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RULE NO. 424 (b) (3)
REGISTRATION NO. 333-20923
PROSPECTUS SUPPLEMENT
(To Prospectus Dated February 12, 1997)
1,590,833 SHARES
PHOENIX NETWORK, INC.
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
THE COMPANY
RECENT DEVELOPMENTS
Phoenix Network, Inc. ("Phoenix" or the "Company") has entered into a
letter of intent, dated April 21, 1997, to merge with US ONE Communications
Corp. (collectively with its subsidiaries, "US One"), with the Company as the
surviving entity. See the Company's Current Report on Form 8-K, as filed with
the SEC on April 25, 1997, which is incorporated in the Prospectus and herein
by reference. As a result, the Company is providing this Prospectus Supplement
which, in addition to the information provided above, presents updated and
supplemented Risk Factors which supersede and replace the Risk Factors included
in the Prospectus dated February 12, 1997.
RISK FACTORS
In evaluating Phoenix's business, prospective investors should consider
carefully the following risk factors in addition to the other information
contained or incorporated by reference in this Prospectus.
This Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below as
well as those discussed in reports filed with the SEC by Phoenix.
Negative Cash Flow From Operations. For the years ended December 31,
1995 and 1996, the Company's consolidated loss before interest expense, income
taxes, depreciation and amortization, loss on abandonment of fixed assets,
aborted bond offering expenses and relocation expense was $148,000 and $5.1
million, respectively. The Company's ability to achieve positive cash flow
from operations will be dependent primarily upon the successful implementation
of the Company's business strategy, which relies largely upon the Company's
ability to increase cash flow through acquisitions and decrease average line
costs through deployment and loading of a nation-wide long distance network
system (the "Network"), consisting of switching equipment in major metropolitan
areas and transmission facilities between these switches. Other factors which
are beyond the control of the Company, such as the future actions of
competitors and regulators, may also affect the Company's realization of the
benefits of its business strategy. There can be no assurance that the Company
will be successful in improving its cash flow.
History of Operating Losses. Phoenix sustained operating losses of $1.9
million, $1.4 million and $12.3 million in the years ended December 31, 1993,
1995 and 1996, respectively, and operating income of only $2,000 for the year
ended December 31, 1994. Phoenix expects to continue to incur operating losses
for the foreseeable future due to the high amortization of goodwill charges
resulting from acquisitions and other factors. To finance its operations,
Phoenix has a line of credit facility of up to $10.0 million under the Amended
and Restated Loan and Security Agreement with Foothill Capital Corporation (the
"Credit Facility") and may incur additional indebtedness from time to time
subject to restrictions in the Credit Facility. If Phoenix cannot achieve
operating profitability, it may have difficulty in attracting equity capital or
other financing, and the value of its Common Stock may be adversely affected,
which may limit the ability of Phoenix to use its Common Stock to make future
acquisitions. This, in turn, could negatively affect Phoenix's ability to
successfully implement its business strategy.
Possible Volatility of Stock Price. The market price of Phoenix's
Common Stock has, in the past, fluctuated substantially over time and may in
the future be highly volatile. Factors such as the announcements of rate
changes for various carriers and/or vendors, including US One and Comdisco
Network Services, a division of Comdisco, Inc.
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("Comdisco"), technological innovation or new products or service offerings by
Phoenix or its competitors, as well as market conditions in the
telecommunications industry generally and variations in Phoenix's operating
results, could cause the market price of Phoenix's Common Stock to fluctuate
substantially. Because the public float for Phoenix's Common Stock is small,
additional volatility may be experienced.
Substantial Leverage. The Company may incur up to $10.0 million of
indebtedness under the Credit Facility and may incur additional indebtedness
from time to time subject to restrictions in the Credit Facility. The level of
the Company's indebtedness could have adverse consequences, including the
effect of such indebtedness on (i) the Company's ability to fund internally, or
obtain additional debt or equity financing in the future for, acquisitions,
working capital, operating losses, capital expenditures and other purposes;
(ii) the Company's flexibility in planning for or reacting to changes in its
business and market conditions; (iii) the Company's flexibility to compete with
less highly leveraged competitors, particularly in the area of price
competition and (iv) the Company's financial vulnerability in the event of a
downturn in its business or the general economy.
The Company's ability to satisfy its debt obligations will depend upon
its future operating performance, which will be affected by the successful
implementation of its business strategy and financial, business and other
factors, certain of which are beyond its control. If the Company's cash flow
and capital resources are insufficient to fund its debt service obligations,
the Company may be required to sell assets, obtain additional equity capital,
restructure its debt and/or reduce or delay capital expenditures. In such
event, the Company could face substantial liquidity problems, and there can be
no assurance as to the success of such measures or the proceeds which the
Company could realize therefrom.
Competition. The telecommunications services industry is highly
competitive and is significantly influenced by the marketing and pricing
decisions of the larger industry participants. It is characterized by low
barriers to entry (e.g., the major facilities-based carriers' bulk rate tariffs
are available to a wide range of potential market entrants), intense
competition for customers and high customer churn rates. Competition on the
basis of price, service offerings, and customer service is expected to increase
in the future.
Furthermore, the Telecommunications Act of 1996 (the "1996 Act") can be
expected to increase competition in the domestic long distance market as the
Regional Bell Operating Companies ("RBOCs") begin providing both in-region and
out-of-region long distance service. The RBOCs may build their own national
networks, resell telecommunications services of others, lease facilities from
others or acquire smaller domestic long distance service providers. To the
extent that the RBOCs enter the domestic long distance market by acquiring
other long distance providers, the domestic long distance service industry may
consolidate.
Certain of Phoenix's competitors are significantly larger, have
substantially greater financial, technical and marketing resources and larger
networks than Phoenix, control transmission lines and have long-standing
relationships with Phoenix's target customers. Phoenix competes with the same
facilities-based carriers from whom Phoenix procures bulk-rate services.
Certain of Phoenix's competitors are able to provide services comparable to or
more extensive than Phoenix's at rates competitive with Phoenix's rates.
Additionally, Phoenix's strategy of deploying and loading a network can be
replicated by some of its competitors.
Phoenix competes with the principal long distance carriers, AT&T
Corporation ("AT&T"), MCI Communications Corp. ("MCI"), and Sprint Corporation
("Sprint") as well as with other major providers of long distance services,
including Frontier Communications (a subsidiary of Frontier Corporation), and
LDDS/WorldCom, Inc. and its subsidiaries, including WilTel ("LDDS/WorldCom").
Additionally, as a result of Congress' recent enactment of the 1996 Act, the
nation's largest local telephone companies (i.e., the RBOCs) and the General
Telephone and Electronics operating companies (collectively "GTE"), energy
utilities, cable television companies, competitive local exchange carriers
("CLECs") such as MFS Communications Company, Inc., and other entities will
also be allowed to provide long distance service in the near future subject to
various regulatory requirements and safeguards. An increase in such
competition could have a material adverse effect on Phoenix's business,
financial condition and results of operations, including higher customer
attrition.
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There can be no assurance that Phoenix will be able to compete
successfully in the future. Phoenix intends to compete in the long distance
market and in the local market on the basis of price, service offerings and
customer service. Phoenix's ability to compete on the basis of price is
dependent on its ability to implement its Network and secure volume-discount
pricing from vendor carriers and wholesale local access and local dial tone
providers. The same volume-discount pricing that Phoenix utilizes is available
to current and potential competitors, and current and potential competitors
could lease or build networks in order to lower line costs. Phoenix does not
have proprietary contractual arrangements in this regard. As a result, there
are no substantial barriers to the entry of additional competitors into the
field. Furthermore, to the extent such competitors acquire or develop
facilities-based long distance and/or local dial tone networks, such
competitors may be able to offer rates as low as or lower than those available
from Phoenix.
Phoenix's competitors may reduce rates or offer incentives to existing
and potential customers of Phoenix, whether caused by general competitive
pressures or the entry of the RBOCs, GTE and other local exchange carriers
("LECs") into the long distance market. Phoenix has historically attracted
customers by pricing its services at a discount to the basic "1 plus" rates
offered by AT&T, MCI and Sprint. These and other large long distance providers
are offering an increasing number of flat rate and other rate plans in addition
to basic service, and these plans are likely to result in a reduction in the
number of long distance customers using basic "1 plus" rates. Because Phoenix
believes that to maintain its competitive position it must be able to reduce
its prices in order to maintain its relative price position in the market, a
decrease in the rates charged by others for long distance services could have a
material adverse effect on Phoenix's business, results of operations and
financial condition.
In addition, in certain instances LECs have been afforded a degree of
pricing flexibility in differentiating among markets and carriers in setting
access charges and other rates in areas where adequate competition has emerged.
As LECs become free to set rates and to provide discounts to high-volume
customers, the ability of competitors that are substantially larger than
Phoenix to obtain volume discounts for access and termination charges could
adversely affect Phoenix by reducing the operating costs of its larger
competitors relative to those of Phoenix. In particular, it is expected that
the largest players in the long distance market, such as AT&T, MCI, Sprint and
LDDS/WorldCom will be able to guarantee substantially larger volumes to LECs
than will Phoenix. As deregulation of the local exchange market occurs, LECs
may be willing to grant large interexchange carriers ("IXCs") significant
discounts in return for guarantees of volume. There can be no assurance that
Phoenix will be able to obtain similar discounts.
Phoenix intends to commence offering local dial tone service in 1997.
Phoenix expects to face intense competition from the RBOCs, which are the
principal current providers of local dial tone services, and from other
telecommunications services providers, including other long distance providers,
who may also enter the market.
Possible Merger with US One; Need for Additional Capital. Phoenix has
entered into a letter of intent to merge with US One, with Phoenix as the
surviving entity. See the Company's Current Report on Form 8-K, as filed with
the SEC on April 25, 1997, and the exhibits thereto. Stockholders of Phoenix
prior to the merger with US One (the "Merger") would own approximately 50% of
the surviving entity following the Merger. Accordingly, stockholders of
Phoenix would experience substantial dilution as to percentage ownership of the
surviving entity and may experience dilution as to share value.
The Merger, if consummated, will represent a strategic shift for the
Company, as the Company's Network would then consist primarily of owned
switches (most of which would be acquired in the Merger) and leased
transmission facilities. Originally, the Company had intended to deploy the
Network relying primarily on switching equipment leased from US One, together
with leased transmission facilities. Further, the Company presently
anticipates that, following the Merger, it may resell on a limited basis
wholesale long distance and local dial tone products in addition to offering
its own retail products. There can be no assurance that the Merger will be
consummated, or that US One can be effectively and profitably integrated into
Phoenix.
Owning US One's switches, proprietary software and other assets would
substantially increase the Company's need for capital. To raise additional
required capital and to fund expenses of the Merger, Phoenix may incur
additional indebtedness to banks and other financial institutions and may
issue, in public or private transactions, equity and debt
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securities. If additional funds are raised by issuing equity securities,
additional dilution to Phoenix stockholders may result. The availability and
terms of any such financing will depend on market and other conditions, and
there can be no assurance that the Company will be able to generate or raise
sufficient capital on terms acceptable to it to enable the Company to implement
its post-Merger business plan or pursue additional revenue opportunities.
Furthermore, consummation of the Merger would subject the Company and
its stockholders to substantial additional risk factors associated with the
operation of US One's businesses and the implementation of US One's business
strategy. Although the Merger is intended to enhance Phoenix's long-term
profitability, the Merger may negatively impact Phoenix's operating results,
particularly during the periods immediately following consummation thereof.
US One was founded in 1994 and has no significant operating history.
Therefore, investors have limited financial information upon which to base an
evaluation of US One, and consequently, the Merger. Additionally, US One is
subject to all the risks inherent in the establishment of a new business
enterprise. US One, and the Company following the Merger, intend to use
untested approaches to market positioning in the telecommunications industry
and new configurations of existing technologies. There can be no assurance
that such approaches will be effective or that such configurations will
function as anticipated.
Possible Acquisitions; Need for Additional Capital. As part of its
growth strategy, Phoenix intends to pursue acquisitions of companies that could
add profitable products or customer bases. With respect to any future
acquisition, there can be no assurance that Phoenix will be able to locate or
acquire suitable acquisition candidates, or that any companies or customer
bases which are acquired can be effectively and profitably integrated into
Phoenix. The success of Phoenix's acquisition strategy is dependent on a
number of factors, many of which are not in Phoenix's control, including (i)
Phoenix's ability to identify attractive acquisition candidates; (ii) Phoenix's
ability to negotiate terms for such acquisitions that are favorable to Phoenix;
(iii) the timely completion of any agreed upon acquisitions; (iv) the
successful integration of the acquired businesses into Phoenix's existing
business; and (v) the ability of Phoenix to retain the acquired customers and
sales personnel after completion of the acquisition. The ability of Phoenix to
transmit the long distance calls of customers of acquired businesses on
Phoenix's Network may be affected by the terms of existing agreements of such
acquired businesses with facilities-based carriers, which could limit the
economic benefit of the migration of this traffic volume to the Network while
such agreements are in effect. While Phoenix believes it can acquire companies
at favorable prices, there can be no assurance that Phoenix will be able to do
so or that intense competition for such companies will not develop among
certain of Phoenix's competitors. Additionally, although acquisitions will be
made with the intent of enhancing Phoenix's long-term profitability, they may
negatively impact Phoenix's operating results, particularly during the periods
immediately following the acquisition. To fund acquisitions, Phoenix may incur
additional indebtedness to banks and other financial institutions and may
issue, in public or private transactions, equity and debt securities. If
additional funds are raised by issuing equity securities, substantial dilution
to Phoenix stockholders may result. The availability and terms of any such
financing will depend on market and other conditions, and there can be no
assurance that such additional financing will be available on terms acceptable
to Phoenix, if at all.
Need to Successfully Integrate Mergers and Acquisitions. Phoenix must
be able to rapidly and effectively integrate the businesses of merged and
acquired ("acquired") companies with its own in order to successfully implement
its business strategy. The successful integration of acquired businesses is
dependent on a number of factors, including minimizing the costs of
assimilating the operations and personnel of the acquired business with
Phoenix's, minimizing customer attrition following the acquisition, avoiding
disruption of Phoenix's ongoing business, including the distraction of
management from day-to-day operations, maximizing the potential of any acquired
products or services, eliminating duplicative costs and maintaining uniform
standards, controls, procedures and policies. Phoenix will be required to
assess and manage the obligations of acquired companies, including contingent
liabilities which may be difficult to quantify. The management information
systems ("MIS systems"), including the billing systems, of the acquired
companies may be different from those of Phoenix's, may be subject to existing
contracts with third party providers and typically must be integrated into
Phoenix's. To the extent Phoenix acquires businesses in which its management
has no prior experience, Phoenix may be dependent on the management of the
acquired business.
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Management of Rapid Growth. Phoenix's strategy to merge with US One and
to grow through additional acquisitions and enter new markets will place
additional demands upon Phoenix's management and its customer service, sales,
marketing and administrative resources. The growth of Phoenix will result in
an increased level of responsibility for both existing and new management
personnel. Phoenix will be required to implement and improve its operating and
financial systems and controls and to attract, retain, train and manage new
employees. Phoenix's management will be required to manage the day-to-day
operations of Phoenix's current long distance service and, if the Merger is
consummated, of US One's current businesses, while pursuing possible
acquisitions and developing and introducing new products and services. If
Phoenix is unable to meet the demands of expected growth, its operations and
financial condition could be materially adversely affected.
Ability to Successfully Implement New Billing and Customer Care
Platform. Primarily as a result of previous acquisitions, Phoenix currently
uses seven distinct billing systems. In addition, it is likely that any
businesses acquired pursuant to Phoenix's acquisition strategy will also have
partially or completely distinct billing systems. Phoenix is in the process of
implementing a new billing and customer care platform (the "New Billing and
Customer Care Platform") to replace the existing billing systems, and
expenditures to complete the migration to the New Billing and Customer Care
Platform are expected to be approximately $1.0 million in 1997. The New
Billing and Customer Care Platform is fully installed and in the process of
being tested. Certain of Phoenix's customers are presently receiving their
bills from the New Billing and Customer Care Platform, and the rest of
Phoenix's customers are expected to be phased onto the New Billing and Customer
Care Platform during 1997. There can be no assurance that the New Billing and
Customer Care Platform will be fully operational when anticipated or will
operate as expected, and any difficulties in operating the New Billing and
Customer Care Platform or integrating MIS systems could adversely affect
Phoenix's ability to generate timely billing information and management
reports.
Dependence on Independent Distributors. Like many other companies in
the telecommunications industry, Phoenix relies on independent distributors for
a significant percentage of its new business sales. While Phoenix devotes
significant resources on training and building relationships with these
distributors, they are independent contractors who, in some instances, also do
business with other telecommunications providers. Phoenix has only a limited
degree of control over the operations of these distributors and adherence by
the distributors to Company policies and procedures.
Reliance on Switching Service Providers; Risks Associated with Network
Deployment. A key component of Phoenix's business strategy has been to lower
its line costs by deploying and loading the Network as an alternative to
purchasing bulk capacity from facilities-based carriers on a bundled basis. If
the Merger is consummated, Phoenix will own most or all of the switching
equipment necessary to fulfill its switching needs, and the Network will
include such owned switches. Until the Merger is consummated, and for the
foreseeable future if the Merger is not consummated, Phoenix will be reliant on
switching service providers to lease switching capacity to the Company.
Phoenix has entered into agreements with US One and another company for the use
of their long distance switches, only some of which have been deployed to date.
In order to maximize the benefits of its Network strategy, Phoenix needs
to maximize the amount of long distance calls transmitted on its Network and
decrease the amount of long distance calls transmitted on the networks of
third-party carriers. Management of Phoenix has estimated, without third party
confirmation, that substantial cost savings can be achieved as a result of
moving call traffic onto the Network (i.e., routed by at least one Company-
controlled switch) ("On-Network") from being handled solely by third-party
carriers off of the Network ("Off-Network"). Management's estimates make
certain assumptions as to general industry and business conditions, many of
which are beyond the control of Phoenix. There can be no assurance that such
cost savings will be realized or that unforeseen costs and expenses or other
factors will not offset the cost savings in whole or in part.
Moreover, if the Merger is consummated, Phoenix's line costs will be
dependent on the total volume of traffic it is able to place on the Network, as
the operating costs of the Network will be charged based upon the Company's
minutes of use. If the Company is not able to generate sufficient traffic
volume, either internally or through resale of wholesale products, the
Company's operating results and competitive position may deteriorate. There
can be no assurance that the Company will be able to adequately load the
Network to achieve the anticipated cost savings.
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Historically, Phoenix has provided long distance services to small
businesses by purchasing bulk-rate capacity from third-party carriers and
transmitting its customers' long distance calls over those carriers' networks.
The success of Phoenix's strategy of deploying its own Network will be
dependent on the ability of management of Phoenix to deploy and load the
Network. Phoenix has had more than eight years of experience in operating
owned switches, but, prior to July 1996, Phoenix had no previous experience in
operating switches such as those being deployed by US One, either on a leased
or owned basis. Under the Company's agreement with US One, US One is obligated
to supply Phoenix with network design engineering assistance and consultation,
but this obligation terminates in April 1998.
Phoenix's Network strategy is based upon third-party agreements with
Comdisco and, until the Merger is consummated, and if the Merger is not
consummated, with US One.
As of April 25, 1997, US One had installed eight switches over which the
Company is transmitting call traffic. Recently, US One has sought investors or
strategic partners to provide capital to complete the build-out of its national
switching and local dial tone service facilities. In order to conserve cash
and focus on its immediate strategic goal of implementing local dial tone
service, US One recently reduced its work force.
If the Merger is not consummated, or if the Company is not able to raise
additional operating capital following the Merger, the Company may be unable to
secure switching services at attractive prices in the markets in which such
services would be most beneficial to it, and the Company may be forced to delay
implementation of, or to modify, its Network strategy. There can be no
assurance that the Company will be able to secure switching services at
attractive prices in additional markets, or that the Company will be able to
accomplish its Network strategy so as to achieve the anticipated benefits
therefrom.
Further, US One experienced service difficulties in the initial phase of
the service cut over coincident with the transfer of long distance traffic from
Phoenix's switch to US One's switch in Denver. US One has stated that these
service difficulties arose principally as a result of US One's use of a newly
designed switch configuration and newly designed software. Because Phoenix's
long distance traffic originating in Denver could not be transferred in phases
to the US One switch, all of Phoenix's long distance traffic originating in
Denver had to be transferred all at once from Phoenix's Colorado Springs
switch to the US One Denver switch. In the two months following the cut over,
Phoenix lost approximately 14% of its customers in the Denver area, which
included both regular attrition and cut over-related difficulties. On the
basis of subsequent switch implementations by US One, the Company believes
that the risks of future service difficulties similar to those encountered with
the Denver switch are remote. However, there can be no assurance that similar
service difficulties will not arise in connection with future switch
deployments, or that any such service difficulties would not result in a loss
of customers. In addition, although US One has eight switches installed and
currently in use, certain of the planned services (including inbound 800 and
dedicated lines services) are not yet available on all of such switches.
Delays in the provision of these services by US One could delay potential cost
savings to Phoenix of using US One switches.
The Comdisco transmission lines are leased from other transmission
providers and are currently in place. Under the Company's Agreement with
Comdisco, Comdisco has the right to increase its monthly fees to Phoenix, upon
30 days' notice, due to any increase in the rates charged to Comdisco by the
underlying carriers from whom it leases transmission lines, provided that
Comdisco may not increase its aggregate fees to Phoenix by more than 10% per
year for the first two years of the term of the agreement. Although Phoenix
intends to utilize Comdisco's fixed-cost inter-machine trunk transmission lines
("IMTs") to interconnect a substantial number of its owned and/or leased
switches, there can be no assurance that capacity will be available on
Comdisco's IMTs. Although Phoenix believes that IMTs will continue to be
available from other sources, there can be no assurance that such IMTs will be
available at prices comparable to those available from Comdisco.
Ability to Successfully Develop New Products and Enter New Markets.
Phoenix believes that offering a full range of telecommunications products and
services will be crucial for it to remain competitive and attract and retain
customers. Phoenix's strategy includes offering local dial tone service,
either utilizing its own capabilities if the Merger is consummated, or
reselling the wholesale dial tone product of a switching service provider or
other outside vendor.
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In either event, local dial tone service is an area in which Phoenix has no
experience. The costs of providing such service and the related increased
customer service support and marketing costs could be substantial.
Phoenix is also seeking to increase the number of residential customers
it serves in the long distance market in order to optimize the use of its
Network. Residential customers have historically accounted for less than 5% of
Phoenix's revenues. Attrition rates for residential customers in the long
distance industry are substantially higher than attrition rates for business
customers.
In addition, in pursuing its acquisition strategy Phoenix may acquire
companies with lines of businesses in which Phoenix has no experience. Entry
into new markets entails risks associated with the state of the market,
competition from companies in those markets and increased selling and marketing
expenses. There can be no assurance that Phoenix's new products or services
will improve its operating results.
Dependence on Service Providers. Presently, approximately 85% of the
long distance calls made by Phoenix's customers are transmitted entirely or
partially on the networks of facilities-based carriers that compete with
Phoenix, including LDDS/WorldCom, Sprint and Frontier. Until Phoenix's Network
is fully deployed and loaded, and even thereafter with respect to at least 10%
of Phoenix's customer traffic which is expected to remain Off-Network and a
portion of Phoenix's On-Network traffic that is terminated through the networks
of vendor carriers, Phoenix will be dependent on its ability to obtain bulk-
rate long distance transmission capacity from such vendor carriers on a cost-
effective basis. Phoenix is vulnerable to changes in its arrangements with
such carriers, such as price increases and service cancellations. Phoenix's
current agreement with Sprint expires in September 1998 and requires Phoenix to
pay minimum usage fees of $20 million during the term of the contract, of which
at least $12 million must be spent in the first twelve months of the contract.
Phoenix's current agreement with LDDS/WorldCom, which became effective in
August 1996 and expires in May 1999, obligates Phoenix to pay minimum usage
fees of $15 million, $12 million and $9 million, respectively, during each of
the first three six-month periods of the agreement and $12 million during the
12-month period commencing February 1998. Phoenix's current agreement with
Frontier expires in March 1998 and requires Phoenix to pay minimum monthly
usage fees of $1 million for domestic calls (before discounts) and $200,000 for
international calls (after discounts). Phoenix has in certain instances in the
past failed to place calling traffic on the networks of vendor carriers
sufficient to meet minimum usage requirements. However, in all instances to
date where Phoenix has missed a minimum usage requirement and such miss
resulted in an obligation to pay a material sum to a vendor carrier, the vendor
carrier has waived the obligation or Phoenix has been reimbursed by a third
party for the amount of such material sum. Although Phoenix expects to be able
to meet its minimum usage requirements going forward, the minimum usage
requirements may, depending upon traffic volume, reduce the benefit to Phoenix
of the availability of the Network until the minimum requirements decrease per
the terms of the agreements or the agreements expire.
Phoenix is dependent on its facilities-based carriers and other vendors
to provide it promptly with the detailed information on which Phoenix bases
customer billings. Any failure of such carriers or vendors to provide accurate
information on a timely basis could have a material adverse effect on Phoenix's
ability to recover charges from its customers.
Customer Attrition. The long distance industry is characterized by a
high level of customer attrition. Customer attrition is measured by the number
of customers who utilize Phoenix's service in a given month and do not utilize
Phoenix's services in the next succeeding month. Phoenix believes its
attrition rate is comparable to the attrition rates of long distance providers
of comparable size. Attrition in the long distance telecommunications industry
is generally attributable to a number of factors, including (i) marketing
initiatives of existing and new competitors as they engage in, among other
things, national advertising campaigns, telemarketing programs, and the
issuance of cash and other forms of customer "win back" initiatives and other
customer acquisition programs and (ii) termination of service for non-payment.
As Phoenix acquires residential customers both for long distance and future
local dial tone service, Phoenix's customer attrition rate is likely to
increase. An increase in Phoenix's customer attrition rate could have a
material adverse effect on Phoenix's business, financial condition and results
of operations.
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Regulatory and Legislative Uncertainty. Federal and state regulations,
regulatory actions and court decisions have had, and may have in the future,
both positive and negative effects on Phoenix and its ability to compete.
Phoenix is subject to regulation by the Federal Communications Commission (the
"FCC") and by various state Public Utilities Commissions ("PUCs") as a
nondominant IXC. Phoenix is required to file tariffs or obtain other approvals
in most of the states in which it operates. The large majority of states
require long distance service providers to apply for authority to provide
telecommunications services and to make filings regarding their activities.
Neither the FCC nor the state PUCs currently regulate Phoenix's profit levels,
but they often reserve the authority to do so. There can be no assurance that
future regulatory, judicial and legislative changes or other activities will
not have a material adverse effect on Phoenix or that regulators or third
parties will not raise material issues with regard to Phoenix's compliance with
applicable laws and regulations.
Phoenix has historically been required to file tariffs specifying the
rates, terms and conditions of its interstate and international services with
the FCC. On October 31, 1996, the FCC released an order which, among other
things, requires all nondominant IXCs to cancel their currently-filed tariffs
for interstate domestic services within nine months of the effective date of
the order and prohibits such tariff filings in the future. Although
information regarding the larger carriers' rate plans is expected to continue
to be available through other means, the elimination of the tariff requirement
may make Phoenix's pricing policies more difficult to benchmark against the
rates of the larger IXCs. Additionally, the elimination of tariff filings may
result in the need for Phoenix to formulate and execute bilateral agreements
with its customers, give notice to customers of any change in rates, terms and
conditions of service, and otherwise increase administrative costs. The
absence of an FCC tariff filing requirement may also result in consumers being
able to pursue remedies for disputes under state consumer protection and
contract laws in a manner currently precluded by the FCC's "filed-rate"
doctrine.
On October 15, 1996, a Federal appeals court issued a stay of
effectiveness of certain regulations adopted by the FCC in August 1996
regarding the prices that an incumbent LEC may charge incoming competitors for
interconnection, unbundled access to network elements, and resale of LEC
services. The stay had been sought by RBOCs, GTE and state regulatory
commissions as part of ongoing litigation challenging the regulations issued by
the FCC pursuant to the 1996 Act to implement competition in local exchange
markets. The stay will remain in effect until the case is decided by the
court, probably sometime in 1997. The effect of the stay is to create an
ambiguity of authority and further regulatory uncertainty concerning the rules
that will apply to the pricing policies of the incumbent LECs. In the absence
of effective FCC rules, the state PUCs, through the details of their
implementation of competition in their local exchange markets, may produce
results that are inconsistent with the FCC's uniform national model. Phoenix
cannot predict the impact of this litigation on its plans to offer its own or
resold local dial tone service, or what further actions the FCC may take in
response to the ultimate outcome of the case.
Technological Change. The telecommunications industry has been
characterized by rapid technological change, frequent new service introductions
and evolving industry standards. Phoenix believes that its future success will
depend on its ability to anticipate such changes and to offer market responsive
services that meet these evolving industry standards on a timely basis. The
effect of technological change upon Phoenix's business cannot be predicted and
there can be no assurance that Phoenix will have sufficient resources to make
the investments necessary to acquire new technology or to introduce new
services to satisfy an expanded range of customer needs.
Dependence on Key Personnel. Phoenix believes that its success depends,
to a significant extent, on the efforts and abilities of its senior management.
Among others, the loss of Wallace M. Hammond, Phoenix's President and Chief
Executive Officer or Jon Beizer, Phoenix's Senior Vice President and Chief
Financial Officer, could have a material adverse effect on Phoenix. Phoenix
intends to announce in the next 60 days that it is naming a new Vice President
of Sales and Marketing, and the Company may interview candidates for a new
position of Chief Operating Officer. Phoenix believes that its success will
depend in large part upon its ability to attract, retain and motivate skilled
employees and other senior management personnel. Although Phoenix expects to
continue to attract sufficient numbers of such persons for the foreseeable
future, there can be no assurance that Phoenix will be able to do so. In
addition, because Phoenix may acquire one or more businesses in the future,
Phoenix's success will be in part dependent upon its ability to retain and
integrate into its own operations personnel from acquired entities who are
necessary to the
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continued success or successful integration of the acquired business.
Transactions with Related Parties; Potential Conflicts of Interest.
Until mid-April 1997, Messrs. Max E. Thornhill and David Singleton were
directors of both Phoenix and US One. Messrs. Thornhill and Singleton have
resigned from the Board of Directors of US One, but continue to own stock in
both companies. As a result, certain conflicts of interest may arise in the
future in connection with the implementation of Phoenix's agreements with US
One and the negotiation of any new agreements, including definitive agreements
for the Merger, between Phoenix and US One.
Control by Officers and Directors. As of December 31, 1996, Phoenix's
executive officers and directors beneficially owned or controlled approximately
25.6% of the outstanding shares of Phoenix's Common Stock, on a fully diluted
basis (assuming full conversion of preferred stock). The votes represented by
the shares beneficially owned or controlled by Phoenix's executive officers and
directors could, if they were cast together, potentially control the election
of a majority of Phoenix's directors and the outcome of most corporate actions
requiring stockholder approval.
Investors who purchase Phoenix's Common Stock may be subject to certain
risks due to the concentrated ownership of Phoenix's Common Stock. Such risks
include: (i) the shares beneficially owned or controlled by Phoenix's executive
officers and directors could, if they were cast together, approve, delay, defer
or prevent a change in control of Phoenix, such as an unsolicited takeover,
which might be beneficial to the stockholders, and (ii) due to the substantial
ownership or control of outstanding shares by Phoenix's executive officers and
directors and the potential adverse impact of such substantial ownership or
control on a change in control of Phoenix, it is less likely that the
prevailing market price of the outstanding shares of Phoenix's Common Stock
will reflect a "premium for control" than would be the case if ownership of the
outstanding shares were less concentrated.
Market Overhang. As part of this offering, the Selling Stockholders may
sell up to 1,509,833 Shares, which represents approximately 6.9% of Phoenix's
total outstanding shares of Common Stock. Although 1,492,500 of the Shares are
presently outstanding, 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.
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