXERCISABLE UNEXERCISABLE
- ------------------------------------ ----------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
Jeffrey L. Bailey................... -- -- 129,693/45,307 330,682/41,193
J. Rex Bell......................... -- -- 94,123/44,877 237,310/40,065
Wallace M. Hammond.................. -- -- 175,000/425,000 197,656/439,844
Paul C. Cissel...................... -- -- 48,437/126,563 3,711/18,164
</TABLE>
- ---------------
(1) Value realized is based on the fair market value of the Company's Common
Stock on the date of exercise minus the exercise price and does not
necessarily indicate that the optionee sold such stock.
(2) Fair market value of the Company's Common Stock at December 31, 1995
($2.625) minus the exercise price of the options.
D-49
<PAGE> 150
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock and voting Preferred Stock as of March 31, 1996
by: (i) each director and nominee for director; (ii) each executive officer
named in the Summary Compensation Table; (iii) all executive officers and
directors of the Company as a group; and (iv) all those known by the Company to
be beneficial owners of more than five percent of its Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(2)
------------------------
NUMBER OF PERCENT OF
BENEFICIAL OWNER ADDRESS SHARES TOTAL
- ---------------------------------------- -------------------------------- --------- ----------
<S> <C> <C> <C>
Thomas H. Bell(3),(4)................... 550 California Street 3,301,456 13.7%
11th Floor
San Francisco, CA 94104
Bell Non-Exempt Marital Trust........... 550 California Street 1,394,335 5.9%
11th Floor
San Francisco, CA 94104
Judy Van Essen.......................... c/o 550 California Street 2,800,000 11.9%
11th Floor
San Francisco, CA 94104
Jon D. Gruber(5),(6),(7)................ 50 Osgood Place 2,214,089 9.3%
San Francisco, CA 94133
J. Patterson McBaine(5),(6),(8)......... 50 Osgood Place 2,191,193 9.2%
San Francisco, CA 94133
Gruber & McBaine Capital
Management(5),(6)..................... 50 Osgood Place 2,172,061 9.1%
San Francisco, CA 94133
Myron A. Wick III(3),(5),(9),(10)....... 550 California Street 1,915,268 8.0%
11th Floor
San Francisco, CA 94104
Charles C. McGettigan(3),(5),(9)........ 50 Osgood Place 1,822,859 7.6%
San Francisco, CA 94133
Max E. Thornhill(3)..................... 1,756,088 7.4%
Sidney Kahn(3).......................... 111,938 0.5%
James W. Gallaway(3).................... 458,425 1.9%
Proactive Investment Managers(5)........ 50 Osgood Place 1,582,929 6.7%
San Francisco, CA 94133
Robert R. Curtis(3),(11)................ 460,188 1.9%
Jeffrey L. Bailey(3).................... 137,498 0.6%
Merrill L. Magowan(3),(12).............. 120,445 0.5%
Wallace M. Hammond(3)................... 266,000 1.1%
John David Singleton(3)................. 172,506 0.7%
J. Rex Bell(3).......................... 101,498 0.4%
Paul C. Cissel(3)....................... 72,112 0.3%
Jon R. Beizer(3)........................ 24,750 0.1%
All executive officers and directors as
a group(13) (12 persons).............. 8,898,170 34.4%
</TABLE>
D-50
<PAGE> 151
- ---------------
(1) In addition to 17,339,037 shares of Common Stock, at March 31, 1996 the
Company has 2,727,389 shares of Preferred Stock outstanding, of which
101,750 are shares of Series A Preferred Stock, 116,250 are shares of
Series B Preferred Stock, 1,000,000 are shares of Series C Preferred Stock,
333,333 are shares of Series D Preferred Stock and 1,176,056 are shares of
Series F Preferred Stock. The Series C Preferred Stock is nonvoting, except
as required by law. The Series A Preferred Stock, Series B Preferred Stock,
Series D Preferred Stock and Series F Preferred Stock vote together with
the Common Stock as a single class on an as-if-converted to Common Stock
basis, except as required by law, the Company's Amended and Restated
Certificate of Incorporation or the Company's Certificates of Designation
of Preferences of Series B, Series C, Series D and Series F Preferred
Stock.
(2) This table is based upon information supplied by executive officers,
directors and principal stockholders and Schedules 13D and 13G filed with
the Securities and Exchange Commission (the "Commission"). Unless otherwise
indicated in the footnotes to this table and subject to community property
laws where applicable, each of the stockholders named in this table has
sole voting and investment power with respect to the shares indicated as
beneficially owned.
(3) Includes shares of Common Stock which certain executive officers, directors
and principal stockholders of the Company have the right to acquire within
60 days after the date of this table pursuant to outstanding options and
warrants as follows: Thomas H. Bell, 545,000 shares; Myron A. Wick III,
67,750 shares; Charles C. McGettigan, 24,000 shares; James W. Gallaway,
87,875 shares; Robert R. Curtis, 426,959 shares; Jeffrey L. Bailey, 137,498
shares; Merrill L. Magowan, 79,125 shares; Wallace M. Hammond, 250,000
shares; Paul C. Cissel, 70,312 shares; Sidney Kahn, 9,438 shares; J. Rex
Bell, 101,498 shares; Jon R. Beizer, 24,750 shares; John David Singleton,
2,088 shares and Max Thornhill, 2,088 shares.
(4) Includes 1,394,335 shares of Common Stock beneficially held in the name of
the Bell Non-Exempt Marital Trust of which Thomas H. Bell is a trustee.
(5) Includes 1,582,930 shares of Common Stock which the following entities
either own or have the right to acquire within 60 days after the date of
this table upon conversion of preferred stock or exercise of warrants held
as follows: 1,510,657 shares held by Proactive Partners, a California
limited partnership ("PP"), the General Partner of which is Proactive
Investment Managers, L.P., a California limited partnership ("PIM"), of
which Messrs. Gruber, McBaine, McGettigan and Wick are general partners;
and 72,273 shares held by Fremont Proactive Partners, L.P., a California
limited partnership ("FPP"), of which PIM is also the general partner.
(6) Includes 589,132 shares of Common Stock which the following entities either
own or have the right to acquire within 60 days after the date of this
table upon conversion of preferred stock, held as follows: 30,500 shares
held by Gruber & McBaine Capital Management, a California corporation
("GMCM"), of which Messrs. Gruber and McBaine are the sole directors;
548,632 held by Lagunitas Partners L.P., a California limited partnership,
of which Messrs. Gruber and McBaine and GMCM are general partners; 5,000
shares held by GMJ Investments, L.P., a California limited partnership, of
which Messrs. Gruber and McBaine and GMCM are general partners; and 5,000
shares held by Lagunitas International, a Cayman Islands Limited
Partnership, of which GMCM is a general partner.
(7) Includes 16,528 shares of Common Stock which Mr. Gruber has the right to
acquire within 60 days after the date of this table upon conversion of
preferred stock.
(8) Includes 4,132 shares of Common Stock which Mr. McBaine has the right to
acquire within 60 days after the date of this table upon conversion of
preferred stock.
(9) Includes 153,950 shares of Common Stock which could be acquired within 60
days of this table upon exercise of warrants held by McGettigan, Wick &
Co., Inc., a merchant banking fund of which Messrs. McGettigan and Wick are
Managing Directors, and 61,980 shares which could be acquired within 60
days of this table upon conversion of preferred stock held by McGettigan,
Wick Investments, a partnership of which Messrs. McGettigan and Wick are
general partners.
D-51
<PAGE> 152
(10) Includes 20,660 shares of Common Stock which Mr. Wick has the right to
acquire within 60 days after the date of this table upon conversion of
preferred stock held by the Myron A. Wick III Trust for which Mr. Wick is
the trustee.
(11) Includes 20,729 shares of Common Stock which Mr. Curtis has the right to
acquire within 60 days after the date of this table upon conversion of
preferred stock and 5,000 shares held by Mr. Curtis for the benefit of his
minor children.
(12) Includes 41,320 shares of Common Stock which Mr. Magowan has the right to
acquire within 60 days after the date of this table upon conversion of
preferred stock.
(13) Includes 4,939,032 shares of Common Stock which such persons have the right
to acquire within 60 days after the date of this table upon conversion of
preferred stock and pursuant to outstanding options and warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnity agreements with certain officers and
directors which provide, among other things, that the Company will indemnify
such officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings which he is or may be made a party by
reason of his position as a director, officer or other agent of the Company, and
otherwise to the fullest extent permitted under Delaware law and the Company's
bylaws.
CHANGE OF CONTROL SEVERANCE PLAN
The Board of Directors has adopted a plan which is intended to provide
eligible employees with severance benefits in the event of the sale of the
Company or any similar corporate event which results in the employee's
involuntary termination of employment with the Company within a year after the
sale of the Company or similar corporate event. The amount of the severance
benefit is determined by the employee's position, title and level of
compensation, and generally will not exceed 4-6 months of compensation at the
rates in effect at the time of termination. Under the plan, stock options held
by terminated employees will accelerate and become fully vested and exercisable
as of the employee's termination. The plan does not cover temporary employees or
employees who have negotiated individual severance agreements with the Company.
CBS AGREEMENT
On October 31, 1994, the Company entered into a letter agreement with
Communication and Business Solutions, Inc. ("CBS") and Paul C. Cissel in which
the parties agreed that the Company would purchase certain assets of CBS
associated with its customer base in exchange for payment of $330,000 in 12
equal monthly installments beginning in December of 1994. Under the letter
agreement, the purchase price is subject to adjustment based on the performance
of the purchased customer base.
AGREEMENT WITH MR. CURTIS
Effective November 7, 1994 the Company and Mr. Curtis, the Chief Executive
Officer and a director of the Company, entered into a consulting agreement under
which Mr. Curtis would resign as Chief Executive Officer of the Company,
effective January 1, 1995, in order to provide consulting service to the Company
during 1995. In exchange for such services, the Company has agreed to pay Mr.
Curtis twelve equal monthly payments of $15,000 each, to pay accrued vacation
and medical leave benefits (without regard for usual limitations), to reimburse
Mr. Curtis for legal costs reasonably incurred negotiating his change in status
with the Company, and to fully vest any options on Company stock held at
December 31, 1994.
D-52
<PAGE> 153
OFFSHORE FINANCINGS
In April 1995, the Company sold 385,000 units at $2.20 per unit for
$847,000 in an offshore transaction pursuant to Regulation S of the Securities
Act of 1933, as amended. Each unit was comprised of one share of the Company's
Common Stock and a Warrant, exercisable until April 18, 2000, which when
combined with another Warrant, entitles the holder to purchase a share of Common
Stock for $2.20. Co-placement agents for the financing were Oakes Fitzwilliams &
Co. Limited and McGettigan, Wick & Co., Inc. Mr. Wick is a principal of
McGettigan, Wick & Co., Inc., a director of the Company and the beneficial owner
of more than 5% of the Company's Common Stock. The co-placement agents received
a cash fee for their services in the financing equal to 10% of the proceeds of
the financing and a five-year warrant for 35,000 units at $2.64 per unit.
PREFERRED STOCK FINANCINGS
In September 1994, the Company issued 55,893 shares of Series E Preferred
Stock at $10.00 per share under an agreement with Proactive Partners, L.P.
("Proactive") to convert a note payable to Proactive with a principle balance of
$500,000 and accrued interest of $58,930. Proactive and its affiliates are
beneficial owners of greater than 5% of the Company's Common Stock. Mr. Wick, a
director of the Company, is a general partner of Proactive Investment Managers,
L.P., the general partner of Proactive. In connection with the issuance of the
Series F Preferred Stock, the Company issued Proactive a five year warrant for
100,000 shares of the Company's Common Stock which was canceled when the
outstanding shares of Series E Stock 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 a purchase
price of $10.00 per share. Additionally, the holder of the Company's Series E
Preferred Stock exchanged its shares of Series E Preferred Stock, plus
accumulated and unpaid dividends of $47,467, for 60,639 shares of Series F
Preferred Stock. The Series E Preferred Stock was held by Proactive, a
beneficial owner of greater than 5% of the Company's Common Stock. In addition
to the conversion of the outstanding Series E Preferred Stock into Series F
Preferred Stock, Proactive, Lagunitas Partners, L.P. ("Lagunitas") and Fremont
Proactive Partners, L.P. ("Fremont") also purchased 65,817, 30,377 and 5,062
shares of Series F Preferred Stock, respectively. Proactive, Lagunitas and
Fremont and their affiliates are beneficial owners of greater than 5% of the
Company's Common Stock. Mr. Wick, a director of the Company is a general partner
of Proactive Investment Managers, L.P., the general partner of Proactive,
Lagunitas and Fremont. 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
Preferred Stock also received warrants for the purchase of 470,422 shares of
Common Stock with an exercise price of $3.00 per share which expire in October
2000. The Series F Preferred stockholders have the right to place two directors
on the Company's Board of Directors (the "Series F Directors") and the Company
is subject to certain covenants requiring it to obtain the consent of the Series
F Directors for certain transactions including mergers, acquisitions and
incurring additional indebtedness in excess of $20,000,000. Currently, the
Series F Directors are Messrs. Singleton and Thornhill who are 0.73% and 7.41%
beneficial owners of the Company's Common Stock and who acquired their interests
in the Company as a result of the Series F Preferred Stock financing. As of
April 15, 1996, the outstanding shares of Series F Preferred Stock are
convertible into 4,704,224 shares of Common Stock.
ISSUANCE OF WARRANT
In August 1995, in exchange for services rendered in connection with the
Series F Preferred Stock financing, the Company issued McGettigan, Wick & Co.,
Inc. a warrant for 62,200 shares of the Company's Common Stock exercisable until
February 15, 1997 at a per share price of $2.50, payable in cash or the
cancellation of Company indebtedness. McGettigan, Wick & Co., Inc. is a merchant
banking fund whose Managing Directors, Messrs. McGettigan and Wick, and their
affiliates, are greater than 5% stockholders in the Company. Mr. Wick is a
director of the Company.
D-53
<PAGE> 154
ACQUISITION OF AUTOMATED COMMUNICATIONS, INC.
In January 1996, the Company acquired from Ms. Judy Van Essen all of the
outstanding shares of Automated Communications, Inc., a Golden, Colorado
facilities-based reseller of long distance service. Consideration for the
transaction was in the form of $4,000,000 in cash, 2,800,000 shares of the
Company's Common Stock valued at $10,500,000 and the issuance of a long-term
note in the amount of $1,300,000. As a result of the transaction and her
acquisition of 2,800,000 shares of the Company's Common Stock, Ms. Van Essen
became an 11.88% stockholder in the Company.
D-54
<PAGE> 155
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 Date: April 26, 1996
-----------------------------------------
Wallace M. Hammond
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ JEFFREY L. BAILEY Date: April 26, 1996
-----------------------------------------
Jeffrey L. Bailey
Senior Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer)
D-55
<PAGE> 156
APPENDIX E
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
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 NUMBER 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 Identification No.)
incorporation or organization)
1687 COLE BOULEVARD, GOLDEN, COLORADO 80401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 232-4333
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
SHARES OUTSTANDING AT
CLASS AUGUST 1, 1996
----- ---------------------
<S> <C>
Common Stock, $.001 par value 17,712,245
</TABLE>
================================================================================
E-1
<PAGE> 157
PHOENIX NETWORK, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.....................................................
Condensed Consolidated Balance Sheets.................................... 3
Condensed Consolidated Statements of Operations.......................... 5
Condensed Consolidated Statements of Cash Flow........................... 6
Notes to Condensed Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................... 11
</TABLE>
E-2
<PAGE> 158
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOENIX NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ($225,356 restricted at December
31, 1995 and June 30, 1996)............................... $ 8,004,511 $ 1,572,196
Accounts receivable, net of allowance for doubtful accounts
of $1,288,000 at December 31, 1995 and $1,628,000 at
June 30, 1996............................................. 11,763,520 16,139,757
Deferred commissions......................................... 1,522,738 1,400,863
Other current assets......................................... 304,920 693,494
----------- -----------
Total current assets........................................... 21,595,689 19,806,310
Furniture, equipment and data processing systems, at cost less
accumulated depreciation..................................... 743,463 2,703,034
Deferred commissions........................................... 1,454,483 1,068,608
Customer acquisition costs, less accumulated amortization...... 2,447,619 3,720,676
Goodwill, less accumulated amortization........................ 3,903,109 18,791,729
Other assets................................................... 223,520 886,584
----------- -----------
$30,367,883 $46,976,941
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
E-3
<PAGE> 159
PHOENIX NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Current liabilities:
Note payable to finance company............................. $ 41,468 $ 608,594
Note payable to stockholder................................. -- 131,406
Note payable to vendor...................................... -- 1,931,315
Accounts payable and accrued liabilities.................... 10,901,725 16,065,416
----------- ------------
Total current liabilities..................................... 10,943,193 18,736,731
Note payable to stockholder -- long term...................... -- 1,182,650
Stockholders' equity:
Preferred stock, $.001 par value; authorized, 5,000,000
shares; issued and outstanding, 2,737,389 shares at
December 31, 1995 and 2,725,014 shares at June 30,
1996..................................................... 2,737 2,725
Common stock, $.001 par value authorized, 30,000,000 shares;
issued and outstanding, 14,459,658 shares at December 31,
1995 and 17,698,974 shares at June 30, 1996.............. 14,460 17,699
Additional paid-in capital.................................. 28,443,144 39,628,718
Treasury stock -- 1,300 shares at cost...................... (2,522) (2,522)
Accumulated deficit from May 1, 1989........................ (9,033,129) (12,589,060)
----------- ------------
Total stockholders' equity.................................... 19,424,690 27,057,560
----------- ------------
$30,367,883 $ 46,976,941
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
E-4
<PAGE> 160
PHOENIX NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 20, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1995 1996 1995 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................................. $ 13,489,242 $21,923,655 $27,683,463 $44,995,365
Cost of revenues......................... 9,352,622 15,914,505 19,060,850 32,531,107
------------ ----------- ----------- -----------
Gross profit............................. 4,136,620 6,009,150 8,622,613 12,464,258
Selling, general & administrative
expenses............................... 3,791,902 6,426,936 7,915,701 12,856,313
Depreciation and amortization............ 128,812 1,075,214 274,024 2,159,187
Relocation expenses...................... -- 607,429 -- 809,174
------------ ----------- ----------- -----------
3,920,714 8,109,579 8,189,725 15,824,674
Income (loss) from operations............ 215,906 (2,100,429) 432,888 (3,360,416)
Net interest expense..................... (69,202) (125,718) (158,181) (163,185)
------------ ----------- ----------- -----------
Net income (loss)........................ 146,704 (2,226,147) 274,707 (3,523,601)
Preferred stock dividends................ (63,701) (312,270) (126,891) (625,073)
------------ ----------- ----------- -----------
Net income (loss) attributable to common
shares................................. $ 83,003 $(2,538,417) $ 147,816 $(4,148,674)
============ =========== =========== ===========
Net income (loss) per common share....... $ 0.01 $ (0.14) $ 0.01 $ (0.24)
============ =========== =========== ===========
Weighted average number of shares
outstanding............................ 13,049,454 17,569,201 12,788,101 17,456,065
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
E-5
<PAGE> 161
PHOENIX NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers.................................. $ 26,682,710 $ 43,323,241
Interest received............................................. 3,648 39,777
Cash paid to suppliers and employees.......................... (26,623,473) (45,152,540)
Interest paid................................................. (161,828) (202,962)
------------ ------------
Net cash used in operating activities........................... (98,943) (1,992,484)
Cash flows from investing activities:
Purchases of furniture and equipment.......................... (188,372) (214,567)
Purchase of other assets...................................... (70,168) (281,958)
Business acquisitions, net of cash acquired................... -- (4,085,093)
------------ ------------
Net cash used in investing activities........................... (258,540) (4,581,618)
Cash flows from financing activities:
Proceeds from (payment on) note payable to finance company.... (752,788) 567,126
Payment on note payable to vendor............................. -- (1,081,810)
Proceeds from issuance of common stock........................ 727,519 --
Proceeds from exercise of common stock options................ 132,972 656,471
------------ ------------
Net cash provided by financing activities....................... 107,703 141,787
------------ ------------
Net decrease in cash............................................ (249,780) (6,432,315)
Cash at beginning of period..................................... 1,209,999 8,004,511
------------ ------------
Cash at end of period........................................... $ 960,219 $ 1,572,196
============ ============
Reconciliation of net income (loss) to net cash used in
operating activities:
Net income (loss)............................................. $ 274,707 $ (3,523,601)
Adjustments
Provision for doubtful accounts............................ 720,107 1,007,788
Depreciation and amortization.............................. 274,024 2,159,187
Changes in assets and liabilities
Accounts receivable...................................... (1,000,753) (2,509,912)
Deferred commissions..................................... (119,983) 507,750
Other assets............................................. (298,838) (363,728)
Accounts payable and accrued expenses.................... 51,793 730,032
------------ ------------
Net cash used in operating activities........................... $ (98,943) $ (1,992,484)
============ ============
Schedule of noncash financing activity
Noncash components of consideration issued in connection with
business combination:
Common stock.................................................. $ -- $ 10,500,000
Note payable to stockholder................................... -- 1,314,056
Assumption of net liabilities................................. -- 1,606,976
Conversion of preferred stock into common stock................. 7,221 32,330
</TABLE>
The accompanying notes are an integral part of these statements.
E-6
<PAGE> 162
PHOENIX NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. These statements should be read in conjunction with the financial
statements and notes thereto included in the Registrant's Form 10-K for year
ended December 31, 1995.
NOTE B -- ACQUISITION
In January 1996, the Company acquired Automated Communications, Inc.
("ACI"), a Golden, Colorado facilities based long distance phone service carrier
operating switching centers in Colorado Springs, Minneapolis and Phoenix.
Consideration for the acquisition was in the form of $4,086,693 in cash,
2,800,000 shares of the company's common stock valued at $10,500,000, a long
term note of $1,314,056 bearing interest at 9%, and the assumption of net
liabilities of $1,606,976. The Company's consolidated results of operations for
the periods ended June 30, 1996 include those of ACI from January 1, 1996, the
effective date of the purchase transaction. The excess of the purchase price
over the fair market value of the assets and liabilities acquired has been
allocated to customer acquisition costs ($1,950,000) and to goodwill
($15,557,725). Customer acquisition costs are amortized over 4 years using the
sum of the years digits method and goodwill is amortized on a straight line
basis over 20 years.
The following condensed pro forma information presents the results of
operation of the Company as if the acquisition of ACI, and certain other
acquisitions completed in 1995, had occurred on January 1, 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1995
------------------ ----------------
<S> <C> <C>
Revenue............................................ $ 21,577,099 $ 45,014,507
Net income......................................... 492,047 1,141,316
Net income attributable to common shares........... 173,833 516,268
Net income per common share........................ 0.01 0.03
</TABLE>
NOTE C -- PROPOSED MERGER
In June 1996, Phoenix and AmeriConnect, Inc., a long distance reseller
based in Overland Park, Kansas, signed a definitive merger agreement and are
proceeding to take the necessary steps to close the merger. Under the terms of
the agreement, Phoenix will issue approximately 2,700,000 share of common stock
in exchange for all of the shares of capital stock held by AmeriConnect
stockholders. For accounting purposes, the transaction will be treated as a
pooling of interests. The following unaudited pro forma condensed consolidated
statements of operations for the three and six month periods ended June 30, 1996
reflect the historical consolidated statements of operations for the periods
then ended to give effect to the proposed merger.
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<PAGE> 163
PHOENIX NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
------------------ ----------------
<S> <C> <C>
Revenues......................................... $ 26,266,000 $ 53,602,000
Cost of revenues................................. 19,085,000 38,903,000
------------ ------------
Gross profit..................................... 7,181,000 14,699,000
Selling, general and administrative.............. 9,038,000 17,962,000
------------ ------------
Loss from operations............................. (1,857,000) (3,263,000)
Other............................................ (125,000) (173,000)
------------ ------------
Net loss......................................... (1,982,000) (3,436,000)
Preferred dividends.............................. (312,000) (625,000)
------------ ------------
Pro forma net loss attributable to common
shares......................................... $ (2,294,000) $ (4,061,000)
============ ============
Net loss per common share........................ $ (0.11) $ (0.20)
============ ============
Weighted average shares outstanding.............. 20,278,000 20,165,000
============ ============
</TABLE>
E-8
<PAGE> 164
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For the quarter ended June 30, 1996 revenues increased to $21,923,655
compared with revenues of $13,489,242 for the comparable period of the prior
year. The increase of 62.5% was due to acquisitions completed by the Company in
late 1995 and the quarter ended March 31, 1996. Billed minutes to customers
increased 88% between periods while the average revenue per minute declined by
13.6% between periods. The average rate decline was due to the combination of
the Company's customers utilizing more competitively priced services offered by
the Company over the past year and the effect of the acquired companies' rate
structures which generally were lower than those offered by the Company. For the
six months ended June 30, 1996, revenues increased 62.5% from the comparable
period of the prior year due to the same reasons as the quarterly comparison.
Cost of revenues for the three months ended June 30, 1996 increased to
$15,914,505 from $9,352,622 in the prior year's period which, as a percentage of
revenue, increased to 72.6% compared to 69.3% for the prior year's period. For
the six month period, cost of revenues increased to 72.3% from 68.9%. Although
the Company's average cost per minute of usage has declined by 9.5% for the
three months ended June 30, 1996 and 9.6% for the six months ended June 31, 1996
compared to the prior year's comparable periods, the higher percentage decrease
in the average revenue per minute resulted in the decline in the Company's gross
profit margin percentage. As a result of the Company's acquisition of ACI, as
described in Note B to the financial statements, the Company now operates three
long distance switches located in Minneapolis, Colorado Springs and Phoenix and
is in the process of moving its customers' traffic to these facilities where
economically feasible. Additionally, the Company has signed an agreement with US
ONE Communications Corp., a switched based carrier which has plans to offer both
long distance origination and local dial tone service from its AT&T #5ESS 2000
switching platforms. Beginning in July 1996, US ONE will start deploying
switches nationwide in 16 major cities with a scheduled completion date in mid
1997. Phoenix will begin moving its customers' traffic to this platform as the
switches become operational. In addition to the US ONE arrangement, the Company
has also entered into an agreement with a division of Comdisco, Inc. which
provides computer disaster recovery assistance to companies on a nationwide
basis. In support of its disaster recovery clients, Comdisco Network Services
has built a nationwide fiber optic, high speed data network which is fully
satellite redundant. The terms of the agreement allow Phoenix to acquire private
line services from Comdisco at discounts to prevailing prices offered by other
private line providers. Phoenix plans to utilize the Comdisco private line
services in conjunction with the US ONE switching platform to offer its
customers a nationwide telecommunications network with a lower cost per minute
of usage than currently available under the Company's reseller contracts with
other facilities based carriers. Accordingly, the Company anticipates
improvement in its gross profit margin as a percentage of revenue as it is able
to move its traffic to these new platforms.
Selling, general and administrative (SG&A) expenses increased slightly as a
percentage of revenue from 28.1% for the quarter ended June 30, 1995 to 29.3%
for the quarter ended June 30, 1996 and were the same at 28.6% as a percentage
of revenue for the comparable six month periods. As a result of the acquisition
of ACI in January 1996, the Company has been operating headquarters facilities
in Golden, Colorado in addition to its San Francisco location for the six months
ending June 30, 1996. The Company has substantially completed relocating its
offices to the Golden facilities in July 1996 and anticipates a reduction in
SG&A as a percentage of revenue for the remainder of 1996. Relocation expenses
for the six month period ended June 30, 1996 were $809,174 and consist primarily
of employee severance, travel, relocation and training costs.
Depreciation and amortization expense increased from $128,812, or 1.0% of
revenue, in the June 1995 quarter to $1,075,214, or 4.9% of revenue, in the
quarter ended June 1996. The increase resulted primarily from the amortization
of the ACI acquisition and the Tele Trend acquisition completed in August 1995.
The reasons for the changes in the six month periods are the same as for the
quarterly comparisons.
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<PAGE> 165
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations for the six months ended June 30, 1996 resulted
in a net negative cash flow of $1,992,484 compared to a negative cash flow of
$98,943 for the prior year. Accounts receivable, net of the allowance for
doubtful accounts, and accounts payable, each increased at June 30, 1996
compared to December 31, 1995, as a result of the acquisition described in Note
B to the financial statements and as a result of increased billings of the
Company for the period. In January 1996, the Company expended $4,086,693 as the
cash component of the consideration paid for ACI (see Note B to the Condensed
Consolidated Financial Statements). 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 $608,594 outstanding under the line at
June 30, 1996.
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<PAGE> 166
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
10(a) -- Comdisco Telecommunications Services Agreement
10(b) -- US One Communications Services Agreement
(a) 11 -- Statement of Computation of Per Share Earnings
27 -- Financial Data Schedule
</TABLE>
(b) None
E-11
<PAGE> 167
SIGNATURES
Pursuant to the requirements 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.
<TABLE>
<S> <C> <C>
PHOENIX NETWORK, INC.
(Registrant)
Date August 14, 1996 /s/ WALLACE M. HAMMOND
---------------------------------
Wallace M. Hammond
Chief Executive Officer
Date August 14, 1996 /s/ JEFFREY L. BAILEY
---------------------------------
Jeffrey L. Bailey
Chief Financial Officer
(Chief Accounting Officer)
</TABLE>
E-12
<PAGE> 168
APPENDIX F
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
MARK ONE
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18654
AMERICONNECT, INC.
(Name of small business issuer as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
<TABLE>
<S> <C> <C>
6750 WEST 93RD STREET, SUITE 110, OVERLAND PARK, KS 66212 48-1056927
(Address of principal executive offices) (I.R.S. Employer Identification No.)
</TABLE>
(913) 341-8888
(Issuer's telephone number, including area code)
---------------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, par value $.01 per share.
---------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. /X/
Issuer's revenues for its most recent fiscal year were $17,099,635.
To the best of the Company's knowledge, the aggregate market value of the
Common Stock held by non-affiliates of the issuer is approximately $6,767,961,
based upon an average bid and asked price of $1.34 at March 28, 1996, based on
information obtained from the NASDAQ bulletin board, which is a quotation
service. The aggregate market value of the issuer's Class A Common Stock, no
shares of which were held by non-affiliates at December 31, 1995, is not readily
ascertainable.
The number of shares outstanding of each of the issuer's classes of common
equity at March 28, 1996, was as follows: 6,324,717 shares of Common Stock and
592,033 shares of Class A Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Issuer's definitive
Proxy Statement for the 1996 Annual Meeting of Stockholders, to be filed with
the Commission on or before April 29, 1996, are incorporated by reference into
Part III of this Annual Report on Form 10-KSB.
Transitional small disclosure format: Yes / / No /X/
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Certain information regarding executive officers and directors is included as
Appendix A.
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<PAGE> 169
FORM 10-KSB
ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ITEM NO. TOPIC PAGE
- --------- ----------------------------------------------------------------------------- ----
<S> <C> <C>
PART I
Item 1. Description of Business...................................................... 1
Item 2. Description of Property...................................................... 5
Item 3. Legal Proceedings............................................................ 6
Item 4. Submission of Matters to a Vote of Security Holders.......................... 6
PART II
Item 5. Market for Common Equity and Related Stockholder Matters..................... 7
Item 6. Management's Discussion and Analysis or Plan of Operation.................... 7
Item 7. Financial Statements......................................................... 14
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure................................................................. 28
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange Act.......................................... 29
Item 10. Executive Compensation....................................................... 29
Item 11. Security Ownership of Certain Beneficial Owners and Management............... 29
Item 12. Certain Relationships and Related Transactions............................... 29
Item 13. Exhibits and Reports on Form 8-K............................................. 29
</TABLE>
F-2
<PAGE> 170
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
AmeriConnect, Inc., a Delaware corporation, which was organized under the
name Amerifax, Inc. ("Amerifax") in Delaware on June 28, 1988 ("AmeriConnect"),
together with its wholly owned subsidiary, AmeriConnect, Inc. of New Hampshire,
a New Hampshire corporation ("ANH" and, together with AmeriConnect, the
"Company"), provides long distance telecommunications services to individuals
and small to medium-sized businesses. On June 7, 1994, Amerifax changed its name
to AmeriConnect, Inc. ANH was formed on June 28, 1993 and started doing business
in New Hampshire in July 1993.
The Company is a switchless reseller of long distance telecommunications
services and, as such, does not own or lease any telephone equipment or
participate in the call completion process. Instead, the Company places its
customers on the long distance networks of facilities-based, interexchange
carriers, which provide the actual call transmission services. Currently, the
Company utilizes the services of Sprint Communications, L.P. ("Sprint") and
WilTel, Inc. ("WilTel"). These interexchange carriers bill the Company at
contractual rates for the combined usage of the Company's customers utilizing
such carriers' respective networks. The Company then bills its customers
individually at rates established by the Company. The Company is responsible for
payments to its carriers without regard to whether payment is made by the
Company's customers.
The Company's corporate headquarters are located at 6750 W. 93rd St., Suite
110, Overland Park, Kansas 66212, and its telephone number is (913) 341-8888.
RECENT DEVELOPMENTS -- POSSIBLE MERGER
On January 15, 1996, the Company and Phoenix Network, Inc. ("Phoenix"), a
San Francisco, California-based long distance reseller and provider of
value-added telecommunications services, signed a letter of intent to merge the
two companies in a stock-for-stock transaction. The parties currently are
negotiating a definitive merger agreement. In connection with the proposed
merger, Phoenix expects to issue approximately 4 million new shares of common
stock in exchange for all of the outstanding shares of the Company. It is
currently anticipated that the closing will take place on or about August 15,
1996, pending the obtaining of all necessary regulatory approvals and approval
of the shareholders of both companies. There can be no assurance that the
ongoing negotiations between the Company and Phoenix will in fact result in the
execution of a definitive merger agreement or that the terms of any such
agreement will be as described above.
SERVICES AND PRICING
The Company provides to its customers a wide variety of long distance
telecommunications services, including both switched and dedicated "WATS"
services, "800" services, calling card services, account codes and international
calling, as well as other specialized services designed for customers with more
sophisticated telecommunications needs.
The Company's customers are able to obtain, through the Company,
substantially all of the basic services offered by the Company's underlying
interexchange carriers to such carriers' direct sale customers, but at rates
generally lower than those available directly from the carrier. Individually,
the Company's customers do not have sufficient long distance usage to qualify
for the discount rates made available by major carriers to large users of long
distance services. By combining all of its customers' traffic under the
Company's accounts with the carriers, the Company can take advantage of volume
discounts offered by such carriers and, in turn, can pass along a portion of
such savings to its customers.
The Company's customers provide the Company with information regarding
their telephone numbers and locations, which the Company processes and forwards
to one of its interexchange carriers. The carrier makes the appropriate
arrangements with the local telephone company so that the customer's long
distance traffic is routed to that carrier. The carrier then sends the Company,
on a periodic basis, information regarding the long
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<PAGE> 171
distance traffic of all the Company's customers who are serviced by such
carrier. The Company is obligated to pay the carrier for such traffic at
contractual rates without regard to whether payment is made by the Company's
customers. The Company processes the information and provides its customers with
monthly invoices for such customers' long distance calls at rates established by
the Company. The customers are obligated to pay the Company directly.
The Company offers its customers a pricing option of one flat rate per
minute (any time and without restrictions) on interstate long distance calls to
points almost anywhere in the United States. In general, the Company believes
the weighted average of the rates charged by the Company's long distance
competitors to typical small to medium-sized business customers is higher than
the Company's flat rate pricing option. The flat rate pricing concept is also
available for the in-bound "800" and calling card services offered by the
Company. While the Company also offers price structures for its various services
that are more typical of the industry (i.e., based upon time of use, distance
and total volume), most of its customers select the flat rate products. The
Company believes this is due to the fact that these products are easier for
customers to understand than traditional volume- and time-variable products. In
response to the marketing efforts of the major interexchange carriers, the
Company offers customers twelve month and twenty-four month Guaranteed Rate
Plans ("GRPs"), assuring customers of consistent rates over the selected period.
VENDORS
The Company provides long distance telecommunications services to its
customers primarily through the Sprint network, an all-digital, all-fiber optic
transmission system, pursuant to a Carrier Transport Switched Services
Agreement, dated July 28, 1995, between Sprint and the Company (as amended, the
"Sprint Agreement"). The Company also provides long distance telecommunications
services to its customers using the WilTel network, pursuant to a
Telecommunications Services Agreement, dated June 27, 1994, between WilTel and
the Company (as amended, the "WilTel Agreement"). Pursuant to the Sprint
Agreement and the WilTel Agreement, the Company receives discounts on long
distance services from Sprint and WilTel based upon the total volume of services
purchased by the Company. Both agreements contain minimum usage requirements
that the Company must meet in order to avoid shortfall penalties.
The Company neither owns nor leases any switching or transmission
facilities used in the actual call completion process, and, as a consequence,
the Company is entirely dependent on the facilities-based carriers providing
these services for the Company's customers.
MARKETING
The Company targets small to medium-sized businesses which are active users
of long distance services. These businesses generally are not large enough to
take advantage of the volume discounts offered by major interexchange carriers
to their large customers. The Company provides what it believes to be superior
billing and customer service at lower prices than major interexchange carriers.
To differentiate itself from the major interexchange carriers, the Company
offers a package of value-added billing summary reports. These reports may
include summaries identifying usage by telephone number, traffic type, time of
day and day of month, as well as frequently called numbers and international
calls. The Company also places a strong emphasis on customer relations. All new
customers receive a welcome letter, most receive an activation call, and larger
customers receive periodic customer support calls to measure their satisfaction
with the Company and its services and to sell additional services.
The Company markets its services primarily through non-employee sales
agents which are supported by area sales directors ("ASDs") who are employees of
the Company. Each ASD is responsible for assisting existing sales agents and
recruiting new sales agents within his or her geographic region. The Company
believes the utilization of non-employee sales agents to be the most cost
effective method of sales because sales agents generally are compensated only by
commissions tied directly to sales. Sales by sales agents now represent
approximately seventy-two percent (72%) of the Company's monthly revenue and
this percentage is expected to increase during 1996. Sales by one agent now
represent approximately nineteen percent (19%) of the Company's monthly revenue.
During 1995, the Company utilized approximately 81 non-employee sales
F-4
<PAGE> 172
agents throughout the United States. At December 31, 1995, the Company employed
4 ASDs and now employs 3 ASDs.
The Company also markets its services through its own direct sales force,
which sales personnel are compensated on a salary plus commission basis. In
December 1995, the Company hired a new sales manager and two new sales persons,
all of whom were concentrating their sales efforts in the Kansas City
metropolitan area. During the first three months of 1996, the Company hired an
additional four new sales persons to concentrate on sales in the Kansas City
metropolitan area. For the year ended December 31, 1995, thirty-four percent
(34%) of the Company's revenues were from the Kansas City metropolitan area.
While the Company does not advertise through the mass-media, it indirectly
benefits from advertising by the major interexchange carriers. Through their
advertising, the Company's primary market is made aware of choices in long
distance suppliers. In addition, the Telecommunications Resellers Association
("TRA"), of which the Company has been a member since its inception, promotes
resellers such as the Company. TRA's public relations campaign has included
major stories in periodicals such as Inc. Magazine, Smart Money and Entrepreneur
as well as regular coverage in Communications Daily, Network World and Phone+.
CUSTOMERS
As of December 31, 1995, the Company had 7,085 customers subscribing to its
long distance telecommunications services. This represents a decrease of 849
customers or approximately 11% from the number of customers at December 31,
1994. During 1995, the Company billed its customers an average of approximately
$190 for long distance usage, compared to average per customer billings of
approximately $150 during 1994. The Company believes the decrease in the number
of customers and the increase in the amount of the average customer bill are
primarily attributable to the loss of certain residential customers associated
with a particular agent. See "Legal Proceedings" and "Management's Discussion
and Analysis or Plan of Operation -- General." During 1995, no single customer
accounted for more than 2% of the Company's gross revenues.
COMPETITION
The long distance telecommunications industry is highly competitive and
subject to rapid technological and regulatory change. The Company's competitors
include the three major facilities-based, interexchange carriers (American
Telephone and Telegraph Company ("AT&T"), MCI Telecommunications Corporation
("MCI") and Sprint), other large carriers (e.g., Frontier Communications, Inc.
("Frontier") and WorldCom Communications, Inc. ("WorldCom")) and several hundred
smaller carriers. As a result of the newly enacted Telecommunications Act of
1996 (the "Telecommunications Act"), the regional bell operating companies (the
"RBOCs") are now authorized to provide inter-LATA ("local access and transport
area") long distance telephone services outside their own regions, and, under
certain circumstances, to provide interLATA long distance telephone services
within their own regions. The Telecommunications Act also removes the
prohibition on providing long distance services previously imposed on the GTE
telephone operating companies (the "GTOCs"). The three major carriers, the
RBOCs, the GTOCs and many of the other carriers have resources significantly
greater than those available to the Company, as well as longer operating
histories and larger customer bases. From time to time any of these entities may
be able to provide a range of services comparable to or more extensive than
those provided by the Company at rates competitive with the Company's rate
structure. In addition, new companies may be formed which utilize the same
volume-discount pricing available to the Company, because the Company does not
have proprietary contractual arrangements in that regard. Most prospective
customers of the Company are already receiving service directly from at least
one long distance carrier, and the Company must convince prospective customers
to alter these relationships to generate new business. As a result of the
foregoing, there can be no assurance that the Company will be competitive.
Furthermore, the Company is in direct competition with the facilities-based
carriers for the right to service the end user. The Company believes, given the
highly competitive nature of the industry, that the
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<PAGE> 173
carriers view switchless resellers as an alternative marketing channel giving
the carrier incremental minutes of traffic with no marketing cost and minimal
support costs.
On February 8, 1996, the Telecommunications Act was signed into law. This
legislation permits the RBOCs to provide inter-LATA long distance services under
certain circumstances and subject to certain restrictions. In particular, the
new legislation permits each of the RBOCs to provide inter-LATA service outside
its own region. Additionally, an RBOC may offer in-region inter-LATA service if
federal and state regulators determine (i) that the RBOC has opened its local
loop network to competitors and (ii) that the RBOC faces competition from a
facilities-based provider offering local exchange service to businesses and
residents in that state. In order for the RBOC to offer this in-region long
distance service, the Federal Communications Commission (the "FCC") also must
determine that such entry is in the "public interest." Many of the RBOCs and the
GTOCs have already announced their intention to enter the business of reselling
long distance services and, as a result, the Company will face significant
additional competition. However, entry into this business will involve
compliance by these companies with certain regulatory requirements. See
"-- Regulation."
In addition, certain regulatory proceedings affecting the Company and its
competitors may affect the Company's competitive position. For a more detailed
discussion of the regulatory proceedings affecting the Company, see
" -- Regulation."
REGULATION
The FCC retains general regulatory jurisdiction over the provision of
telecommunications services by all common carriers, but does not currently
regulate the long distance telephone rates or profit levels of non-dominant
common carriers such as the Company. The FCC imposes certification and tariff
filing requirements for international service and tariff filing requirements for
domestic interstate service for all common carriers. The FCC, however, has
recently proposed "mandatory de-tariffing" of services offered by non-dominant
long distance carriers such as the Company, pursuant to authority granted in the
Telecommunications Act. This mandatory de-tariffing would relieve all domestic
long distance companies, including the Company, from the requirement of filing
tariffs.
Utilizing authority granted in the Telecommunications Act, the FCC has also
recently proposed regulations to govern the entry of the RBOCs into the
interstate long distance service markets. The FCC has proposed that, so long as
these long distance services are offered by affiliates of the RBOCs that are
structurally separate from the RBOCs, these interexchange services would be
classified as "non-dominant" (like the services provided by the Company).
Services classified as dominant are subject to increased regulation of rates,
earnings and operations by the FCC. In a separate rulemaking proceeding, the FCC
has also recently proposed elimination of the structural separation requirement
for the long distance services offered by independent local exchange carriers
and RBOCs outside their regions.
The proposals described above remain under consideration by the FCC. Many
of the existing long distance carriers and long distance resellers have urged
the FCC to classify the RBOCs' long distance service units as dominant, allowing
the FCC greater oversight of their rates, earnings and operations. These
companies have also urged the FCC to adopt stricter structural separation
requirements. The RBOCs, conversely, contend that the structural separation
requirements are unnecessary and constitute a violation of the
Telecommunications Act.
In the fall of 1995, the FCC granted AT&T non-dominant status in the
domestic interexchange service market. As a result, the FCC no longer directly
regulates the rates, earnings and operations of AT&T, a carrier with which the
Company competes and from which the Company may lease transmission services.
The Company's intrastate long distance services generally are subject to
the jurisdiction of utility regulatory authorities in the states in which the
Company operates. The state regulatory authorities regulate access charge
arrangements between the local telephone companies and all long distance
carriers for intrastate long distance services. Most state regulatory
authorities also regulate entry and competition within the intrastate long
distance market by requiring all carriers to obtain and maintain certificates of
public
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convenience and necessity. Some state regulatory authorities also require
carriers to file tariffs which set forth their rates and conditions of service.
Regulation by the state regulatory authorities differs significantly from state
to state. The Company believes it is in substantial compliance with the
applicable state regulatory provisions. The Company historically has not
experienced significant problems in its dealings with state regulatory
authorities.
There is a current trend toward less regulation of intrastate long distance
telecommunications services in certain states in which the Company operates.
Resale long distance carriers historically have been subject to a lesser degree
of regulation than facilities-based carriers and mixed-mode carriers.
Deregulation, however, may result in a more comparable degree of regulation
among all carriers, particularly with regard to rates.
The Company has filed and continues to file, as the case may be, for the
relevant approvals from federal and state regulatory agencies to provide access
to international and intrastate long distance services. As of December 31, 1995,
the Company was authorized to provide intrastate service in 36 states and was
awaiting approval to provide intrastate service in four additional states. The
Company continues to prepare applications consistent with state filing
requirements on a priority basis relative to the Company's potential customer
additions. Although management believes approval of such applications will be
granted, there can be no assurance that the Company will obtain all necessary
remaining approvals to conduct its business as proposed.
PATENTS, TRADEMARKS AND LICENSES
On February 13, 1995, the Company filed two applications for federal
registration of "AmeriConnect" as a service mark, one of which was for the name
only and one of which was for the name with a design. On July 6, 1995, the U.S.
Patent and Trademark Office informed the Company that both of its service mark
applications had been refused because the service marks too closely resembled
other registered service marks. On January 11, 1996, the Company filed
amendments to the two service mark applications appealing the refusals. On April
9, 1996, the U.S. Patent and Trademark Office passed the two service marks to
publication in the official gazette. Barring opposition by any party that feels
it would be damaged by the service marks, the service marks will be registered
exclusively to the Company. However, there is no assurance that the
registrations will not be opposed, perhaps successfully, by other parties. In
that event, the efforts of the Company and the funds expended to develop
recognition of the AmeriConnect name, and to register such name, would have no
value.
EMPLOYEES
At March 28, 1996, the Company had 36 full-time employees and no part-time
employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases office space at 6750 W. 93rd St., Suite 110, Overland
Park, Kansas, under a lease calling for payments of $2,653 per month from
September 1, 1993, through August 31, 1998. An amendment to that lease, dated on
February 1, 1994, which provides for additional office space, calls for payments
of $2,243 per month from February 1, 1994 through August 31, 1998. A second
amendment to the lease, dated November 23, 1994, which also provides for
additional office space, calls for payments of $2,362 per month from January 1,
1995 through December 31, 1999. Consequently, the Company's total rental expense
equals $7,258 per month. Rental expense for the years ended December 31, 1995
and 1994, was $87,967 and $56,358, respectively.
The Company leases office space in McLean, Virginia under a lease providing
for payments of $3,643 per month from June 1, 1991 through May 31, 1996. The
leased property is no longer used by the Company, and the Company has obtained a
sublease for this space. (See Notes 5 and 9 to the Company's Financial
Statements.) In 1995, rental income from the sublease of $30,744 was netted
against rental payments of $46,792 and the difference, $16,048, was charged
against accrued office closing costs.
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ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in certain disputes that have arisen in
the ordinary course of business, including an action in the District Court of
Johnson County, Kansas filed by the Company on July 20, 1995 against Overlooked
Opinions, Inc. ("Overlooked") and a related entity, Lyrihn Communications, Inc.
("Lyrihn"). The Company's claims arose out of the alleged breach by Overlooked
of an agency agreement between the Company and Overlooked for the sale of long
distance services to residential customers and out of the alleged breach by
Overlooked of certain loan agreements between the Company and Overlooked.
Overlooked and Lyrihn have filed a counterclaim alleging breach of the agency
agreement by the Company. The Company is seeking $356,669.63 plus interest and
attorneys' fees in damages. Overlooked and Lyrihn are seeking an unspecified
amount of damages in their counterclaim. The Company is currently negotiating a
mutual release of all claims with Overlooked and Lyrihn and does not expect to
incur any additional liability as a result of this litigation. In the event a
mutual release is not executed, the Company intends to vigorously prosecute
these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1995.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
GENERAL
High and low bid prices for the Company's Common Stock, par value $.01 per
share (the "Common Stock"), for each quarterly period during 1994 and 1995 were:
COMMON STOCK
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
---------------------------------------------------------------------- ---- ---
<S> <C> <C>
March 31, 1994........................................................ 15/16 1/4
June 30, 1994......................................................... 1 1/8 1/8
September 30, 1994.................................................... 1 3/16
December 31, 1994..................................................... 1 1/4 3/16
March 31, 1995........................................................ 9/16 3/8
June 30, 1995......................................................... 7/16 5/16
September 30, 1995.................................................... 3/8 1/4
December 31, 1995..................................................... 1/2 3/8
</TABLE>
In connection with the Company's initial public offering, the Company
issued Units, each of which consisted of five shares of Common Stock and five
Redeemable Class A Warrants. The Redeemable Class A Warrants expired unexercised
on May 29, 1994.
The Common Stock is not listed on an exchange. Price information for the
Common Stock was obtained from the NASDAQ bulletin board which is a quotation
service. These quotations could include inter-dealer prices and may not include
retail mark-up, mark-down or commission and may not represent actual
transactions.
There has never been an established public trading market for the Company's
Class A Common Stock, par value $.00001 per share (the "Class A Common Stock").
At March 27, 1996, there were 60 holders of record of Common Stock and 2
holders of record of Class A Common Stock.
The Company has declared no cash dividends since its inception in 1988, and
it is the Board's intent not to pay dividends for the foreseeable future.
Rather, all available funds will be used for working capital purposes. In
addition, the Company's credit facility prohibits the paying of dividends at
this time.
RECENT SALES OF UNREGISTERED SECURITIES
On April 8, 1993, the Company issued 300,000 shares of Common Stock to Mr.
Robert R. Kaemmer as a commitment fee for a revolving credit agreement, dated
November 10, 1992, pursuant to which Mr. Kaemmer agreed to lend up to $300,000
to the Company. These shares were not registered under the Securities Act of
1933 (as amended, the "Securities Act") in reliance upon the exemption from
registration provided in Section 4(2)of the Securities Act (the "Section 4(2)
Exemption").
On April 27, 1994, Mr. Robert R. Kaemmer purchased 900,000 shares of Common
Stock. Mr. Kaemmer was granted the right to purchase such stock at a purchase
price of $0.33 per share on November 10, 1992, in connection with the execution
of the revolving credit agreement described above. These shares were not
registered under the Securities Act in reliance upon the Section 4(2) Exemption.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT ON FORM
10-KSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
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UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THE COMPANY'S
REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
GENERAL
The Company's financial condition and results of operations deteriorated
substantially during 1995, primarily as a result of the following factors.
Competition. Competition in the long distance telecommunications industry
increased significantly during 1995. Major long distance companies like AT&T and
Sprint began to market directly to the Company's primary market - small to
medium-sized businesses. Other existing competitors began aggressively reducing
rates to maintain and build customer base and expand minute volume. In addition,
new competitors emerged targeting the Company's primary market. Many of these
competitors sought to build volume quickly and, in order to accomplish this
goal, sold their long distance services at rates that, in the Company's opinion,
do not reflect the full costs of doing business. Accordingly, while the Company
reduced its rates and undertook efforts to maintain and build its customer base
(as described below), the Company was unable to match the rates and/or services
offered by many of its competitors, thereby increasing the number of customers
lost to competitors. While the Company continued to acquire new customers, lost
business partially offset new business. As a consequence of this competitive
rate pressure, while the total minutes billed increased approximately 8% from
1994 to 1995, the average revenue per minute dropped approximately 9%.
Direct Operating Costs. The negative effect of the competitive rate
pressure on the Company's financial condition was exacerbated by its inability
to achieve direct operating cost reductions from its major underlying carrier.
Throughout 1995, the Company attempted to negotiate a new contract with such
carrier which would reduce the rates paid by the Company. The Company was unable
to obtain a new contract until September 1995. While the new contract reduces
the Company's costs at certain increased volume targets, which would result in
significant cost reductions for the Company, to date the Company has been unable
to achieve the volume targets necessary to realize the reduced carrier pricing.
Company's Response. In the absence of a new carrier contract, the Company
sought to increase its volume by offering services at rates that were
competitive in the market, but that significantly reduced the Company's margins.
The Company hired Area Sales Directors and other personnel to support its sales
agent program, increased commissions to sales agents to maintain its
relationship with key agents, and promoted aggressive marketing campaigns
designed to increase sales. While the Company believed these actions to be
necessary to respond to the competitive environment, they had the effect of
increasing selling, general and administrative expenses, thereby further
reducing the Company's margins. These actions continue to result in increased
expenses and to negatively impact the Company's margins.
Write-Offs. Throughout 1995 and previous years, the Company had recorded
credits due from one of its carriers which the Company believed at the time
should be applied to reduce usage costs. During the year ended December 31,
1995, approximately $283,000 of these previously recorded credits were
determined to be uncollectible and were written off. This write-off inflated
direct operating costs and reduced overall margins for the year ended December
31, 1995.
In 1994, the Company signed an agreement with an agent representing more
than 25,000 residential customers. In order to facilitate the movement of these
customers, the Company loaned $141,000 to the agent as an advance against future
commissions and paid certain start-up costs on the agent's behalf. While the
Company billed these customers for approximately $1,000,000 in long distance
usage during 1994, due to circumstances beyond the Company's control, the
payment performance was well below, and the attrition rate well above what the
Company typically experiences with respect to small and medium-sized business
customers. As a result, bad debt expense was in excess of the normal expected
rate, and agent commissions were insufficient to pay off the loans which became
due in December 1994. As of December 31, 1995, the total
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amount due from the agent, including the loans was approximately $498,000. As of
December 31, 1994, the Company had recorded $100,000 as an allowance against the
start-up costs due from the agent and uncollected billings due from the
customers represented by this agent. During the year ended December 31, 1995,
the Company determined that all start-up costs and billings from this agent are
uncollectible and, accordingly, $398,000 was written off. This write-off
negatively impacted sales, general and administrative expenses for the year
ended December 31, 1995. These residential long distance users are no longer
customers of the Company. See "Legal Proceedings."
RESULTS OF OPERATIONS
Total Revenues. Total revenues increased from $16,984,324 in 1994 to
$17,099,635 in 1995, an increase of $115,311 or approximately 1%. While the
total number of minutes billed during 1995 increased approximately 8% over 1994,
the average revenue per minute decreased approximately 9%. Also contributing to
the flat revenue increase was the loss in late 1994 of an agent that represented
a large number of residential customers.
Direct Operating Costs. Direct operating costs increased from $12,642,307
in 1994 to $13,399,190 in 1995, an increase of $756,883 or approximately 6%. As
a percentage of revenues, direct operating costs increased from approximately
74% in 1994 to 78% in 1995. Direct operating costs for 1994 included $150,000 in
customer appreciation credits from one of the Company's interexchange carriers.
Without the $150,000 credit, direct operating costs for 1994 would have been
$12,792,307 or approximately 75% of revenue. Direct operating costs for 1995
were negatively impacted by a $200,000 write-off of credits due from a supplier.
Without the $200,000 write-off, direct operating costs for 1995 would have been
$13,199,190 or approximately 77% of revenue. The increase in direct operating
costs as a percentage of revenues, as adjusted, results primarily from
competitive pressures previously mentioned which reduced the revenue per minute
charged to the Company's customers while the rates charged the Company by the
major underlying carrier remained relatively constant.
Selling, Administrative and General Expenses. The Company's selling,
administrative and general expenses increased from $3,912,979 in 1994 to
$4,847,248 in 1995, an increase of $934,269 or approximately 24%. As a
percentage of revenue, selling, administrative and general expenses increased
from 23% in 1994 to 28% in 1995. The biggest single increase in this expense
category in dollars was in compensation expense.
Compensation expenses increased from $2,136,194 in 1994 to $2,418,641 in
1995, an increase of $282,447 or approximately 13%. Salaries for sales related
positions increased from $168,594 to $299,205, an increase of $130,611 or
approximately 77%, which increase resulted from the addition of several sales
positions throughout 1995. Agent commissions increased from $1,310,236 to
$1,435,996, an increase of $125,760 or approximately 10% due to the introduction
in 1995 of a commission plan designed to attract high volume agents.
Billing expenses increased from $469,050 in 1994 to $610,196 in 1995, an
increase of $141,146 or approximately 30%. This increase is attributable in part
to an increase in monthly processing fees charged by the Company's billing
agent. The number of Company call records processed increased significantly
during 1995 and the Company is charged by its billing agent on a per record
basis. In addition, the amount of stored historical information within the
billing system continued to accumulate during 1995. The Company took measures in
early 1996 to find alternative storage methods for such information in order to
reduce the portion of billing expenses attributable to such storage.
Bad debt expenses increased from $537,640 in 1994 to $739,374 in 1995, an
increase of $201,734 or approximately 38%. During 1994, the Company signed an
agreement with an agent representing more than 25,000 residential customers. In
order to facilitate the movement of these customers, the Company loaned $141,000
to the agent as an advance against future commissions and paid certain start-up
costs on the agent's behalf. While the Company billed these customers for some
long distance usage during 1994, due to circumstances beyond the Company's
control, the payment performance was well below, and the attrition rate well
above, what the Company typically experiences with respect to its small and
medium-sized business customers. At December 31, 1994, a reserve of $100,000 was
established against amounts due from this agent
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whose receivable, including unpaid charges, aggregated $498,000. During 1995,
the Company and this agent became involved in litigation, and it has been
determined that no recovery on the amounts will be made. As a result, the
remaining receivable of $398,000 was written off. The Company is currently
negotiating a mutual release of all claims with this agent and does not expect
to incur any additional liability as a result of the litigation.
Office occupancy expenses which include office leases, equipment leases,
telephone expense and insurance expense increased from $255,479 in 1994 to
$364,703 in 1995, an increase of $109,224 or approximately 43%. The increase is
a result of additional leased space occupied during January 1995 and related
expenses associated with an increase in personnel.
Fees for professional services increased from $251,484 in 1994 to $319,207
in 1995, an increase of $67,723 or approximately 27%. This increase resulted
primarily from increases in the costs of legal and accounting services
associated with the litigation with an agent and the potential merger previously
mentioned. A significant amount of legal expenses were also incurred in
connection with the litigation previously mentioned.
Travel expense increased from $53,334 in 1994 to $104,804 in 1995, an
increase of $51,470 or approximately 97%. The increase is directly attributable
to the addition of Area Sales Directors in late 1994. See "Description of
Business -- Marketing."
Income Tax Effect. In 1995, the Company reduced the deferred tax asset to
zero.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1994 and December 31, 1995, the Company had a net worth of
$1,479,219 and a deficit of $237,041, respectively. In 1994, the Company
generated $301,463 cash from operations. Contributing to the cash generated from
operations during 1994 was a $150,000 customer appreciation credit the Company
received from one of its carriers. In 1995, the Company used $64,222 cash in
operations. While the Company reported a net loss of $1,718,510 for 1995,
non-cash items such as depreciation and amortization, provision for doubtful
accounts and deferred income taxes collectively contributed $1,316,067 of the
total loss. The remaining portion of the total loss, $402,443, along with a
$118,481 increase in accounts receivable and a $691,755 increase in accounts
payable, contributed to the cash used in operating activities.
The Company has a contract with a firm to provide subscriber statement
processing and billing services. The contract is for a period of three (3) years
and expires in September 1996. Terms of the contract provide for a monthly base
charge with additional per unit processing charges. Termination of this contract
for cause requires a 90-day period during which any breach of the contract can
be cured, plus a requirement for a subsequent written 30-day notice. Termination
for cause requires the payment of all amounts owed. Termination of the contract
for the convenience of the Company requires a written 180-day notice and a
termination fee equal to one year's charges. The Company is required to make
minimum payments of $5,000 per month.
The Company has a contract with Sprint to provide telecommunications
services for the Company's customers. The agreement covers the pricing of the
services for a term of two years beginning September 1995. The Company has an
annual minimum usage commitment of $12,000,000 through August 1996 and
$14,400,000 from September 1996 to August 1997. In the event the Company's
customers use less than the minimum commitment, the difference is due and
payable by the Company to Sprint. Assuming a monthly average requirement of
$1,000,000 under the Sprint contract, for the period from September, 1995
through December 1995 the Company accumulated a shortfall of $719,545. The
Company anticipates additional shortfall amounts to accumulate during 1996. In
the event the proposed merger with Phoenix Network, Inc. occurs, the Company
currently anticipates that all accumulated shortfall amounts will be addressed
in a new contract between Sprint and the surviving corporation. In the event the
proposed merger does not occur, the Company has begun negotiations with Sprint
to address the accumulated shortfall. While the Company believes the accumulated
shortfall at December 31, 1995, and any additional shortfall amounts, will be
resolved in a manner which will not have a material adverse effect on the
business or financial condition of the
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Company in the event the proposed merger does not occur, there can be no
assurance of such a result. If the Company were required to pay the full amount
of accumulated shortfalls, this would have a material adverse effect on the
Company's financial condition.
The Company has a contract with WilTel, Inc. ("WilTel") to provide
telecommunications services at discounted rates which will vary based upon the
amount of usage by the Company. The term of this usage commitment is thirty-nine
(39) months. The Company's agreement with WilTel calls for a minimum monthly
usage commitment of $50,000 through January 1998. In the event the Company's
customers use less than the minimum commitment in any month, the difference is
due and payable by the Company to WilTel in the following month. The Company was
in compliance with the contractual requirements of the agreement throughout the
year ended December 31, 1995.
On June 8, 1995, the Company entered into a revolving credit facility which
allows for maximum borrowings by the Company of the lesser of $1,000,000 or 50%
of eligible (less than 61 days old) receivables. Interest is payable monthly at
the bank's prime rate (8.5% at December 31, 1995) plus 1%. Under the terms of
the credit facility, the Company is required to meet certain financial
covenants. At December 31, 1995, the Company was in default of certain of these
financial covenants, which defaults are continuing. While the Company currently
does not expect these defaults to impair its ability to utilize this facility
during the remainder of the existing term, it may negatively impact the
Company's ability to renew the credit facility. In the event the credit facility
cannot be renewed or the Company is unable to utilize the existing facility, the
Company would attempt to obtain a comparable credit facility from an alternative
financing source. While the Company has been able to obtain such facilities in
the past, there can be no assurance that the Company will be able to obtain a
credit facility with comparable terms or at all. The inability to obtain a
credit facility would have a material adverse effect on the Company's financial
condition and business. The line is secured by all of the Company's accounts
receivable. During 1995, the Company had used this facility for short terms
borrowings, but had no outstanding borrowings at year end.
In accordance with the terms of the credit facility, the Company purchased
a term life insurance policy on this key employee with a face amount of
$1,750,000 during the year ended December 31, 1994. Annual premiums are
approximately $3,500.
At December 31, 1995, the Company had a ratio of current assets to current
liabilities of 0.86, as opposed to 1994 when such ratio was 1.49. Working
capital deficit at December 31, 1995 was $391,502, as compared to working
capital of $1,112,197 at December 31, 1994.
The Company's business as a non-facilities based reseller of long distance
telecommunications services is generally not a capital intensive business, and
at December 31, 1995, the Company had no material commitments for capital
expenditures. The Company anticipates any additional capital expenditures in the
future will be confined to minimal purchases of office fixtures and equipment.
Currently none of the Company's customers represents more than 2% of the
monthly revenues.
The proposed merger would reduce the Company's direct operating costs
through volume discounts on long-distance pricing from its carriers and would
provide certain economies of scale that together management believes would allow
its operations to become profitable and allow it to compete for new and existing
customers. If for any reason the proposed merger is not consummated, the Company
plans to increase its sales and reduce its costs and will continue to explore
other strategic alternatives (which may include financings, mergers,
acquisitions, joint ventures or other strategic transactions). In addition, if
the proposed merger is not consummated, the Company intends to negotiate new
contracts with its carriers which would allow its operations to become
profitable.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Dependence on Service Providers. The Company depends on a continuing and
reliable supply of telecommunications services from facilities-based,
interexchange carriers. Because the Company does not own or lease switching or
transmission facilities, 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
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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 the Company for its customers on favorable terms and in
a timely manner. See "Description of 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. To the extent the differential between the
telephone rates offered by the major carriers directly to their customers and
the cost of the bulk-rate telecommunications services procured by the Company
from its underlying carriers 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 would also be adversely affected.
Competition. An existing or potential customer of the Company has numerous
other choices available for its telecommunications service needs, including
obtaining services directly from the same carriers whose services the Company
offers. From time to time, the Company's competitors 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 rates. In addition,
most prospective customers of the Company are already receiving service directly
from at least one long distance carrier, and thus the Company must convince
prospective customers to alter these relationships to generate new business. The
Company competes with three major interexchange carriers, AT&T, MCI and Sprint,
other large carriers, including Frontier and WorldCom, and several hundred
smaller carriers. Additionally, as a result of legislation enacted by the
federal government in February of 1996, the RBOCs and GTOCs will have, upon
compliance with certain regulatory requirements, the right to provide long
distance service. Many of the RBOCs and GTOCs have already announced their
intention to enter the business of providing long distance service. The
telecommunications industry is highly competitive and subject to rapid
technological and regulatory change. Because the tariffs offered by the major
carriers for telecommunications 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 the Company will be able to remain competitive in the
current telecommunications environment. See "Description of
Business -- Competition."
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 potential
mergers, acquisitions, joint ventures or other strategic combinations involving
the Company, 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 28, 1996, the Company's
executive officers and directors beneficially owned or controlled approximately
52.9% of the total voting power represented by the Company's outstanding capital
stock, taking into account that holders of the Company's Class A Common Stock
are entitled to five votes per share of such stock and assuming the exercise of
all outstanding options for the Company's capital stock which are exercisable
within sixty (60) days. The votes represented by the shares beneficially owned
or controlled by the Company's executive officers and directors would, if they
were cast together, 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 capital 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
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Company's executive officers and directors and 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, the Company is subject to many of the same regulatory requirements as
facilities-based interexchange carriers. The intrastate long distance
telecommunications operations of the Company are also subject to various state
laws and regulations, including certification requirements. Generally, the
Company must obtain and maintain certificates of public convenience and
necessity from regulatory authorities in most states where it offers service,
and in some 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.
See "Description of Business -- Regulation."
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ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Report of Independent Certified Public Accountants.................................... 15
Consolidated Balance Sheet as of December 31, 1995.................................... 16
Consolidated Statements of Operations for the Years Ended December 31, 1995 and
December 31, 1994................................................................... 17
Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 1995
and December 31, 1994............................................................... 18
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995 and
December 31, 1994................................................................... 19
Notes to the Consolidated Financial Statements........................................ 21
</TABLE>
F-16
<PAGE> 184
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
AmeriConnect, Inc.
We have audited the accompanying consolidated balance sheet of
AmeriConnect, Inc. (a Delaware corporation) and subsidiary as of December 31,
1995, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for each of the two 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 audits 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 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 AmeriConnect,
Inc. and subsidiary as of December 31, 1995, and the consolidated results of
their operations and their consolidated cash flows for each of the two years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ GRANT THORNTON LLP
---------------------------------
GRANT THORNTON LLP
Kansas City, Missouri
February 16, 1996
F-17
<PAGE> 185
AMERICONNECT, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
CURRENT ASSETS
Cash.......................................................................... $ 293,492
Accounts receivable, net of allowance of $361,260 (Notes 1, 2 and 6).......... 1,961,815
Accounts receivable -- trade, with affiliates (Note 3)........................ 6,065
Accounts receivable -- agents, including accrued interest (Note 11)........... 1,492
Notes receivable -- director/shareholder (Note 3)............................. 14,500
Prepaid commissions........................................................... 126,042
Other current assets.......................................................... 94,251
----------
Total current assets.................................................. 2,497,657
NON-CURRENT ASSETS
Equipment and software, net of accumulated depreciation and
amortization of $230,868 (Note 1).......................................... 143,202
Deposits...................................................................... 19,528
----------
TOTAL ASSETS.......................................................... $2,660,387
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable (Notes 1, 2 and 6)........................................... $2,782,432
Sales taxes payable........................................................... 97,460
Accrued office closing costs (Note 9)......................................... 8,539
Other accrued liabilities..................................................... 733
----------
Total current liabilities............................................. 2,889,164
NON-CURRENT LIABILITIES
Customer deposits............................................................. 8,264
----------
Total liabilities..................................................... 2,897,428
COMMITMENTS AND CONTINGENCIES (Notes 5, 6, 8 and 10)............................ --
STOCKHOLDERS' DEFICIT (Note 8)
Class A common stock, par value $.00001 per share; 10,000,000 shares
authorized;
issued 6,562,033 shares.................................................... 66
Common stock, par value $.01 per share; 20,000,000 shares authorized;
issued 6,504,967 shares.................................................... 65,050
Additional paid-in capital.................................................... 3,642,731
Accumulated deficit........................................................... (3,943,025)
Treasury stock -- class A common, at cost; 5,970,000 shares................... (60)
Treasury stock -- common, at cost; 180,250 shares............................. (1,803)
----------
Total stockholders' deficit........................................... (237,041)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT..................................... $2,660,387
==========
</TABLE>
See accompanying notes to financial statements
F-18
<PAGE> 186
AMERICONNECT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
REVENUES (Notes 1, 2, 3 and 6)
Sales......................................................... $17,022,095 $16,923,025
Sales to affiliates........................................... 77,540 61,299
----------- -----------
Total revenues........................................ 17,099,635 16,984,324
COSTS AND EXPENSES
Direct operating costs........................................ 13,399,190 12,642,307
Selling, administrative and general expenses.................. 4,847,248 3,912,979
Depreciation and amortization (Note 1)........................ 76,693 43,793
----------- -----------
Total costs and expenses.............................. 18,323,131 16,599,079
----------- -----------
Operating income (loss)............................... (1,223,496) 385,245
OTHER INCOME (EXPENSE)
Interest income............................................... 19,898 28,000
Interest expense.............................................. (6,558) (18,157)
Interest expense to director/shareholder (Note 3)............. (1,587) --
Loan fees..................................................... (1,250) (3,332)
Miscellaneous................................................. (5,517) 46,229
----------- -----------
Total other income.................................... 4,986 52,740
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX................................. (1,218,510) 437,985
INCOME TAX EXPENSE (NOTES 1 AND 8)
Currently payable............................................. -- 16,405
Deferred...................................................... 500,000 --
----------- -----------
Total income tax expense.............................. 500,000 16,405
----------- -----------
NET INCOME (LOSS)............................................... $(1,718,510) $ 421,580
=========== ===========
Net income (loss) per common and common equivalent share
(Note 1)................................................... $ (0.228) $ 0.061
=========== ===========
Weighted average common and common equivalent shares
outstanding (Note 1)....................................... 7,550,710 6,868,221
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-19
<PAGE> 187
AMERICONNECT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK COMMON STOCK ADDITIONAL
---------------- ------------------- PAID-IN ACCUMULATED
DESCRIPTION SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ---- --------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1994.................... 6,788,833 $ 68 5,251,167 $52,512 $3,350,479 $(2,646,095)
--------- ---- --------- ------- ---------- -----------
Conversion of Class A
to Common................ (113,400) (1) 113,400 1,134 (1,133)
Issuance of Common
to directors............. 19,000 190 3,888
Net income for the
year.................... 421,580
Stock options
exercised............... 933,000 9,330 289,130
--------- ---- --------- ------- ---------- -----------
Balance, December 31,
1994.................... 6,675,433 $ 67 6,316,567 $63,166 $3,642,364 $(2,224,515)
Net loss for the year..... (1,718,510)
Stock options
exercised............... 75,000 750 1,500
Conversion of Class A
to Common................ (113,400) (1) 113,400 1,134 (1,133)
--------- ---- --------- ------- ---------- -----------
Balance, December 31,
1995.................... 6,562,033 $ 66 6,504,967 $65,050 $3,642,731 $(3,943,025)
========= ==== ========= ======= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
CLASS A TREASURY
COMMON STOCK COMMON STOCK
------------------- ------------------
DESCRIPTION SHARES AMOUNT SHARES AMOUNT TOTAL
---------- ---- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1994.................... (5,970,000) $(60) (180,250) $(1,803) 755,101
---------- ---- -------- ------- -----------
Conversion of Class A
to Common................
Issuance of Common
to directors............. 4,078
Net income for the
year.................... 421,580
Stock options
exercised............... 298,460
---------- ---- -------- ------- -----------
Balance, December 31,
1994.................... (5,970,000) $(60) (180,250) $(1,803) $ 1,479,219
Net loss for the year..... (1,718,510)
Stock options
exercised............... 2,250
Conversion of Class A
to Common................
---------- ---- -------- ------- -----------
Balance, December 31,
1995.................... (5,970,000) $(60) (180,250) $(1,803) $ (237,041)
========== ==== ======== ======= ===========
</TABLE>
See accompanying notes to financial statements
F-20
<PAGE> 188
AMERICONNECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................... $(1,718,510) $ 421,580
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 76,693 43,793
Provision for doubtful accounts.............................. 739,374 537,640
Deferred income taxes........................................ 500,000 --
(Increase) decrease in assets:
Accounts receivable........................................ (118,481) (517,299)
Accounts receivable -- trade from affiliates............... 3,804 (6,055)
Prepaid commissions........................................ (88,764) 7,641
Other current assets....................................... (57,041) (36,569)
Deposits................................................... 511 (11,494)
Increase (decrease) in liabilities:
Accounts payable........................................... 691,755 (97,881)
Accrued office closing costs............................... (10,153) (54,521)
Sales taxes payable........................................ (34,193) 50,187
Other accrued liabilities.................................. (29,832) (28,840)
Deferred income............................................ (13,384) (14,219)
Customer deposits.......................................... (6,001) 7,500
----------- -----------
Net cash provided by (used in) operating activities........ (64,222) 301,463
----------- -----------
Cash flows from investing activities:
Purchase of equipment and software.............................. (95,263) (108,001)
Note receivable -- director/shareholder......................... (3,000) (11,500)
Notes receivable -- agents...................................... (23,115) (206,995)
Payments on agents notes receivable............................. 70,900 5,838
----------- -----------
Net cash used in investing activities...................... (50,478) (320,658)
----------- -----------
Cash flows from financing activities:
Proceeds from bank loan......................................... 6,143,950 3,450,000
Payments on bank loan........................................... (6,143,950) (3,450,000)
Sale of stock to officer........................................ -- 297,000
Distribution of stock to director............................... -- 4,078
Sale of stock to employees...................................... 2,250 1,460
----------- -----------
Net cash provided by financing activities.................. 2,250 302,538
----------- -----------
Net increase (decrease) in cash................................... (112,450) 283,343
Cash at beginning of year......................................... 405,942 122,599
----------- -----------
Cash at end of year............................................... $ 293,492 $ 405,942
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-21
<PAGE> 189
AMERICONNECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Supplemental disclosure of cash flow information:
CASH PAID DURING THE YEAR FOR:
<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
Interest.......................................................... $7,854 $18,072
Income Taxes...................................................... $3,340 $20,105
</TABLE>
Supplemental disclosure of non-cash financing activities:
During the third quarter of 1994 and the fourth quarter of 1995, separate
private transactions took place in which, in each case, 113,400 shares of Class
A Common Stock were converted to Common Stock. The effect of this was to reduce
the Class A Common Stock account by $1.00 and to increase the Common Stock
account by $1,134 for each transaction. This occurs because the par value of the
Class A is $.00001 per share and the par value of the Common is $.01 per share.
See accompanying notes to financial statements
F-22
<PAGE> 190
AMERICONNECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY: AmeriConnect, Inc. and its wholly owned subsidiary,
AmeriConnect, Inc. of New Hampshire (collectively, the "Company") resell long
distance telecommunications services primarily to individuals and small to
medium-sized businesses. AmeriConnect, Inc. of New Hampshire was formed June 28,
1993, in order to do business in the state of New Hampshire.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of AmeriConnect, Inc. and its wholly-owned subsidiary,
AmeriConnect, Inc. of New Hampshire. All material intercompany accounts and
transactions have been eliminated.
RECOGNITION OF REVENUE: The Company purchases network services primarily at
bulk rates and resells the services to its customers at marginally higher rates.
Revenue and its associated costs are recognized on an accrual basis in the
period during which the usage occurs.
EQUIPMENT AND SOFTWARE: Equipment and purchased software are recorded at
cost. Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives. The straight-line method of depreciation is used for all assets for
financial reporting purposes, but accelerated methods are used for tax purposes.
INCOME PER COMMON AND COMMON EQUIVALENT SHARE: Income per share is based
upon the weighted average of common and common equivalent shares outstanding
during the period.
COMMON STOCK EQUIVALENTS: Common stock equivalents considered in the
calculation of income per common and common equivalent share include options
outstanding under the Company's 1988 and 1994 stock option plans.
INCOME TAXES: Deferred income taxes result from timing differences between
pretax accounting income and taxable income. Deferred tax assets in 1994 arose
primarily from net operating loss carryforwards. (See Note 7.)
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 and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2 -- ECONOMIC DEPENDENCY AND CONCENTRATION OF CREDIT RISK
ECONOMIC DEPENDENCY: The Company operates as a non-facilities-based
reseller of long distance telecommunications services to individuals and small
to medium-sized businesses. The Company acquires its network services by
contracting with two underlying interexchange carriers (Sprint Communications,
L.P. ("Sprint") and WilTel, Inc. ("WilTel")). As of December 31, 1995, the
Company was indebted to Sprint and WilTel for normal monthly services in the
amount of $2,266,170 and $296,661, respectively, which are included in accounts
payable on the accompanying consolidated balance sheet.
CONCENTRATION OF CREDIT RISK: The Company grants credit to its customers,
who include individuals and small to medium-sized businesses.
NOTE 3 -- TRANSACTIONS WITH RELATED PARTIES
SALES TO RELATED ENTITIES: Sales of long distance service to entities
related to shareholders aggregated $77,540 and $61,299 for the years ended
December 31, 1995 and 1994, respectively. Such sales were consummated on terms
similar to those prevailing with unrelated customers.
F-23
<PAGE> 191
NOTE RECEIVABLE -- DIRECTOR/SHAREHOLDER: During 1994 and early 1995, the
Company made loans totaling $14,500 to a director/shareholder. They were secured
by 19,000 shares of the Company's common stock and bore interest at 2 1/2% over
the published prime rate found in The Wall Street Journal. The loans were paid
in full on January 24, 1996.
NOTE 4 -- SIGNIFICANT SALES TO MAJOR CUSTOMERS
During 1995 and 1994, no customer accounted for 2% or more of the Company's
gross revenue.
NOTE 5 -- OPERATING LEASES
The Company leases office space at 6750 W. 93rd St., Suite 110, Overland
Park, Kansas, under a lease calling for payments of $2,653 per month through
August 31, 1998. An amendment to that lease, executed on February 1, 1994, for
additional office space calls for payments of $2,243 per month from February 1,
1994 through August 31, 1998. A second amendment to the lease for additional
office space calls for payments of $2,362 per month from January 1, 1995 through
December 31, 1999. Rental expense for the years ended December 31, 1995 and
1994, was $87,967 and $56,358, respectively.
The Company also leases office equipment and furniture under various
operating leases. As of December 31, 1995, remaining minimum annual rental
commitments under noncancelable operating leases for office space, office
equipment and furniture are as follows:
<TABLE>
<CAPTION>
TOTAL RENT
FISCAL YEARS COMMITMENTS
- ------------ -----------
<S> <C>
1996............................................... $143,602
1997............................................... 103,945
1998............................................... 67,517
1999............................................... 28,350
--------
$343,414
========
</TABLE>
Total expenses recognized for all operating leases including leases for
office space for the years ended December 31, 1995 and 1994 were $156,366 and
$106,489, respectively.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
The Company has a contract with a firm to provide subscriber statement
processing and billing services. The contract is for a period of three (3) years
and expires in September 1996. Terms of the contract provide for a monthly base
charge with additional per unit processing charges. Termination of this contract
for cause requires a 90-day period during which any breach of the contract can
be cured, plus a requirement for a subsequent written 30-day notice. Termination
for cause requires the payment of all amounts owed. Termination of the contract
for the convenience of the Company requires a written 180-day notice and a
termination fee equal to one year's charges. The Company is required to make
minimum payments of $5,000 per month.
The Company has a contract with Sprint to provide telecommunications
services for the Company's customers. The agreement covers the pricing of the
services for a term of two years beginning September 1995. The Company has an
annual minimum usage commitment of $12,000,000 through August 1996 and
$14,400,000 from September 1996 to August 1997. In the event the Company's
customers use less than the minimum commitment, the difference is due and
payable by the Company to Sprint. Assuming a monthly average requirement of
$1,000,000 under the Sprint contract, for the period from September, 1995
through December 1995 the Company accumulated a shortfall of $719,545. The
Company anticipates additional shortfall amounts to accumulate during 1996. In
the event the proposed merger with Phoenix Network, Inc. occurs, the Company
currently anticipates that all accumulated shortfall amounts will be addressed
in a new contract between Sprint and the surviving corporation. In the event the
proposed merger does not occur, the Company has begun negotiations with Sprint
to address the accumulated shortfall. While the Company
F-24
<PAGE> 192
believes the accumulated shortfall at December 31, 1995, and any additional
shortfall amounts, will be resolved in a manner which will not have a material
adverse effect on the business or financial condition of the Company in the
event the proposed merger does not occur, there can be no assurance of such a
result. If the Company were required to pay the full amount of accumulated
shortfalls, this would have a material adverse effect on the Company's financial
condition.
The Company has a contract with WilTel to provide telecommunications
services at discounted rates which will vary based upon the amount of usage by
the Company. The term of this usage commitment is thirty-nine (39) months. The
Company's agreement with WilTel calls for a minimum monthly usage commitment of
$50,000 through January 1998. In the event the Company's customers use less than
the minimum commitment in any month, the difference is due and payable by the
Company to WilTel in the following month. The Company was in compliance with the
contractual requirements of the agreement throughout the year ended December 31,
1995.
On June 8, 1995, the Company entered into a revolving credit facility which
allows for maximum borrowings by the Company of the lesser of $1,000,000 or 50%
of eligible (less than 61 days old) receivables. Interest is payable monthly at
the bank's prime rate (8.5% at December 31, 1995) plus 1%. Under the terms of
the credit facility, the Company is required to meet certain financial
covenants. The line is secured by all of the Company's accounts receivable.
During 1995, the Company had used this facility for short terms borrowings, but
had no outstanding borrowings at year end. At December 31, 1995, the Company was
in default of certain of these financial covenants, which defaults are
continuing. While the Company currently does not expect these defaults to impair
its ability to utilize this facility during the remainder of the existing term,
it may negatively impact the Company's ability to renew the credit facility. In
the event the credit facility cannot be renewed or the Company is unable to
utilize the existing facility, the Company would attempt to obtain a comparable
credit facility from an alternative financing source. While the Company has been
able to obtain such facilities in the past, there can be no assurance that the
Company will be able to obtain a credit facility with comparable terms or at
all. The inability to obtain a credit facility would have a material adverse
effect on the Company's financial condition and business.
In accordance with the terms of the credit facility, the Company purchased
a term life insurance policy on this key employee with a face amount of
$1,750,000 during the year ended December 31, 1994. Annual premiums are
approximately $3,500.
NOTE 7 -- INCOME TAXES
The valuation of the deferred tax asset includes the following amounts:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Deferred tax asset......................................... $ 1,667,882 $1,091,512
Valuation allowance........................................ (1,667,882) (591,512)
----------- ----------
Deferred tax asset......................................... $ 0 $ 500,000
=========== ==========
</TABLE>
The approximate tax effect caused by the net operating loss carryforward,
and the difference in treatment for book and tax for allowance for doubtful
accounts and prepaid commissions gives rise to the deferred tax asset at
December 31, 1995 and 1994 of $1,667,882 and $1,091,512, respectively. In 1994,
the valuation allowance was established to reduce the deferred tax asset to the
amount that will more likely than not be realized. In 1995, the Company
increased the valuation on its deferred tax asset by $1,076,370, reducing the
deferred asset to zero. Because of the operating loss in 1995, the Company is no
longer able to determine that it would more likely than not realize the deferred
tax asset. As a result of this change in estimate, the valuation allowance was
increased by $500,000, which related to the deferred tax asset as of December
31, 1994, and an additional valuation allowance of $576,370 was recorded to
offset the additional deferred tax asset created by the net operating loss in
1995.
F-25
<PAGE> 193
In 1994, management believed that it would realize the deferred tax asset
of $500,000. The deferred tax asset was classified in the accompanying
consolidated balance sheet as a $250,000 current and a $250,000 long-term asset.
The valuation allowance was adjusted for the years ended December 31, 1995
and 1994, as follows:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Valuation allowance, beginning of year....................... $ 591,512 $688,200
Valuation adjustment......................................... 576,370 (96,688)
Adjustment in allowance due to change in estimate............ 500,000 --
---------- --------
Valuation allowance, end of year................... $1,667,882 $591,512
========== ========
</TABLE>
The income tax expense reflected in the consolidated statements of
operations differs from the amount computed at federal statutory income tax
rates. The principal differences are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Federal income tax expense computed at statutory rate........ $(389,436) $ 139,980
State income tax rate effect................................. (73,111) 26,280
Net operating loss carryforward.............................. 462,547 (158,564)
Alternative minimum tax effect............................... -- 8,709
Valuation adjustment due to change in estimate............... 500,000 --
--------- ---------
Income tax expense................................. $ 500,000 $ 16,405
========= =========
</TABLE>
The components of income tax expense related to continuing operations are
as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Current......................................................... $ -- $16,405
Deferred........................................................ 500,000 --
-------- -------
$500,000 $16,405
======== =======
</TABLE>
The Company has available for income tax purposes the following net
operating loss carryforwards at December 31, 1995:
<TABLE>
<CAPTION>
YEAR OF EXPIRATION AMOUNT
----------------------------------------------- ----------
<S> <C>
2005...................................... $ 363,712
2006...................................... 1,671,205
2007...................................... 185
2008...................................... 185
2010...................................... 1,687,506
----------
$3,722,793
==========
</TABLE>
NOTE 8 -- COMMON STOCK, WARRANTS AND OPTIONS
PUBLIC OFFERING: In its initial public offering in 1989, the Company issued
828,000 units each of which consisted of five shares of previously unissued
common stock, par value $.01 per share, and five redeemable Class A Warrants at
a price per unit of $5.00. Each of the Class A Warrants, which was transferable
separately immediately upon issuance, entitled the holder to purchase for $1.00
one share of common stock and one redeemable Class B common stock purchase
warrant ("Class B Warrant"). The Class A Warrants expired on May 29, 1994. Each
Class B Warrant entitled the holder to purchase one share of common stock at
$1.50 until May 29, 1994. The warrants are not common stock equivalents for the
purposes of the earnings per share computations. (See Note 1.) In addition, the
Company granted the
F-26
<PAGE> 194
underwriter and finder options to purchase 57,600 and 14,400 units,
respectively, at $6.00 per unit exercisable over a period of four years
commencing one year from the date of the prospectus.
MISSING STOCK CERTIFICATES: Prior to the Company's initial public offering,
the stockholders of record as of March 29, 1989, executed escrow agreements
which required the placement in escrow of 150,000 shares of outstanding common
stock and 5,970,000 shares of outstanding Class A common stock pending the
achievement of certain earnings objectives. These earnings objectives were not
met and, consequently, all of the shares subject to the escrow agreement were
retired and have been accounted for as treasury stock since December 31, 1992.
In addition, in connection with the execution of a voting trust agreement in
1989, certificates representing 3,014,751 shares of Class A common stock were
issued in the name of a voting trust in substitution for the certificates held
by some of the stockholder-parties to the voting trust agreement. This voting
trust expired in June of 1992. During the first quarter of 1992, however, the
Company learned that the escrow agent associated with the escrow agreements
asserts that it has never received the stock certificates representing the
shares subject to the escrow agreements. During the same period, the Company
discovered that the certificates representing 2,975,751 of the shares
transferred to the voting trust were never delivered to the Company for
cancellation. The Company has been unable to locate neither the original share
certificates nor the certificates issued to the voting trust. As a result, if a
stockholder attempted to transfer any of the shares subject to the escrow
agreements or the voting trust agreement in violation of such agreements, there
can be no assurance that an innocent transferee could not successfully claim the
right to the shares purportedly transferred to him or her. The Company believes,
however, that the legends affixed to each of the missing certificates, which
state that the shares are subject to the restrictions of the voting trust
agreement and the escrow agreements, respectively, are sufficient to prevent a
transferee from acquiring a valid claim with respect to the shares represented
by the missing certificates. In addition, the Company has obtained affidavits
from each holder of the missing certificates that no such purported transfers
have been made.
STOCK RIGHTS: The rights and preferences of common stock and Class A common
stock are substantially identical except that each share of common stock
entitles the holder to one vote whereas, each share of Class A common stock
entitles the holder to five votes. Class A common stock automatically converts
into common stock on a one-for-one basis upon sale or transfer to an entity or
individual who was not a holder of Class A common stock before such sale or
transfer, or at any time at the option of the holder. During each of 1994 and
1995, 113,400 shares of Class A stock were converted to common stock through
private transactions.
STOCK OPTION PLANS: On July 29, 1988, the Company adopted a stock option
plan allowing 300,000 shares of unissued but authorized common stock for
issuance of incentive and/or non-qualified stock options. At December 31, 1995,
all options had been granted under the plan, and 23,000 options had been
returned to the Company by employees who resigned prior to vesting. Such
returned options are again available for use under the plan.
On May 27, 1994, the Company adopted a second stock option plan allowing
for 500,000 shares of unissued but authorized common stock for issuance of
incentive and/or non-qualified stock options. As of December 31, 1995, 487,000
options under this plan had been granted and 142,000 options had been returned
to the Company by employees who resigned prior to vesting. Such returned options
are again available for use under the plan.
F-27
<PAGE> 195
Stock option plan transactions for the year ended December 31, 1995, are
summarized below:
<TABLE>
<CAPTION>
1988 PLAN 1994 PLAN TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Outstanding, beginning of year.......... 260,000 247,500 507,500
Granted............................... 0 234,500 234,500
Exercised............................. (75,000) 0 (75,000)
Cancelled............................. (16,000) (137,000) (153,000)
------------- ------------- -------------
Outstanding, end of year................ 169,000 345,000 514,000
============= ============= =============
Option price per share exercised........ $0.03 - $0.50 -- $0.03 - $0.50
Price for outstanding options........... $0.03 - $0.50 $0.26 - $0.75 $0.03 - $0.75
============= ============= =============
</TABLE>
The expiration dates for the options issued under the 1988 Plan range from
May 1998 to December 2003. At December 31, 1995, 23,000 shares were available
for future grants under the 1988 Plan.
The expiration dates for the options issued under the 1994 Plan range from
August 2004 to December 2005. At December 31, 1995, 155,000 shares were
available for future grants under the 1994 Plan.
STOCK ISSUED WITH RESPECT TO SERVICE ON BOARD OF DIRECTORS: In October
1992, the Board approved the issuance of stock as compensation to directors not
receiving any other form of compensation from the Company. Each qualifying
director received 5,000 shares of common stock for each quarter of service.
During 1994, 19,000 shares of common stock were issued pursuant to the Board
action, but no shares were issued pursuant thereto in 1995.
STOCK ISSUABLE WITH RESPECT TO REVOLVING CREDIT FACILITY: In connection
with a revolving credit agreement with Robert R. Kaemmer, President of the
Company, Mr. Kaemmer had the option to purchase up to 900,000 shares of common
stock at $0.33 per share. Mr. Kaemmer exercised this option by purchasing
900,000 shares of common stock on April 27, 1994.
NOTE 9 -- OFFICE CLOSING COSTS
After reviewing the costs of maintaining its Washington, D.C. sales office,
the projected sales from that location, and the general financial condition of
the Company, the Board decided to close the office effective December 31, 1991.
All estimated costs and expenses directly associated with the closing of the
office were accrued as of December 31, 1991, and recognized in the financial
statements. Subsequent payments of the accrued costs were charged to the
liability account, accrued office closing costs.
NOTE 10 -- KEY EMPLOYEE INCENTIVE COMPENSATION PLAN
The Company has an incentive compensation plan which provides for incentive
payments to a key employee based on 5% of net earnings before depreciation and
amortization and income taxes. Expenses under the plan amount to $-0- and
$27,726 for the years ended 1995 and 1994, respectively.
In addition, during the year ended December 31, 1994, the board of
directors authorized a one-time performance bonus of $45,000 to this key
employee. The payment was made during the second quarter of 1994.
NOTE 11 -- NOTES RECEIVABLE
The Company conducts a portion of its business through agents. Some of
these agents have borrowed from the Company in order to obtain necessary capital
to expand their operations. These borrowings are represented by short term
promissory notes. The terms of the notes permit the Company to withhold the
monthly payments from commissions due the agents, if necessary. The interest
rate for all the notes is 2 1/2% over the prime rate published by The Wall
Street Journal. At December 31, 1994, a reserve of $100,000 was established
against amounts due from a specific agent whose receivable, including unpaid
charges, aggregated $498,061. During 1995, the Company and this agent became
involved in litigation, and it has been determined
F-28
<PAGE> 196
that no recovery on the amounts will be made. As a result, the remaining
receivable of $398,061 was written off. The Company is currently negotiating a
mutual release of all claims with this agent and does not expect to incur any
additional liability as a result of the litigation.
NOTE 12 -- ONGOING OPERATIONS
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. The Company reported a net loss of
$1,718,510 in 1995. As a result, liabilities exceeded assets by $237,041.
Non-cash items such as depreciation and amortization, provision for doubtful
accounts and deferred income taxes collectively contributed $1,316,067 of the
loss. The remaining $402,443, along with a $118,481 increase in accounts
receivable and a $691,755 increase in accounts payable, contributed to cash used
in operations of $64,222. In light of the foregoing, in order to become
profitable, the Company must achieve sufficient volume levels to obtain
additional discounts under its existing carrier contracts or negotiate new
contracts with its carriers to obtain favorable pricing at existing volume
levels and reduce other costs. In addition, the Company may explore financing
and other strategic transactions, such as the proposed merger (discussed in Note
13 below).
The proposed merger would reduce the Company's direct operating costs
through volume discounts on long-distance pricing from its carriers and would
provide certain economics of scale which management believes would allow its
operations to become profitable and allow it to compete for new and existing
customers. If, for any reason, the proposed merger is not consummated, the
Company plans to increase sales and reduce its costs and will continue to
explore other strategic alternatives (which may include financings, mergers,
acquisitions, joint ventures or other strategic transactions).
NOTE 13 -- SUBSEQUENT EVENT
On January 15, 1996, the Company and Phoenix Network, Inc. ("Phoenix"), a
San Francisco, California-based long distance reseller and provider of
value-added telecommunications services, signed a letter of intent to merge the
two companies in a stock-for-stock transaction. The parties currently are
negotiating a definitive merger agreement. In connection with the proposed
merger, Phoenix expects to issue approximately 4 million new shares of common
stock in exchange for all of the outstanding shares of the Company. It is
currently anticipated that the closing will take place on or about August 15,
1996, pending the obtaining of all necessary regulatory approvals and approval
of the shareholders of both companies. There can be no assurance that the
ongoing negotiations between the Company and Phoenix will in fact result in the
execution of a definitive merger agreement or that the terms of any such
agreement would be as described above.
NOTE 14 -- FOURTH QUARTER ADJUSTMENTS
During the fourth quarter 1995, the Company recorded adjustments of
approximately $940,000 relating primarily to receivables and the deferred tax
asset.
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<PAGE> 197
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the two most recent fiscal years, there were no changes in or
disagreements with the Company's independent certified public accountants.
F-30
<PAGE> 198
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by Item 9 is incorporated herein by reference to
(i) the information under the caption "Election of Directors" (except that the
information set forth under the subcaption "Compensation of Directors" is
expressly excluded from such incorporation) and (ii) the information under the
caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934,"
in each case, in the Company's definitive Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year covered by
this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference to
the Company's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the fiscal year covered by this Form
10-KSB.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated herein by reference to
the Company's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the fiscal year covered by this Form
10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated herein by reference to
the Company's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the fiscal year covered by this Form
10-KSB.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
3.1 -- CERTIFICATE OF INCORPORATION, AS AMENDED TO DATE -- Incorporated by
reference -- previously filed as Exhibit 3.1 to Registrant's Form
10-QSB for the quarterly period ended June 30, 1994.
3.3 -- BYLAWS -- Incorporated by reference -- previously filed as Exhibit
3.3 to Registration Statement on Form S-1 under the Securities Act of
1933 filed by Registrant. Registration Statement No. 33-23845.
4.1 -- FORM OF UNIT PURCHASE OPTION -- Incorporated by
reference -- previously filed as Exhibit 4.1 to Registration
Statement on Form S-1 under the Securities Act of 1933 filed by
Registrant. Registration Statement No. 33-23845.
4.2 -- FORM OF WARRANT AGREEMENT -- Incorporated by reference -- previously
filed as Exhibit 4.2 to Registration Statement on Form S-1 under the
Securities Act of 1933 filed by Registrant. Registration Statement
No. 33-23845.
10.1 -- TERMINATION AGREEMENT, DATED JANUARY 14, 1992, with Gordon Hutchins,
Jr. -- Incorporated by reference -- previously filed as Exhibit 10.1
to Registrant's Form 10-KSB for the fiscal year ended December 31,
1992 filed March 31, 1993.
10.2 -- 1988 STOCK OPTION PLAN -- Incorporated by reference -- previously
filed as Exhibit 10.4 to Registration Statement on Form S-1 under the
Securities Act of 1933 filed by Registrant. Registration Statement
No. 33-23845.
</TABLE>
F-31
<PAGE> 199
<TABLE>
<C> <S>
10.3 -- 1994 STOCK OPTION PLAN, DATED MAY 27, 1994 -- Incorporated by
reference -- previously filed as Exhibit 4.3 to Registration
Statement on Form S-8 under the Securities Act of 1933 filed by
Registrant, Registration Statement No. 33-80058.
10.4 -- DATA PROCESSING SERVICE AGREEMENT WITH AFFILIATED COMPUTER SYSTEMS
COMMERCIAL SERVICES, INC. -- Incorporated by reference -- previously
filed as Exhibit 10.12 to Registrant's Form 10-KSB for the fiscal
year ended December 31, 1990 filed April 9, 1991.
10.5 -- SECOND ADDENDUM PROPOSAL TO DATA PROCESSING SERVICE AGREEMENT IN
EXHIBIT 10.4 HERETO, DATED OCTOBER 4, 1993 -- Incorporated by
reference -- previously filed as Exhibit 10.4 to Registrant's Form
10-KSB for the fiscal year ended December 31, 1993 filed March 30,
1994.
10.6 -- OFFICE BUILDING LEASE FOR REGISTRANT'S FACILITY IN OVERLAND PARK,
KANSAS, DATED AUGUST 20, 1993 -- Incorporated by
reference -- previously filed as Exhibit 10.5 to Registrant's Form
10-KSB for the fiscal year ended December 31, 1993 filed March 30,
1994.
10.7 -- AMENDMENT TO OFFICE BUILDING LEASE, DATED FEBRUARY 1,
1994 -- Incorporated by reference -- previously filed as Exhibit 10.6
to Registrant's Form 10-KSB for the fiscal year ended December 31,
1993 filed March 30, 1994.
10.8 -- OFFICE BUILDING LEASE FOR REGISTRANT'S FACILITY IN MCLEAN, VIRGINIA,
AS AMENDED TO DATE -- Incorporated by reference -- previously filed
as Exhibit 10.13 to Registrant's Form 10-KSB for fiscal year ended
December 31, 1991.
10.9 -- AGREEMENT TO RENEW SUBLEASE FOR REGISTRANT'S FACILITY IN MCLEAN,
VIRGINIA, DATED FEBRUARY 14, 1994 -- Incorporated by
reference -- previously filed as Exhibit 10.8 to Registrant's Form
10-KSB for the fiscal year ended December 31, 1993 filed March 30,
1994.
10.10 -- VOLUME PURCHASE AGREEMENT, DATED MAY 17, 1994, WITH SPRINT
COMMUNICATIONS COMPANY L.P. -- Incorporated by
reference -- previously filed as Exhibit 1 to Registrant's Form
10-QSB for the quarterly period ended June 30, 1994.
10.11 -- TELECOMMUNICATIONS SERVICES AGREEMENT, DATED JUNE 27, 1994, WITH
WILTEL, INC. -- Incorporated by reference -- previously filed as
Exhibit 2 to Registrant's Form 10-QSB for the quarterly period ended
June 30, 1994.
10.12 -- AMENDMENT TO TELECOMMUNICATIONS SERVICES AGREEMENT, DATED NOVEMBER 1,
1994, WITH WILTEL, INC. -- Incorporated by reference -- previously
filed as Exhibit 10.12 to Registrant's Form 10-KSB for the fiscal
year ended December 31, 1994 filed March 31, 1995.*
10.13 -- REVOLVING LOAN AGREEMENT AND ADDENDA, DATED MAY 10, 1994, WITH
MERCANTILE BANK OF KANSAS -- Incorporated by reference -- previously
filed as Exhibit 10.13 to Registrant's Form 10-KSB for the fiscal
year ended December 31, 1994 filed March 31, 1995.
10.14 -- ASSIGNMENT OF LIFE INSURANCE POLICY AS COLLATERAL, DATED MAY 10,
1994, TO MERCANTILE BANK OF KANSAS -- Incorporated by
reference -- previously filed as Exhibit 10.14 to Registrant's Form
10-KSB for the fiscal year ended December 31, 1994 filed March 31,
1995.
10.15 -- SECURITY AGREEMENT, DATED MAY 10, 1994, WITH MERCANTILE BANK OF
KANSAS -- Incorporated by reference -- previously filed as Exhibit
10.15 to Registrant's Form 10-KSB for the fiscal year ended December
31, 1994 filed March 31, 1995.
10.16 -- PROMISSORY NOTE, DATED MAY 10, 1994, WITH MERCANTILE BANK OF
KANSAS -- Incorporated by reference -- previously filed as Exhibit
10.16 to Registrant's Form 10-KSB for the fiscal year ended December
31, 1994 filed March 31, 1995.
</TABLE>
F-32
<PAGE> 200
<TABLE>
<C> <S>
10.17 -- SECURITY AGREEMENT, DATED MAY 10, 1994, WITH MERCANTILE BANK OF
KANSAS -- Incorporated by reference -- previously filed as Exhibit
10.17 to Registrant's Form 10-KSB for the fiscal year ended December
31, 1994 filed March 31, 1995.
10.18 -- EMPLOYMENT AGREEMENT, DATED JANUARY 1, 1995, WITH ROBERT R.
KAEMMER -- Incorporated by reference -- previously filed as Exhibit
10.18 to Registrant's Form 10-KSB for the fiscal year ended December
31, 1994 filed March 31, 1995.**
10.19 -- PROMISSORY NOTE, DATED JUNE 15, 1994, WITH RICHARD K.
HALFORD -- Incorporated by reference -- previously filed as Exhibit
10.19 to Registrant's Form 10-KSB for the fiscal year ended December
31, 1994 filed March 31, 1995.
10.20 -- PROMISSORY NOTE, DATED AUGUST 1, 1994, WITH RICHARD K.
HALFORD -- Incorporated by reference -- previously filed as Exhibit
10.20 to Registrant's Form 10-KSB for the fiscal year ended December
31, 1994 filed March 31, 1995.
10.21 -- PLEDGE AGREEMENT, DATED NOVEMBER 23, 1994, WITH RICHARD K. HALFORD --
Incorporated by reference -- previously filed as Exhibit 10.21 to
Registrant's Form 10-KSB for the fiscal year ended December 31, 1994
filed March 31, 1995.
10.22 -- REVOLVING CREDIT AGREEMENT, DATED NOVEMBER 10, 1992, WITH ROBERT R.
KAEMMER -- Incorporated by reference -- previously filed as Exhibit
10.8 to Registrant's Form 10-KSB for the fiscal year ended December
31, 1992 filed March 31, 1993.
10.23 -- AMENDMENT TO REVOLVING CREDIT AGREEMENT, DATED MAY 7, 1993, WITH
ROBERT R. KAEMMER -- Incorporated by reference -- previously filed as
Exhibit 10.16 to Registrant's Form 10-KSB for the fiscal year ended
December 31, 1993 filed March 30, 1994.
10.24 -- PROMISSORY NOTE, DATED NOVEMBER 10, 1992, WITH ROBERT R. KAEMMER --
Incorporated by reference -- previously filed as Exhibit 10.9 to
Registrant's Form 10-KSB for the fiscal year ended December 31, 1992
filed March 31, 1993.
10.25 -- AMENDMENT TO PROMISSORY NOTE, DATED MAY 7, 1993, WITH ROBERT R.
KAEMMER -- Incorporated by reference -- previously filed as Exhibit
10.18 to Registrant's Form 10-KSB for the fiscal year ended December
31, 1993 filed March 30, 1994.
10.26 -- SECURITY AGREEMENT, DATED NOVEMBER 10, 1993, WITH ROBERT R.
KAEMMER -- Incorporated by reference -- previously filed as Exhibit
10.10 to Registrant's Form 10-KSB for the fiscal year ended December
31, 1992 filed March 31, 1993.
10.27 -- SETTLEMENT AGREEMENT, DATED MAY 1, 1992, WITH AETNA LIFE INSURANCE
COMPANY -- Incorporated by reference -- previously filed as Exhibit
10.11 to Registrant's Form 10-KSB for the fiscal year ended December
31, 1992 filed March 31, 1993.
10.28 -- CARRIER TRANSPORT SWITCHED SERVICES AGREEMENT, DATED JULY 28, 1995,
WITH SPRINT COMMUNICATIONS COMPANY L.P.*
10.29 -- AMENDMENT TO CARRIER TRANSPORT SWITCHED SERVICES AGREEMENT, DATED
OCTOBER 30, 1995, WITH SPRINT COMMUNICATIONS COMPANY L.P.*
10.30 -- AMENDMENT TO CARRIER TRANSPORT SWITCHED SERVICES AGREEMENT, DATED
FEBRUARY 29, 1996, WITH SPRINT COMMUNICATIONS COMPANY L.P.
10.31 -- REVOLVING LOAN AGREEMENT AND ADDENDA, DATED JUNE 8, 1995, WITH
MERCANTILE BANK OF KANSAS.
10.32 -- PROMISSORY NOTE, DATED JUNE 8, 1995, WITH MERCANTILE BANK OF KANSAS.
10.33 -- COMPREHENSIVE SECURITY AGREEMENT, DATED JUNE 8, 1995, WITH MERCANTILE
BANK OF KANSAS.
10.34 -- SECURITY AGREEMENT, DATED JUNE 8, 1995, WITH MERCANTILE BANK OF
KANSAS.
10.35 -- PROMISSORY NOTE, DATED APRIL 3, 1995, WITH RICHARD K. HALFORD.
</TABLE>
F-33
<PAGE> 201
<TABLE>
<C> <S>
10.36 -- AMENDMENT NO. 1 TO PLEDGE AGREEMENT, DATED APRIL 3, 1995, WITH
RICHARD K. HALFORD.
10.37 -- EXTENSION OF JUNE 15, 1994 PROMISSORY NOTE, DATED DECEMBER 29, 1995,
WITH RICHARD K. HALFORD.
10.38 -- EXTENSION OF AUGUST 1, 1994 PROMISSORY NOTE, DATED DECEMBER 29, 1995,
WITH RICHARD K. HALFORD.
10.39 -- EXTENSION OF APRIL 3, 1995 PROMISSORY NOTE, DATED DECEMBER 29, 1995,
WITH RICHARD K. HALFORD.
10.40 -- LETTER TO MERCANTILE BANK OF KANSAS, DATED JANUARY 24, 1996,
REGARDING THE FULL SATISFACTION BY RICHARD K. HALFORD OF THE
PROMISSORY NOTES DATED JUNE 15, 1994, AUGUST 1, 1994 AND APRIL 3,
1995.
10.41 -- SECOND AMENDMENT TO OFFICE BUILDING LEASE FOR REGISTRANT'S FACILITY
IN OVERLAND PARK, KANSAS, DATED NOVEMBER 23, 1994.
21.1 -- LIST OF SUBSIDIARIES OF THE REGISTRANT -- Incorporated by
reference -- previously filed as Exhibit 21.1 to Registrant's Form
10-KSB for the fiscal year ended December 31, 1994 filed March 31,
1995.
23 -- CONSENT OF GRANT THORNTON LLP.
27 -- FINANCIAL DATA SCHEDULE.
</TABLE>
- ---------------
* Confidential material deleted and filed separately with the Commission
pursuant to a request for confidential treatment.
** Management contract or compensatory plan or arrangement required to be
identified by Item 13(a).
(b) Reports on Form 8-K
On January 17, 1996, the Company filed a report on Form 8-K under Item
5 -- Other Events regarding a press release issued by the Company and Phoenix
Network, Inc. ("Phoenix") announcing that they had signed a letter of intent
(the "Letter of Intent") to merge the Company and Phoenix in a stock-for-stock
transaction.
On March 19, 1996, the Company filed a second report on Form 8-K under Item
5 -- Other Events regarding a press release issued by the Company and Phoenix
announcing that they had extended the term of the Letter of Intent.
F-34
<PAGE> 202
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICONNECT, INC.
By: /s/ ROBERT R. KAEMMER
--------------------------------
Robert R. Kaemmer
President and Director
Date: April 15, 1996
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the issuer and in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT R. KAEMMER President and Director April 15, 1996
------------------------------------- (Principal Executive Officer
Robert R. Kaemmer and Principal Financial
Officer)
/s/ JANET M. FLYNN Secretary, Director April 15, 1996
-------------------------------------
Janet M. Flynn
/s/ RICHARD K. HALFORD Director April 15, 1996
-------------------------------------
Richard K. Halford
</TABLE>
F-35
<PAGE> 203
APPENDIX A
LIST OF EXECUTIVE OFFICERS AND DIRECTORS
AS OF APRIL 25, 1994
<TABLE>
<CAPTION>
NAME/POSITION WITH COMPANY OCCUPATION
------------------------------------------------------------
<S> <C>
Robert R. Kaemmer AmeriConnect, Inc.
President and Director President and Director
6750 West 93rd Street, Suite
110
Overland Park, Kansas 66212
Janet M. Flynn AmeriConnect, Inc.
Secretary and Director Administrative Manager
6750 West 93rd Street, Suite
110
Overland Park, Kansas 66212
Richard K. Halford Private Futures Trader
Director Overland Park, Kansas
</TABLE>
F-36
<PAGE> 204
APPENDIX G
AMERICONNECT, INC.
6750 WEST 93RD STREET, SUITE 110
OVERLAND PARK, KANSAS 66212
---------------------
PROXY STATEMENT
---------------------
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of AmeriConnect, Inc., a Delaware corporation (the
"Company"), of proxies for use at the Annual Meeting of Stockholders (the
"Annual Meeting") of the Company to be held at the Courtyard by Marriott, 11301
Metcalf Avenue, Overland Park, Kansas, on Wednesday, May 29, 1996 at 10:00 a.m.,
Central Daylight Time and all adjournments and postponements thereof. The
Company anticipates mailing this Proxy Statement, the accompanying form of proxy
and the Notice of Annual Meeting of Stockholders to the Company's stockholders
of record as of the Record Date (as hereinafter defined), on or about May 1,
1996, together with the Company's Annual Report for the fiscal year ended
December 31, 1995. The matters to be considered and acted upon at the Annual
Meeting are described below.
Only the holders of record of shares of Common Stock, par value $.01 per
share, of the Company (the "Common Stock"), and holders of record of shares of
Class A Common Stock, par value $.00001 per share, of the Company (the "Class A
Stock"), as of the close of business on April 25, 1996 (the "Record Date"), will
be entitled to vote at the Annual Meeting and any adjournments thereof. As of
the Record Date, there were outstanding and entitled to vote 6,324,717 shares of
Common Stock and 592,033 shares of Class A Stock. No other voting securities of
the Company are outstanding.
You are requested to complete, date and sign the accompanying proxy and
return it promptly in the enclosed postage prepaid envelope. Holders giving
proxies may revoke them at any time prior to their being voted by filing with
the Secretary of the Company a written instrument revoking it. All shares
represented by proxy will be voted in the manner specified on the proxy which
accompanies this Proxy Statement or, if not specified, proxies will be voted as
follows:
1. to elect Robert R. Kaemmer, Richard K. Halford and Janet M. Flynn
to serve as directors of the Company until the next Annual Meeting and
until their successors are duly elected and qualified;
2. to ratify and approve the selection of Grant Thornton LLP as the
Company's independent public accountants for the fiscal year ending
December 31, 1996; and
3. in the discretion of the proxy holder as to any other matter coming
before the Annual Meeting.
With respect to each matter properly to come before the Annual Meeting, (a)
each holder of Common Stock is entitled to one (1) vote per share and (b) each
holder of Class A Stock is entitled to five (5) votes per share. Common Stock
and Class A Stock do not have cumulative voting rights and are required to be
voted together as a single class. The Bylaws of the Company require that a
majority of the votes of the shares of stock issued, outstanding and entitled to
vote be present in person or represented by proxy at the Annual Meeting in order
to constitute a quorum for the transaction of business.
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<PAGE> 205
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 28, 1996,
concerning stock ownership of (a) all persons known by the Company to own
beneficially more than 5% of any class of the Company's voting securities, (b)
each director and nominee for director, (c) each executive officer named in the
compensation table, and (d) all directors and executive officers of the Company
as a group. Class A Stock, which is convertible into Common Stock on a share for
share basis, has five (5) votes per share, but is otherwise identical to the
Common Stock.
<TABLE>
<CAPTION>
TITLE OF NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS(1)
- --------------------------- ------------------------------ ----------------------- -----------
<S> <C> <C> <C>
Class A Stock.............. Robert R. Kaemmer 416,766 -- direct 70.4
6750 West 93rd Street,
Suite 110
Overland Park, KS 66210
Common Stock............... Robert R. Kaemmer 1,781,766(2) -- direct 25.9
Class A Stock.............. Richard K. Halford 175,267 -- direct 29.6
9810 West 99th Place
Overland Park, KS 66212
Common Stock............... Richard K. Halford 219,267(3) -- direct 3.4
Common Stock............... J. Morton Davis 355,600(4) -- indirect 5.6
44 Wall Street
New York, NY 10005
Common Stock............... Richard R. Testwuide 375,000(5) -- indirect 5.9
200 Oceangate #900
Long Beach, CA 90802
Common Stock............... Thomas R. Testwuide 375,000 -- direct 5.9
704 S. 15th Street
Sheboygan, WI 53081
Common Stock............... Johnny Craig 411,925(6) -- direct 6.5
15565 Gardner Road
Gardner, KS 66030
Common Stock............... Janet M. Flynn 40,000(7) -- direct 0.6
Class A Stock.............. All Directors and Executive 592,033 100.0
Officers as a Group (3
persons)
Common Stock............... All Directors and Executive 2,041,033(8) 28.8
Officers as a Group (3
persons)
</TABLE>
- ---------------
(1) Calculated in accordance with Rule 13d-3 of the Securities Exchange Act of
1934. Numbers of shares of Common Stock listed give effect to the conversion
of Class A Stock at the rate of one share of Common Stock for one share of
Class A Stock. The persons named in this table have sole voting and
investment power with respect to all shares of Common Stock and Class A
Stock shown as beneficially owned by them, except as noted below.
(2) Includes 1,215,000 shares of Common Stock and 416,766 shares of Class A
Stock owned by Mr. Kaemmer. Also includes 150,000 shares of Common Stock
which may be acquired upon the exercise of outstanding options within sixty
(60) days.
(3) Includes 175,267 shares of Class A Stock.
(4) By reason of the provisions of Rule 13d-3 of the Securities Exchange Act of
1934, Mr. Davis, as the sole shareholder and chairman of the board of D.H.
Blair Holdings, Inc. ("Blair Holdings"), which is the sole shareholder of
D.H. Blair Investment Banking Corp. ("Blair IBC"), is deemed to beneficially
own the 298,400 shares of Common Stock beneficially owned by Blair IBC. Mr.
Davis shares voting and investment power over such shares with the boards of
directors of Blair Holdings and Blair IBC. Also
G-2
<PAGE> 206
includes 57,200 shares owned by Mr. Davis' wife. This information is based
in part on the Schedule 13G, dated June 13, 1994, filed with the SEC jointly
by Mr. Davis, Blair Holdings and Blair IBC.
(5) These shares are held in a family trust for which Mr. Testwuide acts as
trustee.
(6) Includes 104,753 shares of Common Stock owned by Mr. Craig's wife, 20,110
shares of Common Stock owned by Mr. Craig's children and 40,000 shares of
Common Stock which may be acquired upon the exercise of outstanding options
within sixty (60) days, provided that certain revenue requirements are met.
(7) Includes 5,000 shares of Common Stock which may be acquired upon the
exercise of outstanding options within sixty (60) days and 20,000 shares of
Common Stock which may be acquired upon the exercise of outstanding options
within sixty (60) days, provided that certain revenue requirements are met.
Excludes 8,000 shares of Common Stock owned by Ms. Flynn's husband, as to
which Ms. Flynn disclaims beneficial ownership.
(8) Includes 592,033 shares of Class A Stock and 175,000 shares of Common Stock,
of which 155,000 may be acquired upon the exercise of outstanding options
within sixty (60) days and 20,000 may be acquired upon the exercise of
outstanding options within sixty (60) days, provided that certain revenue
requirements are met.
CHANGES IN CONTROL
On January 15, 1996, the Company and Phoenix Network, Inc. ("Phoenix"), a
San Francisco, California-based long distance reseller and provider of
value-added telecommunications services, signed a letter of intent to merge the
two companies in a stock-for-stock transaction. The parties currently are
negotiating a definitive merger agreement. In connection with the proposed
merger, Phoenix expects to issue approximately 4 million new shares of common
stock in exchange for all of the outstanding shares of the Company. It is
currently anticipated that the closing will take place on or about August 15,
1996, pending the obtaining of all necessary regulatory approvals and approval
of the shareholders of both companies. There can be no assurance that the
ongoing negotiations between the Company and Phoenix will in fact result in the
execution of a definitive merger agreement or that the terms of any such
agreement will be as described above.
ELECTION OF DIRECTORS
The Certificate of Incorporation of the Company, as amended (the
"Certificate of Incorporation"), provides that the number of directors of the
Company shall be fixed by, or in the manner provided in, the Bylaws of the
Company. The Bylaws of the Company currently provide that the number of
directors of the Company shall be fixed from time to time by the vote of a
majority of the entire Board of Directors. The Board of Directors, by
resolution, has fixed the number of directors at three. Each director will be
elected to hold office until the next Annual Meeting and until his or her
successor is elected and qualified. If for any reason any nominee should, prior
to the Annual Meeting, become unable to serve or for good cause will not serve,
the person acting under the proxy may vote the proxy for the election of a
substitute. It is not currently expected that any of the nominees will become
unable to serve or for good cause will not serve.
The Board of Directors of the Company intends to present for action at the
Annual Meeting the election of Robert R. Kaemmer, Richard K. Halford and Janet
M. Flynn.
The persons named in the enclosed proxy (Janet M. Flynn and Robert R.
Kaemmer) will vote to elect the three (3) nominees named above, unless authority
to vote for the election of any or all of the nominees is withheld by marking
the proxy to that effect. The affirmative vote of the holders of a plurality of
the votes present or represented at the Annual Meeting is necessary for the
election of the nominees named above.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE IN FAVOR OF
EACH NOMINEE FOR DIRECTOR NAMED ABOVE.
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<PAGE> 207
Information relating to the directors, nominees for directors and executive
officers of the Company is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION DIRECTOR SINCE
- --------------------------------- --- ---------------------------------- --------------
<S> <C> <C> <C>
Robert R. Kaemmer................ 51 Chairman, President, Chief 1988
Executive Officer and Director
Richard K. Halford............... 61 Director 1991
Janet M. Flynn................... 49 Director and Secretary 1995
</TABLE>
Robert R. Kaemmer has served as the Chief Executive Officer of the Company
since January 1992 and as the Company's President since December 1988. Mr.
Kaemmer has served as a director of the Company since its inception in January
1988, when he joined the Company as Executive Vice President -- Operations. From
July 1986 until June 1988, Mr. Kaemmer served as Executive Vice President of
Safety Plus, Inc. From 1968 until June 1986, Mr. Kaemmer was employed by Mobil
Oil Corporation in various engineering, sales and marketing management
positions.
Richard K. Halford has been a director of the Company since November 1991
and has been self-employed as a futures trader since February 1991. Mr. Halford
was a commodities wholesaler with Geldermann, Inc. from August 1989 until
February 1991. Mr. Halford served as Executive Vice President of the Company
from its inception until August 1989.
Janet M. Flynn has been a director of the Company since January 1995, has
served as the Company's Administrative Manager since joining the Company in
February 1992 and has served as the Secretary of the Company since April 1993.
From September 1991 until February 1992, Ms. Flynn was employed by Overland
Consulting, Inc. as Administrative Manager. Prior to that, Ms. Flynn was
employed in a similar capacity by American Consolidated Financial Corporation.
During the fiscal year ended December 31, 1995, each director attended all
of the directors' meetings during the period for which he or she was a director.
In 1995, four (4) directors' meetings were held. Other than the Stock Option
Committee, the Company had no standing Board committees in 1995, and currently
has no such committees other than the Stock Option Committee.
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid or accrued by the
Company during the fiscal years ended December 31, 1995, 1994 and 1993 to the
Company's chief executive officer (the only officer whose total cash
compensation exceeded $100,000).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------- ----------------------- ----------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
NAME AND SALARY BONUS COMPENSATION AWARDS OPTIONS LTIP COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($)(2) (#)(3) PAYOUTS($) ($)(4)
- ------------------------------------ ---- ------- ------ ------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert R. Kaemmer................... 1995 132,000 0 0 0 0 0 792.00
Chairman, Chief Executive Officer 1994 127,000 72,726 0 0 0 0 811.20
and President 1993 90,000 64,459 0 18,750(5) 150,000(6) 0 786.60
</TABLE>
- ---------------
(1) Excludes perquisites and other benefits, unless the aggregate amount of
such compensation exceeds the lesser of $50,000 or 10% of the total salary
and bonus for the named executive officer.
(2) The aggregate number of restricted stock holdings at December 31, 1995 was
300,000. The value of these restricted stock holdings was $108,000
(calculated in the manner specified in paragraph (b)(2)(iv)(A) of Item 402
of Regulation S-B and taking into account that the bid price of the Common
Stock as of
G-4
<PAGE> 208
December 31, 1995 was $.36 per share). In the event that dividends are paid
on the Common Stock, such dividends will be paid on the restricted shares
of Common Stock held by the named executive officer.
(3) The number in the Securities Underlying Options column (column (g))
reflects the number of shares of Common Stock into which such options are
exercisable.
(4) Consists of insurance premiums paid by the Company with respect to term
life insurance for the named executive officer.
(5) On November 10, 1992, the named executive officer agreed to lend up to
$300,000 to the Company pursuant to a revolving credit agreement. As a
commitment fee for the revolving credit, the Company issued 300,000 shares
of Common Stock to Mr. Kaemmer on April 8, 1993. These shares of Common
Stock vested immediately upon issuance to Mr. Kaemmer, but were not
registered under the Securities Act of 1933, as amended. The closing bid
price of the Common Stock on April 8, 1993 was $.0625 per share.
(6) On May 14, 1993, the named executive officer was granted options exercis-
able into 150,000 shares of Common Stock pursuant to the Company's 1988
Stock Option Plan. These options became exercisable on May 14, 1994.
Stock Option Plans. The Company has two stock option plans, the 1988 Stock
Option Plan (the "1988 Plan") and the 1994 Stock Option Plan (the "1994 Plan"),
which are administered by the Board of Directors through the Stock Option
Committee. As of March 28, 1996, options exercisable into 23,000 shares of
Common Stock remain to be issued under the 1988 Plan, and options exercisable
into 155,000 shares of Common Stock remain to be issued under the 1994 Plan. No
stock options were granted pursuant to the 1988 Plan or the 1994 Plan during
1995 to the named executive officer.
The following table provides information with respect to the named
executive officer concerning unexercised options held as of the end of 1995.
AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF SHARES
OF COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert R. Kaemmer, .... 0 0 150,000 -0- 49,500 -0-
Chairman, Chief
Executive Officer and
President
</TABLE>
- ---------------
(1) Represents the difference between the bid price of the Common Stock and the
exercise price of the options. The bid price of the Common Stock as of
December 31, 1995 was $.36 per share.
Directors' Compensation. Non-employee directors of the Company are
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors. In addition, such directors are compensated at the rate of
$2,000 per year in cash, payable in equal quarterly installments, plus $200 per
meeting.
Employment Agreement. The Company has entered into an employment agreement
with Mr. Kaemmer dated January 1, 1995 (the "Employment Agreement"). The
Employment Agreement expires on December 31, 1997 unless terminated sooner by
the Company or Mr. Kaemmer. The Employment Agreement provides for a salary of
$132,000 annually for the term of the Employment Agreement and such compensation
increases, bonuses and other compensation as may be determined by the Board of
Directors or any committee thereof in accordance with the Company's
then-existing salary, bonus and other compensation plans.
The Company may terminate the Employment Agreement in the event of the
permanent disability of Mr. Kaemmer (defined as the inability, by reason of
physical or mental disability, to perform the majority of
G-5
<PAGE> 209
his duties for a period of at least 180 consecutive days), for cause (defined to
include willful misconduct or gross negligence that causes material harm to the
Company, criminal acts, acts involving moral turpitude, fraud, habitual
absenteeism, chronic alcoholism or other form of addiction, or a material breach
of the Employment Agreement), and for any other reason or no reason. In the
event the Employment Agreement is terminated on grounds of permanent disability,
Mr. Kaemmer shall be entitled to one year's salary, the proportionate amount of
any bonus and other compensation, payments and benefits which would otherwise
have been received by Mr. Kaemmer with respect to the year in which such
determination of disability is made, as well as continued health insurance. In
the event the Employment Agreement is terminated for cause, Mr. Kaemmer shall
not be entitled to any additional compensation, payments or benefits. In the
event the Employment Agreement is terminated for any other or no reason, Mr.
Kaemmer shall be entitled to two years' salary and the amount of any bonus and
other compensation, payments and benefits which would otherwise have been
received by Mr. Kaemmer with respect to the remaining term of the Employment
Agreement.
Mr. Kaemmer may terminate the Employment Agreement, upon ten days' prior
written notice, for "Good Reason." "Good Reason" is defined to include (i) a
"Change of Control" of the Company of a nature that would be required to be
reported by the proxy rules promulgated by the Securities and Exchange
Commission, (ii) "Constructive Termination" of the Employment Agreement (defined
to include assignment of Mr. Kaemmer to duties other than those of Chief
Executive Officer of the Company or a requirement that Mr. Kaemmer report other
than to the Board of Directors of the Company), (iii) the acquisition of
beneficial ownership (as defined in SEC Rule 13d-3) of 25% or more of the
combined voting power of the Company's voting securities by certain persons,
(iv) the composition of the Board so that less than a majority of the directors
are persons who were either nominated or selected by the Board, (v) approval by
the Company's stockholders of a merger or consolidation in which the Company's
stockholders would own less than 80% of the total voting power represented by
the voting securities of the surviving corporation, or (vi) approval by the
Company's stockholders of a plan of liquidation or disposition of substantially
all the assets of the Company. In the event that Mr. Kaemmer terminates the
Employment Agreement for Good Reason, he shall be entitled to receive two years'
salary and the amount of any bonus and other compensation, payments and benefits
which would otherwise have been received by Mr. Kaemmer with respect to the year
in which such notice is given.
The Employment Agreement requires Mr. Kaemmer not to compete with the
Company, solicit customers or hire employees for a competitive business during
the term of the Employment Agreement and for a period of one year thereafter. In
addition, the Employment Agreement requires Mr. Kaemmer to maintain the
confidentiality of the Company's confidential information.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Halford Loans. During the last two years, the Company made loans to Richard
K. Halford, a Director of the Company, in the aggregate amount of $14,500. Mr.
Halford executed promissory notes (the "Notes") for this sum for the benefit of
the Company as of the following dates and in the following amounts: (i) June 15,
1994 -- $10,000; (ii) August 1, 1994 -- $1,500; and (iii) April 3,
1995 -- $3,000. Each of the Notes bore interest at the prime rate plus 2% per
annum and each was originally payable in full on December 31, 1995. Pursuant to
a Pledge Agreement, dated as of November 23, 1994, by and between Mr. Halford
and the Company, and amended as of April 3, 1995, the Notes were secured by
19,000 shares of Common Stock owned by Mr. Halford. Mr. Halford and the Company
entered into agreements, each dated as of December 29, 1995, to extend the terms
of the Notes to May 15, 1996. Mr. Halford paid the Notes in full on January 24,
1996.
Kaemmer Agreement. In October 1992, the Board approved a revolving credit
agreement in the amount of $300,000 with Robert R. Kaemmer, President of the
Company. Terms of the revolving credit agreement included interest at 10% per
annum, and the note was secured by all the Company's assets including accounts
receivable and equipment. The original commitment period for the revolving
credit agreement was November 10, 1992, through May 10, 1993. This commitment
period was extended through November 10, 1993, the termination date. During the
commitment period, the Company could borrow, repay and re-borrow up to
G-6
<PAGE> 210
$300,000. Other terms of the agreement included the following: (1) as a
commitment fee, the Company issued to Mr. Kaemmer 300,000 shares of Common Stock
on April 8, 1993; (2) a term life insurance policy on Mr. Kaemmer, for which Mr.
Kaemmer designated the beneficiary, in the amount of $300,000 was purchased and
maintained by the Company so long as any loan under the credit agreement was
outstanding; (3) during the commitment period and on the termination date, Mr.
Kaemmer had the right to convert any or all of the principal owing by the
Company to Common Stock at a conversion rate of $1.00 of indebtedness for three
shares of Common Stock (Mr. Kaemmer chose not to convert any of the indebtedness
to stock); and (4) to the extent that on the termination date the sum of: (i)
the dollar amount of the outstanding principal balance of the note, and (ii)
one-third ( 1/3) of the number of shares of Common Stock, if any, acquired by
Mr. Kaemmer pursuant to exercise of the conversion described above, was less
than 300,000 (called the "unused conversion amount"), Mr. Kaemmer had the right
for a period of 180 days after the termination date to purchase a number of
shares of Common Stock equal to three times the unused conversion amount (up to
900,000 shares), at a purchase price of $0.33 per share. This period expired May
1, 1994. The note was paid in full by the Company on November 2, 1993. Mr.
Kaemmer acquired all 900,000 shares of Common Stock on April 27, 1994.
RATIFICATION OF THE SELECTION OF INDEPENDENT
PUBLIC ACCOUNTANTS
The Board of Directors has selected Grant Thornton LLP as the Company's
independent public accountants for the fiscal year ending December 31, 1996.
Grant Thornton LLP has served as the Company's independent public accountants
since 1991. It is anticipated that representatives of Grant Thornton LLP will be
present at the Annual Meeting. Such representatives will have an opportunity to
make a statement if they desire to do so and will be available to respond to
appropriate questions.
The affirmative vote of a majority of the shares of Common Stock and Class
A Stock, voting as a single class, present or represented at the Annual Meeting
and entitled to vote at the Annual Meeting is required for the ratification of
the selection of Grant Thornton LLP as independent public accountants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL AND
RATIFICATION OF THE SELECTION OF GRANT THORNTON LLP.
COMPLIANCE WITH SECTION 16(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of either
the outstanding Common Stock or Class A Stock ("10% Stockholders"), to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership in such stock and other equity securities. Securities
and Exchange Commission regulations require directors, executive officers and
10% stockholders to furnish the Company with copies of all Section 16(a) reports
they file.
To the Company's knowledge, based solely on a review of the copies of such
reports available to the Company and written representations from certain of the
Company's directors and executive officers that no other Section 16(a) reports
were required, all Section 16(a) reports required to be filed by the Company's
directors, executive officers and 10% Stockholders were filed.
OTHER BUSINESS AND MISCELLANEOUS
Voting Matters. In accordance with Delaware law, a stockholder entitled to
vote in the election of directors can withhold authority to vote for all
nominees for directors or can withhold authority to vote for certain nominees
for directors. Votes that are withheld will be excluded entirely from the vote
and will have no effect. Abstentions may be specified in all proposals, other
than the election of directors. Abstentions will have the effect of a negative
vote on a proposal. Shares of the Company that generate broker non-votes on the
G-7
<PAGE> 211
election of directors are treated as shares of Common Stock and Class A Stock as
to which voting power has been withheld by the respective beneficial holders
and, therefore, as shares not entitled to vote on such election.
Other Matters To Be Voted Upon. The Board of Directors knows of no business
which will be presented for consideration at the Annual Meeting other than as
stated in the Notice of Meeting. However, if any other business properly comes
before the Annual Meeting, it is the intention of the persons named in the
enclosed proxy to vote or otherwise act in accordance with their judgment on
such matters.
Solicitation and Expense. The Company will bear the entire cost of
preparing, assembling, printing and mailing the Proxy Statement, the proxy and
any additional material which may be furnished to stockholders. Solicitation of
proxies will be primarily by mail, but regular employees of the Company may also
solicit proxies by personal interview, by telephone or by telegraph without
additional compensation therefor. Brokers, custodians and fiduciaries in whose
names stock is held will be requested to forward proxy soliciting material to
the owners of stock held in their names and the Company will reimburse them for
their out-of-pocket expenses in connection with the service.
Stockholder Proposals. In the event any stockholder wishes to present a
proposal to stockholders at NEXT YEAR'S Annual Meeting of Stockholders, the
proposal must be received by the Secretary of the Company at 6750 West 93rd
Street, Suite 110, Overland Park, Kansas 66212, not later than January 1, 1997,
for inclusion in the proxy materials for that meeting.
Annual Report. A copy of the Company's Annual Report on Form 10-KSB,
together with an appendix including certain supplemental materials, accompanies
this Proxy Statement, but is not part of the proxy solicitation materials. A
COPY OF ANY EXHIBITS TO THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB, AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION, MAY, TO THE EXTENT REQUIRED BY LAW,
BE OBTAINED BY ANY STOCKHOLDER, WITHOUT CHARGE, UPON WRITTEN REQUEST TO MR.
ROBERT KAEMMER, PRESIDENT, AMERICONNECT, INC., AT SUITE 110, 6750 WEST 93RD
STREET, OVERLAND PARK, KANSAS 66212.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE COMPLETE,
SIGN, DATE AND RETURN TO THE COMPANY THE ENCLOSED PROXY. IF YOU ARE PRESENT AT
THE MEETING, YOU MAY WITHDRAW YOUR PROXY AND VOTE YOUR SHARES PERSONALLY.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ ROBERT R. KAEMMER
----------------------------------
Robert R. Kaemmer, Chairman,
Chief Executive Officer and
President
Overland Park, Kansas
May 1, 1996
G-8
<PAGE> 212
APPENDIX H
================================================================================
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-18654
---------------------
AMERICONNECT, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 48-1056927
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6750 WEST 93RD STREET, SUITE 110, OVERLAND PARK, KS 66212
(Address of principal executive offices) (Zip Code)
</TABLE>
(913) 341-8888
(Issuers's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 / /
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
As of August 1, 1996, the Issuer had outstanding 6,341,361 shares of
Common Stock and 592,033 shares of Class A Common Stock.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
================================================================================
H-1
<PAGE> 213
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICONNECT, INC.
CONSOLIDATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31,
UNAUDITED 1995
------------- ------------
<S> <C> <C>
Current Assets
Cash........................................................... $ 207,959 $ 293,492
Accounts receivable, net of allowance of $396,472 at 1996 and
$361,260 at 1995 (Note 3)................................... 2,414,849 1,961,815
Accounts receivable-trade, with affiliates..................... 11,421 6,065
Accounts receivable-agents, including accrued interest (Note
6).......................................................... 30,355 1,492
Notes receivable-director/shareholder (Note 2)................. -- 14,500
Prepaid commissions............................................ 91,057 126,042
Other current assets........................................... 93,942 94,251
---------- ----------
Total current assets................................... 2,849,583 2,497,657
Non-Current Assets
Equipment and software, net of accumulated depreciation and
amortization of $270,871 at 1996 and $230,868 at 1995....... 118,527 143,202
Deposits....................................................... 18,027 19,528
---------- ----------
TOTAL ASSETS..................................................... $2,986,137 $2,660,387
========== ==========
</TABLE>
See accompanying notes to financial statements
H-2
<PAGE> 214
AMERICONNECT, INC.
CONSOLIDATED
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31,
UNAUDITED 1995
------------- ------------
<S> <C> <C>
Current Liabilities
Accounts payable (Note 3)..................................... $ 3,005,814 $ 2,782,432
Sales taxes payable........................................... 113,667 97,460
Accrued office closing costs.................................. -- 8,539
Other accrued liabilities..................................... 1,247 733
----------- -----------
Total current liabilities............................. 3,120,728 2,889,164
Non-Current Liabilities
Customer deposits............................................. 10,265 8,264
----------- -----------
Total liabilities..................................... 3,130,993 2,897,428
Commitments and Contingencies (Notes 3 and 5)................... -- --
Stockholders' Deficit (Note 5)
Class A common stock, par value $.00001 per share; 10,000,000
shares authorized; issued 6,562,033 shares................. 66 66
Common stock, par value $.01 per share; 20,000,000 shares
authorized; issued 6,521,611 shares........................ 65,216 65,050
Additional paid-in capital.................................... 3,647,154 3,642,731
Accumulated deficit........................................... (3,855,429) (3,943,025)
Treasury stock -- class A common, at cost; 5,970,000 shares... (60) (60)
Treasury stock -- common, at cost; 180,250 shares............. (1,803) (1,803)
----------- -----------
Total stockholders' deficit........................... (144,856) (237,041)
----------- -----------
Total Liabilities and Stockholders' Deficit..................... $ 2,986,137 $ 2,660,387
=========== ===========
</TABLE>
See accompanying notes to financial statements
H-3
<PAGE> 215
AMERICONNECT, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Sales......................................... $4,322,276 $4,378,878 $8,565,187 $8,890,727
Sales to affiliates........................... 19,819 26,410 41,510 41,534
---------- ---------- ---------- ----------
Total revenues........................ 4,342,095 4,405,288 8,606,697 8,932,261
Costs and Expenses
Direct operating costs........................ 3,169,951 3,360,777 6,372,297 6,805,223
Selling, administrative and general
expenses................................... 908,305 1,055,094 2,096,879 2,082,065
Depreciation and amortization................. 19,797 18,777 40,002 34,576
---------- ---------- ---------- ----------
Total costs and expenses.............. 4,098,053 4,434,648 8,509,178 8,921,864
---------- ---------- ---------- ----------
Operating income (loss)............... 244,042 (29,360) 97,519 10,397
Other Income (Expense)
Interest income............................... 2,475 5,558 4,479 12,571
Interest expense.............................. (4,866) (2,498) (17,292) (3,240)
Other income.................................. 2,890 -- 2,890 --
Loan fees..................................... -- -- -- (1,251)
---------- ---------- ---------- ----------
Total other income (expense).......... 499 3,060 (9,923) 8,080
---------- ---------- ---------- ----------
Net Income (Loss) Before Income Taxes........... 244,541 (26,300) 87,596 18,477
Income Tax Expense (Note 4)................... -- -- -- --
---------- ---------- ---------- ----------
Net Income (Loss)............................... $ 244,541 $ (26,300) $ 87,596 $ 18,477
========== ========== ========== ==========
Net income (loss) per common and common
equivalent share........................... $ 0.033 $ (0.004) $ 0.012 $ 0.002
========== ========== ========== ==========
Weighted average common and common equivalent
shares outstanding (Note 5)................ 7,434,054 7,327,698 7,434,054 7,327,698
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
H-4
<PAGE> 216
AMERICONNECT, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
---------------------------------
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 87,596 $ 18,477
Adjustments to reconcile net income to cash provided by/(used
in) operating activities:
Depreciation and amortization.............................. 40,002 34,576
Provision for doubtful accounts............................ 128,680 162,835
(Increase) decrease in assets:
Accounts receivable........................................ (581,714) (443,037)
Accounts receivable -- trade with affiliates............... (5,356) (2,803)
Prepaid commissions........................................ 34,985 --
Other current assets....................................... 309 10,269
Deposits................................................... 1,501 637
Increase (decrease) in liabilities:
Accounts payable -- trade.................................. 223,382 654
Sales tax payable.......................................... 16,207 31,705
Accrued office closing costs............................... (8,539) (9,307)
Deferred Income............................................ -- (13,384)
Customer deposits.......................................... 2,001 --
Other accrued liabilities.................................. 515 (24,730)
----------- -----------
Net cash used in operating activities................. (60,431) (234,108)
----------- -----------
Cash flows from investing activities:
Purchase of equipment and software............................ (15,327) (72,791)
Notes receivable -- director/shareholder...................... -- (3,000)
Payments on notes receivable -- director/shareholder.......... 14,500 --
Notes receivable -- employees................................. (10,000) --
Notes receivable -- agents.................................... (20,000) (20,000)
Payments on agents notes receivable........................... 1,137 16,762
----------- -----------
Net cash used in investing activities................. (29,690) (79,029)
----------- -----------
Cash flows from financing activities:
Proceeds from bank loan....................................... 5,895,000 1,745,000
Payments on bank loan......................................... (5,895,000) (1,703,198)
Sale of stock to employees.................................... 4,588 2,250
----------- -----------
Net cash provided by financing activities............. 4,588 44,052
----------- -----------
Net decrease in cash............................................ (85,533) (269,085)
Cash at beginning of period..................................... 293,492 405,942
----------- -----------
Cash at end of period........................................... $ 207,959 $ 136,857
=========== ===========
Supplemental disclosures of cash flow information Cash paid
during the period for:
Interest................................................... $ 16,560 $ 2,461
Income taxes............................................... $ 2,245 $ 3,320
</TABLE>
See accompanying notes to financial statements
H-5
<PAGE> 217
AMERICONNECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY: AmeriConnect, Inc. and its wholly owned subsidiary,
AmeriConnect, Inc. of New Hampshire (collectively, the "Company") resell long
distance telecommunications services primarily to individuals and small to
medium-sized businesses. AmeriConnect, Inc. of New Hampshire was formed June 28,
1993, in order to do business in the state of New Hampshire.
The consolidated balance sheets as of June 30, 1996, the consolidated
statements of operations for the six months ended June 30, 1996 and 1995, and
the consolidated statements of cash flows for the six months ended June 30, 1996
and 1995 have been prepared by the Company, without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and
cash flows at June 30, 1996, and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 1995 annual
report to shareholders. The results of operations for the periods ended June 30,
1996, and June 30, 1995, are not necessarily indicative of the operating results
for the full year.
NOTE 2 -- NOTE RECEIVABLE -- DIRECTOR/SHAREHOLDER
During 1994 and early 1995, the Company made loans totaling $14,500 to a
director/shareholder. They were secured by 19,000 shares of the Company's common
stock and bore interest at 2 1/2% over the published prime rate found in The
Wall Street Journal. The loans were paid in full on January 24, 1996.
NOTE 3 -- COMMITMENTS AND CONTINGENCIES
The Company has a contract with a firm to provide subscriber statement
processing and billing services. The contract is for a period of three (3) years
and expires in September 1996. The Company has negotiated a month-to-month
arrangement that will begin in October 1996 and continue until shortly after the
merger is consummated. If the merger is not consummated, the Company intends to
negotiate a long term contract. Terms of the contract provide for a monthly base
charge with additional per unit processing charges.
The Company has a contract with Sprint to provide telecommunications
services for the Company's customers. The Company has negotiated an amendment to
the contract that was retroactive to January 1, 1996. The amendment covers the
pricing of the services for a term of two years beginning January 1, 1996. The
Company has a monthly minimum usage commitment of $500,000 for each of the
months covered by the agreement with a total minimum commitment of $12,000,000.
In the event the Company's customers use less than the minimum commitment, the
difference is due and payable by the Company to Sprint. Prior to the amendment,
the Company had a minimum monthly commitment of $1,000,000. For the period
September 1, 1995, through December 1, 1995, the Company had an accumulated
shortfall of approximately $719,549 which will be offset by the amount by which
the Company's actual monthly billed usage for the period beginning on January 1,
1996 exceeds the $500,000 minimum commitment. As a result of this offset, at
June 30, 1996, there was no accumulated shortfall and the Company was in
compliance with the contractual requirements of the agreement. In the event the
proposed merger with Phoenix Network, Inc. occurs (See Note 9), the Company's
amendment to the Sprint contract will terminate on the closing date.
The Company has a contract with WilTel to provide telecommunications
services at discounted rates which will vary based upon the amount of usage by
the Company. The term of this usage commitment is thirty-nine (39) months. The
Company's agreement with WilTel calls for a minimum monthly usage commitment of
$50,000 through January 1998. In the event the Company's customers use less than
the minimum commitment in any month, the difference is due and payable by the
Company to WilTel in the
H-6
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AMERICONNECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
following month. On June 21, 1996, the Company executed an amendment to the
contract. The amendment provides for additional discounts to the Company for the
usage months of June, July, August and September of 1996. In the event the
proposed merger with Phoenix Network, Inc. does not occur (See Note 9), the
Company's monthly commitment would increase to $250,000 beginning with October
1996 usage and continue for the remainder of the existing term. The Company was
in compliance with the contractual requirements of the agreement throughout the
quarter ended June 30, 1996.
On June 1, 1996, the Company entered into a revolving credit facility which
expires October 1, 1996, and allows for maximum borrowings by the Company of the
lesser of $1,000,000 or 50% of eligible (less than 61 days old) receivables.
Interest is payable monthly at the bank's prime rate (8.25% at June 30, 1996)
plus 2%. Under the terms of the credit facility, the Company is required to meet
certain financial covenants. The line is secured by all of the Company's
accounts receivable. During the second quarter of 1996, the Company had used
this facility for short term borrowings, but had no outstanding borrowings at
quarter end. At June 30, 1996, the Company was in default of certain of these
financial covenants, which defaults are continuing. While the Company currently
does not expect these defaults to impair its ability to utilize this facility
during the remainder of the existing term, it may negatively impact the
Company's ability to renew the credit facility. In the event the credit facility
cannot be renewed or the Company is unable to utilize the existing facility, the
Company would attempt to obtain a comparable credit facility from an alternative
financing source. While the Company has been able to obtain such facilities in
the past, there can be no assurance that the Company will be able to obtain a
credit facility with comparable terms or at all. The inability to obtain a
credit facility would have a material adverse effect on the Company's financial
condition and business.
In accordance with the terms of the credit facility, the Company purchased
a term life insurance policy on a key employee with a face amount of $1,750,000
during the year ended December 31, 1994. Annual premiums are approximately
$3,500.
NOTE 4 -- INCOME TAXES
A valuation allowance was established to reduce the deferred tax asset to
the amount that will more likely than not be realized.
The valuation allowance was adjusted for three month period ended June 30,
1996, and the year ended December 31, 1995, as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Valuation allowance, beginning of period............. $1,667,882 $ 591,512
Valuation adjustment................................. (51,214) 576,370
Adjustment in allowance due to change in estimate.... -- 500,000
---------- ----------
Valuation allowance, end of period................... $1,616,668 $1,667,882
========== ==========
</TABLE>
NOTE 5 -- COMMON STOCK, WARRANTS AND OPTIONS
PUBLIC OFFERING: In its initial public offering in 1989, the Company issued
828,000 units each of which consisted of five shares of previously unissued
common stock, par value $.01 per share, and five redeemable Class A Warrants at
a price per unit of $5.00. Each of the Class A Warrants, which was transferable
separately immediately upon issuance, entitled the holder to purchase for $1.00
one share of common stock and one redeemable Class B common stock purchase
warrant ("Class B Warrant"). The Class A Warrants expired on May 29, 1994. Each
Class B Warrant entitled the holder to purchase one share of common stock at
$1.50 until May 29, 1994. The warrants are not common stock equivalents for the
purposes of the earnings per share computations. (See Note 1.) In addition, the
Company granted the
H-7
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AMERICONNECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
underwriter and finder options to purchase 57,600 and 14,400 units,
respectively, at $6.00 per unit exercisable over a period of four years
commencing one year from the date of the prospectus.
MISSING STOCK CERTIFICATES: Prior to the Company's initial public offering,
the stockholders of record as of March 29, 1989, executed escrow agreements
which required the placement in escrow of 150,000 shares of outstanding common
stock and 5,970,000 shares of outstanding Class A common stock pending the
achievement of certain earnings objectives. These earnings objectives were not
met and, consequently, all of the shares subject to the escrow agreement were
retired and have been accounted for as treasury stock since December 31, 1992.
In addition, in connection with the execution of a voting trust agreement in
1989, certificates representing 3,014,751 shares of Class A common stock were
issued in the name of a voting trust in substitution for the certificates held
by some of the stockholder-parties to the voting trust agreement. This voting
trust expired in June of 1992. During the first quarter of 1992, however, the
Company learned that the escrow agent associated with the escrow agreements
asserts that it has never received the stock certificates representing the
shares subject to the escrow agreements. During the same period, the Company
discovered that the certificates representing 2,975,751 of the shares
transferred to the voting trust were never delivered to the Company for
cancellation. The Company has been unable to locate neither the original share
certificates nor the certificates issued to the voting trust. As a result, if a
stockholder attempted to transfer any of the shares subject to the escrow
agreements or the voting trust agreement in violation of such agreements, there
can be no assurance that an innocent transferee could not successfully claim the
right to the shares purportedly transferred to him or her. The Company believes,
however, that the legends affixed to each of the missing certificates, which
state that the shares are subject to the restrictions of the voting trust
agreement and the escrow agreements, respectively, are sufficient to prevent a
transferee from acquiring a valid claim with respect to the shares represented
by the missing certificates. In addition, the Company has obtained affidavits
from each holder of the missing certificates that no such purported transfers
have been made.
STOCK RIGHTS: The rights and preferences of common stock and Class A common
stock are substantially identical except that each share of common stock
entitles the holder to one vote whereas, each share of Class A common stock
entitles the holder to five votes. Class A common stock automatically converts
into common stock on a one-for-one basis upon sale or transfer to an entity or
individual who was not a holder of Class A common stock before such sale or
transfer, or at any time at the option of the holder. During each of 1994 and
1995, 113,400 shares of Class A stock were converted to common stock through
private transactions.
STOCK OPTION PLANS: On July 29, 1988, the Company adopted a stock option
plan allowing 300,000 shares of unissued but authorized common stock for
issuance of incentive and/or non-qualified stock options. At June 30, 1996, all
options had been granted under the plan, and 23,000 options had been returned to
the Company by employees who resigned prior to vesting. Such returned options
are again available for use under the plan.
On May 27, 1994, the Company adopted a second stock option plan allowing
for 500,000 shares of unissued but authorized common stock for issuance of
incentive and/or non-qualified stock options. As of June 30, 1996, 487,000
options under this plan had been granted and 174,356 options had been returned
to the Company by employees who resigned prior to vesting. Such returned options
are again available for use under the plan.
H-8
<PAGE> 220
AMERICONNECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option transactions for the period ended June 30, 1996, are
summarized below:
<TABLE>
<CAPTION>
1988 PLAN 1994 PLAN TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Outstanding, beginning of quarter............... 166,000 314,000 480,000
Granted....................................... -- -- --
Exercised..................................... (3,000) -- (3,000)
Cancelled..................................... -- (12,000) (12,000)
----------- ----------- -----------
Outstanding, end of period...................... 163,000 302,000 465,000
=========== =========== ===========
Option price per share exercised................ $0.03-$0.50 -- $0.03-$0.50
Price for outstanding options................... $0.03-$0.50 $0.26-$0.75 $0.03-$0.75
=========== =========== ===========
</TABLE>
The expiration dates for the options issued under the 1988 Plan range from
May 1998 to December 2003. At June 30, 1996, 23,000 shares were available for
future grants under the 1988 Plan.
The expiration dates for the options issued under the 1994 Plan range from
August 2004 to December 2005. At June 30, 1996, 187,356 shares were available
for future grants under the 1994 Plan.
NOTE 6 -- NOTES RECEIVABLE
The Company conducts a portion of its business through agents. Some of
these agents have borrowed from the Company in order to obtain necessary capital
to expand their operations. These borrowings are represented by short term
promissory notes. The terms of the notes permit the Company to withhold the
monthly payments from commissions due the agents, if necessary. The interest
rate for all the notes is 2 1/2% over the prime rate published by The Wall
Street Journal. At December 31, 1994, a reserve of $100,000 was established
against amounts due from a specific agent whose receivable, including unpaid
charges, aggregated $498,061. During 1995, the Company and this agent became
involved in litigation, and it was determined that no recovery on the amounts
would be made. As a result, the remaining receivable of $398,061 was written
off. The Company has negotiated a mutual release of all claims with this
specific agent. The Company received a credit in the amount of $300,000 in the
second quarter of 1996 as a partial recovery of the amounts previously written
off.
NOTE 7 -- PROFIT SHARING PLAN
The Company adopted a 401(k) savings plan effective January 1, 1994,
covering nearly all eligible employees with at least six months of service.
Under the terms of the plan, employees may contribute up to 15% of their gross
wages. The Company matches 100% of the first 3% contributed by each employee.
The Company's contribution to the plan was $9,639 in the first six months of
1996.
NOTE 8 -- ONGOING OPERATIONS
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. The Company reported a net income of
$87,596 for the six month period ended June 30, 1996. At this time, liabilities
exceed assets by $144,856. Excluding the $300,000 credit, the Company would have
reported a net loss of $212,404. In order to be profitable on an operating
basis, the Company must achieve sufficient volume levels to obtain additional
discounts under its existing carrier contracts or reduce other costs. In
addition, the Company may explore financing and other strategic transactions,
such as the proposed merger (discussed in Note 9 below).
The proposed merger would reduce the Company's direct operating costs
through volume discounts on long-distance pricing from its carriers and would
provide certain economies of scale which management believes would allow its
operations to become profitable and allow it to compete for new and existing
H-9
<PAGE> 221
AMERICONNECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customers. If, for any reason, the proposed merger is not consummated, the
Company plans to increase sales and reduce its costs and will continue to
explore other strategic alternatives (which may include financings, mergers,
acquisitions, joint ventures or other strategic transactions).
NOTE 9 -- SUBSEQUENT EVENT
On January 15, 1996, the Company and Phoenix Network, Inc. ("Phoenix"), a
Golden, Colorado-based long distance reseller and provider of value-added
telecommunications services, signed a letter of intent to merge the two
companies in a stock-for-stock transaction. The parties executed a definitive
merger agreement on June 14, 1996. In connection with the proposed merger,
Phoenix will issue shares of its common stock in exchange for all of the
outstanding shares of the Company. It is currently anticipated that the closing
will take place in October 1996, pending the obtaining of all necessary
regulatory approvals and approval of the Company's shareholders. There can be no
assurance the Company's shareholders will approve the merger or that the other
conditions to the merger will be satisfied.
H-10
<PAGE> 222
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT ON FORM
10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THE COMPANY'S REPORTS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION.
GENERAL
The Company's financial condition and results of operations continue to be
negatively affected by increasing competition which contributes to lower profit
margins and increasing costs for new sales. While the proposed merger with
Phoenix Network, Inc. will afford the new entity savings via combined carrier
contracts and other economies of scale, there is no assurance that the proposed
merger will be consummated.
Competition. Intense competition in the long distance telecommunications
industry continues in 1996. Major long distance companies like AT&T and Sprint
are continuing to market directly to the Company's primary market -- small to
medium-sized businesses. Other existing competitors are aggressively reducing
rates to maintain and build customer base and expand minute volume. In addition,
new competitors continue to emerge targeting the Company's primary market. Many
of these competitors sought to build volume quickly and, in order to accomplish
this goal, sold their long distance services at rates that, in the Company's
opinion, do not reflect the full costs of doing business. Accordingly, while the
Company reduced its rates and undertook efforts to maintain and build its
customer base (as described below), the Company was unable to match the rates
and/or services offered by many of its competitors, thereby increasing the
number of customers lost to competitors. While the Company continued to acquire
new customers, lost business and rate reductions to existing accounts more than
offset new business. While total minutes billed increased approximately 7% from
the second quarter 1995 to the second quarter 1996, the average revenue per
minute dropped approximately 9%.
Sales Costs. The Company sought to increase its volume by offering services
at rates that were competitive in the market. In addition, the Company hired
Area Sales Directors and other personnel to support its sales agent program,
increased commissions to sales agents to maintain its relationship with key
agents, hired a Kansas City area direct sales force and promoted aggressive
marketing campaigns designed to increase sales. While the Company believes these
actions to be necessary to respond to the competitive environment, they have the
effect of increasing selling, general and administrative expenses.
SECOND QUARTER RESULTS 1996 COMPARED TO SECOND QUARTER RESULTS 1995
Total Revenues. Total revenues decreased from $4,405,288 in the second
quarter 1995 to $4,342,095 in the second quarter 1996, a decrease of $63,193 or
approximately 1%. The decrease is attributable to the decrease in average
revenue per minute as previously discussed.
Direct Operating Costs. Direct operating costs decreased from $3,360,777 in
the second quarter 1995 to $3,169,951 in the second quarter 1996, a decrease of
$190,826 or approximately 6%. As a percentage of revenues, direct operating
costs decreased from approximately 76% in the second quarter of 1995 to
approximately 73% in the second quarter of 1996. The decrease is attributable
mainly to the execution of an amended contract with one of the Company's
underlying carriers that afforded the Company more competitive rates. The
Company's direct operating costs decreased approximately $261,000 as a result of
the amended contract. Of the $261,000, approximately $133,000 related to first
quarter 1996 usage.
Selling, Administrative and General Expenses. The Company's selling,
administrative and general expenses decreased from $1,055,094 in the second
quarter 1995 to $908,305 in the second quarter 1996, a decrease of $146,789 or
approximately 14%. As a percentage of revenue, selling, administrative and
general
H-11
<PAGE> 223
expenses decreased from approximately 24% in the second quarter 1995 to
approximately 21% in the second quarter 1996. The decrease in selling,
administrative and general expenses is due in large part to the recovery of a
bad debt previously written off. The Company received a credit in the amount of
$300,000 related to the bad debt previously written off. Without the effect of
the $300,000 credit, selling, administrative and general expenses would have
increased from $1,055,094 in the second quarter of 1995 to $1,208,305 in the
second quarter of 1996, an increase of $153,211 or approximately 14%. The
biggest single increase in this expense category in dollars was in compensation
expense.
Compensation expenses increased from $601,987 in the second quarter 1995 to
$674,008 in the second quarter 1996, an increase of $72,021 or approximately
12%. Salaries for sales related positions increased from $79,627 to $115,719, an
increase of $36,092 or approximately 45%, which resulted from the addition of
several sales positions throughout 1996. In-house commissions increased from
$8,531 to $27,102, an increase of $18,571 or approximately 218%. Agent
commissions increased from $361,211 to $373,142, an increase of $11,931 or
approximately 3% due to the introduction in late 1995 of a commission plan
designed to attract high volume agents.
Fees for professional services increased from $49,415 in the second quarter
1995 to $109,196 in the second quarter 1996, an increase of $59,781 or
approximately 121%. This increase resulted primarily from increases in the costs
of legal and accounting services associated with the potential merger previously
mentioned.
SIX MONTH RESULTS 1996 COMPARED TO SIX MONTH RESULTS 1995
Total Revenues. Total revenues decreased from $8,932,261 for the first six
months of 1995 to $8,606,697 for the first six months of 1996, a decrease of
$325,564 or approximately 4%. This decrease in revenues is attributable to the
decrease in average revenue per minute.
Direct Operating Costs. Direct operating costs decreased from $6,805,223
for the first six months of 1995 to $6,372,297 for the first six months of 1996,
a decrease of $432,926 or approximately 6%. As a percentage of revenues, direct
operating costs decreased from approximately 76% in 1995 to 74% in 1996. The
decrease was the result of the execution of a new carrier contract that was
effective September 1, 1995 and an amendment to the new contract that was
effective January 1, 1996. (See Second Quarter Results above.)
Selling, Administrative and General Expenses. The Company's selling,
administrative and general expenses increased from $2,082,065 for the first six
months of 1995 to $2,096,879 for the first six months of 1996, an increase of
$14,814 or approximately 1%. As a percentage of revenue, selling, administrative
and general expenses increased from 23% in 1995 to 24% in 1996. The increase in
selling, administrative and general expenses was insignificant due in large part
to the recovery of a bad debt previously written off. The Company received a
credit in the amount of $300,000 related to the bad debt previously written off.
Without the effect of the $300,000 credit, selling, administrative and general
expenses would have increased from $2,082,065 for the first six months of 1995
to $2,396,879 for the first six months of 1996, an increase of $314,814 or
approximately 28%. The biggest single increase in this expense category in
dollars was in compensation expense.
Compensation expenses increased from $1,136,816 for the first six months of
1995 to $1,324,579 for the first six months of 1996, an increase of $187,763 or
approximately 16%. Salaries for sales related positions increased from $135,274
to $221,314, an increase of $86,040 or approximately 64%, which resulted from
the addition of several sales positions throughout 1996. In-house commissions
increased from $19,775 to $51,739, an increase of $31,964 or approximately 162%.
Agent commissions increased from $672,104 to $727,111, an increase of $55,007 or
approximately 8% due to the introduction in late 1995 of a commission plan
designed to attract high volume agents.
Fees for professional services increased from $94,103 for the first six
months of 1995 to $215,714 for the first six months of 1996, an increase of
$121,611 or approximately 129%. This increase resulted primarily from increases
in the costs of legal and accounting services associated with the potential
merger previously mentioned.
H-12
<PAGE> 224
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1995 and June 30, 1996, the Company had a stockholders'
deficit of $237,041 and $144,856, respectively. During the first six months of
1995, the Company used $234,108 cash from operations. During the first six
months of 1996, the Company used $60,431 cash in operations.
The Company has a contract with Sprint to provide telecommunications
services for the Company's customers. The Company has negotiated an amendment to
the contract that was retroactive to January 1, 1996. The amendment covers the
pricing of the services for a term of two years beginning January 1, 1996. The
Company has a monthly minimum usage commitment of $500,000 for each of the
months covered by the agreement with a total minimum commitment of $12,000,000.
In the event the Company's customers use less than the minimum commitment, the
difference is due and payable by the Company to Sprint. Prior to the amendment,
the Company had a minimum monthly commitment of $1,000,000. For the period
September 1, 1995, through December 1, 1995, the Company had an accumulated
shortfall of approximately $719,549 which will be offset by the amount by which
the Company's actual monthly billed usage for the period beginning on January 1,
1996 exceeds the $500,000 minimum commitment. As a result of this offset, at
June 30, 1996, there was no accumulated shortfall and the Company was in
compliance with the contractual requirements of the agreement. In the event the
proposed merger with Phoenix Network, Inc. occurs (See Note 9), the Company's
amendment to the Sprint contract will terminate on the closing date.
The Company has a contract with WilTel to provide telecommunications
services at discounted rates which will vary based upon the amount of usage by
the Company. The term of this usage commitment is thirty-nine (39) months. The
Company's agreement with WilTel calls for a minimum monthly usage commitment of
$50,000 through January 1998. In the event the Company's customers use less than
the minimum commitment in any month, the difference is due and payable by the
Company to WilTel in the following month. On June 21, 1996, the Company executed
an amendment to the contract. The amendment provides for additional discounts to
the Company for the usage months of June, July, August and September of 1996. In
the event the proposed merger with Phoenix Network, Inc. does not occur (See
Note 9), the Company's monthly commitment would increase to $250,000 beginning
with October 1996 usage and continue for the remainder of the existing term. The
Company was in compliance with the contractual requirements of the agreement
throughout the quarter ended June 30, 1996.
On June 1, 1996, the Company entered into a revolving credit facility which
expires October 1, 1996, and allows for maximum borrowings by the Company of the
lesser of $1,000,000 or 50% of eligible (less than 61 days old) receivables.
Interest is payable monthly at the bank's prime rate (8.25% at June 30, 1996)
plus 2%. Under the terms of the credit facility, the Company is required to meet
certain financial covenants. The line is secured by all of the Company's
accounts receivable. During the second quarter of 1996, the Company had used
this facility for short term borrowings, but had no outstanding borrowings at
quarter end. At June 30, 1996, the Company was in default of certain of these
financial covenants, which defaults are continuing. While the Company currently
does not expect these defaults to impair its ability to utilize this facility
during the remainder of the existing term, it may negatively impact the
Company's ability to renew the credit facility. In the event the credit facility
cannot be renewed or the Company is unable to utilize the existing facility, the
Company would attempt to obtain a comparable credit facility from an alternative
financing source. While the Company has been able to obtain such facilities in
the past, there can be no assurance that the Company will be able to obtain a
credit facility with comparable terms or at all. The inability to obtain a
credit facility would have a material adverse effect on the Company's financial
condition and business.
In accordance with the terms of the credit facility, the Company purchased
a term life insurance policy on a key employee with a face amount of $1,750,000
during the year ended December 31, 1994. Annual premiums are approximately
$3,500.
At June 30, 1996, the Company had a ratio of current assets to current
liabilities of 0.91. Working capital deficit at June 30, 1996 was $271,145.
The Company's business as a non-facilities based reseller of long distance
telecommunications services is generally not a capital intensive business, and
at June 30, 1996, the Company had no material commitments
H-13
<PAGE> 225
for capital expenditures. The Company anticipates any additional capital
expenditures in the future will be confined to minimal purchases of office
fixtures and equipment.
The proposed merger would reduce the Company's direct operating costs
through volume discounts on long-distance pricing from its carriers and would
provide certain economies of scale that together management believes would allow
its operations to become profitable and allow it to compete for new and existing
customers. If for any reason the proposed merger is not consummated, the Company
plans to increase its sales and reduce its costs and will continue to explore
other strategic alternatives (which may include financings, mergers,
acquisitions, joint ventures or other strategic transactions).
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Dependence on Service Providers. The Company depends on a continuing and
reliable supply of telecommunications services from facilities-based,
interexchange carriers. Because the Company does not own or lease switching or
transmission facilities, 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 the Company for its customers on favorable terms and in a timely manner.
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. To the extent the differential between the
telephone rates offered by the major carriers directly to their customers and
the cost of the bulk-rate telecommunications services procured by the Company
from its underlying carriers 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 would also be adversely affected.
Competition. An existing or potential customer of the Company has numerous
other choices available for its telecommunications service needs, including
obtaining services directly from the same carriers whose services the Company
offers. From time to time, the Company's competitors 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, or lower than, the Company's
rates. In addition, most prospective customers of the Company are already
receiving service directly from at least one long distance carrier, and thus the
Company must convince prospective customers to alter these relationships to
generate new business. The Company competes with three major interexchange
carriers, AT&T, MCI and Sprint, other large carriers, including Frontier and
WorldCom, and several hundred smaller carriers. Additionally, as a result of
legislation enacted by the federal government in February of 1996, the RBOCs and
GTOCs will have, upon compliance with certain regulatory requirements, the right
to provide long distance service. Many of the RBOCs and GTOCs have already
announced their intention to enter the business of providing long distance
service. As a consequence, the telecommunications industry will remain highly
competitive and be subject to rapid technological and regulatory change. Because
the tariffs offered by the major carriers for telecommunications 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 the Company will be
able to become or remain competitive in the current telecommunications
environment.
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 potential
mergers, acquisitions, joint ventures or other strategic combinations involving
the Company. The announcement of the inability to consummate the proposed
merger, rate changes for various carriers, technological innovation or new
products or service offerings by the Company or its competitors, as well as
H-14
<PAGE> 226
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 June 30, 1996, the Company's
executive officers and directors beneficially owned or controlled approximately
46.5% of the total voting power represented by the Company's outstanding capital
stock, taking into account that holders of the Company's Class A Common Stock
are entitled to five votes per share of such stock and assuming the exercise of
all outstanding options for the Company's capital stock which are exercisable
within sixty (60) days. The votes represented by the shares beneficially owned
or controlled by the Company's executive officers and directors would, if they
were cast together, 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 capital 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 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, the Company is subject to many of the same regulatory requirements as
facilities-based interexchange carriers. The intrastate long distance
telecommunications operations of the Company are also subject to various state
laws and regulations, including certification requirements. Generally, the
Company must obtain and maintain certificates of public convenience and
necessity from regulatory authorities in most states where it offers service,
and in some 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.
H-15
<PAGE> 227
PART 2. -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
1. WilTel Amendment, dated June 11, 1996, by and between Registrant and
WilTel.
2. Mercantile Promissory Note, dated June 1, 1996, by and between
Registrant and Mercantile Bank.
3. Financial Data Schedule
(b) Reports on Form 8-K
On June 20, 1996, the Company filed a report on Form 8-K under Item
5 -- Other Events regarding a press release issued by the Company and Phoenix
announcing that they had executed a definitive merger agreement.
H-16
<PAGE> 228
SIGNATURE
Pursuant to the requirements 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 (the undersigned being its President).
AMERICONNECT, INC.
Date: August 14, 1996
/s/ Robert R. Kaemmer
------------------------------------
Robert R. Kaemmer
President
H-17
<PAGE> 229
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the Registrant's Certificate of Incorporation ("Article VI")
is consistent with Section 102(b)(7) of the Delaware General Corporation Law,
which generally permits a company to include a provision limiting the personal
liability of a director in the company's certificate of incorporation. With
limitations, Article VI eliminates the personal liability of the Registrant's
directors to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. However, Article VI does not eliminate director
liability: (i) for breaches of the duty of loyalty to the Registrant or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) for any transaction
from which a director derives an improper personal benefit; and (iv) under
Section 174 of the Delaware General Corporation Law ("Section 174"). Section 174
makes directors personally liable for unlawful dividends and stock repurchases
or redemptions and expressly sets forth a negligence standard with respect to
such liability. While Article VI protects the directors from awards for monetary
damages for breaches of their duty of care, it does not eliminate their duty of
care. The limitations in Article VI have no effect on claims arising under the
federal securities laws.
With certain limitations, Article XI of the Registrant's By-Laws ("By-Laws
Article XI") provides for indemnification of any of the Registrant's past,
present and future officers and directors against liabilities and reasonable
expenses incurred in any criminal or civil action by reason of such person's
being or having been an officer or director of the Registrant or of any other
corporation which such person serves as such at the request of the Registrant.
Indemnification under By-Laws Article XI is limited to officers and directors
who have acted in good faith and in a manner they reasonably believed to be in
the best interests of the Registrant. Any questions regarding whether the
officer or director has met the required standards of conduct are to be answered
by (i) a majority of disinterested directors, or (ii) a written opinion of
independent legal counsel selected by the Board. Indemnification rights under
By-Laws Article XI are non-exclusive. In the event of an officer's or director's
death, such person's indemnification rights shall extend to his or her heirs and
legal representatives. Rights under By-Laws Article XI are separable, and if any
part of that section is determined to be invalid for any reason, all other parts
remain in effect.
Under Section 145 of the Delaware General Corporation Law, directors and
officers, as well as other employees and individuals, may be indemnified against
expenses (including attorneys' fees), judgments, fines, amounts paid in
settlement in connection with specified actions, suits, or proceedings, whether
civil, criminal, administrative, or investigative (other than an action by or in
the right of the corporation -- a "derivative action") if they acted in good
faith and in a manner they reasonably believed to be in, or not opposed to, the
best interests of the corporation, and, with respect to criminal actions or
proceedings, had no reasonable cause to believe their conduct was unlawful. A
similar standard of care is applicable in the case of derivative actions, except
that indemnification only extends to expenses (including attorneys' fees)
incurred in connection with the defense or settlement of such an action, and the
Delaware General Corporation Law requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation.
II-1
<PAGE> 230
ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES
(a) Exhibits:
The list of exhibits is incorporated herein by reference to the Index
to Exhibits on page II-6 hereof, immediately following the signature pages.
ITEM 22. UNDERTAKINGS
1. The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
2. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form;
4. The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (3) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of
II-2
<PAGE> 231
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof;
5. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
6. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
7. The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE> 232
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Golden, State of
Colorado, on August 22, 1996.
PHOENIX NETWORK , INC.
By: /s/ WALLACE M. HAMMOND
------------------------------------
Wallace M. Hammond
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Wallace M. Hammond and Jeffrey L. Bailey, and
each of them singly, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities (including his capacity as a director and
officer of Phoenix Network, Inc.), to sign any and all amendments (including
post-effective amendment) to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each said attorney-in-fact and agent, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities on August 22, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<C> <S>
Chairman of the Board and Director
- ---------------------------------------------
Thomas H. Bell
Vice Chairman of the Board and Director
- ---------------------------------------------
Robert R. Curtis
/s/ WALLACE M. HAMMOND President, Chief Executive Officer
- --------------------------------------------- (Principal Executive Officer) and Director
Wallace M. Hammond
/s/ JEFFREY L. BAILEY Senior Vice President and Chief Financial
- --------------------------------------------- Officer (Principal Financial and
Jeffrey L. Bailey Accounting Officer)
/s/ JAMES W. GALLAWAY Director
- ---------------------------------------------
James W. Gallaway
/s/ MERRILL L. MAGOWAN Director
- ---------------------------------------------
Merrill L. Magowan
/s/ MYRON A. WICK, III Director
- ---------------------------------------------
Myron A. Wick, III
</TABLE>
II-4
<PAGE> 233
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
Director
- ---------------------------------------------
Sidney Kahn
Director
- ---------------------------------------------
Max Thornhill
/s/ DAVID SINGLETON Director
- ---------------------------------------------
David Singleton
</TABLE>
II-5
<PAGE> 234
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE NO.
EXHIBIT IN THIS
NO. FILING
------- --------
<S> <C> <C>
2 Amended and Restated Agreement and Plan of Merger among the Registrant,
Phoenix Merger Corp. and AmeriConnect, Inc., dated as of June 14, 1996
5* Opinion of Freeborn & Peters, counsel for Registrant, as to the legality
of the securities being registered, and consent
8* Opinion of Freeborn & Peters, counsel for Registrant, as to tax matters
21 List of subsidiaries of the Registrant
23(a) Consent of Grant Thornton LLP
23(b) Consent of Grant Thornton LLP
23(c) Consent of Freeborn & Peters (included in Exhibit 5)
99* Form of Proxy Card
</TABLE>
- ---------------
* To be filed by amendment.
II-6
<PAGE> 1
EXHIBIT 2
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMONG
PHOENIX NETWORK, INC.,
PHOENIX MERGER CORP.
AND
AMERICONNECT, INC.
DATED AS OF JUNE 14, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
1. THE MERGER AND EFFECTIVE TIME........................................................ 1
1.01. The Merger.................................................................. 1
1.02. The Effective Time of the Merger............................................ 1
1.03. Closing..................................................................... 1
2. CERTIFICATE OF INCORPORATION; BY-LAWS; DIRECTORS AND
OFFICERS............................................................................. 2
2.01. Certificate of Incorporation................................................ 2
2.02. By-laws..................................................................... 2
2.03. Directors and Officers...................................................... 2
3. CONVERSION AND EXCHANGE OF SHARES.................................................... 2
3.01. Conversion of Shares........................................................ 2
3.02. Exchange of Certificates.................................................... 3
3.03. Distributions with Respect to Unexchanged Shares............................ 4
3.04. No Further Ownership Rights in Company Stock................................ 4
3.05. No Fractional Shares........................................................ 5
3.06. Termination of Exchange Fund................................................ 5
3.07. No Liability................................................................ 5
3.08. Lost Certificates........................................................... 5
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................ 5
4.01. Organization................................................................ 5
4.02. Capitalization.............................................................. 6
4.03. Subsidiaries................................................................ 6
4.04. Authority................................................................... 7
4.05. Consents and Approvals; No Violations....................................... 7
4.06. No Default.................................................................. 8
4.07. SEC Reports and Financial Statements........................................ 8
4.08. Absence of Undisclosed Liabilities.......................................... 8
4.09. Conduct of Business -- Events Subsequent to December 31, 1995............... 9
4.10. Compliance With Law......................................................... 9
4.11. Tax Matters................................................................. 9
4.12. Properties; Leases; Tangible Assets......................................... 10
4.13. Litigation.................................................................. 10
4.14. Pooling of Interests........................................................ 10
4.15. Registration Statement; Proxy Statement..................................... 10
4.16. Brokers..................................................................... 11
4.17. Environmental Matters....................................................... 11
4.18. Corporate Records........................................................... 11
4.19. Accounting Records.......................................................... 12
4.20. Labor Matters............................................................... 12
4.21. ERISA....................................................................... 12
4.22. Intellectual Property....................................................... 12
4.23. Disclosure.................................................................. 13
4.24. Vote Required............................................................... 13
4.25. Contract Defaults........................................................... 13
5. REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB..................................... 13
5.01. Organization................................................................ 13
5.02. Capitalization.............................................................. 13
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
5.03. Subsidiaries................................................................ 14
5.04. Authority................................................................... 14
5.05. Consents and Approvals; No Violations....................................... 14
5.06. SEC Reports and Financial Statements........................................ 15
5.07. Absence of Undisclosed Liabilities.......................................... 15
5.08. Absence of Certain Changes or Events........................................ 16
5.09. Litigation.................................................................. 16
5.10. Pooling of Interests........................................................ 16
5.11. Registration Statement; Proxy Statement..................................... 16
5.12. Brokers..................................................................... 16
5.13. Interim Operations of Sub................................................... 16
5.14. Company Stock Ownership..................................................... 16
5.15. Authorization for Parent Common Stock....................................... 16
5.16. Continued Existence of the Company.......................................... 16
6. CERTAIN UNDERSTANDINGS AND AGREEMENTS................................................ 17
6.01. Conduct of Business by the Company Pending the Merger....................... 17
6.02. Conduct of Business by Parent Pending the Merger............................ 18
6.03. Conduct of Business of Sub.................................................. 18
6.04. No Solicitation, Etc........................................................ 19
6.05. Registration Statement; Proxy Statement..................................... 19
6.06. Access...................................................................... 19
6.07. Meeting of Stockholders..................................................... 20
6.08. Legal Requirements to Merger; Consents...................................... 20
6.09. Affiliates.................................................................. 20
6.10. Authorization for Shares and Stock Exchange Listing......................... 21
6.11. Company Stock Plans and Benefits............................................ 21
6.12. Mutual Efforts; Further Assurances.......................................... 21
6.13. Expenses.................................................................... 21
6.14. Public Statements........................................................... 21
6.15. Certification of Stockholder Vote........................................... 21
6.16. Notification of Certain Matters............................................. 21
6.17. Indemnification and Insurance............................................... 22
6.18. Production of Documents by the Company Pending the Merger................... 23
6.19. Tax and Accounting Treatment................................................ 23
6.20. Rule 145.................................................................... 23
7. CONDITIONS TO OBLIGATIONS OF EACH PARTY.............................................. 23
7.01. Approval of Stockholders.................................................... 23
7.02. Fairness Opinions........................................................... 23
7.03. AMEX Approval............................................................... 23
7.04. No Stop Order............................................................... 23
7.05. Pooling Letters............................................................. 24
7.06. Tax Opinion................................................................. 24
7.07. No Action or Proceeding..................................................... 24
7.08. Other Approvals............................................................. 24
8. CONDITIONS TO OBLIGATIONS OF PARENT AND SUB.......................................... 24
8.01. Representations and Warranties True on the Closing Date..................... 24
8.02. The Company's Performance................................................... 24
8.03. Officers' Certificate....................................................... 24
8.04. Authority................................................................... 24
8.05. Opinion of Counsel.......................................................... 24
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
8.06. Affiliate Letters........................................................... 25
8.07. Comfort Letters............................................................. 25
8.08. No Company Material Adverse Effect.......................................... 25
8.09. Company Stockholder Exercise of Appraisal Rights............................ 25
9. CONDITIONS TO OBLIGATIONS OF THE COMPANY............................................. 25
9.01. Representations and Warranties True on the Closing Date..................... 25
9.02. Parent's and Sub's Performance.............................................. 25
9.03. Officers' Certificate....................................................... 25
9.04. Authority................................................................... 25
9.05. Opinion of Parent Counsel................................................... 25
9.06. Comfort Letters............................................................. 25
9.07. No Parent Material Adverse Effect........................................... 25
10. TERMINATION.......................................................................... 26
10.01. Termination................................................................. 26
10.02. Effect of Termination....................................................... 26
10.03. Liability of the Parties.................................................... 27
10.04. Termination Fee............................................................. 27
11. MISCELLANEOUS........................................................................ 27
11.01. Nonsurvival of Representations, Warranties and Agreements................... 27
11.02. Notices..................................................................... 28
11.03. Assignability and Parties in Interest; Third Party Beneficiaries............ 28
11.04. Governing Law............................................................... 29
11.05. Counterparts................................................................ 29
11.06. Publicity................................................................... 29
11.07. Complete Agreement.......................................................... 29
11.08. Specific Performance........................................................ 29
11.09. Modifications, Amendments and Waivers....................................... 29
11.10. Headings.................................................................... 29
11.11. Severability................................................................ 29
11.12. Obligation of Parent........................................................ 29
11.13. Certain Definitions......................................................... 30
</TABLE>
iii
<PAGE> 5
INDEX OF TERMS
DEFINED TERM SECTION
- ------------ -------
Affiliate................................................................. 11.13
Agreement.............................................................. Preamble
AMEX................................................................... 3.05(ii)
Certificate of Merger...................................................... 1.02
Certificates........................................................... 3.02(ii)
Closing.................................................................... 1.03
Closing Agreement.......................................................... 4.11
Closing Bid Price.................................................. 3.01(iii)(C)
Closing Date............................................................... 1.03
Closing Parent Common Stock Price.................................. 3.01(iii)(C)
Code................................................................... Preamble
Commission................................................................. 4.07
Common Shares Trust.................................................... 3.05(ii)
Communications Act......................................................... 4.05
Company................................................................ Preamble
Company Appraisal Rights Stockholder................................... 3.01(iv)
Company Class A Common Stock........................................... Preamble
Company Commission Filings................................................. 4.07
Company Common Stock................................................... Preamble
Company Confidentiality Agreement.......................................... 6.06
Company Financial Statements.......................................... 4.11(iii)
Company Material Adverse Effect............................................ 4.01
Company Options............................................................ 4.02
Company PUC Approvals...................................................... 4.05
Company Schedule of Exceptions................................................ 4
Company Stock.......................................................... Preamble
Company Stock Option Plans................................................. 4.02
Company's Balance Sheet............................................ 3.01(iii)(E)
Confidentiality Agreement.................................................. 6.04
Conversion Number...................................................... 3.01(iv)
DGCL....................................................................... 1.01
Effective Time............................................................. 1.02
Employee Plan(s)........................................................... 4.21
Environmental Actions.................................................... 4.17C.
Environmental Law........................................................ 4.17D.
ERISA...................................................................... 4.21
Excess Shares.......................................................... 3.05(ii)
Exchange Act............................................................... 4.05
Exchange Agent.......................................................... 3.02(i)
Exchange Fund........................................................... 3.02(i)
FCC Approvals.............................................................. 4.05
GAAP....................................................................... 4.07
Governmental Entity........................................................ 4.05
Hazardous Discharge...................................................... 4.17A.
Hazardous Materials...................................................... 4.17B.
HSR Act.................................................................... 4.05
Individual Grant........................................................... 5.02
Injunction................................................................. 7.07
Proxy Statement............................................................ 6.05
Material Assets............................................................ 4.12
iv
<PAGE> 6
DEFINED TERM SECTION
- ------------ -------
Merger..................................................................... 1.01
Merger Consideration............................................... 3.01(iii)(B)
Notice..................................................................... 8.09
PUCs....................................................................... 4.05
PUC Approvals.............................................................. 5.05
Parent................................................................. Preamble
Parent Commission Filings.................................................. 5.06
Parent Common Stock.................................................... Preamble
Parent Confidentiality Agreement........................................... 6.06
Parent Material Adverse Effect............................................. 5.01
Parent Options............................................................. 5.02
Parent PUC Approvals....................................................... 5.05
Parent Preferred Stock................................................. Preamble
Parent Schedule of Exceptions................................................. 5
Parent Stock Option........................................................ 6.11
Parent Stock Option Plans.................................................. 5.02
Rule 145 Affiliate......................................................... 6.09
Securities Act............................................................. 4.02
S-4........................................................................ 6.05
Sprint............................................................. 3.01(iii)(E)
Sprint Adjustment Amount........................................... 3.01(iii)(F)
Stockholder's Equity Adjustment Amount............................. 3.01(iii)(D)
Stockholder's Equity Amount........................................ 3.01(iii)(E)
Stockholders' Meeting...................................................... 4.15
Sub.................................................................... Preamble
Sub Common Stock....................................................... Preamble
Subsidiary................................................................. 4.03
Surviving Corporation...................................................... 1.01
Taxes...................................................................... 4.11
Tax Return................................................................. 4.11
Tax Ruling................................................................. 4.11
Third Party Transaction.................................................... 6.04
1988 Plan.................................................................. 4.02
1994 Plan.................................................................. 4.02
v
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of June 14, 1996
by and among PHOENIX NETWORK, INC., a Delaware corporation ("Parent"), Phoenix
Merger Corp., a Delaware corporation ("Sub"), and AmeriConnect, Inc., a Delaware
corporation (the "Company").
WHEREAS, the authorized capital stock of Parent consists of 5,000,000
shares of Preferred Stock, $.001 par value ("Parent Preferred Stock"), and
30,000,000 shares of Common Stock, $.001 par value ("Parent Common Stock");
WHEREAS, the authorized capital stock of Sub consists of 100 shares of
Common Stock, $.001 par value ("Sub Common Stock");
WHEREAS, all of the issued and outstanding shares of Sub Common Stock are
owned by Parent;
WHEREAS, the authorized capital stock of the Company consists of 20,000,000
shares of Common Stock, par value $.01 per share ("Company Common Stock"), and
10,000,000 shares of Class A Common Stock, par value $.00001 per share (the
"Company Class A Common Stock" and, together with the Company Common Stock, the
"Company Stock");
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
deem it advisable and in the best interests of their respective stockholders
that Sub shall merge with and into the Company upon the terms and subject to the
conditions of this Agreement;
WHEREAS, for financial accounting purposes, it is a condition to the
Closing that the merger be accounted for as a "pooling of interests;"
WHEREAS, the parties intend that such merger be treated as a reorganization
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended (the "Code"); and
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein contained, the parties hereto agree as set forth
below:
1. THE MERGER AND EFFECTIVE TIME.
1.01. The Merger. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time (as defined in Section 1.02 hereof), the
separate existence and corporate organization of Sub shall cease and the Sub
shall be merged with and into the Company (the "Merger"), which shall be (and is
hereinafter sometimes referred to as) the "Surviving Corporation." The corporate
existence of the Company with all its rights, privileges, powers and franchises
shall continue unaffected and unimpaired by the Merger, and as the Surviving
Corporation it shall be governed by the laws of the State of Delaware and
succeed to all rights, privileges, powers, franchises, assets, liabilities and
obligations of Sub in accordance with the Delaware General Corporation Law (the
"DGCL"). The Merger shall have the effects specified in the DGCL.
1.02. The Effective Time of the Merger. Upon the terms and subject to the
conditions of this Agreement, the Merger shall become effective at the time (the
"Effective Time") of filing with the Secretary of State of the State of Delaware
of a certificate of merger (the "Certificate of Merger") in such form as is
required by, and executed in accordance with, the applicable provisions of the
DGCL, or at such later time as may be agreed to by Parent and the Company and
specified in the Certificate of Merger. The parties will cause the Certificate
of Merger to be filed with the Secretary of State of the State of Delaware as
soon as practicable on or after the Closing Date (as defined in Section 1.03).
1.03. Closing. The closing of the Merger (the "Closing") will take place at
10:00 a.m. local time, on a date specified by the parties, but in no event later
than two business days after the satisfaction or, if permissible, waiver of the
conditions set forth in Articles 7, 8 and 9 hereof (the date and time of the
Closing being hereinafter referred to as the "Closing Date"), at the offices of
Freeborn & Peters, 950 Seventeenth Street, Suite 2600, Denver, Colorado 80202,
unless another time or place is agreed to by the parties hereto.
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2. CERTIFICATE OF INCORPORATION; BY-LAWS; DIRECTORS AND OFFICERS.
2.01. Certificate of Incorporation. The Certificate of Incorporation of the
Company, as in effect immediately prior to the Effective Time, shall be amended
at the Effective Time to change Article Fourth thereof to read in full as
follows: "FOURTH: The total number of shares which the Corporation shall be
authorized to issue is 100 shares of common stock, $.001 par value."
From and after the Effective Time, said Certificate of Incorporation, as so
amended, shall continue as the Certificate of Incorporation of the Surviving
Corporation, until amended as provided by law.
2.02. By-laws. The By-laws of the Company, as in effect at the Effective
Time, shall continue to be the Bylaws of the Surviving Corporation, until
altered, amended or repealed in accordance with law, the Certificate of
Incorporation of the Surviving Corporation or said By-laws.
2.03. Directors and Officers. The directors of the Surviving Corporation at
and immediately following the Effective Time shall be Wallace M. Hammond and
Jeffrey Bailey, to serve in accordance with the By-laws of the Surviving
Corporation. The officers of the Surviving Corporation at and immediately
following the Effective Time shall be Wallace M. Hammond and Jeffrey Bailey, to
serve in accordance with the By-laws of the Surviving Corporation.
3. CONVERSION AND EXCHANGE OF SHARES.
The manner and basis of converting at the Effective Time Company Stock into
Parent Common Stock and the exchange of certificates therefor shall be as set
forth herein.
3.01. Conversion of Shares. (i) Each share of Sub Common Stock issued and
outstanding as of the Effective Time shall, by virtue of the Merger and without
any action on the part of Parent, the sole stockholder of Sub, be converted into
one share of legally and validly issued, fully paid and nonassessable common
stock, $.001 par value, of the Surviving Corporation. Each stock certificate of
Sub evidencing ownership of Sub Common Stock shall by virtue of the Merger
evidence ownership of common stock of the Surviving Corporation.
(ii) Each share of Company Stock held in the treasury of the Company and
each share of Company Stock owned by any Subsidiary (as defined in Section 4.03
below) of the Company immediately prior to the Effective Time shall be canceled
and retired and shall cease to exist and no Parent Common Stock or other
consideration shall be delivered in exchange for such shares.
(iii) Subject to Section 3.05, each share of Company Stock issued and
outstanding as of the Effective Time (except shares of Company Stock canceled as
provided in (ii) above and shares held by a Company Appraisal Rights Stockholder
(as hereinafter defined) who has perfected his or her appraisal rights as set
forth in Section 3.01 (v)) shall, by virtue of the Merger and without any action
on the part of the holder thereof, be converted into the right to receive the
Conversion Number of fully paid and nonassessable shares of Parent Common Stock.
For purposes of this Section 3.01(iii), the following terms shall have the
following meanings:
(A) "Conversion Number" shall mean the number equal to the quotient
obtained by dividing (1) the quotient obtained by dividing the Merger
Consideration (as hereinafter defined) by the Closing Parent Common Stock
Price by (2) the sum of (a) the number of shares of Company Stock
outstanding immediately prior to the Effective Time and (b) the number of
shares of Company Stock underlying Company Options (as hereinafter defined)
outstanding immediately prior to the Effective Time;
(B) "Merger Consideration" shall mean an amount equal to $15,130,119
minus (i) the Stockholders' Equity Adjustment Amount and (ii) all severance
payments to be made by the Company to the officers and directors of the
Company because of this Agreement and the transactions contemplated hereby,
to the extent such payments are not already reflected in the Company's
Balance Sheet (as hereinafter defined);
(C) "Closing Parent Common Stock Price" shall mean (i) $5.25 if the
closing price of a share of Parent Common Stock on the American Stock
Exchange on the day immediately preceding the Closing
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(the "Closing Bid Price") is equal to or greater than $4.50 and equal to or
less than $6.00, (ii) if the Closing Bid Price is less than $4.50, $5.25
minus 50% of the amount the Closing Bid Price is less than $4.50, or (iii)
if the Closing Bid Price is more than $6.00, $5.25 plus 50% of the amount
the Closing Bid Price is greater than $6.00.
(D) "Stockholders' Equity Adjustment Amount" shall be equal to the
amount, if any, by which the Stockholders' Equity Amount is less than
$250,000;
(E) "Stockholders' Equity Amount" shall mean an amount equal to the
number that results from (1) the stockholders' equity of the Company as
determined from the Company's balance sheet, prepared in accordance with
GAAP, as of the close of business on the last day of the month preceding
the Closing Date (the "Company's Balance Sheet"), plus (2) the Sprint
Adjustment Amount, minus (3) all Transaction Expenses that accrue or are
paid after the date of the Company's Balance Sheet, and minus (4) all
liabilities of the Company to Sprint Communications Company L.P. ("Sprint")
in respect of shortfall amounts as of the date of the Company's Balance
Sheet; provided, that, in the event that such sum exceeds $250,000, the
Stockholders' Equity Amount shall mean an amount equal to $250,000;
(F) "Sprint Adjustment Amount" shall mean an amount equal to any
billing credits which the Company or the Parent on behalf of the Company is
entitled to receive from Sprint prior to the Company's Balance Sheet that
are not otherwise reflected in the Company's Balance Sheet;
(G) "Transaction Expenses" shall mean accounting fees and expenses,
attorney fees and expenses, and investment banking fees and expenses of
George K. Baum & Company paid or accrued for by the Company with regard to
the negotiation and execution of this Agreement and the consummation of the
transactions set forth herein.
(iv) Any holder of Company Stock that, as of the Effective Time, has taken
all steps necessary to perfect his or her appraisal rights pursuant to Section
262 of the DGCL (a "Company Appraisal Rights Stockholder") and who subsequently
withdraws or loses its appraisal rights after the Effective Time, shall be
deemed for purposes of the Merger to have consented to the Merger and shall
receive the consideration set forth in Section 3.01(iii).
(v) Any Company Appraisal Rights Stockholder that has effectively perfected
his or her appraisal rights pursuant to Section 262 of the DGCL shall receive
all cash for his or her Company Stock in an amount determined in accordance with
the provisions of Section 262 of the DGCL.
(vi) In the event of any stock split, combination, reclassification,
recapitalization, exchange, stock dividend or other distribution payable in
Parent Common Stock with respect to shares of Parent Common Stock (or if a
record date with respect to any of the foregoing should occur) during the period
between the date of this Agreement and the Effective Time, then the Conversion
Number will be appropriately adjusted to reflect such stock split, combination,
reclassification, recapitalization, exchange, stock dividend or other
distribution.
3.02. Exchange of Certificates. (i) As of the Effective Time, Parent shall
deposit with such bank or trust company designated by Parent and reasonably
acceptable to the Company (the "Exchange Agent"), for the benefit of the holders
of shares of Company Stock, for exchange in accordance with this Article 3,
through the Exchange Agent, certificates representing the shares of Parent
Common Stock (such shares of Parent Common Stock, together with any dividends or
distributions with respect thereto being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Section 3.01 in exchange for outstanding
shares of Company Stock. The Exchange Agent shall, pursuant to irrevocable
instructions, deliver the Parent Common Stock contemplated to be issued pursuant
to Section 3.01 out of the Exchange Fund. The Exchange Fund shall not be used
for any other purpose. Parent Common Stock into which Company Stock shall be
converted pursuant to the Merger shall be deemed to have been issued at the
Effective Time.
(ii) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of Company Stock (the "Certificates") whose shares were
converted pursuant to
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Section 3.01 into the right to receive shares of Parent Common Stock (A) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as Parent and the Company may reasonably specify) and (B)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of Parent Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, and such other documents as Parent or the Exchange
Agent shall reasonably request, the holder of such Certificate shall be entitled
to receive promptly in exchange therefor a certificate representing that number
of shares (rounded down to the nearest whole number) of Parent Common Stock
which such holder has the right to receive pursuant to the provisions of this
Article 3 (together with any dividends or distributions with respect thereto
pursuant to Section 3.03 and any cash in lieu of fractional shares of Parent
Common Stock pursuant to Section 3.05), and the Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of Company Stock
which is not registered in the transfer records of the Company, a certificate
representing the proper number of shares of Parent Common Stock may be issued to
a transferee if the Certificate representing such Company Stock is presented to
the Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 3.02, each Certificate
shall be deemed at any time after the Effective Time to represent only the right
to receive upon such surrender the certificate representing shares of Parent
Common Stock and cash in lieu of any fractional shares of Parent Common Stock as
contemplated by this Section 3.02 and Section 3.05, respectively. The Exchange
Agent shall not be entitled to vote or exercise any rights of ownership with
respect to the Parent Common Stock held by it from time to time hereunder,
except that it shall receive and hold all dividends or other distributions paid
or distributed with respect thereto for the account of persons entitled thereto.
3.03. Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby, and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to Section 3.05, unless and
until the holder of such Certificate shall surrender such Certificate in
accordance with Section 3.02. Subject to the effect of applicable laws,
following surrender of any such Certificate, there shall be paid to the record
holder of the certificates representing whole shares of Parent Common Stock
issued in exchange therefor, without interest, (i) at the time of such
surrender, the amount of any cash payable in lieu of a fractional share of
Parent Common Stock to which such holder is entitled pursuant to Section 3.05
and the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Parent
Common Stock, and (ii) at the appropriate payment date, the amount of dividends
or the distributions with a record date on or after the Effective Time but prior
to surrender and a payment date subsequent to surrender payable with respect to
such whole shares of Parent Common Stock. Subject to applicable law, no holder
of an unsurrendered Certificate shall be entitled, until the surrender of such
Certificate to vote the shares of Parent Common Stock into which his Company
Stock shall have been converted.
3.04. No Further Ownership Rights in Company Stock. All shares of Parent
Common Stock issued upon the surrender for exchange of shares of Company Stock
in accordance with the terms hereof (including any cash paid pursuant to Section
3.03 or 3.05) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Stock, subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have been
declared or made by the Company on such shares of Company Stock in accordance
with the terms of this Agreement or prior to the date hereof and which remain
unpaid at the Effective Time, and, on and after the Effective Time, there shall
be no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of Company Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article 3.
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3.05. No Fractional Shares. (i) No certificates or scrip representing
fractional shares of Parent Common Stock shall be issued in the Merger upon the
surrender for exchange of Certificates pursuant to Section 3.02 and such
fractional interests shall not entitle the owner thereof to vote or to any
rights as a security holder of Parent.
(ii) All fractional shares of Parent Common Stock that a holder of Company
Stock would otherwise be entitled to receive as a result of the Merger (the
"Excess Shares") shall be aggregated by the Exchange Agent and sold on the
American Stock Exchange ("AMEX") through one or more member firms of the AMEX
and shall be executed in round lots to the extent practicable. Until the net
proceeds of such sale or sales have been distributed to the holders of Company
Stock, the Exchange Agent will hold such proceeds in trust for the holders of
Company Stock (the "Common Shares Trust"). Parent shall pay all commissions,
transfer taxes and other out-of-pocket transaction costs, including the expenses
and compensation of the Exchange Agent, incurred in connection with such sale of
the Excess Shares. The Exchange Agent shall determine the portion of the Common
Shares Trust to which each holder of Company Stock shall be entitled, if any, by
multiplying the amount of the aggregate net proceeds comprising the Common
Shares Trust by a fraction, the numerator of which is the amount of the
fractional share interest to which such holder of Company Stock is entitled and
the denominator of which is the aggregate amount of fractional share interests
to which all holders of Company Stock are entitled.
(iii) As soon as practicable after the determination of the amount of cash,
if any, to be paid to holders of Company Stock in lieu of any fractional share
interests, the Exchange Agent shall mail such amounts to such holders of Company
Stock; provided, that no such amount shall be paid to any holder of Company
Stock prior to the surrender by such holder of the Certificate formerly
representing such holder's Company Stock.
3.06. Termination of Exchange Fund. Any portion of the Exchange Fund and
the Common Shares Trust which remains undistributed to the stockholders of the
Company as of the date which is twelve months after the Effective Time shall be
delivered to Parent, upon demand, and any stockholders of the Company who have
not theretofore complied with this Article 3 shall thereafter look only to
Parent for payment of their claim for Parent Common Stock, any cash in lieu of
fractional shares of Parent Common Stock pursuant to Section 3.05 and any
dividends or distributions with respect to Parent Common Stock pursuant to
Section 3.03.
3.07. No Liability. None of Parent, the Surviving Corporation or the
Exchange Agent shall be liable to any holder of shares of Company Stock or
Parent Common Stock, as the case may be, for such shares (or dividends or
distributions with respect thereto) or cash from the Common Shares Trust
delivered to a state abandoned property administrator or other public official
pursuant to any applicable abandoned property, escheat or similar law.
3.08. Lost Certificates. In the event any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed, the Exchange Agent
will issue in exchange for such lost, stolen or destroyed Certificate the shares
of Parent Common Stock (and any dividends or distributions with respect thereto
and any cash pursuant to Section 3.05) deliverable in respect thereof as
determined in accordance with Section 3.02. When authorizing such payment in
exchange for any lost, stolen or destroyed Certificate, the person to whom the
Parent Common Stock is to be issued shall, as a condition precedent to the
issuance thereof, give Parent a bond satisfactory to Parent in such sum as it
may direct or otherwise indemnify Parent in a manner satisfactory to Parent
against any claim that may be made against Parent or the Surviving Corporation
with respect to the Certificate alleged to have been lost, stolen or destroyed.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as disclosed in the schedule of exceptions (the "Company Schedule of
Exceptions") attached hereto and made a part hereof, the Company represents and
warrants to Parent and Sub as follows:
4.01. Organization. The Company and each of its Subsidiaries (as defined in
Section 4.03) is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, has requisite power
and authority to carry on its business now being conducted and to own or
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lease and operate the assets and properties now owned or leased and operated by
it, except where the failure to be so organized, existing and in good standing
or to have such power and authority would not individually or in the aggregate
have a material adverse effect on the business, operations, properties, assets,
liabilities, condition (financial or otherwise), prospects or results of
operations of the Company and its Subsidiaries, taken as a whole (a "Company
Material Adverse Effect"). Each of the Company and its Subsidiaries is duly
qualified or licensed to do business and in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
where the failure to be so duly qualified or licensed and in good standing would
not, individually or in the aggregate, have a Company Material Adverse Effect.
4.02. Capitalization. As of the date hereof, the authorized capital stock
of the Company consists of 20,000,000 shares of Company Common Stock and
10,000,000 shares of Company Class A Common Stock. As of the close of business
on June 6, 1996, (i) 6,339,361 shares of Company Common Stock were issued and
outstanding, (ii) 592,033 shares of Company Class A Common Stock were issued and
outstanding, (iii) 180,250 shares of Company Common Stock were held by the
Company in its treasury and (iv) 5,970,000 shares of Company Class A Common
Stock were held in its treasury. All the outstanding shares of Company Stock
are, and all shares of Company Stock which will be outstanding at the Effective
Time will be, duly authorized and validly issued, fully paid and nonassessable,
are not and will not be subject to or issued in violation of any preemptive
rights. All outstanding Company Options (as hereinafter defined), granted by the
Company have been duly granted in accordance with the terms of the Company Stock
Option Plans (as hereinafter defined). The Company Stock Option Plans that have
been adopted in accordance with the DGCL, and the Company's Certificate of
Incorporation and By-laws, by the board of directors and the stockholders of the
Company. The Company has reserved sufficient shares of Company Common Stock for
issuance upon the exercise of outstanding Company Options. No bonds, debentures,
notes or other indebtedness having general voting rights (or convertible into
securities having such rights) of the Company are issued or outstanding. There
are no outstanding contractual obligations of the Company to repurchase, redeem
or otherwise acquire any shares of capital stock of the Company and, except as
contemplated by this Agreement, there are not now, and at the Effective Time
there will not be, any voting trusts or other agreements or understandings to
which the Company is a party or is bound which will limit in any way the
solicitation of proxies by or on behalf of the Company from, or the casting of
votes by, the stockholders of the Company with respect to the Merger. As of June
6, 1996, 470,500 shares of Company Common Stock were reserved for issuance upon
the exercise of stock options outstanding as of the date hereof (the "Company
Options") under the Company's 1988 Stock Option Plan (the "1988 Plan") and the
Company's 1994 Stock Option Plan (the "1994 Plan" and, together with the 1988
Plan, the "Company Stock Option Plans"). Except for the Company Options, there
are no options, calls, subscriptions, warrants, rights, agreements or
commitments of any character obligating the Company to issue shares of its
capital stock or to register shares of its capital stock under the Securities
Act of 1933, as amended (the "Securities Act"), or any other applicable
securities laws.
4.03. Subsidiaries. Section 4.03 of the Company Schedule of Exceptions sets
forth the name of each Subsidiary (as defined below) of the Company, the percent
of outstanding voting stock or other equity interest of such Subsidiary held
directly or indirectly by the Company, the jurisdiction of such Subsidiary's
organization and the other jurisdictions in which such Subsidiary is qualified
to do business. The Company owns, directly or indirectly, free and clear of all
covenants, conditions, restrictions, voting trust arrangements, voting
agreements, liens, charges, encumbrances, options and adverse claims and rights
of any kind whatsoever, and has the unrestricted power to dispose of and vote,
all of the outstanding capital stock or other equity interest held by it of each
Subsidiary. Except as disclosed in Section 4.03 of the Company Schedule of
Exceptions, there are no outstanding options, warrants or other rights to
subscribe for or purchase from the Company or any Subsidiary, or any plans,
contracts or commitments providing for the issuance of, or the granting of
rights to acquire (i) any capital stock of or other ownership interest in any
Subsidiary or (ii) any securities convertible into or exchangeable for any
capital stock of or other ownership interests in any Subsidiary. All of the
outstanding shares of each class of capital stock of each Subsidiary have been
validly issued, are fully paid and non-assessable and were not issued in
violation of any preemptive rights. Except for the Subsidiaries, neither the
Company nor any Subsidiary of the Company owns greater than a twenty percent
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(20%) equity interest, directly or indirectly, in any corporation, partnership,
joint venture, business, trust or other entity, other than any investments owned
by Company Employee Plans. As used in this Agreement, the term "Subsidiary"
means, with respect to any party, any corporation or other organization, whether
incorporated or unincorporated, of which (A) such party or any other Subsidiary
of such party is a general partner (excluding partnerships the general
partnership interests of which held by such party or any Subsidiary of such
party do not have a majority of the voting interest in such partnerships) or (B)
at least a majority of the securities or other interests having by their terms
ordinary voting power to elect a majority of the board of directors or others
performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or by
any one or more of such party's Subsidiaries, or by such party and one or more
of its Subsidiaries.
4.04. Authority. The Company has the requisite power and authority to
execute and deliver this Agreement and all other agreements and documents
contemplated hereby and, subject, with respect to consummation of the Merger, to
approval of this Agreement and the Merger by the stockholders of the Company in
accordance with the DGCL and the Company's Certificate of Incorporation, to
perform its obligations hereunder. The execution, delivery and performance of
this Agreement and all other agreements and documents contemplated hereby and
the consummation of the Merger and of the other transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of the
Company, subject, with respect to consummation of the Merger, to approval of
this Agreement and the Merger by the stockholders of the Company in accordance
with the DGCL and the Company's Certificate of Incorporation. This Agreement has
been duly executed and delivered by the Company and, subject, with respect to
consummation of the Merger, to the approval of this Agreement and the Merger by
the stockholders of the Company in accordance with the DGCL and the Company's
Certificate of Incorporation, and, assuming this Agreement constitutes the valid
and binding obligation of Parent and Sub, constitutes the valid and binding
obligations of the Company, enforceable against the Company in accordance with
its terms, except as may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally, and subject to general principles of equity.
4.05. Consents and Approvals; No Violations. Except for (i) filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Act, the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
promulgated thereunder, (ii) filings as may be required under any state
securities or blue sky laws, (iii) any filing of a premerger notification report
by the Company required under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), and the expiration of the applicable
waiting period, (iv) the filing and recordation of the Certificate of Merger as
required by the DGCL, (v) such filings, authorizations, orders and approvals
(the "FCC Approvals") as may be required under the Communications Act of 1934,
as amended (the "Communications Act"), and (vi) the necessary approvals, if any,
of the state public utilities commissions or similar state regulatory bodies
("PUCs") having jurisdiction over the Company or any of its Subsidiaries (the
"Company PUC Approvals"), pursuant to applicable state laws or regulations, no
filing with or notice to, and no permit, authorization, consent or approval of,
any court or tribunal or administrative, governmental or regulatory body, agency
or authority (a "Governmental Entity") is necessary for the execution and
delivery by the Company of this Agreement or the consummation by the Company of
the transactions contemplated hereby, except where the failure to obtain such
permits, authorizations, consents or approvals or to make such filings or give
such notice would not have a Company Material Adverse Effect. Subject, with
respect to consummation of the Merger, to the approval of this Agreement and the
Merger by the stockholders of the Company in accordance with the DGCL and the
Company's Certificate of Incorporation, neither the execution, delivery and
performance of this Agreement by the Company nor the consummation by the Company
of the transactions contemplated hereby will (a) conflict with or result in any
breach of any provision of the respective Certificates of Incorporation or
By-laws of the Company or of any of its Subsidiaries, (b) result in a violation
or breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration) under, or result in the creation of a lien or
other encumbrance on any properties or assets of the Company or any of its
Subsidiaries under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, license, contract, agreement or other instrument or
obligation to which the Company or any of its Subsidiaries
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is a party or by which any of them or any of their respective properties or
assets may be bound or (c) violate any order, writ, injunction, decree, law,
statute, rule or regulation applicable to the Company or any of its Subsidiaries
or any of their respective properties or assets, except where a waiver with
respect thereto has been or will, prior to Closing, be obtained or except in the
case of (b) or (c) for violations, breaches or defaults which would not,
individually or in the aggregate, have a Company Material Adverse Effect.
4.06. No Default. Except as set forth in Section 4.06 of the Company
Schedule of Exceptions, none of the Company or any of its Subsidiaries is in
default or violation (and no event has occurred which with or without due notice
or the lapse of time or both would constitute a default or violation) of any
term, condition or provision of (i) its Certificate of Incorporation or By-laws
(or similar governing documents), (ii) any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument or obligation to which
the Company or any of its Subsidiaries is now a party or by which any of them or
any of their respective properties or assets may be bound or (iii) any order,
writ, injunction, decree, law, statute, rule or regulation applicable to the
Company, any of its Subsidiaries or any of their respective properties or
assets, except in the case of (ii) or (iii) for violations, breaches or defaults
that would not, individually or in the aggregate, have a Company Material
Adverse Effect.
4.07. SEC Reports and Financial Statements. The Company has heretofore
delivered to Parent true and complete copies of all reports, registration
statements, definitive proxy statements and other documents (in each case,
together with all amendments thereto) filed by the Company with the Securities
and Exchange Commission (the "Commission") since January 1, 1992 (such reports,
registration statements, definitive proxy statements and other documents,
together with any amendments thereto, are sometimes collectively referred to as
the "Company Commission Filings"). As of their respective dates, each of the
Company Commission Filings complied as to form in all material respects with the
applicable requirements of the Securities Act, the Exchange Act and the rules
and regulations thereunder applicable to the Company Commission filings and none
of the Company Commission Filings when filed contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. When filed with the Commission, the
financial statements included in the Company Commission Filings complied as to
form in all material respects with the applicable rules and regulations of the
Commission under the Securities Act and the Exchange Act with respect thereto
and were prepared in accordance with generally accepted accounting principles
("GAAP") (as in effect from time to time) applied, except as noted in the
immediately succeeding sentence, on a consistent basis during the periods
involved, and such financial statements fairly present in accordance with the
applicable requirements of GAAP the consolidated financial position of the
Company and its consolidated Subsidiaries as of the dates thereof and the
consolidated results of their operations and their consolidated cash flows for
the periods then ended, subject, in the case of the unaudited interim financial
statements, to normal, recurring year-end audit adjustments. As disclosed in the
Company Commission Filings, effective January 1, 1993, the Company changed its
method of accounting for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
4.08. Absence of Undisclosed Liabilities. Except as and to the extent
disclosed in the Company Commission Filings filed prior to the date hereof,
there are no liabilities or obligations of the Company or any of its
Subsidiaries of any nature, whether or not accrued, contingent or otherwise,
that would be required by GAAP to be reflected on a consolidated balance sheet
of the Company and its Subsidiaries (including the notes thereto), other than
(i) liabilities disclosed in the Company Commission Filings, (ii) liabilities
incurred since December 31, 1995 in the ordinary course of business and which
would not have, individually or in the aggregate, a Company Material Adverse
Effect, (iii) liabilities set forth in Section 4.08 of the Company Schedule of
Exceptions, and (iv) liabilities under this Agreement.
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4.09. Conduct of Business -- Events Subsequent to December 31, 1995. Except
as set forth in Section 4.09 of the Company Schedule of Exceptions, subsequent
to December 31, 1995, there has not been any event that would have a Company
Material Adverse Effect. Without limiting the generality of the foregoing,
except as set forth in Section 4.09 of the Company Schedule of Exceptions, since
that date there has not been:
(1) any increase in compensation payable to, or any employment, bonus
or compensation agreement entered into with, any employee or consultant of
the Company, other than in the ordinary course of business consistent with
past practices;
(2) any loan to, or other transaction with, any of the Company's
directors, officers, and employees by the Company outside the ordinary
course of business;
(3) any amendment to the Certificate of Incorporation or By-Laws of
the Company, or any split, combination or reclassification of the Company's
securities, or any declaration, setting aside or payment of any dividend or
other distribution;
(4) any declaration, setting aside or payment of any dividends or
distributions in respect of the shares of its capital stock or any
issuance, sale, transfer or any commitment to issue, sell or transfer by
the Company or a Subsidiary (other than dividends by a Subsidiary to the
Company), any shares of its capital stock, or any redemption, purchase or
other acquisition of any of their respective securities, other than
pursuant to the exercise of options pursuant to the Company Stock Option
Plans.
(5) any grant of Company Options.
(6) any material transactions between the Company or any of its
Subsidiaries on the one hand, and any (i) officer or director of the
Company or any of its Subsidiaries, (ii) record or beneficial owner of five
percent or more of the voting securities of the Company or (iii) affiliate
of any such officer, director or beneficial owner, on the other hand, other
than payment of compensation for services rendered to the Company or any of
its Subsidiaries.
4.10. Compliance With Law. The Company and its Subsidiaries hold, and are
in compliance in all material respects with, all licenses, permits and
authorizations necessary for the lawful conduct of their respective businesses,
and are not in violation of any applicable Federal, state, local or foreign
statutes, laws, ordinances, rules and regulations except such licenses, permits
and authorizations the lack of which, and for violations of which, individually
or in the aggregate, would not have a Company Material Adverse Effect or impair
the Company's ability to consummate the Merger and the other transactions
contemplated by this Agreement.
4.11. Tax Matters. For the purpose of this Section 4.11, "Taxes" means any
federal, state, county, local or foreign taxes, charges, fees, levies, or other
assessments, including, without limitation, all income, excise, alternative
minimum, sales and use, ad valorem, transfer, gains, profits, excise, franchise,
real and personal property, gross receipt, capital stock, production, business
and occupation, disability, employment, payroll, license, estimated, stamp,
custom duties, severance or withholding taxes or charges imposed by any
governmental entity, and includes any interest and penalties thereon or
additions thereto and "Tax Return" means any report, return or other information
supplied or required to be supplied to a governmental entity with respect to
Taxes. Except as set forth in Section 4.11 of the Company Schedule of
Exceptions: (i) as of the Closing Date the Company and each of its Subsidiaries
will have filed all Tax Returns required to be filed by applicable law and all
Tax Returns were in all respects (and, as to Tax Returns not filed as of the
date hereof, will be) true, complete and correct and filed on a timely basis,
(ii) the Company and each of its Subsidiaries have, within the time and in the
manner prescribed by law, paid (and until the Closing Date will pay within the
time and in the manner prescribed by law) all Taxes that are due and payable;
(iii) the Company and each of its Subsidiaries have established (and until the
Closing Date will maintain) on their books and records reserves adequate to pay
all Taxes not yet due and payable in accordance with GAAP which are reflected in
the financial statements delivered to Parent pursuant to Section 4.07 (the
"Company Financial Statements") to the extent required; (iv) there are no Tax
liens upon the assets of the Company or any of its Subsidiaries except liens for
Taxes not yet due; (v) the Company and each of its Subsidiaries have complied
(and until the
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<PAGE> 16
Closing Date will comply) in all respects with the provisions of the Code
relating to the payment and withholding of Taxes, including, without limitation,
the withholding and reporting requirements under Code Sections 1441 through
1464, 3401 through 3606, and 6041 and 6049, as well as similar provisions under
any other laws, and have, within the time and in the manner prescribed by law,
withheld from employee wages and paid over to the proper governmental
authorities all amounts required; (vi) neither the Company nor any of its
Subsidiaries has requested any extension of time within which to file any Tax
Return, which Tax Return has not since been filed; (vii) neither the Company nor
any of its Subsidiaries has executed any outstanding waivers or comparable
consents regarding the application of the statute of limitations with respect to
any Taxes or Tax Returns for which the statute of limitations has not yet
expired; (viii) no deficiency for any Taxes has been proposed, asserted or
assessed against the Company or any of its Subsidiaries that has not been
resolved and paid in full; (ix) no audits or other administrative proceedings or
court proceedings are presently in progress or pending (or, to the best of the
knowledge of the Company or any of its Subsidiaries, threatened) with regard to
any Taxes or Tax Returns of the Company or any of its Subsidiaries; (x) neither
the Company nor any of its Subsidiaries has received a Tax Ruling (as defined
below) or entered into a Closing Agreement (as defined below) with any taxing
authority that would have a continuing adverse effect after the Effective Time
("Tax Ruling" shall mean a written ruling of a taxing authority relating to
Taxes and "Closing Agreement" shall mean a written and legally binding agreement
with a taxing authority relating to Taxes); (xi) the Company and its
Subsidiaries have made available to Parent complete and accurate copies of all
Tax Returns, and any amendments thereto, filed by the Company or any of its
Subsidiaries for all taxable years ending on or prior to the Effective Time;
(xii) no agreements relating to allocating or sharing of Taxes exist among the
Company and any of its Subsidiaries.
4.12. Properties; Leases; Tangible Assets. Except as set forth in Section
4.12 of the Company Schedule of Exceptions, the Company (and its respective
Subsidiaries) owns and has good and marketable title to or, in the case of
leased properties, a good and valid leasehold interest in, all of its Material
Assets (as hereinafter defined), free and clear of all liens or other
encumbrances ("Liens") except (i) those liens set forth on Schedule 4.12, (ii)
those Material Assets disposed of in the ordinary course of business after
December 31, 1995 and (iii) Material Assets, the loss of which would not result
in a Company Material Adverse Effect. The Company enjoys peaceful and
undisturbed possession of its premises and is not in breach of any provisions of
the leases related thereto. For purposes of this Section 4.12, the term Material
Assets shall mean (i) in the case of a tangible asset the Company holds title
to, any single asset having a book value reflected on the consolidated balance
sheet of the Company annual report on Form 10-K for the year ended December 31,
1995 of $10,000 or more, and (ii) in the case of a tangible leased asset, any
single asset whose underlying lease has a term greater than one year and such
asset had an initial cost of $10,000 or more.
4.13. Litigation. Except as disclosed in the Company Commission Filings
filed prior to the date hereof, or in Section 4.13 of the Company Schedule of
Exceptions, there is no suit, claim, action, proceeding or investigation pending
or, to the knowledge of the Company, threatened against the Company or any of
its Subsidiaries or any of their respective properties or assets before any
Governmental Entity which, if decided adversely, individually or in the
aggregate, could have a Company Material Adverse Effect or would prevent or
delay the consummation of the transactions contemplated by this Agreement.
Except as disclosed in the Company Commission Filings filed prior to the date
hereof, or in Schedule 4.13 of the Company Schedule of Exceptions, neither the
Company nor any of its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, individually or in the aggregate, in the future
could result in a Company Material Adverse Effect or would prevent or delay the
consummation of the transactions contemplated hereby.
4.14. Pooling of Interests. To the knowledge of the Company, the Company
has not taken or failed to take any action which (without giving effect to any
action taken or agreed to be taken by Parent, Sub or any of their respective
Affiliates) would prevent the accounting for the Merger as a pooling of
interests in accordance with Accounting Principles Board Opinion No. 16, the
interpretive releases issued pursuant thereto, and the pronouncements of the
Commission.
4.15. Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by the Company for inclusion or incorporation by
reference in (i) the S-4 (as hereinafter defined) will, at the time the S-4 is
filed with the Commission and at the time it becomes effective under the
Securities Act or at the
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<PAGE> 17
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Proxy Statement (as hereinafter
defined), will at the date mailed to stockholders of the Company and at the
times of any meetings of stockholders to be held in connection with the Merger
(each a "Stockholders' Meeting") and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Proxy Statement
will comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder.
4.16. Brokers. No broker, finder or investment banker (other than George K.
Baum & Company with respect to its investment banking services, including its
fairness opinion regarding the transactions contemplated hereby) is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company or any of its Subsidiaries.
4.17. Environmental Matters. Except as described in Section 4.17 of the
Company's Schedule of Exceptions hereto, to the Company's knowledge: (a) the
Company and its Subsidiaries and all of the facilities and properties owned or
operated by the Company and its Subsidiaries as of the date hereof are in
compliance with all applicable Environmental Laws and are not subject to any
outstanding or threatened Environmental Actions; (b) none of the properties or
facilities owned or operated by the Company and its Subsidiaries as of the date
hereof has been used by the Company and its Subsidiaries for the generation,
storage, manufacture, use, transportation, disposal or treatment of Hazardous
Materials other than in compliance with applicable Environmental Laws or except
where the failure to so comply would not reasonably be likely to have a Company
Material Adverse Effect; (c) there has been no Hazardous Discharge by the
Company or any of its Subsidiaries on or from any of the properties or
facilities owned or operated by the Company as of the date hereof, except in
compliance with applicable Environmental Laws; and (d) there are no threatened
or outstanding Environmental Actions against the Company or any of its
Subsidiaries or the owners of any facilities that may have received Hazardous
Materials from the Company or any of its Subsidiaries.
A. "Hazardous Discharge" shall mean any releasing, spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, disposing or dumping of any Hazardous Materials into the soil,
surface waters or ground waters at any of the properties or facilities
owned or operated by the Company as of the date hereof.
B. "Hazardous Materials" shall mean any chemical, substance, material,
object, condition, waste or combination thereof which is or may be
hazardous to human health or safety or to the environment due to its
radioactivity, ignitability, corrosivity, reactivity, explosiveness,
toxicity, carcinogenicity, infectiousness or other harmful or potentially
harmful properties or effects, including, without limitation, all of those
chemicals, substances, materials, objects, conditions, wastes or
combinations thereof which are now listed, defined or regulated in any
manner by any Environmental Law.
C. "Environmental Actions" shall mean any complaint, summons,
citation, notice, directive, order, claim, litigation, investigation,
proceeding, or judgment from any federal, state, local or municipal agency,
department, bureau, office or other authority or any third party applicable
to any of the properties owned or operated by the Company as of the date
hereof and involving any violation of any applicable Environmental Laws.
D. "Environmental Law" shall mean any and all laws, statutes,
ordinances, rules, regulations, judgments, orders, decrees, permits,
concessions, grants, agreements, licenses, or other governmental
restrictions or requirements regulating Hazardous Materials or relating to
health, safety, the environment or the release of Hazardous Materials into
the environment, now in effect.
4.18. Corporate Records. The minute books of the Company accurately reflect
all actions taken to this date by the stockholders, board of directors and
committees of the board of directors of the Company and contain true and
complete copies of the Certificate of Incorporation, By-laws and all amendments
thereto.
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4.19. Accounting Records. The Company and its Subsidiaries maintain
accounting records which fairly and validly reflect, in all material respects,
their transactions and maintain accounting controls sufficient to provide
reasonable assurances that such transactions are, in all material respects, (i)
executed in accordance with management's general or specific authorization, and
(ii) recorded as necessary to permit the preparation of financial statements in
conformity with GAAP.
4.20. Labor Matters. Neither the Company nor any of its Subsidiaries is a
party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization. There is no
unfair labor practice or labor arbitration proceeding pending or, to the
knowledge of the Company, threatened against the Company or its Subsidiaries
relating to their business, except for any such proceedings which would not have
a Company Material Adverse Effect.
4.21. ERISA. Except for the Company Employee Plans identified in Section
4.21 of the Company Schedule of Exceptions, neither the Company nor any of its
Subsidiaries maintains nor contributes to any Employee Plan. "Employee Plan(s)"
shall mean and include any pension, retirement, profit-sharing, severance,
deferred compensation, bonus or other incentive plan, stock option or stock
purchase plan, medical, retiree medical, vision, dental or other health plan, or
life insurance plan, or any other employee benefit plan, program, employment
agreement, arrangement, agreement or understanding, including, without
limitation, any "employee benefit plan" as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") that
provides benefits to any current or former employees, officers or directors of
the Company or any of its Subsidiaries. The Company has made available to Parent
true, correct and complete copies of all Employee Plans, summary plan
descriptions thereof, and all trust agreements or funding agreements including
insurance contracts and all amendments thereto and the most recently filed IRS
determination letter application and the most recently filed IRS Forms 5500.
Except as disclosed in Section 4.21 of the Company Schedule of Exceptions, with
respect to such Employee Plans in respect of the Company or any of its
Subsidiaries: (i) each Employee Plan that is a "welfare benefit plan" (as
defined in Section 3(1) of ERISA) is either unfunded or funded through insurance
contracts; (ii) neither the Company nor any of its Subsidiaries is in material
default under any Employee Plan, and all such Employee Plans have been
maintained in material compliance with all applicable provisions of all
applicable statutes, rules or regulations (including, without limitation, ERISA
and the Code); (iii) as to each Employee Plan for which an Annual Report,
including schedules, or comparable report, is required to be filed under ERISA
or the Code or any analogous legislation, each such Annual Report has been
filed, no material liabilities with respect to such plan existed on the date of
any such Annual Report except as disclosed therein, and no material adverse
change has occurred with respect to the financial data covered by such Annual
Report since the date thereof; (iv) the execution of this Agreement and
performance of the transactions contemplated hereby (either alone or together
with any other event) will not result in any payment (whether of severance pay
or otherwise) becoming due from the Company (or any of its Subsidiaries), Sub or
Parent to any employees of the Company; (v) each such Employee Plan that is a
"pension plan," as defined in Section 3(2)of ERISA, is, to the Company's best
knowledge, tax-qualified under Section 401(a) of the Code; (vi) neither the
Company nor any Subsidiary has maintained, contributed to or been required to
contribute to, at any time, any Employee Plan which is subject to the minimum
funding standards under Section 412 of the Code or which is subject to Title IV
of ERISA, or under which more than one employer makes contributions (within the
meaning of Section 4064(a) of ERISA); (vii) none of the Employee Plans provides
for or promises retiree medical, disability or life insurance benefits to any
current or former officer, director or employee of the Company or any of its
Subsidiaries; (viii) there has been no prohibited transaction (within the
meaning of Section 406 of ERISA or Section 4975 of the Code) with respect to any
Employee Plan which could subject the Company, any of the Subsidiaries or any
Employee Plans (or their trusts, trustees or administrators) to any material tax
or penalty imposed under Section 4975 of the Code or Section 502(i) of ERISA;
and (ix) no complete or partial termination has occurred within the five years
preceding the date hereof with respect to any Employee Plan.
4.22. Intellectual Property. Except as disclosed in Section 4.22 of the
Company Schedule of Exceptions, to the knowledge of the Company, the Company has
not received any written notice alleging any interference, infringement,
misappropriation, or violation of any intellectual property rights of third
parties (including any
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claim that the Company must license or refrain from using any intellectual
property rights of any third party). Except as disclosed in Section 4.22 of the
Company Schedule of Exceptions, to the knowledge (including employees with
responsibility for intellectual property matters) of the Company, no third party
has interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any intellectual property rights of the Company.
4.23. Disclosure. Any information furnished by or on behalf of the Company
to Parent in writing pursuant to this Agreement and any information contained in
the Company Schedule of Exceptions, does not and will not contain any untrue
statement of material fact and does not and will not omit to state any material
fact necessary to make any statement, in light of the circumstances under which
such statement is made, not misleading.
4.24. Vote Required. The affirmative vote of a majority of the outstanding
shares of Company Stock entitled to vote thereon, voting as a single class, is
the only vote of the holders of any class or series of the Company's capital
stock necessary to approve this Agreement and the Merger.
4.25. Contract Defaults. Except as set forth in Section 4.25 of the
Company's Schedule of Exceptions, the Company is not in default in any respect
under the terms of any outstanding material contract, agreement, lease or other
commitment which is material to the business, operation, properties or assets,
or the condition, financial or otherwise, of the Company, and no event has
occurred which with notice or lapse of time, or both, may be or become an event
of default under any such material contract, agreement, lease or other
commitment.
5. REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB.
Except as disclosed in the schedule of exceptions (the "Parent Schedule of
Exceptions") attached hereto and made a part hereof, Parent and Sub each hereby
represent and warrant to the Company as follows:
5.01. Organization. The Parent and each of its Subsidiaries (including the
Sub) is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization, has requisite power and
authority to carry on its business now being conducted and to own or lease and
operate the assets and properties now owned or leased and operated by it, except
where the failure to be so organized, existing and in good standing or to have
such power and authority would not individually or in the aggregate have a
material adverse effect on the business, operations, properties, assets,
liabilities, condition (financial or otherwise), prospects or results of
operations of Parent and its Subsidiaries taken as a whole (a "Parent Material
Adverse Effect"). The Parent and each of its Subsidiaries (including the Sub) is
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the property owned, leased or operated by it or the nature
of the business conducted by it makes such qualification or licensing necessary,
except where the failure to be so duly qualified or licensed and in good
standing would not, individually or in the aggregate, have a Parent Material
Adverse Effect.
5.02. Capitalization. As of the date hereof, the authorized capital stock
of Parent consists of 5,000,000 shares of Parent Preferred Stock and 30,000,000
shares of Parent Common Stock. As of the close of business on June 6, 1996, (i)
101,100 shares of Parent Series A Preferred Stock were issued and outstanding,
(ii) 114,500 shares of Parent Series B Preferred Stock were issued and
outstanding, (iii) 1,000,000 shares of Parent Series C Preferred Stock were
issued and outstanding, (iv) 333,333 shares of Parent Series D Preferred Stock
were issued and outstanding, (v) no shares of Parent Series E Preferred Stock
were issued and outstanding, (vi) 1,176,056 shares of Parent Series F Preferred
Stock were issued and outstanding, (vii) 17,650,852 shares of Parent Common
Stock were issued and outstanding, (viii) no shares of Parent Preferred Stock
were held by Parent in its treasury and (ix) 1,300 shares of Parent Common Stock
were held in its treasury. All the outstanding shares of Parent Common Stock
are, and all shares of Parent Common Stock which will be outstanding at the
Effective Time will be, duly authorized and validly issued, fully paid and
nonassessable, are not and will not be subject to or issued in violation of any
preemptive rights. All the outstanding shares of Parent Preferred Stock are, and
all shares of Parent Preferred Stock which will be outstanding at the Effective
Time will be, duly authorized and validly issued, fully paid and nonassessable,
are not and will not be subject to or issued in violation of any preemptive
rights. All outstanding Parent Options
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<PAGE> 20
(as hereinafter defined) granted by the Parent have been duly granted in
accordance with the terms of the Parent Stock Option Plans (as hereinafter
defined). The Parent Stock Option Plans have been adopted in accordance with the
DGCL, and the Parent's Certificate of Incorporation and By-laws, by the board of
directors and the stockholders of the Parent. The Parent has reserved sufficient
shares of Parent Common Stock for issuance upon the exercise of outstanding
Parent Options. No bonds, debentures, notes or other indebtedness having general
voting rights (or convertible into securities having such rights) of the Parent
are issued or outstanding. There are no outstanding contractual obligations of
the Parent to repurchase, redeem or otherwise acquire any shares of capital
stock of the Parent. As of the date hereof, 2,928,123 shares of Parent Common
Stock were reserved for issuance upon the exercise of stock options outstanding
as of the date hereof (the "Parent Options") under, one grant to an individual
(the "Individual Grant"), the Parent's 1989 Stock Option Plan (the "1989 Plan")
and the Company's 1992 Non-Employee Directors Stock Option Plan (the "1992 Plan"
and, together with the Individual Grant and the 1989 Plan, the "Parent Stock
Option Plans"). As of the date hereof, 1,107,205 shares of Parent Common Stock
were reserved for issuance upon the exercise of warrants outstanding as of the
date hereof (the "Parent Warrants"). Except as set forth in Section 5.02 of the
Schedule of Exceptions, other than the Parent Options, Parent Warrants and
Parent Preferred Stock, there are no options, calls, subscriptions, warrants,
rights, agreements or commitments of any character obligating the Parent to
issue shares of its capital stock or to register shares of its capital stock
under the Securities Act, or any other applicable securities laws.
As of the date hereof, the authorized capital stock of Sub consists of 100
shares of Sub Common Stock, all of which have been duly authorized and validly
issued, and are fully paid and nonassessable, and owned, of record and
beneficially, by Parent.
5.03. Subsidiaries. Section 5.03 of the Schedule of Exceptions sets forth
the name of each Subsidiary (as defined below) of Parent, the percent of
outstanding voting stock or other equity interest of such Subsidiary held
directly or indirectly by Parent, the jurisdiction of such Subsidiary's
organization and the other jurisdictions in which such Subsidiary is qualified
to do business. Parent owns, directly or indirectly, free and clear of all
covenants, conditions, restrictions, voting trust arrangements, voting
agreements, liens, charges, encumbrances, options and adverse claims and rights
of any kind whatsoever, and has the unrestricted power to dispose of and vote,
all of the outstanding capital stock or other equity interest held by it of each
Subsidiary. Except as disclosed in Section 5.03 of the Parent Schedule of
Exceptions, there are no outstanding options, warrants or other rights to
subscribe for or purchase from Parent or any Subsidiary, or any plans, contracts
or commitments providing for the issuance of, or the granting of rights to
acquire (i) any capital stock of or other ownership interest in any Subsidiary
or (ii) any securities convertible into or exchangeable for any capital stock of
or other ownership interests in any Subsidiary. All of the outstanding shares of
each class of capital stock of each Subsidiary have been validly issued, are
fully paid and non-assessable and were not issued in violation of any preemptive
rights. Except for the Subsidiaries, neither Parent nor any Subsidiary of Parent
owns greater than a twenty percent (20%) equity interest, directly or
indirectly, in any corporation, partnership, joint venture, business, trust or
other entity, other than any investments owned by Parent Employee Plans.
5.04. Authority. Each of Parent and Sub has the requisite power and
authority to execute and deliver this Agreement and all other agreements and
documents contemplated hereby and to perform its obligations hereunder. The
execution, delivery and performance of this Agreement and all other agreements
and documents contemplated hereby and the consummation of the Merger and of the
other transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Parent and Sub (including by Parent as
the sole stockholder of Sub). This Agreement has been duly executed and
delivered by each of Parent and Sub and assuming this Agreement constitutes the
valid and binding obligation of the Company, constitutes the valid and binding
obligations of each of Parent and Sub, enforceable against them in accordance
with their respective terms, except as may be limited by or subject to any
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally, and subject to general
principles of equity.
5.05. Consents and Approvals; No Violations. Except for (i) filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Act, the Exchange
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<PAGE> 21
Act, and the rules and regulations promulgated thereunder, (ii) filings as may
be required under any state securities or blue sky laws, (iii) any filing of a
premerger notification report by Parent required under the HSR Act and the
expiration of the applicable waiting period, (iv) the filing and recordation of
the Certificate of Merger as required by the DGCL, (v) the FCC Approvals and
(vi) the necessary approvals, if any, of the PUCs having jurisdiction over the
Parent or any of its Subsidiaries (the "Parent PUC Approvals" and, together with
the Company PUC Approvals, the "PUC Approvals"), pursuant to applicable state
laws or regulations, no filing with or notice to, and no permit, authorization,
consent or approval of, any Governmental Entity is necessary for the execution
and delivery by Parent and Sub of this Agreement or the consummation by Parent
and Sub of the transactions contemplated hereby, except where the failure to
obtain such permits, authorizations, consents or approvals or to make such
filings or give such notice would not have a Parent Material Adverse Effect.
Neither the execution, delivery and performance of this Agreement by Parent and
Sub, nor the consummation by Parent and Sub of the transactions contemplated
hereby will (a) conflict with or result in any breach of any provision of the
respective Certificate of Incorporation or By-laws of Parent or of any of its
Subsidiaries, (b) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under, or result
in the creation of a lien or other encumbrance on any property or asset of
Parent or any of its Subsidiaries under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, license, contract,
agreement or other instrument or obligation to which Parent or any of its
Subsidiaries is a party or by which any of them or any of their respective
properties or assets may be bound or (c) violate any order, writ, injunction,
decree, law, statute, rule or regulation applicable to Parent or any of its
Subsidiaries or any of their respective properties or assets, except in the case
of (b) and (c) for violations, breaches or defaults which would not,
individually or in the aggregate, have a Parent Material Adverse Effect.
5.06. SEC Reports and Financial Statements. Parent has heretofore delivered
to the Company true and complete copies of all reports, registration statements,
definitive proxy statements and other documents (in each case, together with all
amendments thereto) filed by Parent with the Commission since January 1, 1992
(such reports, registration statements, definitive proxy statements and other
documents, together with any amendments thereto, are sometimes collectively
referred to as the "Parent Commission Filings"). As of their respective dates,
each of the Parent Commission Filings complied as to form in all material
respects with the applicable requirements of the Securities Act, the Exchange
Act and the rules and regulations thereunder applicable to the Parent Commission
Filings, and none of the Parent Commission Filings when filed contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. When filed with
the Commission, the financial statements included in the Parent Commission
Filings complied as to form in all material respects with the applicable rules
and regulations of the Commission under the Securities Act and the Exchange Act
with respect thereto and were prepared in accordance with GAAP (as in effect
from time to time) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Rule 10-01 of Regulation S-X of the
Commission), and such financial statements fairly present in accordance with the
applicable requirements of GAAP the consolidated financial position of Parent
and its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and their consolidated cash flows for the periods
then ended, subject, in the case of the unaudited interim financial statements,
to normal, recurring year-end audit adjustments.
5.07. Absence of Undisclosed Liabilities. Except as and to the extent
disclosed in the Parent Commission Filings filed prior to the date hereof, there
are no liabilities or obligations of Parent or any of its Subsidiaries of any
nature, whether or not accrued, contingent or otherwise, that would be required
by GAAP to be reflected on a consolidated balance sheet of Parent and its
Subsidiaries (including the notes thereto), other than (i) liabilities disclosed
in the Parent Commission Filings, (ii) liabilities incurred since December 31,
1995, in the ordinary course of business and which would not have, individually
or in the aggregate, a Parent Material Adverse Effect and (iii) liabilities
under this Agreement.
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5.08. Absence of Certain Changes or Events. Except as set forth in Section
5.08 of the Parent Schedule of Exceptions, Parent has since December 31, 1995
conducted its business only in the ordinary course and there has not been any
event that would have a Parent Material Adverse Effect.
5.09. Litigation. Except as disclosed in the Parent Commission Filings
filed prior to the date hereof, or in Section 5.09 of the Company Schedule of
Exceptions, there is no suit, claim, action, proceeding or investigation pending
or, to the knowledge of Parent, threatened against Parent or any of its
Subsidiaries or any of their respective properties or assets before any
Governmental Entity which, if decided adversely, individually or in the
aggregate, could result in a Parent Material Adverse Effect or would prevent or
delay the consummation of the transactions contemplated by this Agreement.
Except as disclosed in the Parent Commission Filings filed prior to the date
hereof, or in Section 5.09 of the Company Schedule of Exceptions, neither Parent
nor any of its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, individually or in the aggregate, in the future
could result in a Parent Material Adverse Effect or would prevent or delay the
consummation of the transactions contemplated hereby.
5.10. Pooling of Interests. To the knowledge of Parent, Parent has not
taken or failed to take any action which (without giving effect to any action
taken or agreed to be taken by the Company or any of its Affiliates) would
prevent the accounting for the Merger as a pooling of interests in accordance
with Accounting Principles Board Opinion No. 16, the interpretive releases
issued pursuant thereto, and the pronouncements of the Commission.
5.11. Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by Parent or Sub for inclusion or incorporation by
reference in (i) the S-4 (as hereinafter defined) will, at the time the S-4 is
filed with the Commission and at the time it becomes effective under the
Securities Act or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and (ii) the Proxy
Statement will, at the date mailed to stockholders of the Company and at the
times of any Stockholders' Meeting and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The S-4, insofar as
it relates to Parent, Sub or Subsidiaries of Parent or other information
supplied by Parent or Sub for inclusion therein, will comply as to form in all
material respects with the provisions of the Securities Act and the rules and
regulations thereunder.
5.12. Brokers. No broker, finder or investment banker (other than Hoak
Securities Corporation with respect to its investment banking services,
including its fairness opinion regarding the transactions contemplated hereby)
is entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Parent or any of its Subsidiaries.
5.13. Interim Operations of Sub. Sub was formed solely for the purpose of
engaging in the transactions contemplated hereby and has not engaged in any
business activities or conducted any operations other than in connection with
the transactions contemplated hereby.
5.14. Company Stock Ownership. Neither Parent nor any of its Subsidiaries
owns any shares of Company Stock or any securities convertible into Company
Stock.
5.15. Authorization for Parent Common Stock. Prior to the Effective Time,
Parent will have taken all necessary action to permit it to issue the number of
shares of Parent Common Stock required to be issued pursuant to the terms of
this Agreement. Shares of Parent Common Stock issued pursuant to the terms of
this Agreement will, when issued, be validly issued, fully paid and
nonassessable and no person will have any preemptive right of subscription or
purchase in respect thereof. Such shares of Parent Common Stock will, when
issued, be registered under the Securities Act and the Exchange Act and be
registered or exempt from registration under any applicable state securities
laws and will, when issued, be listed on the AMEX, subject to official notice of
issuance.
5.16. Continued Existence of the Company. Parent has no present intention
or any intention in the foreseeable future after the Closing to liquidate or
otherwise cause the dissolution of the Company.
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6. CERTAIN UNDERSTANDINGS AND AGREEMENTS.
6.01. Conduct of Business by the Company Pending the Merger. Except as set
forth in Section 6.01 of the Company's Schedule of Exceptions, during the period
from the date of this Agreement and continuing until the Effective Time, the
Company agrees as to itself and its Subsidiaries that (except as expressly
contemplated or permitted by this Agreement or to the extent that Parent shall
otherwise consent):
(i) The Company and its Subsidiaries shall carry on their respective
businesses in the ordinary course consistent with past practice and use all
reasonable efforts to (a) preserve intact their present business
organizations, (b) maintain in effect all licenses, permits and
authorizations the failure of which to maintain would have a Company
Material Adverse Effect, (c) keep available the services of their present
officers and employees and (d) preserve their relationships with customers,
suppliers and others having business dealings with them.
(ii) Neither the Company nor any of its Subsidiaries shall, nor shall
any of them propose to, (A) declare, set aside or pay any dividends on or
make other distributions in respect of any of its capital stock, except for
dividends by a wholly owned Subsidiary of the Company or of such
Subsidiary, (B) split, combine or reclassify any shares of its capital
stock or issue or authorize or propose the issuance of any other securities
in respect of, in lieu of or in substitution for shares of its capital
stock, or (C) repurchase, redeem or otherwise acquire, or permit any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock or any securities convertible into, or any rights, warrants,
calls, subscriptions or options to acquire, shares of capital stock of such
party or any of its Subsidiaries.
(iii) Neither the Company nor any of its Subsidiaries shall issue,
deliver or sell, or authorize or propose the issuance, delivery or sale of,
any shares of its capital stock of any class, or any securities convertible
into, or any rights, warrants, calls, subscriptions or options to acquire,
any such shares or convertible securities, other than (A) the issuance of
shares of Company Common Stock upon the exercise of Company Options in
accordance with their present terms, and (B) issuances by a wholly owned
Subsidiary of its capital stock to the Company or one of its Subsidiaries.
(iv) The Company shall not amend or propose to amend its Certificate
of Incorporation or By-laws.
(v) Neither the Company nor any of its Subsidiaries shall acquire or
agree to acquire by merging or consolidating with, or by purchasing a
substantial equity interest in or substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof or otherwise
acquire or agree to acquire any assets, in each case which are material,
individually or in the aggregate, to the Company and its Subsidiaries,
taken as a whole, except in the ordinary course of business.
(vi) Neither the Company nor any of its Subsidiaries shall sell,
lease, license, encumber or otherwise dispose of, or agree to sell, lease,
license, encumber or otherwise dispose of, any of its assets which are
material, individually or in the aggregate, to the Company and its
Subsidiaries taken as a whole, other than in the ordinary course of
business consistent with past practice.
(vii) Neither the Company nor any of its Subsidiaries shall incur any
indebtedness for borrowed money or guarantee any such indebtedness or issue
or sell any debt securities or warrants or rights to acquire any debt
securities of the Company or any of its Subsidiaries or guarantee any debt
securities of others, other than in each case in the ordinary course of
business consistent with prior practice.
(viii) The Company shall not make any change in any of the accounting
principles or practices used by it except as required by the Commission or
the Financial Accounting Standards Board.
(ix) Neither the Company nor any of its Subsidiaries shall (A) enter
into, adopt, amend (except as may be required by law) or terminate any
Employee Plan or any agreement, arrangement, plan or policy between the
Company and one or more of its directors, officers, employees or
independent contractors or (B) except in the ordinary course of business
and consistent with past practice, increase in any manner the compensation
or fringe benefits (including but not limited to severance benefits) of any
director, officer, employee or independent contractor or pay any benefit
not required by any plan and arrangement
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as in effect as of the date hereof (including, without limitation, the
granting of stock appreciation rights or performance awards) or enter into
any contract, agreement, commitment or arrangement to do any of the
foregoing.
(x) The Company shall not take any action which would prevent (A)
qualification of the Merger as a reorganization within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code or (B) the Merger to be
accounted for as a "pooling of interests" for financial accounting
purposes.
(xi) The Company shall, upon Parent's reasonable request, confer with
Parent to report on operational matters.
(xii) Neither the Company nor any of its Subsidiaries will, except to
the extent any such policy is replaced with comparable coverage, allow or
permit any insurance policy naming it as beneficiary or a loss payable
payee to be canceled or terminated other than in the ordinary course of
business consistent with past practice.
(xiii) Neither the Company nor any of its Subsidiaries will adopt a
plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of
the Company or any of its Subsidiaries.
(xiv) Neither the Company nor any of its Subsidiaries shall take any
action that would be reasonably likely to result in any of the Company's
representations and warranties set forth in this Agreement not being true
in all material respects or agree in writing or otherwise to take any of
the actions specified in this Section 6.01.
(xv) Subject to the terms and conditions of this Agreement, the
Company shall take all commercially reasonable steps necessary or desirable
and proceed diligently and in good faith to satisfy each of the conditions
to the Merger set forth in Articles 7 and 8 and will not take or fail to
take any action that could reasonably be expected to result in the
nonfulfillment of any such condition.
6.02. Conduct of Business by Parent Pending the Merger. During the period
from the date of this Agreement and continuing until the Effective Time, Parent
agrees that (except as expressly contemplated or permitted by this Agreement or
to the extent that Company shall otherwise consent):
(i) Parent shall not amend or propose to amend its Certificate of
Incorporation or By-laws.
(ii) Parent shall not make any change in any of the accounting
principles or practices used by it except as required by the Commission or
the Financial Accounting Standards Board.
(iii) Parent shall not take any action which would prevent (A)
qualification of the Merger as a reorganization within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code or (B) the Merger to be
accounted for as a "pooling of interests" for financial accounting
purposes.
(iv) Parent will not adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or
other reorganization.
(v) Parent shall not take any action that would be reasonably likely
to result in any of Parent's or Sub's representations and warranties set
forth in this Agreement not being true in all material respects or agree in
writing or otherwise to take any of the actions specified in this Section
6.02.
(vi) Subject to the terms and conditions of this Agreement, Parent
shall take all commercially reasonable steps necessary or desirable and
proceed diligently and in good faith to satisfy each of the conditions to
the Merger set forth in Articles 7 and 9 and will not take or fail to take
any action that could reasonably be expected to result in the
nonfulfillment of any such condition.
6.3. Conduct of Business of Sub. During the period from the date of this
Agreement to the Effective Time, Sub shall not engage in any activities of any
nature except as provided in or contemplated by this Agreement.
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6.04. No Solicitation, Etc. From the date hereof through the Effective Time
or the termination of this Agreement in accordance with the terms hereof, the
Company and each of its Subsidiaries shall not, and shall cause each of their
officers, directors, employees, agents, legal and financial advisors and
affiliates not to solicit, or otherwise encourage (including by way of
furnishing information or assistance), initiate, endorse or enter into
substantive discussions or any agreement or agreement in principal, announce any
intention to do any of the foregoing, with respect to any offer or proposal
which constitutes or may reasonably be expected to lead to the acquisition of
all or a significant part of the business and properties, or the acquisition of
at least a majority of the outstanding securities whether by purchase, merger,
purchase of assets, tender offer, exchange offer, business combination or
otherwise (a "Third Party Transaction"), of the Company (other than by Parent or
Sub). Except to the extent permitted by the immediately succeeding sentence,
prior to the Effective Time, the Company and its Subsidiaries shall not, and
shall cause each of their officers, directors, legal and financial advisors,
agents and affiliates not to, directly or indirectly, participate in any
negotiations or discussions regarding, or furnish any information with respect
to, or otherwise cooperate in any way in connection with, or assist or
participate in, facilitate or encourage, any effort or attempt to effect or seek
to effect, a Third Party Transaction with respect to the Company. Nothing in
this Section 6.04 shall prohibit the board of directors of the Company from (i)
furnishing information to, or entering into discussions or negotiations with,
any person or entity that makes an unsolicited written bona fide proposal to
effect a Third Party Transaction with respect to the Company if the board of
directors in its reasonable judgment, based on written advice from its outside
legal counsel, determines that the failure to do so would violate the fiduciary
obligations of the board of directors under applicable law, provided that prior
to furnishing such information to, or entering into discussions or negotiations
with, such person or entity, the Company shall enter into a confidentiality
agreement in customary form on terms comparable to the confidentiality agreement
entered into between the Company and Parent (a "Confidentiality Agreement"); or
(ii) to the extent applicable, complying with Rule 14e-2 promulgated under the
Exchange Act with regard to a Third Party Transaction with respect to the
Company. The Company represents it is not currently involved in any existing
discussions or negotiations with any party with respect to a Third Party
Transaction with respect to the Company. Prior to the Effective Time, the
Company will promptly communicate to Parent the terms of any proposal which it
may receive in respect of any Third Party Transaction with respect to the
Company and will keep Parent informed as to the status of any actions, including
negotiations or discussions taken pursuant to this Section 6.04.
6.05. Registration Statement; Proxy Statement. (a) As promptly as
practicable after the execution of this Agreement, the Company shall prepare and
file with the Commission a proxy statement in definitive form relating to the
Company's Stockholders' Meeting (the "Proxy Statement") and Parent shall prepare
and file with the Commission a registration statement on Form S-4 (the
registration statement together with the amendments thereto being the "S-4"), in
connection with the registration under the Securities Act of the Parent Common
Stock and the other transactions contemplated by this Agreement, containing the
Proxy Statement. The Parent will use all reasonable efforts to have or cause the
S-4 to become effective under the Securities Act as promptly as practicable, and
shall take any reasonable action required to be taken under any applicable state
securities or "blue sky" laws in connection with the issuance of shares of
Parent Common Stock in the Merger. Each of Parent and the Company shall furnish
all information concerning it and the holders of its capital stock as the other
may reasonably request in connection with such actions. As promptly as
practicable after the S-4 shall have become effective, the Company shall mail
the Proxy Statement to its stockholders. The Proxy Statement shall include the
recommendation of the Company's board of directors in favor of the Merger,
unless otherwise required by the applicable fiduciary duties of the directors of
the Company as advised in writing by outside legal counsel.
(b) If at any time prior to the Effective Time any event or circumstances
relating to the Company, Parent or any of their respective Subsidiaries, or its
or their respective officers or directors, should be discovered by the Company
or Parent which should be set forth in an amendment to the S-4 or a supplement
to the Proxy Statement, such party shall promptly inform the other.
6.06. Access. Upon reasonable notice, the Company and Parent shall each
(and shall cause each of their respective Subsidiaries to) afford to the
officers, employees, accountants, counsel and other representatives of
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the other, access, during normal business hours during the period prior to the
Effective Time, to all its properties, books, contracts, commitments and records
and, during such period, each of the Company and Parent shall (and shall cause
each of their respective Subsidiaries to) furnish promptly to the other (a) a
copy of each report, schedule, registration statement and other document filed
with the Commission or received by it during such period pursuant to the
requirements of the Federal securities laws and (b) all other information
concerning its business, properties and personnel as such other party may
reasonably request. Each of the Company and Parent agree that it will not, and
will cause its respective representatives not to, use any information obtained
pursuant to this Section 6.06 for any purpose unrelated to the consummation of
the transactions contemplated by this Agreement. The Confidentiality Agreement
dated December 22, 1995 (the "Company Confidentiality Agreement"), by and
between the Company and Parent, shall apply with respect to information
furnished by the Company or its Subsidiaries and the Company's representatives
thereunder or hereunder and any other activities contemplated thereby. The
Confidentiality Agreement dated December 22, 1995 (the "Parent Confidentiality
Agreement"), by and between the Company and Parent, shall apply to information
furnished by Parent or its Subsidiaries and Parent representatives thereunder or
hereunder any other activities contemplated thereby. The parties agree that this
Agreement and the transactions contemplated hereby shall not constitute a
violation of either the Company Confidentiality Agreement or the Parent
Confidentiality Agreement.
6.07. Meeting of Stockholders. The Company shall take all action necessary,
in accordance with applicable law and the Companys' Certificate of Incorporation
and By-laws to convene the Stockholders' Meeting as promptly as practicable to
consider and vote upon this Agreement and the Merger. Subject to the third
sentence of Section 6.04, the Company shall use all reasonable efforts to
solicit from its stockholders proxies in favor of the adoption and approval of
this Agreement and to take all other action necessary to secure the vote of
stockholders required by law to effect the Merger. The Company and Parent shall
coordinate and cooperate with respect to the timing of such Stockholders'
Meeting and shall use all reasonable efforts to hold such Stockholders' Meeting
as soon as practicable after the date hereof. Parent shall (i) cause Sub
promptly to submit this Agreement and the transactions contemplated hereby for
approval and adoption by Parent as its sole stockholder by written consent, (ii)
authorize and cause an officer of Parent to vote Parent's shares of Sub for
adoption and approval of this Agreement and the transactions contemplated
hereby, and (iii) take all additional actions as the sole stockholder of Sub
necessary to adopt and approve this Agreement and the transactions contemplated
hereby.
6.08. Legal Requirements to Merger; Consents. Each of the Company, Parent
and Sub will take, or cause to be taken, all reasonable actions necessary to
comply promptly with all legal requirements which may be imposed on it with
respect to the Merger (including furnishing all information required under the
HSR Act, in connection with the FCC Approvals and the PUC Approvals and in
connection with approvals of or filing with any other Governmental Entity) and
will promptly cooperate with and furnish information to each other in connection
with any such requirements imposed upon any of them or any of their Subsidiaries
in connection with the Merger. Each of the Company, Parent and Sub will, and
will cause its Subsidiaries to, take all reasonable actions necessary to obtain
(and will cooperate with each other in obtaining) any consent, authorization,
order or approval of, or any exemption by, any Governmental Entity or private
third party, required to be obtained or made by Parent, Sub or the Company or
any of their Subsidiaries in connection with the Merger or the taking of any
action contemplated by this Agreement.
6.09. Affiliates. At least 30 days prior to the Closing Date, the Company
shall deliver to Parent a letter identifying all persons who are, at the time
this Agreement is submitted for approval to the stockholders of the Company,
"affiliates" of the Company (each a "Rule 145 Affiliate") for purposes of Rule
145 under the Securities Act ("Rule 145"). The Company shall use its best
efforts to cause each such person to deliver to Parent on or prior to the
Closing Date a written agreement, in form and substance reasonably satisfactory
to the Company and Parent and their respective counsel, to the effect that such
person will not offer to sell, sell or otherwise dispose of any shares of Parent
Common Stock issued in the Merger, except pursuant to an effective registration
statement, in compliance with Rule 145, as amended from time to time, or in a
transaction which, in the opinion of legal counsel, which opinion shall be
satisfactory to Parent, is exempt from the registration requirements of the
Securities Act.
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6.10. Authorization for Shares and Stock Exchange Listing. Prior to the
Effective Time, Parent shall have taken all action necessary to permit it to
issue the number of shares of Parent Common Stock required to be issued pursuant
to Section 3.01. Parent shall use all reasonable efforts to cause the shares of
Parent Common Stock to be issued in the Merger to be approved for listing on the
AMEX, subject to official notice of issuance, prior to the Closing Date.
6.11. Company Stock Plans and Benefits. At the Effective Time, all then
outstanding Company Options shall, by virtue of the Merger and without any
further action on the part of the Company or the holder of any such Company
Options, be assumed by Parent in such manner that Parent (A) is a corporation
"assuming a stock option in a transaction to which Section 424(a) of the Code
applies," or (B) to the extent that Section 424(a) of the Code does not apply to
any such Company Options, would be such a corporation were Section 424(a)
applicable to such Company Options. Each outstanding Company Option assumed by
Parent under any Company employee stock option plan or arrangement shall be
converted into a Parent stock option (a "Parent Stock Option"), under which the
number of shares underlying the Parent Stock Option shall be determined by
multiplying the number of shares of Company Common Stock underlying such Company
Option immediately prior to the Effective Time by the Conversion Number and
rounding down to the nearest whole number, and the exercise price per share of
Parent Common Stock at which the Parent Stock Option shall be exercisable shall
be determined by dividing the exercise price per share of the Company Common
Stock subject to such Company Option immediately prior to the Effective Time by
the Conversion Number and rounding up to the nearest whole cent. Each such
Parent Stock Option shall be assumed at the Effective Time by Parent on the same
terms and subject to the same conditions as in effect immediately prior to the
Effective Time, subject to such equitable adjustments as may be necessary to
reflect the Merger. Parent and the Company shall take or cause to be taken any
and all action necessary or appropriate to implement the adjustments
contemplated by this Section 6.11. Employees of the Company who remain employed
by the Company after the Effective Time shall be eligible to participate in the
Parent Employee Plans that are available to similarly situated Parent employees.
6.12. Mutual Efforts; Further Assurances. Each of the parties hereto agrees
to use all commercially reasonable efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or advisable
to cause the fulfillment of the conditions to such party's obligations
hereunder. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement or to vest
the Surviving Corporation with full title to all properties, assets, rights,
approvals, immunities and franchises of the Company or Sub, the proper officers
and directors of each party to this Agreement shall take all such necessary
action.
6.13. Expenses. Except as otherwise provided in Sections 10.3 and 10.4, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expense.
6.14. Public Statements. The parties shall consult with each other prior to
issuing any public announcement or statement with respect to this Agreement or
the transactions contemplated hereby and shall not issue any such public
announcement or statement prior to such consultation, except that any party may
issue such a public announcement or statement prior to such consultation if and
to the extent required by law or any listing agreement with a national
securities exchange, in which case such party shall use all reasonable efforts
to consult with the other parties prior to issuing such public announcement or
statement.
6.15. Certification of Stockholder Vote. At or prior to the Closing, the
Company shall deliver to Parent a certificate of the Company's Secretary setting
forth the number of shares of Company Stock voted in favor of adoption of this
Agreement and the consummation of the Merger and the number of such shares voted
against adoption of this Agreement and consummation of the Merger.
6.16. Notification of Certain Matters. Each party shall give the other
prompt notice of (i) the occurrence, or non-occurrence, of any event the
occurrence, or non-occurrence, of which would be likely to cause (A) any
representation or warranty contained in this Agreement to be untrue or
inaccurate or (B) any covenant, condition or agreement contained in this
Agreement not to be complied with or satisfied and (ii) any failure of the
Company or Parent, as the case may be, to comply with or satisfy any covenant,
condition or agreement to
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be complied with or satisfied by it hereunder; provided, that the delivery of
any notice pursuant to this Section 6.16 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
6.17. Indemnification and Insurance. (i) The Surviving Corporation and
Parent agree that the Surviving Corporation shall maintain all rights to
indemnification (including with respect to the advancement of expenses incurred
in the defense of any action or suit) existing on the date of this Agreement in
favor of the present and former directors and officers of the Company as
provided in the Company's Certificate of Incorporation and By-laws or otherwise,
in each case in effect on the date of this Agreement, and that the Certificate
of Incorporation and By-laws of the Surviving Corporation shall not be amended
to reduce or limit the rights of indemnity afforded to the present and former
directors and officers of the Company, or the ability of the Surviving
Corporation to indemnify them, nor to hinder, delay or make more difficult the
exercises of such rights of indemnity or the ability to indemnify.
(ii) The Surviving Corporation will indemnify to the fullest extent
possible under its Certificate of Incorporation, its By-laws and applicable law
the present and former directors and officers of the Company against all losses,
damages, liabilities or claims made against them arising from their service in
such capacities prior to and including the Effective Time, to at least the same
extent as such persons are currently required to be indemnified pursuant to the
Company's Certificate of Incorporation and By-laws. The Company (or after the
Effective Time, the Surviving Corporation) will pay expenses in advance of the
final disposition of any such action or proceeding to each present or former
director or officer to the full extent permitted by law. Without limiting the
foregoing, in the event any such claim, action, suit, proceeding or
investigation is brought against any present or former director or officer of
the Company (whether arising before or after the Effective Time), (i) the
present and former directors and officers of the Company may retain counsel
satisfactory to them and the Company (or them and the Surviving Corporation
after the Effective Time) and the Company (or after the Effective Time, the
Surviving Corporation) shall pay all fees and expenses of such counsel for such
indemnified parties promptly as statements therefor are received; and (ii) the
Company (or after the Effective Time, the Surviving Corporation) will use all
reasonable efforts to assist in the vigorous defense of any such matter,
provided that neither the Company nor the Surviving Corporation shall be liable
for any settlement effected without its written consent, which consent shall not
be unreasonably withheld. Any former or present director or officer of the
Company wishing to claim indemnification under this Section 6.17, upon learning
of any such claim, action, suit, proceeding or investigation, shall promptly
notify the Company or the Surviving Corporation of the existence of such claim,
action, suit, proceeding or investigation (but the failure to so notify shall
not relieve a party from any liability which it may have under this Section 6.17
except to the extent such failure prejudices such party). The present and former
directors and officers of the Company as a group may retain only one law firm to
represent them with respect to each such matter unless there is, under
applicable standards of professional conduct, a conflict on any significant
issue between the positions of any two or more of such indemnified parties.
(iii) The Surviving Corporation shall cause to be maintained in effect for
a period ending not sooner than the third anniversary of the Effective Time, at
no expense to the beneficiaries thereof, directors' and officers' liability
insurance providing at least the same coverage with respect to the Company's
present and former officers and directors as the current policies maintained by
or on behalf of the Company, and containing terms and conditions which are
substantially similar, with respect to matters occurring prior to the Effective
Time (to the extent such insurance is currently available on commercially
reasonable terms with respect to such matters).
(iv) In the event the Surviving Corporation or any of its successors or
assigns (A) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (B) transfers all or substantially all of its properties and assets to
any person, then and in each such case, proper provisions shall be made so that
the successors and assigns of the Surviving Corporation shall assume the
obligations of the Surviving Corporation set forth in this Section 6.17.
(v) The provisions of this Section 6.17 are intended to be for the benefit
of, and shall be enforceable by, each indemnified party and his or her heirs and
representatives.
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<PAGE> 29
6.18. Production of Documents by the Company Pending the Merger. During the
period from the date of this Agreement and continuing until the Effective Time,
the Company agrees as to itself and its Subsidiaries that it shall furnish to
Parent the following documents as soon as the documents are available:
(i) profit and loss statements and balance sheets as of the end of
each month;
(ii) weekly ANI (LEC Code) reports;
(iii) invoices from Sprint with respect to the following: Master
Summary (Carrier Transport), Product Summaries (Carrier
Transport), Private Line and Enhanced 800;
(iv) invoices from Wiltel Inc. with respect to switched, dedicated
and private line service;
(v) weekly accounts status reports;
(vi) monthly accounts receivable summary aging report; and
(vii) monthly payroll reports.
6.19. Tax and Accounting Treatment. The parties intend, and shall use their
best efforts to cause, the transactions contemplated hereby to qualify as a
"reorganization" as defined in Sections 368(a)(1)(A) and 368(a)(2)(E) of the
Code, or other applicable provisions of the Code, and to be eligible for pooling
of interests accounting treatment. The Company and Parent shall use their best
efforts to cause each affiliate of the Company and Parent, as applicable, to
deliver to the Company and Parent, prior to 30 days before the Merger, an
executed affiliate's agreement in substantially the form of Exhibit A-1 (for
affiliates of Parent) or EXHIBIT A-2 (for affiliates of the Company) hereto.
6.20. Rule 145. Parent will file the reports required to be filed by it
under the Securities Act and the Exchange Act and the rules and regulations
thereunder and will take such further action as any Rule 145 Affiliate may
reasonably request, all to the extent required from time to time to enable such
Rule 145 Affiliate to sell Parent Common Stock without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 145,
as such Rule may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the Commission. Upon the request of any Rule 145
Affiliate, Parent will deliver to such Rule 145 Affiliate a written statement as
to whether it has complied with such requirements.
7. CONDITIONS TO OBLIGATIONS OF EACH PARTY.
The obligations of each party to effect the Merger shall be subject to the
fulfillment, at or prior to the Effective Time, of the following conditions:
7.01. Approval of Stockholders. This Agreement shall have been adopted
by such vote or votes of the stockholders of the Company as shall be
required by the DGCL and the Certificate of Incorporation and By-laws of
the Company.
7.02. Fairness Opinions. The opinions of Hoak Securities Corporation
and George K. Baum & Company to the effect that the Conversion Number is
fair from a financial point of view to the stockholders of Parent and the
Company, respectively, shall have been received by Parent and the Company,
respectively, and such firms shall not have withdrawn such fairness
opinions prior to or on the Closing Date.
7.03. AMEX Approval. The shares of Parent Common Stock issuable
pursuant to the Merger and such other shares of Parent Common Stock
required to be reserved for issuance in connection with the Merger or upon
exercise of Company Options shall have been authorized for listing on the
AMEX, upon official notice of issuance.
7.04. No Stop Order. The S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order. The offer and sale of the Parent
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<PAGE> 30
Common Stock to be issued in connection herewith shall have been approved
under relevant state securities or blue sky laws.
7.05. Pooling Letters. Parent shall have received from Grant Thornton
LLP an opinion that the Merger will be treated as a "pooling of interests"
under applicable financial accounting standards.
7.06. Tax Opinion. The Company and Parent shall have received the
opinion of Freeborn & Peters satisfactory in form and substance to the
Company and Parent dated the Closing Date to the effect that, based upon
reasonable assumptions and conditions, (1) the Merger will be treated for
Federal income tax purposes as a reorganization within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, (2) Parent, Sub and the
Company will be parties to that reorganization and (3) no stockholder of
the Company will recognize gain or loss as the result of the receipt by
such stockholder of Parent Common Stock solely in exchange for shares of
Company Stock surrendered in the Merger; such firm shall have consented to
the filing of such opinion as an exhibit to the S-4 and to the reference to
such firm in the S-4, and such firm shall have reconfirmed such opinion in
writing as of the Closing Date. The Company and Parent shall have received
such evidence as each may reasonably require that all assumptions or
conditions to such opinion are valid or have been satisfied.
7.07. No Action or Proceeding. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the Merger shall be in effect;
provided, however, that prior to invoking this condition, each party shall
use all reasonable efforts to have any such decree, ruling, injunction or
order vacated, except as otherwise contemplated by this Agreement.
7.08. Other Approvals. Other than the filing provided for by Section
1.02, all authorizations, consents, orders or approvals of, or declarations
or filings with, or expirations of waiting periods imposed by, any
Governmental Entity (including those described in Sections 4.05 and 5.05)
the failure to obtain which would have a Company Material Adverse Effect or
a Parent Material Adverse Effect, as the case may be (including all filings
under the HSR Act and the expiration of all waiting periods thereunder),
shall have been filed, occurred or been obtained. Parent shall have
received all state securities laws or "blue sky" permits and authorizations
necessary to issue Parent Common Stock pursuant to the terms of the Merger.
8. CONDITIONS TO OBLIGATIONS OF PARENT AND SUB.
The obligation of Parent and the obligation of Sub to effect the Merger
shall be subject to the fulfillment, at or prior to the Effective Time, of the
following additional conditions:
8.01. Representations and Warranties True on the Closing Date. The
representations and warranties of the Company set forth in this Agreement
shall be true and correct in all material respects, in each case as of the
date of this Agreement, and (except to the extent such representations and
warranties speak specifically as of an earlier date) as of the Closing Date
as though made on and as of the Closing Date, except as otherwise
contemplated by this Agreement.
8.02. The Company's Performance. The Company shall have performed, in
all material respects, all obligations required to be performed by it under
this Agreement on or before the Closing Date.
8.03. Officers' Certificate. On or before the Closing Date, the
Company shall have delivered to Parent a certificate signed by an officer
of the Company to the effects of Sections 8.01 and 8.02.
8.04. Authority. All action required to be taken by, or on the part
of, the Company to authorize the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby
and thereby shall have been duly and validly taken by the board of
directors and stockholders of the Company.
8.05. Opinion of Counsel. Parent shall have been furnished with an
opinion substantially in the form of Exhibit B hereto of Cooley Godward
Castro Huddleson & Tatum, counsel to the Company, dated the Closing Date.
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<PAGE> 31
8.06. Affiliate Letters. Parent shall have received from each person
named in the letter referred to in Section 6.09 an executed copy of an
agreement substantially in the form contemplated thereby.
8.07. Comfort Letters. Parent shall have received a comfort letter
from Grant Thornton LLP, dated the date on which the S-4 shall become
effective and the Closing Date and addressed to Parent, in each case
satisfactory to Parent and customary in form and substance for such letters
delivered in connection with registration statements similar to the S-4 and
transactions similar to those contemplated by this Agreement.
8.08. No Company Material Adverse Effect. Except for the execution of
this Agreement and the consummation of the transactions contemplated
hereby, since the date hereof there shall not have occurred any Company
Material Adverse Effect.
8.09. Company Stockholder Exercise of Appraisal Rights. The holders of
no more than nine percent (9%) of the outstanding Company Stock shall have
exercised their appraisal rights under Section 262 of the DGCL.
9. CONDITIONS TO OBLIGATIONS OF THE COMPANY.
The obligation of the Company to effect the Merger shall be subject to the
fulfillment, at or prior to the Effective Time, of the following additional
conditions:
9.01. Representations and Warranties True on the Closing Date. The
representations and warranties of Parent and Sub set forth in this
Agreement shall be true and correct in all material respects, in each case
as of the date of this Agreement and (except to the extent such
representations and warranties speak specifically as of an earlier date) as
of the Closing Date as though made on and as of the Closing Date, except as
otherwise contemplated by this Agreement.
9.02. Parent's and Sub's Performance. Parent and Sub shall have
performed in all material respects all obligations required to be performed
by them under this Agreement on or before the Closing Date.
9.03. Officers' Certificate. On or before the Closing Date, Parent and
Sub shall have delivered to the Company certificates signed by an officer
of Parent and Sub, respectively, to the effects of Sections 9.01 and 9.02.
9.04. Authority. All action required to be taken by, or on the part
of, Parent and Sub to authorize the execution, delivery and performance of
this Agreement and the consummation of the transaction contemplated by this
Agreement shall have been duly and validly taken by the Boards of Directors
of Parent and Sub, respectively, and by the sole stockholder of Sub.
9.05. Opinion of Parent Counsel. The Company shall have been furnished
with an opinion or opinions substantially in the form of Exhibit C hereto
of Freeborn & Peters, counsel to Parent, dated the Closing Date.
9.06. Comfort Letters. The Company shall have received a comfort
letter from Grant Thornton LLP, dated the date on which the S-4 shall
become effective and the Closing Date and addressed to the Company, in each
case satisfactory to the Company and customary in form and substance for
such letters delivered in connection with registration statements similar
to the S-4 and transactions similar to those contemplated by this
Agreement.
9.07. No Parent Material Adverse Effect. Except for the execution of
this Agreement and the consummation of the transactions contemplated
hereby, since the date hereof there shall not have occurred any Parent
Material Adverse Effect.
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10. TERMINATION.
10.01. Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval and adoption of this Agreement by the stockholders of the Company:
(i) by mutual consent of Parent and the Company;
(ii) by either Parent or the Company if any permanent injunction or
other order of a court or other competent Governmental Entity preventing
the consummation of the Merger shall have become final and non-appealable;
(iii) by either Parent or the Company, if there shall have been a
material breach of any representation, warranty, covenant or agreement on
the part of the Company or on the part of Parent or Sub, as applicable,
which breach shall not have been cured prior to the earlier of (A) fifteen
business days following receipt by the breaching party of notice of such
breach and (B) the Closing Date;
(iv) by either Parent or the Company if the Merger shall not have been
consummated before November 30, 1996; provided, that the right to terminate
this Agreement under this Section 10.01(iv) shall not be available to any
party who has materially breached its representations, warranties,
covenants, or agreements under this Agreement and such material breach has
been the cause of or resulted in the failure of the Merger to occur on or
before such date; and provided, further, that if any condition to this
Agreement shall fail to be satisfied by reason of the existence of an
injunction or order of any court or Governmental Entity resulting from an
action or proceeding commenced by any party which is not a Governmental
Entity, then at the request of either party the deadline date referred to
above shall be extended for a reasonable period of time, not in excess of
120 days, to permit the parties to have such injunction vacated or order
reversed;
(v) by either Parent or the Company if this Agreement and the Merger
fail to receive the requisite vote for approval and adoption by the
stockholders of the Company at the Stockholders' Meeting;
(vi) by the Company if its board of directors, in the exercise of its
good faith judgment as to its fiduciary duties to its stockholders imposed
by law and upon written advice from counsel, determines that such
termination is required by reason of a Third Party Transaction; or
(vii) by Parent if (A) the board of directors of the Company shall
withdraw, modify or change its recommendation of this Agreement or the
Merger in a manner adverse to Parent or shall have resolved to do any of
the foregoing; (B) the board of directors of the Company shall have
recommended to the stockholders of the Company a Third Party Transaction;
(C) a tender offer or exchange offer for 15% or more of the outstanding
shares of capital stock of the Company is commenced and the board of
directors of the Company, within 10 business days after such tender offer
or exchange offer is commenced, either fails to recommend against
acceptance of such tender offer or exchange offer by its stockholders or
takes no position with respect to the acceptance of such tender offer or
exchange offer by its stockholders; or (D) after the date hereof, any
person (other than Mr. Robert R. Kaemmer) shall have acquired beneficial
ownership of or the right to acquire beneficial ownership of or any "group"
(as such term is defined in Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder) shall have been formed which
beneficially owns, or has the right to acquire beneficial ownership of, 15%
or more of the then outstanding shares of Company Stock (other than those
beneficial owners of 15 percent or more of the outstanding Company Stock as
of the date hereof or an affiliate thereof or Parent or an affiliate
thereof).
10.02. Effect of Termination. In the event of a termination of this
Agreement by either the Company or Parent as provided in Section 10.01, this
Agreement shall forthwith become void and there shall be no liability or
obligation on the part of Parent, Sub or the Company or their respective
officers, directors or stockholders, except to the extent provided in the
second, third and fourth sentences of Section 6.06 and in (ii) Sections 10.03
and 10.04.
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10.03. Liability of the Parties. Upon a willful breach by a party hereto of
any of its representations, warranties, covenants or agreements set forth in
this Agreement, Parent or the Company, whichever shall be the party at fault,
shall be liable (among other things) to reimburse the terminating party or
parties for all legal, accounting, printing, and other out-of-pocket expenses
reasonably incurred by the terminating party or parties in connection with this
Agreement and the transactions contemplated hereby. Except as set forth in
Sections 10.02 and 10.04, upon any other termination, no party shall have any
liability or obligation under this Agreement and each party shall bear the
expenses incurred by it, except that the filing fees and expenses paid to
Governmental Entities under Federal or other applicable securities laws shall be
borne equally by the Company and Parent.
10.04. Termination Fee. Notwithstanding anything in this Agreement to the
contrary and in addition to any payments required pursuant to Section 10.03, in
the event that:
(a) Parent terminates this Agreement pursuant to Section 10.01(iii) or
(iv) above and (A) such termination is the result of a willful breach of
any covenant, agreement, representation or warranty contained herein by the
Company, (B) there exists a Third Party Transaction at the time of such
termination and (C) within one year of such termination the Company enters
into a definitive agreement for the Third Party Transaction described in
(B) above or the Third Party Transaction described in (B) above is
consummated; or
(b) the Company or Parent terminates this Agreement pursuant to
Section 10.01(v) above and such termination is due to the fact that this
Agreement and the Merger shall not have been approved by the requisite vote
of the Company's stockholders as provided in Section 7.01 in circumstances
where (a) an offer or proposal to effect a Third Party Transaction with or
for the Company or its Subsidiaries has been publicly announced that is
financially superior to the Merger and reasonably capable of being financed
(as determined in each case in good faith by the Company's board of
directors after consultation with the Company's financial advisors) or (b)
after the date hereof any person or group (as defined in Section 13(d)(3)
of the Exchange Act) (other than Parent or any of its affiliates or Mr.
Robert R. Kaemmer) shall have become the beneficial owner (as defined in
Rule 13d-3 promulgated under the exchange Act) of at least 15 percent of
the outstanding shares of Company Stock or any person or group shall have
commenced, or shall have publicly announced an intention to commence, a
tender or exchange offer for at least 15 percent of the outstanding shares
of Company Stock that is financially superior to the Merger and reasonably
capable of being financed (as determined in each case in good faith by the
Company's board of directors after consultation with the Company's
financial advisors); or
(c) the Company terminates this Agreement pursuant to Section
10.01(vi) above; or
(d) Parent terminates this Agreement pursuant to Section 10.01(vii)(A)
above and, at the time of such termination, there exists a Third Party
Transaction or within one year of such termination the Company enters into
a definitive agreement for a Third Party Transaction or a Third Party
Transaction is consummated; or
(e) Parent terminates this Agreement pursuant to Section
10.01(vii)(B), (C) or (D) above,
then the Company shall promptly but in no event later than two days after the
first of such events shall occur, pay Parent a fee equal to $250,000 which
amount shall be payable forthwith without any demand therefor, in immediately
available funds. The parties hereto agree that such fee and payment of expenses
set forth in Section 10.03 shall be liquidated damages, are reasonable in light
of the difficulty in determining the precise level of damages which would be
incurred under such circumstances and the payment thereof shall constitute the
sole remedy of Parent for the termination of this Agreement by the Company under
the circumstances described in this Section 10.04.
11. MISCELLANEOUS.
11.01. Nonsurvival of Representations, Warranties and Agreements. None of
the representations, warranties, covenants and agreements in this Agreement (or
the exhibits and schedules hereto) or in any instrument delivered pursuant to
this Agreement shall survive the Effective Time, except for the agreements
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<PAGE> 34
contained in Article 3, the last sentence of Section 6.11, Sections 6.12, 6.13,
6.17, 6.20 and Article 11, and the agreements of the Rule 145 Affiliates of the
Company delivered pursuant to Sections 6.09 and 6.19. The Company
Confidentiality Agreement and Parent Confidentiality Agreement shall survive the
execution and delivery of this Agreement, and the provisions of the Company
Confidentiality Agreement and the Parent Confidentiality Agreement shall apply
to all information and material developed by any party hereunder.
11.02. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be (i) delivered personally, (ii) mailed
by postage prepaid, certified mail or registered mail, return receipt requested,
(iii) delivered by prepaid, overnight courier of recognized national standing,
such as Federal Express, or (iv) sent by facsimile transmission with written
confirmation of receipt requested, in any such case, addressed as follows:
If to Parent or Sub:
Phoenix Network, Inc.
1687 Cole Boulevard
Golden, CO 80401
Attention: Wallace M. Hammond
Telephone No.: (303) 232-4333
Telecopy No.: (303) 232-1250
With a copy to:
Freeborn & Peters
950 Seventeenth Street
Suite 2600
Denver, CO 80202
Attention: Ernest J. Panasci, Esq.
Telephone No.: (303) 628-4200
Telecopy No.: (303) 628-4240
If to the Company:
AmeriConnect, Inc.
6750 W. 93rd Street
Suite 110
Overland Park, KS 66212
Attention: Robert R. Kaemmer
Telephone No.: (913) 341-8888
Telecopy No.: (913) 341-2132
With a copy to:
Cooley Godward Castro Huddleson & Tatum
5 Palo Alto Square, Suite 400
Palo Alto, CA 94306
Attention: Patrick A. Pohlen, Esq.
Telephone No.: (415) 843-5000
Telecopy No.: (415) 857-0663
Such notices, requests, demands and other communications shall be deemed
made as of the date of actual delivery to the addressee thereof, which (x) in
the case of notice mailed return receipt requested, shall be the date of
delivery shown on the return receipt (y) in the case of notice delivered by
prepaid, overnight courier, shall be the date of delivery reflected on the
sender's invoice from such courier, and (z) in the case of notice sent by
facsimile transmission, shall be the date of such transmission.
11.03. Assignability and Parties in Interest; Third Party Beneficiaries.
Neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other parties, except that
Sub may
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<PAGE> 35
assign, subject to the reasonable approval of the Company, any or all of its
rights, interests and obligations hereunder to Parent or to any wholly owned
Subsidiary of Parent. Subject to the immediately preceding sentence, this
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective successors and assigns; except as provided in Section 6.17
nothing in this Agreement is intended to confer, expressly or by implication,
upon any other person any rights or remedies under or by reason of this
Agreement.
11.04. Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of Colorado without
regard to any principles of conflicts of laws.
11.05. Counterparts. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
11.06. Publicity. In addition to the provisions of Section 6.14 above, the
Company and Parent agree that press releases and other announcements with
respect to the Merger shall be subject to mutual agreement to the maximum extent
feasible that is consistent with their respective legal obligations to
disseminate material information to their stockholders and the public.
11.07. Complete Agreement. This Agreement, the exhibits hereto and the
schedules and documents delivered pursuant hereto or referred to herein contain
the entire agreement between the parties hereto with respect to the transactions
contemplated herein and therein and supersede all previous negotiations,
commitments and writings.
11.08. Specific Performance. Each of the parties hereto acknowledges and
agrees that the other party or parties hereto would be irreparably damaged in
the event any of the covenants or agreements contained in this Agreement are not
performed in accordance with their specific terms or are otherwise breached.
Accordingly, each of the parties hereto agrees that each of them shall be
entitled, without bond or other security, to an injunction or injunctions to
prevent breaches of the covenants or agreements contained in this Agreement and
to enforce specifically this Agreement and the covenants and agreements
contained herein in any action instituted in any court of the United States or
any state thereof having subject matter jurisdiction, in addition to any other
remedy to which such party may be entitled at law or in equity.
11.09. Modifications, Amendments and Waivers. At any time prior to the
Effective Time, the parties hereto may, by written agreement, (i) extend the
time for the performance of any of the obligations or other acts of the parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained in this Agreement or in any schedule or document delivered pursuant
hereto and (iii) waive compliance with any of the covenants or agreements
contained in this Agreement. At any time prior to the Effective Time, by action
of their respective boards of directors, the parties hereto may, by written
agreement, before or after stockholder approval, amend or supplement any of the
provisions of this Agreement, provided, however, that after this Agreement has
been adopted by stockholders, no amendment or supplement shall be made which is
required by law to have the further approval of stockholders unless such
amendment or supplement is approved by stockholders. Any written instrument or
agreement referred to in this Section 11.09 shall be validly and sufficiently
authorized for the purposes of this Agreement if signed, on behalf of the
Company, Parent and Sub, by persons authorized to sign this Agreement. This
Agreement may not be amended, waived or extended except by an instrument in
writing signed on behalf of each of the parties hereto.
11.10. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
11.11. Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11.12. Obligation of Parent. Whenever this Agreement requires Sub to take
any action, such requirement shall be deemed to include an undertaking on the
part of Parent to cause Sub to take such action.
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<PAGE> 36
11.13. Certain Definitions. (A) As used in this Agreement, an "Affiliate"
of any person means any other person directly or indirectly controlling or
controlled by or under direct or indirect common control with such person. For
the purposes of this definition, "control", when used with respect to any person
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such person, whether through the
ownership of voting securities, by contract or otherwise; the terms
"controlling" and "controlled" have meanings correlative to the foregoing; and
the term "person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof; and (B) where
any representation and warranty contained in this Agreement is expressly
qualified by reference to the "knowledge" of a party, such term shall be limited
to the actual knowledge of the executive officers and directors of the party
making the representation and warranty.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be executed by their respective duly authorized officers as of the date first
above written.
PHOENIX NETWORK, INC.
By: /s/ WALLACE M. HAMMOND
---------------------------------
Name: Wallace M. Hammond
Title: President & CEO
PHOENIX MERGER CORP.
By: /s/ WALLACE M. HAMMOND
---------------------------------
Name: Wallace M. Hammond
Title: President & CEO
AMERICONNECT, INC.
By: /s/ ROBERT R. KAEMMER
---------------------------------
Name: Robert R. Kaemmer
Title: Chairman of the Board,
President & CEO
31
<PAGE> 38
EXHIBIT A-1
[PHOENIX NETWORK, INC. AFFILIATES AGREEMENT]
Phoenix Network, Inc.
1687 Cole Boulevard
Golden, CO 80401
Attention: Jeffrey Bailey
AmeriConnect, Inc.
6750 W. 93rd Street, Suite 110
Overland Park, KS 66212
Attention: Robert R. Kaemmer
Dear Sirs:
Solely for purposes of this letter, I assume that as of the date hereof, I
may be deemed to be an "affiliate" of Phoenix Network, Inc., a Delaware
corporation ("Phoenix"), as that term is defined for purposes of Accounting
Series Releases Nos. 130 and 135 as amended by Staff Accounting Bulletin Nos. 65
and 76 issued by the Securities and Exchange Commission under the Securities Act
of 1933, as amended. An Agreement and Plan of Merger (the "Agreement") has been
entered into by and among Phoenix, AmeriConnect, Inc., a Delaware corporation
("AmeriConnect") and Phoenix Merger Corp. In accordance with the Agreement,
Phoenix will acquire all of the stock of AmeriConnect and in return
AmeriConnect's stockholders will receive shares of Phoenix common
stock, $.001 par value per share, on a pro rata basis.
With respect to the Phoenix Common Stock owned by me, I represent, warrant
and agree that, if the Merger qualifies for pooling-of-interest accounting
treatment, I will not, unless the Agreement is terminated, sell, transfer or
otherwise reduce my interest in the Phoenix Common Stock or reduce my risk
relating thereto during the time period commencing thirty (30) days prior to the
Closing Date and ending on the date Phoenix has issued financial results
covering at least thirty (30) days of combined operations of Phoenix and
AmeriConnect after the Closing Date.
Very truly yours,
-----------------------------------
Phoenix Stockholder
Date: , 1996
Accepted: Accepted:
Date: , 1996 Date: , 1996
PHOENIX NETWORK, INC. AMERICONNECT, INC.
By: By:
------------------------------------ --------------------------------
Wallace M. Hammond Robert R. Kaemmer
President & CEO President & CEO
<PAGE> 39
EXHIBIT A-2
[AMERICONNECT, INC. AFFILIATES AGREEMENT]
Phoenix Network, Inc.
1687 Cole Boulevard
Golden, CO 80401
Attention: Jeffrey Bailey
AmeriConnect, Inc.
6750 W. 93rd Street, Suite 110
Overland Park, KS 66212
Attention: Robert R. Kaemmer
Dear Sirs:
Solely for purposes of this letter, I assume that as of the date hereof, I
may be deemed to be an "affiliate" of AmeriConnect, Inc., a Delaware corporation
("AmeriConnect"), as that term is defined for purposes of Accounting Series
Releases Nos. 130 and 135 as amended by Staff Accounting Bulletin Nos. 65 and 76
issued by the Securities and Exchange Commission under the Securities Act of
1933, as amended. An Agreement and Plan of Merger (the "Agreement") has been
entered into by and among Phoenix Network, Inc., a Delaware corporation
("Phoenix"), AmeriConnect and Phoenix Merger Corp. In accordance with the
Agreement, Phoenix will acquire all of the stock of AmeriConnect and in return
AmeriConnect's stockholders will receive shares of Phoenix common
stock, $.001 par value per share, on a pro rata basis.
With respect to the AmeriConnect capital stock owned by me, I represent,
warrant and agree that, if the Merger qualifies for pooling-of-interest
accounting treatment, I will not, unless the Agreement is terminated, sell,
transfer or otherwise reduce my interest in the AmeriConnect capital stock or
reduce my risk relating thereto during the time period commencing thirty (30)
days prior to the Closing Date and ending on the date Phoenix has issued
financial results covering at least thirty (30) days of combined operations of
Phoenix and AmeriConnect after the Closing Date.
Very truly yours,
------------------------------------
AmeriConnect Stockholder
Date: , 1996
Accepted: Accepted:
Date: , 1996 Date: , 1996
PHOENIX NETWORK, INC. AMERICONNECT, INC.
By: By:
------------------------------------ ---------------------------------
Wallace M. Hammond Robert R. Kaemmer
President & CEO President & CEO
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EXHIBIT 21
Subsidiaries of the Registrant
Jurisdiction of
Name Incorporation
- ---- ----------------
Phoenix Telcom, Inc. California
Phoenix Network, Inc. of New Hampshire New Hampshire
Phoenix Merger Corp. Delaware
Phoenix Network Acquisition Corp. Delaware
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EXHIBIT 23(a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated March 28, 1996 accompanying the consolidated
financial statements of Phoenix Network, Inc. and Subsidiaries appearing in the
1995 Annual Report of the Company to its stockholders and accompanying the
schedules included in the Annual Report on Form 10-K for the year ended December
31, 1995 which are incorporated by reference in this Registration Statement. We
consent to the incorporation by reference in the Registration Statement of the
aforementioned reports and to the use of our name as it appears under the
captions "Summary Financial Data" and "Experts."
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
San Francisco, California
August 21, 1996
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 16, 1996 accompanying the
consolidated financial statements of AmeriConnect, Inc. and subsidiary
appearing in the 1995 Annual Report of the Company to its shareholders and
accompanying the schedules included in the Annual Report on Form 10-KSB for the
year ended December 31, 1995 which are incorporated by reference in this
Registration Statement. We consent to the incorporation by reference in the
Registration Statement of the aforementioned reports and to the use of our
name as it appears under the captions "Summary Financial Data" and "Experts."
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Kansas City, Missouri
August 21, 1996
