<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1997
REGISTRATION NO. 333-33091
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
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
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<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 4,387,500 $1.21875(1) $5,347,265.625(1) $1,620.38
- --------------------------------------------------------------------------------------------------------------
Common Stock underlying Warrants 112,500 $2.00 $225,000 $68.18
- --------------------------------------------------------------------------------------------------------------
Total $5,572,265.625
- --------------------------------------------------------------------------------------------------------------
TOTAL REGISTRATION FEE $1,688(2)
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</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 September 8, 1997.
(2) A registration fee of $1,435 was previously paid in connection with
the initial filing.
---------------------------------
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.
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<PAGE> 3
PROSPECTUS
4,500,000 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 4,500,000 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 September 12, 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 as amended on Forms 10-K/A;
(b) Phoenix's Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1996, as amended on Forms 10-Q/A, and June 30,
1997;
(c) Phoenix's Current Reports on Form 8-K dated January 23,
1997, April 25, 1997, July 10, 1997, July 17, 1997 and September 2,
1997;
(d) 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
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<PAGE> 5
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 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--Need to Deploy and Load a
Network; 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.
3
<PAGE> 6
RECENT DEVELOPMENTS
The Company experienced a loss of $5.7 million for the six months
ended June 30, 1997. Revenues decreased to $41,280,046 compared with revenues
of $53,604,952 for the comparable period of the prior year. The decrease was
primarily due to a 10.2% decrease in the average revenue per minute due to the
Company's customers utilizing more competitively priced services offered by the
Company over the past year. In addition, for the six month period ended June
30, 1997, selling, general and administrative expenses have increased as a
percentage of revenue by 6.3% over the comparable period of the prior year.
In April 1997, the Company filed a Summons and Complaint in the Circuit
Court for Palm Beach County, Florida against Alpha Digital Technology, a former
customer ("Alpha Digital"), seeking to recover for services rendered in the
amount of approximately $560,000. That litigation is inactive because the
Company has been unable to effect service of process on Alpha Digital. The
Company plans to file a Summons and Complaint in the Circuit Court for
Hillsborough County, Florida against Classic Personnel Services, Inc. d/b/a
World Placement Services, a former customer ("World Placement"), seeking to
recover for services rendered in the amount of approximately $486,000, although
service of process problems are also expected. No revenue has been recorded
related to these amounts. It is unlikely that the actions against Alpha Digital
and World Placement, if pursued, will be successful because, to date, efforts to
locate the defendants have been unsuccessful and the defendants may never be
found and/or may not be financially viable. The Company has incurred
approximately $510,000 in carrier costs related to services provided to Alpha
Digital and World Placement in the second quarter ended June 30, 1997.
On August 13, 1997, the Company entered into a definitive agreement
providing for the merger of the Company with and into MIDCOM Communications
Inc. ("Midcom") with Midcom as the surviving entity. In addition, on August 13,
1997, the Company entered into definitive agreements to purchase substantially
all of the assets of Trans National Communications, Inc. and to acquire,
pursuant to a plan of reorganization, substantially all of the assets of Trans
National Communications International, Inc. See the Company's Current Report on
Form 8-K, as filed with the SEC on September 2, 1997, and the exhibits thereto.
The Company's executive offices are located at 1687 Cole Boulevard,
Golden, Colorado 80401, telephone: (303) 205-3500.
4
<PAGE> 7
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 by merging with a company operating its own long distance network system,
consisting of leased and/or owned switching equipment in major metropolitan
areas and leased transmission facilities between these switches. In furtherance
of this strategy, the Company currently intends to merge (the "Midcom Merger")
with Midcom, a Southfield, Michigan-based interexchange carrier ("IXC") that
operates or plans to operate in the near future six switches leased or acquired
by it. There can be no assurance that the Company will be able to consummate
its merger with Midcom or another IXC or that such a merger would result in
lower line costs. In addition, merging with Midcom involves a number of
additional risks associated with operation of the business of such merger
partner. See "-Special Risks Associated with Midcom Merger." Additional
factors, such as those discussed below and the future actions of competitors
and regulators, many of which are beyond the control of the Company, may impact
the ability of the Company to effect and/or realize 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; ANTICIPATED FUTURE 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 increased
competitiveness in the telecommunications industry. In addition, Midcom has
experienced significant losses since its inception and anticipates experiencing
additional losses in the future. See "-Special Risks Associated with Midcom
Merger." Accordingly, consummation of the Midcom Merger may increase losses
experienced by the combined Phoenix/Midcom entity (sometimes referred to herein
as the "combined entity").
Due to the increase in new competitors, the overall decline in retail
rates and price sensitivity in the telecommunications industry, the Company's
customer churn, bad debt and new customer acquisition costs have increased over
the last two years. Competitive pricing has resulted in a decrease in the
Company's average revenue per minute and lower gross margins. In addition,
while the Company's selling, general and administrative expenses ("SG&A") have
decreased in the six month period ended June 30, 1997 as compared to the same
period of the prior year, as a percentage of revenues SG&A have increased.
Moreover, following the Midcom Merger, SG&A of the combined entity, as a
percentage of revenues of the combined entity, would likely be substantially
greater than for the Company alone.
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.
NEED TO DEPLOY AND LOAD A LONG DISTANCE NETWORK; NEED FOR ADDITIONAL
CAPITAL. Phoenix's strategy includes merging with a company operating its own
switch network as a means of lowering line costs. Originally,
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<PAGE> 8
Phoenix had intended to merge with US ONE Communications Corp. to achieve this
objective, but such proposed merger has been abandoned. See the Company's
Current Reports on Form 8-K, as filed with the SEC on April 25, 1997, July 10,
1997 and July 17, 1997, and the respective exhibits thereto. The Company has
since entered into an agreement to merge with Midcom. There can be no
assurance that Phoenix will be able to consummate the Midcom Merger, or that
the combined entity can effectively and profitably integrate such a network
into its operations.
Phoenix has projected a need for additional working capital to fund
operating losses and working capital requirements. Furthermore, the Midcom
Merger, if consummated, would substantially increase the combined entity's
needs for capital. Midcom has projected a need for substantial additional
amounts of capital in 1997 to fund operating losses, working capital
requirements and capital expenditures relating to deployment of its switches
and for other purposes. See "-Special Risks Associated with Midcom Merger."
The exact amount and timing of these capital requirements is unknown. To raise
additional required capital, Phoenix (or the combined entity following
consummation of the Midcom Merger) may be required to incur additional
indebtedness to banks and other financial institutions and to issue, in public
or private transactions, equity and debt securities. If additional funds are
raised by issuing equity securities, dilution to 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 (or the combined
entity) will be able to generate or raise sufficient capital on terms
acceptable to it to enable it to implement its business plan or pursue
additional revenue opportunities. If the Company (or the combined entity
following consummation of the Midcom Merger) is unable to generate or raise
sufficient capital on acceptable terms, it may be forced to curtail operations,
dispose of assets or seek extended payment terms from its vendors and other
creditors. Such events would materially affect the value of the Company's
securities.
Furthermore, development (through acquisition or merger, including the
Midcom Merger) and operation of a long distance network would subject the
Company and its stockholders to substantial additional risks associated with
the operation of such business. Although the Company's strategy of acquiring or
merging with a company operating its own long distance network is intended to
enhance long-term profitability, consummation of an acquisition or merger in
furtherance of such strategy may negatively impact Phoenix's operating results,
particularly during the periods immediately following consummation thereof.
POSSIBLE ACQUISITIONS; NEED FOR ADDITIONAL CAPITAL. As part of its
business 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 that 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 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 planned
long distance 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 a lower cost
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.
Phoenix has recently entered into agreements to acquire (the "TNC
Acquisition") certain assets and assume certain liabilities from three
affiliated companies relating to the sale and resale of long distance telephone
service of
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Trans National Communications, Inc. ("TNC Inc."), Trans National Communications
International, Inc. ("TNC International"), and Trans National Group Services
International, Inc. ("TNC Services" and, together with TNC Inc. and TNC
International, are collectively referred to as "TNC"). TNC has no minimum
commitments with vendor carriers, giving Phoenix the flexibility to transition
TNC's traffic onto a lower-cost switch network when it becomes available.
Consideration to be paid to TNC consists of approximately 5,164,000 shares of
the Common Stock of Phoenix, assumption of certain indebtedness in satisfaction
of the obligations of TNC Inc. to Sprint Corporation and Sprint Communication
Company LP, and assumption of certain other liabilities. The TNC Acquisition
is subject to a condition precedent that all conditions to Phoenix's and
Midcom's obligations to consummate the Midcom Merger shall have been satisfied,
and certain other customary conditions precedent.
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, including, without limitation, the Midcom Merger and the
TNC Acquisition. 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.
POSSIBLE VOLATILITY OF STOCK PRICE; POTENTIAL DILUTIVE EFFECT OF
MIDCOM MERGER. 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 announcements of rate changes for various carriers and/or
vendors, 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.
If consummated, the Midcom Merger would result in holders of Phoenix's
Common Stock receiving a number of shares of Midcom common stock determined in
accordance with a formula set forth in the agreement governing such Merger.
Phoenix's obligation to consummate the Midcom Merger is subject to a number of
conditions, including a condition that the average closing bid price for shares
of the common stock of Midcom as traded on the NASDAQ Stock Market for the ten
trading days prior to the closing date of such merger shall not be less than
$5.75. Other than the foregoing condition, the obligation of Phoenix to
consummate the Midcom Merger, and the conversion ratio of shares of Midcom
common stock to Phoenix Common Stock, do not vary with variations in the
relative public trading prices of the two stocks. Accordingly, due to
fluctuations in such prices, the Midcom Merger, if consummated, could have a
dilutive effect on the value of shares of Phoenix Common Stock.
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,
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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 there can be no
assurance as to the success of such measures or the proceeds that the Company
could realize therefrom.
CREDIT FACILITY COVENANTS. From time to time the Company has been, and
is currently, in violation of certain of its covenants in the Credit Facility.
The Company has in the past received waivers of its violations of these
covenants. In the future, should the Company violate, or have a continuing
violation of, any of the covenants constituting an event of default under the
Credit Facility, there can be no assurance that it will receive a waiver of
such violation. Under the terms of the Credit Facility, upon the occurrence of
an event of default, the lender may, among other things, declare all amounts
outstanding under the Credit Facility immediately due and payable, cease
advancing money or extending credit to the Company and/or, during the
continuance of an event of default, increase the interest rate on amounts
outstanding under the Credit Facility. If the lender were to exercise certain
of the remedies available to it upon an event of default, the Company may need
to obtain an alternate source of financing. The availability and terms of any
such financing will depend on market and other conditions, and there can be no
assurance that such alternate financing will be available on terms acceptable
to the Company, if at all. If Phoenix is unable to meet its obligations under
the Credit Facility, its operations and financial condition could be materially
adversely affected.
If the Midcom Merger is consummated, the combined entity may also be
subject to the financial covenants contained in Midcom's current credit
facility or a new credit facility entered into by the combined entity. Midcom
has, from time to time, been in violation of certain of its covenants in its
credit facility which to date have been waived by the lender. If Midcom's
lender were to exercise certain of the remedies available to it upon a future
event of default, or refuse to allow assignment of such credit facility, Midcom
(or the combined entity following the Midcom Merger) may need to obtain an
alternate source of financing. The availability and terms of any such
financing will depend on market and other conditions, and there can be no
assurance that such alternate financing will be available on terms acceptable
to Midcom (or the combined entity), if at all. If Midcom (or the combined
entity) is unable to meet its obligations under Midcom's present, or any new,
credit facility, its operations and financial condition could be materially
adversely affected.
COMPETITION. The telecommunications services industry is highly
competitive and is significantly influenced by the marketing and pricing
decisions of the larger industry participants. It is characterized by low
barriers to entry (e.g., the major facilities-based carriers' bulk rate tariffs
are 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.
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").
Moreover, 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
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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 (and, following the Midcom Merger, the
combined entity's) business, financial condition and results of operations,
including higher customer attrition.
There can be no assurance that Phoenix (or, following the Midcom
Merger, the combined entity) will be able to compete successfully in the
future. Phoenix intends to compete in the long distance market on the basis of
price, service offerings and customer service. Phoenix's (and the combined
entity's) ability to compete on the basis of price is dependent on consummation
of the Midcom Merger, and its ability to implement its business strategy,
including deployment of Midcom's planned switches and securing volume-discount
pricing from vendor carriers. The same volume-discount pricing that Phoenix and
Midcom presently utilize is available to current and potential competitors, and
current and potential competitors could lease or build networks in order to
lower line costs. 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 (or the combined entity following the Midcom
Merger).
Phoenix's competitors may reduce rates or offer incentives to existing
and potential customers of Phoenix (or the combined entity following the Midcom
Merger), 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 among markets and carriers in setting
access charges (i.e., charges to connect to an originating or terminating
telephone using the switches and transmission lines of the LEC) 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 (or the combined entity
following the Midcom Merger) to obtain volume discounts for access and
termination charges could adversely affect it by reducing the operating costs
of its larger competitors. 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 (or the combined entity). As deregulation of the local
exchange market occurs, LECs may be willing to grant large IXCs significant
discounts in return for guarantees of volume. There can be no assurance that
Phoenix (or the combined entity) will be able to obtain similar discounts.
MANAGEMENT OF RAPID GROWTH. Phoenix's strategy to acquire or merge
with a company operating its own long distance switch network and to grow
through additional acquisitions and enter new markets will place additional
demands upon Phoenix's (and, following the Midcom Merger, the combined
entity's) management and its customer service, sales, marketing and
administrative resources. Such growth will result in an increased level of
responsibility for both existing and new management personnel. Phoenix (and,
if the Midcom Merger is consummated, the combined entity) will be required to
implement and improve its operating and financial systems and controls and to
attract, retain, train and manage new employees. Management will be required
to manage the day-to-day operations of Phoenix's current long distance service
while pursuing possible acquisitions, developing and introducing new products
and services, and integrating the Midcom Merger (if consummated). 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 MIS SYSTEMS. Primarily as a
result of previous acquisitions, Phoenix currently uses seven distinct billing
systems. In addition, Midcom uses one or more distinct billing systems, and it
is
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likely that any businesses acquired pursuant to Phoenix's acquisition strategy
will also have partially or completely distinct billing systems. Phoenix
believes such billing systems must be integrated into a unified system. There
can be no assurance that any such new MIS System can be successfully installed,
integrated or operated, and any difficulties in the installation, integration
and operation thereof 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, 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.
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 the capabilities of Midcom following consummation of the Midcom
Merger, 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 and Midcom have no experience. The costs of providing
such service and the related increased customer service support and marketing
costs could be substantial.
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, substantially all 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. For the foreseeable
future, Phoenix (and the combined entity if the Midcom Merger is consummated)
will be dependent on their ability to obtain bulk-rate long distance
transmission capacity from such vendor carriers on a cost-effective basis.
Phoenix is (and the combined entity would be) 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 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 Midcom's planned switch
network (if the Midcom Merger is consummated) until the minimum requirements
decrease per the terms of the agreements or the agreements expire. In
addition, Midcom has minimum volume commitments with its vendor carriers that
may also reduce the benefit to the combined entity following consummation of
the Midcom Merger of Midcom's planned switch network.
Phoenix and Midcom are dependent on their facilities-based carriers
and other vendors to provide them promptly with the detailed information on
which Phoenix and Midcom respectively base 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 (or the combined entity's)
ability to recover charges from its customers.
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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 a provider's service in a given month and do not
utilize that provider's service in the next succeeding month. Phoenix believes
its and Midcom's attrition rates are 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. Although part of Phoenix's operating strategy is to
reduce customer attrition, there can be no assurance that Phoenix (or the
combined entity following the Midcom Merger) will be successful in this regard.
An increase in such customer attrition rate could have a material adverse
effect on the business, financial condition and results of operations of
Phoenix or such combined entity.
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 Midcom and their ability to
compete (individually or together). Phoenix and Midcom are subject to
regulation by the Federal Communications Commission (the "FCC") and by various
state Public Utilities Commissions ("PUCs") as nondominant IXCs and are
required to file tariffs or obtain other approvals in most of the states in
which they operate. It is expected that the combined entity would be subject to
similar regulation following consummation of the Midcom Merger.
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 or Midcom'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 the combined entity if the Midcom Merger is
consummated) or that regulators or third parties will not raise material issues
with regard to its compliance with applicable laws and regulations.
IXCs such as Phoenix have historically been required to file tariffs
specifying the rates, terms and conditions of their 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 smaller IXCs' 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 smaller IXCs to
formulate and execute bilateral agreements with their 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.
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. The impact of this litigation on Phoenix's and
Midcom's plans to offer local dial tone service, or what further actions the
FCC may take in response to the ultimate outcome of the case, cannot be
predicted.
TECHNOLOGICAL CHANGE. The telecommunications industry has been
characterized by rapid technological change, frequent new service introductions
and evolving industry standards. Phoenix believes that its, and, following the
Midcom Merger, the combined entity's, future success will depend on their
ability to anticipate such changes and
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to offer market responsive services that meet these evolving industry standards
on a timely basis. The effect of technological change upon their businesses
cannot be predicted and there can be no assurance that they 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,
could have a material adverse effect on Phoenix. 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.
If the Midcom Merger is consummated, the combined entity's ability to
implement its operating strategy will be highly dependent upon its ability to
retain a qualified senior management team. Such entity's management team likely
will be comprised of a combination of the management of Phoenix and the
management of Midcom. In addition to the key personnel named in the preceding
paragraph, the loss of William H. Oberlin, Midcom's current President and Chief
Executive Officer, or the other key members of Midcom's management team, could
have a material adverse effect on the combined entity's business, financial
condition and results of operations.
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.
As of December 31, 1996, Midcom's executive officers and directors
beneficially owned or controlled approximately 40.0% of the outstanding shares
of Midcom's common stock. Accordingly, consummation of the Midcom Merger could
result in additional concentration of voting power in executive officers and
directors of the combined entity.
Investors who purchase Phoenix's Common Stock may be subject to
certain risks due to the concentrated ownership of Phoenix's Common Stock (or
of the combined entity following the Midcom Merger). Such risks include: (i)
the shares beneficially owned or controlled by executive officers and directors
could, if they were cast together, approve, delay, defer or prevent a change in
control, 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 such executive officers and directors and the potential
adverse impact of such substantial ownership or control on a change in control,
it is less likely that the prevailing market price of the outstanding shares of
Phoenix's Common Stock (or the common stock of the combined entity following
the Midcom Merger) will reflect a "premium for control" than would be the case
if ownership of the outstanding shares were less concentrated.
SPECIAL RISKS ASSOCIATED WITH MIDCOM MERGER. Substantially all of the
risks detailed above will be applicable to the combined entity following
consummation of the Midcom Merger. Stockholders of Phoenix are cautioned that
there are certain additional risks applicable to Midcom that are not presently
applicable to Phoenix, but to which the combined entity will be subject as a
result of or following the Midcom Merger.
Midcom has experienced significant losses since its inception. Net
losses for 1994, 1995 and 1996 were approximately $3.0 million, $33.4 million
and $97.3 million, respectively. Midcom has reported that the execution of its
restructuring, network and marketing strategy will require it to substantially
increase its investment in sales, marketing, capital equipment, systems
development and other areas. Midcom has also reported that a substantial
portion of these expenditures will be made before it realizes a significant
increase in revenue or an improvement in gross
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margin. It is therefore expected that, during at least the first three
quarters of 1997, Midcom's operating costs will increase both in actual dollars
and as a percentage of revenue and net losses will continue. If Midcom
continues to incur net losses, the value of the Midcom common stock to be
received by Phoenix stockholders in the Midcom Merger could be materially
adversely affected.
A central part of Midcom's stated operating strategy is to deploy
dedicated switches to route its call traffic, resulting in a reduction in
overall line costs. Midcom's ability to implement its network strategy may be
impaired by technical, operational or other difficulties encountered in the
installation or operation of such switches.
Like Phoenix, Midcom purchases bulk capacity from facilities-based
carriers on a bundled basis for the substantial majority of its long distance
service requirements, and likely will continue to do so for the foreseeable
future until it has successfully deployed its planned switches, and even
thereafter with respect to that portion of its traffic that such switches will
not be able to route. Midcom has entered into vendor carrier contracts with
numerous facilities-based carriers to supply such requirements. Such contracts
generally require that Midcom purchase certain minimum volumes of a variety of
long distance services during stated periods whether or not such volumes are
used. In the past, Midcom has fallen short of its minimum volume commitments
with certain carriers, and Midcom has made substantial payments in respect of
such shortfalls. Following the Midcom Merger, the combined entity will be
liable both for Phoenix's and Midcom's minimum volume commitments. There can
be no assurance that Phoenix and/or Midcom will not incur volume commitment
shortfalls in the future or that they will be able to successfully renegotiate,
or otherwise obtain relief from, its minimum volume commitments in the future.
Payments in respect of minimum volume commitments are not presently
contemplated in Phoenix's or Midcom's capital budgets, and material payments in
respect thereof could have a material adverse effect on the business, financial
condition and results of operation of the combined entity.
Further, because Midcom and Phoenix are obligated to fulfill their
commitments to vendor carriers by purchasing at predetermined rates, the
combined entity could be adversely affected if its vendor carriers were to make
lower rates available to its competitors without a corresponding reduction in
combined entity's rates, or if its vendor carriers failed to adjust their
overall pricing in response to price reductions by other major carriers.
Midcom has outstanding $97.7 million aggregate principal amount of 8
1/4% Convertible Subordinated Notes ("Notes"). Such Notes will mature on
August 15, 2003, and interest thereon is due semi-annually on February 15 and
August 15 of each year, in the aggregate amount of approximately $4.0 million
for each payment. Following the Midcom Merger, the combined entity will be
responsible for the payment thereof, in addition to payment of all other
indebtedness of either Phoenix or Midcom existing at the time of the Midcom
Merger. Accordingly, the combined entity will be highly leveraged. The
combined entity's ability to make scheduled payments of the principal of, or
interest on, its indebtedness will depend on its future performance, which is
subject to economic, financial, competitive and other factors, many of which
will be beyond its control.
In the event of a change of control, each holder of Notes has the
right to require that Midcom (or, following the Midcom Merger, the combined
entity) repurchase the Notes in whole or in part at a redemption price equal to
101% of the principal amount thereof, plus accrued interest, if any, to the
date of repurchase. Although the Midcom Merger does not constitute such a
change of control, if a change of control were to occur, there can be no
assurance that the combined entity would have sufficient funds to pay such
redemption price for all Notes tendered by the holders thereof. If the combined
entity were required to pay such redemption price, such payment could have a
material adverse effect on its liquidity, results of operations and financial
condition. Moreover, such repurchase obligation could have the effect of
delaying, deferring or preventing a change of control and could limit the price
that certain investors might be willing to pay in the future for the combined
entity's common stock.
Midcom, its Vice Chairman of the Board of Directors and largest
shareholder, its former President, Chief Executive Officer and director, and
its former Chief Financial Officer are named as defendants in a securities
action filed in the U.S. District Court for the Western District of Washington
(the "Complaint"). The Complaint was filed on behalf of a class of purchasers
of Midcom's common stock during the period beginning on July 6, 1995, the date
of Midcom's initial public offering, and ending on March 4, 1996 (the "Class
Period"). In April 1997, the Board of Directors of Midcom unanimously approved
the terms of a settlement of all claims against Midcom and all of the
individual
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defendants. The settlement, which is subject to Court approval and which
admits no liability or fault, provides for the payment of $1.0 million in cash
by Midcom's insurance carrier, and the issuance of approximately 420,000 shares
of Midcom's common stock, subject to adjustments depending upon the fair market
value of the stock on the date that the settlement is approved by the Court.
Midcom was informed in May 1996 that the SEC was conducting an
informal inquiry regarding Midcom. In May 1997, Midcom learned that a formal
order of investigation had been entered by the SEC. Midcom believes that the
focus of the investigation is on (i) the accuracy of disclosures in certain
documents filed by Midcom with the SEC; (ii) whether Midcom had maintained
adequate books and records and had adequate internal controls; and (iii)
whether records had been falsified. Midcom has voluntarily provided documents
requested by the SEC, is in the process of furnishing additional requested
documents, and has cooperated with the SEC in scheduling interviews with
certain former Midcom personnel. Midcom is unable to predict the ultimate
outcome of the investigation. Midcom and certain of its former employees could
be subject to civil or criminal sanctions including monetary penalties and
injunctive measures. If imposed on Midcom, such penalties and injunctive
measures could have a material adverse effect on Midcom's business, financial
condition and results of operation and, following consummation of the Midcom
Merger, the combined entity.
On August 19, 1996, Midcom was served with a complaint filed in the
U.S. District Court for the Eastern District of Michigan by Frontier
Corporation ("Frontier"). The complaint named as defendants Midcom and eleven
individuals, all of whom are former employees of Frontier who resigned their
positions with Frontier. Frontier has recently agreed to dismiss all of the
individual defendants in the case except William H. Oberlin, Midcom's President
and CEO and it dropped certain of its causes of action against Midcom. The
surviving claims are that: (i) Mr. Oberlin breached fiduciary duties as a
former employee and officer of Frontier and breached obligations under an
employment agreement with Frontier, (ii) Midcom is in violation of a
non-disclosure agreement between Frontier and Midcom by virtue of its alleged
use of confidential information of Frontier obtained through employees hired
from Frontier and otherwise; (iii) Midcom aided and abetted Mr. Oberlin's
alleged breaches of fiduciary duties and (iv) Midcom and Mr. Oberlin tortuously
interfered in Frontier's contractual relationships with various Frontier
employees and contractors. The complaint seeks: (i) that the defendants be
preliminary and permanently enjoined from breaching their respective agreements
with Frontier; (ii) that Midcom be enjoined from aiding and abetting certain
alleged breaches of fiduciary duties; (iii) an order that Midcom hold all
profits which it earns as a result of its hiring of the individual defendant
and other Frontier employees as constructive trustees for the benefit of
Frontier; (iv) an accounting of all profits realized by Midcom as a result of
its hiring of the defendant and other Frontier employees; (v) a declaratory
judgment on its various claims; (vi) damages in an unspecified amount; (vii)
Frontier's costs, including reasonable attorney's fees, incurred in bringing
the action; and (viii) other appropriate relief. Midcom has recently filed a
motion to dismiss the action and it awaits a hearing on this motion. Midcom
intends to continue to defend this action and seek dismissal of all remaining
claims.
An affiliate of Frontier has also filed a complaint in the same U.S.
Federal District Court claiming $515,000 for unpaid amounts under a supply
agreement. Midcom believes this claim to be without substantial merit and is
vigorously defending it. Frontier has filed a motion to transfer the case to
the FCC as a matter of primary jurisdiction. Midcom has filed a motion to
dismiss and it awaits a hearing on the matter and has opposed a transfer of the
case to the FCC because there is no technical issue that its present court is
not capable of answering.
In September and December 1995, Midcom purchased two significant
customer bases from Cherry Communications. The first transaction ("Cherry I")
provided for the purchase of long distance customer accounts having monthly
revenue for the three months preceding the date of closing of $2.0 million, net
of taxes, customer credits and bad debt. The second transaction ("Cherry II")
provided for the purchase of long distance customer accounts having monthly
revenue which were to average $2.0 million per month over the 12 months
following the transaction, net of taxes, customer credits and bad debt. The
purchase price payable with respect to Cherry I was a total of $10.5 million,
of which $5.5 million was paid in cash and the balance was paid by the delivery
of 317,460 shares of Midcom common stock (subject to a possible increase in
such number based on the future value of the Midcom common stock), of which
126, 984 shares are held in escrow to be applied to indemnify claims or to
cover shortfalls in revenue from the $2.0 million monthly average. The
purchase price for Cherry II was $18.0 million, of which $7.0 million has been
paid in
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cash. Additional installments of $3.4 million were due in February, March and
April of 1996, of which $400,000 of each installment was to be placed in an
escrow account for satisfaction of indemnity claims or to cover shortfalls in
revenue from the $2.0 million monthly average. The parties later agreed that
Midcom could pay up to $9.0 million of the Cherry II payments either in cash or
by delivery of shares of Midcom common stock. Separately, Midcom also agreed
to pay Cherry Communications for servicing customer accounts on behalf of
Midcom. The acquired customer bases have not generated the required minimum
revenue levels and Cherry Communications has failed to remit to Midcom
collections received by Cherry Communications from a portion of the acquired
customers. Accordingly, Midcom has withheld the final three installment
payments for Cherry II (a total of $9.0 million excluding escrowed sums),
payment of invoices for carrier service for the acquired basis (up to $11.0
million) and accrued customer service charges of $840,000. Negotiations
between Cherry Communications and Midcom failed to produce a settlement of
these disputes.
Cherry Communications filed a lawsuit against Midcom in the United
States District Court for the Northern District of Illinois, Eastern Division.
In its First Amended Complaint filed on July 18, 1996, Cherry Communications
seeks recovery of (i) approximately $7.2 million plus interest and attorneys'
fees alleged to be due and owing under a Rebiller/Reseller Agreement for
Switched Services between Cherry Communication and Midcom, (ii) approximately
$9.0 million plus interest and attorney's fees alleged to be due and owing
under the November 1, 1995 Customer Base Purchase and Sale Agreement between
Cherry Communications and Midcom (the "Cherry II Agreement"), and a Promissory
Note executed in connection with the Cherry II Agreement, (iii) customer
service charges of $840,000. It is the position of Midcom that Cherry
Communications has breached its obligations under the Cherry I Agreement and
the Cherry II Agreement by among other breaches (i) failing to sell MIDCOM
customer bases having the average monthly revenues required by the customer
base agreements, and (ii) failing to remit to MIDCOM monies collected from the
customer accounts. It is also the position of Midcom that, as a result of
Cherry Communication's breaches of the Cherry I Agreement and the Cherry II
Agreement, as amended by certain addenda, that Midcom has offsets and
counterclaims against Cherry Communications in excess of the sums it has
withheld from Cherry Communications. Midcom is attempting to negotiate a
resolution of the disputes. In the event that a settlement is not reached,
Midcom intends to vigorously defend the lawsuit filed by Cherry Communications.
However, Midcom is unable to predict the outcome of this lawsuit. As a result
of this litigation, as of September 1, 1996, Midcom discontinued booking
revenue generated by the customer bases purchased from Cherry Communications.
Discom Corporation ("Discom"), a former distributor of Midcom, in an
arbitration proceeding in New York against Midcom has filed to increase the
amount of its claim against Midcom to approximately $8.0 million purportedly
based upon a lost profit and damage analysis of its expert. Midcom has not yet
had an opportunity to depose Discom's expert, but preliminary indications are
that the evaluation is seriously flawed and that Midcom's own expert testimony
will more accurately reflect the maximum possible damage claim of $250,000 to
$500,000, which amount has been escrowed by Midcom. Midcom disputes that any
amounts are owed to Discom and it is vigorously defending the case.
Arbitration dates are scheduled in August, September and October 1997 with a
decision by the arbitration panel expected near year end.
Midcom is also party to other routine litigation incidental to its
business and to which its property is subject. Midcom's management believes
that the ultimate resolution of such matters will not have a material adverse
effect on Midcom's business, financial condition or results of operations.
Although Midcom intends to defend its existing litigation and other
disputes vigorously, it is unable to predict the nature or timing of any
resolution of such matters. If Midcom, or the combined entity following
consummation of the Midcom Merger, is determined to be liable for, or otherwise
agrees to settle or compromise, any claim, it would most likely be required to
make a payment in the form of cash, indebtedness or equity securities.
Depending on the size, type and timing of any such payment, it could materially
impair Midcom's (or the combined entity's) limited capital resources or
significantly dilute its stockholders. In addition, such litigation,
investigations and disputes could result in substantial legal costs to Midcom
and divert management's attention from the other business affairs of Midcom (or
the combined entity) for substantial periods of time.
The Midcom Merger is subject to numerous conditions precedent,
including the following:
15
<PAGE> 18
1. Midcom shall have raised and received at or before the closing
of the Midcom Merger at least $20 million of debt and/or equity capital on
terms reasonably acceptable to Phoenix and Midcom;
2. The average closing bid price per share of Midcom common stock
for the ten trading days prior to the closing shall not be less than $5.75 nor
more than $11.75;
3. Each of Phoenix and Midcom shall have obtained fairness
opinions prior to the closing of the Midcom Merger concluding that the Midcom
Merger is fair from a financial point of view to such party and its
stockholders; and
4. Regulatory and stockholder approvals, and other conditions set
forth in the definitive agreement governing the Midcom Merger.
MARKET OVERHANG. As part of this offering, the Selling Stockholders
may sell up to 4,500,000 Shares, which represents approximately 13% 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.
16
<PAGE> 19
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 $225,000 for these
Shares if JNC Opportunity Fund Ltd. ("JNC"), Wharton Capital Partners, Ltd.
("Wharton") and Keith A. Rhodes ("Rhodes") exercise their warrants to acquire
75,000, 30,000 and 7,500 Shares, respectively, at an exercise price of $2.00
per share. The proceeds, if any, from the exercise of the warrants will be
added to the Company's working capital. See "Selling Stockholders."
SELLING STOCKHOLDERS
JNC was issued 125,000 shares of the Company's Series I Convertible
Preferred Stock (the "Series I Preferred Stock")and a warrant to acquire 45,000
Shares on July 17, 1997 and a warrant to acquire 30,000 shares on July 23,
1997. Wharton received a warrant to acquire 19,000 Shares on July 17, 1997 and
a warrant to acquire 11,000 Shares on July 23, 1997 in partial payment of
financial advisory services to the Company. Rhodes received a warrant to
acquire 3,500 Shares on July 17, 1997 and a warrant to acquire 4,000 Shares on
July 23, 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 4,500,000 Shares being registered: (i) an estimated
4,387,500 Shares will be issuable to JNC, subject to certain
limitations, upon the conversion of 125,000 shares of Series I
Preferred Stock issued to JNC in a private placement; (ii) 75,000
Shares will be issuable to JNC, 30,000 Shares will be issuable to
Wharton and 7,500 Shares will be issuable to Rhodes upon the exercise
of warrants issued to JNC (the "JNC Warrant"), 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 I
Preferred Stock without partial redemption of the Series I 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 I
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 I Preferred Stock. The JNC Warrant, 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.
17
<PAGE> 20
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
September 3, 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 August 1, 1994.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER
SHARES BENEFICIALLY SHARES OFFERING(1)(2)
OWNED PRIOR TO BEING -----------------------------
NAME OFFERING(1) OFFERED(2) NUMBER PERCENT(3)
- ----- ------------------------- ---------- ------ ----------
<S> <C> <C> <C> <C>
JNC Opportunity Fund, Ltd. 5,509,229(4) 4,462,500 1,046,729 3.5%
Wharton Capital Partners, Ltd. 80,000(5) 30,000 30,000 0
Keith A. Rhodes 17,500(6) 7,500 7,500 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) Assumes the sale of all shares offered hereby.
(3) Applicable percentage of ownership is based on 29,852,678 shares of
Common Stock outstanding on September 8, 1997.
(4) Includes (i) an estimated maximum of 4,387,500 shares issuable upon
conversion of 125,000 shares of Series I Preferred Stock, (ii) 75,000
shares issuable upon exercise of the JNC Warrant and (iii) 1,046,729
shares issuable upon conversion of 56,000 shares of Series G
Preferred Stock.
The Company issued 125,000 shares of Series I Preferred Stock to JNC.
The Series I Preferred Stock 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 I 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 $1.875 and (ii) a 17% discount to
the average of the lowest five closing bid prices during the ten
trading days immediately preceding a conversion, subject to adjustment
under certain circumstances. In addition, all dividends payable with
regards to the Series I 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 I Preferred Stock
or in conversion of the Series I 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 July 17, 1997 (the
"Maximum Issuable Shares") upon conversion of the Series I 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 I 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.
JNC owns, as of September 3, 1997, 56,000 shares of Series G Preferred
Stock. The Series G Preferred Stock 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
18
<PAGE> 21
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 (i) 30,0000 shares issuable upon exercise of the Wharton
Warrant and (ii) 50,000 shares issuable upon exercise of a warrant
owned by Wharton.
(6) Represents (i) 7,500 shares issuable upon exercise of the Rhodes
Warrant and (ii) 10,000 shares issuable upon exercise of a warrant
owned by Rhodes.
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.
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.
19
<PAGE> 22
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.
20
<PAGE> 23
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
4,500,000 SHARES
PHOENIX NETWORK, INC.
COMMON STOCK
PROSPECTUS
SEPTEMBER 12, 1997
<PAGE> 24
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,435
Legal expenses* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Accounting fees and expenses* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Miscellaneous* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,435
</TABLE>
- -------------------------------
* Estimated
The Selling Stockholders will bear their own legal fees, sales
commissions and related sales expenses in connection with this offering, but
will not bear any of 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> 25
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> 26
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> 27
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 September 12,
1997.
PHOENIX NETWORK, INC.
By: /s/ Wallace M. Hammond
---------------------------------------
Wallace M. Hammond
President and Chief Executive Officer
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 September 12, 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> 28
<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
Director
- ------------------------------------------------
David Singleton
Director
- ------------------------------------------------
Max E. Thornhill
</TABLE>
- -----------
* Signed by Wallace M. Hammond pursuant to a power of attorney that was
previously filed.
By: /s/ Wallace M. Hammond
---------------------------------------------
Wallace M. Hammond
Attorney-in-fact
II-5
<PAGE> 29
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 July 17, 1997.
4.4 Registration Rights Agreement between the Registrant and JNC Opportunity Fund Ltd., dated as of July 17, 1997.
5.1 Opinion of Slivka Robinson Waters & O'Dorisio, P.C.
23.1 Consent of Slivka Robinson Waters & O'Dorisio, P.C. (contained in Exhibit 5.1)
23.2 Consent of Grant Thornton LLP
24.1 Power of Attorney*
</TABLE>
- ------------------------
* Previously filed.
II-6
<PAGE> 1
EXHIBIT 4.3
================================================================================
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
Between
PHOENIX NETWORK, INC.
and
JNC OPPORTUNITY FUND LTD.
------------------------------
July 17, 1997
------------------------------
================================================================================
<PAGE> 2
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, dated as of
July 17, 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 I Convertible
Preferred Stock, par value $.001 per share (the "Preferred Stock"), and certain
of the Company's common stock purchase warrants.
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 Dates" shall mean, collectively, the Initial Closing
Date and the Subsequent Closing Date.
<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.
"Encore" shall have the meaning set forth in Section
2.1(c)(i).
"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 F, 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.
"Foothill Facility" means the Amended and Restated Loan and
Security Agreement, dated as of September 26, 1995, between the Company,
Phoenix Network Acquisition Corp. and AmeriConnect, Inc. (as Borrowers) and
Foothill Capital Corporation, as amended, supplemented or otherwise modified in
accordance with its terms.
"Initial Closing" shall have the meaning set forth in Section
2.1(b).
"Initial Closing Date" shall have the meaning set forth in
Section 2.1(b).
"Initial Warrant" means the Common Stock purchase warrant to
be issued to the Purchaser at the Initial Closing, in the form of Exhibit E,
entitling the Purchaser to purchase up to 45,000 shares of Common Stock
(subject to adjustment as therein provided) in accordance with the terms
thereof.
"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).
-2-
<PAGE> 4
"Original Issue Date" shall mean the Initial Closing Date,
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.
"Purchaser" shall have the meaning set forth in the recitals
hereto.
"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.
"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.
"Subsequent Warrant" means the Common Stock purchase warrant
to be issued to the Purchaser at the Subsequent Closing, if any, in the form of
Exhibit E, entitling the Purchaser to purchase up to 30,000 shares of Common
Stock (subject to adjustment as therein provided) in accordance with the terms
thereof.
"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).
-3-
<PAGE> 5
"Underlying Shares" means the shares of Common Stock issuable
upon conversion of Shares and as payment of dividends thereon in accordance
with the terms hereof and the Certificate of Designation, and upon exercise of
the Warrants in accordance with the terms thereof.
"Underlying Shares Registration Statement" shall have the
meaning set forth in Section 3.1(f).
"Warrants" mean, collectively, the Initial Warrant and the
Subsequent Warrant.
ARTICLE II
PURCHASE OF SHARES
Section 2.1. Purchase of Shares; Closings.
(a) Subject to the terms and conditions set forth in this
Agreement, at the closings described below, the Company shall issue and sell to
the Purchaser, and the Purchaser shall purchase from the Company the 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.
(b)(i) The closing of the purchase and sale of 75,000 Shares
and the Initial Warrant (the "Initial 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 Initial Closing is
referred to herein as the "Initial Closing Date".
(ii) At the Initial 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 (A) to the Purchaser, (1) one or more stock certificates representing
75,000 Shares and the Initial Warrant to be purchased hereunder, each
registered in the name of the Purchaser, and (2) the legal opinion addressed to
it and dated the Initial Closing Date, of Slivka Robinson Waters & O'Dorisio,
P.C., counsel for the Company, substantially in the form of Exhibit C; (B) to
the Company, $1,500,000, 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
Initial Closing; and (iii) to the party entitled thereto, all documents,
instruments and writings required to have been delivered at or prior to the
Initial Closing by either the Company or the Purchaser pursuant to this
Agreement.
-4-
<PAGE> 6
(c)(i) The Purchaser and the Company agree that if a managed
account of Encore does not purchase 50,000 Shares from the Company on the
fourth Business Day after the Initial Closing Date, the Company will issue and
the Purchaser will purchase 50,000 Shares and the Subsequent Warrant at a
closing (the "Subsequent Closing") to occur on such fourth Business Day at the
offices of the Escrow Agent, 1290 Avenue of the Americas, New York, New York
10104, or at such other time and/or place as the Purchaser and the Company may
agree. The date of the Subsequent Closing is referred to herein as the
"Subsequent Closing Date". If such managed account timely purchases such
Shares, neither the Company nor the Purchaser shall have any obligation to the
other in respect of a Subsequent Closing.
(ii) At the Subsequent Closing (if any under the
terms hereof), 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 (A) to the Purchaser, (1) one or more stock
certificates representing 50,000 Shares and the Subsequent Warrant to be
purchased hereunder, each registered in the name of the Purchaser, and (2) the
legal opinion addressed to it and dated the Subsequent Closing Date, of Slivka
Robinson Waters & O'Dorisio, P.C., counsel for the Company, substantially in
the form of Exhibit C; (B) to the Company, $1,000,000, 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 Subsequent Closing; and (C) to the party
entitled thereto, all documents, instruments and writings required to have been
delivered at or prior to the Subsequent 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 of the date
hereof and as of each of the Closing Dates 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
-5-
<PAGE> 7
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 this Agreement, the Registration Rights Agreement, the Escrow
Agreement, the Warrants or the Certificate of Designation (collectively, 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").
(b) Authorization; Enforcement. The Company has the
requisite corporate power and authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and to otherwise carry
out its obligations 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 and the Warrants 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, Warrants and Underlying Shares.
The Shares and the Warrants have been duly authorized and, when paid for in
accordance with the terms
-6-
<PAGE> 8
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 or the
Warrants are outstanding will maintain a reserve of shares of Common Stock to
enable it to perform its conversion, exercise and other obligations under this
Agreement, the Certificate of Designation and the Warrants, which reserve shall
be no less than the sum of (i) twice the number of Underlying Shares as are
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, (ii) such number of Underlying Shares as are issuable as payment of
dividends on account of the Shares and (iii) such number of Underlying Shares
as are issuable upon the exercise in full of the Warrants. When issued in
accordance with the terms hereof, the Certificate of Designation and the
Warrants, the Underlying Shares will have been duly authorized, validly issued,
fully paid and nonassessable, and free and clear of any Liens.
(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 Initial 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,
-7-
<PAGE> 9
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, Warrants 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 (other than such
violations of the Foothill Facility as have been waived in writing, true and
complete copies of which have been delivered to the Purchaser) any indenture,
loan or credit agreement or any other agreement or 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. ("Wharton") 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. The
Company shall indemnify and hold harmless the Purchaser, its employees,
officers, directors, agents, and partners, and their respective Affiliates (as
such term is defined under Rule 405 promulgated under the Securities Act), from
and against all claims, losses, damages, costs (including the costs of
preparation and attorney's fees) and expenses suffered in respect of any such
claimed or existing fees.
(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,
the Warrants or the Underlying Shares under the Securities Act) which might
subject the offering, issuance or sale of the Shares, the Warrants 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
-8-
<PAGE> 10
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 June 18, 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.
(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 each of
the Closing Dates 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. 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
-9-
<PAGE> 11
quoted) to the effect that the Company is not in compliance with the listing or
maintenance requirements of such exchange or market.
Section 3.2. Representations and Warranties of the Purchaser.
The Purchaser hereby represents and warrants to the Company as of the date
hereof and as of each of the Closing Dates 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 and the Warrants 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, the Warrants 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, Warrants 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 part of such Shares,
Warrants 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 and the Warrants, 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 each
of the Closing Dates, 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 the
Warrants, and has so evaluated the merits and risks of such investment.
-10-
<PAGE> 12
(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
the Warrants and, at the present time, is able to afford a complete loss of
such investment.
(f) Prohibited Transactions. Neither Shares nor the
Warrants are 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 Warrants 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 and the Warrants.
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 and the Warrants 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.
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 or any portion of the Warrants
(and upon conversion or exercise (as the case may be) 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
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<PAGE> 13
thereof. In connection with any transfer of any of the Shares, any portion of
the Warrants or the Underlying Shares other than pursuant to an effective
registration statement or to the Company, the Company may require the
transferor thereof 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, Warrants 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, Warrants or Underlying Shares:
[NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] [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.
[For Shares only] 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 JULY
17, 1997 BETWEEN PHOENIX NETWORK, INC. (THE "COMPANY") AND THE
ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF THE COMPANY.
The Underlying Shares issuable upon conversion of Shares or
exercise of Warrants (as the case may be) shall not contain the legend set
forth above if such conversion or exercise 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, the Warrants 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
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<PAGE> 14
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 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 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 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 (with respect to the Shares) a notice of conversion or
(with respect to the Warrants) form of election to purchase were to be
delivered on such date, precluded from converting at least 135% of the full
number of Shares that remain unconverted, or from exercising each entire
Warrant, 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 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.
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<PAGE> 15
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 any Shares,
the Warrants 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, the Warrants or
the Underlying Shares in a manner that would require the registration under the
Securities Act of the sale of the Shares, the Warrants 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, the Warrants or Underlying Shares and any amendments and
supplements thereto prepared in compliance herewith or (ii) solicit any offer
to buy or sell the Shares, the Warrants 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 the later to occur of the Initial Closing Date or the Subsequent
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 Encore 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
-14-
<PAGE> 16
effected, and an executed term sheet or similar document relating thereto shall
be attached to such Subsequent Financing Notice and (B) Encore 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
designate the Purchaser or another fund managed by Encore to provide financing
to the Company on substantially the terms set forth in the Subsequent Financing
Notice and to cause such managed fund to provide such Subsequent Financing
within 20 Business Days after its receipt of the Subsequent Financing Notice,
subject to completion of mutually satisfactory final documentation for such
Subsequent Financing. If Encore 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 Encore with a second Subsequent
Financing Notice, and Encore 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.
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
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<PAGE> 17
\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 Initial 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 2,600,000
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. If at any time within the three-year period after
the last to occur of the Initial Closing Date or Subsequent Closing Date, if
any, 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 Purchaser 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.
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<PAGE> 18
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 any Transaction
Document, as well as any events or occurrences arising after the date hereof
and prior to the Subsequent 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 therein to be incorrect or breached as of the Subsequent
Closing Date. However, no disclosure by either party pursuant to this Section
shall be deemed to cure any breach of any such representation, warranty or
other 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 in the Transaction Documents inaccurate in any respect at either the
Initial Closing Date or the Subsequent 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
and exercise of the Warrants, including any forms of conversion and or exercise
notice to be provided upon conversion or exercise, as the case may be,
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 rights of conversion and exercise smoothly and
expeditiously, which are not otherwise specified in this Agreement, the Shares
or the Warrants.
Section 4.17. Conversion and Exercise Obligations of the
Company. The Company covenants to honor conversions of the Shares and
exercises of the Warrants, and to
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<PAGE> 19
deliver Underlying Shares, each in accordance with the terms and conditions and
time periods set forth in the Certificate of Designation and the Warrants.
Section 4.18. Use of Proceeds. The Company shall use all of
the net proceeds from the placement of the securities offered hereby for
working capital purposes and not for the satisfaction of any portion of Company
debt (other than under the Foothill Facility) or to redeem any Company equity
or equity-equivalent securities. Pending their permitted application, the
Company will invest such proceeds in interest bearing accounts and short-term,
interest bearing securities.
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 the Warrants (and upon conversion or exercise 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), the Warrants and
that certain letter agreement between the Company and the Purchaser, dated the
date hereof and relating to the Foothill Facility, 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.
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<PAGE> 20
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.
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
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<PAGE> 21
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 without the prior written
consent of the other, except that the Purchaser may assign its rights under any
Transaction Document 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 the rights
specified under Section 4.9, which are intended for the benefit of, and may be
enforced by, Encore, and other than 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 Dates (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.
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<PAGE> 22
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 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]
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<PAGE> 23
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/ Wallace M. Hammond
----------------------------------
Name: Wallace M. Hammond
Title: President and CEO
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 July 17, 1997, between Phoenix Network, Inc., a Delaware
corporation (the "Company"), JNC Opportunity Fund Ltd., a Cayman Islands
corporation ("JNC"), and such other mutually acceptable parties signatory
hereto (such other parties, together with JNC, the "Purchasers").
This Agreement is made pursuant to the Convertible Preferred
Stock Purchase Agreement, dated as of the date hereof between the Company and
JNC (as amended, supplemented, restated or otherwise modified in accordance
with its terms, the "Purchase Agreement").
The Company and the Purchasers 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.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value
$.001 per share.
"Effectiveness Date" means the 75th day after the Initial
Closing Date.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
<PAGE> 2
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Filing Date" means the 30th day after the Initial Closing
Date.
"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).
"Initial Closing Date" shall have the meaning set forth in the
Purchase Agreement.
"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 I Convertible
Preferred Stock, par value $.001 per share, of the Company issued to the
Purchasers 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 the Purchasers, 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
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issuable upon conversion of shares of Preferred Stock is determined in part
upon the market price of the 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 Initial Closing Date
(assuming all shares of Preferred Stock were issued on the Initial 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 for such number of shares of Common Stock so that the
aggregate number of Registrable Securities then registered covers twice the
number of shares of Common Stock as would be issuable upon conversion in full
of the total number of shares of Preferred Stock then outstanding. 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.
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"Special Counsel" means any special counsel to the Holders,
for which the Holders will be reimbursed by the Company pursuant to Section 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 five 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.
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<PAGE> 5
(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 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
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<PAGE> 6
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 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.
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<PAGE> 7
(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 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
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<PAGE> 8
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.
(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
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<PAGE> 9
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 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
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<PAGE> 10
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.
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) such 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(b), 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
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(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 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.
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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
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<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
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<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), a Purchaser
shall not be required to contribute, in the aggregate, any amount in excess of
the amount by which the proceeds actually received by such Purchaser from the
sale of the Registrable Securities subject to the Proceeding exceeds the amount
of any damages that such 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.
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<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
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<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. 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.
(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.
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<PAGE> 17
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
- 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
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<PAGE> 18
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. A Purchaser may assign its rights hereunder in the
manner and to the Persons as permitted under the Purchase Agreement and as
permitted in Section 7(h).
(h) Assignment of Registration Rights. The rights of the
Holders hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by the Holders to any assignee or transferee of all or
a portion of the shares of Preferred Stock, the Warrants or the Registrable
Securities if: (i) the Holders agree in writing with the transferee or assignee
to assign such rights, and a copy of such agreement is furnished to the Company
within a reasonable time after such assignment, (ii) the Company is, within a
reasonable time after such transfer or assignment, furnished with written
notice of (a) the name and address of such transferee or assignee, and (b) the
securities with respect to such registration rights are being transferred or
assigned, (iii) following such transfer or assignment the further disposition
of such securities by the transferee or assignees restricted under the
Securities Act and applicable state securities laws, (iv) at or before the time
the Company receives the written notice contemplated by clause (ii) of this
Section, the transferee or assignee agrees in writing with the Company to be
bound by all of the provisions of this Agreement, and (v) such transfer shall
have been made in accordance with the applicable requirements of the Purchase
Agreement. The rights to assignment shall apply to the Holders' (and to
subsequent) successors and assigns.
(i) 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.
(j) 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.
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<PAGE> 19
(k) Cumulative Remedies. The remedies provided herein
are cumulative and not exclusive of any remedies provided by law.
(l) 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 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.
(m) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(n) 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 Purchasers 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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
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<PAGE> 20
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
PHOENIX NETWORK, INC.
By: /s/ Wallace M. Hammond
---------------------------------------
Name: Wallace M. Hammond
Title: President and CEO
JNC OPPORTUNITY FUND LTD.
By: /s/ Philip C. Pedro
----------------------------------------
Name: Philip C. Pedro
Title: Secretary
<PAGE> 1
EXHIBIT 5.1
[SLIVKA ROBINSON WATERS & O'DORISIO LETTERHEAD]
------------------
September 12, 1997
Phoenix Network, Inc.
1687 Cole Boulevard
Golden, CO 80401
Re: Registration Statement on Form S-3, File No. 333-33091
Ladies and Gentlemen:
We have acted as counsel to Phoenix Network, Inc., a Delaware
corporation (the "Corporation"), in connection with the preparation and filing
of the Registration Statement on Form S-3, File No. 333-33091, with the United
States Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Registration Statement"), pertaining to the registration by the
Corporation of shares (the "Shares") of its Common Stock (the "Common Stock"),
par value $.001 per share, described on the cover page of such Registration
Statement. Terms not otherwise defined herein shall have the same meaning
ascribed to them in the Registration Statement or the Accord (hereinafter
defined).
This Opinion Letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of
Business Law (1991). As a consequence, it is subject to a number of
qualifications, exceptions, definitions, limitations on coverage and other
limitations, all as more particularly described in the Accord, and this Opinion
Letter is subject to and should be read in conjunction therewith. The law
covered by the opinions expressed herein is limited to the Laws of the State of
Delaware for the limited purpose of the organization, power and authority of
corporations and the Laws of the State of Colorado and the United States of
America. In addition, as to any facts material to this opinion, we have
relied, among other sources listed in the Accord, on factual representations
made by the Corporation in the Registration Statement.
Based on the foregoing, we are of the opinion that:
1. The Corporation (a) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and (b)
has requisite corporate power and authority to carry on its business as
described in the Registration Statement.
<PAGE> 2
Phoenix Network, Inc.
September 12, 1997
Page 2
2. The shares of Common Stock to be issued pursuant to the
Wharton Warrant, the Rhodes Warrant, the JNC Warrant and the Series I Preferred
Stock have been duly and validly authorized for issuance and, when delivered by
authorized officers of the Corporation pursuant to the Wharton Warrant, the
Rhodes Warrant, the JNC Warrant and the Series I Preferred Stock, such shares
will be validly issued, fully paid and non-assessable. The shares of Series I
Preferred Stock currently outstanding have been duly and validly issued to JNC
and such shares are fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the section
entitled "Legal Matters" in the Registration Statement.
The opinions set forth above are subject to the General Qualifications
and are provided to you and may be relied upon by you only in connection with
the Registration Statement and as legal opinions only and not as a guarantee or
warranty of the matters discussed herein.
This opinion is furnished to you in connection with the filing of the
Registration Statement and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose.
Very truly yours,
/s/ Slivka Robinson Waters & O'Dorisio, P.C.
SLIVKA ROBINSON WATERS & O'DORISIO, P.C.
<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 as amended on Form 10-K/A. 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 Form S-3/A
Registration Statement (File No. 333-33091) 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
September 11, 1997
