<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM S-3
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) 205-3500
(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) 205-3500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With Copies to:
ERNEST J. PANASCI, ESQ.
KEVIN G. O'CONNELL, ESQ.
SLIVKA ROBINSON WATERS & O'DORISIO, P.C.
1099 18TH STREET, SUITE 2600
DENVER, COLORADO 80202
(303) 297-2600
(303) 297-2750 (FAX)
----------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. ( )
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. (x )
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of earlier
effective registration statement for the same offering. ( )
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for the same offering. ( )
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.( )
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================================
Amount Proposed Maximum Proposed Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to be Registered Registered Per Share Offering Price Fee
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value 3,151,224 $2,09375(1) $6,597,875.25(1) $1,999.36
- ------------------------------------------------------------------------------------------------------------
Common Stock underlying Warrants 60,000 $2.3375 $140,250 $42.50
- ------------------------------------------------------------------------------------------------------------
Total $6,738,125.25
- ------------------------------------------------------------------------------------------------------------
TOTAL REGISTRATION FEE $2,042
============================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(c) solely for purposes of calculating
the registration fee based on the average of the high and low prices
of the Registrant's Common Stock as reported on the American Stock
Exchange on April 22, 1997.
----------------------------------
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> 3
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 APRIL 28, 1997
3,211,224 SHARES
PHOENIX NETWORK INC.
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
----------------------------------
This Prospectus relates to the public offering, which is not being
underwritten, of 3,211,224 shares (the "Shares") of Common Stock of Phoenix
Network, Inc. ("Phoenix" or the "Company"). The Shares may be offered by
certain stockholders of the Company (the "Selling Stockholders") from time to
time in transactions on the American Stock Exchange, in negotiated transactions
or otherwise, at fixed prices which may be changed, at prices related to
prevailing market prices or at negotiated prices. See "Plan of Distribution."
The Selling Stockholders may effect such transactions by selling the Shares to
or through broker-dealers, and such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling Stockholders
and/or the purchasers of the Shares for whom such broker-dealers may act as
agents or to whom they sell as principals, or both (which compensation as to a
particular broker might be in excess of customary commissions). To the extent
required, the specific Shares to be sold, the names of the Selling
Stockholders, the public offering price, the names of any such agent, dealer or
underwriter, and any applicable commission or discount with respect to any
particular offer will be set forth in an accompanying Prospectus Supplement.
None of the proceeds from the sale of the Shares by the Selling
Stockholders will be received by the Company. The Company has agreed to bear
certain expenses (other than selling commissions and fees and expenses of
counsel and other advisors to the Selling Stockholders in excess of $10,000) in
connection with the registration of the Shares being offered by the Selling
Stockholders.
INVESTMENTS IN THE SHARES INVOLVES SIGNIFICANT RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED IN EVALUATING AN INVESTMENT IN PHOENIX COMMON STOCK.
The Common Stock of the Company is traded on the American Stock
Exchange under the trading symbol "PHX."
----------------------------------
The Selling Stockholders and any broker-dealers, agents or
underwriters that participate with the Selling Stockholders in the distribution
of the Shares may be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act of 1933 (the "Securities Act"), and any commissions
received by them and any profit on the resale of the Shares purchased by them
may be deemed to be underwriting commissions or discounts under the Securities
Act.
----------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
----------------------------------
The date of this Prospectus is April __, 1997
<PAGE> 4
AVAILABLE INFORMATION
Phoenix is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files 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. The Company's 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.
Phoenix has filed with the SEC a registration statement on Form S-3
(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 the Company's Common Stock being offered by this Prospectus. This
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 OF CERTAIN DOCUMENTS BY REFERENCE
This Prospectus incorporates documents by reference which are not
presented herein or delivered herewith. These documents are available upon
request from the Company. Requests should be directed to Phoenix Network,
Inc.'s principal executive offices at 1687 Cole Boulevard, Golden, Colorado
80401 Attention: Jon Beizer, Senior Vice President and Chief Financial Officer,
telephone (303) 205-3500.
Phoenix will provide without charge to each person, 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 person 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, 1996;
(b) Phoenix's Current Reports on Form 8-K dated January
23, 1997 and April 25, 1997.
(c) The description of Phoenix's Common Stock which is
contained in Phoenix's Registration Statement on Form 10, filed August
7, 1989 (File No. 0-17909) including any amendment or report filed for
the purpose of updating such description.
All documents filed by Phoenix pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date hereof and prior to the termination of
the offering of the Shares 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 Prospectus or in any document incorporated into
this 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 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
2
<PAGE> 5
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection
with the offering made hereby, and given or made, such information or
representations must not be relied upon as having been authorized by the
Company, any Selling Stockholder or by any other person. Neither the delivery
of this Prospectus nor any sale made thereunder shall, under any circumstances,
create any implication that information herein is correct as of any time
subsequent to the date hereof. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy the Shares to any person or by anyone
in any jurisdiction in which such offer or solicitation may not lawfully be
made.
FORWARD-LOOKING STATEMENTS
This 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 COMPANY."
In connection with forward-looking statements which appear in these
disclosures, prospective investors should carefully review the factors set
forth in this Prospectus under "RISK FACTORS--Possible Merger with US ONE; Need
for Additional Capital," "--Possible Acquisitions; Need for Additional
Capital," "--Need to Successfully Integrate Mergers and Acquisitions,"
"--Management of Rapid Growth," "--Ability to Successfully Implement New
Billing and Customer Care Platform," "--Reliance on Switching Service
Providers; Risks Associated with Network Deployment," "--Ability to
Successfully Develop New Products and Enter New Markets" and "--Customer
Attrition."
THE COMPANY
GENERAL
Phoenix is a facilities-based reseller of telecommunications services
which sells to residential accounts and 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.
During the latter half of 1995, Phoenix embarked on an acquisition
strategy with the stated goal of acquiring companies which could either add new
products to Phoenix's product portfolio or whose customer base and sales
organization would represent a profitable investment. During 1995, Phoenix
acquired Bright Telecom, L.P., a small international call-back provider and
Tele-Trend Communications, LLC, a Denver-based switchless reseller. During
1996, Phoenix acquired Automated Communications, Inc., a Denver
facilities-based reseller and AmeriConnect, Inc., an Overland Park-based
switchless reseller. Phoenix will continue to pursue acquisitions of companies
which could add profitable products or customer bases. 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.
RECENT DEVELOPMENTS
The Company's board of directors has authorized the Company to seek
the conversion into Common Stock of all of the issued and outstanding shares of
the Company's Series A Preferred Stock, Series B Preferred Stock and Series D
Preferred Stock. As of March 31, 1997, Phoenix estimates that the conversion
of each of the above series of Preferred Stock will result in the issuance of
an aggregate of approximately 1,908,954 shares of Common Stock. It is expected
that such conversion, if it occurs, will take place in the second and/or third
quarters of 1997.
The Company's executive offices are located at 1687 Cole Boulevard,
Golden, Colorado 80401 (telephone: (303) 205-3500.
3
<PAGE> 6
RISK FACTORS
In evaluating Phoenix's business, prospective investors should
consider carefully the following risk factors in addition to the other
information contained or incorporated by reference in this Prospectus.
This 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.
Negative Cash Flow From Operations. For the years ended December 31,
1995 and 1996, the Company's consolidated loss before interest expense, income
taxes, depreciation and amortization, loss on abandonment of fixed assets,
aborted bond offering expenses and relocation expense was $148,000 and $5.1
million, respectively. The Company's ability to achieve positive cash flow
from operations will be dependent primarily upon the successful implementation
of the Company's business strategy, which relies largely upon the Company's
ability to increase cash flow through acquisitions and decrease average line
costs through deployment and loading of a nation-wide long distance network
system (the "Network"), consisting of switching equipment in major metropolitan
areas and transmission facilities between these switches. Other factors which
are beyond the control of the Company, such as the future actions of
competitors and regulators, may also affect the Company's realization of the
benefits of its business strategy. There can be no assurance that the Company
will be successful in improving its cash flow.
History of Operating Losses. Phoenix sustained operating losses of
$1.9 million, $1.4 million and $12.3 million in the years ended December 31,
1993, 1995 and 1996, respectively, and operating income of only $2,000 for the
year ended December 31, 1994. Phoenix expects to continue to incur operating
losses for the foreseeable future due to the high amortization of goodwill
charges resulting from acquisitions and other factors. To finance its
operations, Phoenix has a line of credit facility of up to $10.0 million under
the Amended and Restated Loan and Security Agreement with Foothill Capital
Corporation (the "Credit Facility") and may incur additional indebtedness from
time to time subject to restrictions in the Credit Facility. If Phoenix cannot
achieve operating profitability, it may have difficulty in attracting equity
capital or other financing, and the value of its Common Stock may be adversely
affected, which may limit the ability of Phoenix to use its Common Stock to
make future acquisitions. This, in turn, could negatively affect Phoenix's
ability to successfully implement its business strategy.
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 and/or vendors, including US One Communications
Corp. (collectively with its subsidiaries, "US One") and Comdisco Network
Services, a division of Comdisco, Inc. ("Comdisco"), 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.
Substantial Leverage. The Company may incur up to $10.0 million of
indebtedness under the Credit Facility and may incur additional indebtedness
from time to time subject to restrictions in the Credit Facility. The level of
the Company's indebtedness could have adverse consequences, including the
effect of such indebtedness on (i) the Company's ability to fund internally, or
obtain additional debt or equity financing in the future for, acquisitions,
working capital, operating losses, capital expenditures and other purposes;
(ii) the Company's flexibility in planning for or reacting to changes in its
business and market conditions; (iii) the Company's flexibility to compete with
less highly leveraged competitors, particularly in the area of price
competition and (iv) the Company's financial vulnerability in the event of a
downturn in its business or the general economy.
The Company's ability to satisfy its debt obligations will depend upon
its future operating performance, which will be affected by the successful
implementation of its business strategy and financial, business and other
factors, certain of which are beyond its control. If the Company's cash flow
and capital resources are insufficient to fund its debt service obligations,
the Company may be required to sell assets, obtain additional equity capital,
restructure its debt and/or reduce or delay capital expenditures. In such
event, the Company could face substantial liquidity problems, and
4
<PAGE> 7
there can be no assurance as to the success of such measures or the proceeds
which the Company could realize therefrom.
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 available 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
in the future.
Furthermore, the Telecommunications Act of 1996 (the "1996 Act") can
be expected to increase competition in the domestic long distance market as the
Regional Bell Operating Companies ("RBOCs") begin providing both in-region and
out-of-region long distance service. The RBOCs may build their own national
networks, resell telecommunications services of others, lease facilities from
others or acquire smaller domestic long distance service providers. To the
extent that the RBOCs enter the domestic long distance market by acquiring
other long distance providers, the domestic long distance service industry may
consolidate.
Certain of Phoenix's competitors are significantly larger, have
substantially greater financial, technical and marketing resources and larger
networks than Phoenix, control transmission lines and have long-standing
relationships with Phoenix's target customers. Phoenix competes with the same
facilities-based carriers from whom Phoenix procures bulk-rate services.
Certain of Phoenix's competitors are able to provide services comparable to or
more extensive than Phoenix's at rates competitive with Phoenix's rates.
Additionally, Phoenix's strategy of deploying and loading a network can be
replicated by some of its competitors.
Phoenix competes with the principal long distance carriers, AT&T
Corporation ("AT&T"), MCI Communications Corp. ("MCI"), and Sprint Corporation
("Sprint") as well as with other major providers of long distance services,
including Frontier Communications (a subsidiary of Frontier Corporation), and
LDDS/WorldCom, Inc. and its subsidiaries, including WilTel ("LDDS/WorldCom").
Additionally, as a result of Congress' recent enactment of the 1996 Act, the
nation's largest local telephone companies (i.e., the RBOCs) and the General
Telephone and Electronics operating companies (collectively "GTE"), energy
utilities, cable television companies, competitive local exchange carriers
("CLECs") such as MFS Communications Company, Inc., and other entities will
also be allowed to provide long distance service in the near future subject to
various regulatory requirements and safeguards. An increase in such
competition could have a material adverse effect on Phoenix's business,
financial condition and results of operations, including higher customer
attrition.
There can be no assurance that Phoenix will be able to compete
successfully in the future. Phoenix intends to compete in the long distance
market and in the local market on the basis of price, service offerings and
customer service. Phoenix's ability to compete on the basis of price is
dependent on its ability to implement its Network and secure volume-discount
pricing from vendor carriers and wholesale local access and local dial tone
providers. The same volume-discount pricing that Phoenix utilizes is available
to current and potential competitors, and current and potential competitors
could lease or build networks in order to lower line costs. Phoenix does not
have proprietary contractual arrangements in this regard. As a result, there
are no substantial barriers to the entry of additional competitors into the
field. Furthermore, to the extent such competitors acquire or develop
facilities-based long distance and/or local dial tone networks, such
competitors may be able to offer rates as low as or lower than those available
from Phoenix.
Phoenix's competitors may reduce rates or offer incentives to existing
and potential customers of Phoenix, whether caused by general competitive
pressures or the entry of the RBOCs, GTE and other local exchange carriers
("LECs") into the long distance market. Phoenix has historically attracted
customers by pricing its services at a discount to the basic "1 plus" rates
offered by AT&T, MCI and Sprint. These and other large long distance providers
are offering an increasing number of flat rate and other rate plans in addition
to basic service, and these plans are likely to result in a reduction in the
number of long distance customers using basic "1 plus" rates. Because Phoenix
believes that to maintain its competitive position it must be able to reduce
its prices in order to maintain its relative price position in the market, a
decrease in the rates charged by others for long distance services could have a
material adverse effect on Phoenix's business, results of operations and
financial condition.
In addition, in certain instances LECs have been afforded a degree of
pricing flexibility in differentiating
5
<PAGE> 8
among markets and carriers in setting access charges and other rates in areas
where adequate competition has emerged. As LECs become free to set rates and
to provide discounts to high-volume customers, the ability of competitors that
are substantially larger than Phoenix to obtain volume discounts for access and
termination charges could adversely affect Phoenix by reducing the operating
costs of its larger competitors relative to those of Phoenix. In particular,
it is expected that the largest players in the long distance market, such as
AT&T, MCI, Sprint and LDDS/WorldCom will be able to guarantee substantially
larger volumes to LECs than will Phoenix. As deregulation of the local
exchange market occurs, LECs may be willing to grant large interexchange
carriers ("IXCs") significant discounts in return for guarantees of volume.
There can be no assurance that Phoenix will be able to obtain similar
discounts.
Phoenix intends to commence offering local dial tone service in 1997.
Phoenix expects to face intense competition from the RBOCs, which are the
principal current providers of local dial tone services, and from other
telecommunications services providers, including other long distance providers,
who may also enter the market.
Possible Merger with US One; Need for Additional Capital. Phoenix has
entered into a letter of intent to merge with US One, with Phoenix as the
surviving entity. See the Company's Current Report on Form 8-K, as filed with
the SEC on April 25, 1997, and the exhibits thereto. Stockholders of Phoenix
prior to the merger with US One (the "Merger") would own approximately 50% of
the surviving entity following the Merger. Accordingly, stockholders of
Phoenix would experience substantial dilution as to percentage ownership of the
surviving entity and may experience dilution as to share value.
The Merger, if consummated, will represent a strategic shift for the
Company, as the Company's Network would then consist primarily of owned
switches (most of which would be acquired in the Merger) and leased
transmission facilities. Originally, the Company had intended to deploy the
Network relying primarily on switching equipment leased from US One, together
with leased transmission facilities. Further, the Company presently
anticipates that, following the Merger, it may resell on a limited basis
wholesale long distance and local dial tone products in addition to offering
its own retail products. There can be no assurance that the Merger will be
consummated, or that US One can be effectively and profitably integrated into
Phoenix.
Owning US One's switches, proprietary software and other assets would
substantially increase the Company's need for capital. To raise additional
required capital and to fund expenses of the Merger, 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, additional 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 the Company will be able to generate or raise sufficient capital
on terms acceptable to it to enable the Company to implement its post-Merger
business plan or pursue additional revenue opportunities.
Furthermore, consummation of the Merger would subject the Company and
its stockholders to substantial additional risk factors associated with the
operation of US One's businesses and the implementation of US One's business
strategy. Although the Merger is intended to enhance Phoenix's long-term
profitability, the Merger may negatively impact Phoenix's operating results,
particularly during the periods immediately following consummation thereof.
US One was founded in 1994 and has no significant operating history.
Therefore, investors have limited financial information upon which to base an
evaluation of US One, and consequently, the Merger. Additionally, US One is
subject to all the risks inherent in the establishment of a new business
enterprise. US One, and the Company following the Merger, intend to use
untested approaches to market positioning in the telecommunications industry
and new configurations of existing technologies. There can be no assurance
that such approaches will be effective or that such configurations will
function as anticipated.
Possible Acquisitions; Need for Additional Capital. As part of its
growth strategy, Phoenix intends to pursue acquisitions of companies that 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 integrated into
Phoenix. The success of Phoenix's acquisition strategy is dependent on a
number of factors, many of which are not in Phoenix's control, including (i)
Phoenix's ability to identify attractive acquisition candidates; (ii) Phoenix's
ability to negotiate terms for
6
<PAGE> 9
such acquisitions that are favorable to Phoenix; (iii) the timely completion of
any agreed upon acquisitions; (iv) the successful integration of the acquired
businesses into Phoenix's existing business; and (v) the ability of Phoenix to
retain the acquired customers and sales personnel after completion of the
acquisition. The ability of Phoenix to transmit the long distance calls of
customers of acquired businesses on Phoenix's Network may be affected by the
terms of existing agreements of such acquired businesses with facilities-based
carriers, which could limit the economic benefit of the migration of this
traffic volume to the Network while such agreements are in effect. While
Phoenix believes it can acquire companies at favorable prices, there can be no
assurance that Phoenix will be able to do so or that intense competition for
such companies will not develop among certain of Phoenix's competitors.
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.
Need to Successfully Integrate Mergers and Acquisitions. Phoenix must
be able to rapidly and effectively integrate the businesses of merged and
acquired ("acquired") companies with its own in order to successfully implement
its business strategy. The successful integration of acquired businesses is
dependent on a number of factors, including minimizing the costs of
assimilating the operations and personnel of the acquired business with
Phoenix's, minimizing customer attrition following the acquisition, avoiding
disruption of Phoenix's ongoing business, including the distraction of
management from day-to-day operations, maximizing the potential of any acquired
products or services, eliminating duplicative costs and maintaining uniform
standards, controls, procedures and policies. Phoenix will be required to
assess and manage the obligations of acquired companies, including contingent
liabilities which may be difficult to quantify. The management information
systems ("MIS systems"), including the billing systems, of the acquired
companies may be different from those of Phoenix's, may be subject to existing
contracts with third party providers and typically must be integrated into
Phoenix's. To the extent Phoenix acquires businesses in which its management
has no prior experience, Phoenix may be dependent on the management of the
acquired business.
Management of Rapid Growth. Phoenix's strategy to merge with US One
and to grow through additional acquisitions and enter new markets will place
additional demands upon Phoenix's management and its customer service, sales,
marketing and administrative resources. The growth of Phoenix will result in
an increased level of responsibility for both existing and new management
personnel. Phoenix will be required to implement and improve its operating and
financial systems and controls and to attract, retain, train and manage new
employees. Phoenix's management will be required to manage the day-to-day
operations of Phoenix's current long distance service and, if the Merger is
consummated, of US One's current businesses, while pursuing possible
acquisitions and developing and introducing new products and services. If
Phoenix is unable to meet the demands of expected growth, its operations and
financial condition could be materially adversely affected.
Ability to Successfully Implement New Billing and Customer Care
Platform. Primarily as a result of previous acquisitions, Phoenix currently
uses seven distinct billing systems. In addition, it is likely that any
businesses acquired pursuant to Phoenix's acquisition strategy will also have
partially or completely distinct billing systems. Phoenix is in the process of
implementing a new billing and customer care platform (the "New Billing and
Customer Care Platform") to replace the existing billing systems, and
expenditures to complete the migration to the New Billing and Customer Care
Platform are expected to be approximately $1.0 million in 1997. The New
Billing and Customer Care Platform is fully installed and in the process of
being tested. Certain of Phoenix's customers are presently receiving their
bills from the New Billing and Customer Care Platform, and the rest of
Phoenix's customers are expected to be phased onto the New Billing and Customer
Care Platform during 1997. There can be no assurance that the New Billing and
Customer Care Platform will be fully operational when anticipated or will
operate as expected, and any difficulties in operating the New Billing and
Customer Care Platform or integrating MIS systems could adversely affect
Phoenix's ability to generate timely billing information and management
reports.
Dependence on Independent Distributors. Like many other companies in
the telecommunications industry, Phoenix relies on independent distributors for
a significant percentage of its new business sales. While Phoenix devotes
significant resources on training and building relationships with these
distributors, they are independent contractors who,
7
<PAGE> 10
in some instances, also do business with other telecommunications providers.
Phoenix has only a limited degree of control over the operations of these
distributors and adherence by the distributors to Company policies and
procedures.
Reliance on Switching Service Providers; Risks Associated with Network
Deployment. A key component of Phoenix's business strategy has been to lower
its line costs by deploying and loading the Network as an alternative to
purchasing bulk capacity from facilities-based carriers on a bundled basis. If
the Merger is consummated, Phoenix will own most or all of the switching
equipment necessary to fulfill its switching needs, and the Network will
include such owned switches. Until the Merger is consummated, and for the
foreseeable future if the Merger is not consummated, Phoenix will be reliant on
switching service providers to lease switching capacity to the Company.
Phoenix has entered into agreements with US One and another company for the use
of their long distance switches, only some of which have been deployed to date.
In order to maximize the benefits of its Network strategy, Phoenix
needs to maximize the amount of long distance calls transmitted on its Network
and decrease the amount of long distance calls transmitted on the networks of
third-party carriers. Management of Phoenix has estimated, without third party
confirmation, that substantial cost savings can be achieved as a result of
moving call traffic onto the Network (i.e., routed by at least one
Company-controlled switch) ("On-Network") from being handled solely by
third-party carriers off of the Network ("Off-Network"). Management's
estimates make certain assumptions as to general industry and business
conditions, many of which are beyond the control of Phoenix. There can be no
assurance that such cost savings will be realized or that unforeseen costs and
expenses or other factors will not offset the cost savings in whole or in part.
Moreover, if the Merger is consummated, Phoenix's line costs will be
dependent on the total volume of traffic it is able to place on the Network, as
the operating costs of the Network will be charged based upon the Company's
minutes of use. If the Company is not able to generate sufficient traffic
volume, either internally or through resale of wholesale products, the
Company's operating results and competitive position may deteriorate. There
can be no assurance that the Company will be able to adequately load the
Network to achieve the anticipated cost savings.
Historically, Phoenix has provided long distance services to small
businesses by purchasing bulk-rate capacity from third- party carriers and
transmitting its customers' long distance calls over those carriers' networks.
The success of Phoenix's strategy of deploying its own Network will be
dependent on the ability of management of Phoenix to deploy and load the
Network. Phoenix has had more than eight years of experience in operating
owned switches, but, prior to July 1996, Phoenix had no previous experience in
operating switches such as those being deployed by US One, either on a leased
or owned basis. Under the Company's agreement with US One, US One is obligated
to supply Phoenix with network design engineering assistance and consultation,
but this obligation terminates in April 1998.
Phoenix's Network strategy is based upon third-party agreements with
Comdisco and, until the Merger is consummated, and if the Merger is not
consummated, with US One.
As of April 25, 1997, US One had installed eight switches over which
the Company is transmitting call traffic. Recently, US One has sought
investors or strategic partners to provide capital to complete the build-out of
its national switching and local dial tone service facilities. In order to
conserve cash and focus on its immediate strategic goal of implementing local
dial tone service, US One recently reduced its work force.
If the Merger is not consummated, or if the Company is not able to
raise additional operating capital following the Merger, the Company may be
unable to secure switching services at attractive prices in the markets in
which such services would be most beneficial to it, and the Company may be
forced to delay implementation of, or to modify, its Network strategy. There
can be no assurance that the Company will be able to secure switching services
at attractive prices in additional markets, or that the Company will be able to
accomplish its Network strategy so as to achieve the anticipated benefits
therefrom.
Further, US One experienced service difficulties in the initial phase
of the service cut over coincident with the transfer of long distance traffic
from Phoenix's switch to US One's switch in Denver. US One has stated that
these service difficulties arose principally as a result of US One's use of a
newly designed switch configuration and newly designed software. Because
Phoenix's long distance traffic originating in Denver could not be transferred
in phases to the US One switch, all of Phoenix's long distance traffic
originating in Denver had to be transferred all at once from
8
<PAGE> 11
Phoenix's Colorado Springs switch to the US One Denver switch. In the two
months following the cut over, Phoenix lost approximately 14% of its customers
in the Denver area, which included both regular attrition and cut over-related
difficulties. On the basis of subsequent switch implementations by US One,
the Company believes that the risks of future service difficulties similar to
those encountered with the Denver switch are remote. However, there can be no
assurance that similar service difficulties will not arise in connection with
future switch deployments, or that any such service difficulties would not
result in a loss of customers. In addition, although US One has eight switches
installed and currently in use, certain of the planned services (including
inbound 800 and dedicated lines services) are not yet available on all of such
switches. Delays in the provision of these services by US One could delay
potential cost savings to Phoenix of using US One switches.
The Comdisco transmission lines are leased from other transmission
providers and are currently in place. Under the Company's Agreement with
Comdisco, Comdisco has the right to increase its monthly fees to Phoenix, upon
30 days' notice, due to any increase in the rates charged to Comdisco by the
underlying carriers from whom it leases transmission lines, provided that
Comdisco may not increase its aggregate fees to Phoenix by more than 10% per
year for the first two years of the term of the agreement. Although Phoenix
intends to utilize Comdisco's fixed-cost inter-machine trunk transmission lines
("IMTs") to interconnect a substantial number of its owned and/or leased
switches, there can be no assurance that capacity will be available on
Comdisco's IMTs. Although Phoenix believes that IMTs will continue to be
available from other sources, there can be no assurance that such IMTs will be
available at prices comparable to those available from Comdisco.
Ability to Successfully Develop New Products and Enter New Markets.
Phoenix believes that offering a full range of telecommunications products and
services will be crucial for it to remain competitive and attract and retain
customers. Phoenix's strategy includes offering local dial tone service,
either utilizing its own capabilities if the Merger is consummated, or
reselling the wholesale dial tone product of a switching service provider or
other outside vendor. In either event, local dial tone service is an area in
which Phoenix has no experience. The costs of providing such service and the
related increased customer service support and marketing costs could be
substantial.
Phoenix is also seeking to increase the number of residential
customers it serves in the long distance market in order to optimize the use of
its Network. Residential customers have historically accounted for less than
5% of Phoenix's revenues. Attrition rates for residential customers in the
long distance industry are substantially higher than attrition rates for
business customers.
In addition, in pursuing its acquisition strategy Phoenix may acquire
companies with lines of businesses in which Phoenix has no experience. Entry
into new markets entails risks associated with the state of the market,
competition from companies in those markets and increased selling and marketing
expenses. There can be no assurance that Phoenix's new products or services
will improve its operating results.
Dependence on Service Providers. Presently, approximately 85% of the
long distance calls made by Phoenix's customers are transmitted entirely or
partially on the networks of facilities-based carriers that compete with
Phoenix, including LDDS/WorldCom, Sprint and Frontier. Until Phoenix's Network
is fully deployed and loaded, and even thereafter with respect to at least 10%
of Phoenix's customer traffic which is expected to remain Off-Network and a
portion of Phoenix's On-Network traffic that is terminated through the networks
of vendor carriers, Phoenix will be dependent on its ability to obtain
bulk-rate long distance transmission capacity from such vendor carriers on a
cost-effective basis. Phoenix is vulnerable to changes in its arrangements
with such carriers, such as price increases and service cancellations.
Phoenix's current agreement with Sprint expires in September 1998 and requires
Phoenix to pay minimum usage fees of $20 million during the term of the
contract, of which at least $12 million must be spent in the first twelve
months of the contract. Phoenix's current agreement with LDDS/WorldCom, which
became effective in August 1996 and expires in May 1999, obligates Phoenix to
pay minimum usage fees of $15 million, $12 million and $9 million,
respectively, during each of the first three six-month periods of the agreement
and $12 million during the 12-month period commencing February 1998. Phoenix's
current agreement with Frontier expires in March 1998 and requires Phoenix to
pay minimum monthly usage fees of $1 million for domestic calls (before
discounts) and $200,000 for international calls (after discounts). Phoenix has
in certain instances in the past failed to place calling traffic on the
networks of vendor carriers sufficient to meet minimum usage requirements.
However, in all instances to date where Phoenix has missed a minimum usage
requirement and such miss resulted in an obligation to pay a material sum to a
vendor carrier, the vendor carrier has waived the obligation or Phoenix has
been reimbursed by a third party for the
9
<PAGE> 12
amount of such material sum. Although Phoenix expects to be able to meet its
minimum usage requirements going forward, the minimum usage requirements may,
depending upon traffic volume, reduce the benefit to Phoenix of the
availability of the Network until the minimum requirements decrease per the
terms of the agreements or the agreements expire.
Phoenix is dependent on its facilities-based carriers and other
vendors to provide it promptly with the detailed information on which Phoenix
bases customer billings. Any failure of such carriers or vendors to provide
accurate information on a timely basis could have a material adverse effect on
Phoenix's ability to recover charges from its customers.
Customer Attrition. The long distance industry is characterized by a
high level of customer attrition. Customer attrition is measured by the number
of customers who utilize Phoenix's service in a given month and do not utilize
Phoenix's services in the next succeeding month. Phoenix believes its
attrition rate is comparable to the attrition rates of long distance providers
of comparable size. Attrition in the long distance telecommunications industry
is generally attributable to a number of factors, including (i) marketing
initiatives of existing and new competitors as they engage in, among other
things, national advertising campaigns, telemarketing programs, and the
issuance of cash and other forms of customer "win back" initiatives and other
customer acquisition programs and (ii) termination of service for non-payment.
As Phoenix acquires residential customers both for long distance and future
local dial tone service, Phoenix's customer attrition rate is likely to
increase. An increase in Phoenix's customer attrition rate could have a
material adverse effect on Phoenix's business, financial condition and results
of operations.
Regulatory and Legislative Uncertainty. Federal and state
regulations, regulatory actions and court decisions have had, and may have in
the future, both positive and negative effects on Phoenix and its ability to
compete. Phoenix is subject to regulation by the Federal Communications
Commission (the "FCC") and by various state Public Utilities Commissions
("PUCs") as a nondominant IXC. Phoenix is required to file tariffs or obtain
other approvals in most of the states in which it operates. The large majority
of states require long distance service providers to apply for authority to
provide telecommunications services and to make filings regarding their
activities. Neither the FCC nor the state PUCs currently regulate Phoenix's
profit levels, but they often reserve the authority to do so. There can be no
assurance that future regulatory, judicial and legislative changes or other
activities will not have a material adverse effect on Phoenix or that
regulators or third parties will not raise material issues with regard to
Phoenix's compliance with applicable laws and regulations.
Phoenix has historically been required to file tariffs specifying the
rates, terms and conditions of its interstate and international services with
the FCC. On October 31, 1996, the FCC released an order which, among other
things, requires all nondominant IXCs to cancel their currently-filed tariffs
for interstate domestic services within nine months of the effective date of
the order and prohibits such tariff filings in the future. Although
information regarding the larger carriers' rate plans is expected to continue
to be available through other means, the elimination of the tariff requirement
may make Phoenix's pricing policies more difficult to benchmark against the
rates of the larger IXCs. Additionally, the elimination of tariff filings may
result in the need for Phoenix to formulate and execute bilateral agreements
with its customers, give notice to customers of any change in rates, terms and
conditions of service, and otherwise increase administrative costs. The
absence of an FCC tariff filing requirement may also result in consumers being
able to pursue remedies for disputes under state consumer protection and
contract laws in a manner currently precluded by the FCC's "filed-rate"
doctrine.
On October 15, 1996, a Federal appeals court issued a stay of
effectiveness of certain regulations adopted by the FCC in August 1996
regarding the prices that an incumbent LEC may charge incoming competitors for
interconnection, unbundled access to network elements, and resale of LEC
services. The stay had been sought by RBOCs, GTE and state regulatory
commissions as part of ongoing litigation challenging the regulations issued by
the FCC pursuant to the 1996 Act to implement competition in local exchange
markets. The stay will remain in effect until the case is decided by the
court, probably sometime in 1997. The effect of the stay is to create an
ambiguity of authority and further regulatory uncertainty concerning the rules
that will apply to the pricing policies of the incumbent LECs. In the absence
of effective FCC rules, the state PUCs, through the details of their
implementation of competition in their local exchange markets, may produce
results that are inconsistent with the FCC's uniform national model. Phoenix
cannot predict the impact of this litigation on its plans to offer its own or
resold local dial tone service, or what further actions the FCC may take in
response to the ultimate outcome of the case.
10
<PAGE> 13
Technological Change. The telecommunications industry has been
characterized by rapid technological change, frequent new service introductions
and evolving industry standards. Phoenix believes that its future success will
depend on its ability to anticipate such changes and to offer market responsive
services that meet these evolving industry standards on a timely basis. The
effect of technological change upon Phoenix's business cannot be predicted and
there can be no assurance that Phoenix will have sufficient resources to make
the investments necessary to acquire new technology or to introduce new
services to satisfy an expanded range of customer needs.
Dependence on Key Personnel. Phoenix believes that its success
depends, to a significant extent, on the efforts and abilities of its senior
management. Among others, the loss of Wallace M. Hammond, Phoenix's President
and Chief Executive Officer or Jon Beizer, Phoenix's Senior Vice President and
Chief Financial Officer, could have a material adverse effect on Phoenix.
Phoenix intends to announce in the next 60 days that it is naming a new Vice
President of Sales and Marketing, and the Company may interview candidates for
a new position of Chief Operating Officer. Phoenix believes that its success
will depend in large part upon its ability to attract, retain and motivate
skilled employees and other senior management personnel. Although Phoenix
expects to continue to attract sufficient numbers of such persons for the
foreseeable future, there can be no assurance that Phoenix will be able to do
so. In addition, because Phoenix may acquire one or more businesses in the
future, Phoenix's success will be in part dependent upon its ability to retain
and integrate into its own operations personnel from acquired entities who are
necessary to the continued success or successful integration of the acquired
business.
Transactions with Related Parties; Potential Conflicts of Interest.
Until mid-April 1997, Messrs. Max E. Thornhill and David Singleton were
directors of both Phoenix and US One. Messrs. Thornhill and Singleton have
resigned from the Board of Directors of US One, but continue to own stock in
both companies. As a result, certain conflicts of interest may arise in the
future in connection with the implementation of Phoenix's agreements with US
One and the negotiation of any new agreements, including definitive agreements
for the Merger, between Phoenix and US One.
Control by Officers and Directors. As of December 31, 1996, Phoenix's
executive officers and directors beneficially owned or controlled approximately
25.6% of the outstanding shares of Phoenix's Common Stock, on a fully diluted
basis (assuming full conversion of preferred stock). 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,
approve, 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.
Market Overhang. As part of this offering, the Selling Stockholders
may sell up to 3,211,224 Shares, which represents approximately 12% of
Phoenix's total outstanding shares of Common Stock. The registration of these
shares will have the immediate effect of increasing the public float of
Phoenix's stock. Such increase may cause the market price of Phoenix's Common
Stock to decline or fluctuate significantly.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Shares
offered hereby although the Company will receive a total of $140,250 for these
Shares if Wharton Capital Partners, Ltd. ("Wharton") and Keith A. Rhodes
("Rhodes") exercise their warrants to acquire 50,000 and 10,000 Shares,
respectively, at an exercise price of $2.3375 per share. The proceeds, if any,
from the exercise of the warrants will be added to the Company's working
capital. See "Selling Stockholders."
11
<PAGE> 14
SELLING STOCKHOLDERS
JNC Opportunity Fund Ltd. ("JNC") was issued 150,000 shares of the
Company's Series G Convertible Preferred Stock (the "Series G Preferred Stock")
on April 4, 1997. Wharton and Rhodes each received a warrant to acquire Shares
on April 4, 1997 in partial payment of financial advisory services to the
Company. JNC, Wharton and Rhodes are collectively referred to as the Selling
Stockholders. The Selling Stockholders were issued securities, for which the
Shares covered by this Prospectus are issuable, in a series of private
placements as summarized below:
Of the 3,211,224 Shares being registered: (i) an estimated
3,151,224 Shares will be issuable to JNC, subject to certain
limitations, upon the conversion of 150,000 shares of Series G
Preferred Stock issued to JNC in a private placement; (ii) 50,000
Shares will be issuable to Wharton and 10,000 Shares will be issuable
to Rhodes upon the exercise of warrants issued to Wharton (the
"Wharton Warrant") and Rhodes (the "Rhodes Warrant"). The number of
Shares covered by this Prospectus relating to JNC has been estimated
to be the maximum number of Shares issuable upon conversion of the
Series G Preferred Stock without partial redemption of the Series G
Preferred Stock or other specified events.
In each case, the issuance of securities by Phoenix to the Selling
Stockholders was undertaken pursuant to Section 4(2) of the Securities Act.
In addition, in connection with the private placement of the Series G
Preferred Stock described above, the Company and JNC entered into a
registration rights agreement (the "Registration Rights Agreement") providing,
among other things, for the registration of the Shares issuable upon conversion
of the Series G Preferred Stock. The Wharton Warrant and the Rhodes Warrant
provide for registration rights relating to the Shares underlying such warrants
on substantially the same terms as the Registration Rights Agreement.
The following table sets forth the names of the Selling Stockholders,
the number of shares of Common Stock owned beneficially by each of them as of
April 25, 1997, the number of Shares which may be offered pursuant to this
Prospectus and the number of shares of Common Stock owned beneficially after
this offering assuming the sale of all of the Shares. This information is
based upon information provided by the Selling Stockholders. Except as provided
below, the Selling Stockholders have not held any positions or offices with,
been employed by, or otherwise had a material relationship with, the Company or
any of its predecessors or affiliates since April 1, 1994.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Owned After
Offering(1) Shares Offering(1)(3)
-------------------------- Being --------------------
Name Number Percent(2) Offered(3) Number Percent
- ---- -------------------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
JNC Opportunity Fund, Ltd. 3,151,224(4) 10.8% 3,151,224 0 0
Wharton Capital Partners, Ltd. 50,000(5) * 50,000 0 0
Keith A. Rhodes 10,000(6) * 10,000 0 0
</TABLE>
__________________________________
* Less than one percent
(1) Unless otherwise indicated below, the persons named in the table have
sole voting and investment power with respect to all shares
beneficially owned by them, subject to community property laws where
applicable.
(2) Applicable percentage of ownership is based on 25,914,745 shares of
Common Stock outstanding on April 25, 1997.
(3) Assumes the sale of all shares offered hereby.
(4) The Company issued 150,000 shares of Series G Preferred Stock to JNC.
The Series G Preferred Stock
12
<PAGE> 15
provides for conversion into Shares on the basis of a floating
conversion ratio tied to a percentage of the market price of the
Company's Common Stock. The stated value of $20 per share of each
share of Series G Preferred Stock is convertible into shares of the
Company's Common Stock at any time at the lower of (i) the fixed price
conversion of $2.45 and (ii) a 20% discount to the five day average
closing bid price prior to the conversion date, subject to adjustment
under certain circumstances. In addition, all dividends payable with
regards to the Series G Preferred Stock are payable in Shares of the
Company at the lower of (i) and (ii) above. The Company may not issue
Shares either in payment of dividends on the Series G Preferred Stock
or in conversion of the Series G Preferred Stock if any such issuance
would result in the recipient thereof beneficially owning more than
4.9% of the issued and outstanding shares of the Company's Common
Stock. In the event that the conversion price would result in the
issuance of Shares equal to or in excess of 20% of the number of
shares of the Company's Common Stock outstanding on April 4, 1997 (the
"Maximum Issuable Shares") upon conversion of the Series G Preferred
Stock, the Company shall issue the Maximum Issuable Shares and, at
JNC's election, shall: (a) obtain stockholder approval of such
issuance or (b) redeem a portion of the Series G Preferred Stock in
order to issue not more than the Maximum Issuable Shares. In the
event that the Company is unsuccessful in obtaining stockholder
approval or in effecting a partial redemption, the Company is subject
to the payment of interest on the redemption price payable pursuant to
(b) above at a rate of 15% per annum until such redemption price and
any accrued interest thereon is paid in full.
(5) Represents shares issuable upon exercise of the Wharton Warrant.
(6) Represents shares issuable upon exercise of the Rhodes Warrant.
PLAN OF DISTRIBUTION
The Shares offered hereby are being offered directly by the Selling
Stockholders. The Company will receive no proceeds from the sale of any of the
Shares. The sale of the Shares may be effected by the Selling Stockholders
from time to time in transactions, including block transactions, on the
American Stock Exchange, in negotiated transactions or otherwise, at fixed
prices which may be changed, at prices related to prevailing market prices or
at negotiated prices. The Selling Stockholders may effect such transactions by
selling the Shares to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Stockholders and/or the purchasers of the Shares for whom such
broker-dealers may act as agents or to whom they sell as principals, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). From time to time the Selling Stockholders may engage
in short sales, including short sales against the box, puts and calls and other
transactions in securities of the Company or derivatives thereof, and may sell
and deliver the Shares in connection therewith. Further, except as set forth
herein, the Selling Stockholders are not restricted as to the number of Shares
which may be sold at any one time, and it is possible that a significant number
of Shares could be sold at the same time, which may have a depressive effect on
the market price of the Common Stock. The Selling Stockholders may also pledge
Shares as collateral for margin accounts, and such Shares could be resold
pursuant to the terms of such accounts.
At the time a particular offer of Shares is made, to the extent
required, a supplemental Prospectus will be distributed which will set forth
the number of Shares being offered and the terms of the offering including the
name or names of any underwriters, dealers or agents, the purchase price paid
by any underwriter for the Shares purchased from the Selling Stockholders, any
discounts, commissions and other items constituting compensation from the
Selling Stockholders and any discounts, commissions or discounts allowed or
reallowed or paid to dealers.
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale
in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
The Selling Stockholders and any broker-dealers, agents or
underwriters that participate with the Selling Stockholders in the distribution
of the Shares may be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act, and any commissions received by them and any
profit on the sale of the Shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
13
<PAGE> 16
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Shares may not simultaneously engage
in market making activities with respect to the Common Stock of the Company for
a period of two business days prior to the commencement of such distribution.
In addition and without limiting the foregoing, the Selling Stockholders will
be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M, which
provisions may limit the timing of purchases and sales of shares of the
Company's Common Stock by the Selling Stockholders.
Any securities covered by this Prospectus which qualify for sale
pursuant to Rule 144 under the Securities Act may be sold under that Rule
rather than pursuant to his Prospectus.
There can be no assurance that the Selling Stockholders will sell any
or all of the Shares offered by them hereunder.
The Company has agreed to indemnify the Selling Stockholders against
certain civil liabilities, including certain liabilities under the Securities
Act, in connection with the sale of the Shares.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Slivka Robinson Waters & O'Dorisio, P.C., Denver, Colorado. A
shareholder of such firm serves as Secretary of the Company.
EXPERTS
The audited consolidated financial statements as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31, 1996,
which are included in the Company's Annual Report on Form 10-K and the audited
consolidated financial statements and supplemental consolidated financial
statements of the Company, and the consolidated financial statements of
AmeriConnect, Inc. as of December 31, 1994 and 1995, and for each of the three
years in the period ended December 31, 1995, which are included in the
Company's Form 8-K dated January 23, 1997, have been incorporated herein by
reference in reliance on the reports of Grant Thornton LLP, independent
certified public accountants upon the authority of said firm as experts in
accounting and auditing
14
<PAGE> 17
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information . . . . . . . . . . . . . 2
Incorporation of Certain Documents by
Reference . . . . . . . . . . . . . . . . . 2
Forward-Looking Statements . . . . . . . . . . 3
The Company . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . 4
Use of Proceeds . . . . . . . . . . . . . . . . 11
Selling Stockholders . . . . . . . . . . . . . 12
Plan of Distribution . . . . . . . . . . . . . 13
Legal Matters . . . . . . . . . . . . . . . . . 14
Experts . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
3,211,224 SHARES
PHOENIX NETWORK, INC.
COMMON STOCK
PROSPECTUS
____________ , 1997
<PAGE> 18
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized statement of all estimated
expenses in connection with the issuance and distribution of the securities
being registered:
<TABLE>
<S> <C>
SEC registration fee . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,042
American Stock Exchange listing fee . . . . . . . . . . . . . . . . . . . 17,500
Legal expenses* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Accounting fees and expenses* . . . . . . . . . . . . . . . . . . . . . . . 2,000
Miscellaneous* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Total* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33,542
</TABLE>
______________________________
* Estimated
The Selling Stockholders will bear their own legal fees in excess of
$10,000 (which first $10,000 the Company has agreed to pay), sales commissions
and related sales expenses in connection with this offering, but will not bear
any of the expenses listed above.
ITEM 15. 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
II-1
<PAGE> 19
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.
ITEM 16. EXHIBITS
The list of exhibits is incorporated herein by reference to the Index
to Exhibits immediately preceding the Exhibits to this Registration Statement.
ITEM 17. 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;
Provided, however, that paragraphs (a)(i) and (a)(ii)
do not apply if the Registration Statement is on Form S-3 or
Form S-8 and the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed by the issuer pursuant to section 13 or
section 15(d) of the Exchange Act that are incorporated by
reference in this 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.
II-2
<PAGE> 20
3. 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.
II-3
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Golden, State of Colorado, on April 28, 1997.
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 Jon Beizer, 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 amendments) 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 indicated on April 28, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Wallace M. Hammond President, Chief Executive Officer
- -------------------------------------- and Director
Wallace M. Hammond (Principal Executive Officer)
/s/ Jon Beizer Senior Vice President and Chief
- -------------------------------------- Financial Officer
Jon Beizer (Principal Financial and Accounting Officer)
</TABLE>
II-4
<PAGE> 22
<TABLE>
<S> <C>
/s/ Thomas H. Bell Director
- --------------------------------------
Thomas H. Bell
/s/ James W. Gallaway Director
- --------------------------------------
James W. Gallaway
/s/ Merrill L. Magowan Director
- --------------------------------------
Merrill L. Magowan
/s/ Charles C. McGettigan Director
- --------------------------------------
Charles C. McGettigan
/s/ David Singleton Director
- --------------------------------------
David Singleton
/s/ Max E. Thornhill Director
- --------------------------------------
Max E. Thornhill
</TABLE>
II-5
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --- -----------
<S> <C>
4.1 Certificate of Incorporation of the Registrant as amended to date.
4.2 Bylaws of the Registrant filed as an exhibit to the Registrant's Registration Statement on Form S-3 filed January 31, 1997,
and amended on Form S-3/A on February 12, 1997 (Registration No. 333-20923) is hereby incorporated by reference.
4.3 Convertible Preferred Stock Purchase Agreement between the Registrant and JNC Opportunity Fund Ltd., dated as of March 31,
1997.
4.4 Registration Rights Agreement between the Registrant and JNC Opportunity Fund Ltd., dated as of March 31, 1997.
5.1 Opinion of Freeborn & Peters *
23.1 Consent of Freeborn & Peters (contained in Exhibit 5.1)
23.2 Consent of Grant Thornton LLP
24.1 Power of Attorney (contained on the signature pages)
</TABLE>
______________
* To be filed by Amendment.
<PAGE> 1
EXHIBIT 4.1
RESTATED CERTIFICATE OF INCORPORATION
OF
PHOENIX NETWORK, INC.
PHOENIX NETWORK, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: The Certificate of Incorporation of Phoenix Network, Inc. was
filed with the Secretary of State of Delaware on May 17, 1989.
SECOND: The Restated Certificate of Incorporation of Phoenix Network,
Inc. in the form attached hereto as Exhibit A, has been duly adopted in
accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware by a majority of the directors and
stockholders of the Corporation.
THIRD: The Restated Certificate of Incorporation so adopted reads in
full as set forth in Exhibit A attached hereto and hereby incorporated by
reference.
IN WITNESS WHEREOF, Phoenix Network, Inc. has caused this certificate to
be signed by the President this 11th day of December, 1990.
PHOENIX NETWORK, INC.
By /s/ Marc L. Goyette
-------------------------------
Marc L. Goyette
President
ATTEST:
/s/ Kenneth L. Guernsey
- ---------------------------------
Kenneth L. Guernsey
Secretary
1.
<PAGE> 2
EXHIBIT A
RESTATED CERTIFICATE OF INCORPORATION
OF
PHOENIX NETWORK, INC.
ARTICLE I
The name of the corporation (hereinafter called the "Corporation") is
Phoenix Network, Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 229 South State Street, County of Kent, Dover, Delaware and the
name of the registered agent of the Corporation in the State of Delaware at
such address is The Prentice-Hall Corporation Systems, Inc.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE IV
A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation is authorized to issue is Twenty-Five
Million (25,000,000) shares. Twenty Million (20,000,000) shares shall be
Common Stock, each having a par value of $0.001. Five Million (5,000,000)
shares shall be Preferred Stock, each having a par value of $0.001.
B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, to fix or alter the
dividend rights, dividend rate, 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
2.
<PAGE> 3
series of Preferred Stock, and the number of shares constituting any such
series and the designation thereof, or any of them; and to increase or decrease
the number of shares of any series subsequent to the issuance of shares of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
C. The relative rights, preferences, privileges, and restrictions
granted to or imposed upon the corporation's Common and Preferred or the holders
thereof are as follows:
1. Designation of Preferred Stock. Three Hundred Thousand
(300,000) of the authorized shares of Preferred Stock are hereby designated
"Series A Preferred Stock." The rights, preferences, privileges, restrictions
and other matters relating to the Three Hundred Thousand (300,000) shares of
Series A Preferred Stock are as set forth herein.
2. Dividends. In each fiscal year of the Corporation, the
holders of the Series A Preferred Stock shall be entitled to receive, before
any cash dividends shall be declared and paid upon or set aside for the Common
Stock in such fiscal year, a dividend at the rate of ninety cents ($0.90) per
share per annum (as adjusted for any combinations, consolidations, stock
distributions or stock dividends with respect to such shares), payable when, as
and if declared by the Board of Directors out of funds legally available
therefor. Such dividends shall be cumulative and shall accrue daily on each
share of Series A Preferred Stock whether or not declared. No dividends (other
than those payable solely in the Common Stock of the Corporation) shall be
declared or paid on any Common Stock of the Corporation until all accrued but
unpaid dividends on the Series A Preferred Stock shall have been declared and
paid or set apart.
3. Liquidation Preference.
i. In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, the holders of
the Series A Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock by reason of their ownership
thereof, the amount of ten dollars ($10.00) per share (as adjusted for any
combinations, consolidations, stock distributions or stock dividends with
respect to such shares) plus all accrued but unpaid dividends on such share for
each share of Series A Preferred Stock then held by them and no more. If upon
the occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amount, then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed among the holders
3.
<PAGE> 4
of the Series A Preferred Stock in proportion to the shares of Series A
Preferred Stock then held by them.
ii. After payment to the holders of the Series A
Preferred Stock of the amount set forth in subparagraph (a) above, the entire
remaining assets and funds of the Corporation legally available for
distribution, if any, shall be distributed among the holders of the Common
Stock in proportion to the shares of Common Stock then held by them.
(c) A consolidation or merger of the Corporation with
or into any other corporation or corporations, or a sale of all or
substantially all of the assets of the Corporation shall be deemed a
liquidation, dissolution or winding up within the meaning of this Section if
more than fifty percent (50%) of the surviving entity is not owned by persons
who were holders of capital stock or securities convertible into capital stock
of the Corporation immediately prior to such merger, consolidation or sale.
4. Voting Rights. Except as otherwise expressly provided
herein or as required by law, the Series A Preferred Stock shall vote together
with the Common Stock as a single class. The holder of each share of Series A
Preferred Stock shall be entitled to that number of votes equal to the number
of shares of Common Stock into which such share could then be converted and
shall be entitled to notice of all stockholders' meetings in accordance with
the Bylaws of the Corporation.
5. Conversion. The holders of the Series A Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):
iii. Right to Convert.
(1) Each share of Series A Preferred Stock shall
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share, at the office of the Corporation or any transfer
agent for such stock, into such number of fully paid and nonassessable shares
of Common Stock as is determined by dividing ten dollars ($10.00) (the
"Original Issue Price") plus all declared but unpaid dividends on each share of
Series A Preferred Stock by the then applicable Conversion Price, determined as
hereinafter provided, in effect on the date the certificate is surrendered for
conversion. The price at which shares of Common Stock shall be deliverable
upon conversion (the "Conversion Price") shall initially be two dollars and
fifty cents ($2.50) per share of Common Stock. Such initial Conversion Price
shall be adjusted as hereinafter provided.
(b) Mechanics of Conversion. Before any holder of
Series A Preferred Stock shall be entitled to convert the same into shares of
Common Stock, he shall
4.
<PAGE> 5
surrender the certificate or certificates thereof, duly endorsed, at the office
of the Corporation or of any transfer agent for such stock, and shall give
written notice to the Corporation at such office that he elects to convert the
same and shall state therein the name or names in which he wishes the
certificate or certificates for shares of Common Stock to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series A Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of surrender of the
shares of Series A Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on such date.
(c) Adjustments to Conversion Price for Diluting
Issues.
(i) Special Definitions. For purposes of this
Section 5(c), the following definitions shall apply:
(a) 'Options' shall mean rights,
options, or warrants to subscribe for, purchase or otherwise acquire either
Common Stock or Convertible Securities.
(b) 'Original Issue Date' shall mean the
date on which a share of Series A Preferred Stock was first issued.
(c) 'Convertible Securities' shall mean
any evidences of indebtedness, shares (other than Common Stock and Series A
Preferred Stock) or other securities convertible into or exchangeable for
Common Stock.
(d) 'Additional Shares of Common Stock'
shall mean all shares of Common Stock issued (or, pursuant to Section
5(c)(iii), deemed to be issued) by the Corporation after the Original Issue
Date, other than shares of Common Stock issued or issuable:
(i) upon conversion of shares of
Series A Preferred Stock;
(ii) to officers, directors or
employees of, or consultants to, the Corporation, on terms approved by the
Board of Directors;
(iii) as a dividend or distribution on
Preferred
5.
<PAGE> 6
Stock; or
(iv) for which adjustment of the
Conversion Price is made pursuant to Section 5(c)(vi).
(E) in any transaction approved by the
Company's Board of Directors involving the acquisition of more than fifty
percent (50%) of the stock of another corporation or substantially all of the
assets of another corporation or business, whether by merger, exchange of
shares, purchase of assets, or otherwise.
(2) No Adjustment of Conversion Price. No
adjustment in the Conversion Price of a particular share of Series A Preferred
Stock shall be made in respect of the issuance of Additional Shares of Common
Stock unless the consideration per share for an Additional Share of Common
Stock issued or deemed to be issued by the Corporation is less than the
Conversion Price in effect on the date of, and immediately prior to such issue,
for such share of Series A Preferred Stock.
(3) Deemed Issue of Additional Shares of Common
Stock. Subject to paragraph 5(c)(i)(4)(B) herein, in the event the Corporation
at any time or from time to time after the Original Issue Date shall issue any
Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities then entitled to receive
any such Options or Convertible Securities, then the maximum number of shares
(as set forth in the instrument relating thereto without regard to any
provisions contained therein designed to protect against dilution) of Common
Stock issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as
of the time of such issue or, in case such a record date shall have been fixed,
as of the close of business on such record date, provided that Additional
Shares of Common Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to Section 5(c)(v) hereof) of such
Additional Shares of Common Stock would be less than the Conversion Price in
effect on the date of and immediately prior to such issue, or such record date,
as the case may be, and provided further that in any such case in which
Additional Shares of Common Stock are deemed to be issued:
(a) no further adjustments in the
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(b) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration
6.
<PAGE> 7
payable to the Corporation, or decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the Conversion
Price computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities (provided, however, that no such adjustment of the Conversion Price
shall affect Common Stock previously issued upon conversion of the Series A
Preferred Stock);
(c) upon the expiration of any such
Options or any rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, the Series A Conversion Price
computed upon the original issue thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments based thereon,
shall, upon such expiration, be recomputed as if:
(i) in the case of Convertible
Securities or Options for Common Stock the only Additional Shares of Common
issued were the shares of Common Stock, if any, actually issued upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration actually received by the Corporation
upon such exercise, or for the issue of all such Convertible Securities which
were actually converted or exchanged, plus the additional consideration, if
any, actually received by the Corporation upon such conversion or exchange, and
(ii) in the case of Options for
Convertible Securities, only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue of such
Options and the consideration received by the Corporation for the Additional
Shares of Common Stock deemed to have been then issued was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration deemed to have been received by the
Corporation (determined pursuant to Section 5(c)(v)) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(d) no readjustment pursuant to clauses
(2) or (3) above shall have the effect of increasing the Conversion Price to an
amount which exceeds the lower of (A) the Conversion Price on the original
adjustment date, or (B) the Conversion Price that would have resulted from any
issuance of Additional Shares of Common Stock between the original adjustment
date and such readjustment date;
(e) in the case of any Options that
expire by their terms
7.
<PAGE> 8
not more than thirty (30) days after the date of issue thereof, no adjustment
of the Series A Conversion Price shall be made, except as to shares of Series A
Preferred Stock converted in such period, until the expiration or exercise of
all such Options, whereupon such adjustment shall be made in the same manner
provided in clause (3) above; and
(f) if any such record date shall have
been fixed and such Options or Convertible Securities are not issued on the
date fixed thereof, the adjustment previously made in the Series A Conversion
Price which became effective on such record date shall be cancelled as of the
close of business on such record date, and shall instead be made on the actual
date of issuance, if any.
(4) Adjustment of Conversion Price Upon
Issuance of Additional Shares of Common Stock. In the event the Corporation
shall issue Additional Shares of Common Stock (including Additional Shares of
Common Stock deemed to be issued pursuant to Section 5(c)(iii)) without
consideration or for a consideration per share less than the Conversion Price
in effect on the date of and immediately prior to such issue, then and in such
event, such Conversion Price shall be reduced, concurrently with such issue, to
a price (calculated to the nearest cent) determined by multiplying such
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding and the number of shares of Common Stock
issuable upon conversion of the shares of Series A Preferred Stock outstanding
immediately prior to such issue plus the number of shares of Common Stock that
the aggregate consideration received by the Corporation for the total number of
Additional Shares of Common Stock so issued would purchase at such Conversion
Price, and the denominator of which shall be the number of shares of Common
Stock outstanding and the number of shares of Common Stock issuable upon
conversion of the shares of Series A Preferred Stock outstanding immediately
prior to such issue plus the number of such Additional Shares of Common Stock
so issued.
(5) Determination of Consideration. For
purposes of this Section 5(c), the consideration received by the Corporation
for the issue of any Additional Shares of Common Stock shall be computed as
follows:
(a) Cash and Property: Such consideration
shall:
(i) insofar as it consists of cash,
be computed at the aggregate amount of cash received by the Corporation
excluding amounts paid or payable for accrued interest or accrued dividends;
(ii) insofar as it consists of
property other than cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith
8.
<PAGE> 9
by the Board; and
(iii) in the event Additional Shares of
Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the
proportion of such consideration so received, computed as provided in clauses
(A) and (B) above, as determined in good faith by the Board of Directors.
(b) Options and Convertible Securities.
The consideration per share received by the Corporation for Additional Shares
of Common Stock deemed to have been issued pursuant to Section 5(c)(iii),
relating to Options and Convertible Securities, shall be determined by dividing
(i) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of
such Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein designed to protect against
dilution) payable to the Corporation upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such Convertible
Securities by
(ii) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein designed to protect against dilution)
issuable upon the exercise of such Options or the conversion or exchange of
such Convertible Securities.
(6) Adjustments for Combinations or Subdivisions
of Common Stock. In the event the Corporation at any time or from time to time
after the Original Issue Date shall declare or pay any dividend on the Common
Stock payable in Common Stock or in any right to acquire Common Stock, or shall
effect a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or
otherwise), or in the event the outstanding shares of Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock, then the Conversion Price in effect
immediately prior to such event shall, concurrently with the effectiveness of
such event, be proportionately decreased or increased, as appropriate.
(d) Redemption.
9.
<PAGE> 10
(i) Right to Redeem. Any or all of the
outstanding shares of Series A Preferred Stock shall be redeemable by the
Corporation in the event that (1) the market price of the Corporation's
outstanding Common Stock (as quoted on any national or regional securities
exchange or automated quotation system on which or through which the
Corporation's Common Stock is traded) has equaled or exceed for a period of at
least twenty (20) consecutive trading days 200% of the Conversion Price in
effect during such period and (2) the managing underwriter of a registered
public offering of the Corporation's Common Stock agrees to register and offer
at least 50% of the shares of Common Stock into which the then outstanding
Series A Preferred Stock is then convertible.
(ii) Mechanics of Redemption. Before the
Corporation shall be entitled to redeem any of the shares of Series A Preferred
Stock, it shall give written notice to each holder thereof whose shares of
Series A Preferred Stock are to be redeemed indicating the number of shares of
Series A Preferred Stock to be redeemed. Each holder thereof shall, as soon as
practicable thereafter, surrender its certificates for such shares, duly
endorsed, at the office of the Corporation or of any transfer agent for such
shares, at which time the Corporation shall pay to such holder the Redemption
Price (defined below) for each such share to be redeemed. The Redemption Price
shall be payable in cash or by check, which need not be certified. Such
redemption shall be deemed to have been made immediately prior to the close of
business on the date of tender of the Redemption Price for the shares of Series
A Preferred Stock to be redeemed.
(iii) Redemption Price Defined. The "Redemption
Price" shall mean the Original Issue Price plus all accrued but unpaid
dividends on each share of Series A Preferred Stock to be redeemed.
(e) Other Distributions. In the event the Corporation
shall at any time or from time to time make or issue, or fix a record date for
the determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of the Corporation or any of it
subsidiaries other than Additional Shares of Common Stock, then in each such
event provision shall be made so that the holders of Series A Preferred Stock
shall receive, upon the conversion thereof, the securities of the Corporation
which they would have received had their stock been converted into Common Stock
on the date of such event.
(f) No Impairment. The Corporation will not, by
amendment of its Articles of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 5 and in the taking of all such action as
may be necessary or
10.
<PAGE> 11
appropriate in order to protect the Conversion Rights of the holders of the
Series A Preferred Stock against impairment.
(g) Certificates as to Adjustments. Upon the
occurrence of each adjustment or readjustment of the Conversion Price pursuant
to this Section 5, the Corporation shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series A Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series A Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price at the time in effect,
and (iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series A
Preferred Stock.
(h) Notices of Record Date. In the event of any taking
by the Corporation of a record of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any security or
right convertible into or entitling the holder thereof to receive Additional
Shares of Common Stock, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property,
or to receive any other right, the Corporation shall mail to each holder of
Series A Preferred Stock at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution, security or right, and the
amount and character of such dividend, distribution, security or right.
(i) Issue Taxes. The Corporation shall pay any and all
issue and other taxes that may be payable in respect of any issue or delivery
of shares of Common Stock on conversion of shares of Series A Preferred Stock
pursuant hereto; provided, however, that the Corporation shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any holder
in connection with any such conversion.
(j) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, the Corporation will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of
11.
<PAGE> 12
shares as shall be sufficient for such purpose, including, without limitation,
engaging in best efforts to obtain the requisite shareholder approval of any
necessary amendment to these Articles.
(k) Fractional Shares. No fractional share shall be
issued upon the conversion of any share or shares of Series A Preferred Stock.
All shares of Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series A Preferred Stock by a holder
thereof shall be aggregated for purposes of determining whether the conversion
would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share of Common Stock, the Corporation shall, in lieu of issuing
any fractional share, pay the holder otherwise entitled to such fraction a sum
in cash equal to the fair market value of such fraction on the date of
conversion (as determined in good faith by the Board of Directors of the
Corporation).
(l) Notices. Any notice required by the provisions of
this Section 5 to be given to the holders of shares of Series A Preferred Stock
shall be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing on the books of
the Corporation.
(m) Adjustments. In case of any reorganization or any
reclassification of the capital stock of the Corporation, any consolidation or
merger of the Corporation with or into another corporation or corporations, or
the conveyance of all or substantially all of the assets of the Corporation to
another corporation, each share of Series A Preferred Stock shall thereafter be
convertible into the number of shares of stock or other securities or property
(including cash) to which a holder of the number of shares of Common Stock
deliverable upon conversion of such share of Series A Preferred Stock would
have been entitled upon the record date of (or date of, if no record date is
fixed) such reorganization, reclassification, consolidation, merger or
conveyance; and, in any case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the holders of
such Series A Preferred Stock, to the end that the provisions set forth herein
shall thereafter be applicable, as nearly as equivalent as is practicable, in
relation to any shares of stock or the securities or property (including cash)
thereafter deliverable upon the conversion of the shares of such Series A
Preferred Stock.
6. Restrictions and Limitations. So long as at least One
Hundred Thousand (100,000) shares of Series A Preferred Stock remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of not less than a majority of the then outstanding shares of
Series A Preferred Stock voting together as a single class, amend, repeal or
waive any provision of, or add any provision to, the Corporation's Articles of
Incorporation
12.
<PAGE> 13
or Bylaws if such action would materially and adversely alter the preferences,
rights, privileges or powers of, or the restrictions provided for the benefit
of, the Preferred Stock.
7. Amendment. Any term relating to the Series A Preferred
Stock may be amended only with the vote or written consent of holders of not
less than a majority of all Series A Preferred Stock then outstanding. Any
such amendment shall be binding upon the Corporation and any holder of Series A
Preferred Stock.
ARTICLE V
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors shall have the power to adopt, amend, repeal or
otherwise alter the bylaws without any action on the part of the stockholders;
provided, however, that any bylaws made by the Board of Directors and any and
all powers conferred by any of said bylaws may be amended, altered or repealed
by the stockholders.
ARTICLE VI
A director of the Corporation shall, to the full extent permitted by the
Delaware General Corporation Law, not be liable to the Corporation or its
stockholders for monetary damages for breach of his fiduciary duty as a
director.
13.
<PAGE> 14
CERTIFICATE OF
DESIGNATION OF
PREFERENCES OF
SERIES B PREFERRED STOCK
---------------
The undersigned, Thomas H. Bell, the Chief Executive Officer of Phoenix
Network, Inc., a Delaware corporation (the "Corporation"), the Certificate of
Incorporation of which was filed in the office of the Secretary of State the
State of Delaware on May 17, 1989, acting pursuant to Section 151 of the
General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: That at
a meeting of the Board of Directors of the Corporation duly convened and held
on December 20, 1991 the following resolution was adopted:
RESOLVED, that pursuant to Article IV of the Corporation's
Certificate of Incorporation relating to the shares of the Corporation,
the Board of Directors hereby authorizes, fixes and creates a series of
Preferred Stock having the following powers, preferences, designations,
rights and other characteristics:
A. Two Hundred Thousand (200,000) of the authorized shares of
Preferred Stock are hereby designated "Series B Preferred Stock."
B. The rights, preferences, privileges, restrictions and other
matters relating to the Two Hundred Thousand (200,000) shares of Series B
Preferred Stock are as follows:
1. Dividends. In each fiscal year of the Corporation, the holders
of the Series B Preferred Stock shall be entitled to receive, before any cash
dividends shall be declared and paid upon or set aside for the Common Stock in
such fiscal year, a dividend at the rate of ninety cents ($0.90) per share per
annum (as adjusted for any combinations, consolidations, stock distributions or
stock dividends with respect to such shares), payable when, as and if declared
by the Board of Directors out of funds legally available therefor. Such
dividends shall be cumulative and shall accrue daily on each share of Series B
Preferred Stock whether or not declared. No dividends (other than those
payable solely in the Common Stock of the Corporation) shall be declared or
paid on any Common Stock of the Corporation until all accrued but unpaid
dividends on the Series B Preferred Stock shall have been declared and paid or
set apart.
1.
<PAGE> 15
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, the holders of the Series
B Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common Stock by reason of their ownership thereof, the amount of
ten dollars ($10.00) per share (as adjusted for any combinations,
consolidations, stock distributions or stock dividends with respect to such
shares) plus all accrued but unpaid dividends on such share for each share of
Series B Preferred Stock then held by them and no more. If upon the occurrence
of such event, the assets and funds thus distributed among the holders of the
Series B Preferred Stock shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amount, then the entire assets and
funds of the Corporation legally available for distribution shall be
distributed among the holders of the Series B Preferred Stock in proportion to
the shares of Series B Preferred Stock then held by them.
(b) After payment to the holders of the Series B Preferred
Stock of the amount set forth in subparagraph (a) above, the entire remaining
assets and funds of the Corporation legally available for distribution, if any,
shall be distributed among the holders of the Common Stock in proportion to the
shares of Common Stock then held by them.
(c) A consolidation or merger of the Corporation with or into
any other corporation or corporations, or a sale of all or substantially all of
the assets of the Corporation shall be deemed a liquidation, dissolution or
winding up within the meaning of this Section if more than fifty percent (50%)
of the surviving entity is not owned by persons who were holders of capital
stock or securities convertible into capital stock of the Corporation
immediately prior to such merger, consolidation or sale.
3. Voting Rights. Except as otherwise expressly provided herein or
as required by law, the Series B Preferred Stock shall vote together with the
Common Stock as a single class. The holder of each share of Series B Preferred
Stock shall be entitled to that number of votes equal to the number of shares
of Common Stock into which such share could then be converted and shall be
entitled to notice of all stockholders' meetings in accordance with the Bylaws
of the Corporation.
4. Conversion. The holders of the Series B Preferred Stock shall
have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert.
(i) Each share of Series B Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable
2.
<PAGE> 16
shares of Common Stock as is determined by dividing ten dollars ($10.00) (the
"Original Issue Price") plus all declared but unpaid dividends on each share of
Series B Preferred Stock by the then applicable Conversion Price, determined as
hereinafter provided, in effect on the date the certificate is surrendered for
conversion. The price at which shares of Common Stock shall be deliverable
upon conversion (the "Conversion Price") shall initially be two dollars ($2.00)
per share of Common Stock. Such initial Conversion Price shall be adjusted as
hereinafter provided.
(b) Mechanics of Conversion. Before any holder of Series B
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, he shall surrender the certificate or certificates thereof, duly
endorsed, at the office of the Corporation or of any transfer agent for such
stock, and shall give written notice to the Corporation at such office that he
elects to convert the same and shall state therein the name or names in which
he wishes the certificate or certificates for shares of Common Stock to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series B Preferred Stock, a
certificate or certificates for the number of shares of Common Stock to which
he shall be entitled as aforesaid. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of surrender
of the shares of Series B Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
(c) Adjustments to Conversion Price for Diluting Issues.
(i) Special Definitions. For purposes of this Section
4(c), the following definitions shall apply:
(1) 'Options' shall mean rights, options, or
warrants to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(2) 'Original Issue Date' shall mean the date on
which a share of Series B Preferred Stock was first issued.
(3) 'Convertible Securities' shall mean any
evidences of indebtedness, shares (other than Common Stock and Series B
Preferred Stock) or other securities convertible into or exchangeable for
Common Stock.
(4) 'Additional Shares of Common Stock' shall
mean all shares of Common Stock issued (or, pursuant to Section 4(c)(iii),
deemed to be issued) by the Corporation after the Original Issue Date, other
than shares of Common Stock issued or issuable:
(A) upon conversion of shares of Series
B Preferred Stock;
3.
<PAGE> 17
(B) to officers, directors or employees
of, or consultants to, the Corporation, on terms approved by the Board of
Directors;
(C) as a dividend or distribution on
Preferred Stock; or
(D) for which adjustment of the
Conversion Price is made pursuant to Section 4(c)(vi).
(E) in any transaction approved by the
Company's Board of Directors involving the acquisition of more than fifty
percent (50%) of the stock of another corporation or substantially all of the
assets of another corporation or business, whether by merger, exchange of
shares, purchase of assets, or otherwise.
(ii) No Adjustment of Conversion Price. No adjustment
in the Conversion Price of a particular share of Series B Preferred Stock shall
be made in respect of the issuance of Additional Shares of Common Stock unless
the consideration per share for an Additional Share of Common Stock issued or
deemed to be issued by the Corporation is less than the Conversion Price in
effect on the date of, and immediately prior to such issue, for such share of
Series B Preferred Stock.
(iii) Deemed Issue of Additional Shares of Common Stock.
Subject to paragraph 4(c)(i)(4)(B) herein, in the event the Corporation at any
time or from time to time after the Original Issue Date shall issue any Options
or Convertible Securities or shall fix a record date for the determination of
holders of any class of securities then entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
designed to protect against dilution) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed, as of the close of
business on such record date, provided that Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to Section 4(c)(v) hereof) of such Additional Shares of
Common Stock would be less than the Conversion Price in effect on the date of
and immediately prior to such issue, or such record date, as the case may be,
and provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
(1) no further adjustments in the Conversion
Price shall be made upon the subsequent issue of Convertible Securities or
shares of Common Stock upon the exercise of such Options or conversion or
exchange of such Convertible Securities;
4.
<PAGE> 18
(2) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase in
the consideration payable to the Corporation, or decrease in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price computed upon the original issue thereof (or upon
the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities (provided, however, that no such adjustment of the
Conversion Price shall affect Common Stock previously issued upon conversion of
the Series B Preferred Stock);
(3) upon the expiration of any such Options or
any rights of conversion or exchange under such Convertible Securities which
shall not have been exercised, the Series B Conversion Price computed upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(A) in the case of Convertible
Securities or Options for Common Stock the only Additional Shares of Common
issued were the shares of Common Stock, if any, actually issued upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration actually received by the Corporation
upon such exercise, or for the issue of all such Convertible Securities which
were actually converted or exchanged, plus the additional consideration, if
any, actually received by the Corporation upon such conversion or exchange, and
(B) in the case of Options for
Convertible Securities, only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue of such
Options and the consideration received by the Corporation for the Additional
Shares of Common Stock deemed to have been then issued was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration deemed to have been received by the
Corporation (determined pursuant to Section 4(c)(v)) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(4) no readjustment pursuant to clauses (2) or
(3) above shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (A) the Conversion Price on the original adjustment
date, or (B) the Conversion Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date;
(5) in the case of any Options that expire by
their terms not more than thirty (30) days after the date of issue thereof, no
adjustment of the Series B Conversion Price
5.
<PAGE> 19
shall be made, except as to shares of Series B Preferred Stock converted in
such period, until the expiration or exercise of all such Options, whereupon
such adjustment shall be made in the same manner provided in clause (3) above;
and
(6) if any such record date shall have been
fixed and such Options or Convertible Securities are not issued on the date
fixed thereof, the adjustment previously made in the Series B Conversion Price
which became effective on such record date shall be cancelled as of the close
of business on such record date, and shall instead be made on the actual date
of issuance, if any.
(iv) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common Stock. In the event the Corporation shall issue
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Section 4(c)(iii)) without consideration or for
a consideration per share less than the Conversion Price in effect on the date
of and immediately prior to such issue, then and in such event, such Conversion
Price shall be reduced, concurrently with such issue in order to increase the
number of shares of Common Stock into which the Series B Preferred Stock is
convertible, to a price equal to the consideration per share received by the
Corporation for such Additional Shares of Common Stock.
(v) Determination of Consideration. For purposes of
this Section 4(c), the consideration received by the Corporation for the issue
of any Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Such consideration
shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Corporation excluding
amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of property
other than cash, be computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board; and
(C) in the event Additional Shares of
Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the
proportion of such consideration so received, computed as provided in clauses
(A) and (B) above, as determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 4(c)(iii), relating
to Options and Convertible Securities, shall be
6.
<PAGE> 20
determined by dividing
(A) the total amount, if any, received
or receivable by the Corporation as consideration for the issue of such Options
or Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein designed to protect against dilution)
payable to the Corporation upon the exercise of such Options or the conversion
or exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein designed to protect against dilution)
issuable upon the exercise of such Options or the conversion or exchange of
such Convertible Securities.
(vi) Adjustments for Combinations or Subdivisions of
Common Stock. In the event the Corporation at any time or from time to time
after the Original Issue Date shall declare or pay any dividend on the Common
Stock payable in Common Stock or in any right to acquire Common Stock, or shall
effect a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or
otherwise), or in the event the outstanding shares of Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock, then the Conversion Price in effect
immediately prior to such event shall, concurrently with the effectiveness of
such event, be proportionately decreased or increased, as appropriate.
(d) Redemption.
(i) Right to Redeem. Any or all of the outstanding
shares of Series B Preferred Stock shall be redeemable by the Corporation in
the event that (1) the market price of the Corporation's outstanding Common
Stock (as quoted on any national or regional securities exchange or automated
quotation system on which or through which the Corporation's Common Stock is
traded) has equaled or exceed for a period of at least twenty (20) consecutive
trading days 200% of the Conversion Price in effect during such period and (2)
upon such time as such stock can be traded on a public market or sold pursuant
to Rule 144 or any other applicable rule of the Securities and Exchange
Commission.
(ii) Mechanics of Redemption. Before the Corporation
shall be entitled to redeem any of the shares of Series B Preferred Stock, it
shall give written notice to each holder thereof whose shares of Series B
Preferred Stock are to be redeemed indicating the number of shares of Series B
Preferred Stock to be redeemed. Each holder thereof shall, as soon as
practicable
7.
<PAGE> 21
thereafter, surrender its certificates for such shares, duly endorsed, at the
office of the Corporation or of any transfer agent for such shares, at which
time the Corporation shall pay to such holder the Redemption Price (defined
below) for each such share to be redeemed. The Redemption Price shall be
payable in cash or by check, which need not be certified. Such redemption
shall be deemed to have been made immediately prior to the close of business on
the date of tender of the Redemption Price for the shares of Series B Preferred
Stock to be redeemed.
(iii) Redemption Price Defined. The "Redemption
Price" shall mean the Original Issue Price plus all accrued but unpaid
dividends on each share of Series B Preferred Stock to be redeemed.
(e) Other Distributions. In the event the Corporation shall at
any time or from time to time make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of the Corporation or any of it
subsidiaries other than Additional Shares of Common Stock, then in each such
event provision shall be made so that the holders of Series B Preferred Stock
shall receive, upon the conversion thereof, the securities of the Corporation
which they would have received had their stock been converted into Common Stock
on the date of such event.
(f) No Impairment. The Corporation will not, by amendment of
its Articles of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the
provisions of this Section 4 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series B Preferred Stock against impairment.
(g) Certificates as to Adjustments. Upon the occurrence of
each adjustment or readjustment of the Conversion Price pursuant to this
Section 4, the Corporation shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series B Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series B Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price at the time in effect,
and (iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series B
Preferred Stock.
(h) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any security or
8.
<PAGE> 22
right convertible into or entitling the holder thereof to receive Additional
Shares of Common Stock, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property,
or to receive any other right, the Corporation shall mail to each holder of
Series B Preferred Stock at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution, security or right, and the
amount and character of such dividend, distribution, security or right.
(i) Issue Taxes. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of shares of Series B Preferred Stock
pursuant hereto; provided, however, that the Corporation shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any holder
in connection with any such conversion.
(j) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series B Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series B Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series B Preferred Stock, the Corporation will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose, including, without limitation, engaging in best efforts to
obtain the requisite shareholder approval of any necessary amendment to these
Articles.
(k) Fractional Shares. No fractional share shall be issued
upon the conversion of any share or shares of Series B Preferred Stock. All
shares of Common Stock (including fractions thereof) issuable upon conversion
of more than one share of Series B Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result in
the issuance of any fractional share. If, after the aforementioned
aggregation, the conversion would result in the issuance of a fraction of a
share of Common Stock, the Corporation shall, in lieu of issuing any fractional
share, pay the holder otherwise entitled to such fraction a sum in cash equal
to the fair market value of such fraction on the date of conversion (as
determined in good faith by the Board of Directors of the Corporation).
(l) Notices. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series B Preferred Stock
shall be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing on the books of
the Corporation.
9.
<PAGE> 23
(m) Adjustments. In case of any reorganization or any
reclassification of the capital stock of the Corporation, any consolidation or
merger of the Corporation with or into another corporation or corporations, or
the conveyance of all or substantially all of the assets of the Corporation to
another corporation, each share of Series B Preferred Stock shall thereafter be
convertible into the number of shares of stock or other securities or property
(including cash) to which a holder of the number of shares of Common Stock
deliverable upon conversion of such share of Series B Preferred Stock would
have been entitled upon the record date of (or date of, if no record date is
fixed) such reorganization, reclassification, consolidation, merger or
conveyance; and, in any case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the holders of
such Series B Preferred Stock, to the end that the provisions set forth herein
shall thereafter be applicable, as nearly as equivalent as is practicable, in
relation to any shares of stock or the securities or property (including cash)
thereafter deliverable upon the conversion of the shares of such Series B
Preferred Stock.
5. Restrictions and Limitations. So long as at least One Hundred
Thousand (100,000) shares of Series B Preferred Stock remain outstanding, the
Corporation shall not, without the vote or written consent by the holders of
not less than a majority of the then outstanding shares of Series B Preferred
Stock voting together as a single class, amend, repeal or waive any provision
of, or add any provision to, the Corporation's Articles of Incorporation or
Bylaws if such action would materially and adversely alter the preferences,
rights, privileges or powers of, or the restrictions provided for the benefit
of, the Preferred Stock.
6. Amendment. Any term relating to the Series B Preferred Stock may
be amended only with the vote or written consent of holders of not less than a
majority of all Series B Preferred Stock then outstanding. Any such amendment
shall be binding upon the Corporation and any holder of Series B Preferred
Stock.
10.
<PAGE> 24
IN WITNESS WHEREOF, I have executed this Certificate this 23 day of
December, 1991.
/s/ Thomas H. Bell
------------------------------------
Thomas H. Bell
Chief Executive Officer
ATTEST:
/s/ Kenneth L. Guernsey
- ------------------------------
Kenneth L. Guernsey
Secretary
11.
<PAGE> 25
CERTIFICATE OF DESIGNATION
OF PREFERENCES OF
SERIES C PREFERRED STOCK
---------------
The undersigned, Robert R. Curtis, the Chief Executive Officer of
Phoenix Network, Inc., a Delaware corporation (the "Corporation"), the Restated
Certificate of Incorporation of which was filed in the office of the Secretary
of State the State of Delaware on December 12, 1990, acting pursuant to Section
151 of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY: That pursuant to an action by unanimous written consent of the Board
of Directors of the Corporation dated as of August 21, 1992 the following
resolution was adopted:
RESOLVED, that pursuant to Article IV of the Corporation's
Restated Certificate of Incorporation relating to the shares of the
Corporation, the Board of Directors hereby authorizes, fixes and creates
a series of Preferred Stock having the following powers, preferences,
designations, rights and other characteristics:
A. One Million (1,000,000) of the authorized shares of Preferred
Stock are hereby designated "Series C Preferred Stock."
B. The rights, preferences, privileges, restrictions and other
matters relating to the One Million (1,000,000) shares of Series C Preferred
Stock are as follows:
1. Dividends. In each fiscal year of the Corporation, the
holders of the Series C Preferred Stock shall be entitled to receive, before
any cash dividends shall be declared and paid upon or set aside for the Common
Stock in such fiscal year, but after any cash dividends shall be declared and
paid upon or set aside for the Series A or Series B Preferred Stock of the
Corporation in such fiscal year, a dividend for each share of Series C
Preferred Stock held equal to four percent (4%) per annum of the Original
Issuance Price (as defined in Section 4(a)), as adjusted for any combinations,
consolidations, stock distributions or stock dividends with respect to such
shares, payable when, as and if declared by the Board of Directors out of funds
legally available therefor. Such dividends shall be non-cumulative and shall
not accrue unless declared by the Board of Directors. No dividends (other than
those payable solely in the Common Stock of the Corporation)
1.
<PAGE> 26
shall be declared or paid on any Common Stock of the Corporation until
all accrued but unpaid dividends on the Series C Preferred Stock shall
have been declared and paid or set apart.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, the holders of
the Series C Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock by reason of their ownership
thereof, but subsequent to the distribution of any of the assets or surplus
funds of the Corporation to the holders of the Series A and Series B Preferred
Stock of the Corporation, an amount per share equal to the par value of the
Series C Preferred Stock (as adjusted for any combinations, consolidations,
stock distributions or stock dividends with respect to such shares) plus all
accrued but unpaid dividends on such share for each share of Series C Preferred
Stock then held by them and no more. If upon the occurrence of such event, the
assets and funds thus distributed among the holders of the Series C Preferred
Stock shall be insufficient to permit the payment to such holders of the full
aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed among the
holders of the Series C Preferred Stock in proportion to the shares of Series C
Preferred Stock then held by them.
(b) After payment to the holders of the Series C
Preferred Stock of the amount set forth in subparagraph (a) above, the entire
remaining assets and funds of the Corporation legally available for
distribution, if any, shall be distributed among the holders of the Common
Stock in proportion to the shares of Common Stock then held by them.
(c) A consolidation or merger of the Corporation with
or into any other corporation or corporations, or a sale of all or
substantially all of the assets of the Corporation shall not be deemed a
liquidation, dissolution or winding up within the meaning of this Section.
3. Voting Rights. The Series C Preferred Stock shall be
nonvoting, but shall be entitled to notice of all stockholders' meetings in
accordance with the Bylaws of the Corporation.
4. Conversion. The holders of the Series C Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Subject to the terms and
conditions of the Agreement dated as of June 1, 1992 between Sprint
Communications Company L.P., a Delaware limited partnership, and the
Corporation (the "Agreement") (a copy of which is available for inspection at
the principal executive offices of the Corporation), which terms and conditions
include but are not limited to the delivery of a Notice of Default (as that
term is defined in the Agreement) prior to conversion, each share of
outstanding Series C Preferred Stock shall be convertible at the office of the
Corporation or any transfer agent for such stock into such number of fully paid
and
2.
<PAGE> 27
nonassessable shares of Common Stock as is determined by dividing the original
issuance price per share of the Series C Preferred Stock as calculated pursuant
to the Agreement (the "Original Issuance Price") plus all declared but unpaid
dividends on each share of the Series C Preferred Stock by the Series C
Conversion Price (as hereinafter defined) in effect on the date the certificate
is surrendered for conversion. The "Series C Conversion Price" shall initially
be one-half of the Original Issuance Price. Such Series C Conversion Price
shall be adjusted as hereinafter provided.
(b) Mechanics of Conversion. Before any holder of
Series C Preferred Stock shall be entitled to convert the same into shares of
Common Stock, he shall surrender the certificate or certificates thereof, duly
endorsed, at the office of the Corporation or of any transfer agent for such
stock, and shall give written notice to the Corporation at such office that he
elects to convert the same and shall state therein the name or names in which
he wishes the certificate or certificates for shares of Common Stock to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series C Preferred Stock, a
certificate or certificates for the number of shares of Common Stock to which
he shall be entitled as aforesaid. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of surrender
of the shares of Series C Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
(c) Adjustments for Combinations or Subdivisions of
Common Stock. In the event the Corporation at any time or from time to time
after the date on which a share of Series C Preferred Stock was first issued
shall declare or pay any dividend on the Common Stock payable in Common Stock
or in any right to acquire Common Stock, or shall effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of Common
Stock (by stock split, reclassification or otherwise), or in the event the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
then the Series C Conversion Price in effect immediately prior to such event
shall, concurrently with the effectiveness of such event, be proportionately
decreased or increased, as appropriate.
(d) Redemption. Neither the Corporation nor any holder
of the Series C Preferred Stock shall have the right to require the redemption
of any shares of the Series C Preferred Stock.
(e) No Impairment. The Corporation will not, by
amendment of its Restated Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series C Preferred Stock against
impairment.
3.
<PAGE> 28
(f) Certificates as to Adjustments. Upon the
occurrence of each adjustment or readjustment of the Series C Conversion Price
pursuant to this Section 4, the Corporation shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Series C Preferred Stock a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series C Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Series C Conversion Price at the time
in effect, and (iii) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the conversion
of Series C Preferred Stock.
(g) Issue Taxes. The Corporation shall not pay any
issue or other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of shares of Series C Preferred Stock
pursuant hereto nor shall the Corporation shall not be obligated to pay any
transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
(h) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series C Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series C Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series C Preferred Stock, the Corporation will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose, including, without limitation, engaging in best efforts to
obtain the requisite shareholder approval of any necessary amendment to this
Certificate.
(i) Fractional Shares. No fractional share shall be
issued upon the conversion of any share or shares of Series C Preferred Stock.
All shares of Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series C Preferred Stock by a holder
thereof shall be aggregated for purposes of determining whether the conversion
would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share of Common Stock, the Corporation shall, in lieu of issuing
any fractional share, pay the holder otherwise entitled to such fraction a sum
in cash equal to the fair market value of such fraction on the date of
conversion (as determined in good faith by the Board of Directors of the
Corporation).
(j) Notices. Any notice required by the provisions of
this Section 4 to be given to the holders of shares of Series C Preferred Stock
shall be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing
4.
<PAGE> 29
on the books of the Corporation.
(k) Adjustments. In case of any reorganization or any
reclassification of the capital stock of the Corporation, any consolidation or
merger of the Corporation with or into another corporation or corporations, or
the conveyance of all or substantially all of the assets of the Corporation to
another corporation, each share of Series C Preferred Stock shall thereafter be
convertible into the number of shares of stock or other securities or property
(including cash) to which a holder of the number of shares of Common Stock
deliverable upon conversion of such share of Series C Preferred Stock would
have been entitled upon the record date of (or date of, if no record date is
fixed) such reorganization, reclassification, consolidation, merger or
conveyance; and, in any case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the holders of
such Series C Preferred Stock, to the end that the provisions set forth herein
shall thereafter be applicable, as nearly as equivalent as is practicable, in
relation to any shares of stock or the securities or property (including cash)
thereafter deliverable upon the conversion of the shares of such Series C
Preferred Stock.
5. Restrictions and Limitations. So long as at least Fifty
Thousand (50,000) shares of Series C Preferred Stock remain outstanding, the
Corporation shall not, without the vote or written consent by the holders of
not less than a majority of the then outstanding shares of Series C Preferred
Stock voting together as a single class, amend, repeal or waive any provision
of, or add any provision to, the Corporation's Restated Certificate of
Incorporation or Bylaws if such action would materially and adversely alter the
preferences, rights, privileges or powers of, or the restrictions provided for
the benefit of, the Preferred Stock.
6. Amendment. Any term relating to the Series C Preferred
Stock may be amended only with the vote or written consent of holders of not
less than a majority of all Series C Preferred Stock then outstanding. Any
such amendment shall be binding upon the Corporation and any holder of Series C
Preferred Stock.
5.
<PAGE> 30
IN WITNESS WHEREOF, I have executed this Certificate this 3rd day of
November, 1992.
/s/ Robert R. Curtis
-------------------------------------
Robert R. Curtis
President and
Chief Executive Officer
ATTEST:
/s/ Kenneth L. Guernsey
- -----------------------------
Kenneth L. Guernsey
Secretary
6.
<PAGE> 31
CERTIFICATE OF DESIGNATION
OF PREFERENCES OF
SERIES D PREFERRED STOCK
---------------
The undersigned, Robert R. Curtis, the President and Chief Executive
Officer of Phoenix Network, Inc., a Delaware corporation (the "Corporation"),
the Restated Certificate of Incorporation of which was filed in the office of
the Secretary of State the State of Delaware on December 12, 1990, acting
pursuant to Section 151 of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY: That pursuant to an action by the Board of
Directors of the Corporation taken at a meeting of the Board of Directors on
December 14, 1992 the following resolution was adopted:
RESOLVED, that pursuant to Article IV of the Corporation's
Restated Certificate of Incorporation relating to the shares of the
Corporation, the Board of Directors hereby authorizes, fixes and creates
a series of Preferred Stock having the following powers, preferences,
designations, rights and other characteristics:
A. Six Hundred Sixty-six Thousand Six Hundred Sixty-six (666,666) of
the authorized shares of Preferred Stock are hereby designated "Series D
Preferred Stock."
B. The rights, preferences, privileges, restrictions and other
matters relating to the Six Hundred Sixty-six Thousand Six Hundred Sixty-six
(666,666) shares of Series D Preferred Stock are as follows:
1. Dividends. In each fiscal year of the Corporation, the
holders of the Series D Preferred Stock shall be entitled to receive, before
any cash dividends shall be declared and paid upon or set aside for the Common
Stock in such fiscal year, but after any cash dividends shall be declared and
paid upon or set aside for the Series A, Series B or Series C Preferred Stock
of the Corporation in such fiscal year, a dividend for each share of Series D
Preferred Stock held equal to six percent (6%) per annum of the Original
Issuance Price (as defined in Section 4(a)), as adjusted for any combinations,
consolidations, stock distributions or stock dividends with respect to such
shares, payable when, as and if declared by the Board of Directors out of funds
legally available therefor. Such dividends shall be non-cumulative and shall
not accrue unless declared by the Board of Directors. No dividends (other than
those payable solely in the Common Stock of the
1.
<PAGE> 32
Corporation) shall be declared or paid on any Common Stock of the Corporation
until all accrued but unpaid dividends on the Series D Preferred Stock shall
have been declared and paid or set apart.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, the holders of
the Series D Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock by reason of their ownership
thereof, but subsequent to the distribution of any of the assets or surplus
funds of the Corporation to the holders of the Series A, Series B and Series C
Preferred Stock of the Corporation, an amount per share equal to the Original
Issuance Price (as defined below) of the Series D Preferred Stock (as adjusted
for any combinations, consolidations, stock distributions or stock dividends
with respect to such shares) plus all accrued but unpaid dividends on such
share for each share of Series D Preferred Stock then held by them and no more.
If upon the occurrence of such event, the assets and funds thus distributed
among the holders of the Series D Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential amount,
then the entire assets and funds of the Corporation legally available for
distribution shall be distributed among the holders of the Series D Preferred
Stock in proportion to the shares of Series D Preferred Stock then held by
them.
(b) After payment to the holders of the Series D
Preferred Stock of the amount set forth in subparagraph (a) above, the entire
remaining assets and funds of the Corporation legally available for
distribution, if any, shall be distributed among the holders of the Common
Stock in proportion to the shares of Common Stock then held by them.
(c) A consolidation or merger of the Corporation with
or into any other corporation or corporations, or a sale of all or
substantially all of the assets of the Corporation shall not be deemed a
liquidation, dissolution or winding up within the meaning of this Section.
3. Voting Rights. Except as otherwise expressly provided
herein or as required by law, the Series D Preferred Stock shall vote together
with the Common Stock as a single class. The holder of each share of Series D
Preferred Stock shall be entitled to that number of votes equal to the number
of shares of Common Stock into which such share could then be converted and
shall be entitled to notice of all stockholders' meetings in accordance with
the Bylaws of the Corporation.
4. Conversion. The holders of the Series D Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of outstanding Series
D Preferred Stock shall be convertible at the office of the Corporation or any
transfer agent for such stock into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing $1.50 (the "Original
Issuance Price") plus all declared but unpaid dividends on each share of the
Series D
2.
<PAGE> 33
Preferred Stock by the Series D Conversion Price (as hereinafter defined) in
effect on the date the certificate is surrendered for conversion. The "Series
D Conversion Price" shall initially be $1.50. Such Series D Conversion Price
shall be adjusted as hereinafter provided.
(b) Mechanics of Conversion. Before any holder of
Series D Preferred Stock shall be entitled to convert the same into shares of
Common Stock, he shall surrender the certificate or certificates thereof, duly
endorsed, at the office of the Corporation or of any transfer agent for such
stock, and shall give written notice to the Corporation at such office that he
elects to convert the same and shall state therein the name or names in which
he wishes the certificate or certificates for shares of Common Stock to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series D Preferred Stock, a
certificate or certificates for the number of shares of Common Stock to which
he shall be entitled as aforesaid. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of surrender
of the shares of Series D Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
(c) Adjustments for Combinations or Subdivisions of
Common Stock. In the event the Corporation at any time or from time to time
after the date on which a share of Series D Preferred Stock was first issued
shall declare or pay any dividend on the Common Stock payable in Common Stock
or in any right to acquire Common Stock, or shall effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of Common
Stock (by stock split, reclassification or otherwise), or in the event the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
then the Series D Conversion Price in effect immediately prior to such event
shall, concurrently with the effectiveness of such event, be proportionately
decreased or increased, as appropriate.
(d) Redemption. Neither the Corporation nor any holder
of the Series D Preferred Stock shall have the right to require the redemption
of any shares of the Series D Preferred Stock.
(e) No Impairment. The Corporation will not, by
amendment of its Restated Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series D Preferred Stock against
impairment.
(f) Certificates as to Adjustments. Upon the
occurrence of each adjustment or readjustment of the Series D Conversion Price
pursuant to this Section 4, the Corporation shall
3.
<PAGE> 34
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of Series D Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Series D Preferred
Stock, furnish or cause to be furnished to such holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the Series D
Conversion Price at the time in effect, and (iii) the number of shares of
Common Stock and the amount, if any, of other property which at the time would
be received upon the conversion of Series D Preferred Stock.
(g) Issue Taxes. The Corporation shall pay any issue
or other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of shares of Series D Preferred Stock
pursuant hereto, but the Corporation shall not be obligated to pay any transfer
taxes resulting from any transfer requested by any holder in connection with
any such conversion.
(h) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series D Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series D Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series D Preferred Stock, the Corporation will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose, including, without limitation, engaging in best efforts to
obtain the requisite shareholder approval of any necessary amendment to this
Certificate.
(i) Fractional Shares. No fractional share shall be
issued upon the conversion of any share or shares of Series D Preferred Stock.
All shares of Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series D Preferred Stock by a holder
thereof shall be aggregated for purposes of determining whether the conversion
would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share of Common Stock, the Corporation shall, in lieu of issuing
any fractional share, pay the holder otherwise entitled to such fraction a sum
in cash equal to the fair market value of such fraction on the date of
conversion (as determined in good faith by the Board of Directors of the
Corporation).
(j) Notices. Any notice required by the provisions of
this Section 4 to be given to the holders of shares of Series D Preferred Stock
shall be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing on the books of
the Corporation.
4.
<PAGE> 35
(k) Adjustments. In case of any reorganization or any
reclassification of the capital stock of the Corporation, any consolidation or
merger of the Corporation with or into another corporation or corporations, or
the conveyance of all or substantially all of the assets of the Corporation to
another corporation, each share of Series D Preferred Stock shall thereafter be
convertible into the number of shares of stock or other securities or property
(including cash) to which a holder of the number of shares of Common Stock
deliverable upon conversion of such share of Series D Preferred Stock would
have been entitled upon the record date of (or date of, if no record date is
fixed) such reorganization, reclassification, consolidation, merger or
conveyance; and, in any case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the holders of
such Series D Preferred Stock, to the end that the provisions set forth herein
shall thereafter be applicable, as nearly as equivalent as is practicable, in
relation to any shares of stock or the securities or property (including cash)
thereafter deliverable upon the conversion of the shares of such Series D
Preferred Stock.
5. Restrictions and Limitations. So long as at least One
Hundred Thousand (100,000) shares of Series D Preferred Stock remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of not less than a majority of the then outstanding shares of
Series D Preferred Stock voting together as a single class, amend, repeal or
waive any provision of, or add any provision to, the Corporation's Restated
Certificate of Incorporation or Bylaws if such action would materially and
adversely alter the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Preferred Stock.
6. Amendment. Any term relating to the Series D Preferred
Stock may be amended only with the vote or written consent of holders of not
less than a majority of all Series D Preferred Stock then outstanding. Any
such amendment shall be binding upon the Corporation and any holder of Series D
Preferred Stock.
5.
<PAGE> 36
IN WITNESS WHEREOF, I have executed this Certificate this 14th day of
December, 1992.
/s/ Robert R. Curtis
-------------------------------------
Robert R. Curtis
President and
Chief Executive Officer
ATTEST:
/s/ Kenneth L. Guernsey
- ----------------------------
Kenneth L. Guernsey
Secretary
6.
<PAGE> 37
CERTIFICATE OF
DESIGNATION OF
PREFERENCES OF
SERIES E PREFERRED STOCK
---------------
The undersigned, WALLACE M. HAMMOND, the President of PHOENIX NETWORK,
INC., a Delaware corporation (the "Corporation"), the Restated Certificate of
Incorporation of which was filed in the office of the Secretary of State of the
State of Delaware on December 12, 1990, acting pursuant to Section 151 of the
General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: That at
a meeting of the Board of Directors of the Corporation duly convened and held
on April 5, 1995 the following resolution was adopted:
RESOLVED, that pursuant to Article IV of the Corporation's
Restated Certificate of Incorporation relating to the shares of the
Corporation, the Board of Directors hereby authorizes, fixes and creates
a series of Preferred Stock having the following powers, preferences,
designations, rights and other characteristics:
A. Two Hundred Thousand (200,000) of the authorized shares of
Preferred Stock are hereby designated "Series E Preferred Stock."
B. The rights, preferences, privileges, restrictions and other
matters relating to the Two Hundred Thousand (200,000) shares of Series E
Preferred Stock are as follows:
1. DIVIDENDS. In each fiscal year of the Corporation, the
holders of the Series E Preferred Stock shall be entitled to receive, before
any cash dividends shall be declared and paid upon or set aside for the Common
Stock in such fiscal year, a dividend at the rate of ninety cents ($0.90) per
share per annum (as adjusted for any combinations, consolidations, stock
distributions or stock dividends with respect to such shares), payable when, as
and if declared by the Board of Directors out of funds legally available
therefor. Such dividends shall be cumulative and shall accrue daily on each
share of Series E Preferred Stock whether or not declared. No dividends (other
than those payable solely in the Common Stock of the Corporation) shall be
declared or paid on any Common Stock of the Corporation until all accrued but
unpaid dividends on the Series E Preferred Stock shall have been declared and
paid or set apart.
1.
<PAGE> 38
2. LIQUIDATION PREFERENCE.
(A) In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, the holders of
the Series E Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock by reason of their ownership
thereof, but subsequent to the distribution of any assets or surplus funds of
the Corporation to the holders of the Series A, Series B, Series C and Series D
Preferred Stock of the Corporation, the amount of ten dollars ($10.00) per
share (as adjusted for any combinations, consolidations, stock distributions or
stock dividends with respect to such shares) plus all accrued but unpaid
dividends on such share for each share of Series E Preferred Stock then held by
them and no more. If upon the occurrence of such event, the assets and funds
thus distributed among the holders of the Series E Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amount, then the entire assets and funds of the Corporation
legally available for distribution shall be distributed among the holders of
the Series E Preferred Stock in proportion to the shares of Series E Preferred
Stock then held by them.
(B) After payment to the holders of the Series E
Preferred Stock of the amount set forth in subparagraph (a) above, the entire
remaining assets and funds of the Corporation legally available for
distribution, if any, shall be distributed among the holders of the Common
Stock in proportion to the shares of Common Stock then held by them.
(C) A consolidation or merger of the Corporation with
or into any other corporation or corporations, or a sale of all or
substantially all of the assets of the Corporation shall be deemed a
liquidation, dissolution or winding up within the meaning of this Section if
more than fifty percent (50%) of the surviving entity is not owned by persons
who were holders of capital stock or securities convertible into capital stock
of the Corporation immediately prior to such merger, consolidation or sale.
3. VOTING RIGHTS. Except as otherwise expressly provided
herein or as required by law, the Series E Preferred Stock shall vote together
with the Common Stock as a single class. The holder of each share of Series E
Preferred Stock shall be entitled to that number of votes equal to the number
of shares of Common Stock into which such share could then be converted and
shall be entitled to notice of all stockholders' meetings in accordance with
the Bylaws of the Corporation.
4. CONVERSION. The holders of the Series E Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):
(A) RIGHT TO CONVERT.
(I) Each share of Series E Preferred Stock shall
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share, at the office
2.
<PAGE> 39
of the Corporation or any transfer agent for such stock, into such number of
fully paid and nonassessable shares of Common Stock as is determined by
dividing ten dollars ($10.00) (the "Original Issue Price") plus all declared
but unpaid dividends on each share of Series E Preferred Stock by the then
applicable Conversion Price, determined as hereinafter provided, in effect on
the date the certificate is surrendered for conversion. The price at which
shares of Common Stock shall be deliverable upon conversion (the "Conversion
Price") shall initially be one dollar and seventy-five cents ($1.75) per share
of Common Stock. Such initial Conversion Price shall be adjusted as
hereinafter provided.
(B) MECHANICS OF CONVERSION. Before any holder of
Series E Preferred Stock shall be entitled to convert the same into shares of
Common Stock, he shall surrender the certificate or certificates thereof, duly
endorsed, at the office of the Corporation or of any transfer agent for such
stock, and shall give written notice to the Corporation at such office that he
elects to convert the same and shall state therein the name or names in which
he wishes the certificate or certificates for shares of Common Stock to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series E Preferred Stock, a
certificate or certificates for the number of shares of Common Stock to which
he shall be entitled as aforesaid. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of surrender
of the shares of Series E Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
(C) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING
ISSUES.
(I) SPECIAL DEFINITIONS. For purposes of this
Section 4(c), the following definitions shall apply:
(1) "OPTIONS" shall mean rights,
options, or warrants to subscribe for, purchase or otherwise acquire either
Common Stock or Convertible Securities.
(2) "ORIGINAL ISSUE DATE" shall mean the
date on which a share of Series E Preferred Stock was first issued.
(3) "CONVERTIBLE SECURITIES" shall mean
any evidences of indebtedness, shares (other than Common Stock and Series E
Preferred Stock) or other securities convertible into or exchangeable for
Common Stock.
(4) "ADDITIONAL SHARES OF COMMON STOCK"
shall mean all shares of Common Stock issued (or, pursuant to Section
4(c)(iii), deemed to be issued) by the Corporation after the Original Issue
Date, other than shares of Common Stock issued or issuable:
3.
<PAGE> 40
(A) upon conversion of shares of
Series E Preferred Stock;
(B) to officers, directors or
employees of, or consultants to, the Corporation, on terms approved by the
Board of Directors;
(C) as a dividend or distribution on
Preferred Stock; or
(D) for which adjustment of the
Conversion Price is made pursuant to Section 4(c)(vi).
(E) in any transaction approved by
the Company's Board of Directors involving the acquisition of more than fifty
percent (50%) of the stock of another corporation or substantially all of the
assets of another corporation or business, whether by merger, exchange of
shares, purchase of assets, or otherwise.
(II) No Adjustment of Conversion Price. No
adjustment in the Conversion Price of a particular share of Series E Preferred
Stock shall be made in respect of the issuance of Additional Shares of Common
Stock unless the consideration per share for an Additional Share of Common
Stock issued or deemed to be issued by the Corporation is less than the
Conversion Price in effect on the date of, and immediately prior to such issue,
for such share of Series E Preferred Stock.
(III) Deemed Issue of Additional Shares of Common
Stock. Subject to paragraph 4(c)(i)(4)(B) herein, in the event the Corporation
at any time or from time to time after the Original Issue Date shall issue any
Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities then entitled to receive
any such Options or Convertible Securities, then the maximum number of shares
(as set forth in the instrument relating thereto without regard to any
provisions contained therein designed to protect against dilution) of Common
Stock issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as
of the time of such issue or, in case such a record date shall have been fixed,
as of the close of business on such record date, provided that Additional
Shares of Common Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to Section 4(c)(v) hereof) of such
Additional Shares of Common Stock would be less than the Conversion Price in
effect on the date of and immediately prior to such issue, or such record date,
as the case may be, and provided further that in any such case in which
Additional Shares of Common Stock are deemed to be issued:
(1) no further adjustments in the
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the
4.
<PAGE> 41
exercise of such Options or conversion or exchange of such Convertible
Securities;
(2) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Corporation, or decrease in
the number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities (provided, however, that no such adjustment of the
Conversion Price shall affect Common Stock previously issued upon conversion of
the Series E Preferred Stock);
(3) upon the expiration of any such
Options or any rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, the Series E Conversion Price
computed upon the original issue thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments based thereon,
shall, upon such expiration, be recomputed as if:
(A) in the case of Convertible
Securities or Options for Common Stock the only Additional Shares of Common
issued were the shares of Common Stock, if any, actually issued upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration actually received by the Corporation
upon such exercise, or for the issue of all such Convertible Securities which
were actually converted or exchanged, plus the additional consideration, if
any, actually received by the Corporation upon such conversion or exchange, and
(B) in the case of Options for
Convertible Securities, only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue of such
Options and the consideration received by the Corporation for the Additional
Shares of Common Stock deemed to have been then issued was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration deemed to have been received by the
Corporation (determined pursuant to Section 4(c)(v)) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(4) no readjustment pursuant to clauses
(2) or (3) above shall have the effect of increasing the Conversion Price to an
amount which exceeds the lower of (A) the Conversion Price on the original
adjustment date, or (B) the Conversion Price that would have resulted from any
issuance of Additional Shares of Common Stock between the original adjustment
date and such readjustment date;
5.
<PAGE> 42
(5) in the case of any Options that
expire by their terms not more than thirty (30) days after the date of issue
thereof, no adjustment of the Series E Conversion Price shall be made, except
as to shares of Series E Preferred Stock converted in such period, until the
expiration or exercise of all such Options, whereupon such adjustment shall be
made in the same manner provided in clause (3) above; and
(6) if any such record date shall have
been fixed and such Options or Convertible Securities are not issued on the
date fixed thereof, the adjustment previously made in the Series E Conversion
Price which became effective on such record date shall be cancelled as of the
close of business on such record date, and shall instead be made on the actual
date of issuance, if any.
(IV) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE
OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation shall issue
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Section 4(c)(iii)) without consideration or for
a consideration per share less than the Conversion Price in effect on the date
of and immediately prior to such issue, then and in such event, such Conversion
Price shall be reduced, concurrently with such issue in order to increase the
number of shares of Common Stock into which the Series E Preferred Stock is
convertible, to a price equal to the consideration per share received by the
Corporation for such Additional Shares of Common Stock.
(V) DETERMINATION OF CONSIDERATION. For
purposes of this Section 4(c), the consideration received by the Corporation
for the issue of any Additional Shares of Common Stock shall be computed as
follows:
(1) CASH AND PROPERTY: Such
consideration shall:
(A) insofar as it consists of cash,
be computed at the aggregate amount of cash received by the Corporation
excluding amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of
property other than cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board; and
(C) in the event Additional Shares
of Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the
proportion of such consideration so received, computed as provided in clauses
(A) and (B) above, as determined in good faith by the Board of Directors.
(2) OPTIONS AND CONVERTIBLE SECURITIES.
The
6.
<PAGE> 43
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 4(c)(iii), relating
to Options and Convertible Securities, shall be determined by dividing
(A) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of
such Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein designed to protect against
dilution) payable to the Corporation upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such Convertible
Securities by
(B) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein designed to protect against dilution)
issuable upon the exercise of such Options or the conversion or exchange of
such Convertible Securities.
(VI) ADJUSTMENTS FOR COMBINATIONS OR SUBDIVISIONS
OF COMMON STOCK. In the event the Corporation at any time or from time to time
after the Original Issue Date shall declare or pay any dividend on the Common
Stock payable in Common Stock or in any right to acquire Common Stock, or shall
effect a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or
otherwise), or in the event the outstanding shares of Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock, then the Conversion Price in effect
immediately prior to such event shall, concurrently with the effectiveness of
such event, be proportionately decreased or increased, as appropriate.
(D) REDEMPTION.
(I) RIGHT TO REDEEM. Any or all of the
outstanding shares of Series E Preferred Stock shall be redeemable by the
Corporation in the event that (1) the market price of the Corporation's
outstanding Common Stock (as quoted on any national or regional securities
exchange or automated quotation system on which or through which the
Corporation's Common Stock is traded) has equaled or exceed for a period of at
least twenty (20) consecutive trading days 200% of the Conversion Price in
effect during such period and (2) upon such time as such stock can be traded on
a public market or sold pursuant to Rule 144 or any other applicable rule of
the Securities and Exchange Commission.
(II) MECHANICS OF REDEMPTION. Before the
Corporation shall be entitled to redeem any of the shares of Series E Preferred
Stock, it shall give written notice to each holder thereof whose shares of
Series E Preferred Stock are to be redeemed indicating the number
7.
<PAGE> 44
of shares of Series E Preferred Stock to be redeemed. Each holder thereof
shall, as soon as practicable thereafter, surrender its certificates for such
shares, duly endorsed, at the office of the Corporation or of any transfer
agent for such shares, at which time the Corporation shall pay to such holder
the Redemption Price (defined below) for each such share to be redeemed. The
Redemption Price shall be payable in cash or by check, which need not be
certified. Such redemption shall be deemed to have been made immediately prior
to the close of business on the date of tender of the Redemption Price for the
shares of Series E Preferred Stock to be redeemed.
(III) REDEMPTION PRICE DEFINED. The "Redemption
Price" shall mean the Original Issue Price plus all accrued but unpaid
dividends on each share of Series E Preferred Stock to be redeemed.
(E) OTHER DISTRIBUTIONS. In the event the Corporation
shall at any time or from time to time make or issue, or fix a record date for
the determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of the Corporation or any of it
subsidiaries other than Additional Shares of Common Stock, then in each such
event provision shall be made so that the holders of Series E Preferred Stock
shall receive, upon the conversion thereof, the securities of the Corporation
which they would have received had their stock been converted into Common Stock
on the date of such event.
(F) NO IMPAIRMENT. The Corporation will not, by
amendment of its Articles of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as
may be necessary or appropriate in order to protect the Conversion Rights of
the holders of the Series E Preferred Stock against impairment.
(G) CERTIFICATES AS TO ADJUSTMENTS. Upon the
occurrence of each adjustment or readjustment of the Conversion Price pursuant
to this Section 4, the Corporation shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series E Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series E Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price at the time in effect,
and (iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series E
Preferred Stock.
(H) NOTICES OF RECORD DATE. In the event of any taking
by the Corporation of a record of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other
8.
<PAGE> 45
distribution, any security or right convertible into or entitling the holder
thereof to receive Additional Shares of Common Stock, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any
other securities or property, or to receive any other right, the Corporation
shall mail to each holder of Series E Preferred Stock at least twenty (20) days
prior to the date specified therein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution,
security or right, and the amount and character of such dividend, distribution,
security or right.
(I) ISSUE TAXES. The Corporation shall pay any and all
issue and other taxes that may be payable in respect of any issue or delivery
of shares of Common Stock on conversion of shares of Series E Preferred Stock
pursuant hereto; provided, however, that the Corporation shall not be obligated
to pay any transfer taxes resulting from any transfer requested by any holder
in connection with any such conversion.
(J) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series E Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series E Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series E Preferred Stock, the Corporation will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose, including, without limitation, engaging in best efforts to
obtain the requisite shareholder approval of any necessary amendment to these
Articles.
(K) FRACTIONAL SHARES. No fractional share shall be
issued upon the conversion of any share or shares of Series E Preferred Stock.
All shares of Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series E Preferred Stock by a holder
thereof shall be aggregated for purposes of determining whether the conversion
would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share of Common Stock, the Corporation shall, in lieu of issuing
any fractional share, pay the holder otherwise entitled to such fraction a sum
in cash equal to the fair market value of such fraction on the date of
conversion (as determined in good faith by the Board of Directors of the
Corporation).
(L) NOTICES. Any notice required by the provisions of
this Section 4 to be given to the holders of shares of Series E Preferred Stock
shall be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing on the books of
the Corporation.
(M) ADJUSTMENTS. In case of any reorganization or any
reclassification
9.
<PAGE> 46
of the capital stock of the Corporation, any consolidation or merger of the
Corporation with or into another corporation or corporations, or the conveyance
of all or substantially all of the assets of the Corporation to another
corporation, each share of Series E Preferred Stock shall thereafter be
convertible into the number of shares of stock or other securities or property
(including cash) to which a holder of the number of shares of Common Stock
deliverable upon conversion of such share of Series E Preferred Stock would
have been entitled upon the record date of (or date of, if no record date is
fixed) such reorganization, reclassification, consolidation, merger or
conveyance; and, in any case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the holders of
such Series E Preferred Stock, to the end that the provisions set forth herein
shall thereafter be applicable, as nearly as equivalent as is practicable, in
relation to any shares of stock or the securities or property (including cash)
thereafter deliverable upon the conversion of the shares of such Series E
Preferred Stock.
5. RESTRICTIONS AND LIMITATIONS. So long as at least
Seventy-Five Thousand (75,000) shares of Series E Preferred Stock remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of not less than a majority of the then outstanding shares of
Series E Preferred Stock voting together as a single class, amend, repeal or
waive any provision of, or add any provision to, the Corporation's Articles of
Incorporation or Bylaws if such action would materially and adversely alter the
preferences, rights, privileges or powers of, or the restrictions provided for
the benefit of, the Preferred Stock.
6. AMENDMENT. Any term relating to the Series E Preferred
Stock may be amended only with the vote or written consent of holders of not
less than a majority of all Series E Preferred Stock then outstanding. Any
such amendment shall be binding upon the Corporation and any holder of Series E
Preferred Stock.
10.
<PAGE> 47
IN WITNESS WHEREOF, I have executed this Certificate this 6 day of
April, 1995.
/s/ Wallace M. Hammond
-------------------------------------
WALLACE M. HAMMOND
President
ATTEST:
/s/ Kenneth L. Guernsey
- ----------------------------
KENNETH L. GUERNSEY
Secretary
11.
<PAGE> 48
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
PHOENIX NETWORK, INC.
PHOENIX NETWORK, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that the original Certificate of
Incorporation of Corporation was filed with the Delaware Secretary of State on
May 17, 1989. The Corporation further hereby certifies that:
1. The Board of Directors of the Corporation adopted resolutions to
amend paragraph A of Article IV of the Restated Certificate of Incorporation of
the Corporation to read in its entirety as follows:
"ARTICLE IV
A. This Corporation is authorized to issue two classes of
shares to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Corporation is authorized
to issue is Thirty-Five Million (35,000,000) shares. Thirty Million
(30,000,000) shares shall be Common Stock, each having a par value of
$0.001. Five Million (5,000,000) shares shall be Preferred Stock, each
having a par value of $0.001."
II. Thereafter at the Corporation's Annual Meeting of Stockholders,
held August 24, 1995, the necessary number of shares as required by statute
were voted in favor of the amendment.
III. The aforesaid amendment was duly adopted in accordance with the
applicable provisions of Section 242 of the Delaware General Incorporation Law.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of the Restated Certificate of Incorporation to be signed by Wallace
M. Hammond, President and Chief Executive Officer, and by Kenneth L. Guernsey,
Secretary, this 29th day of September, 1995.
PHOENIX NETWORK, INC.
/s/ Wallace M. Hammond
-----------------------------
Wallace M. Hammond
President & Chief Executive
Officer
ATTEST:
/s/ Kenneth L. Guernsey
- --------------------------
Kenneth L. Guernsey
Secretary
<PAGE> 49
PHOENIX NETWORK, INC.
CERTIFICATE OF
DESIGNATIONS OF
SERIES F PREFERRED STOCK
--------------------
The undersigned, WALLACE M. HAMMOND, the President of PHOENIX NETWORK,
INC., a Delaware corporation (the "Corporation"), the Restated Certificate of
Incorporation of which was filed in the office of the Secretary of State of the
State of Delaware on December 12, 1990, acting pursuant to Section 151 of the
General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY that at a
meeting of the Board of Directors of the Corporation duly convened and held on
September 29, 1995 the following resolution was adopted:
RESOLVED, that pursuant to Article IV of the Corporation's
Restated Certificate of Incorporation relating to the shares of the
Corporation, the Board of Directors hereby authorizes, fixes and
creates a series of Preferred Stock, par value $.01 per share, having
the following powers, preferences, designations, rights and other
characteristics:
A. One Million Two Hundred Thousand (1,200,000) of the authorized
shares of Preferred Stock are hereby designated "Series F Preferred Stock."
B. The rights, preferences, privileges, restrictions and other
matters relating to the Series F Preferred Stock are as follows:
1. RANKING. The Series F Preferred Stock shall rank as
to dividends and upon liquidation, dissolution or winding up of the Corporation
(i) on a parity with the Corporations's Series A Preferred and Series B
Preferred Stock and with any class or series of Preferred Stock which by its
express terms provides that it ranks on a parity with the Series F Preferred
Stock (collectively, the "Pari Passu Stock"), and (ii) prior to any class of
common equity of the Corporation and any other class or series of capital stock
which by its express terms provides that it ranks junior to the Series F
Preferred Stock or which does not expressly provide for any ranking as to
dividends, liquidation, dissolution or winding up (collectively, the "Junior
Stock").
1.
<PAGE> 50
2. DIVIDENDS.
(a) The holders of Series F Preferred Stock shall
be entitled to receive cumulative dividends at the rate of nine percent (9%)
per annum per share (as adjusted for any combinations, consolidations, stock
distributions or dividends, stock splits, reverse stock splits or other similar
transactions with respect to such shares) payable, when, as and if declared by
the Board of Directors out of legally available funds therefor. Subject to
Section 2(b) below, such dividends shall be payable in cash annually on January
1st of each year (unless such day is not a business day, in which event on the
next succeeding business day) (each a "Dividend Payment Date"), commencing on
the next Dividend Payment Date succeeding the date of original issue of such
shares of Series F Preferred Stock, to holders of record as they appear on the
register of the Corporation for the Series F Preferred Stock on the 15th day
immediately preceding such Dividend Payment Date. Dividends on shares of
Series F Preferred Stock shall be computed on the basis of a 360-day year of
twelve 30-day months and shall accumulate from the date of original issue of
such shares. Any declaration of a dividend may be for a portion, or all, of
the then accumulated dividends. Any accumulated dividends that are not paid
will continue to cumulate in the manner described above.
(b) Solely at the option of the Corporation, dividends
may be paid, instead of in cash, on declaration of the Board of Directors, in
shares of the Corporation's common stock, par value $.001 per share (the
"Common Stock"), to the extent of legally available surplus of the Corporation,
in respect of any or all Dividend Payment Dates. The aggregate par value of
Common Stock issued in payment of any dividend shall be transferred from the
legal surplus of the Corporation to its capital at the time of such payment.
If a dividend is to be paid in Common Stock, the number of shares of Common
Stock to be issued in payment of the dividend with respect to each outstanding
share of Series F Preferred Stock shall be determined by dividing the amount of
the dividend to be paid with respect to such share of Series F Preferred Stock
by an amount equal to the Fair Market Value (as defined in Section 5(c) below)
of the Common Stock on the date such dividend is declared by the Board of
Directors. Any such shares distributed as a dividend shall first be registered
on a registration statement with the Securities and Exchange Commission (the
"SEC") and such registration statement shall have been declared effective by
the SEC.
(c) No dividend or distribution in cash, shares of
capital stock or other property shall be paid or declared and set apart for
payment on any date on or in respect of (i) the Junior Stock (any such dividend
or distribution on such stock hereinafter referred to as a "Junior Stock
Distribution"), or (ii) any Pari Passu Stock (any such dividends or
distributions on such stock hereinafter referred to as a "Pari Passu Stock
Distribution"), unless, contemporaneously therewith or with respect to the
immediately preceding Dividend Payment Date for the Series F Preferred Stock, a
dividend or distribution is or was paid or declared and set apart for payment
on or in respect of the Series F Preferred Stock, payable at the rate set forth
herein and payable on a date no later than the payment date set forth for such
Junior Stock Distribution or Pari Passu Stock Distribution, as the case may be.
2.
<PAGE> 51
(d) In no event may the Corporation (i) make a Junior
Stock Distribution or a Pari Passu Stock Distribution while there are dividends
in arrears on the Series F Preferred Stock or (ii) redeem, purchase or
otherwise acquire for value any Junior Stock or Pari Passu Stock unless, prior
to or contemporaneously with such redemption, purchase or acquisition the
Series F Preferred Stock is redeemed in full (in the case of redemption,
purchase or acquisition of Junior Stock) or on a pro rata basis based on
liquidation preference (in the case of redemption, purchase or acquisition of
Pari Passu Stock).
3. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution
or winding up of the Corporation, either voluntary or involuntary, the holders
of the Series F Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Junior Stock, the amount of Ten Dollars
($10.00) per share in cash (as adjusted for any stock subdivisions,
combinations or consolidations or any stock distributions or dividends with
respect to such shares) plus an amount in cash equal to all accrued but unpaid
dividends (the "Liquidation Preference") on each share of Series F Preferred
Stock then held by them and no more. If upon the occurrence of such event, the
assets and funds thus distributed among the holders of the Series F Preferred
Stock and the Pari Passu Stock shall be insufficient to permit the payment to
such holders of their Liquidation Preference, then the entire assets and funds
of the Corporation legally available for distribution shall be distributed
among the holders of the Series F Preferred Stock and the Pari Passu Stock
ratably in accordance with the respective amounts which would be payable on
such shares if all amounts payable thereon were paid in full.
(b) After payment to the holders of the Series F
Preferred Stock of the Liquidation Preference, the entire remaining assets and
funds of the Corporation legally available for distribution, if any, shall be
distributed among the holders of the Junior Stock in accordance with the
corporation's Certificate of Incorporation or any other Certificate of
Designation with respect to the Preferred Stock.
(c) For the purposes of this Section 3, neither
the merger or the consolidation of the Corporation into or with another
corporation, nor the merger or consolidation of any other corporation into or
with the Corporation, nor the voluntary sale, conveyance, exchange, transfer or
other disposition (for cash, shares of stock, securities or other
consideration) of all or substantially all the property or assets of the
Corporation, shall be deemed to be a voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation.
4. VOTING RIGHTS.
(a) Except as otherwise expressly provided herein
or as required by law, the Series F Preferred Stock shall vote together with
the Series A Preferred Stock, Series B Preferred
3.
<PAGE> 52
Stock, Series D Preferred Stock, Series E Preferred Stock and the Common Stock
as a single class. The holder of each share of Series F Preferred Stock shall
be entitled to that number of votes equal to the number of shares of Common
Stock into which such share could then be converted pursuant hereto and shall
be entitled to notice of all stockholders' meetings in accordance with the
Bylaws of the Corporation.
(b) So long as at least Two Hundred Thousand
(200,000) shares of Series F Preferred Stock remain outstanding, the holders of
the Series F Preferred Stock then outstanding shall be entitled, voting
together as a class, to elect two (2) directors of the Corporation at each
election of directors. If there shall cease to be at least One Hundred Fifty
Thousand (150,000) shares of Series F Preferred Stock outstanding but there
shall remain at least Seventy Five Thousand (75,000) shares of such stock
outstanding, the holders of the Series F Preferred Stock then shall be entitled
voting as a class to elect one (1) director. Any vacancy occurring because of
the death, resignation or removal of a director elected by the holders of
Series F Preferred Stock shall be filled by the vote or written consent of the
holders of a majority of the shares of Series F Preferred Stock.
5. CONVERSION. The holders of the Series F Preferred
Stock shall have conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series F
Preferred Stock shall be convertible, at the option of the holder thereof, or,
with respect to all of the Series F Preferred Stock, upon the vote or written
consent of the holders of at least sixty-six and two thirds percent (66 2/3%)
in interest of the Series F Preferred Stock, at any time after the date of
issuance of such shares, at the office of the Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing ten dollars ($10.00) (the "Original
Issue Price") plus all accrued and unpaid dividends, on each share of Series F
Preferred Stock by the then applicable Conversion Price (as hereinafter
defined) in effect on the date the certificate is surrendered for conversion.
The price at which shares of Common Stock shall be deliverable upon conversion
(the "Conversion Price") shall initially be two dollars and fifty cents ($2.50)
per share of Common Stock. Such initial Conversion Price shall be adjusted as
hereinafter provided.
(b) MECHANICS OF CONVERSION. Before any holder
of Series F Preferred Stock shall be entitled to convert the same into shares
of Common Stock, he shall surrender the certificate or certificates thereof,
duly endorsed, at the office of the Corporation or of any transfer agent for
such stock, and shall give written notice to the Corporation at such office
that he elects to convert the same and shall state therein the name or names in
which he wishes the certificate or certificates for shares of Common Stock to
be issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series F Preferred Stock, a
certificate or certificates for the number of shares of Common Stock to which
he shall be entitled as aforesaid. Such conversion shall be deemed to have
been made immediately prior to the close of business on
4.
<PAGE> 53
the date of surrender of the shares of Series F Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(c) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING ISSUES.
(i) SPECIAL DEFINITIONS. For purposes
of this Section 5(c), the following definitions shall apply:
(1) "OPTIONS" shall mean rights, options,
or warrants to subscribe for, purchase or otherwise acquire either Common Stock
or Convertible Securities.
(2) "ORIGINAL ISSUE DATE" shall mean the
date on which a share of Series F Preferred Stock was first issued.
(3) "CONVERTIBLE SECURITIES" shall mean any
evidences of indebtedness, shares (other than Common Stock and Series F
Preferred Stock) or other securities convertible into or exchangeable for
Common Stock.
(4) "ADDITIONAL SHARES OF COMMON STOCK"
shall mean all shares of Common Stock issued (or, pursuant to Section
5(c)(iii), deemed to be issued) by the Corporation after the Original Issue
Date, other than shares of Common Stock issued or issuable:
(A) upon conversion of shares of
Series F Preferred Stock;
(B) to officers, directors or
employees of the Corporation, under a stock option plan approved by the Board
of Directors, to the extent such issuances do not exceed 15% of the fully
diluted Common Stock outstanding on the date of the original issue of Series F
Preferred Stock;
(C) as a dividend or distribution
on the Preferred Stock authorized and outstanding on the date hereof in
accordance with the terms of any applicable Certificate of Designations; or
(D) for which adjustment of the
Conversion Price is made pursuant to Section 5(c)(vi).
(5) "FAIR MARKET VALUE" shall mean the
average closing price of the Company's Common Stock as listed on the American
Stock Exchange over the twenty (20) business days immediately preceding the
determination of Fair Market Value or in the event
5.
<PAGE> 54
such Common Stock is not listed on the American Stock Exchange then on any
other recognized exchange using the same twenty (20) day trading period or if
not listed on any exchange, then Fair Market Value shall be determined in good
faith by the Board of Directors of the Corporation.
(ii) NO ADJUSTMENT OF CONVERSION PRICE. No
adjustment in the Conversion Price of a particular share of Series F Preferred
Stock shall be made in respect of the issuance of Additional Shares of Common
Stock unless the consideration per share for an Additional Share of Common
Stock issued or deemed to be issued by the Corporation is less than the Fair
Market Value in effect on the date of such issuance.
(iii) DEEMED ISSUE OF ADDITIONAL SHARES OF
COMMON STOCK. Subject to paragraph 5(c)(i)(4)(B) herein, in the event the
Corporation at any time or from time to time after the Original Issue Date
shall issue any Options or Convertible Securities or shall fix a record date
for the determination of holders of any class of securities then entitled to
receive any such Options or Convertible Securities, then the maximum number of
shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein designed to protect against dilution) of Common
Stock issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as
of the time of such issue or, in case such a record date shall have been fixed,
as of the close of business on such record date, provided that Additional
Shares of Common Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to Section 5(c)(v) hereof) of such
Additional Shares of Common Stock would be less than the Fair Market Value on
the date of issuance, or such record date, as the case may be, and provided
further that in any such case in which Additional Shares of Common Stock are
deemed to be issued:
(1) no further adjustments in the
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(2) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Corporation, or decrease in
the number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities (provided, however, that no such adjustment of the
Conversion Price shall affect Common Stock previously issued upon conversion of
the Series F Preferred Stock);
(3) upon the expiration of any such
Options or any rights of conversion or exchange under such Convertible
Securities which shall not have been exercised,
6.
<PAGE> 55
the Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration, be recomputed as if:
(A) in the case of Convertible
Securities or Options for Common Stock the only Additional Shares of Common
Stock issued were the shares of Common Stock, if any, actually issued upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration actually received by the Corporation
upon such exercise, or for the issue of all such Convertible Securities which
were actually converted or exchanged, plus the additional consideration, if
any, actually received by the Corporation upon such conversion or exchange, and
(B) in the case of Options for
Convertible Securities, only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue of such
Options and the consideration received by the Corporation for the Additional
Shares of Common Stock deemed to have been then issued was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration deemed to have been received by the
Corporation (determined pursuant to Section 5(c)(v)) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(4) no readjustment pursuant to clauses (2)
or (3) above shall have the effect of increasing the Conversion Price to an
amount which exceeds the lower of (A) the Conversion Price on the original
adjustment date, or (B) the Conversion Price that would have resulted from any
issuance of Additional Shares of Common Stock between the original adjustment
date and such readjustment date;
(5) in the case of any Options that expire
by their terms not more than thirty (30) days after the date of issue thereof,
no adjustment of the Conversion Price shall be made, except as to shares of
Series F Preferred Stock converted in such period, until the expiration or
exercise of all such Options, whereupon such adjustment shall be made in the
same manner provided in clause (3) above; and
(6) if any such record date shall have been
fixed and such Options or Convertible Securities are not issued on the date
fixed thereof, the adjustment previously made in the Series F Conversion Price
which became effective on such record date shall be canceled as of the close of
business on such record date, and shall instead be made on the actual date of
issuance, if any.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation shall issue
Additional Shares
7.
<PAGE> 56
of Common Stock (including Additional Shares of Common Stock deemed to be
issued pursuant to Section 5(c)(iii)) without consideration or for a
consideration per share less than the Fair Market Value in effect on the date
of and immediately prior to such issue, then and in such event, such Conversion
Price shall be adjusted, concurrently with such issue, to the price (calculated
to the nearest cent) determined by multiplying the Conversion Price by a
fraction (a) the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to the issuance of such Additional Shares
of Common Stock plus the number of shares of Common Stock which the aggregate
consideration for the total number of such Additional Shares of Common Stock so
issued would purchase at the Fair Market Value, and (b) the denominator of
which shall be the number of shares of Common Stock outstanding immediately
prior to the issuance of such Additional Shares of Common Stock plus the number
of such Additional Shares of common stock so issued.
(v) DETERMINATION OF CONSIDERATION. For purposes
of this Section 5(c), the consideration received by the Corporation for the
issue of any Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration
shall:
(A) insofar as it consists of
cash, be computed at the aggregate amount of cash received by the Corporation
excluding amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of
property other than cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board of Directors; and
(C) in the event Additional Shares
of Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the
proportion of such consideration so received, computed as provided in clauses
(A) and (B) above, as determined in good faith by the Board of Directors.
(2) OPTIONS AND CONVERTIBLE
SECURITIES. The consideration per share received by the Corporation for
Additional Shares of Common Stock deemed to have been issued pursuant to
Section 5(c)(iii), relating to Options and Convertible Securities, shall be
determined by dividing
(A) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of
such Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein designed to protect against
dilution) payable to the Corporation upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such
8.
<PAGE> 57
Options for Convertible Securities and the conversion or exchange of such
Convertible Securities by
(B) the maximum number of shares
of Common Stock (as set forth in the instruments relating thereto, without
regard to any provision contained therein designed to protect against dilution)
issuable upon the exercise of such Options or the conversion or exchange of
such Convertible Securities.
(vi) ADJUSTMENTS FOR COMBINATIONS OR
SUBDIVISIONS OF COMMON STOCK. In the event the Corporation at any time or from
time to time after the Original Issue Date shall declare or pay any dividend on
the Junior Stock in Common Stock or in any right to acquire Common Stock, or
shall effect a subdivision of the outstanding shares of Common Stock into a
greater number of shares of Common Stock (by stock split, reclassification or
otherwise), or in the event the outstanding shares of Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock, then the Conversion Price in effect
immediately prior to such event shall, concurrently with the effectiveness of
such event, be proportionately decreased or increased, as appropriate.
(d) REDEMPTION.
(i) RIGHT TO REDEEM AND VOLUNTARY CONVERSION.
Any or all of the outstanding shares of Series F Preferred Stock shall be
redeemable by the Corporation in the event that the market price of the
Corporation's outstanding Common Stock (as quoted on any national or regional
securities exchange or automated quotation system on which or through which the
Corporation's Common Stock is traded) has equaled or exceed for a period of at
least twenty (20) consecutive trading days 200% of the Conversion Price in
effect during such period. In the event that any holder of Series F Preferred
Stock has not responded to the Corporation's notice of redemption within ten
(10) days, then such Series F Preferred shall be deemed to be a voluntary
conversion of such Series F Preferred Stock into Common Stock by the holder
pursuant to Section 5(a) above.
(ii) MECHANICS OF REDEMPTION. Before the
Corporation shall be entitled to redeem any of the shares of Series F Preferred
Stock, it shall give written notice to each holder thereof whose shares of
Series F Preferred Stock are to be redeemed indicating the number of shares of
Series F Preferred Stock to be redeemed. Each holder thereof shall, as soon as
practicable thereafter, surrender its certificates for such shares, duly
endorsed, at the office of the Corporation or of any transfer agent for such
shares, at which time the Corporation shall pay to such holder the Redemption
Price (defined below) for each such share to be redeemed. The Redemption Price
shall be payable in cash or by check, which need not be certified. Such
redemption shall be deemed to have been made immediately prior to the close of
business on the date of tender of the Redemption Price for the shares of Series
F Preferred Stock to be redeemed.
9.
<PAGE> 58
(iii) REDEMPTION PRICE DEFINED. The
"Redemption Price" shall mean the Original Issue Price plus all accrued but
unpaid dividends on each share of Series F Preferred Stock to be redeemed.
(e) OTHER DISTRIBUTIONS. In the event the Corporation
shall at any time or from time to time make or issue, or fix a record date for
the determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of the Corporation or any of it
subsidiaries other than Additional Shares of Common Stock, then in each such
event provision shall be made so that the holders of Series F Preferred Stock
shall receive, upon the conversion thereof, the securities of the Corporation
which they would have received had their stock been converted into Common Stock
on the date of such event.
(f) NO IMPAIRMENT. The Corporation will not, by
amendment of its Articles of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 5 and in the taking of all such action as
may be necessary or appropriate in order to protect the Conversion Rights of
the holders of the Series F Preferred Stock against impairment.
(g) CERTIFICATES AS TO ADJUSTMENTS. Upon the
occurrence of each adjustment or readjustment of the Conversion Price pursuant
to this Section 5, the Corporation shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series F Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series F Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price at the time in effect,
and (iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series F
Preferred Stock.
(h) NOTICES OF RECORD DATE. In the event of any
taking by the Corporation of a record of the holders of any class of securities
for the purpose of determining the holders thereof who are entitled to receive
any dividend (other than a cash dividend) or other distribution, any security
or right convertible into or entitling the holder thereof to receive Additional
Shares of Common Stock, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property,
or to receive any other right, the Corporation shall mail to each holder of
Series F Preferred Stock at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution, security or right, and the
amount and character of such dividend, distribution, security or right.
10.
<PAGE> 59
(i) ISSUE TAXES. The Corporation shall pay any and
all issue and other taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of shares of Series F
Preferred Stock pursuant hereto; provided, however, that the Corporation shall
not be obligated to pay any transfer taxes resulting from any transfer
requested by any holder in connection with any such conversion.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of the Series F Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of the Series F Preferred
Stock; and if at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series F Preferred Stock, the Corporation will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose, including, without limitation,
engaging in best efforts to obtain the requisite shareholder approval of any
necessary amendment to these Articles.
(k) FRACTIONAL SHARES. No fractional share shall be
issued upon the conversion of any share or shares of Series F Preferred Stock.
All shares of Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series F Preferred Stock by a holder
thereof shall be aggregated for purposes of determining whether the conversion
would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share of Common Stock, the Corporation shall, in lieu of issuing
any fractional share, pay the holder otherwise entitled to such fraction a sum
in cash equal to the fair market value of such fraction on the date of
conversion (as determined in good faith by the Board of Directors of the
Corporation).
(l) NOTICES. Any notice required by the provisions
of this Section 4 to be given to the holders of shares of Series F Preferred
Stock shall be deemed given if deposited in the United States mail, postage
prepaid, and addressed to each holder of record at his address appearing on the
books of the Corporation.
(m) ADJUSTMENTS. In case of any reorganization
or any reclassification of the capital stock of the Corporation, any
consolidation or merger of the Corporation with or into another corporation or
corporations, or the conveyance of all or substantially all of the assets of
the Corporation to another corporation, each share of Series F Preferred Stock
shall thereafter be convertible into the number of shares of stock or other
securities or property (including cash) to which a holder of the number of
shares of Common Stock deliverable upon conversion of such share of Series F
Preferred Stock would have been entitled upon the record date of (or date of,
if no record date is fixed) such reorganization, reclassification,
consolidation, merger or conveyance; and, in any case, appropriate adjustment
(as determined by the Board of Directors) shall be made in the
11.
<PAGE> 60
application of the provisions herein set forth with respect to the rights and
interests thereafter of the holders of such Series F Preferred Stock, to the
end that the provisions set forth herein shall thereafter be applicable, as
nearly as equivalent as is practicable, in relation to any shares of stock or
the securities or property (including cash) thereafter deliverable upon the
conversion of the shares of such Series F Preferred Stock.
6. RESTRICTIONS AND LIMITATIONS. So long as at least
Two Hundred Thousand (200,000) shares of Series F Preferred Stock remain
outstanding, the Corporation shall not, without the vote or written consent by
the holders of not less than sixty-six and two thirds percent (66 2/3%) in
interest of the then outstanding shares of Series F Preferred Stock voting
together as a single class, amend, repeal or waive any provision of, or add any
provision to, the Corporation's Certificate of Incorporation or Bylaws if such
action would materially and adversely alter the preferences, rights, privileges
or powers of, or the restrictions provided for the benefit of, the Preferred
Stock.
7. AMENDMENT. Any term relating to the Series F
Preferred Stock may be amended only with the vote or written consent of holders
of not less than sixty-six and two thirds percent (66 2/3%) in interest of all
Series F Preferred Stock then outstanding. Any such amendment shall be binding
upon the Corporation and any holder of Series F Preferred Stock.
IN WITNESS WHEREOF,I have executed this Certificate this 3rd day of
October, 1995.
/s/ Wallace M. Hammond
---------------------------
WALLACE M. HAMMOND
President
ATTEST:
/s/ Kenneth L. Guernsey
- ----------------------------------
KENNETH L. GUERNSEY
Secretary
12.
<PAGE> 61
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
PHOENIX NETWORK, INC.
PHOENIX NETWORK, INC., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
1. The Board of Directors of the Corporation adopted resolutions
to amend paragraph A of Article IV of the Restated Certificate of Incorporation
of the Corporation to read in its entirety as follows:
"A. This corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Corporation is
authorized to issue is Fifty-Five Million (55,000,000) shares. Fifty
Million (50,000,000) shares shall be Common Stock, each having a par
value of $0.001. Five Million (5,000,000) shares shall be Preferred
Stock, each having a par value of $0.001."
II. Thereafter at the Corporation's Annual Meeting of
Stockholders, held September 26, 1996 the necessary number of shares as
required by statute were voted in favor of the amendment.
III. The aforesaid amendment was duly adopted in accordance with
the applicable provisions of Section 242 of the Delaware General Incorporation
Law.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of the Restated Certificate of Incorporation to be signed by Wallace
M. Hammond, President and Chief Executive Officer, and by Ernest J. Panasci,
Secretary, this 1st day of October, 1996.
PHOENIX NETWORK, INC.
/s/ Wallace M. Hammond
----------------------------
Wallace M. Hammond
President & CEO
ATTEST:
/s/ Ernest J. Panasci
- ------------------------
Ernest J. Panasci
Secretary
<PAGE> 62
CERTIFICATE OF DESIGNATION OF
SERIES G CONVERTIBLE PREFERRED STOCK OF
PHOENIX NETWORK, INC.
The undersigned, Jonathan F. Beizer and Ernest J. Panasci, hereby
certify that:
I. They are the duly elected and acting Senior Vice President
and Secretary, respectively, of Phoenix Network, Inc., a Delaware corporation
(the "Company").
II. The Certificate of Incorporation of the Company authorizes
5,000,000 shares of preferred stock, par value $.001 per share, of which
546,458 are issued and outstanding.
III. The following is a true and correct copy of resolutions
duly adopted by the Board of Directors of the Company (the "Board of
Directors") at a meeting duly held March 27, 1997, which constituted all
requisite action on the part of the Company for adoption of such resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors is authorized to provide for the
issuance of the shares of preferred stock from time to time in one or more
series, and by filing a certificate pursuant to the applicable law of the State
of Delaware, to establish from time to time the number of shares to be included
in each such series, and to fix or alter the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including any
sinking fund provisions), redemption price or prices, and the liquidation
preferences of any wholly unissued series of preferred stock.
WHEREAS, the Board of Directors desires, pursuant to its
authority as aforesaid, to designate a new series of preferred stock, set the
number of shares constituting such series and fix the rights, preferences,
privileges and restrictions of such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors
hereby designates a new series of preferred stock and the number of shares
constituting such series and fixes the rights, preferences, privileges and
restrictions relating to such series as follows:
<PAGE> 63
Section 1. Designation, Amount and Par Value. The series of
preferred stock shall be designated as the Series G Convertible Preferred Stock
(the "Preferred Stock"), and the number of shares so designated shall be
150,000 (which shall not be subject to increase without the consent of the
holders ("Holder") thereof). Each share of Preferred Stock shall have a par
value of $.001 per share and a stated value of $20 per share (the "Stated
Value").
Section 2. Dividends.
(a) Holders of Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors out of funds legally available
therefor, and the Company shall pay, cumulative dividends at the rate per share
(as a percentage of the Stated Value per share) equal to 5% per annum, payable,
in shares of Common Stock (as defined in Section 7), quarterly in arrears, but
in no event later than the Conversion Date (as hereinafter defined) applicable
to such share of Preferred Stock. Dividends on the Preferred Stock shall
accrue daily commencing the Original Issue Date (as defined in Section 7), and
shall be deemed to accrue on such date whether or not earned or declared and
whether or not there are profits, surplus or other funds of the Company legally
available for the payment of dividends. The party that holds the Preferred
Stock of record on an applicable record date for any dividend payment will be
entitled to receive such dividend payment and any other accrued and unpaid
dividends which accrued prior to such dividend payment date, without regard to
any sale or disposition of such Preferred Stock subsequent to the applicable
record date but prior to the applicable dividend payment date. Except as
otherwise provided herein, if at any time the Company pays less than the total
amount of dividends then accrued on account of the Preferred Stock, such
payment shall be distributed ratably among the Holders of the Preferred Stock
based upon the number of shares held by each Holder. Payment of dividends on
the Preferred Stock is further subject to the provisions of Section 5(c)(i).
(b) Notwithstanding anything to the contrary contained herein,
the Company may not issue shares of Common Stock in payment of dividends (and,
at the option of the Holder, shall be required to either deliver cash in
respect thereof or such dividends shall accrue without interest thereon) on the
Preferred Stock if:
(i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, or held as treasury
stock, is insufficient to issue such dividends to be paid in shares of Common
Stock;
(ii) the shares of Common Stock to be issued in respect
of such dividends are not registered for resale pursuant to an effective
registration statement that names the recipient of such dividend as a selling
stockholder thereunder or may not be sold without volume restrictions pursuant
to Rule 144 as determined by counsel to the Company pursuant to a written
opinion letter, addressed to the Holder, in form and substance acceptable to
such Holder.
(iii) the shares of Common Stock to be issued in respect
of such dividends are not listed on the American Stock Exchange (or Nasdaq
National Market, Nasdaq SmallCap
-2-
<PAGE> 64
Market or The New York Stock Exchange) and any other exchange or quotation
system on which the Common Stock is then listed for trading; or
(iv) the issuance of such shares would result in the
recipient thereof beneficially owning, in accordance with Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended, more than
4.9% of the issued and outstanding shares of Common Stock.
(c) So long as any Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities (as defined in
Section 7), nor shall the Company directly or indirectly pay or declare any
dividend or make any distribution (other than a dividend or distribution
described in Section 5) upon, nor shall any distribution be made in respect of,
any Junior Securities, nor shall any monies be set aside for or applied to the
purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities unless all accrued and unpaid dividends on the Preferred Stock for
all past dividend periods shall have been paid.
Section 3. Voting Rights. Except as otherwise provided herein
and as otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are outstanding, the
Company shall not, without the affirmative vote of the Holders of a majority of
the shares of the Preferred Stock then outstanding, (a) alter or change
adversely the powers, preferences or rights given to the Preferred Stock, (b)
alter or amend this Certificate of Designation or (c) authorize or create any
class of stock ranking as to dividends or distribution of assets upon a
Liquidation (as defined in Section 4) senior or prior to the Preferred Stock.
Section 4. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the Holders of Preferred Stock shall be entitled to receive out of the assets
of the Company, whether such assets are capital or surplus, for each share of
Preferred Stock an amount equal to the Stated Value plus all accrued but unpaid
dividends per share, whether declared or not, before any distribution or
payment shall be made to the Holders of any Junior Securities, and if the
assets of the Company shall be insufficient to pay in full such amounts, then
the entire assets to be distributed to the Holders of Preferred Stock shall be
distributed among the Holders of Preferred Stock ratably in accordance with the
respective amounts that would be payable on such shares if all amounts payable
thereon were paid in full. A sale, conveyance or disposition of all or
substantially all of the assets of the Company or the effectuation by the
Company of a transaction or series of related transactions in which more than
50% of the voting power of the Company is disposed of, or a consolidation or
merger of the Company with or into any other company or companies shall not be
treated as a Liquidation, but instead shall be subject to the provisions of
Section 5. The Company shall mail written notice of any such Liquidation, not
less than 45 days prior to the payment date stated therein, to each record
Holder of Preferred Stock.
-3-
<PAGE> 65
Section 5. Conversion.
(a)(i) Each share of Preferred Stock shall be convertible into
shares of Common Stock (subject to reduction pursuant to Section 5(a)(iii)
below and Section 4.10 of the Purchase Agreement (as defined in Section 7)) at
the Conversion Ratio (as defined in Section 7) at the option of the Holder in
whole or in part at any time after the expiration of the earlier to occur of:
(A) 90 days after the Original Issue Date or (B) the date the Securities and
Exchange Commission (the "Commission") declares effective under the Securities
Act of 1933, as amended (the "Securities Act"), the registration statement
contemplated by the Registration Rights Agreement, dated the Original Issue
Date (the "Registration Rights Agreement"), between the Company and the
original Holder of the Preferred Stock, pursuant to which the Company is, among
other things, required to register the resale of the shares of Common Stock
issuable upon conversion of the Preferred Stock (the "Underlying Shares
Registration Statement"). The Holder shall effect conversions by surrendering
the certificate or certificates representing the shares of Preferred Stock to
be converted to the Company, duly endorsed or accompanied by a validly executed
stock power, together with the form of conversion notice attached hereto as
Exhibit A (the "Holder Conversion Notice"). Each Holder Conversion Notice
shall specify the number of shares of Preferred Stock to be converted and the
date on which such conversion is to be effected, which date may not be prior to
the date the Holder delivers such Holder Conversion Notice by facsimile (the
"Holder Conversion Date"). If no Holder Conversion Date is specified in a
Holder Conversion Notice, the Holder Conversion Date shall be the date that the
Holder Conversion Notice is deemed delivered pursuant to Section 5(h). Subject
to Sections 5(b) and 5(a)(iii) hereof and Section 4.10 of the Purchase
Agreement, each Holder Conversion Notice, once given, shall be irrevocable. If
the Holder is converting less than all shares of Preferred Stock represented by
the certificate or certificates tendered by the Holder with the Holder
Conversion Notice, or if a conversion hereunder cannot be effected in full for
any reason, the Company shall promptly deliver to such Holder (in the manner
and within the time set forth in Section 5(b)) a certificate for such number of
shares as have not been converted.
(ii) The Company may from time to time require the
conversion of all or any portion of the then outstanding and unconverted shares
of Preferred Stock at the Conversion Ratio (subject to reduction pursuant to
Section 5(a)(iii) below and Section 4.10 of the Purchase Agreement) by
delivering to the Holder of such shares to be converted a notice in the form
attached hereto as Exhibit B (the "Company Conversion Notice"), provided, that,
no such conversion is permitted unless at the time of the delivery of the
Company Conversion Notice and on the Company Conversion Date (as defined
below), (a) an Underlying Shares Registration Statement covering the resale of
the shares of Common Stock issuable upon such conversion is effective, (b) the
shares of Common Stock issuable upon such conversion are listed for trading on
the American Stock Exchange (or Nasdaq National Market, Nasdaq SmallCap Market
or The New York Stock Exchange) and any other exchange or quotation system on
which the Common Stock is then listed for trading, and (c) the Average Per
Share Market Value for the 20 Trading Days immediately preceding the Company
Conversion Date exceeds two times the Initial Conversion Price (defined in
Section 5(c)(i)). Each Company Conversion Notice shall specify the number of
shares of Preferred Stock to be converted and the date on which such conversion
is to be effected, which date
-4-
<PAGE> 66
may not be prior to the day after the Company delivers such Company Conversion
Notice by facsimile (the "Company Conversion Date"). If no Company Conversion
Date is specified in a Company Conversion Notice, the Company Conversion Date
shall be the date that the Company Conversion Notice is deemed delivered
pursuant to Section 5(h). A Holder Conversion Date and a Company Conversion
Date are sometimes referred to herein as the "Conversion Date" and a Holder
Conversion Notice and a Company Conversion Notice are sometimes referred to as
a "Conversion Notice." Any conversion pursuant to this Section 5(a)(ii) shall
be subject to Section 5(b) with respect to consequences of the Company's
failure to deliver shares of Common Stock in respect of a conversion under this
Section. If the Company is converting less than all shares of Preferred Stock
represented by the certificate or certificates tendered by the Holder in
response to a Company Conversion Notice, or if a conversion hereunder cannot be
effected in full for any reason, the Company shall promptly deliver to such
tendering Holder (in the manner and within the time set forth in Section 5(b))
a certificate for such number of shares as have not been converted.
(iii) Certain Regulatory Approval. If on the Conversion
Date applicable to any conversion under this Section 5(a), (A) the Common Stock
is then listed for trading on the American Stock Exchange or the Nasdaq
National Market or if the rules of the Nasdaq Stock Market are hereafter
amended to extend Rule 4460(i) promulgated thereby (or any successor or
replacement provision thereof) to the Nasdaq SmallCap Market and the Company's
Common Stock is then listed for trading on such market, (B) the Conversion
Price then in effect is such that the aggregate number of shares of Common
Stock that would then be issuable upon conversion of all outstanding shares of
Preferred Stock, together with any shares of Common Stock previously issued
upon conversion of Preferred Stock and in respect of payment of dividends
hereunder, would equal or exceed 20% of the number of shares of Common Stock
outstanding on the Original Issue Date (the "Issuable Maximum"), and (C) the
Company has not previously obtained Shareholder Approval (as defined below),
then the Company shall issue to the Holder so requesting conversion of
Preferred Stock the Issuable Maximum and, with respect to any shares of Common
Stock that otherwise would have been issuable to such Holder in respect of the
Conversion Notice at issue or in respect of payment of dividends hereunder in
excess of the Issuable Maximum, the Holder shall have the option to require the
Company to either (1) as promptly as possible, but in no event later than 60
days after such Conversion Date, convene a meeting of the holders of the Common
Stock and use its best efforts to obtain the Shareholder Approval or (2)
redeem, from funds legally available therefor at the time of such redemption,
the balance of the Preferred Stock subject to such Conversion Notice at a price
per share equal to the product of (i) the average Per Share Market Value for
the five (5) Trading Days immediately preceding (1) the Conversion Date or (2)
the date of payment in full by the Company of such redemption price, whichever
is greater, and (ii) the Conversion Ratio calculated on the Conversion Date;
provided, however, that if the Holder has requested that the Company obtain
Shareholder Approval under paragraph (1) above and the Company fails for any
reason to obtain such Shareholder Approval within the time period set forth in
(1) above, the Company shall be obligated to redeem the Preferred Stock not
converted as a result of the provisions of this Section in accordance with the
provisions of paragraph (2) above, and in such case the interest contemplated
by the immediately succeeding sentence shall be deemed to accrue from the
Conversion Date. If the Holder has requested that the Company redeem shares of
Preferred Stock pursuant to this Section
-5-
<PAGE> 67
and the Company fails for any reason to pay the redemption price under (2)
above within seven days after the Conversion Date, the Company will pay
interest on such redemption price at a rate of 15% per annum to the converting
Holder of Preferred Stock, accruing from the Conversion Date until the
redemption price plus any accrued interest thereon is paid in full. The entire
redemption price, including interest thereon, shall be paid in cash.
"Shareholder Approval" means the approval by a majority of the total votes cast
on the proposal, in person or by proxy, at a meeting of the shareholders of the
Company held in accordance with the Company's Certificate of Incorporation and
by-laws, of the issuance by the Company of shares of Common Stock exceeding the
Issuable Maximum as a consequence of the conversion of Preferred Stock into
Common Stock at a price less than the greater of the book or market value on
the Original Issue Date as and to the extent required pursuant to Rule 713 of
the American Stock Exchange or Rule 4460(i) of the Nasdaq Stock Market (or any
successor or replacement provision thereof), as applicable.
(b) Not later than three Trading Days after the Conversion
Date, the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other than
those required by Section 4.1(b) of the Purchase Agreement) representing the
number of shares of Common Stock being acquired upon the conversion of shares
of Preferred Stock (subject to reduction pursuant to Section 5(a)(iii) and
Section 4.10 of the Purchase Agreement) and (ii) one or more certificates
representing the number of shares of Preferred Stock not converted; provided,
however, that the Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of any shares of
Preferred Stock until certificates evidencing such shares of Preferred Stock
are either delivered for conversion to the Company or any transfer agent for
the Preferred Stock or Common Stock duly endorsed or accompanied by a validly
executed stock power, or the Holder of such Preferred Stock notifies the
Company that such certificates have been lost, stolen or destroyed and provides
a bond (or other adequate security) reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection therewith. If
in the case of any Conversion Notice such certificate or certificates,
including for purposes hereof, any shares of Common Stock to be issued on the
Conversion Date on account of accrued but unpaid dividends hereunder, are not
delivered to or as directed by the applicable Holder by the third Trading Day
after the Conversion Date, the Holder shall be entitled by written notice to
the Company at any time on or before its receipt of such certificate or
certificates thereafter, to rescind such conversion, in which event the Company
shall immediately return the certificates representing the shares of Preferred
Stock tendered for conversion. If the Company fails to deliver to the Holder
such certificate or certificates pursuant to this Section, including for
purposes hereof, any shares of Common Stock to be issued on the Conversion Date
on account of accrued but unpaid dividends hereunder, prior to the fifth
Trading Day after the Conversion Date, the Company shall pay to such Holder, in
cash, as liquidated damages and not as a penalty, $1,500 for each day after
such fifth Trading Day until such certificates are delivered. If the Company
fails to deliver to the Holder such certificate or certificates pursuant to
this Section prior to the 20th day after the Conversion Date, the Company
shall, at the Holder's option (i) redeem, from funds legally available therefor
at the time of such redemption, such number of shares of Preferred Stock then
held by such Holder, as requested by such Holder, and (ii) pay all accrued but
unpaid dividends on account of the Preferred Stock for which the Company shall
have
-6-
<PAGE> 68
failed to issue Common Stock certificates hereunder, in cash. The redemption
price per share shall be equal to the product of (A) the average Per Share
Market Value for the five (5) Trading Days immediately preceding (1) the
Conversion Date or (2) the date of payment in full by the Company of such
redemption price, whichever is greater, and (ii) the Conversion Ratio
calculated on the Conversion Date. If the Holder has requested that the
Company redeem shares of Preferred Stock pursuant to this Section and the
Company fails for any reason to pay the redemption price under (2) above within
seven days after such notice is deemed delivered pursuant to Section 5(h), the
Company will pay, to such Holder, interest on the redemption price at a rate of
15% per annum, in cash or shares of Common Stock at the option of the Holder,
accruing from such seventh day until the redemption price and any accrued
interest thereon is paid in full.
(c) (i) The conversion price for each share of Preferred
Stock (the "Conversion Price") in effect on any Conversion Date shall be the
lesser of (A) $2.45 (the "Initial Conversion Price") or (B) 80% of the average
Per Share Market Value for the five (5) Trading Days immediately preceding the
Conversion Date; provided that, (a) if the Underlying Shares Registration
Statement is not filed on or prior to the 20th day after the Original Issue
Date, or (b) the Company fails to file with the Commission a request for
acceleration in accordance with Rule 12d1-2 promulgated under the Securities
Exchange Act of 1934, as amended, within five (5) days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Shares Registration Statement will not be
"reviewed," or (c) if the Underlying Shares Registration Statement is not
declared effective by the Commission on or prior to the 90th day after the
Original Issue Date, or (d) if such Underlying Shares Registration Statement is
filed with and declared effective by the Commission but thereafter ceases to be
effective (whether by action of the Commission or by virtue of a notice
delivered by the Company) as to all Registrable Securities (as such term is
defined in the Registration Rights Agreement) at any time prior to the
expiration of the "Effectiveness Period" (as such term as defined in the
Registration Rights Agreement), without being succeeded within 10 Business Days
by a subsequent Underlying Shares Registration Statement filed with and
declared effective by the Commission, or (e) if trading in the Common Stock
shall be suspended for any reason for more than three Trading Days, or (f) if
the conversion rights of the Holders of Preferred Stock hereunder are suspended
for any reason (any such failure being referred to as an "Event," and for
purposes of clauses (a), (c) and (f) the date on which such Event occurs, or
for purposes of clause (b) the date on which such five (5) days period is
exceeded, or for purposes of clause (d) the date which such 10 Business Day-
period is exceeded, or for purposes of clause (e) the date on which such three
Trading Day period is exceeded, being referred to as "Event Date"), the
Conversion Price shall be decreased by 2.5% each month (i.e., 77.5% as of the
Event Date and 75% as of the one month anniversary of the Event Date) until the
earlier to occur of the second month anniversary after the Event Date and such
time as the applicable Event is cured. Commencing the second month anniversary
after the Event Date, at the option of each Holder for each applicable monthly
period either (a) the Company shall pay to the Holders of the Preferred Stock
2.5% of the product of the number of outstanding shares of Preferred Stock and
the Stated Value (each Holder being entitled to receive such portion of such
amount as equals its pro rata portion of the Preferred Stock then outstanding),
in cash or (b) the Conversion Price shall be decreased by 2.5% for each
additional such month (to be effective in full on the monthly applicable Event
Date) as liquidated
-7-
<PAGE> 69
damages, and not as a penalty on the first day of each monthly anniversary of
the Event Date in either case until such time as the applicable Event is cured.
Any decrease in the Conversion Price pursuant to this Section shall continue
notwithstanding the fact that the Event causing such decrease has been
subsequently cured. The provisions of this Section are not exclusive and shall
in no way limit the Company's obligations under the Registration Rights
Agreement. Notwithstanding anything to the contrary set forth herein, the
Company may not, without the prior written consent of the Holders, pay
liquidated damages hereunder in cash unless it shall have received the prior
written consent of all lenders of the Company or its Affiliates that have the
right to require such consent or to subordinate any such cash payment, which
consent shall provide that the payment by the Company of any such liquidated
damages hereunder (and the retention of such sum by the receiving Holder) is
not subject to any applicable subordination rights of such lender.
(ii) If the Company, at any time while any shares of
Preferred Stock are outstanding, (a) shall pay a stock dividend or otherwise
make a distribution or distributions on shares of its Junior Securities payable
in shares of Common Stock, (b) subdivide outstanding shares of Common Stock
into a larger number of shares, (c) combine outstanding shares of Common Stock
into a smaller number of shares, or (d) issue by reclassification of shares of
Common Stock any shares of capital stock of the Company, the Initial Conversion
Price shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator shall be the number
of shares of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section 5(c)(ii) shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights or warrants to all Holders
of Common Stock entitling them to subscribe for or purchase shares of Common
Stock at a price per share less than the Per Share Market Value of Common Stock
at the record date mentioned below, the Initial Conversion Price shall be
multiplied by a fraction, of which the denominator shall be the number of
shares of Common Stock (excluding treasury shares, if any) outstanding on the
date of issuance of such rights or warrants plus the number of additional
shares of Common Stock offered for subscription or purchase, and of which the
numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding on the date of issuance of such rights or warrants
plus the number of shares which the aggregate offering price of the total
number of shares so offered would purchase at such Per Share Market Value.
Such adjustment shall be made whenever such rights or warrants are issued, and
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such rights or warrants. However, upon the
expiration of any right or warrant to purchase Common Stock the issuance of
which resulted in an adjustment in the Initial Conversion Price pursuant to
this Section 5(c)(iii), if any such right or warrant shall expire and shall not
have been exercised, the Initial Conversion Price shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Initial Conversion Price made pursuant to the
-8-
<PAGE> 70
provisions of this Section 5 after the issuance of such rights or warrants) had
the adjustment of the Initial Conversion Price made upon the issuance of such
rights or warrants been made on the basis of offering for subscription or
purchase only that number of shares of Common Stock actually purchased upon the
exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while shares of
Preferred Stock are outstanding, shall distribute to all Holders of Common
Stock (and not to Holders of Preferred Stock) evidences of its indebtedness or
assets or rights or warrants to subscribe for or purchase any security
(excluding those referred to in Sections 5(c)(ii) and (iii) above), then in
each such case the Initial Conversion Price at which each share of Preferred
Stock shall thereafter be convertible shall be determined by multiplying the
Initial Conversion Price in effect immediately prior to the record date fixed
for determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the Per Share Market Value of Common
Stock determined as of the record date mentioned above, and of which the
numerator shall be such Per Share Market Value of the Common Stock on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of Common Stock as determined by the Board of Directors in
good faith; provided, however, that in the event of a distribution exceeding
ten percent (10%) of the net assets of the Company, such fair market value
shall be determined by a nationally recognized or major regional investment
banking firm or firm of independent certified public accountants of recognized
standing (which may be the firm that regularly examines the financial
statements of the Company) (an "Appraiser") selected in good faith by the
Holders of a majority in interest of the shares of Preferred Stock then
outstanding; and provided, further, that the Company, after receipt of the
determination by such Appraiser shall have the right to select an additional
Appraiser, in good faith, in which case the fair market value shall be equal to
the average of the determinations by each such Appraiser. In either case the
adjustments shall be described in a statement provided to the Holders of
Preferred Stock of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common
Stock. Such adjustment shall be made whenever any such distribution is made
and shall become effective immediately after the record date mentioned above.
(v) All calculations under this Section 5 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Initial Conversion Price is adjusted
pursuant to Section 5(c)(ii),(iii) or (iv), the Company shall promptly mail to
each Holder of Preferred Stock, a notice setting forth the Initial Conversion
Price after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.
(vii)
A. In the case of any reclassification of the
Common Stock into other securities of the Company or any such compulsory share
exchange pursuant to which the Common Stock is converted into cash, property or
other securities of the Company, the Holders of
-9-
<PAGE> 71
the Preferred Stock then outstanding shall have the right thereafter to convert
such shares only into the shares of stock and other securities, cash and
property receivable upon or deemed to be held by Holders of Common Stock
following such reclassification or share exchange, and the Holders of the
Preferred Stock shall be entitled upon such event to receive such amount of
securities, cash or property as the shares of the Common Stock of the Company
into which such shares of Preferred Stock could have been converted immediately
prior to such reclassification or share exchange would have been entitled.
B. In the case of any consolidation or merger of the
Company with or into another person or entity pursuant to which the Company
will not be the surviving entity, any sale or transfer of all or substantially
all of the assets of the Company, sale or transfer, or compulsory share
exchange pursuant to which the Common Stock is converted into securities of an
entity other than the Company, the Holders of the Preferred Stock then
outstanding (1) shall be issued shares of convertible preferred stock or
convertible debentures of the entity with which such consolidation, merger,
sale or transfer, or share exchange takes place, which newly issued shares or
debentures (as the case may be), shall have terms substantially similar in all
material respects to the terms of the Preferred Stock (including with respect
to conversion) and shall be entitled to all of the rights and privileges of a
Holder of Preferred Stock set forth in this Certificate of Designation, the
Registration Rights Agreement and the Purchase Agreement (including, without
limitation, as such rights relate to the acquisition, transferability,
registration and listing of such freely tradeable shares of stock or other
securities issuable upon conversion of such convertible preferred stock or
convertible debentures), and (2) simultaneously with such issuance of
convertible preferred stock or convertible debentures, shall have the right to
convert such shares only into the shares of stock and other securities, cash
and property receivable upon or deemed to be held by Holders of Common Stock
following such consolidation, merger, sale or transfer, or share exchange. In
such case, the conversion price for such shares shall retain the discounts
present in the Certificate of Designation. The conversion price for such newly
issued shares shall be based upon the amount of securities, cash or property
that each share of Common Stock would receive in such transaction, the
Conversion Ratio immediately prior to the effective or closing date for such
transaction and the Conversion Price stated herein.
The terms of any such reclassification, consolidation, merger, sale,
transfer or share exchange under this Section 5(c)(vii) shall include such
terms so as to continue to give to the Holder of Preferred Stock the right to
receive the securities, cash or property set forth in this Section 5(c)(vii)
upon any conversion or redemption following such reclassification,
consolidation, merger, sale, transfer or share exchange. This provision shall
similarly apply to successive reclassifications, consolidations, mergers,
sales, transfers or share exchanges.
(viii) If:
A. the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
-10-
<PAGE> 72
B. the Company shall declare a special
nonrecurring cash dividend on or a redemption
of its Common Stock; or
C. the Company shall authorize the granting to
all Holders of the Common Stock rights or
warrants to subscribe for or purchase any
shares of capital stock of any class or of
any rights; or
D. the approval of any stockholders of the
Company shall be required in connection with
any reclassification of the Common Stock of
the Company, any consolidation or merger to
which the Company is a party, any sale or
transfer of all or substantially all of the
assets of the Company, of any compulsory
share of exchange whereby the Common Stock
is converted into other securities, cash or
property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or
winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained
for the purpose of conversion of Preferred Stock, and shall cause to be mailed
to the Holders of Preferred Stock at their last addresses as they shall appear
upon the stock books of the Company, at least 30 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the Holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that Holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however,
that the failure to mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the corporate action required to be
specified in such notice. Holders are entitled to convert shares of Preferred
Stock during the 30-day period commencing the date of such notice to the
effective date of the event triggering such notice.
(d) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued Common Stock solely for
the purpose of issuance upon conversion of Preferred Stock and payment of
dividends on Preferred Stock, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders of Preferred Stock, not less than such number of shares of Common Stock
as shall (subject to any additional requirements of the Company as to
reservation of such shares set forth in the Purchase Agreement) be issuable
(taking into account the adjustments and restrictions of Section 5(c)) upon the
conversion of all outstanding shares of Preferred Stock and payment of
dividends hereunder.
-11-
<PAGE> 73
The Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid,
nonassessable and freely tradeable.
(e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Per Share Market Value at such time. If
the Company elects not, or is unable, to make such a cash payment, the Holder
of a share of Preferred Stock shall be entitled to receive, in lieu of the
final fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such shares of Preferred
Stock so converted and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(g) Shares of Preferred Stock converted into Common Stock
shall be canceled and shall have the status of authorized but unissued shares
of undesignated stock.
(h) Any and all notices or other communications or deliveries
to be provided by the Holders of the Preferred Stock hereunder, including,
without limitation, any Conversion Notice, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed to
the attention of the Chief Executive Officer of the Company at the facsimile
telephone number or address of the principal place of business of the Company
as set forth in the Purchase Agreement. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be
in writing and delivered personally, by facsimile, sent by a nationally
recognized overnight courier service or sent by certified or registered mail,
postage prepaid, addressed to each Holder of Preferred Stock at the facsimile
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other communication
or deliveries hereunder shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
4:30 p.m. (Eastern Time), (ii) the date after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile telephone
number specified in this Section later than 4:30 p.m. (Eastern Time) on any
date and earlier than 11:59 p.m. (Eastern Time) on such date, (iii) four days
after deposit in the United States mails, (iv) the Business Day following the
date of mailing, if send by nationally recognized overnight courier service, or
(v) upon actual receipt by the party to whom such notice is required to be
given.
-12-
<PAGE> 74
Section 6. Redemption.
(a) The Company shall have the right, exercisable at any time
upon 20 Trading Days notice to the Holders of the Preferred Stock given at any
time after the Original Issue Date to redeem, from funds legally available
therefor at the time of such redemption, all or any portion of the shares of
Preferred Stock which have not previously been converted or redeemed, at a
price per share equal to the product of (i) the average Per Share Market Value
for the five (5) Trading Days immediately preceding (1) the date of the
redemption notice referenced above or (2) the date of payment in full by the
Company of the redemption price hereunder, whichever is greater, and (ii) the
Conversion Ratio calculated on the date of such redemption notice. The entire
redemption price shall be paid in cash. Holders of Preferred Stock may convert
any shares of Preferred Stock, including shares subject to a redemption notice
given under this Section, during the period from the date of such redemption
notice through the 18th Trading Day thereafter.
(b) If any portion of the applicable redemption price under
Section 6(a) shall not be paid by the Company within seven (7) calendar days
after the date due, interest shall accrue thereon at the rate of 15% per annum
until the redemption price plus all such interest is paid in full (which amount
shall be paid as liquidated damages and not as a penalty). In addition, if any
portion of such redemption price remains unpaid for more than 7 calendar days
after the date due, the Holder of the Preferred Stock subject to such
redemption may elect, by written notice to the Company given within 30 days
after the date due, to either (i) demand conversion in accordance with the
formula and the time frame therefor set forth in Section 5 of all of the shares
of Preferred Stock for which such redemption price, plus accrued liquidated
damages thereof, has not been paid in full (the "Unpaid Redemption Shares"), in
which event the Per Share Market Price for such shares shall be the lower of
the Per Share Market Price calculated on the date such redemption price was
originally due and the Per Share Market Price as of the Holder's written demand
for conversion, or (ii) invalidate ab initio such redemption, notwithstanding
anything herein contained to the contrary. If the Holder elects option (i)
above, the Company shall within three (3) Trading Days of its receipt of such
election deliver to the Holder the shares of Common Stock issuable upon
conversion of the Unpaid Redemption Shares subject to such Holder conversion
demand and otherwise perform its obligations hereunder with respect thereto;
or, if the Holder elects option (ii) above, the Company shall promptly, and in
any event not later than three (3) Trading Days from receipt of Holder's notice
of such election, return to the Holder all of the Unpaid Redemption Shares.
Notwithstanding anything to the contrary contained herein, the Company may not,
without the written consent of the Holder, redeem shares of Preferred Stock
unless both the payment thereof and the retention of such paid cash by the
Holder is consented to in writing free of any subordination prior thereto by
all lenders of the Company who by agreement have the right to consent to or
force the subordination of such payment.
Section 7. Definitions. For the purposes hereof, the
following terms shall have the following meanings:
-13-
<PAGE> 75
"Business Day" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"Common Stock" means the Company's common stock, $.001 par value
per share, of the Company and stock of any other class into which such shares
may hereafter have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends (including any
accrued but unpaid interest thereon) but only to the extent not paid in shares
of Common Stock in accordance with the terms hereof, and of which the
denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company which are junior in rights and liquidation preference
to the Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance
of any shares of the Preferred Stock regardless of the number of transfers of
any particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the American
Stock Exchange or other stock exchange or quotation system on which the Common
Stock is then listed or if there is no such price on such date, then the
closing bid price on such exchange or quotation system on the date nearest
preceding such date, or (b) if the Common Stock is not listed then on the
American Stock Exchange or any stock exchange or quotation system, the closing
bid price for a share of Common Stock in the over-the-counter market, as
reported by the Nasdaq Stock Market or in the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting
prices), then the average of the "Pink Sheet" quotes for the relevant
conversion period, as determined in good faith by the Holder, or (d) if the
Common Stock is not then publicly traded the fair market value of a share of
Common Stock as determined by an Appraiser selected in good faith by the
Holders of a majority in interest of the shares of the Preferred Stock;
provided, however, that the Company, after receipt of the determination by such
Appraiser, shall have the right to select an additional Appraiser, in which
case, the fair market value shall be equal to the average of the determinations
by each such Appraiser.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
-14-
<PAGE> 76
"Purchase Agreement" means the Convertible Preferred Stock
Purchase Agreement, dated as of March 31, 1997, between the Company and the
original Holder of the Preferred Stock.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of March 31, 1997, by and between the Company and the
original Holder of Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is traded
on the American Stock Exchange or other stock exchange or market on which the
Common Stock has been listed, or (b) if the Common Stock is not listed on the
American Stock Exchange or any stock exchange or market, a day on which the
Common Stock is traded in the over-the-counter market, as reported by the OTC
Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin
Board, a day on which the Common Stock is quoted in the over-the-counter market
as reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices).
"Underlying Shares" means the number of shares of Common Stock
into which the Shares are convertible in accordance with the terms hereof and
the Purchase Agreement.
RESOLVED FURTHER, that the Senior Vice President and Secretary of
the Company be, and they hereby are, authorized and directed to prepare,
execute, verify, and file with the Secretary of State of Delaware, a
Certificate of Designation in accordance with these resolutions and as required
by law.
-15-
<PAGE> 77
IN WITNESS WHEREOF, Phoenix Network, Inc. has caused its
corporate seal to be hereunto affixed and this certificate to be signed by
Jonathan F. Beizer, its Senior Vice President, and attested by Ernest J.
Panasci, its Secretary, this 3rd day of April, 1997.
PHOENIX NETWORK, INC.
By: /s/ Jonathan F. Beizer
-------------------------------
Name: Jonathan F. Beizer
Title: Senior Vice President
Attest:
By: /s/ Ernest J. Panasci
-----------------------
Name: Ernest J. Panasci
Title: Secretary
-16-
<PAGE> 78
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series G
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $.001 per share (the "Common Stock"), of Phoenix Network, Inc. (the
"Company") pursuant to the terms of the Certificate of Designation of Series G
Convertible Preferred Stock of the Company, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the Holder for
any conversion, except for such transfer taxes, if any.
Conversion calculations:
---------------------------------------------
Date to Effect Conversion
---------------------------------------------
Number of shares of Preferred Stock
to be Converted
---------------------------------------------
Number of shares of Common Stock
to be Issued
---------------------------------------------
Applicable Conversion Price
---------------------------------------------
Signature
---------------------------------------------
Name
---------------------------------------------
Address
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested
hereby), notify the converting Holder by facsimile of the number of shares of
Common Stock outstanding on such date and the number of shares of Common Stock
which would be issuable to the Holder if the conversion requested in this
conversion notice were effected in full, whereupon, if the Company determines
that such conversion would result in it owning in excess of 4.9% of the
outstanding shares of Common Stock on such date, the Company shall convert up
to an amount equal to 4.9% of the outstanding shares of Common Stock and issue
to the Holder one or more certificates representing shares of Preferred Stock
which have not been converted as a result of this provision.
<PAGE> 79
EXHIBIT B
NOTICE OF CONVERSION AT
THE ELECTION OF THE COMPANY
The undersigned in the name and on behalf of Phoenix Network, Inc. (the
"Company") hereby notifies the addressee hereof that the Company hereby elects
to exercise its right to convert [ ] shares of its Series G Convertible
Preferred Stock (the "Preferred Stock") held by the Holder into shares of
Common Stock, par value $.001 per share (the "Common Stock") of the Company
according to the terms hereof, as of the date written below. No fee will be
charged to the Holder for any conversion hereunder, except for such transfer
taxes, if any which may be incurred by the Company if shares are to be issued
in the name of a person other than the person to whom this notice is addressed.
Conversion calculations:
---------------------------------------------
Date to effect Conversion
---------------------------------------------
Number of shares of Preferred Stock
to be Converted
---------------------------------------------
Number of shares of Common Stock
to be Issued
---------------------------------------------
Applicable Conversion Price
---------------------------------------------
Name of Holder
---------------------------------------------
Address of Holder
<PAGE> 1
EXHIBIT 4.3
===============================================================================
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
Between
PHOENIX NETWORK, INC.
and
JNC OPPORTUNITY FUND LTD.
______________________________
Dated as of March 31, 1997
______________________________
===============================================================================
<PAGE> 2
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, dated as of March
31, 1997 (this "Agreement"), between Phoenix Network, Inc., a Delaware
corporation (the "Company"), and JNC Opportunity Fund Ltd., a corporation
organized and existing under the laws of the Cayman Islands (the "Purchaser").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchaser and the
Purchaser desires to acquire shares of the Company's Series G Convertible
Preferred Stock, par value $.001 per share (the "Preferred Stock").
IN CONSIDERATION of the mutual covenants and agreements set forth
herein and for good and valuable consideration, the receipt of which is hereby
acknowledged, the parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. Certain Definitions. As used in this Agreement,
unless the context requires a different meaning, the following terms have the
meanings indicated in this Section 1.1:
"Affiliate" means, with respect to any Person, any Person that,
directly or indirectly, controls, is controlled by or is under common control
with such Person. For the purposes of this definition, "control" (including,
with correlative meanings, the terms "controlled by" and "under common control
with") shall mean 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 or by contract or otherwise.
"Agreement" shall have the meaning set forth in the recitals
hereto.
"Business Day" means any day except Saturday, Sunday and any day
which shall be a Federal legal holiday or a day on which banking institutions
in the State of New York are authorized or required by law or other government
actions to close.
"Certificate of Designation" shall have the meaning set forth in
Section 2.1(a).
"Closing" shall have the meaning set forth in Section 2.1(b).
"Closing Date" shall have the meaning set forth in Section
2.1(b).
<PAGE> 3
"Code" means the Internal Revenue Code of 1986, as amended, and
the rules and regulations thereunder as in effect on the date hereof.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, par value $.001
per share.
"Company" shall have the meaning set forth in the recitals
hereto.
"Conversion Ratio" shall have the meaning set forth in the
Certificate of Designation.
"Escrow Agent" means Robinson Silverman Pearce Aronsohn & Berman
LLP.
"Escrow Agreement" means the escrow agreement, dated as of the
date hereof, by and among the Company, the Purchaser and the Escrow Agent, in
the form of Exhibit E, as the same may be amended, supplemented or otherwise
modified in accordance with its terms.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, right of first refusal, charge, security interest or encumbrance of any
kind in or on such asset or the revenues or income thereon or therefrom.
"Material Adverse Effect" shall have the meaning set forth in
Section 3.1(a).
"Original Issue Date" shall mean the first issuance of any
Shares, regardless of the number of transfers of any particular Share and
regardless of the number of certificates which may be issued to evidence any
particular Share.
"Per Share Market Value" shall have the meaning set forth in the
Certificate of Designation.
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Preferred Stock" shall have the meaning set forth in the
recitals hereto.
"Purchase Price" shall have the meaning set forth in Section
2.1(a).
"Purchaser" shall have the meaning set forth in the recitals
hereto.
-2-
<PAGE> 4
"Registration Rights Agreement" means the registration rights
agreement, dated as of the date hereof, between the Company and the Purchaser,
in the form of Exhibit B, as the same may be amended, supplemented or otherwise
modified in accordance with its terms.
"Required Approvals" shall have the meaning set forth in Section
3.1(f).
"SEC Documents" shall have the meaning set forth in Section
3.1(l).
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means the shares of Preferred Stock to be purchased by
the Purchaser pursuant to this Agreement.
"Stated Value" shall have the meaning set forth in Section
2.1(a).
"Subsequent Financing" shall have the meaning set forth in
Section 4.9.
"Subsequent Financing Notice" shall have the meaning set forth in
Section 4.9.
"Subsidiaries" shall have the meaning set forth in Section
3.1(a).
"Trading Day" shall have the meaning set forth in the Certificate
of Designation.
"Transaction Documents" shall have the meaning set forth in
Section 3.1(b).
"Underlying Shares" means the shares of Common Stock issuable
upon conversion of Shares in accordance with the terms hereof and the
Certificate of Designation.
"Underlying Shares Registration Statement" shall have the meaning
set forth in Section 3.1(f).
ARTICLE II
PURCHASE OF SHARES
Section 2.1. Purchase of Shares; Closing.
(a) Subject to the terms and conditions set forth in this
Agreement, the Company shall issue and sell to the Purchaser, and the Purchaser
shall purchase from the Company on the Closing Date 150,000 Shares, which shall
have the respective rights, preferences and privileges set forth in Exhibit A
(the "Certificate of Designation"), at a price per Share of $20 (the "Stated
Value"). The aggregate "Purchase Price" for the Shares is $3,000,000.
-3-
<PAGE> 5
(b) The closing of the purchase and sale of the Shares (the
"Closing") shall take place at the offices of the Escrow Agent, 1290 Avenue of
the Americas, New York, New York 10104, immediately following the execution
hereof, or at such other time and/or place as the Purchaser and the Company may
agree. The date of the Closing is referred to herein as the "Closing Date".
(c) At the Closing, the Escrow Agent, in accordance with and
subject to the terms and conditions of the Escrow Agreement, shall, pursuant to
instructions of the Company and the Purchaser, deliver (i) to the Purchaser,
(A) one or more stock certificates representing the Shares purchased hereunder,
registered in the name of the Purchaser, and (B) the legal opinion addressed to
it and dated the Closing Date, of Slivka Robinson Waters & O'Dorisio, P.C.,
counsel for the Company, substantially in the form of Exhibit C; (ii) to the
Company, the Purchase Price, less the amounts to be deducted in accordance with
the Escrow Agreement, in United States dollars in immediately available funds
by wire transfer to an account designated in writing by the Company prior to
the Closing; and (iii) to the party entitled thereto, all documents,
instruments and writings required to have been delivered at or prior to Closing
by either the Company or the Purchaser pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1. Representations and Warranties of the Company. The
Company hereby represents and warrants to the Purchaser as follows:
(a) Organization and Qualification. The Company is a
corporation, duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, with the requisite corporate
power and authority to own and use its properties and assets and to carry on
its business as currently conducted. The Company has no subsidiaries other
than as set forth in the SEC Documents or in Schedule 3.1(a) (collectively, the
"Subsidiaries"). Each of the Subsidiaries is a corporation, duly incorporated,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, with the requisite corporate power and authority to own and use
its properties and assets and to carry on its business as currently conducted.
Each of the Company and the Subsidiaries is duly qualified to do business and
is in good standing as a foreign corporation in each jurisdiction in which the
nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, (x)
adversely affect the legality, validity or enforceability of any of the
Transaction Documents, (y) have a material adverse effect on the results of
operations, assets, prospects, or financial condition of the Company and the
Subsidiaries, taken as a whole or (z) adversely impair the Company's ability to
perform fully on a timely basis its obligations under the Transaction Documents
(a "Material Adverse Effect").
-4-
<PAGE> 6
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated hereby and by the Registration Rights Agreement, the Escrow
Agreement and Certificate of Designation (collectively with this Agreement, the
"Transaction Documents") and to otherwise carry out its obligations hereunder
and thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company, including, without limitation, approval thereof by the
Company's Board of Directors. Each of the Transaction Documents has been duly
executed and delivered by the Company and constitutes the legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application. Neither the
Company nor any Subsidiary is in violation of any of the provisions of its
respective certificate of incorporation, bylaws or other charter documents.
(c) Capitalization. The authorized, issued and outstanding
capital stock of the Company and each of the Subsidiaries is set forth in
Schedule 3.1(c). No shares of Common Stock are entitled to preemptive or
similar rights. Except as specifically disclosed in Schedule 3.1(c), there are
no outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or, except as a result of
the purchase and sale of the Shares hereunder, securities, rights or
obligations convertible into or exchangeable for, or giving any Person any
right to subscribe for or acquire any shares of Common Stock, or contracts,
commitments, understandings, or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock,
or securities or rights convertible or exchangeable into shares of Common
Stock. To the knowledge of the Company, except as specifically disclosed in
the SEC Documents or Schedule 3.1(c), no Person beneficially owns (as
determined pursuant to Rule 13d-3 promulgated under the Exchange Act) or has
the right to acquire by agreement with or by obligation binding upon the
Company beneficial ownership of in excess of 5% of the Common Stock.
(d) Issuance of Shares and Underlying Shares. The Shares have
been duly authorized and, when paid for in accordance with the terms hereof,
shall be validly issued, fully paid and nonassessable, free and clear of any
Liens. The Company has and at all times while any Shares are outstanding will
maintain a reserve of shares of Common Stock to enable it to perform its
conversion and other obligations under this Agreement and the Certificate of
Designation, which reserve shall be no less than the sum of twice the number of
shares of Common Stock issuable upon conversion of all of the then outstanding
and previously unconverted Shares into Common Stock pursuant to the terms
hereof and the Certificate of Designation, assuming such conversion occurred on
the Original Issue Date. When issued in accordance with the terms hereof and
the Certificate of Designation, the Underlying Shares will have been duly
authorized, validly issued, fully paid and nonassessable, and free and clear of
any Liens.
-5-
<PAGE> 7
(e) No Conflicts. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its certificate of incorporation or bylaws (each as
amended through the date hereof) or (ii) subject to obtaining the consents
specified in Section 3.1(f), conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture, loans or credit agreement or other
instrument or agreement to which the Company is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment, injunction, decree or
other restriction of any court or governmental authority to which the Company
is subject (including Federal and state securities laws and regulations), or by
which any property or asset of the Company is bound or affected, except in the
case of each of clauses (ii) and (iii), such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as could not,
individually or in the aggregate, have or result in a Material Adverse Effect.
The business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental authority, except in such case
where the conduct of such business in violation of any law, ordinance or
regulation of any governmental authority, could not, individually or in the
aggregate, have or result in a Material Adverse Effect.
(f) Consents and Approvals. Except as specifically set forth
in Schedule 3.1(f), neither the Company nor any Subsidiary is required to
obtain any consent, waiver, authorization or order of, or make any filing or
registration with, any court or other Federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, except
for (i) the filing of the Certificate of Designation with respect to the Shares
with the Secretary of State of Delaware, which filing shall be effected on or
prior to the Closing Date, (ii) the filing of the registration statement
covering the Underlying Shares (the "Underlying Shares Registration Statement")
with the Commission and the making of the applicable blue-sky filings under
state securities laws, each as contemplated by the Registration Rights
Agreement, and (iii) other than, in all other cases, where the failure to
obtain such consent, waiver, authorization or order, or to give or make such
notice or filing, could not, individually or in the aggregate, have or would
result in a Material Adverse Effect (together with the consents, waivers,
authorizations, orders, notices and filings referred to in Schedule 3.1(f), the
"Required Approvals").
(g) Litigation; Proceedings. There is no action, suit, notice
of violation, proceeding or investigation pending or, to the best knowledge of
the Company, threatened against or affecting the Company or any of its
Subsidiaries or any of their respective properties before or by any court,
governmental or administrative agency or regulatory authority (Federal, state,
county, local or foreign) which relates to or challenges the legality, validity
or enforceability of the Transaction Documents, Shares, or Underlying Shares or
which could, individually or in the aggregate, have or result in a Material
Adverse Effect.
(h) No Default or Violation. Neither the Company nor any
Subsidiary (i) is in default under or in violation of any indenture, loan or
credit agreement or any other agreement or
-6-
<PAGE> 8
instrument to which it is a party or by which it or any of its properties is
bound, (ii) is in violation of any order of any court, arbitrator or
governmental body, or (iii) is in violation of any statute, rule or regulation
of any governmental authority, except as could not, in any case of (i) above,
individually or in the aggregate, have or result in a Material Adverse Effect.
(i) Certain Fees. Except for fees payable by the Company to
Wharton Capital Partners, Ltd. and Keith A. Rhodes, no fees or commissions are
or will be payable by the Company to any broker, finder, investment banker or
bank with respect to the consummation of the transactions contemplated hereby.
The Purchaser shall have no obligation with respect to such fees or with
respect to any claims made by other Persons for fees of a type contemplated in
this Section due in connection with this transaction.
(j) Private Offering. Neither the Company nor any Person
acting on its behalf has taken or will take any action (including, without
limitation, any offering of securities of the Company under circumstances which
would require the integration of such offering with the offering of the Shares
or the Underlying Shares under the Securities Act) which might subject the
offering, issuance or sale of the Shares or the Underlying Shares to the
registration requirements of Section 5 of the Securities Act.
(k) SEC Documents. The Company has filed all reports required
to be filed by it under the Exchange Act, including pursuant to Section 13(a)
or 15(d) thereof, for the three years preceding the date hereof (or such
shorter period as the Company was required by law to file such material) (the
foregoing materials being collectively referred to herein as the "SEC
Documents") on a timely basis, or has received a valid extension of such time
of filing (in which case it has made all such filings in the time required by
such extension). As of their respective dates, the SEC Documents complied in
all material respects with the requirements of the Securities Act and the
Exchange Act and the published rules and regulations of the Commission
promulgated thereunder, and none of the SEC Documents, when filed, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the SEC
Documents comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved, except as may be otherwise specifically indicated in such
financial statements or the notes thereto, and fairly present in all material
respects the financial position of the Company and its consolidated
subsidiaries as of and for the dates thereof and the results of operations and
cash flows for the periods then ended, subject, in the case of unaudited
statements, to normal year-end audit adjustments. The Company last filed
audited financial statements with the Commission on March 31, 1997, and the
Company has not received any comments from the Commission in respect of such
audited financial statements. Since the date of the financial statements
included in the last filed Annual Report on Form 10-K, there has been no event,
occurrence or development that has had, could have or would result in a
Material Adverse Effect which has not been specifically disclosed to the
Purchaser.
-7-
<PAGE> 9
(l) Seniority. No class of equity securities of the Company
is senior to the Shares in right of payment, whether upon liquidation,
dissolution or otherwise.
(m) Form S-3 Eligibility. The Company is, and at the Closing
Date will be, eligible to register securities for resale with the Commission
under Form S-3 promulgated under the Securities Act.
(n) Investment Company. The Company is not and is not an
Affiliate of an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(o) Exclusivity. The Company shall not issue and sell the
Preferred Stock to any Person other than the Purchaser other than with the
specific prior written consent of the Purchaser.
(p) Listing and Maintenance Requirements Compliance. Other
than as specifically listed in Schedule 3.1(q), the Company has not in the two
years prior to the date hereof received written notice from any stock exchange
or market on which the Common Stock is or has been listed (or on which it is or
has been quoted) to the effect that the Company is not in compliance with the
listing or maintenance requirements of such exchange or market. The Company
has provided to the Purchaser true and complete copies of any notices
referenced in Schedule 3.1(q).
Section 3.2. Representations and Warranties of the Purchaser.
The Purchaser hereby represents and warrants to the Company as follows:
(a) Organization; Authority. The Purchaser is a corporation
duly and validly existing and in good standing under the laws of the
jurisdiction of its incorporation. The Purchaser has the requisite corporate
power and authority to enter into and to consummate the transactions
contemplated hereby and by the Registration Rights Agreement and the Escrow
Agreement and otherwise to carry out its obligations hereunder and thereunder.
The purchase of the Shares by the Purchaser hereunder has been duly authorized
by all necessary action on the part of the Purchaser. Each of this Agreement,
the Registration Rights Agreement and the Escrow Agreement has been duly
executed and delivered by or on behalf of the Purchaser and constitutes the
valid and legally binding obligation of the Purchaser, enforceable against it
in accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights generally and to general principles
of equity.
(b) Investment Intent. The Purchaser is acquiring the Shares
and the Underlying Shares for its own account (and/or on behalf of managed
accounts who are purchasing solely for their own accounts for investment) for
investment purposes only and not with a view to or for distributing or
reselling such Shares or Underlying Shares or any part thereof or interest
therein, without prejudice, however, to the Purchaser's right, subject to the
provisions of the Transaction Documents, at all times to sell or otherwise
dispose of all or any
-8-
<PAGE> 10
part of such Shares or Underlying Shares under an effective registration
statement under the Securities Act and in compliance with applicable State
securities laws or under an exemption or exclusion from such registration.
(c) Purchaser Status. At the time the Purchaser (and any
account for which it is purchasing) was offered the Shares, it (and any managed
account for which it is purchasing) was, and at the date hereof, it (and any
managed account for which it is purchasing) is, and at the Closing Date, it
(and any managed account for which it is purchasing) will be, an "accredited
investor" as defined in Rule 501(a) under the Securities Act.
(d) Experience of Purchaser. The Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Shares, and has so
evaluated the merits and risks of such investment.
(e) Ability of Purchaser to Bear Risk of Investment. The
Purchaser is able to bear the economic risk of an investment in the Shares and,
at the present time, is able to afford a complete loss of such investment.
(f) Prohibited Transactions. The Shares are not being
acquired, directly or indirectly, with the assets of any "employee benefit
plan", within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended.
(g) Access to Information. The Purchaser acknowledges that it
or its representatives has been afforded (i) the opportunity to ask such
questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Shares and the merits and risks of an investment therein; (ii)
access to information about the Company and the Company's financial condition,
results of operations, business, properties and management sufficient to enable
it to evaluate such investment; and (iii) the opportunity to obtain such
additional information which the Company possesses or can acquire without
unreasonable effort or expense that is necessary to make an informed investment
decision with respect to the Shares. The Purchaser has made detailed inquiry
concerning the Company, its business and its personnel. The Company has made
available to Purchaser any and all written information that it has requested
and has answered to Purchaser's satisfaction all inquiries made by Purchaser.
(h) Reliance. The Purchaser understands and acknowledges that
(i) the Shares are being offered and sold, and the Underlying Shares are being
offered, to it without registration under the Securities Act in a private
placement that is exempt from the registration provisions of the Securities Act
and (ii) the availability of such exemption depends in part on, and that the
Company will rely upon the accuracy and truthfulness of, the foregoing
representations and the Purchaser hereby consents to such reliance.
-9-
<PAGE> 11
The Company acknowledges and agrees that the Purchaser makes no
representation or warranty with respect to the transactions contemplated hereby
other than those specifically set forth in this Section 3.2.
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
Section 4.1. Transfer Restrictions. (a) If the Purchaser
should decide to dispose of any of the Shares (and upon conversion thereof, any
Underlying Shares), the Purchaser understands and agrees that it may do so only
pursuant to an effective registration statement under the Securities Act, to
the Company or pursuant to an available exemption from the registration
requirements thereof. In connection with any transfer of any of the Shares or
Underlying Shares other than pursuant to an effective registration statement or
to the Company, the Company may require the transferor of such Shares to
provide to the Company an opinion of counsel experienced in the area of United
States securities laws selected by the transferor, the form and substance of
which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration of such Shares or Underlying
Shares under the Securities Act.
(b) The Purchaser agrees to the imprinting, so long as
is required by this Section 4.1(b), of the following legend on certificates
representing the Shares or Underlying Shares:
[NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE CONVERTIBLE [THE SECURITIES REPRESENTED HEREBY] HAVE
[NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND CONVERSION SET FORTH IN A CONVERTIBLE
PREFERRED STOCK PURCHASE AGREEMENT, DATED AS OF MARCH 31, 1997 BETWEEN
THE COMPANY AND THE ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS
ON FILE AT THE PRINCIPAL OFFICE OF PHOENIX NETWORK, INC.
-10-
<PAGE> 12
The Underlying Shares issuable upon conversion of Shares shall not
contain the legend set forth above if the conversion of Shares occurs at any
time while the Underlying Shares Registration Statement is effective under the
Securities Act or in the event there is not an effective Underlying Shares
Registration Statement at such time, if in the opinion of counsel to the
Company experienced in the area of United States securities laws determines
that such legend is not required under applicable requirements of the
Securities Act (including judicial interpretations and pronouncements issued by
the staff of the Commission). The certificates representing the Shares and the
Underlying Shares shall also bear any other legends required by applicable
Federal or state securities laws, which legends shall be removed when not
required in accordance with this Section 4.1(b). The Company agrees that it
will provide the Purchaser, upon request, with a certificate or certificates
representing Underlying Shares, free from such legend at such time as such
legend is no longer required in accordance with this Section 4.1(b). The
Purchaser agrees that it will not offer or sell any Underlying Shares except
pursuant to an effective registration statement under the Securities or
pursuant to an available exemption from, or in a transaction not subject to,
the registration requirements of the Securities Act and in accordance with
applicable State securities laws and in connection with any transfer of
Underlying Shares by it pursuant to an effective registration statement under
the Securities Act, it will comply with the prospectus delivery requirements of
the Securities Act.
Section 4.2. Stop Transfer Instruction. The Company may not be
entitled to make any notation on its records or give instructions to any
transfer agent of the Company which enlarge the restrictions of transfer set
forth in Section 4.1 above.
Section 4.3. Furnishing of Information. For so long as the
Purchaser owns Shares or Underlying Shares, the Company covenants to timely
file (or obtain valid extensions in respect thereof) all reports required to be
filed by the Company after the date hereof pursuant to Section 13(a) or 15(d)
of the Exchange Act and to promptly furnish the Purchaser with true and
complete copies of all such filings. If the Company is not at the time
required to file reports pursuant to such sections, it will prepare and furnish
to the Purchaser annual and quarterly financial statements, together with a
discussion and analysis of such financial statements in form and substance
substantially similar to those that would otherwise be required to be included
in reports required by Section 13(a) or 15(d) of the Exchange Act in the time
period that such filings would have been required to have been made under the
Exchange Act.
Section 4.4. [INTENTIONALLY OMITTED]
Section 4.5. Increase in Authorized Shares. At such time as the
Company would be, if a notice of conversion were to be delivered on such date,
precluded from converting the full number of Shares that remain unconverted at
such date due to the unavailability of authorized but unissued or re-acquired
Common Stock, the Board of Directors of the Company shall promptly (and in any
case within 14 Business Days from such date prepare and mail to the
shareholders of the Company proxy materials requesting authorization to amend
the Company's certificate of incorporation to increase the number of shares of
Common Stock which the Company is authorized to issue to at least 60,000,000
shares. In connection therewith, the Board of Directors
-11-
<PAGE> 13
shall (a) adopt proper resolutions authorizing such increase, (b) recommend to
and otherwise use its best efforts to promptly and duly obtain stockholder
approval to carry out such resolutions (and hold a special meeting of the
shareholders no later than the 30th day after delivery of the proxy materials
relating to such meeting) and (c) within 5 Business Days of obtaining such
shareholder authorization, file an appropriate amendment to the Company's
certificate of incorporation to evidence such increase.
Section 4.6. Blue Sky Laws. In accordance with the Registration
Rights Agreement, the Company shall qualify the Underlying Shares under the
securities or Blue Sky laws of such jurisdictions as the Purchaser may
reasonably request and continue such qualification at all times until the
earlier of (i) the date the Underlying Shares Registration Statement is no
longer effective pursuant to the Registration Rights Agreement or (ii)
Purchaser notifies the Company in writing that it no longer owns Shares or
Underlying Shares; provided, however, that neither the Company nor its
Subsidiaries shall be required in connection therewith to qualify as a foreign
corporation where they are not now so qualified.
Section 4.7. Integration. The Company shall not and shall use
its best efforts to ensure that no Affiliate shall sell, offer for sale or
solicit offers to buy security (as defined in Section 2 of the Securities Act)
that would be integrated with the offer or sale of the Shares or the Underlying
Shares in a manner that would require the registration under the Securities Act
of the sale of the Shares or Underlying Shares to the Purchaser.
Section 4.8. Solicitation Materials. The Company shall not (i)
distribute any offering materials in connection with the offering and sale of
the Shares or Underlying Shares and any amendments and supplements thereto
prepared in compliance herewith or (ii) solicit any offer to buy or sell the
Shares or Underlying Shares by means of any form of general solicitation or
advertising.
Section 4.9. Right of First Refusal; Subsequent Registrations;
Certain Corporate Actions. (a) The Company shall not, directly or indirectly,
without the prior written consent of the Purchaser, offer, sell, grant any
option to purchase, or otherwise dispose (or announce any offer, sale, grant or
any option to purchase or other disposition) of any of its or its Affiliates
equity or equity-equivalent securities at a price which is on the face thereof
or implied therein, less than either the market price or fair market value for
such securities (a "Subsequent Financing") for a period of 180 days after
Closing Date, except (i) the granting of options to employees, officers and
directors, and the issuance of shares upon exercise of options granted, under
any stock option plan heretofore or hereinafter duly adopted by the Company,
(ii) shares of Common Stock issued upon exercise of any currently outstanding
warrants and upon conversion of any currently outstanding convertible preferred
stock in each case disclosed in Schedule 3.1(c), (iii) shares of Common Stock
issued for the acquisition of another company by the Company by merger,
purchase of substantially all of the assets of such company, or other
reorganization resulting in the ownership by the Company of more than 50% of
the voting power of such company, and (iv) shares of Common Stock issued upon
conversion of Shares in accordance herewith and the Certificate of Designation,
unless (A) the Company delivers to the
-12-
<PAGE> 14
Purchaser a written notice (the "Subsequent Financing Notice") of its intention
to effect such Subsequent Financing, which Subsequent Financing Notice shall
describe in reasonable detail the proposed terms of such Subsequent Financing,
the amount of proceeds intended to be raised thereunder, the Person with whom
such Subsequent Financing shall be effected, and an executed term sheet or
similar document relating thereto shall be attached to such Subsequent
Financing Notice and (B) the Purchaser shall not have notified the Company by
5:00 p.m. (Eastern Time) on the seventh Business Day after its receipt of the
Subsequent Financing Notice of its willingness to provide (or to cause its sole
designee to provide) financing to the Company on substantially the terms set
forth in the Subsequent Financing Notice and provide such Subsequent Financing
within 20 Business Days after its receipt of the Subsequent Financing Notice,
provided, that this 20 Business Day period shall be extended to the extent that
such Subsequent Financing is not provided by such date due to the delay or bad
faith of the Company. If the Purchaser shall fail to notify the Company of its
intention to commit within such time period, the Company may effect the
Subsequent Financing substantially upon the terms and to the Persons (or
Affiliates of such Persons) set forth in the Subsequent Financing Notice;
provided, that the Company shall provide the Purchaser with a second Subsequent
Financing Notice, and the Purchaser shall again have the right of first refusal
set forth above in this paragraph (a), if the Subsequent Financing subject to
the initial Subsequent Financing Notice shall not have been consummated for any
reason on substantially the terms set forth in such Subsequent Financing Notice
within 60 Business Days after the date of the initial Subsequent Financing
Notice with the Person (or an Affiliate of such Person) identified in the
Subsequent Financing Notice.
(b) Except Underlying Shares and other "Registrable
Securities" (as such term is defined in the Registration Rights Agreement) to
be registered in accordance with the Registration Rights Agreement and as set
forth in Schedule 3.1(c), the Company shall not, without the prior written
consent of the Purchaser, (i)issue or sell any of its or any of its Affiliates'
equity or equity-equivalent securities pursuant to Regulation S promulgated
under the Securities Act, or (ii) register for resale any securities of the
Company, in either case of (i) or (ii) above, for a period of not less than 90
days after the date that the Underlying Shares Registration Statement is
declared effective by the Commission. Any days that the Purchaser is unable to
sell Underlying Shares under the Underlying Shares Registration Statement as a
result of the failure of the Underlying Shares Registration Statement being
effective and not subject to any suspension or blackout; any action taken by
the Company to prevent such ability to sell Underlying Shares under the
Underlying Shares Registration Statement; or a delisting or a suspension of
trading of the Common Stock, shall be added to such 90 day period for the
purposes of (i) and (ii) above.
(c) As long as there are Shares outstanding, the Company shall
not and shall cause the Subsidiaries not to, without the consent of the
Purchaser, (i) amend its certificate of incorporation, bylaws or other charter
documents so as to adversely affect any rights of the Purchaser; (ii) repay,
repurchase or offer to repay, repurchase or otherwise acquire shares of its
Common Stock other than as to the Underlying Shares; or (iii) enter into any
agreement with respect to any of the foregoing.
-13-
<PAGE> 15
Section 4.10. Purchaser Ownership of Common Stock. The
Purchaser may not use its ability to convert Shares hereunder or under the
terms of the Certificate of Designation to the extent that such conversion
would result in the Purchaser beneficially owning (for purposes of Rule 13d-3
under the Exchange Act) more than 4.9% of the outstanding shares of the Common
Stock; provided, however, that if ten days shall have elapsed since the
Purchaser has declared an event of default under any Transaction Document and
such event shall not have been cured to the Purchaser's satisfaction prior to
the expiration of such ten-day period, the provisions of this Section 4.10
shall be null and void ab initio.
Section 4.11. Listing of Underlying Shares. The Company shall
(a) not later than the fifth Business Day following the Closing Date, prepare
and file with the American Stock Exchange (and each other national securities
exchange or market on which the Common Stock is then listed) an additional
shares listing application covering at least 3,211,224 Underlying Shares, (b)
take all steps necessary to cause such shares to be approved for listing on
such exchanges and markets as soon as possible thereafter, and (c) provide to
the Purchaser evidence of such filing and listing, and the Company shall
maintain the listing of its Common Stock on such exchange.
Section 4.12. Purchaser's Rights if Trading in Common Stock is
Suspended or Delisted. In the event that at any time within the three-year
period after the Closing Date trading in the shares of the Common Stock is
suspended on or delisted from the American Stock Exchange or any other
principal market or exchange for such shares (other than as a result of the
suspension of trading in securities on such market or exchange generally or
temporary suspensions pending the release of material information) for more
than three Trading Days, at the Purchaser's option exercisable by five Business
Days prior written notice to the Company, the Company shall redeem all Shares
and Underlying Shares then held by the Purchaser, at an aggregate purchase
price equal to the sum of (I) the number of Shares then held by the Purchase
multiplied by the product of (1) the average Per Share Market Value for the
five (5) Trading Days immediately preceding (a) the day of such notice or (b)
the date of payment in full of the redemption price calculated under this
Section 4.12, whichever is greater, multiplied by (2) the Conversion Ratio on
the date of the repurchase notice, (II) the number of Underlying Shares then
held by the Purchaser multiplied by the average Per Share Market Value for the
five (5) Trading Days immediately preceding (A) the date of the notice or (B)
the date of payment in full by the Company of the redemption price calculated
under this Section 4.12, whichever is greater, and (III) interest on the
amounts set forth in I - II above accruing from the 5th day after such notice
until the redemption price under this Section 4.12 is paid in full at the rate
of 15% per annum.
Section 4.13. No Violation of Applicable Law. Notwithstanding
any provision of this Agreement to the contrary, if any redemption of Shares or
Underlying Shares otherwise required under the Transaction Documents would be
prohibited by the relevant provisions of the Delaware General Corporation Law,
such redemption shall be effected as soon as it is permitted under such law;
provided, however, that, interest payable by the Company with respect to any
such redemption shall continue to accrue in accordance with Section 4.12 during
any such period.
-14-
<PAGE> 16
Section 4.14. Redemption Restrictions. Notwithstanding any
provision of this Agreement to the contrary, if any redemption of Shares or
Underlying Shares otherwise required under this Agreement would be prohibited
in the absence of consent from any lender of the Company or of any Subsidiary,
or by the holders of any class of securities of the Company, the Company shall
use its best efforts to obtain such consent as promptly as practicable after
the redemption is required. Interest payable by the Company with respect to
any such redemption shall continue to accrue in accordance with Section 4.12
until such consent is obtained. Nothing contained in this Section shall be
construed as a waiver by the Purchaser of any rights it may have by virtue of
any breach of any representation or warranty of the Company herein as to the
absence of any requirement to obtain any such consent.
Section 4.15. Notice of Breaches. Each of the Company and the
Purchaser shall give prompt written notice to the other of any breach of any
representation, warranty or other agreement contained in this Agreement or in
the Registration Rights Agreement, as well as any events or occurrences arising
after the date hereof and prior to the Closing Date, which could reasonably be
likely to cause any representation or warranty or other agreement of such
party, as the case may be, contained herein or therein to be incorrect or
breached as of such Closing Date. However, no disclosure by either party
pursuant to this Section shall be deemed to cure any breach of any
representation, warranty or other agreement contained herein or in the
Registration Rights Agreement. Neither the Company, any Subsidiary nor the
Purchaser will take, or agree to commit to take, any action that is intended to
make any representation or warranty of the Company or the Purchaser, as the
case may be, contained herein or in the Registration Rights Agreement
inaccurate in any respect at the Closing Date.
Notwithstanding the generality of the foregoing, the Company
shall promptly notify the Purchaser of any notice or claim (written or oral)
that it receives from any lender of the Company to the effect that the
consummation of the transactions contemplated by any of the Transaction
Documents violates or would violate any written agreement or understanding
between such lender and the Company, and the Company shall promptly furnish by
facsimile to the holders of the Shares a copy of any written statement in
support of or relating to such claim or notice.
Section 4.16. Conversion Procedures. Exhibit D attached hereto
sets forth the procedures with respect to the conversion of the Shares,
including the forms of conversion notice to be provided upon conversion,
instructions as to the procedures for conversion, the form of legal opinion, if
necessary, that shall be rendered to the Company's transfer agent and such
other information and instructions as may be reasonably necessary to enable the
Purchaser to exercise its right of conversion smoothly and expeditiously.
Section 4.17. Conversion Obligations of the Company. The
Company covenants to convert Shares and to deliver Underlying Shares in
accordance with the terms and conditions and time periods set forth in the
Certificate of Designation.
-15-
<PAGE> 17
ARTICLE V
MISCELLANEOUS
Section 5.1. Fees and Expenses. Except as set forth in the
Registration Rights Agreement, each party shall pay the fees and expenses of
its advisers, counsel, accountants and other experts, if any, and all other
expenses incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of this Agreement. The Company shall pay
all stamp and other taxes and duties levied in connection with the issuance of
the Shares (and upon conversion thereof, the Underlying Shares) pursuant
hereto. The Purchaser shall be responsible for its own tax liability that may
arise as a result of the investment hereunder or the transactions contemplated
by this Agreement.
Section 5.2. Entire Agreement; Amendments. This Agreement,
together with the Exhibits and Schedules hereto, the Escrow Agreement, the
Certificate of Designation, the Registration Rights Agreement (together with
the respective Exhibits and Schedules thereto) and that certain letter
agreement contain the entire understanding of the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
oral or written, with respect to such matters.
Section 5.3. Notices. Any and all notices or other
communications or deliveries required or permitted to be provided hereunder
shall be in writing and shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
4:30 p.m. (New York City time) on a Business Day, (ii) the Business Day after
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section later
than 4:30 p.m. (New York City time) on any date and earlier than 11:59 p.m.
(New York City time) on such date, (iii) the Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or (iv)
upon actual receipt by the party to whom such notice is required to be given.
If to the Company: Phoenix Network, Inc.
1687 Cole Blvd.
Golden, CO 80401
Facsimile No.: (303) 205-3511
Attn: Chief Executive Officer
With copies to: Slivka Robinson Waters & O'Dorisio, P.C.
1099 18th St., Suite 2600
Denver, CO 80202-1926
Facsimile No.: (303) 297-2750
Attn: Ernest J. Panasci
If to JNC: JNC Opportunity Fund Ltd.
-16-
<PAGE> 18
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House
20 Reid Street
Hamilton HM11
Bermuda
Facsimile No.: (441) 295-2305
Attn: Philip Pedro
with copies to: Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive
Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil Chau
- and -
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
Section 5.4. Amendments; Waivers. No provision of this
Agreement may be waived or amended except in a written instrument signed, in
the case of an amendment, by both the Company and the Purchaser, or, in the
case of a waiver, by the party against whom enforcement of any such waiver is
sought. No waiver of any default with respect to any provision, condition or
requirement of this Agreement shall be deemed to be a continuing waiver in the
future or a waiver of any other provision, condition or requirement hereof, nor
shall any delay or omission of either party to exercise any right hereunder in
any manner impair the exercise of any such right accruing to it thereafter.
Section 5.5. Headings. The headings herein are for convenience
only, do not constitute a part of this Agreement and shall not be deemed to
limit or affect any of the provisions hereof.
Section 5.6. Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties and their successors and
permitted assigns. Neither the Company nor the Purchaser may assign this
Agreement or any rights or obligations hereunder
-17-
<PAGE> 19
without the prior written consent of the other, except that the Purchaser may
assign its rights hereunder and under the Registration Rights Agreement to an
Affiliate thereof or to a managed account of either the Purchaser or such
Affiliate, provided, that such assignee demonstrates to the reasonable
satisfaction of the Company its satisfaction of the representations and
warranties set forth in Section 3.2 herein. The assignment by a party of this
Agreement or any rights hereunder shall not affect the obligations of such
party under this Agreement.
Section 5.7. No Third-Party Beneficiaries. This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns and, other than with respect to permitted assignees
under Section 5.6, is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
Section 5.8. Governing Law. This Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York without regard to the principles of conflicts of law thereof.
Section 5.9. Survival. The representations and warranties of
the Company and the Purchaser contained in Article III and the agreements and
covenants of the parties contained in Article IV and this Article V shall
survive the Closing (or any earlier termination of this Agreement) and any
conversion of Shares and exercise of Warrants hereunder until five (5) years
after the date hereof.
Section 5.10. Counterpart Signatures. This Agreement may be
executed in two or more counterparts, all of which when taken together shall be
considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party,
it being understood that both parties need not sign the same counterpart. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid and binding obligation of the party executing
(or on whose behalf such signature is executed) the same with the same force
and effect as if such facsimile signature page were an original thereof.
Section 5.11. Publicity. The Company and the Purchaser shall
consult with each other in issuing any press releases or otherwise making
public statements with respect to the transactions contemplated hereby and
neither party shall issue any such press release or otherwise make any such
public statement without the prior written consent of the other, which consent
shall not be unreasonably withheld or delayed, except that no prior consent
shall be required if such disclosure is required by law, in which such case the
disclosing party shall provide the other party with prior notice of such public
statement.
Section 5.12. Severability. In case any one or more of the
provisions of this Agreement shall be invalid or unenforceable in any respect,
the validity and enforceability of the remaining terms and provisions of this
Agreement shall not in any way be affecting or impaired thereby and the parties
will attempt to agree upon a valid and enforceable provision which shall
-18-
<PAGE> 20
be a reasonable substitute therefor, and upon so agreeing, shall incorporate
such substitute provision in this Agreement.
Section 5.13. Remedies. In addition to being entitled to
exercise all rights provided herein or granted by law, including recovery of
damages, the Purchaser will be entitled to specific performance of the
obligations of the Company under this Agreement and the Company will be
entitled to specific performance of the obligations of the Purchaser hereunder
with respect to the subsequent transfer of Shares and the Underlying Shares.
Each of the Company and the Purchaser agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of any breach of its
obligations described in the foregoing sentence and hereby agrees to waive in
any action for specific performance of any such obligation the defense that a
remedy at law would be adequate.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
-19-
<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the date first indicated above.
Company:
PHOENIX NETWORK, INC.
By: /s/ Jon Beizer
----------------------------------
Name: Jon Beizer
Title: Chief Financial Officer
Purchaser:
JNC OPPORTUNITY FUND LTD.
By: /s/ Philip C. Pedro
----------------------------------
Name: Philip C. Pedro
Title: Secretary
<PAGE> 1
EXHIBIT 4.4
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of March 31, 1997, between Phoenix Network, Inc., a Delaware
corporation (the "Company"), and JNC Opportunity Fund Ltd., a Cayman Islands
corporation (the "Purchaser").
This Agreement is made pursuant to the Convertible Preferred
Stock Purchase Agreement, dated as of the date hereof between the Company and
the Purchaser (the "Purchase Agreement").
The Company and the Purchaser hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein shall
have the meanings given such terms in the Purchase Agreement. As used in this
Agreement, the following terms shall have the following meanings:
"Advice" shall have meaning set forth in Section 3(o).
"Affiliate" means, with respect to any Person, any other Person
that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "control," when
used with respect to any Person, means the possession, direct or indirect, 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; and the terms of "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
state of New York generally are authorized or required by law or other
government actions to close.
"Closing Date" shall have the meaning set forth in the Purchase
Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value $.001
per share.
"Effectiveness Date" means July 3, 1997.
<PAGE> 2
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Filing Date" means April 24, 1997.
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section
5(c).
"Indemnifying Party" shall have the meaning set forth in Section
5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Preferred Stock" means the shares of Series G Convertible
Preferred Stock, par value $.001 per share, of the Company issued to the
Purchaser pursuant to the Purchase Agreement.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" means the shares of Common Stock
issuable (a) upon conversion of all shares of Preferred Stock (b) upon payment
of dividends in respect of the Preferred Stock and (c) upon exercise of the
Common Stock purchase warrants issued by the Company to Wharton Capital
Partners, Ltd. and Keith A. Rhodes in connection with the transactions
contemplated by the Purchase Agreement; provided, however that in order to
account for the fact that the number of shares of Common Stock that are
issuable upon conversion of shares of Preferred Stock is determined in part
upon the market price of the
-2-
<PAGE> 3
Common Stock at the time of conversion, Registrable Securities shall include
(but not be limited to) a number of shares of Common Stock equal to no less
than the sum of (1) two times the number of shares of Common Stock issuable
upon conversion in full of the Preferred Stock, assuming such conversion
occurred on the Closing Date, and (2) the number of shares of Common Stock
issuable upon conversion in full of the warrants described above.
Notwithstanding anything herein contained to the contrary, if the actual number
of shares of Common Stock issuable upon conversion in full of the Preferred
Stock at any time exceeds twice the number of shares of Common Stock issuable
if such conversion occurred on the Closing Date, the term "Registrable
Securities" shall be deemed to include such additional shares of Common Stock
and the Company shall promptly, but in any case within 7 days of notice of such
fact, file one or more additional Registration Statements covering such
additional shares of Common Stock. The Company shall use its best efforts to
cause such additional Registration Statements to be declared effective as
promptly as possible, but in any event within 60 days after the date of the
notice triggering such requirement.
"Registration Statement" means the registration statement
contemplated by Section 2(a) (and any additional Registration Statements
contemplated in the definition of Registrable Securities), including (in each
case) the Prospectus, amendments and supplements to such registration statement
or Prospectus, including pre- and post-effective amendments, all exhibits
thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means any special counsel to the Holders, for
which the Holders will be reimbursed by the Company pursuant to Section 4.
-3-
<PAGE> 4
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
2. Shelf Registration
(a) On or prior to the Filing Date, the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis
pursuant to Rule 415. The Registration Statement shall be on Form S-3 (except
if otherwise directed by the Holders in accordance herewith or if the Company
is not then eligible to register for resale the Registrable Securities on Form
S-3, in which case such registration shall be on another appropriate form in
accordance herewith). The Company shall (i) not permit any securities other
than the Registrable Securities to be included in the Registration Statement
and (ii) use its best efforts to cause the Registration Statement to be
declared effective under the Securities Act as promptly as possible after the
filing thereof, but in any event prior to the Effectiveness Date, and to keep
such Registration Statement continuously effective under the Securities Act
until the date which is three years after the date that such Registration
Statement is declared effective by the Commission or such earlier date when all
Registrable Securities covered by such Registration Statement have been sold or
may be sold without volume restrictions pursuant to Rule 144 as determined by
the counsel to the Company pursuant to a written opinion letter, addressed to
the Holders to such effect (the "Effectiveness Period"); provided, however,
that the Company shall not be deemed to have used its best efforts to keep the
Registration Statement effective during the Effectiveness Period if it
voluntarily takes any action that would result in the Holders not being able to
sell the Registrable Securities covered by such Registration Statement during
the Effectiveness Period, unless such action is required under applicable law
or the Company has filed a post-effective amendment to the Registration
Statement and the Commission has not declared it effective.
(b) If the Holders of a majority of the Registrable Securities
so elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and if the managing underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable Securities proposed to
be sold in such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there shall be
included in such Underwritten Offering the amount of such Registrable
Securities which in the opinion of such managing underwriters can be sold, and
such amount shall be allocated pro rata among the Holders proposing to sell
Registrable Securities in such Underwritten Offering.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by the Holders
of a majority of the Registrable Securities included in such offering. No
Holder may participate in any Underwritten Offering
-4-
<PAGE> 5
hereunder unless such Person (i) agrees to sell its Registrable Securities on
the basis provided in any underwriting agreements approved by the Persons
entitled hereunder to approve such arrangements and (ii) completes and executes
all questionnaires, powers of attorney, indemnities, underwriting agreements
and other documents required under the terms of such arrangements.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date a Registration Statement on Form S-3 (or such other form if
directed by the Holders in connection with an Underwritten Offering hereunder
or if the Company is not then eligible to register for resale the Registrable
Securities on Form S-3, in which case such registration shall be on another
appropriate form in accordance herewith) in accordance with the method or
methods of distribution thereof as specified by the Holders (except if
otherwise directed by the Holders), and cause the Registration Statement to
become effective and remain effective as provided herein; provided, however,
that not less than five (5) Business Days prior to the filing of the
Registration Statement or any related Prospectus or any amendment or supplement
thereto (including any document that would be incorporated or deemed to be
incorporated therein by reference), the Company shall (i) furnish to the
Holders, their Special Counsel and any managing underwriters, copies of all
such documents proposed to be filed, which documents (other than those
incorporated or deemed to be incorporated by reference) will be subject to the
review of such Holders, their Special Counsel and such managing underwriters,
and (ii) cause its officers and directors, counsel and independent certified
public accountants to respond to such inquiries as shall be necessary, in the
opinion of respective counsel to such Holders and such underwriters, to conduct
a reasonable investigation within the meaning of the Securities Act. The
Company shall not file the Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities, their Special Counsel, or any managing underwriters,
shall reasonably object within five (5) Business Days of their receipt thereof.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to all
Registrable Securities for the Effectiveness Period and prepare and file with
the Commission such additional Registration Statements in order to register for
resale under the Securities Act all of the Registrable Securities; (ii) cause
the related Prospectus to be amended or supplemented by any required Prospectus
supplement, and as so supplemented or amended to be filed pursuant to Rule 424
(or any similar provisions then in force) promulgated under the Securities Act;
(iii) respond as promptly as practicable to any comments received from the
Commission with respect to the
-5-
<PAGE> 6
Registration Statement or any amendment thereto and promptly provide the
Holders true and complete copies of all correspondence from and to the
Commission relating to the Registration Statement; and (iv) comply with the
provisions of the Securities Act and the Exchange Act with respect to the
disposition of all Registrable Securities covered by the Registration Statement
during the applicable period in accordance with the intended methods of
disposition by the Holders thereof set forth in the Registration Statement as
so amended or in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters immediately (and, in the
case of (i)(A) below, not less than five (5) days prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later than one
(1) Business Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is
proposed to be filed; (B) when the Commission notifies the Company whether
there will be a "review" of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement and (C) with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective; (ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to the
Registration Statement or Prospectus or for additional information; (iii) of
the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement covering any or all of the Registrable Securities
or the initiation of any Proceedings for that purpose; (iv) if at any time any
of the representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true
and correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement made
in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect
or that requires any revisions to the Registration Statement, Prospectus or
other documents so that, in the case of the Registration Statement or the
Prospectus, as the case may be, it will not 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, in light of the circumstances
under which they were made, not misleading.
(d) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness of
the Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the Holders of
a majority of the Registrable Securities to be sold in connection with an
Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the
-6-
<PAGE> 7
Registration Statement such information as such managing underwriters and such
Holders reasonably agree should be included therein and (ii) make all required
filings of such Prospectus supplement or such post-effective amendment as soon
as practicable after the Company has received notification of the matters to be
incorporated in such Prospectus supplement or post-effective amendment;
provided, however, that the Company shall not be required to take any action
pursuant to this Section 3(e) that would, in the opinion of counsel for the
Company, violate applicable law.
(f) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel,
and any underwriters, without charge, as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders and any underwriters in connection with
the offering and sale of the Registrable Securities covered by such Prospectus
and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the selling
Holders, any underwriters and their Special Counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any Holder or underwriter requests in writing, to keep each such registration
or qualification (or exemption therefrom) effective during the Effectiveness
Period and to do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Registrable Securities
covered by a Registration Statement; provided, however, that the Company shall
not be required to qualify generally to do business in any jurisdiction where
it is not then so qualified or to take any action that would subject it to
general service of process in any such jurisdiction where it is not then so
subject or subject the Company to any material tax in any such jurisdiction
where it is not then so subject.
(i) Cooperate with the Holders and any managing underwriters
to facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold, which certificates shall be free of all
restrictive legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any such managing underwriters or
Holders may request at least two Business Days prior to any sale of Registrable
Securities.
-7-
<PAGE> 8
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as practicable, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit 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.
(k) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on the American Stock
Exchange and any other securities exchange, quotation system, market or over-
the-counter bulletin board, if any, on which similar securities issued by the
Company are then listed as and when required pursuant to the Purchase
Agreement.
(l) Enter into such agreements (including an underwriting
agreement in form, scope and substance as is customary in Underwritten
Offerings) and take all such other actions in connection therewith (including
those reasonably requested by any managing underwriters and the Holders of a
majority of the Registrable Securities being sold) in order to expedite or
facilitate the disposition of such Registrable Securities, and whether or not
an underwriting agreement is entered into, (i) make such representations and
warranties to such Holders and such underwriters as are customarily made by
issuers to underwriters in underwritten public offerings, and confirm the same
if and when requested; (ii) obtain and deliver copies thereof to each Holder
and the managing underwriters, if any, of opinions of counsel to the Company
and updates thereof addressed to each selling Holder and each such underwriter,
in form, scope and substance reasonably satisfactory to any such managing
underwriters and Special Counsel to the selling Holders covering the matters
customarily covered in opinions requested in Underwritten Offerings and such
other matters as may be reasonably requested by such Special Counsel and
underwriters; (iii) immediately prior to the effectiveness of the Registration
Statement, and, in the case of an Underwritten Offering, at the time of
delivery of any Registrable Securities sold pursuant thereto, obtain and
deliver copies to the Holders and the managing underwriters, if any, of "cold
comfort" letters and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other independent certified
public accountants of any subsidiary of the Company or of any business acquired
by the Company for which financial statements and financial data is, or is
required to be, included in the Registration Statement), addressed to each
selling Holder and each of the underwriters, if any, in form and substance as
are customary in connection with Underwritten Offerings; (iv) if an
underwriting agreement is entered into, the same shall contain indemnification
provisions and procedures no less favorable to the selling Holders and the
underwriters, if any, than those set forth in Section 6 (or such other
provisions and procedures acceptable to the managing underwriters, if any, and
holders of a majority of Registrable Securities participating in such
Underwritten Offering; and (v) deliver such documents and certificates as may
be reasonably requested by the Holders of a majority
-8-
<PAGE> 9
of the Registrable Securities being sold, their Special Counsel and any
managing underwriters to evidence the continued validity of the representations
and warranties made pursuant to clause 3(l)(i) above and to evidence compliance
with any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
(m) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any
disposition of Registrable Securities, and any attorney or accountant retained
by such selling Holders or underwriters, at the offices where normally kept,
during reasonable business hours, all financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries, and
cause the officers, directors, agents and employees of the Company and its
subsidiaries to supply all information in each case requested by any such
Holder, representative, underwriter, attorney or accountant in connection with
the Registration Statement; provided, however, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential
by such Persons, unless (i) disclosure of such information is required by court
or administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by
such Person to be bound by a confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the
Commission and make generally available to its security holders earning
statements satisfying the provisions of Section 11(a) of the Securities Act and
Rule 158 not later than 45 days after the end of any 12-month period (or 90
days after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Registrable Securities are
sold to underwriters in a firm commitment or best efforts Underwritten Offering
and (ii) if not sold to underwriters in such an offering, commencing on the
first day of the first fiscal quarter of the Company after the effective date
of the Registration Statement, which statement shall cover said 12-month
period, or end shorter periods as is consistent with the requirements of Rule
158.
(o) Provide a CUSIP number for all Registrable Securities, not
later than the effective date of the Registration Statement.
The Company may require each selling Holder to furnish to the
Company such information regarding the distribution of such Registrable
Securities as is required by law to be disclosed in the Registration Statement
and the Company may exclude from such registration the Registrable Securities
of any such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request.
-9-
<PAGE> 10
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder
shall have the right to require (i) the inclusion therein of language, in form
and substance reasonably satisfactory to such Holder, to the effect that the
ownership by such Holder of such securities is not to be construed as a
recommendation by such Holder of the investment quality of the Company's
securities covered thereby and that such ownership does not imply that such
Holder will assist in meeting any future financial requirements of the Company,
or (ii) if such reference to such Holder by name or otherwise is not required
by the Securities Act or any similar Federal statute then in force, the
deletion of the reference to such Holder in any amendment or supplement to the
Registration Statement filed or prepared subsequent to the time that such
reference ceases to be required.
Each Purchaser covenants and agrees that (i) it will not offer or
sell any Registrable Securities under the Registration Statement until it has
received copies of the Prospectus as then amended or supplemented as
contemplated in Section 3(g) and notice from the Company that such Registration
Statement and any post-effective amendments thereto have become effective as
contemplated by Section 3(c) and (ii) the Purchaser and its officers, directors
or Affiliates, if any, will comply with the prospectus delivery requirements of
the Securities Act as applicable to them in connection with sales of
Registrable Securities pursuant to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of such
Registrable Securities until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement contemplated by
Section 3(j), or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed, and, in either case,
has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
4. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall, except as and to the
extent specified in Section 4(c), be borne by the Company whether or not
pursuant to an Underwritten Offering and whether or not the Registration
Statement is filed or becomes effective and whether or not any Registrable
Securities are sold pursuant to the Registration Statement. The fees and
expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without
limitation, fees and expenses (A) with respect to filings required to be made
with the American Stock Exchange and each other securities exchange or market
on which Registrable Securities are required hereunder to be listed and (B) in
compliance with state securities or Blue Sky laws (including, without
limitation, fees and disbursements of
-10-
<PAGE> 11
counsel for the Holders in connection with Blue Sky qualifications of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as the managing
underwriters, if any, or the Holders of a majority of Registrable Securities
may designate)), (ii) printing expenses (including, without limitation,
expenses of printing certificates for Registrable Securities and of printing
prospectuses if the printing of prospectuses is requested by the managing
underwriters, if any, or by the holders of a majority of the Registrable
Securities included in the Registration Statement), (iii) messenger, telephone
and delivery expenses, (iv) fees and disbursements of counsel for the Company
and Special Counsel for the Holders, in the case of the Special Counsel, to a
maximum amount of $10,000, (v) Securities Act liability insurance, if the
Company so desires such insurance, and (vi) fees and expenses of all other
Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement. In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with the
consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, the
fees and expenses incurred in connection with the listing of the Registrable
Securities on any securities exchange as required hereunder.
(b) In connection with the Registration Statement, the Company
shall reimburse the Holders for up to $10,000 of the fees and disbursements of
one firm of attorneys chosen by the Holders of a majority of the Registrable
Securities.
(c) If the Holders require an Underwritten Offering pursuant
to the terms hereof, the Company shall be responsible for all costs, fees and
expenses in connection therewith, except for the fees and disbursements of the
Underwriters and their legal counsel and accountants (which shall be borne by
the Holders). Therefore, in such circumstances the Holder shall bear the
expenses of the fees and disbursements of any legal counsel or accounting firm
retained by the underwriters in connection with such Underwritten Offering and
the costs of any determination (but not filing) by the underwriters of the
eligibility of the Registrable Securities for investment under the applicable
state securities laws. By way of illustration which is not intended to
diminish from the provisions of Section 4(a), the Holders shall not be
responsible for, and the Company shall be required to pay the fees or
disbursements incurred by the Company (including by its legal counsel and
accountants) in connection with, the preparation and filing of a Registration
Statement and related Prospectus for such offering, the maintenance of such
Registration Statement in accordance with the terms hereof, the listing of the
Registrable Securities in accordance with the requirements hereof, and printing
expenses incurred to comply with the requirements hereof.
-11-
<PAGE> 12
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement and without limitation as to
time, indemnify and hold harmless each Holder, the officers, directors, agents
(including any underwriters retained by such Holder in connection with the
offer and sale of Registrable Securities), brokers (including brokers who offer
and sell Registrable Securities as principal as a result of a pledge or any
failure to perform under a margin call of Common Stock), investment advisors
and employees of each of them, each Person who controls any such Holder (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) and the officers, directors, agents and employees of each such controlling
Person, to the fullest extent permitted by applicable law, from and against any
and all losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or relating to any untrue
or alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to the
Company by or on behalf of such Holder expressly for use therein, which
information was reasonably relied on by the Company for use therein or to the
extent that such information relates to such Holder or such Holder's proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in the Registration
Statement, such Prospectus or such form of Prospectus or in any amendment or
supplement thereto. The Company shall notify the Holders promptly of the
institution, threat or assertion of any Proceeding of which the Company is
aware in connection with the transactions contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, the directors,
officers, agents and employees, each Person who controls the Company (within
the meaning of Section 15 of the Securities Act and Section 20 of the Exchange
Act), and the directors, officers, agents or employees of such controlling
Persons, to the fullest extent permitted by applicable law, from and against
all Losses (as determined by a court of competent jurisdiction in a final
judgment not subject to appeal or review) arising solely out of or based solely
upon any untrue statement of a material fact contained in the Registration
Statement, any Prospectus, or any form of prospectus, or arising solely out of
or based solely upon any omission of a material fact required to be stated
therein or necessary to make the statements therein not misleading to the
extent, but only to the extent, that such untrue statement or omission is
contained in any information so furnished in writing by such Holder to the
Company specifically for inclusion in the Registration Statement or such
Prospectus and that such information was reasonably
-12-
<PAGE> 13
relied upon by the Company for use in the Registration Statement, such
Prospectus or such form of prospectus or to the extent that such information
relates to such Holder or such Holder's proposed method of distribution of
Registrable Securities and was reviewed and expressly approved in writing by
such Holder expressly for use in the Registration Statement, such Prospectus or
such form of Prospectus. In no event shall the liability of any selling Holder
hereunder be greater in amount than the dollar amount of the net proceeds
received by such Holder upon the sale of the Registrable Securities giving rise
to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall notify the
Person from whom indemnity is sought (the "Indemnifying Party") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant
to this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed to
pay such fees and expenses; or (2) the Indemnifying Party shall have failed
promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or
(3) the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a conflict of
interest is likely to exist if the same counsel were to represent such
Indemnified Party and the Indemnifying Party (in which case, if such
Indemnified Party notifies the Indemnifying Party in writing that it elects to
employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such
Proceeding effected without its written consent, which consent shall not be
unreasonably withheld. No Indemnifying Party shall, without the prior written
consent of the Indemnified Party, effect any settlement of any pending
Proceeding in respect of which any Indemnified Party is a party, unless such
settlement includes an unconditional release of such Indemnified Party from all
liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such
-13-
<PAGE> 14
Proceeding in a manner not inconsistent with this Section) shall be paid to the
Indemnified Party, as incurred, within 10 Business Days of written notice
thereof to the Indemnifying Party (regardless of whether it is ultimately
determined that an Indemnified Party is not entitled to indemnification
hereunder; provided, that the Indemnifying Party may require such Indemnified
Party to undertake to reimburse all such fees and expenses to the extent it is
finally judicially determined that such Indemnified Party is not entitled to
indemnification hereunder).
(d) Contribution. If a claim for indemnification under
Section 5(a) or 5(b) is unavailable to an Indemnified Party because of a
failure or refusal of a governmental authority to enforce such indemnification
in accordance with its terms (by reason of public policy or otherwise), then
each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such
Indemnifying Party and Indemnified Party shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission of
a material fact, has been taken or made by, or relates to information supplied
by, such Indemnifying Party or Indemnified Party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action, statement or omission. The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in Section 5(c), any attorneys' or other fees or expenses incurred by
such party in connection with any Proceeding to the extent such party would
have been indemnified for such fees or expenses if the indemnification provided
for in this Section was available to such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 5(d), the Purchaser
shall not be required to contribute, in the aggregate, any amount in excess of
the amount by which the proceeds actually received by the Purchaser from the
sale of the Registrable Securities subject to the Proceeding exceeds the amount
of any damages that the Purchaser has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.
-14-
<PAGE> 15
6. Rule 144
The Company shall file the reports required to be filed by it
under the Securities Act and the Exchange Act in a timely manner and, if at any
time the Company is not required to file such reports, they will, upon the
request of any Holder, make publicly available other information so long as
necessary to permit sales of its securities pursuant to Rule 144. The Company
further covenants that it will take such further action as any Holder may
reasonably request, all to the extent required from time to time to enable such
Holder to sell Registrable Securities without registration under the Securities
Act within the limitation of the exemptions provided by Rule 144. Upon the
request of any Holder, the Company shall deliver to such Holder a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
7. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement.
The Company and each Holder agree that monetary damages would not provide
adequate compensation for any losses incurred by reason of a breach by it of
any of the provisions of this Agreement and hereby further agrees that, in the
event of any action for specific performance in respect of such breach, it
shall waive the defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Except as and to the extent
specifically set forth in Schedule 7(b) attached hereto, neither the Company
nor any of its subsidiaries has, as of the date hereof, nor shall the Company
or any of its subsidiaries, on or after the date of this Agreement, enter into
any agreement with respect to its securities that is inconsistent with the
rights granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except and to the extent specifically set forth on Schedule
7(b) attached hereto, neither the Company nor any of its subsidiaries has
previously entered into any agreement granting any registration rights with
respect to any of its securities to any Person. Without limiting the
generality of the foregoing, without the written consent of the Holders of a
majority of the then outstanding Registrable Securities, the Company shall not
grant to any Person the right to request the Company to register any securities
of the Company under the Securities Act unless the rights so granted are
subject in all respects to the prior rights in full of the Holders set forth
herein, and are not otherwise in conflict or inconsistent with the provisions
of this Agreement.
(c) No Piggyback on Registrations. Except as and to the
extent specifically set forth on Schedule 7(c) attached hereto, neither the
Company nor any of its security holders (other than the Holders in such
capacity pursuant hereto) may include securities of the
-15-
<PAGE> 16
Company in the Registration Statement other than the Registrable Securities,
and the Company shall not enter into any agreement providing any such right to
any of its securityholders.
(d) Piggy-Back Registrations. If at any time the Company
shall determine to prepare and file with the Commission a registration
statement relating to an offering for its own account or the account of others
under the Securities Act of any of its equity securities, other than on Form S-
4 or Form S-8 (each as promulgated under the Securities Act) or their then
equivalents relating to equity securities to be issued solely in connection
with any acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, the Company shall
send to each holder of Registrable Securities written notice of such
determination and, if within twenty (20) days after receipt of such notice, any
such holder shall so request in writing, the Company shall include in such
registration statement all or any part of the Registrable Securities such
holder requests to be registered, except that if, in connection with any
Underwritten Offering for the account of the Company the managing
underwriter(s) thereof shall impose a limitation on the number of shares of
Common Stock which may be included in the registration statement because, in
such underwriter(s)' judgment, such limitation is necessary to effect an
orderly public distribution of securities covered thereby, then the Company
shall be obligated to include in such registration statement only such limited
portion of the Registrable Securities for to which such holder has requested
inclusion hereunder. Any exclusion of Registrable Securities shall be made pro
rata among the holders seeking to include Registrable Securities, in proportion
to the number of Registrable Securities sought to be included by such holders;
provided, however, that the Company shall not exclude any Registrable
Securities unless the Company has first excluded all outstanding securities the
holders of which are not entitled by right to inclusion of securities in such
registration statement; and provided, further, however, that, after giving
effect to the immediately preceding proviso, any exclusion of Registrable
Securities shall be made pro rata with holders of other securities having the
right to include such securities in such registration statement. No right to
registration of Registrable Securities under this Section shall be construed to
limit any registration otherwise required hereunder.
(e) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least a majority of the then outstanding Registrable
Securities; provided, however, that, for the purposes of this sentence,
Registrable Securities that are owned, directly or indirectly, by the Company,
or an Affiliate of the Company are not deemed outstanding. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with
respect to a matter that relates exclusively to the rights of Holders and that
does not directly or indirectly affect the rights of other Holders may be given
by Holders of at least a majority of the Registrable Securities to which such
waiver or consent relates; provided, however, that the provisions of this
sentence may not be amended, modified, or supplemented except in accordance
with the provisions of the immediately preceding sentence.
-16-
<PAGE> 17
(f) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 4:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 4:30
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) the Business Day following the date of mailing,
if sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given.
If to the Company: Phoenix Network, Inc.
1687 Cole Blvd.
Golden, CO 80401
Facsimile No.: (303) 205-3511
With copies to: Slivka Robinson Waters
& O'Dorisio, P.C.
1099 18th St., #2600
Denver, CO 80202
Fax: 303-297-2750
Attn: Ernest J. Panasci
If to JNC: JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House
20 Reid Street
Hamilton HM11, Bermuda
Facsimile No.: (441) 295-2305
Attn: Philip Pedro
with copies to: Encore Capital Management,
L.L.C.
12007 Sunrise Valley Drive
Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil Chau
-17-
<PAGE> 18
- and -
Robinson Silverman Pearce
Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears
in the stock transfer books of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(g) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. The Purchaser may assign its rights hereunder in the manner and
to the Persons as permitted under the Purchase Agreement.
(h) Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
(i) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to principles of conflicts of law.
(j) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(k) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to
be invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or
-18-
<PAGE> 19
invalidated, and the parties hereto shall use their reasonable efforts to find
and employ an alternative means to achieve the same or substantially the same
result as that contemplated by such term, provision, covenant or restriction.
It is hereby stipulated and declared to be the intention of the parties that
they would have executed the remaining terms, provisions, covenants and
restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.
(l) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(m) Shares Held by The Company and its Affiliates. Whenever
the consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than the Purchaser or transferees or successors or
assigns thereof if such Persons are deemed to be Affiliates solely by reason of
their holdings of such Registrable Securities) shall not be counted in
determining whether such consent or approval was given by the Holders of such
required percentage.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first written above.
PHOENIX NETWORK, INC.
By: /s/ Jon Beizer
---------------------------------
Name: Jon Beizer
Title: CFO
JNC OPPORTUNITY FUND LTD.
By: /s/ Philip C. Pedro
--------------------------------
Name: Philip C. Pedro
Title: Secretary
-19-
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated March 12, 1997, accompanying the consolidated
financial statements of Phoenix Network, Inc. and subsidiaries appearing in the
1996 Annual Report of the Company to its stockholders and accompanying the
schedule included in the Annual Report on Form 10-K for the year ended December
31, 1996. We have issued our reports dated March 28, 1996 (except for note A,
as to which the date is October 8, 1996) accompanying the 1995 consolidated
financial statements and supplemental consolidated financial statements of
Phoenix Network, Inc. and subsidiaries and our report dated February 16, 1996
accompanying the 1995 consolidated financial statements of AmeriConnect, Inc.
and subsidiaries appearing in the Company's Form 8-K dated January 23, 1997.
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
caption "Experts."
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Denver, Colorado
April 28, 1997
