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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 0-17909
Phoenix Network, Inc.
(Exact Name of registrant as specified in its charter)
DELAWARE 84-0881154
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1687 COLE BLVD., GOLDEN, COLORADO 80401
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 205-3500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock $0.001 Par Value AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 24, 1997, the aggregate market value of the voting stock
held by nonaffiliates of the Registrant was $44,187,299 (based on the closing
sales price as reported on the American Stock Exchange).
The number of shares outstanding of the Registrant's Common Stock,
$0.001 par value, was 25,900,036 at March 24, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's definitive proxy statement for the annual meeting of stockholders
which will be filed no later than 120 days after the close of the Registrant's
fiscal year ended December 31, 1996.
Part III also incorporates certain information by reference from the
Registrant's definitive proxy statement for the annual meeting of stockholders
held on September 26, 1996 (the "1996 Proxy").
Part II also incorporates certain information by reference from the
Registrant's Registration Statement on Form S-3 (file no. 333-20923), as
amended (the "Registration Statement on Form S-3"), which was filed with the
Securities and Exchange Commission (the "Commission") on January 31, 1997, and
is incorporated by reference herein.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Registrant's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the sections
entitled "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in the section entitled "Risk Factors"
included within the Registrant's Registration Statement on Form S-3
incorporated by reference herein.
PART I
ITEM 1. BUSINESS
GENERAL
Phoenix Network, Inc., together with its subsidiaries ("Phoenix" or
the "Company"), is among the nation's fastest growing publicly-owned
inter-exchange carriers ("IXCs") of long distance telecommunications services.
Phoenix believes that it offers "simple, honest and straightforward" pricing
plans that are generally priced lower than many plans of larger carriers such
as AT&T, MCI and Sprint. Moreover, the Company believes that it provides more
attentive customer service than its larger competitors. In addition to "1 plus"
domestic long distance service, Phoenix offers its customers a wide range of
value-added products and services, including inbound (800) service, dedicated
access and private line service, Internet access, calling cards, international
call-back, conference calling, debit cards, broadcast facsimile transmission
and customized management reports.
Phoenix has begun, and plans to continue, a strategy of aggressively
pursuing acquisitions designed to increase revenues and margins, augment
product and service offerings, expand distribution capabilities, and increase
scale and scope of operations. See "--Acquisitions and Mergers." Since May
1995, Phoenix has acquired 10 companies or customer bases, including one
switched reseller, two switchless resellers, one international call-back
company, and six customer bases. These acquired companies and customer bases
have added significant amounts of revenue, added new products and services,
enhanced marketing capabilities and provided technical and network
infrastructure.
Primarily through acquisitions, Phoenix believes it has amassed
sufficient size and scope to achieve significant cost savings through
deployment of a long distance network system (the "Network") consisting of
leased switching equipment in major metropolitan areas and leased transmission
facilities between these switches. See "--Network Operations." In contrast to
many other IXCs who are investing substantial capital to build networks, the
Company is deploying its Network without substantial capital investment. This
has been made possible by the increasing availability of capacity on switching
and transmission equipment on a leased basis from other telecommunications
providers. The ability to lease rather than purchase this capacity, and to
expand capacity on an "as needed" basis, creates a significant opportunity for
Phoenix to rapidly deploy its Network, while preserving most of the Company's
capital spending budget for the acquisition of additional customer traffic that
may be shifted onto the Company's Network. By leasing capacity on switching
equipment and transmission facilities, Phoenix intends to fully-deploy and
substantially load its planned Network by the middle of 1998. Phoenix has
entered into agreements to lease switches from US ONE Communications Corp. ("US
One") and other providers and to lease fixed-cost IMTs from Comdisco Network
Services, a division of Comdisco, Inc. ("Comdisco") and WorldCom, Inc.
("LDDS/WorldCom"). The Network also includes three switches (located in Colorado
Springs,
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Minneapolis and Phoenix) which were acquired by the Company in connection with
an acquisition in January 1996. The Company expects deployment of the Network
to significantly reduce the Company's average per minute line costs and provide
an important competitive advantage compared to resellers and other IXCs without
comparable networks.
BUSINESS STRATEGY
The Company's objective is to rapidly grow revenues and cash flow by
being a leading provider of telecommunications services. The Company's strategy
for achieving this goal is to: (i) increase margins by continued deployment and
loading of the Network, (ii) continue an aggressive acquisition program, (iii)
provide customers a full range of telecommunications products and services and
(iv) bill all of a customers' products and services on one invoice and provide
customers with a single point of customer service contact.
Increase Margins by Continued Deployment and Loading of the Network.
Phoenix intends to deploy and load its Network in order to reduce line costs,
improve gross margins, have greater control over its customer base and offer
enhanced calling features. In addition, by utilizing the Network rather than
relying on third-party vendor carriers, the Company believes it is positioned
to quickly benefit from potential reductions in local access charges. In
contrast to many of its competitors who are investing substantial capital in
networks, the Company plans to deploy its Network without substantial capital
investment. Phoenix has entered into agreements to lease switching equipment
and transmission facilities which, together with the Company's owned switches,
have enabled the Company to place approximately 17% of its long distance
minutes On-Network (i.e., routed by at least one Company-controlled switch) as
of December 31, 1996. The Company believes its leased and owned switching
equipment and leased transmission facilities will enable it to carry
approximately 90% of its long distance minutes On-Network by December 31, 1997.
The Company believes that, when 90% of its long distance minutes are
On-Network, its average cost per minute will decline by at least 10% from its
average cost per minute in 1996 (assuming present levels of local access
charges).
Continue an Aggressive Acquisition Program. The Company intends to
continue to pursue complementary acquisitions which will allow it to rapidly
add customers and maximize the number of minutes traveling over the Network.
Although Phoenix considers many factors when evaluating a potential
acquisition, Phoenix seeks to purchase companies with positive EBITDA (i.e.,
earnings before income taxes, depreciation and amortization), potential
synergies to rapidly increase EBITDA, substantial uncommitted minutes of
traffic which can be moved quickly to the Network, strong sales organizations
to complement Phoenix's existing marketing efforts and new products and
services. Phoenix currently anticipates that long distance resellers are most
likely to meet its acquisition criteria, although the Company may also consider
other IXCs and telecommunications-related service providers where significant
cross-marketing opportunities exist, including cellular, paging and PCS
resellers. In addition, because residential calls primarily take place during
evenings or on weekends, while business calls generally occur during the day,
residential customers' calling patterns are complementary to business
customers' calling patterns. Therefore, in order to optimize its use of the
Network, the Company may pursue acquisitions which will enhance its residential
customer base. See "--Acquisitions and Mergers." Phoenix believes that larger
IXCs rarely compete to purchase the Company's desired acquisition candidates
due to such acquisition candidates' relatively small size, and, therefore, the
Company believes it has been able and will continue to be able to complete
acquisitions at attractive valuations. Upon consummation of an acquisition, the
Company seeks to eliminate duplicative costs and integrate the target company's
customer base onto its Network and billing system as quickly as possible.
Provide a Full Range of Products and Services. Phoenix seeks to provide
a full range of telecommunications products and services. See "--Products and
Services." As competition increases in the telecommunications industry, the
Company believes that the successful companies will be those that can offer a
wide range of products and services, acting as a "one-stop-shop" for customers
who are confronted with a proliferation of products and technologies. In
addition to providing extra sources of revenue, Phoenix believes that
cross-selling a variety of products and services to its customers builds
customer loyalty. To complement its current offerings, the Company is currently
considering diversifying into a variety of related products and services,
including reselling cellular, paging and PCS services and offering its own
voicemail. In the wake of recent regulatory changes, the Company intends to
compete in the $100 billion local telephone service market which will enhance
its offering of telecommunications products and services. Accordingly, Phoenix
intends to offer local dialtone service in select markets beginning in the
second half of 1997, and, in preparation for this rollout, the Company has filed
for and received regulatory approvals in California and New York to offer local
dialtone service, pending final tariff filings.
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One Invoice Billing and Single Point of Customer Service Contact.
Phoenix believes that the ability to bill customers for all products and
services on a single invoice is an important value-added service. The Company
is in the process of migrating to a new, state-of-the-art billing and customer
care platform, Kenan Systems Corporation's Arbor/BP 6.0 (the "New Billing and
Customer Care Platform"), which will give the Company single-billing
capabilities. In addition, the New Billing and Customer Care Platform will
enable the Company to provide more complete and timely customer service and
improved management information reports. The Company is currently billing
certain customers on the New Billing and Customer Care Platform and running
parallel billing cycles for certain other customers. The Company presently
anticipates that all of its customers will be phased onto the New Billing and
Customer Care Platform during 1997. The Company's migration to its New Billing
and Customer Care Platform is also designed to allow the Company's customer
service department to respond to customer inquiries more quickly, efficiently
and accurately. The New Billing and Customer Care Platform will allow customer
service representatives quick and easy access to information pertaining to all
of a customer's accounts, including calling history, payment history, and
current account balances, allowing the customer to receive all customer service
from a single point of contact. See "--Billing and Information Systems."
ACQUISITIONS AND MERGERS
Prior Acquisitions and Mergers. Since May 1995, Phoenix has acquired
10 companies or customer bases, including one switched reseller, two switchless
resellers, one international call-back company, and six customer bases. The
following acquired companies and customer bases have added significant amounts
of revenue, added new products and services, enhanced marketing capabilities
and provided technical and network infrastructure:
<TABLE>
<CAPTION>
Acquisition Monthly(1) Purchase Form of Type of
Acquisition Date Revenues (000s) Price (000s) Consideration Acquisition
----------- ------ ---------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
AMERICOM July 1995 $30 $98 Cash Customer base
Bright Telecom, LP August 1995 $50 $356 Cash Company
Interstate Savings, Inc. August 1995 $367 $1,450 Cash Customer base
Tele-Trend August 1995 $725 $4,430 Cash Company
Communications, LLC
Education Communications December 1995 $175 $525 Cash Customer base
Systems, Inc.
Automated January 1996 $1,917 $17,522 Cash, common Company
Communications, Inc. stock and note
King Communications January 1996 $54 $203 Cash Customer base
Baldcor Capital Group January 1996 $28 $119 Cash Customer base
Connections March 1996 $20 $36 Cash Customer base
Communications Source
AmeriConnect, Inc. October 1996 $1,442 $12,820(2) Common stock Company
</TABLE>
(1) Monthly revenues for first month's billing following the acquisition.
(2) Represents estimated fair market value of Common Stock issued in
connection with this transaction, which was accounted for as a pooling
of interests.
Future Acquisitions. Phoenix believes that there will continue to be
suitable acquisition candidates that may be acquired at attractive valuations.
Phoenix estimates that there are more than 800 long distance companies in the
United States and that over 95% of these companies have annual revenues of less
than $100 million. The Company believes that many of these companies do not
have sufficient capital or access to reasonably-priced capital to rapidly grow
their businesses or sufficient traffic volume to become "facilities-based"
providers (thereby gaining lower line costs, better control over
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customers and enhanced calling functions), and therefore may consider selling
their businesses. Additionally, the larger IXCs rarely seek acquisitions of
such relatively small long distance companies because these smaller companies
would add only marginally to the larger IXCs' market size and economies of
scale. For these reasons, the Company believes there exists a unique
opportunity for Phoenix to pursue select acquisitions and "roll-up" a number of
smaller telecommunications companies. Phoenix currently anticipates that long
distance resellers are most likely to meet its acquisition criteria, although
the Company may also consider other IXCs and telecommunications-related service
providers, including cellular, paging and PCS resellers.
NETWORK OPERATIONS
The Company's Network strategy is to reduce its line costs by
transitioning traffic in whole or in part to the Network. Because the switches
and transmission facilities comprising the Network are primarily being leased,
the Company will be able to deploy its Network without substantial capital
investment. Where economically feasible, the Company will supplement its use of
leased switches with use of switches currently owned or acquired in future
acquisitions. Through a combination of the Network and agreements with vendor
carriers, the Company is able to complete point-to-point long distance calls
from anywhere within the United States and various foreign countries to
anywhere in the world.
Switching Capabilities. The Company's switches enable the Company to
lower its line costs for calls carried in whole or in part over the Network by
(i) affording the Company access to more favorable pricing schedules of vendor
carriers normally reserved for carriers who own switches and (ii) enhancing the
Company's ability to select the most advantageous transmission alternative
available from the Company's leased, fixed-cost IMTs or from the carriers with
whom Phoenix has vendor arrangements.
Leased and owned switches allow the Company to reduce its costs for
the services of vendor carriers (where such services are required) by
unbundling switching charges from the cost of completing a call. By not
purchasing switching services from a vendor carrier, the Company is able to
avoid the vendor carrier's mark-up for providing such services, thereby
improving the Company's margin for the call.
In most instances, the most advantageous transmission alternative
available will be the Company's leased, fixed-cost IMTs (described below).
However, in instances where a Company IMT is not the most advantageous
transmission alternative available, optimization software running on the switch
can be programmed to select the best transmission alternative available from
among the networks of vendor carriers with whom Phoenix has agreements.
Where the Company leases or owns a switch, the Company also has the
capability of optimizing LEC access routing, thereby reducing the Company's
cost of completing the call. As an example, because local access charges in
some areas are dependent on the distance to the termination telephone, it may
be more cost effective for the Company to route a call from Denver to Aspen,
Colorado over intrastate long distance routes using a vendor carrier (such as
LDDS/WorldCom) rather than terminating the call through the Denver LEC (i.e.,
U.S. West) over the LEC's local network to Aspen. The optimization software
running on the Company's Denver switch gives the Company this flexibility and
control.
Leased and owned switches also give the Company the capability of
quickly benefitting from reductions in local access charges. Because the
Company's agreements with vendor carriers specify rates for origination and/or
termination of long distance calls which incorporate levels of local access
charges in place at the time such agreements were negotiated, reductions in
local access charges reduce the vendor carriers' cost of completing calls
without any concomitant reduction in the rates Phoenix is required to pay to
such vendor carriers until such agreements are renegotiated. For On-Network
traffic, reductions in local access charges reduce Phoenix's costs, thereby
improving its margins for such traffic.
The Company has entered into an agreement to lease switches from US
One. The Company may also lease switches from additional telecommunications
providers as the Network is expanded. In addition to leased switches, the
Network also includes three switches (located in Colorado Springs, Minneapolis
and Phoenix) which were acquired by the Company in connection with the
acquisition of Automated Communications, Inc. ("ACI") in January 1996 and may
include additional switching and transmission equipment acquired in the future
through acquisitions.
The Company intends to deploy switches and connect those switches to
the Network with IMTs in those markets in which it has sufficient long distance
traffic to justify deployment. The Company evaluates calling patterns and the
amount
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of long distance traffic in a particular market in determining whether
to deploy switches and IMTs in such market. The Company believes that it can
cost justify such deployment in those markets in which it has approximately
750,000 originating or terminating long distance minutes per month. The Company
is currently utilizing switches that it owns or is leasing from US One in New
York, Chicago, Denver, Colorado Springs, Phoenix, Minneapolis and Tampa. In the
future, the Company intends to lease switches and commence switching in Los
Angeles, San Francisco, Seattle, Atlanta, Washington, D.C., Dallas, Boston,
Columbus, Kansas City and Detroit. The ability of the Company to begin
switching in a market is dependent (where the Company does not own a switch) on
a switching service provider having a switch deployed and operational in or
near that market. The Company believes that US One or another switching
provider will have switches in operation in each market in which the Company
intends to commence switching.
Transmission Facilities. On routes where the Company has leased IMTs,
such IMTs interconnect the Company's leased and/or owned switches and transport
long distance telephone calls between such switches. Where the volume of long
distance traffic on a particular route between such switches justifies leasing
a fixed-cost IMT, access to the IMT affords the Company the opportunity to
reduce line costs by transmitting its long distance traffic over such IMT,
where available. Because fees for IMTs are fixed and do not vary with usage,
additional minutes of use may be loaded on the IMTs without incurring
additional costs for such IMTs, thereby improving the Company's margins.
In most instances, the Company intends to secure its fixed-cost IMTs
from Comdisco. The Company has an agreement with Comdisco that allows it to
lease IMTs at rates that are no more expensive than the least expensive
alternative available from another provider on a given route. In addition, for
Comdisco IMTs, the Company has the opportunity to pay a portion of the fees for
such IMT in the Company's Common Stock, thereby reducing the Company's cash
requirements for securing such IMT. The Company believes that the total fees
paid to Comdisco for IMTs will generally be less than the fees payable to the
next best alternative provider. See "--Description of Certain Agreements."
However, on routes where IMTs are not available from Comdisco, the Company
believes it may lease IMTs from numerous other providers, including
LDDS/WorldCom and Qwest Communications Corporation. (Fixed-cost IMTs leased by
the Company, whether leased from Comdisco or others, are sometimes referred to
herein as the "Company's IMTs.")
OFF-NETWORK CALLS
As of December 31, 1996, the Company estimates that approximately 17%
of its traffic was On-Network. The other 83% of its long distance traffic
("Off-Network" traffic) was carried entirely on the networks of vendor carriers
with whom the Company has agreements. The percentage of traffic that is
Off-Network is expected to decline substantially over the next 12 months as the
Network is more fully deployed. However, the Company estimates that
approximately 10% of its traffic will always be Off-Network.
The Company has agreements with numerous major vendor carriers, such as
LDDS/WorldCom, Sprint, Frontier Communications, AT&T and others to carry its
Off-Network traffic and portions of its On-Network traffic. The Company
believes it is well positioned relative to many of its competitors with respect
to vendor carrier contracts because, although certain of these contracts
specify minimum volume usage, such requirements scale down quickly over time
and should not prevent the Company from shifting a substantial portion of its
traffic On-Network. In the second half of 1996, the Company signed new carrier
contracts with LDDS/WorldCom, Frontier and Sprint. During 1997, Phoenix expects
to use LDDS/WorldCom, Frontier and Sprint for most of its vendor carrier needs.
The vendor carriers whose networks are used by Phoenix have
established customer records in their databases. The carriers send to Phoenix,
on a daily, weekly, or monthly basis, information containing the long distance
traffic of all of Phoenix's customers who have been served by that carrier.
Phoenix is obligated to pay the carrier for such traffic at its pre-established
contractual rates. The Company processes the call detail information and
provides each of its customers with a monthly invoice for its long distance
calls at rates established by Phoenix. The customer then pays Phoenix directly.
The rates charged to the customer by Phoenix are quoted, contractual rates and
are not affected by the particular transmission and switching facilities
selected for transmission of a call.
In most cases, Phoenix, and all long distance providers that resell
long distance as some portion of their business, are in direct competition with
such vendor carriers for the right to serve the end user. The Company believes
that such carriers view the Company and other companies that resell such
carriers' services as a low cost, alternative marketing channel which gives the
carriers incremental minutes.
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PRODUCTS AND SERVICES
The Company offers a wide variety of long distance and value-added
products and services to its customers. These products and services include: "1
plus" domestic long distance service, inbound (800) service, dedicated access
and private line services, Internet access, calling cards, international
call-back, conference calling, debit cards and broadcast facsimile
transmission. The Company also provides customized management reports to help
its customers better understand and manage their telecommunications costs. In
addition, the Company's business strategy includes adding additional
telecommunications products and services, such as local service, cellular
service, voicemail, paging and PCS services. See "--Business Strategy." In the
wake of recent regulatory changes, the Company intends to compete in the $100
billion local telephone service market. Accordingly, the Company intends to
offer local dialtone service in select markets beginning in the second half of
1997. The Company's local dialtone product will be based upon resale of the
wholesale dialtone products of switching service providers. The Company
believes the ability to offer local dialtone service will further enhance its
competitive position by improving its product offerings as well as provide
opportunities for revenue growth. Access to the local telephone service market
will be subject to availability of wholesale dialtone products from switching
service providers and/or regional bell operating companies ("RBOCs") and will
be affected by the outcome of pending litigation challenging certain FCC
regulations.
The Company's pricing structure for its products and services is
established on the basis of cost and competition. The Company believes that its
customers generally select the Company because it offers lower cost long
distance transmission than larger IXCs, such as AT&T, MCI and Sprint, while
providing more attentive customer service. The Company offers a variety of rate
plans that it believes meet the needs of its customers. Under the Company's
most commonly subscribed long distance rate plans, customers are generally sold
flat per minute rates for interstate and intrastate long distance calls. Such
rates generally are determined based upon the customers' usage levels at the
time of the sale and do not vary based upon the time of day of a call.
CUSTOMERS
At December 31, 1996, the Company's customer base was comprised of
over 47,000 customers, consisting primarily of small and medium-size business
customers and, to a lesser extent, residential customers. The Company targets
its marketing efforts primarily to business customers spending $10,000 or less
per month on long distance services, and, in the future, the Company will be
increasing its focus on building its residential customer base. For the year
ended December 31, 1996, the Company's 20 largest customers accounted for less
than 5% of revenue and no one customer accounted for more than 1% of revenue.
Phoenix is presently serving customers in 49 states. Through its
international call-back service, the Company serves approximately 900 customers
in various countries worldwide.
MARKETING AND SALES
Overview. The Company's marketing and sales efforts are designed to
differentiate the Company from its competitors through simple and low-cost
pricing, customization of products and services and person-to-person customer
service. The Company's pricing schedules typically include a flat-rate cost per
minute, with additional discounts available for higher volume use. While a
variety of rate plans are offered, the Company attempts to price its long
distance service generally below the basic rates of AT&T, MCI and Sprint.
The Company emphasizes to its business customers that its menu of
services can be customized to meet each individual company's needs, including
monthly management reports and specially formatted invoices that help identify
and sort calling patterns and track non-business calling. The Company also
highlights the high level of regular personal contact in its approach to
customer service, including a five-person team of customer representatives that
is assigned to each business customer throughout its relationship with Phoenix.
The Company believes that a key attraction of its marketing and sales
presentations to business customers is its invoice system, which utilizes
simple and understandable formats for conveying billing information and
presents on a single bill all services provided by Phoenix to a customer
(except international call-back service). When operational, the New
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Billing and Customer Care Platform will enhance the Company's ability to provide
single-bill invoicing, which the Company believes will be increasingly
important as a marketing tool as telecommunications companies offer a wider
range of products and services. See "--Billing and Information Systems."
Under the Company's "clear billing" system, since January 1996,
charges for "1 plus" calls to new customers are based upon six-second
increments and the applicable per-minute rate charge. The Company believes that
this calculation method differs from that currently employed by certain of its
competitors, who use minutes as the minimum billing increment and round up
partial minutes of calling time to the next whole minute. In addition, under
the Company's most recent rate plans, per call charges are calculated out to
four decimal places while many of the Company's competitors round charges for
each call up to two decimal places. The resulting charges for the "rounded-up"
portion of calling time can be significant for business customers with a high
volume of short calls, and the Company's billing method is thus presented to
potential customers as a cost-saving feature. The Company views its clear
billing policies as a competitive advantage when compared to the billing
practices of certain of its competitors.
The Company conducts its marketing efforts through a focused program
that combines direct sales offices located in major metropolitan areas with a
network of master sales agents and independent distributors. The Company
believes that utilizing a staff of dedicated sales employees facilitates lower
turnover, better training and more consistency in presenting the Company's
image to the marketplace. At the same time, its network of agents and
distributors serves to extend the Company's marketing reach and coverage
efficiently and economically.
For the year ended December 31, 1996, the Company's direct sales and
independent distributor (including Master Sales Agent) systems contributed
approximately 60% and 40%, respectively, of the total number of new customers,
exclusive of customers gained through acquisitions during the period.
Direct Sales Offices. The Company currently operates 11 sales offices
in San Francisco, Los Angeles, Orange County, Seattle, Denver, Chicago,
Minneapolis, St. Paul, Atlanta, Kansas City, and Tampa. At December 31, 1996,
the Company employed 40 direct sales representatives, 11 sales managers (one in
each sales office) that support, train and assist the direct sales
representatives and 11 supervisory and administrative personnel in its sales
offices. The Company intends to open an additional sales office in New York
City in 1997. See "--Future Marketing Initiatives."
Distribution Network. The Company's distributor network consists
primarily of master sales agents and independent distributors. Master sales
agents are either individuals or marketing companies with their own experienced
sales forces and established networks of business customers. They typically sell
telecommunications products and services offered by other companies in addition
to Phoenix. Independent, or "standard", distributors are non-employee
contractors who generally have not developed the larger sales staffs that
characterize master sales agents. The Company estimates that the number of its
standard distributor relationships that produce sales on a regular monthly basis
is currently in the range of 30-35, although the Company has approximately 50
standard distributor relationships that occasionally produce sales.
Future Marketing Initiatives. The Company believes that the
proliferation of services it expects to offer in the future as a
"one-stop-shop" telecommunications provider will require corresponding
refinements and enhancements to the Company's marketing and sales strategy.
Beginning in the Company's New York City direct sales office, which is expected
to open in conjunction with the commencement of local dialtone service, the
Company will focus increasingly on offering its customers "bundled" solutions
to a wide variety of telecommunications needs in addition to basic long
distance service. The Company's current marketing approach usually promotes
long distance service as the primary product offering, with other services
being offered supplementally. With the expected entry of the Company into the
local dialtone market, the marketing focus is expected, over time, to evolve
more towards offering both local dialtone and long distance service on a
bundled basis. See "--Products and Services." Also, the Company expects that
the increasing importance of Internet access to business customers will result
in additional resources being devoted to marketing Internet services,
particularly to those customers whose need for data transmission is large
enough to justify dedicated access for this service.
CUSTOMER SERVICE
The Company places a strong emphasis on customer service and believes
that frequent contact with customers is a significant factor in customer
retention. The Company's migration to its New Billing and Customer Care
Platform is designed to allow the Company's customer service department to
respond to customer inquiries more quickly, efficiently
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and accurately. The New Billing and Customer Care Platform will allow customer
service representatives quick and easy access to information pertaining to all
of a customer's accounts, including calling history, payment history, and
current account balances.
The Company has recently completed a new Customer Service Call Center
(the "Center") that has state-of-the-art telephone systems, data systems and
operating maps to assist in the customer service function. The Center is
located adjacent to the Company's headquarters and houses all of the Company's
customer service representatives. The Company believes that its new Center
further enhances its ability to serve its customers.
Customer service representatives are available from 6:00 a.m. to 7:00
p.m. Mountain Standard Time (encompassing the business day on both coasts) by
dialing a toll-free number to handle any customer inquiries regarding their
service. Additionally, the Company is presently providing 24-hour customer
service to its dedicated business customers and plans to offer 24-hour customer
service to all customers beginning in 1997. To assess satisfaction with the
services and products being provided by Phoenix, customer service
representatives call existing business customers on a routine basis. In
addition, every new customer receives a welcome call.
The Company's customer service department is organized into four
person teams, with each having a team leader that supervises activities. Each
customer is assigned to one of the teams which is responsible for all the
service needs of that customer. The Company employed 61 customer service
representatives as of December 31, 1996.
BILLING AND INFORMATION SYSTEMS
The Company is in the process of migrating to its New Billing and
Customer Care Platform, Kenan Systems Corporation's Arbor/BP 6.0, from seven
distinct billing systems, most of which were acquired through acquisitions. The
New Billing and Customer Care Platform is fully installed, and certain of the
Company's customers have been receiving bills from it. The Company is in the
process of running several parallel billing cycles with a presently-utilized
billing system to further verify successful operation of the New Billing and
Customer Care Platform. Following verification of successful parallel billing
cycles, the Company expects that additional customers will receive their bills
in the second quarter of 1997 from the New Billing and Customer Care Platform.
The Company's remaining customers are planned to be phased into the New Billing
and Customer Care Platform over 1997.
The New Billing and Customer Care Platform is expected to provide four
primary benefits to the Company. First, the Company anticipates that it will
give the Company more flexibility and control in the billing process. The
Company views the ability to bill customers for all such services on a single
invoice to be critical as new products and services are offered. The New Billing
and Customer Care Platform will also allow the Company to customize bill formats
as per a customer's request. Second, the Company anticipates that the New
Billing and Customer Care Platform will make customer service more efficient,
more accurate and more meaningful to the customer. The New Billing and Customer
Care Platform will allow customer service representatives quick and easy access
to information pertaining to all of a customer's accounts, including calling
history, payment history and current account balances. Third, the Company
expects that the New Billing and Customer Care Platform will improve the
Company's order entry and provisioning system by adding an automated element to
what had previously been done manually. Finally, the Company anticipates that
the New Billing and Customer Care Platform will interface with the Company's
general accounting ledger to feed financial data directly to the accounting
software package.
At the present time, the Company uses seven distinct billing systems
in its business, most of which came into use as a result of acquisitions. These
billing systems will be phased out over time as the New Billing and Customer
Care Platform is fully implemented. Under the current billing systems, four
different call detail formats are available so the customer can customize the
way its call detail is presented. The formats include sorting by chronological
order, originating phone number, accounting code, and terminating phone number.
Additionally, the Company has the ability to write custom reports for a large
individual user to replace existing internal reports or provide new reports to
that customer.
EMPLOYEES
As of December 31, 1996, the Company had approximately 231 full-time
employees. Of the full-time employees, 71 are engaged in sales and marketing,
61 in customer service, and the remainder in management, development, finance
and
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<PAGE> 10
administrative capacities. None of the Company's employees are represented
by a labor union. The Company believes its relations with employees to be good.
GOVERNMENT REGULATION
The terms and conditions under which the Company provides
telecommunications products and services are subject to government regulation.
Federal laws and FCC regulations apply to interstate and international
telecommunications, while particular state regulatory authorities have
jurisdiction over telecommunications that originate and terminate within the
same state.
Federal. The Company is classified by the FCC as a non-dominant
carrier, and therefore is subject to significantly reduced federal regulation.
After the recent reclassification of AT&T as a non-dominant carrier in its
provision of domestic services, among domestic carriers only the LECs are
classified as dominant carriers for the provision of interstate access
services. As a consequence, the FCC regulates many of the rates, charges, and
services of the LECs to a greater degree than the Company's. The FCC has
proposed that the RBOCs offering out-of-region interstate inter-exchange
services be regulated as non-dominant carriers, as long as such services are
offered by an affiliate of the RBOC that complies with certain structural
separation requirements, which may make it easier for the RBOCs to compete
directly with the Company for long distance subscribers. These would be the
same separation requirements that currently are applicable to independent LECs
that provide interstate inter-exchange services, although the FCC on March 21,
1996 initiated a rule-making proceeding in which it is considering whether to
modify or eliminate these separation requirements.
Because AT&T is no longer classified as a dominant carrier, certain
pricing restrictions that formerly applied to AT&T have been eliminated, which
may make it easier for AT&T to compete with the Company for low volume long
distance subscribers. International carriers may also be classified as dominant
if they exercise market power or are considered to be affiliated with foreign
carriers, as defined under the FCC's rules. Non-dominant carriers are currently
required to file international tariffs. The FCC generally does not exercise
direct oversight over cost justification and the level of charges for service
of non-dominant carriers, such as the Company, although it has the statutory
power to do so. Non-dominant carriers are required by statute to offer
interstate and international services under rates, terms, and conditions that
are just, reasonable, and not unduly discriminatory. The FCC has the
jurisdiction to act upon complaints filed by third parties or brought on the
FCC's own motion against any common carrier, including non-dominant carriers,
for failure to comply with its statutory obligations. Additionally, the 1996
Act grants explicit authority to the FCC to "forbear" from regulating any
telecommunications services provider in response to a petition and if the
agency determines that the public interest will be served. On October 31, 1996,
the FCC exercised this authority and released an order which, among other
things, requires 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 filings in the future.
The FCC imposes only minimal reporting requirements on non-dominant
resellers, although the Company is subject to certain reporting, accounting,
and record keeping obligations. A number of these requirements are imposed, at
least in part, on all carriers, and others are imposed on carriers, such as the
Company, whose annual operating revenues exceed $100 million. The Company has
been granted authority by the FCC to provide international telecommunication
services through the resale of switched services of various vendor carriers.
The FCC reserves the right to condition, modify, or revoke such international
authority for violations of the Communications Act of 1934 or its rules.
The Company currently has two tariffs on file with the FCC, one
covering its domestic interstate services and one covering international
services. Pursuant to the FCC's October 31, 1996 order, the Company intends to
cancel its tariff for domestic interstate services. As an international
non-dominant carrier, the Company has been required to include, and has
included, detailed rate schedules in its international tariffs, which are filed
on 14-days' notice without cost support to justify rates. Resale carriers, like
all other interstate carriers, are also subject to a variety of miscellaneous
regulations that, for instance, govern the documentation and verifications
necessary to change a subscriber's long distance carrier, limit the use of
"800" numbers for pay-per-call services, require disclosure of certain
information if operator assisted services are provided, and govern interlocking
directors and management.
The 1996 Act authorizes the RBOCs to provide inter-LATA inter-exchange
telecommunication services, upon the receipt of any necessary state and/or
federal regulatory approvals that are otherwise applicable to the provision of
intrastate or interstate long distance services and, for in-region long
distance services, upon specific FCC approval and upon satisfying
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<PAGE> 11
other conditions, including a checklist of interconnection and other
requirements. The 1996 Act also provides for certain safeguards against
anticompetitive conduct by the RBOCs in the provision of inter-LATA service
including a requirement for a separate subsidiary and certain joint marketing
limitations.
GTE was previously prohibited from providing inter-exchange
telecommunications services by the GTE Decree. The 1996 Act vacates the GTE
Decree and authorizes GTE to provide inter-LATA inter-exchange
telecommunications services without regard to limitations by region, although
the necessary state and/or federal regulatory approvals that are otherwise
applicable to the provision of intrastate and/or interstate long distance
service must be obtained by the various operating companies of GTE prior to the
provision of long distance service, and GTE is subject to the provisions of the
1996 Act that impose interconnection and other requirements on the LECs.
Like substantially all other long distance carriers, the Company has
been the subject of complaints before the FCC regarding the unauthorized
switching of subscribers' long distance carriers, also known in the industry as
"slamming." The Company believes that most of such complaints arose from
telemarketing efforts by the Company, a marketing practice that the Company has
discontinued. The Company has never been penalized or cited for "slamming" by
the FCC. As to all complaints pending at December 31, 1996, the Company has
filed timely responses to such complaints and believes that such complaints
will be resolved without a material adverse impact upon the Company.
In addition, the 1996 Act adds a new provision that imposes liability
upon all telecommunications carriers to the carrier previously selected by the
subscriber for unauthorized switching of subscribers' long distance carriers.
Liability is imposed in an amount equal to all charges paid by the subscriber
after the unauthorized conversion. The FCC is required to adopt new rules to
implement this new statutory requirement. The impact that this statutory
provision will have on the Company cannot be determined at this time.
State. The Company is subject to varying levels of regulation in the 49
states in which it is currently authorized to provide originating interstate
telecommunications services and the 47 states in which it is currently
authorized to provide intrastate telecommunications services. The vast majority
of the states require the Company to apply for certification, which entails
proof of technical, managerial and financial ability, to provide intrastate
telecommunications services, or at least to register or to be found exempt from
regulation, before commencing intrastate service. A majority of states also
require the Company to file and maintain detailed tariffs listing their rates
for intrastate service. Many states also impose various reporting requirements
and/or require prior approval or notice for transfers of control of certified
carriers, and/or for corporate reorganizations; acquisitions of
telecommunications operations; assignments of carrier assets, including
subscriber bases; and carrier securities offerings. In certain instances the
Company has sought retroactive authority in various jurisdictions for certain
acquisitions and other reportable events. While the Company expects to receive
all requested approvals with respect to such retroactive filings, the Company
had not received all of such approvals as of March 30, 1997. Certificates of
authority can generally be conditioned, modified, canceled, terminated, or
revoked by state regulatory authorities for failure to comply with state law
and/or the rules, regulations, and policies of the state regulatory authorities.
Fines and other penalties, including the return of all monies received for
intrastate traffic from residents of a state, may be imposed for such
violations. If state regulatory agencies conclude that the Company has taken
steps without obtaining the required authority, they may impose one or more of
the sanctions listed above.
Currently, the Company can provide originating interstate and
intrastate service to customers in 47 states and the District of Columbia. Of
the states in which the Company provides originating service, 38 have public
utility commissions that actively assert regulatory oversight over the services
offered by the Company. Recently, two states (Arizona and Oklahoma) modified
their rules to require certification, and, although the applications were filed
with both commissions, the Company has not yet received written approval.
However, resale of long distance services in these states was previously
allowed without certification, and such resale is permitted to continue during
the pendency of these filings.
Additionally, the rules for each state vary in regard to the
authorization of inter-LATA versus intra-LATA service. Upon initial
certification, the Company generally requested approval to provide resold
intrastate long distance telecommunications services, unless a state had
specific rules pertaining to LATAs. At the time, depending on the individual
state regulations, some states only allowed the Company to provide inter-LATA
services, and the LECs typically provided intra-LATA services. However, many
states have modified their rules to allow competition in the intra-LATA market.
Generally speaking, as the rules have been modified, the states have either
ordered that all certified inter-LATA carriers now have the authority to
provide intra-LATA services, or directives have been given for companies to
apply for intra-LATA
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<PAGE> 12
authority or revise existing tariffs to comply with state regulations. In those
states which issued directive for companies to apply for intra-LATA authority
or revise tariffs, the Company has complied with such orders.
The Company continuously monitors regulatory developments in all
states in which it does business in order to ensure regulatory compliance. To
the extent that the Company converts from a switchless reseller to a switched
reseller, modification or amendment of the Company's state certifications may
be required.
Additional complaints for unauthorized switching of subscribers' long
distance carriers and for other issues involving subscriber liability for
billed calls for which the subscriber denies responsibility and other billing
issues have been lodged against the Company before other state public utilities
commissions. Although such complaints could result in additional legal actions
or proceedings being initiated against the Company, the Company believes that
such matters would be satisfactorily resolved without a material adverse impact
upon the Company's results of operations or financial condition. A final
determination by one or more jurisdictions that the Company engaged in the
unauthorized switching of subscribers' long distance carriers or other
unauthorized conduct could have a material adverse effect upon the Company's
results of operations or financial condition as, among other things, the
Company would be subject to financial penalties and potential revocation of its
operating authority in the particular jurisdiction, as well as other possible
restrictions.
The Company believes that it is in compliance in all material respects
with the requirements of federal and state regulatory authorities and maintains
communications regularly with the various regulatory authorities in each
jurisdiction.
DESCRIPTION OF CERTAIN AGREEMENTS
The following is a discussion of certain material terms and provisions
of the Company's agreements with US One and Comdisco. Such discussions are
qualified in their entirety by reference to the terms of such contracts.
US One. The Company's Agreement with US One, dated May 22, 1996 and
amended October 11, 1996, December 30, 1996, January 3, 1997 and March 26,
1997 (as amended, the "US One Agreement"), has an initial term which expires on
May 22, 2003, but it is automatically renewed for successive one year terms in
the absence of non-renewal by either party. The US One Agreement gives the
Company access to US One's switches as they are deployed and includes a Switch
Implementation Schedule which specifies target dates for deployment of the
first 14 of US One's switches in specific service areas (the "Service Areas").
Four of US One's switches had been deployed as of December 31, 1996, and the
remaining 11 switches are scheduled to be deployed by December 1997.
US One experienced technical difficulties and delays with the
implementation of its first switch that resulted in service deficiencies for
certain of Phoenix's Denver customer base. US One has successfully deployed
three additional switches without similar technical difficulties.
The US One Agreement provides that US One will supply, at its expense,
network design engineering assistance and consultation to facilitate the
Company's transition into utilizing US One's services and in developing systems
and procedures for management of such services until November 22, 1997 or until
nine months following the actual installation date of the last switch
identified on the Switch Implementation Schedule, whichever is later. This
engineering assistance includes the use of US One's network optimization model
that runs on the Company's switches leased from US One and which is designed to
select the least expensive transmission route available for each long distance
call by a Phoenix customer. By November 1997, the Company expects to develop
the engineering expertise to be able to bring the network design and
optimization function in-house.
The US One Agreement does not prevent Phoenix from contracting with
other providers of Communications Services, nor does it restrict US One from
providing such services to other long distance or telecommunications services
providers.
The US One Agreement limits the liability of each of Phoenix and US
One for defaults, breaches of representations, warranties or agreements under
the US One Agreement to amounts that were or would have been charged for the
related Communications Service. Neither party may be liable to the other for
any indirect, special, reliance, incidental or
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<PAGE> 13
consequential losses or damages. The US One Agreement further provides for
certain rights of indemnification in favor of each of the parties.
Comdisco. The initial term of the Company's agreement with Comdisco,
dated March 25, 1996 (the "Comdisco Agreement") runs through March 25, 1999,
but it automatically renews unless either party gives notice of nonrenewal.
Pursuant to the Comdisco Agreement, Comdisco has agreed to furnish the Company
with transmission capacity on its fixed-cost IMTs. Phoenix has the option to
increase or decrease the number of IMT circuits upon 30 or 60 days prior
written notice, respectively, subject to required service intervals and
availability.
Comdisco has agreed that, on routes where the Company has leased IMTs
from Comdisco, the monthly charges for such IMTs will not exceed the charges
from the least expensive alternative available from an alternative provider on
the same route. When the Company leases Comdisco's facilities, the monthly fees
per IMT consist of two forms of payment. The first payment is comprised of a
cash payment based upon Comdisco's incremental cost for such facility (the
"Incremental Cost Payment"). The second payment (the "Cost Savings Payment")
consists of cash or equity of the Company and is based upon the cost savings
between the total cost of next best alternative facility on the same route
available from an alternative provider and the Incremental Cost Payment. If
paid in cash, the second payment is equal to such cost savings. If paid in
equity of the Company, the second payment is in Common Stock of the Company
with a fair market value equal to one-half of such cost savings. The Cost
Savings Payment is payable in the Company's Common Stock until March 25, 1997,
and, at the Company's option, in cash or Common Stock thereafter. When the
Company's Common Stock is used to pay a portion of the fees for Comdisco IMTs,
this arrangement reduces the Company's cash requirements for securing such
IMTs.
Comdisco has specifically disclaimed any representation or warranty
concerning the products, equipment, software, or services provided under the
Comdisco Agreement, and has not warranted that transmission service will be
uninterrupted. Other than for certain indemnification obligations, Comdisco's
liability to Phoenix for losses and damages is limited to the amount of cash
fees paid by Phoenix during the preceding 12 month period. Comdisco may not be
held liable for special, exemplary or consequential damages to Phoenix.
Phoenix has the option to terminate the Comdisco Agreement upon 30
days' notice to Comdisco or immediately if service on an IMT is interrupted for
a period of 24 or more consecutive hours. Either party may terminate the
Comdisco Agreement upon the occurrence of material default by the other party
upon 30 days' prior written notice after the other party has been given an
opportunity to cure the default.
ITEM 2. PROPERTIES
The Company leases its principal executive offices in Golden,
Colorado. In June 1996, the Company completed the relocation of its corporate
headquarters from San Francisco. The lease for the Golden, Colorado offices
expires on December 30, 1997, and the Company believes that the term of such
lease will be extended in the second quarter of 1997. The Company leases sales
offices in the following cities: Atlanta, Chicago, Denver, Kansas City, Los
Angeles, Minneapolis, Orange County, San Francisco, Seattle, St. Paul and
Tampa. In addition, the Company intends to open a sales office in the New York
metropolitan area during 1997. The Company also leases space for its Customer
Service Call Center in Golden, Colorado. The Company currently leases
approximately 78,802 square feet of office space for an aggregate of $115,000
per month. In addition, the Company currently leases spaces for switches in
Colorado Springs, Minneapolis and Phoenix for an aggregate of $15,000 per
month.
ITEM 3. LEGAL PROCEEDINGS
LDDS Communications, Inc. commenced an action in the United States
District Court for the Southern District of Mississippi in July of 1993 against
ACI and the former owner of ACI asserting claims relating to alleged breaches
of Noncompete and Confidentiality Agreements the defendants had signed in
connection with two transactions in which LDDS was involved. The alleged
breaches primarily relate to ACI's hiring of sales representatives employed by
Dial-Net, Inc., a long distance company LDDS acquired in a merger transaction,
before the merger was consummated. LDDS asserted a monetary damage claim of
between $2.0 million and $3.0 million. ACI and ACI's former owner
counterclaimed, asserting a monetary damage claim in excess of $5.0 million.
Before trial, LDDS was informed that a subsidiary of Phoenix Network had
acquired ACI, but LDDS took no steps to change the pleadings to name Phoenix in
the litigation. A trial on this action was conducted in the United States
District Court in Jackson, Mississippi from October 2, 1996 through October 17,
1996,
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<PAGE> 14
and final arguments were heard on November 15, 1996. The trial court took
the matter under advisement at the close of the trial. The Company cannot
predict when the trial court will reach a decision in the case. The former
owner of ACI has actively defended and pursued the claims on behalf of herself
and ACI and has agreed to indemnify Phoenix against any liability the Company
might have as a result of this action. An escrow account, funded with 1,400,000
shares of Phoenix Common Stock has been established by the former owner of ACI
with respect to this indemnification obligation. The Company believes it
unlikely that the outcome of this action will have a material adverse affect
upon the Company's results of operations or financial condition, however, there
can be no assurance that this matter will not result in such a material adverse
affect upon the Company.
In addition, the Company is a party, from time to time, in litigation
incident to its business. The Company is not aware of any current or pending
litigation that it believes will have a material adverse affect on the
Company's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange
under the symbol "PHX". The following table reflects the range of high and low
closing sales prices for each period indicated.
<TABLE>
<CAPTION>
Low High
--- ----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995
First quarter ended March 31, 1995 ................. $ 1.88 $ 3.50
Second quarter ended June 30, 1995 ................. $ 2.25 $ 3.13
Third quarter ended September 30, 1995 ............. $ 2.44 $ 4.63
Fourth quarter ended December 31, 1995 ............. $ 3.31 $ 4.44
YEAR ENDED DECEMBER 31, 1996
First quarter ended March 31, 1996 ................. $ 3.44 $ 4.00
Second quarter ended June 30, 1996 ................. $ 2.88 $ 5.88
Third quarter ended September 30, 1996 ............. $ 4.50 $ 5.94
Fourth quarter ended December 31, 1996 ............. $ 3.38 $ 4.94
</TABLE>
The closing sales price of the Company's Common Stock as reported by
the American Stock Exchange on March 24, 1997 was $2.563.
As of the close of business on March 24, 1997, there were
approximately 734 stockholders of record of the Company's Common Stock,
including shares held in street name by various brokerage firms.
The Company has not, since 1983, paid any dividends on its Common
Stock and the Company does not anticipate the payment of dividends on such
stock in the foreseeable future. In addition to any applicable state law
restrictions relating to the payment of dividends on its Common Stock, the
Company is restricted from paying dividends on Common Stock until all dividends
due on outstanding Preferred Stock have been paid. Since September 1993, the
Company is additionally restricted from paying any dividends on its Common or
Preferred Stock without the consent of its finance company under the terms of
its Credit Agreement (as hereinafter defined).
The Company had 98,625 shares of Series A Preferred Stock and 114,500
shares of Series B Preferred Stock outstanding at December 31, 1996 with a
combined cumulative dividend requirement of $191,813 per year. Additionally,
the Company had 333,333 shares of Series D Preferred Stock outstanding at
December 31, 1996 with non-cumulative dividend preferences over Common Stock.
As of December 31, 1996, the Series A, B and D shares, with accumulated and
unpaid dividends of $736,770 were convertible into 1,908,977 shares of Common
Stock.
ITEM 6. SELECTED FINANCIAL DATA
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<PAGE> 15
The selected consolidated financial data presented below for, and as
of the end of, the years ended December 31, 1996, 1995, 1994, 1993 and 1992
have been derived from the consolidated financial statements of the Company,
which statements have been audited by Grant Thornton LLP, independent certified
public accountants. This data should be read in conjunction with the
consolidated financial statements, related notes and other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue ............................................. $ 36,502 $ 53,905 $ 74,405 $ 75,855 $ 99,307
Cost of revenue ..................................... 27,352 39,381 52,650 53,776 73,438
-------- -------- -------- -------- --------
Gross profit ......................... 9,150 14,524 21,755 22,079 25,869
Selling, general and administrative expenses ........ 9,438 15,851 21,075 22,323 31,115
Depreciation and Amortization ....................... 254 538 678 1,126 4,358
Relocation expenses ................................. -- -- -- -- 1,133
Acquisition expenses ................................ -- -- -- -- 1,309
Aborted bond offering expenses ...................... -- -- -- -- 246
-------- -------- -------- -------- --------
9,692 16,389 21,753 23,449 38,161
-------- -------- -------- -------- --------
Operating income (loss) ......................... (542) (1,865) 2 (1,370) (12,292)
Other income (expense):
Interest income ................................. 40 19 36 103 85
Interest expense ................................ (42) 186 (425) (261) (626)
Loss on abandonment of fixed assets ............. -- -- -- (1,020) (15)
Miscellaneous income (expense) .................. (11) (10) 43 (7) 4
-------- -------- -------- -------- --------
(13) (177) (346) (1,184) (552)
-------- -------- -------- -------- --------
Income (loss) before income taxes and
cumulative effect of accounting change ........... (555) (2,042) (344) (2,554) (12,844)
Income tax benefit (expense) ........................ -- 494 (16) (500) --
-------- -------- -------- -------- --------
Income (loss) before cumulative effect of
accounting change ................................. (555) (1,548) (360) (3,054) (12,844)
Cumulative effect of change in amortization of
deferred commissions .............................. -- -- 123 -- --
-------- -------- -------- -------- --------
Net income (loss) .................... $ (555) $ (1,548) $ (483) $ (3,054) $(12,844)
======== ======== ======== ======== ========
Net income (loss) attributable to common shares:
Net income (loss) ................................ $ (555) $ (1,548) $ (483) $ (3,054) $(12,844)
Preferred dividends .............................. (262) (268) (232) (594) (1,206)
-------- -------- -------- -------- --------
$ (817) $ (1,816) $ (715) $ (3,648) $(14,050)
======== ======== ======== ======== ========
Loss per common share:
Loss before cumulative effect of accounting
change ............................................ $ (0.08) $ (0.15) $ (0.04) $ (0.24) $ (0.68)
Cumulative effect of accounting change .............. -- -- (0.01) -- --
-------- -------- -------- -------- --------
Net loss per common share ........................... $ (0.08) $ (0.15) $ (0.05) $ (0.24) $ (0.68)
======== ======== ======== ======== ========
BALANCE SHEET DATA (at end of period):
Working capital (deficit) ........................... $ 370 $ 1,478 $ 1,409 $ 10,252 $ (7,786)
Total assets ........................................ 11,340 17,317 17,568 33,028 45,794
Long term debt ...................................... -- -- -- -- 2,213
Stockholders' equity (deficit) ...................... (2,825) 3,668 4,512 19,188 18,172
</TABLE>
The Company has not, since 1983, declared or paid any dividends on its
Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to the historical information contained herein, the
following discussion contains certain forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the section
entitled "Business" and the section entitled "Risk Factors" included in the
Registration Statement on Form S-3 incorporated by reference herein. The
following discussion reflects the merger with AmeriConnect, Inc. (the
"AmeriConnect Merger") on a pooling of interests basis and is based upon and
should be read in conjunction with the Company's consolidated financial
statements and the notes thereto included elsewhere in this Annual Report.
GENERAL
The Company entered the telecommunications industry as a switchless
long distance reseller in 1985, and the Company grew internally on the efforts
of its sales and marketing force during the following decade. Additionally,
since May
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1995, the Company has completed 10 acquisitions of companies or customer bases,
thereby strengthening the Company's customer base, product and service
offerings and sales distribution. The largest of these acquisitions iclude:
Bright Telecom L.P. ("Bright"), a San Francisco-based international call-back
company, Tele-Trend, a switchless reseller based in Denver, and a portion of
the customer base of ISI Telecommunications, Inc. ("ISI"), a switched reseller,
all of which were completed in the last half of 1995. In January 1996, the
Company acquired ACI and, in October 1996, the Company completed the
AmeriConnect Merger. See "Item 1--Business--Acquisitions and Mergers."
Phoenix believes it has amassed sufficient size and scope to achieve
significant cost savings through deployment of its Network, consisting of
switching equipment in major metropolitan areas and transmission facilities
between these switches. In contrast to some other IXC's who are investing
substantial capital to build networks, the Company is deploying its Network
without substantial capital investment. This has been made possible by the
increasing availability of capacity on switching and transmission equipment on
a leased basis from other telecommunications providers. The ability to lease
rather than purchase this capacity, and to expand capacity on an "as needed"
basis, creates a significant opportunity for Phoenix to rapidly deploy its
Network, while preserving most of the Company's capital spending budget for the
acquisition of additional customer traffic that may be shifted onto the
Company's Network. By leasing capacity on switching equipment and transmission
facilities, Phoenix intends to fully-deploy and substantially load its planned
Network by the end of 1997. Phoenix has entered into agreements to lease
switches from US One and other vendors on an as-needed basis and to lease
fixed-cost IMTs from Comdisco and LDDS/WorldCom. The Network also includes
three switches (located in Colorado Springs, Minneapolis and Phoenix) which
were acquired by the Company in connection with the acquisition of ACI in
January 1996 and may include additional switches acquired in the future through
acquisitions. The Company expects deployment of the Network to significantly
reduce the Company's average per minute line costs and provide an important
competitive advantage compared to resellers and other IXCs without comparable
networks.
Phoenix currently has agreements with major long distance carriers,
such as LDDS/WorldCom, Sprint, Frontier, AT&T and others, to carry the majority
of its long distance traffic. During the planned 12 month transition period as
the Network is being deployed, and afterward on a limited basis, the Company
will continue to use these vendors to carry traffic. The Company's agreements
with vendors specify minimum volume usage requirements, but, in contrast to
many of its competitors, such requirements scale down over the next 18 months,
thereby freeing traffic to be loaded on the Network. Accordingly, minimum
volume usage requirements under these agreements, where they exist, should not
limit the Company's ability to load a substantial portion of its traffic on the
Network as it is deployed.
The Company derives revenue through sales of telecommunications
services to its customers including, (i) "1 plus" and (800) service and (ii)
dedicated service and private lines. Revenues are based upon rates set by the
Company and billed to its customers for the services utilized. The Company's
other revenues are primarily derived from calling cards, Internet access,
international call-back and conference calling.
The Company's cost of revenues consists of amounts paid to switching
services providers and to carriers for bundled switching and transmission
services. Switching services rates are fixed on a contractual, per minute
basis. The rates the Company pays for bundled switching and transmission
service vary depending on which underlying carrier is used for service and the
volume of traffic on such carriers.
Selling, general and administrative expenses ("SG&A") consist of
personnel costs, sales commissions and marketing costs, facilities costs,
billing costs, bad debt expense and other general expenses. Sales commissions
represent the amounts paid to employees and independent contractors for the
procurement of new customers. Commissions paid are a combination of one-time
up-front payments for new customers and residual commissions paid based upon
customers' usage. One-time up-front commissions paid to independent contractors
are amortized primarily over a four year period. All other commissions are
expensed as earned. Bad debt expense is provided for on a monthly basis as a
charge to earnings based upon estimated uncollectible accounts. Accounts are
written off against the reserve when deemed to be uncollectible.
RESULTS OF OPERATIONS
The following table sets forth for the years and periods indicated the
respective percentages of revenues represented by certain items in the
Company's statements of operations.
16
<PAGE> 17
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues .......................... 100.0% 100.0% 100.0%
Cost of revenues .................. 70.8 70.9 74.0
------ ------ ------
Gross profit ...................... 29.2 29.1 26.0
Selling, general and
administrative ................. 28.3 29.4 31.3
Depreciation and
amortization ................... 0.9 1.5 4.4
Relocation expenses ............... -- -- 1.1
Acquisition expenses .............. -- -- 1.3
Aborted bond offering expenses .... -- -- 0.2
------ ------ ------
29.2 30.9 38.3
------ ------ ------
Operating income (loss) ........... -- (1.8) (12.3)
Interest income ................... -- 0.1 --
Interest expense .................. (0.5) (0.3) (0.6)
Loss on abandonment of
fixed assets ................... -- (1.3) --
Miscellaneous income .............. -- -- --
Income tax benefit
(expense) ...................... -- (0.7) --
------ ------ ------
Loss before cumulative
effect of accounting
change ......................... (0.5) (4.0) (12.9)
Cumulative effect of change
in amortization of deferred
commissions .................... (0.2) -- --
------ ------ ------
Net income (loss) ................. (0.7)% (4.0)% (12.9)%
====== ====== ======
Preferred dividends ............... (0.3) (0.8) (1.2)
------ ------ ------
Net income (loss)
attributable to common
shares ......................... (1.0)% (4.8)% (14.1)%
====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues increased by $23.4 million or 30.8%, to $99.3
million for the 1996 from $75.9 million for 1995. This increase was primarily
the result of an increase in MOU of 214,484,000 minutes, to 628,352,000 minutes
for
17
<PAGE> 18
1996, from 413,868,000 minutes for 1995 which was partially offset by a
13.7% decrease in the average revenue per MOU to $.158 per MOU for 1996 from
$.183 per MOU for 1995. Revenues per MOU decreased primarily as a result of the
Company's customers utilizing more competitively priced services offered by the
Company during 1996 and the effect of acquired companies' rate structures which
generally were lower than those offered by the Company. The customers gained
from the ACI acquisition during 1996 accounted for approximately 26.8% of total
MOU in the period.
Cost of Revenues. Cost of revenues increased by $19.6 million or
36.4%, to $73.4 million for 1996 from $53.8 million for 1995. This increase was
primarily the result of an increase in MOU resulting from acquisitions. Cost of
revenues per MOU decreased 10.0% to $.117 per MOU for 1996 from $.130 per MOU
for 1995 primarily as a result of the acquisition of ACI, which had a cost per
MOU which was lower than the Company's, and, to a lesser extent, the Company
being able to place new business on its most favorably priced vendor carrier
contracts. As a percentage of revenues, cost of revenues increased to 74.0% for
1996 from 70.9% for 1995. The increase in cost of revenues as a percentage of
revenues was primarily the result of the Company providing lower-priced
services to its customers without a corresponding decrease in the cost of
providing such services. Historically, as the Company's traffic volume with its
vendor carriers has increased, it has been able to negotiate more favorable
rates with such vendor carriers, usually in conjunction with an increased
volume commitment. However, in order to pursue its long-term strategy of
deploying and loading the Network, the Company did not renegotiate any of its
material vendor carrier contracts in the first half of 1996 in order to avoid
increased vendor carrier commitments.
Selling, General and Administrative Expenses. SG&A increased by $8.8
million, or 39.4%, to $31.1 million for 1996 from $22.3 million for 1995. This
increase was primarily the result of incremental SG&A associated with the ACI
acquisition. SG&A as a percentage of revenue increased to 31.3% for 1996 from
29.4% of revenues for 1995. During 1996, the Company was incurring certain
duplicative operating costs in connection with the operation of ACI, such as
facilities expense and salaries of administrative personnel performing similar
functions. The Company consolidated its San Francisco operations into the
former ACI facilities in July 1996. During 1996, the Company incurred
approximately $1.0 million in duplicative operating costs which were eliminated
as of July 1996. The Company expects to realize further savings as it
integrates the AmeriConnect Merger in the first quarter of 1997.
Depreciation and Amortization. Depreciation and amortization increased
by $3.3 million to $4.4 million for 1996 from $1.1 million for 1995. This
increase is primarily attributable to the increased amortization of goodwill
and customer bases recorded as a result of the acquisitions discussed above.
Relocation Expenses. Relocation expenses of $1.1 million were incurred
in 1996 from the Company's relocation of its primary operations from San
Francisco to Golden, Colorado.
Acquisition Expenses. Acquisition expenses of $1.3 million were
incurred in connection with the AmeriConnect Merger and consist primarily of
transaction fees to third parties, legal and accounting fees and a contractual
severance payment to AmeriConnect's CEO.
Aborted Bond Offering Expenses. Aborted bond offering expenses relate
to legal and accounting fees in connection with a proposed bond offering the
Company began in the last half of 1996. The Company decided to discontinue the
offering in January 1997 due to unfavorable market conditions.
Interest Income. Interest income decreased by $18,000 to $85,000 for
1996 from $103,000 for 1995, as a result of lower cash balances in the
Company's interest bearing bank accounts.
Interest Expense. Interest expense increased by $364,000 to $625,000
for 1996 from $261,000 for 1995. This increase was primarily the result of
increased borrowings under the Company's credit facility. Interest expense will
increase substantially in future periods as a result of increased indebtedness
under the Company's credit facility.
Net Loss. Net loss increased by $9.8 million to a net loss of $12.8
million for 1996 from a net loss of $3.0 million for 1995 for the reasons
discussed above.
Preferred Dividends. Preferred dividend requirements increased by
$612,000 to $1,206,000 for 1996 from $594,000 for 1995 primarily as a result of
the issuance of 1,176,056 shares of Series F Preferred Stock in June 1995.
18
<PAGE> 19
Effective in December 1996, the Company converted the Company's outstanding
Series F Preferred Stock into Common Stock of the Company in accordance with
the terms therewith. As a result of the conversion of the Series F Preferred
Stock, the Company's preferred dividend requirements have decreased.
Net Loss Attributable to Common Shares. Net loss attributable to
common shares increased by $10.4 million to a net loss attributable to Common
Stock of $14.0 million for 1996 from a net loss attributable to Common Stock of
$3.6 million for 1995 for the reasons discussed above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Revenues increased by $1.5 million, or 1.9%, to $75.9
million for 1995 from $74.4 million for 1994. This increase was primarily the
result of an increase in MOU of 35,222,000 minutes, from 378,646,000 minutes
for 1994 to 413,868,000 minutes for 1995, which was partially offset by a 7.1%
decrease in the average revenue per MOU from $0.197 per MOU for 1994 to $0.183
for 1995. Revenues per MOU decreased primarily as a result of the Company's
customers utilizing more competitively priced services offered by the Company
during 1995 and the effect of acquired companies' rate structures which
generally were lower than those offered by the Company. In August 1995, the
Company acquired Bright, Tele-Trend and selected customers from ISI. The
customers gained from these acquisitions accounted for approximately 5.1% of
total MOU for 1995.
Cost of Revenues. Cost of revenues increased by $1.2 million, or 2.1%,
to $53.8 million for 1995 from $52.6 million for 1994. This increase was
primarily the result of an increase in MOU resulting from acquisitions. Cost of
revenues per MOU decreased 6.5% to $0.130 per MOU for 1995 from $0.139 per MOU
for 1994 as a result of the Company being able to place new business on its
most favorably priced vendor carrier contracts. As a percentage of revenues,
cost of revenues remained comparable between periods at 70.9% for 1995 compared
to 70.8% for 1994.
Selling, General and Administrative Expenses. SG&A increased by $1.2
million, or 5.9%, to $22.3 million for 1995 from $21.1 million for 1994. This
increase was due in part to $423,000 of incremental SG&A as a result of the
Tele-Trend acquisition. SG&A as a percentage of revenues increased to 29.4% for
1995 from 28.3% for 1994 primarily due to the acquisition.
Depreciation and Amortization. Depreciation and amortization increased
by $448,000, or 66.1%, to $1.1 million for 1995 from $678,000 for 1994. This
increase is primarily attributable to the increased amortization of goodwill
and customer bases recorded as a result of the acquisitions of Bright and
Tele-Trend and the acquisition of selected customers from ISI, discussed above.
Interest Income. Interest income increased by $67,000 to $103,000 for
1995 from $36,000 for 1994 due to the investment of the proceeds from certain
of the Company's equity offerings.
Interest Expense. Interest expense decreased by $164,000 to $261,000
for 1995 from $425,000 for 1994 primarily due to a lower average outstanding
balance under the Company's credit facility.
Loss on Abandonment of Fixed Assets. The Company recorded a loss on
abandonment of fixed assets of $1.0 million in 1995. The loss relates to a
write off of software development costs during the fourth quarter of 1995
incurred in connection with the development of a new billing system to replace
the Company's existing systems. The Company ultimately decided to license an
outside vendor's software for its billing system. Accordingly, the cost of the
in-house software development was written off during 1995.
Income Tax Expense. Income tax expense increased by $484,000 to
$500,000 for 1995 from $16,000 for 1994. The increase relates to an increase in
the income tax valuation allowance by the Company's subsidiary, AmeriConnect,
Inc., as a result of its determination that realization of net operating losses
was doubtful due to its increasing operating losses.
Net Income (Loss). Net loss increased by $2.6 million to $3.0 million
for 1995 from a net loss of $483,000 for 1994 for the reasons described above.
19
<PAGE> 20
Preferred Dividends. Preferred dividend requirements increased by
$363,000 to $594,000 for 1995 from $231,000 for 1994 primarily due to the
issuance of the 1,176,056 shares of Series F Preferred Stock in 1995.
Net Income (Loss) Attributable to Common Shares. Net loss attributable
to common shares increased by $2.9 million to $3.6 million for 1995 from a net
loss of $715,000 for 1994 for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital expenditures were $3.6 million, $589,000 and
$991,000 in 1996, 1995 and 1994, respectively. Expenditures to complete the
migration to the New Billing and Customer Care Platform are expected to be
approximately $1.0 million in 1997. The Company has financed approximately $1.4
million of the 1996 costs associated with the New Billing and Customer Care
Platform through a financing company over a three year term. The Company
believes that its strategy for implementing and operating the Network pursuant
to various contractual arrangements will allow it to pursue its operating
strategy without the necessity of making significant additional capital
expenditures to upgrade its Network.
During 1996, and during 1995, the Company spent $17.6 million and $6.2
million, respectively, on acquisitions, of which $4.6 million and $6.2 million,
respectively, was paid in cash. The cash for such acquisitions was raised
through equity offerings and short-term borrowings.
The Company's principal source of cash to fund its liquidity needs is
anticipated to be net cash flows from operating activities and borrowings under
the Company's credit facility. The credit facility allows for borrowings of up
to $10 million based upon the Company's qualified accounts receivable. The loan
balance as of December 31, 1996 was $4.7 million. The components of net cash
flows from operating activities are detailed in the consolidated financial
statements and related notes and include net income or loss adjusted for (i)
depreciation and amortization; and (ii) changes in operating assets and
liabilities. Net cash used in operating activities for 1996 was $4.0 million
compared to $1.7 million for 1995, primarily as a result of the loss incurred
for the period. Net cash used in operating activities for 1995 was $1.7
million, a decrease of $3.1 million from $1.4 million of net cash provided by
operating activities for 1994. The total net cash used by operations over the
periods discussed above has generally been a result of the losses incurred by
the Company over such periods. The Company believes that implementation of its
Network strategy will result in increasingly lower line costs over the next
year which should improve the Company's gross margins and generate positive
operating cash flows.
The Company is currently negotiating with several private investors
regarding a $3.0 to $6.0 million cash equity placement. There can be no
assurance that the Company will be able to consummate such equity placements on
terms acceptable to the Company.
SEASONALITY
The Company's revenues, and thus its potential earnings, are affected
by holiday and seasonal variations. A substantial portion of the Company's
revenues are generated by direct dial domestic long distance business
customers, and, accordingly, the Company experiences a decrease in revenues
around holidays, particularly the quarter ending December 31, when business
customers reduce their usage. The Company's fixed operating expenses, however,
do not decrease during these quarters. Accordingly, the Company has
experienced, and may continue to experience, lower revenues and earnings in its
first and fourth fiscal quarters when compared with the other fiscal quarters.
EFFECT OF INFLATION
Inflation is not a material factor affecting the Company's business.
TAX BENEFIT
As of December 31, 1996, the Company had available to offset future
Federal taxable income, net operating loss carryforwards ("NOL") of
approximately $20.4 million which expire in varying amounts from 2002 through
2011. A portion of the NOLs may be subject to limitations as a result of
provisions of the Internal Revenue Code relating to changes in ownership and
utilization of losses by successor entities.
20
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Company and the related
report of independent accountants are included in this report beginning at page
F-1:
Report of Independent Certified Public Accountants
Balance Sheets
Statements of Operations
Statement of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS.
The names of the directors and certain information about them are set
forth below:
<TABLE>
<CAPTION>
Director
Name Age Since
---- --- -----
<S> <C> <C>
Thomas H. Bell(1)(3).................................................................. 49 1985
James W. Gallaway(2).................................................................. 57 1988
Merrill L. Magowan(2)(3).............................................................. 59 1990
Wallace M. Hammond.................................................................... 51 1994
David Singleton(1)(3)(4).............................................................. 57 1995
Max E. Thornhill(2)(4)................................................................ 64 1995
Charles C. McGettigan(1).............................................................. 52 1996
- ----------
</TABLE>
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Nominating Committee.
(4) Messrs. Singleton and Thornhill were elected to the Board by the holders of
the Company's Series F Preferred Stock. Effective in December, 1996, all of the
Series F Preferred Stock was converted into Common Stock of the Company.
Messrs. Singleton and Thornhill tendered their resignations from the Board, but
the Board of Directors elected not to accept such resignations. Accordingly,
Messrs. Singleton and Thornhill will continue to serve as directors until the
next Annual Meeting of Stockholders and until their successors are elected and
have duly qualified.
THOMAS H. BELL
21
<PAGE> 22
Mr. Bell is the founder of the Company. He has served as the Chairman
of the Board of Phoenix since its inception under the name Phoenix Telcom, Inc.
in 1985, as the Company's Chief Executive Officer from 1985 to January 1992,
and as President of the Company from 1985 to September 1990. Mr. Bell is also
an independent consultant in the telecommunications industry. Mr. Bell is the
brother of J. Rex Bell, the Company's Senior Vice President of Customer
Service.
JAMES W. GALLAWAY
Mr. Gallaway has served as a director of the Company since July 1988.
He was a founder, director from 1984 to 1988, and Vice President from 1983 to
1986, of Centex Telemanagement, Inc., a telecommunications company that resold
local telephone service. Since 1980, he has been Chairman of the Board of
Gallaway Enterprises, Inc., a telecommunications company. From February 1988
through December 1994, he served as a director and Vice President of
StellarNet, Inc., an information management company in the health care
industry. Mr. Gallaway is a U.S. Marine Corps Reserve (Retired) Colonel.
MERRILL L. MAGOWAN
Mr. Magowan became a director of the Company in September 1990. Since
1982, Mr. Magowan has been a principal of S F Associates, a California
registered investment advisory firm (formerly known as Magowan Dirickson
Investment Company). He is also currently a director of Nordeman Grimm (since
1975), an executive search consulting firm. From 1968 to 1986, he was a
director of Safeway Stores, Inc., a retail grocery chain.
WALLACE M. HAMMOND
Mr. Hammond joined the Company as Executive Vice President in February
1994. He was elected to the Company's Board of Directors and named President
and Chief Operating Officer of the Company in May 1994. Mr. Hammond was elected
Chief Executive Officer of the Company in December 1994. From 1992 to 1993, he
was President and Chief Executive Officer of ANSCO & Associates, a telephone
engineering and plant construction company. From 1979 to 1992, he was with
BellSouth Communication Systems, Inc., a nationwide division of BellSouth
Corporation involved in the customer premises equipment after-market, where he
was promoted to Vice President-Operations in 1989.
DAVID SINGLETON
Mr. Singleton has served as a director of the Company since October
1995. He was a founding director of LDDS WorldCom, Inc., a long distance
telecommunications company, and served as a director of that company from 1983
to 1992. He was a founding director, and currently serves as a director of, US
One. Mr. Singleton also serves as a director of Red Fox Environmental Services.
Mr. Singleton has worked in personal and small business financial planning for
25 years and currently manages a private portfolio.
MAX E. THORNHILL
Mr. Thornhill has served as a director of the Company since October
1995. He was a founding director of LDDS WorldCom, Inc. and served as a
director of that company from 1983 to September 1993. He was a founding
director, and currently serves as a director of, US ONE Communications Corp.
Mr. Thornhill is currently engaged in real estate development and oil and gas
exploration and production.
CHARLES C. MCGETTIGAN
Mr. McGettigan served as a director of the Company from November 1990
through December 1991 and was re-elected as a director in September 1996. He
was a co-founder (in 1991) and presently is a general partner of Proactive
Investment Managers, L.P., which is the general partner of Proactive Partners,
L.P., a merchant banking fund. Mr. McGettigan was a co-founder (in 1988) and is
a managing director of McGettigan, Wick & Co., Inc., an investment banking
firm. From 1984 to 1988, he was a Principal, Corporate Finance, of Hambrecht &
Quist, Incorporated. Prior to that, Mr. McGettigan was a Senior Vice President
of Dillon, Read & Co. Inc. He currently serves on the Boards of Directors
22
<PAGE> 23
of digital dictation, inc.; I-Flow Corporation; Modtech, Inc.; NDE
Environmental Corporation; Onsite Energy, Inc.; PMR Corporation; Sonex
Research, Inc.; and Wray-Tech Instruments, Inc.
EXECUTIVE OFFICERS OF THE REGISTRANT WHO ARE NOT DIRECTORS
JEFFREY L. BAILEY
Mr. Bailey, 44, has been Senior Vice President and Chief Financial
Officer of the Company since March 1990. He is a Certified Public Accountant
and, from 1985 to 1990, was a Senior Manager with Grant Thornton LLP, an
accounting and management consulting firm. From 1975 to 1985 he was with Arthur
Young & Company (now, Ernst & Young, L.L.P.).
J. REX BELL
Mr. Bell, 43, has been Senior Vice President of Customer Service of
the Company since May 1993. From March 1991 to May 1993, he was Vice President
of Operations. From January 1990 to March 1991, he held the position of
Director of Marketing of the Company. Prior to joining the Company, Mr. Bell
was a Senior Telecommunications Consultant from 1984 to 1990 for two California
consulting firms, COMSUL, Ltd. and Robin & Dackerman, Inc. Between 1980 and
1984, he held management positions with MCI Communications and Cable and
Wireless, Ltd. Mr.
Bell is the brother of Thomas H. Bell, a director of the Company.
JON BEIZER
Mr. Beizer, 32, was promoted to Vice President of Corporate Development
in 1995. Since joining the Company in July 1992, he has held various positions,
the last of which was Director of Marketing. Mr. Beizer holds an M.B.A. from
Stanford University, where he attended from 1990 to 1992. Mr. Beizer worked
from 1987 through 1990 as a consultant for Braxton Associates, a management
consulting firm specializing in corporate strategy.
Thomas H. Bell, a director of the Company, and J. Rex Bell, Senior
Vice President of Customer Service, are brothers. With the exception of that
relationship, there are no other family relationships among officers or
directors of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Commission initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Offices, directors
and greater than ten percent stockholders are required by Commission regulation
to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and representations that no other reports
were required, during the fiscal year ended December 31, 1996, all Section
16(a) filing requirements applicable to its officers, directors and greater
than ten percent beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
No cash fees are paid to directors for serving on the Board. The
members of the Board are, however, eligible for reimbursement for their
expenses incurred in connection with attendance at Board and Committee meetings
in accordance with Company policy. Furthermore, each non-employee director of
the Company also receives stock option grants under the 1992 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"), as described below.
Directors who are employees of the Company are not eligible to participate in
the Directors' Plan, but are eligible to participate in the Company's 1989
Stock Option Plan. See "Compensation of Executive Officers--Stock Option Grants
and Exercises."
23
<PAGE> 24
Option grants under the Directors' Plan are non-discretionary. Each
person who is elected or appointed on or after January 4, 1993 to be a
non-employee director of the Company is automatically granted under the
Directors' Plan an option to purchase 10,000 shares of Common Stock of the
Company. In addition, on the first business day of each year thereafter, each
non-employee director of the Company is automatically granted under the
Directors' Plan an option to purchase shares of Common Stock (rounded to the
nearest 100 shares) of the Company equal to the Proration Factor (as
hereinafter defined) multiplied by the sum of (i) 10,000 shares of Common Stock
of the Company and (ii) 2,500 shares of Common Stock of the Company multiplied
by the number of full years such non-employee director has served in such
capacity. The "Proration Factor" is a fraction, the numerator of which is the
number of calendar days during the preceding year on which such person served
as a non-employee director and the denominator of which is 365. No other
options may be granted at any time under the Directors' Plan. The exercise
price of options granted under the Directors' Plan is equal to the fair market
value of the Common Stock subject to the option on the date of grant. The
number of options granted under the Directors' Plan is subject to certain
anti-dilution protections in favor of the participants, and options granted
under the Directors' Plan expire ten years from the date of grant. Options
granted under the Directors' Plan vest and become exercisable at the rate of
one-sixteenth of the shares subject to such options per quarter for sixteen
quarters following the date of the grant.
COMPENSATION OF EXECUTIVE OFFICERS
Summary of Compensation
The following table shows for the fiscal years ending December 31,
1996, 1995 and 1994, compensation awarded or paid to, or earned by the
Company's Chief Executive Officer and each other officer at December 31, 1996
who received total annual salary and bonus in excess of $100,000 for the year
ended December 31, 1996 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Awards
------
Annual Compensation Securities
------------------------ Underlying
Name and Principal Salary(1) Bonus Options/(2) All Other
Position Year ($) ($) SARs (#) Compensation(4)($)
------------------- ---- --------- ------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Mr. Wallace M. Hammond(3).... 1996 252,500 60,000 400,000 25,120
President and Chief 1995 203,511 67,451 300,000 2,320
Executive Officer 1994 127,885 300,000(2)
Mr. Jeffrey L. Bailey........ 1996 137,934 60,000 23,499
Senior Vice President and 1995 129,219 15,193 50,000 2,320
Chief Financial Officer 1994 120,573 500
Mr. J. Rex Bell.............. 1996 127,721 50,000 15,427
Senior Vice President 1995 117,657 15,193 50,000 2,320
of Customer Service 1994 109,585
Mr. Jon Beizer............... 1996 105,417 125,000 10,544
Vice President 1995 96,418 60,000
of Corporate Development 1994 78,663
</TABLE>
- ----------
(1) Includes amounts earned but deferred at the election of the
executives. As permitted by Commission rules, no amounts are shown for
certain perquisites, where such amounts do not exceed the lesser of
10% of bonus plus salary or $50,000.
(2) Repriced options treated as new grants. The Company has no stock
appreciation rights (SARS).
(3) Mr. Hammond was not employed by the Company before February 1994, thus
amounts disclosed include compensation commencing in February 1994 for
Mr. Hammond, when he joined the Company as Executive Vice
24
<PAGE> 25
President. Mr. Hammond was Elected President and Chief Operating
Officer of the Company in May 1994 and Chief Executive Officer in
December 1994.
(4) In each case, all other compensation includes $500 in matching section
401(k) plan contributions made by the Company in 1994, $1,000 in 1995
and $1,000 in 1996. The balance in 1994 and 1995 of the amount
reported for each officer represents a reimbursement of parking
expenses. In addition to a parking reimbursement, the balance of the
amount reported for each officer in 1996 represents relocation
expenses paid for the officers' move to Colorado from California.
Employment Agreements
See the 1996 Proxy Statement under the heading "Executive
Compensation--Compensation of Executive Officers--Employment Agreements" for a
description of Mr. Hammond's employment agreement. The Company had no other
employment agreements in effect during 1996.
Stock Option Grants and Exercises
The Company grants options to its executive officers under its 1989
Stock Option Plan (the "1989 Plan"). As of December 31, 1996, options to
purchase a total of 2,277,506 shares had been granted and were outstanding
under the plan and 631,736 shares remained available for grant thereunder.
25
<PAGE> 26
The following tables show, for the fiscal year ended December 31,
1996, certain information regarding options granted to, exercised by, and held
at year end by the named executive officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-------------------
Potential
Percentage Realizable Value at
Number of of Total Assumed Annual
Securities Options Rates of Stock Price
Underlying Granted to Exercise Appreciation
Options Employees or Base Expira- for Option Term(2)
Granted in Fiscal Price tion -----------------------
Name (#) 1996(1) ($/Sh) Date 5% ($) 10% ($)
---- ---------- ------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Wallace M. Hammond..... 200,000 22% 3.0000 4/12/2006 377,337 956,245
200,000 22% 3.5625 12/16/2006 448,087 1,135,542
Jeffrey L. Bailey...... 60,000 6% 3.0000 4/12/2006 113,201 286,873
J. Rex Bell............ 50,000 5% 3.0000 4/12/2006 94,334 239,061
Jon Beizer............. 50,000 5% 3.5625 1/3/2006 112,022 283,885
75,000 8% 3.0000 4/12/2006 141,501 358,592
</TABLE>
- ----------
(1) Based on options to purchase 921,600 shares of the Company's Common
Stock granted in 1996.
(2) The potential realizable value is based on the term of the option at
its time of grant (10 years in each case). The potential realizable
value is calculated by assuming that the stock price on the date of
grant appreciates at the indicated annual rate, compounded annually
for the entire term of the option and that the option is exercised and
sold on the last day of its term for the appreciated stock price. No
gain to the optionee is possible unless the stock price increases over
the option term, which will benefit all stockholders.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996 AND
VALUE OF OPTIONS AT END OF FISCAL YEAR 1996
<TABLE>
<CAPTION>
Number Of
Securities Value Of
Underlying Unexercised
Unexercised In-the-money
Options/SARs Options/SARs
Shares at End of at End of
Acquired Value Fiscal 1996 (#) Fiscal 1996 ($)(2)
On Exercise Realized Exercisable/ Exercisable/
Name (#) ($)(1) Unexercisable Unexercisable
---- ----------- --------- --------------- -----------------
<S> <C> <C> <C> <C>
Jeffrey L. Bailey ..... 15,000 66,562 128,748/ 91,252 274,139/ 40,861
Jon Beizer ............ 24,750 67,586 21,500/154,000 468/ 35,312
J. Rex Bell ........... 14,000 66,500 93,748/ 81,252 191,014/ 37,110
Wallace M. Hammond .... 50,000 116,087 275,000/675,000 419,062/249,218
</TABLE>
- ----------
(1) Value realized is based on the fair market value of the Company's
Common Stock on the date of exercise minus the exercise price and does
not necessarily indicate that the optionee sold such stock.
(2) Fair market value of the Company's Common Stock at December 31, 1996
($3.375) Minus the exercise price of the options.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference
from the Company's definitive Proxy Statement to be filed with the Commission
not later than 120 days after December 31, 1996.
26
<PAGE> 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LINKAGES WITH US ONE
The Company and US One share common directors and stockholders. Mr.
David Singleton and Mr. Max E. Thornhill are directors of both the Company and
US One. As a result, certain conflicts of interest may arise in the future in
connection with the implementation of the US One Agreement and the negotiation
of any new agreements between the Company and US One. Mr. Singleton
beneficially owns Common Stock representing less than 1% of the Company's total
voting power at December 31, 1996. Mr. Thornhill beneficially owns Common Stock
representing approximately 6.8% of the Company's total voting power at December
31, 1996.
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnity agreements with certain
officers and directors which provide, among other things, that the Company will
indemnify such officer or director, under the circumstances and to the extent
provided for therein, for expenses, damages, judgments, fines and settlements
he may be required to pay in actions or proceedings to which he is or may be
made a party by reason of his position as a director, officer or other agent of
the Company, and otherwise to the fullest extent permitted under Delaware law
and the Company's By-laws.
ACQUISITION OF ACI
In January 1996, the Company acquired from Ms. Judy Van Essen all of
the outstanding shares of ACI, a Golden, Colorado facilities-based reseller of
long distance service. Consideration for the transaction was in the form of
$4.0 million in cash, 2,800,000 shares of the Company's Common Stock valued at
$10.5 million and the issuance of a long-term note in the amount of $1.3
million. As a result of the transaction and her acquisition of 2,800,000 shares
of the Company's Common Stock, Ms. Van Essen held approximately 10.8% of the
Common Stock of the Company as of December 31, 1996.
PREFERRED STOCK CONVERSIONS
In December 1996, the Company received all requisite consents of the
holders of the Company's Series F Preferred Stock to convert all outstanding
shares of Series F Preferred Stock into Common Stock of the Company. Messrs.
McGettigan, Thornhill and Singleton, directors of the Company, and certain of
their affiliates, were holders of such Series F Preferred Stock prior to such
conversion. Effective December 14, 1996, the Series F Preferred Stock, together
with accrued dividends thereon, was converted into 5,191,064 shares of Common
Stock.
The Company is also seeking the agreement of the holders of the
Company's Series A, B and D Preferred Stock to convert such Preferred Stock
into Common Stock of the Company. Messrs. Magowan and McGettigan, directors of
the Company, and certain of their affiliates are holders of shares of such
Preferred Stock. If fully converted as of December 31, 1996, the Series A, B
and D Preferred Stock, together with accrued dividends thereon, would have been
converted into 1,908,977 shares of Common Stock.
27
<PAGE> 28
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this Annual Report on
Form 10-K:
(a) Financial Statements: The financial statements and schedule filed
as part of this report are set forth following page F-1 of this report.
<TABLE>
(b) Exhibits:
<S> <C>
3.1 -- Restated Certificate of Incorporation of the Company(1)
3.2 -- Bylaws of the Company(1)
10.1 -- 1989 Stock Option Plan(2)
10.2 -- Forms of option grant pursuant to the 1989 Stock Option
Plan(3)
10.3 -- 1992 Non-Employee Directors' Stock Option Plan, as
Amended(5)
10.4 -- Form of option grant pursuant to the 1992 Non-Employee
Directors' Stock Option Plan(5)
10.5 -- Series A Preferred Stock Purchase Agreement dated as of
August 17, 1990(4)
10.6 -- Series B Preferred Stock Purchase Agreement dated as of
December 27, 1991 with List of Purchasers(6)
10.7 -- Series D Preferred Stock Purchase Agreement dated as of
December 15, 1992(5)
10.8 -- Sublease and Consent between the Company and Richard
Goldman & Co. relating to the premises at One Maritime
Plaza, San Francisco, CA(4)
10.9 -- Amended and Restated Loan and Security Agreement, among
the Company, Phoenix Network Acquisition Corp.,
Americonnect, Inc. and Foothill Capital Corporation, dated
September 26, 1995 (the "Original Foothill Agreement")
10.10 -- Amendment Number One to the Original Foothill Agreement,
dated October 17, 1996
10.11 -- Amendment Number Two to the Original Foothill Agreement,
dated December 23, 1996
10.12 -- Amendment Number Three to the Original Foothill
Agreement, dated March 12, 1997
10.13 -- Office Lease Agreement with Itel Rail Corporation,
dated June 8, 1994(10)
10.14 -- Stockholders Agreement, dated October 20, 1995(7)
10.15 -- Series F Preferred Stock and Warrant Purchase Agreement,
dated October 20, 1995(7)
10.16 -- Communications Services Agreement, between the Company
and US ONE Communications Corp., dated May 22, 1996 (the
"Original US ONE Agreement")(8)
10.17 -- Amendment No. 1 to the Original US ONE Agreement, dated
October 11, 1996
10.18 -- Amendment No. 2 to the Original US ONE Agreement, dated
October 11, 1996
10.19 -- Amendment No. 3 to the Original US ONE Agreement, dated
January 3, 1997
10.20 -- Amendment No. 4 to the Original US ONE Agreement, dated
December 30, 1996
10.21 -- Amendment No. 5 to the Original US ONE Agreement, dated
March 26, 1997
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C>
10.22 -- Telecommunications Services Agreement, between the
Company and Comdisco Disaster Recovery Services, a
Division of Comdisco, Inc., dated March 25, 1996(8)
10.23 -- Employment Agreement, between the Company and Wallace M.
Hammond, dated January 1, 1996
11.1 -- Computation of earnings per share(11)
18.1 -- Letter re change in accounting principles(9)
21.1 -- Subsidiaries of Phoenix Network, Inc.
23.1 -- Consent of Grant Thornton LLP
27.1 -- Financial Data Schedule
</TABLE>
- ----------
(1) Filed as an Exhibit to the Company's Registration Statement on Form
S-3 (file no. 333-20923), as filed with the Commission on January 31,
1997, and amended on Form S-3/A on February 12, 1997, and incorporated
herein by reference.
(2) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended October 31, 1990, and incorporated herein by
reference.
(3) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended April 30, 1990, and incorporated herein by
reference.
(4) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended July 31, 1990, and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992, and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
the transition period ended December 31, 1991, and incorporated herein
by reference.
(7) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995, and incorporated herein by
reference.
(8) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, and incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, and incorporated herein by reference.
(10) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994, and incorporated herein by reference.
(11) This data appears in the Consolidated Statement of Operations included
in the Company's Consolidated Financial Statements.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PHOENIX NETWORK, INC.
By: /s/ WALLACE M. HAMMOND
-------------------------------
Wallace M. Hammond
Chief Executive Officer
Date: March 26, 1997
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE Title Date
--------- ----- ----
<S> <C> <C>
/s/ THOMAS H. BELL Chairman of the Board March 26, 1997
- -------------------------------- and Director
Thomas H. Bell
/s/ WALLACE M. HAMMOND President, Chief Executive March 26, 1997
- -------------------------------- Officer (Principal Executive
Wallace M. Hammond Officer) and Director
/s/ JEFFREY L. BAILEY Senior Vice President, Chief March 26, 1997
- -------------------------------- Financial Officer
Jeffrey L. Bailey (Principal Financial and
Accounting Officer)
/s/ JAMES W. GALLAWAY Director March 26, 1997
- --------------------------------
James W. Gallaway
/s/ MERRILL L. MAGOWAN Director March 26, 1997
- --------------------------------
Merrill L. Magowan
/s/ CHARLES C. MCGETTIGAN Director March 26, 1997
- --------------------------------
Charles C. McGettigan
Director March __, 1997
- --------------------------------
Max E. Thornhill
/s/ DAVID SINGLETON Director March 26, 1997
- --------------------------------
David Singleton
</TABLE>
30
<PAGE> 31
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
PHOENIX NETWORK, INC.
AND SUBSIDIARIES
December 31, 1994, 1995 and 1996
<PAGE> 32
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Phoenix Network, Inc.
We have audited the accompanying balance sheets of Phoenix Network, Inc. (a
Delaware Corporation) and Subsidiaries as of December 31, 1995 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phoenix Network, Inc. and
Subsidiaries as of December 31, 1995 and 1996, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in note C, the Company changed its method of accounting for
deferred commissions in 1994.
GRANT THORNTON LLP
/s/ GRANT THORNTON LLP
Denver, Colorado
March 12, 1997
F-1
<PAGE> 33
Phoenix Network, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<S> <C> <C>
1995 1996
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ($225,356 restricted in 1995) $ 8,298,003 $ 1,548,061
Accounts receivable, net of allowance for doubtful accounts
of $1,649,013 in 1995 and $3,600,830 in 1996 13,731,400 14,419,829
Deferred commissions 1,648,780 969,940
Other current assets 415,163 686,271
----------- -----------
Total current assets 24,093,346 17,624,101
Furniture, equipment and data processing systems - at cost,
less accumulated depreciation of $1,350,597 in 1995 and
$2,495,701 in 1996 886,665 5,522,771
Deferred commissions 1,454,483 414,873
Customer acquisition costs, less accumulated amortization of
$1,005,262 in 1995 and $3,145,245 in 1996 2,447,619 2,725,275
Goodwill, less accumulated amortization of $82,961 in 1995
and $1,059,613 in 1996 3,903,109 18,553,332
Other assets 243,048 953,831
----------- -----------
$33,028,270 $45,794,183
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of note payable to finance company $ - $ 444,839
Note payable to vendor - 1,161,148
Line of credit - finance company 41,468 4,698,645
Accounts payable and accrued liabilities 13,799,153 19,105,317
----------- -----------
Total current liabilities 13,840,621 25,409,949
LONG-TERM DEBT
Note payable to stockholder - 1,388,206
Note payable to finance company, less current maturities - 824,306
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value, authorized 5,000,000 shares,
issued and outstanding 2,737,389 in 1995 and 546,458 in
1996, liquidation preference aggregating $15,332,780 and
$3,368,020 at December 31, 1995 and 1996, respectively 2,737 546
Common stock - $.001 par value, authorized 50,000,000
shares, issued 16,952,455 in 1995 and 25,851,894 in 1996 16,952 25,851
Additional paid-in capital 32,146,636 45,225,554
Accumulated deficit (12,976,154) (27,077,707)
Treasury stock - 1,300 shares at cost (2,522) (2,522)
----------- -----------
19,187,649 18,171,722
----------- -----------
$33,028,270 $45,794,183
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE> 34
Phoenix Network, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Revenue $74,404,808 $75,854,969 $ 99,307,277
Cost of revenue 52,649,359 53,775,779 73,438,757
----------- ----------- ------------
Gross profit 21,755,449 22,079,190 25,868,520
Selling, general and administrative expenses 21,074,942 22,323,202 31,114,723
Depreciation and amortization 678,038 1,125,563 4,357,720
Relocation expenses - - 1,133,158
Acquisition expenses - - 1,308,634
Aborted bond offering expenses - - 246,083
----------- ----------- ------------
21,752,980 23,448,765 38,160,318
----------- ----------- ------------
Operating income (loss) 2,469 (1,369,575) (12,291,798)
Other income (expense)
Interest income 36,121 103,125 84,627
Interest expense (425,222) (260,639) (625,817)
Loss on abandonment of fixed assets - (1,019,648) (15,238)
Miscellaneous income (expense) 42,897 (6,767) 4,264
----------- ----------- ------------
(346,204) (1,183,929) (552,164)
----------- ----------- ------------
Loss before income taxes and
cumulative effect of accounting change (343,735) (2,553,504) (12,843,962)
Income tax benefit (expense) (16,405) (500,000) -
----------- ----------- ------------
Loss before cumulative effect of
accounting change (360,140) (3,053,504) (12,843,962)
Cumulative effect of change in amortization of
deferred commissions (123,224) - -
----------- ----------- ------------
Net loss $ (483,364) $(3,053,504) $(12,843,962)
=========== =========== ============
Net loss attributable to common shares
Net loss $ (483,364) $(3,053,504) $(12,843,962)
Preferred dividends (231,255) (594,381) (1,206,042)
----------- ----------- ------------
$ (714,619) $(3,647,885) $(14,050,004)
=========== =========== ============
Loss per common share
Loss before cumulative effect of accounting change $ (0.04) $ (0.24) $ (0.68)
Cumulative effect of accounting change (0.01) - -
----------- ----------- ------------
Net loss per common share $ (0.05) $ (0.24) $ (0.68)
=========== =========== ============
Weighted average common shares 13,576,265 15,335,268 20,673,276
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 35
Phoenix Network, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three years ended December 31, 1996
<TABLE>
<CAPTION>
Additional
Preferred Common paid-in Accumulated Treasury
stock stock capital deficit stock
--------- ------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $1,610 $12,803 $12,857,297 $(9,200,859) $(2,522)
Exercise of stock options
and warrants - 738 763,141 - -
Conversion of preferred
stock into common stock (44) 277 43,686 (43,919) -
Issuance of preferred stock
upon conversion of debt 56 - 558,874 - -
Issuance of common stock - 7 4,071 - -
Net loss - - - (483,364) -
--------- ------- ----------- ------------ --------
Balance at December 31, 1994 1,622 13,825 14,227,069 (9,728,142) (2,522)
Exercise of stock options and
warrants - 418 525,914 - -
Conversion of preferred
stock into common stock (4) 24 7,200 (7,220) -
Issuance of common stock,
net of expenses - 2,685 6,314,779 - -
Issuance of preferred stock,
net of expenses, and
conversion of Series E of
Series F 1,119 - 11,071,674 - -
Preferred dividends - - - (187,288) -
Net loss - - - (3,053,504) -
--------- ------- ----------- ------------ --------
Balance at December 31, 1995 2,737 16,952 32,146,636 (12,976,154) (2,522)
Exercise of stock options and
warrants - 792 1,327,243 - -
Conversion of preferred
stock into common stock (2,191) 5,307 1,254,475 (1,257,591) -
Issuance of common stock in
connection with a business
acquisition - 2,800 10,497,200 - -
Net loss - - - (12,843,962) -
--------- ------- ----------- ------------ --------
Balance at December 31, 1996 $546 $25,851 $45,225,554 $(27,077,707) $ (2,522)
========= ======= =========== ============ ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE> 36
Phoenix Network, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION> 1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities $71,432,918 $ 72,103,864 $ 98,612,681
Cash received from customers 8,121 83,227 84,627
Interest received (69,551,595) (73,638,371) (102,047,484)
Cash paid to suppliers and employees (425,137) (259,919) (625,817)
Interest paid (20,105) (3,340) (2,245)
Cash paid for income taxes ------------ - ----------- ------------
Net cash provided by (used in) 1,444,202 (1,714,539) (3,978,238)
operating activities
Cash flows from investing activities
Note receivable - director/shareholder (11,500) (3,000) -
Purchases of furniture, equipment and
data processing systems (990,934) (589,419) (3,620,989)
Notes receivable - agents (206,995) (23,115) -
Payments on agents notes receivable 5,838 70,900 -
Customer base acquisitions - (1,553,238) (468,002)
Business acquisitions, net of cash acquired - (4,692,153) (4,085,093)
Acquisitions of other assets (123,528) - -
------------ ---------- ------------
Net cash used in investing activities (1,327,119) (6,790,025) (8,174,084)
Cash flows from financing activities
Proceeds from issuance of common stock,
net of offering costs - 6,317,464 -
Proceeds from issuance of preferred stock,
net of offering costs - 11,072,793 -
Proceeds from sale of stock to officer 297,000 - -
Proceeds from distribution of stock to director 4,078 - -
Proceeds from notes payable to bank and
finance company 3,450,000 6,143,950 6,060,358
Payments on notes payable to bank and
finance company (4,317,828) (8,686,625) (134,036)
Payments on note payable to vendor - - (1,851,977)
Payments on capital lease obligation (16,584) - -
Preferred stock dividends - (187,288) -
Proceeds from exercise of options and warrants 466,880 526,332 1,328,035
------------ ---------- ------------
Net cash provided by (used in)
financing activities (116,454) 15,186,626 5,402,380
------------ ---------- ------------
NET INCREASE (DECREASE)
IN CASH 629 6,682,062 (6,749,942)
Cash and cash equivalents at beginning of year 1,615,312 1,615,941 8,298,003
------------ ---------- - ------------
Cash and cash equivalents at end of year $ 1,615,941 $8,298,003 $ 1,548,061
============ ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 37
Phoenix Network, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended December 31,
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Reconciliation of net loss to net cash provided by
(used in) operating activities
Net loss $ (483,364) $ (3,053,504) $(12,843,962)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities
Cumulative effect of change in amortization
of deferred commissions 123,224 - -
Provision for doubtful accounts 2,440,369 2,689,250 3,147,077
Abandonment of fixed assets - 1,019,648 15,238
Depreciation and amortization 678,038 1,125,563 4,357,720
Deferred taxes - 500,000 -
Changes in assets and liabilities
Accounts receivable (2,971,890) (3,751,105) (959,900)
Deferred commissions 713,839 (1,467,519) 1,718,450
Other current assets 104,449 (163,740) (217,473)
Other assets (11,494) 511 (67,893)
Accounts payable and accrued liabilities 851,031 1,386,357 872,505
----------- ------------ ------------
Net cash provided by (used in)
operating activities $ 1,444,202 $ (1,714,539) $ (3,978,238)
=========== ============ ============
Noncash financing and investing activities
- ---------------------------------------------------
Conversion of preferred stock dividends
into common stock $ 43,963 $ 7,224 $ 1,259,782
Conversion of note payable to stockholder,
including accrued interest, into preferred stock 558,930 - -
Noncash components of consideration issued
in connection with business combination
Common stock - - 10,500,000
Note payable to stockholder - - 1,388,206
Assumption of net liabilities - - 1,603,576
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 38
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1995 and 1996
NOTE A - DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES
Phoenix Network, Inc. ("Phoenix" or the "Company") was a switchless reseller
of long distance telecommunication services designed primarily for small to
medium sized commercial accounts located throughout the United States.
Effective January 1, 1996, as a result of the acquisition of Automated
Communications, Inc. ("ACI"), the Company became a facilities based reseller.
The Company provides its customers with long distance services utilizing the
networks of facilities-based carriers, such as American Telephone & Telegraph
Company, MCI Telecommunications Corporation, Sprint Communications, L.P., ALC
Communications Corporation, WorldCom, Inc. (formerly Wiltel, Inc.), U.S. One
Communications Corp. and others, who handle the actual transmission services.
The carriers bill Phoenix at contractual rates for the combined usage of
Phoenix's customers utilizing their network. Phoenix then bills its
customers individually at rates established by Phoenix.
The following is a summary of the Company's significant accounting policies
applied in the preparation of the accompanying consolidated financial
statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions are eliminated
in consolidation.
Revenue Recognition
Revenue is recognized in the month in which the Company's customers complete
the telephone call.
Cash and Cash Equivalents
The Company considers demand deposits, certificates of deposit and United
States Treasury bills purchased with a maturity of three months or less as
cash and cash equivalents. The carrying amount approximates fair value
because of the short maturity of these instruments.
Deferred Commissions
Deferred commissions consist of direct commissions paid on a one-time basis
to third parties upon the acquisition of new customers. Deferred commissions
are amortized on a four-year sum of the year's digits method.
F-7
<PAGE> 39
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE A - DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
Furniture, Equipment and Data Processing Systems
Depreciation of furniture, equipment and data processing systems is provided
utilizing the straight-line method over five years.
Customer Acquisition Costs
Customer acquisition costs represent the value of acquired billing bases of
customers and are amortized using the sum-of-the-years-digits method over a
four-year period.
Goodwill
Goodwill represents the excess of cost over the fair value of the net assets
acquired and is being amortized by the straight-line method over 20 years.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements, as well as revenue and expenses during the period.
Significant estimates made by management include the allowance for doubtful
accounts, estimated carrier credits, and the amortization periods related to
acquired customers and goodwill. Actual results could differ from those
estimates.
Income Taxes
Deferred income taxes are recognized for tax consequences of temporary
differences by applying current enacted tax rates to differences between the
financial reporting and the tax basis of existing assets and liabilities.
Reclassification
Prior years' financial statements have been reclassified to conform to
current year presentation.
F-8
<PAGE> 40
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE B - POOLING-OF-INTERESTS AND ACQUISITIONS
On October 8, 1996, Americonnect, Inc. was merged with and into Phoenix
Network, Inc. (the Company), and 2,663,810 shares of the Company's common
stock were issued in exchange for all of the outstanding common stock of
Americonnect. The merger was accounted for as a pooling-of-interests and,
accordingly, the accompanying financial statements have been restated to
include the accounts and operations of Americonnect for all periods prior to
the merger.
Separate results of the combining entities for the two years in the period
ended December 31, 1995, are as follows (amounts in 000s):
<TABLE>
<CAPTION>
December 31
-----------------
1994 1995
------- --------
<S> <C> <C>
Net sales
Phoenix $57,420 $ 58,755
Americonnect 16,985 17,100
------- --------
$74,405 $75,855
======= ========
Net income (loss)
Phoenix $ (905) $ (1,334)
Americonnect 422 (1,719)
------- --------
$ (483) $ (3,053)
======= ========
</TABLE>
In connection with the merger, approximately $1.3 million of merger costs and
expenses were incurred and have been charged to expense in the Company's
fourth quarter of 1996.
In August of 1995, the Company acquired in purchase transactions the customer
bases and substantially all of the assets and liabilities of Tele-Trend
Communications, LLC ("Tele-Trend"), a Denver based switchless reseller, and
Bright Telecom L.P. ("Bright"), an international call-back provider, for
$4,369,317 and $356,388, respectively. The operations of Tele-Trend and
Bright are included from August 1, 1995.
Additionally, during 1995, the Company acquired three customer bases at a
cost of $2,078,238. At December 31, 1995, accounts payable includes $525,000
due for the purchase of one of the customer bases.
F-9
<PAGE> 41
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE B - POOLING-OF-INTEREST AND ACQUISITIONS AND MERGERS (CONTINUED)
In January 1996, the Company acquired, in a purchase transaction, Automated
Communications, Inc. (ACI), a Golden, Colorado, facilities-based long
distance phone service carrier operating state-of-the-art switching centers
in Colorado Springs, Minneapolis, and Phoenix. Consideration for the
acquisition was in the form of $4,085,093 in cash, 2,800,000 shares of the
Company's common stock valued at approximately $10,500,000, a long-term note
of $1,388,206 bearing interest at 9%, and the assumption of net liabilities
of $1,603,576. The Company's consolidated results of operations include ACI
from January 1, 1996, the effective date of the purchase transaction. The
excess of the purchase price over the fair market value of the assets and
liabilities acquired has been allocated to customer acquisition costs
($1,950,000) and to goodwill ($15,626,875). Customer acquisition costs are
amortized over four years using the sum-of-the-years-digits method, and
goodwill is amortized on a straight-line basis over 20 years.
The following unaudited condensed pro forma information presents the results
of operations of the Company as if the acquisition of ACI and Tele-Trend had
occurred on January 1, 1995.
<TABLE>
<CAPTION>
Year ended December 31, 1995
----------------------------
<S> <C>
Revenue $104,729,000
Net loss $(4,428,000)
Net loss attributable to common shares $(5,603,000)
Net loss per common share $ (0.31)
Weighted average number of shares outstanding 18,135,000
</TABLE>
NOTE C - ACCOUNTING CHANGES
Effective January 1, 1994, the Company changed its method of accounting for
deferred commissions from the straight-line basis to the sum of the years
digits method. Additionally, the Company changed their estimate of the
period benefited from two years to four years. Management believes that
these changes more accurately match expense with the revenue generated by the
customer base. The cumulative effect of the change in accounting method was
to increase accumulated amortization at January 1, 1994 by approximately
$123,000. The effect of both changes was to reduce the 1994 amortization
expense and loss before cumulative effect of change in accounting by
approximately $242,000 ($0.02 per common share).
F-10
<PAGE> 42
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE D - FURNITURE, EQUIPMENT AND DATA PROCESSING SYSTEMS
Furniture, equipment and data processing systems consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1996
--------- -----------
<S> <C> <C>
Data processing systems $1,404,833 $4,872,174
Switching equipment - 1,898,593
Furniture and fixtures 331,094 710,234
Other equipment 501,335 537,471
---------- -----------
2,237,262 8,018,472
Less accumulated depreciation (1,350,597) (2,495,701)
---------- -----------
$ 886,665 $ 5,522,771
========== ===========
</TABLE>
The loss on abandonment of assets in 1995 primarily relates to a write-off of
billing and customer service software development costs. Management decided
to minimize the risk of development and to have access to a new system on a
more timely basis and, accordingly, has decided to license an existing
billing and customer service system from a vendor at a cost of approximately
$3,000,000, of which approximately $1,500,000 has been incurred through
December 31, 1996.
NOTE E - LINE OF CREDIT - FINANCE COMPANY
In September 1995, the Company renewed its Loan and Security Agreement (the
"Agreement") with a finance company to make available to the Company a line
of credit of up to $10,000,000. The Company may borrow up to the lesser of
$10,000,000 or its borrowing base, which is defined as a percentage of its
eligible receivables. The term of the Agreement is three years, expiring
October 1998, with automatic renewal options. There are penalties for early
termination by the Company. Borrowings bear interest at .75% over the
"reference rate," as defined. In connection with the renewal, fees and
transaction costs of $80,972 were incurred, which are being amortized on a
straight-line basis over three years. The loan is collateralized by the
Company's accounts receivable, equipment, general intangibles and other
personal property assets. Among other provisions, the Company must maintain
certain minimum financial covenants, is prohibited from paying dividends
without the approval of the finance company, and is subject to limits on
capital expenditures. As of December 31, 1996, the Company was in violation
of certain financial covenants. The finance company has waived the covenant
violations in connection with a restructuring of the line of credit
agreement. At December 31, 1996, $4,698,645 was outstanding under the line
and the interest rate was 10%.
F-11
<PAGE> 43
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE E - LINE OF CREDIT - FINANCE COMPANY (CONTINUED)
Average daily outstanding borrowing for the year ended December 31, 1996 was
$859,044 at a weighted average interest rate of 10%. The highest month-end
balance outstanding for the year ended December 31, 1996 was $4,698,645.
NOTE F - LONG-TERM DEBT
During 1996, the Company entered into a note payable with a finance company to
fund the cost of new billing and customer service software. The note
agreement requires twelve quarterly payments of $138,854 plus accrued interest
at 10.5% commencing July, 1996 through July, 1999.
In addition, as part of the acquisition of Automated Communications, Inc., on
January 1, 1996, the Company issued a 9% note payable for $1,388,206 to a
current stockholder, which is payable in annual installments through 2001.
Future minimum payments on long-term debt at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year ended Note payable Note payable
December 31, to finance company to stockholder Total
------------ ------------------ -------------- ----------
<S> <C> <C> <C>
1997 $ 444,839 $ - $ 444,839
1998 491,019 231,414 722,433
1999 333,287 231,414 564,701
2000 - 231,414 231,414
2001 - 693,964 693,964
---------- ---------- ----------
$1,269,145 $1,388,206 $2,657,351
========== ========== ==========
</TABLE>
NOTE G - LEASES
The Company has operating leases for office space and equipment which expire
on various dates through 2000, and which require that the Company pay certain
maintenance, insurance and other operating expenses. Rent expense for the
years ended December 31, 1994, 1995 and 1996 was $856,797, $1,028,462 and
$1,331,911, respectively.
F-12
<PAGE> 44
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE G - LEASES (CONTINUED)
Future minimum lease payments for years ending December 31, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $2,506,223
1998 1,580,685
1999 1,392,208
2000 547,812
2001 191,302
----------
$6,218,230
==========
</TABLE>
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company has contracts with its major vendors to provide
telecommunications services to its customers. The agreements cover the
pricing of the services and are for various periods. Among other provisions,
the agreements contain minimum usage requirements which must be met to
receive the contractual price and to avoid shortfall penalties. The Company
is currently in compliance with the contractual requirements. Total future
minimum usage commitments at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, Commitment
------------ -----------
<S> <C>
1997 $33,000,000
1998 18,500,000
1999 1,000,000
-----------
Total $52,500,000
===========
</TABLE>
F-13
<PAGE> 45
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE I - CAPITAL STOCK
Preferred Stock
The Company's certificate of incorporation authorizes it to issue up to
5,000,000 shares of $.001 par value preferred stock. At December 31, 1996, the
Company's authorized preferred stock is allocated as follows:
<TABLE>
<CAPTION>
Authorized Issued and
shares outstanding
---------- -----------
<S> <C> <C>
Reserved shares:
Series A 300,000 98,625
Series B 200,000 114,500
Series C 1,000,000 -
Series D 666,666 333,333
Series F 1,200,000 -
Undesignated shares 1,633,334 -
--------- -------
Total 5,000,000 546,458
========= =======
</TABLE>
Series A Preferred Stock ("Series A") outstanding consists of 98,625 shares.
The shares are entitled to 9% cumulative dividends, voting rights and are
convertible into common stock subject to certain anti-dilution provisions. In
connection with the initial offering, the Company also issued a warrant for
62,200 shares of common stock with an exercise price of $2.50 per share to an
investment banking firm, controlled by an individual, who was subsequently
elected to the Company's Board of Directors. The warrant expires in February
1997. During 1994, 16,000 shares of Series A were converted into 70,996 shares
of common stock. During 1995, 3,000 shares of Series A were converted into
14,449 shares of common stock. During 1996, 3,125 shares of Series A were
converted into 16,664 shares of common stock. The conversions also include
unpaid dividends. At December 31, 1996, the outstanding Series A shares were
convertible into 405,864 shares Series of common stock.
Series B Preferred Stock ("Series B") outstanding consists of 114,500 shares.
The shares are entitled to 9% cumulative dividends, voting rights and are
convertible into shares of common stock subject to certain anti-dilution
provisions. In connection with the initial offering, the Company issued a
warrant to an investment banking firm, controlled by one of the Company's
directors, for 69,750 shares of common stock, with an exercise price of $2.00
per share. The warrant expires in February 1997. During 1995, 1,250 shares of
Series B were converted into 9,749 shares of common stock. During 1996, 11,750
shares of Series B were converted into 98,717 shares of common stock. The
conversions also include unpaid dividends. At December 31, 1996, the
outstanding Series B shares are convertible into 763,333 shares of common stock.
F-14
<PAGE> 46
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE I - CAPITAL STOCK (CONTINUED)
In November 1992, the Company issued 1,000,000 shares of its Series C
Preferred Stock ("Series C") to one of its major vendors as collateral for
amounts due the vendor for services provided. The Company was released from
all collateral requirements during 1996 and the preferred stock reverted back
to the Company.
Series D Preferred Stock outstanding consists of 333,333 shares. The shares
are entitled to 6% non-cumulative dividends, when and if declared by the
Board of Directors and only after payment of dividends on previously issued
series of preferred stock. These shares are non-voting and are convertible
into common stock subject to certain anti-dilution provisions. In connection
with the initial offering, the Company issued a warrant to an investment
banking firm, controlled by one of the Company's directors, for 22,000 shares
of common stock, with an exercise price of $1.50 per share. The warrant
expires in December 1997. At December 31, 1996, the outstanding Series D
Preferred shares are convertible into 333,333 shares of common stock.
In September 1994, the Company issued 55,893 shares of Series E Preferred
Stock at $10 per share under an agreement to convert a note payable to
stockholder, with a principal balance of $500,000 and accrued interest of
$58,930. In connection with the issuance of the stock, the Company issued
the stockholder a five-year warrant for 100,000 shares of the Company's
common stock which was canceled when the Series E shares were converted to
Series F Preferred Stock (see below).
During the period July 1995 through October 1995, the Company raised
approximately $11,024,207, net of offering costs of $129,963, through a
private placement of 1,115,417 shares of its Series F Preferred Stock at $10
per share. Additionally, the holder of the Company's Series E Preferred
Stock exchanged their Series E shares, plus accumulated and unpaid dividends
of $47,467, for 60,639 shares of Series F Preferred Stock. The Series F
shares are entitled to 9% cumulative dividends, voting rights, demand
registration rights for the underlying common shares after six months and are
convertible initially into 4,704,224 shares of common stock, subject to
anti-dilution provisions. The holders of the Series F also received warrants
for the purchase of 470,422 shares of common stock with an exercise price of
$3.00 per share which expire in October 2000. The Series F shareholders have
the right to place two directors on the Company's board (the "Series F
Directors") and the Company is subject to certain covenants requiring it to
obtain the consent of the Series F Directors for certain transactions
including mergers, acquisitions and incurring additional indebtedness in
excess of $20,000,000. During December 1996, the outstanding Series F
Preferred shares were converted into 5,191,064 shares of common stock. This
conversion also included unpaid dividends.
The common shares reserved for issuance upon the conversion of Series A, B
and D Preferred Stock have been registered with the Securities and Exchange
Commission.
At December 31, 1996, the Company had cumulative, unpaid dividends on Series
A and B Preferred Stock of $340,945 ($3.45 per share) and $395,825 ($3.45 per
share), respectively.
F-15
<PAGE> 47
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE I - CAPITAL STOCK (CONTINUED)
Common Stock
In May 1995, the Company closed a private placement of its common stock which
raised $727,519, net of offering costs of $119,481. The Company sold 385,000
units, at $2.20 per unit, in an off-shore financing pursuant to Regulation S
under the Securities Act of 1933. A unit consists of one share of common
stock and a five-year warrant for one-half share of common stock. Two
warrants can be exercised to purchase 38,500 units at $2.42 per unit. The
Company closed another private placement of its common stock under Regulation
S in September 1995. In this transaction, the Company sold 2,300,000 shares
of common stock for $2.75 per share. Proceeds to the Company, net of
offering costs of $735,055, were $5,589,945.
Stock Options and Warrants
The Company has various stock option plans accounted for under APB Opinion 25
and related interpretations. The options generally have a term of 10 years
when issued, and generally vest over 2-4 years. No compensation cost has
been recognized for the plans. Had compensation cost for the plan been
determined based on the fair value of the options at the grant dates
consistent with the method of Statement of Financial Accounting Standards
123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company's net
loss and loss per common share would have been increased to the pro forma
amounts indicated below. Pro forma results for 1995 and 1996 may not be
indicative of pro forma results in future periods because the pro forma
amounts do not include pro forma compensation cost for options granted prior
to January 1, 1995.
<TABLE>
<CAPTION>
1995 1996
------------ -------------
<S> <C> <C>
Net loss
As reported $(3,647,885) $(14,050,004)
Pro forma (3,787,774) (14,474,477)
Loss per common share
As reported $(0.24) $(0.68)
Pro forma (0.25) (0.70)
</TABLE>
F-16
<PAGE> 48
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE I - CAPITAL STOCK (CONTINUED)
Stock Options and Warrants (Continued)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: no expected
dividends; expected volatility of 55%; weighted average risk-free interest
rate of 6%; and expected lives of five years.
In 1987, the Company granted certain directors stock options to purchase up
to 900,000 shares of common stock at a price of $0.10 per share, expiring no
earlier than ten (10) years from the grant date. At December 31, 1995,
options for 500,000 shares remain outstanding.
The Company's 1989 Stock Option Plan authorizes the grant of incentive stock
options or supplemental stock options for up to 3,500,000 shares of common
stock. The exercise price of each incentive stock option shall be not less
than 100% of the fair market value of the stock on the date the option is
granted. The exercise price of each supplemental stock option shall be not
less than eighty-five percent (85%) of the fair market value of the stock on
the date the option is granted.
In November, 1992, the Board of Directors approved the 1992 Non-Employee
Directors' Stock Option Plan. Under the Plan, 480,000 shares of common stock
have been reserved for issuance to non-employee directors of the Company.
Options are granted annually based upon length of service at fair market
value at date of grant.
The Company's subsidiary, Americonnect, had two stock option plans. All
options have been converted into options for the Company common stock and are
included in the following summary. The options were granted at prices from
$0.08 to $2.06 per share of Company common stock.
F-17
<PAGE> 49
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE I - CAPITAL STOCK (CONTINUED)
Stock Options and Warrants (Continued)
A summary of the status of the Company's fixed stock option plans as of
December 31, 1996, and changes during each of the three years in the period
ended December 31, 1996 is presented below.
<TABLE>
<CAPTION>
Weighted
Number average price
of shares per share
---------- -------------
<S> <C> <C>
Outstanding at January 1, 1994 2,453,492 $1.21
Exercised (412,876) 1.13
Granted 1,125,433 3.30
Canceled (505,984) 3.08
----------
Outstanding at December 31, 1994 2,660,065 1.58
Exercised (382,851) 1.16
Granted 898,414 2.58
Canceled (156,458) 2.43
----------
Outstanding at December 31, 1995 3,019,170 1.91
Exercised (724,567) 1.64
Granted 1,017,500 3.27
Canceled (177,951) 3.23
----------
Outstanding at December 31, 1996 3,134,152 2.32
==========
</TABLE>
<TABLE>
<CAPTION>
Range Options
------------- ----------
<S> <C> <C>
Exercisable at December 31, 1994 $0.08 - $6.88 1,244,797
Exercisable at December 31, 1995 $0.08 - $6.38 1,797,977
</TABLE>
<TABLE>
<CAPTION>
Weighted
average
Range Options Proceeds exercise price
------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Exercisable at December 31, 1996 $0.10 - $0.10 500,000 $ 50,000 $0.10
$0.72 - $1.90 475,367 567,341 1.19
$2.08 - $4.13 617,636 1,741,067 2.82
$4.88 - $6.88 40,977 258,074 6.30
------------- --------- ----------
1,633,980 $2,616,482 1.60
</TABLE>
Weighted average fair value of options granted during 1995 and 1996 is $1.42
and $1.70 per share, respectively.
F-18
<PAGE> 50
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE I - CAPITAL STOCK (CONTINUED)
Stock Options and Warrants (Continued)
The following information applies to options outstanding at December 31,
1996:
<TABLE>
<S> <C> <C> <C> <C>
Range of exercise prices $0.10 - $0.10 $0.72 - $1.90 $2.08 - $4.13 $4.88 - $6.88
Options outstanding 500,000 476,338 2,043,685 114,129
Weighted average exercise
price $ 0.10 $1.19 $3.02 $ 4.39
Weighted average remaining
contractual life (years) 1 7 9 6
Options exercisable 500,000 475,367 617,636 40,977
Weighted average exercise
price $ 0.10 $1.19 $2.82 $ 6.30
</TABLE>
Common shares subject to warrants are summarized below:
<TABLE>
<CAPTION>
Number Price
of shares per share
------------- -------------
<S> <C> <C> <C>
Outstanding at January 1, 1994 386,533 $1.50 - $7.00
Granted 125,000 $3.25
---------
Outstanding at December 31, 1994 511,533 $1.50 - $7.00
Exercised (34,675) $2.42
Granted 720,672 $2.42 - $3.00
Canceled (100,000) $3.25
---------
Outstanding at December 31, 1995 1,097,530 $1.50 - $7.00
Exercised (58,825) $2.42
Granted - -
Canceled - -
---------
Outstanding at December 31, 1996 1,038,705 $1.50 - $7.00
=========
</TABLE>
All warrants are exercisable at grant.
F-19
<PAGE> 51
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE J - LOSS PER COMMON SHARE
Loss per common share is based upon the weighted average number of common and
dilutive common equivalent shares outstanding. The preferred dividend
requirements on the preferred stock are deducted in computing loss per common
share. The effect of outstanding options and warrants are antidilutive for
all periods presented.
NOTE K - INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using current enacted tax rates. A valuation
allowance is established to reduce net deferred tax assets to their estimated
realizable value.
As of December 31, 1996, the Company has available to offset future Federal
taxable income, net operating loss carryforwards (NOLs) of approximately
$20,400,000 which expire in varying amounts from 2002 through 2011. The NOLs
may be subject to limitations as a result of provisions of the Internal
Revenue Code relating to changes in ownership and utilization of losses by
successor entities.
The Company's effective income tax rate is different from the Federal
statutory income tax rate because of the following factors:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Federal tax rate applied to loss before taxes (34.0)% (34.0)% (34.0)%
State tax rate applied to allowable carry-
forward losses (5.7) (5.9) (4.6)
Valuation allowance for deferred taxes 44.4 59.9 38.6
------ ----- -----
Effective tax rate 4.7% 19.6% - %
====== ===== ====
</TABLE>
F-20
<PAGE> 52
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE K - INCOME TAXES (CONTINUED)
Deferred federal and state tax assets and valuation allowance are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1996
----------- ------------
<S> <C> <C>
Current
Allowance for bad debts $704,000 $1,326,000
Noncurrent
Noncurrent assets 291,000 1,187,000
Net operating loss carryforward 4,934,000 8,496,000
----------- ------------
5,225,000 9,683,000
----------- ------------
5,929,000 11,009,000
Valuation allowance (5,929,000) (11,009,000)
---------- ------------
$ - $ -
========== ============
</TABLE>
In 1993, the Company's subsidiary, Americonnect, Inc., reduced its valuation
allowance by $500,000 due to changes in circumstances subsequent to adoption
of SFAS No. 109. The changes in circumstances related to increased cash
flows, increased profitability, and anticipated continued increases. Due to
operating losses in 1995, Americonnect was no longer able to determine if it
would more likely than not realize the deferred asset. As a result of this
change in estimate, the valuation allowance was increased by $500,000.
The components of income tax benefit (expense) related to loss before
cumulative effect of accounting change are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1994 1995 1996
------- ------- ---------
<S> <C> <C> <C>
Current $(16,405) $ - $ -
Deferred - (500,000) -
-------- --------- ------
$(16,405) $(500,000) $ -
======== ========= ======
</TABLE>
The increase in the valuation allowance was approximately $548,000,
$1,917,000 and $5,080,000 for the years ended December 31, 1994, 1995 and
1996, respectively.
F-21
<PAGE> 53
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
NOTE L - EMPLOYEE BENEFIT PLANS
On June 1, 1993, the Company established a 401(k) tax savings plan for all
employees. Employer and participant contributions to the plan vest
immediately. The plan is a defined contribution plan covering all of its
employees. Under this plan, employees with a minimum of one year of
qualified service can elect to participate by contributing a minimum of one
percent of their gross earnings up to a maximum of 20 percent.
For those eligible plan participants, the Company will contribute an amount
equal to 100 percent of each participant's personal contribution up to an
annual maximum of $1,000. The Company's contributions to the 401(k) plan for
the year ending December 31, 1994, 1995 and 1996 were approximately $23,000,
$59,000 and $109,000, respectively.
NOTE M - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate
that value:
Line of credit - Carrying amount approximates fair value because of the
short maturity of this instrument.
Long-term debt - Carrying amount approximates fair value because the
interest rate at December 31, 1996 approximates the
market rate.
NOTE N - RELATED PARTIES
Two members of the Company's Board of Directors also serve on the Board of
Directors of U.S. One Communications, with whom Phoenix has entered into an
agreement to lease capacity on switching equipment.
NOTE O - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1996, the Company recorded adjustments
increasing their net loss by approximately $1,200,000 related to receivables,
$500,000 related to deferred commissions and $300,000 related to Local
Exchange Carriers' billing charges.
F-22
<PAGE> 54
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS ON SCHEDULE
Board of Directors
Phoenix Network, Inc.
In connection with our audit of the consolidated financial statements of
Phoenix Network, Inc., and Subsidiaries referred to in our report dated March
12, 1997, which is included in the Company's annual report on Form 10-K, we
have also audited Schedule II for the years ended December 31, 1994, 1995 and
1996. In our opinion, this schedule presents fairly, in all material respects,
the information to be set forth therein.
Grant Thornton LLP
/s/ Grant Thornton LLP
Denver, Colorado
March 12, 1997
<PAGE> 55
Phoenix Network, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------- ---------- ---------- -------------- -------------
Additions
Balance at charged to
beginning costs and Balance at
Description of period expenses Deductions (1) end of period
- ------------------------------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
December 31, 1994 $1,117,341 $2,440,369 $2,105,010 $1,452,700
December 31, 1995 $1,452,700 $2,689,250 $2,492,937 $1,649,013
December 31, 1996 $1,649,013 $3,147,077 $1,195,260 $3,600,830
</TABLE>
(1) Write-offs of uncollectible accounts, net of recoveries.
<PAGE> 56
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number Descriptions
------- ------------
<S> <C>
3.1 -- Restated Certificate of Incorporation of the Company(1)
3.2 -- Bylaws of the Company(1)
10.1 -- 1989 Stock Option Plan(2)
10.2 -- Forms of option grant pursuant to the 1989 Stock Option
Plan(3)
10.3 -- 1992 Non-Employee Directors' Stock Option Plan, as
Amended(5)
10.4 -- Form of option grant pursuant to the 1992 Non-Employee
Directors' Stock Option Plan(5)
10.5 -- Series A Preferred Stock Purchase Agreement dated as of
August 17, 1990(4)
10.6 -- Series B Preferred Stock Purchase Agreement dated as of
December 27, 1991 with List of Purchasers(6)
10.7 -- Series D Preferred Stock Purchase Agreement dated as of
December 15, 1992(5)
10.8 -- Sublease and Consent between the Company and Richard
Goldman & Co. relating to the premises at One Maritime
Plaza, San Francisco, CA(4)
10.9 -- Amended and Restated Loan and Security Agreement, among
the Company, Phoenix Network Acquisition Corp.,
Americonnect, Inc. and Foothill Capital Corporation, dated
September 26, 1995 (the "Original Foothill Agreement")
10.10 -- Amendment Number One to the Original Foothill Agreement,
dated October 17, 1996
10.11 -- Amendment Number Two to the Original Foothill Agreement,
dated December 23, 1996
10.12 -- Amendment Number Three to the Original Foothill
Agreement, dated March 12, 1997
10.13 -- Office Lease Agreement with Itel Rail Corporation,
dated June 8, 1994(10)
10.14 -- Stockholders Agreement, dated October 20, 1995(7)
10.15 -- Series F Preferred Stock and Warrant Purchase Agreement,
dated October 20, 1995(7)
10.16 -- Communications Services Agreement, between the Company
and US ONE Communications Corp., dated May 22, 1996 (the
"Original US ONE Agreement")(8)
10.17 -- Amendment No. 1 to the Original US ONE Agreement, dated
October 11, 1996
10.18 -- Amendment No. 2 to the Original US ONE Agreement, dated
October 11, 1996
10.19 -- Amendment No. 3 to the Original US ONE Agreement, dated
January 3, 1997
10.20 -- Amendment No. 4 to the Original US ONE Agreement, dated
December 30, 1996
10.21 -- Amendment No. 5 to the Original US ONE Agreement, dated
March ___, 1997
</TABLE>
<PAGE> 57
<TABLE>
<S> <C>
10.22 -- Telecommunications Services Agreement, between the
Company and Comdisco Disaster Recovery Services, a
Division of Comdisco, Inc., dated March 25, 1996(8)
10.23 -- Employment Agreement, between the Company and Wallace M.
Hammond, dated January 1, 1996
11.1 -- Computation of earnings per share(11)
18.1 -- Letter re change in accounting principles(9)
21.1 -- Subsidiaries of Phoenix Network, Inc.
23.1 -- Consent of Grant Thornton LLP
27.1 -- Financial Data Schedule
</TABLE>
- ----------
(1) Filed as an Exhibit to the Company's Registration Statement on Form
S-3 (file no. 333-20923), as filed with the Commission on January 31,
1997, and amended on Form S-3/A on February 12, 1997, and incorporated
herein by reference.
(2) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended October 31, 1990, and incorporated herein by
reference.
(3) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended April 30, 1990, and incorporated herein by
reference.
(4) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended July 31, 1990, and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992, and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
the transition period ended December 31, 1991, and incorporated herein
by reference.
(7) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995, and incorporated herein by
reference.
(8) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, and incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, and incorporated herein by reference.
(10) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994, and incorporated herein by reference.
(11) This data appears in the Consolidated Statement of Operations included
in the Company's Consolidated Financial Statements.
<PAGE> 1
EXHIBIT 10.9
- --------------------------------------------------------------------------------
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
PHOENIX NETWORK, INC.
AND
FOOTHILL CAPITAL CORPORATION
DATED AS OF SEPTEMBER 26, 1995
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . 11
1.3 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.4 Construction . . . . . . . . . . . . . . . . . . . . . . . . 11
1.5 Schedules and Exhibits. . . . . . . . . . . . . . . . . . . 12
2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . 12
2.1 Revolving Advances. . . . . . . . . . . . . . . . . . . . . 12
2.2 Letters of Credit and Letter of Credit Guarantees. . . . . . 13
2.3 {Intentionally Omitted} . . . . . . . . . . . . . . . . . . 14
2.4 Overadvances . . . . . . . . . . . . . . . . . . . . . . . . 14
2.5 Interest: Rates, Payments, and Calculations . . . . . . . . 15
2.6 Crediting Payments; Application of Collections . . . . . . . 16
2.7 Statements of Obligations . . . . . . . . . . . . . . . . . . 16
2.8 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3. CONDITIONS; TERM OF AGREEMENT . . . . . . . . . . . . . . . . . . . 17
3.1 Conditions Precedent to Initial Advance, L/C, or L/C Guaranty 17
3.2 Conditions Precedent to All Advances, L/Cs, or L/C Guarantees 19
3.3 Term; Automatic Renewal . . . . . . . . . . . . . . . . . . 20
3.4 Effect of Termination . . . . . . . . . . . . . . . . . . . 20
3.5 Early Termination by Borrower . . . . . . . . . . . . . . . 20
3.6 Termination Upon Intentional Event of Default . . . . . . . 21
4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . 21
4.1 Grant of Security Interest . . . . . . . . . . . . . . . . . 21
4.2 Negotiable Collateral . . . . . . . . . . . . . . . . . . . 21
4.3 Collection of Accounts, General Intangibles, Negotiable
Collateral . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.4 Delivery of Additional Documentation Required . . . . . . . 22
4.5 Power of Attorney . . . . . . . . . . . . . . . . . . . . . 22
4.6 Right to Inspect . . . . . . . . . . . . . . . . . . . . . . 23
5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . 23
5.1 No Prior Encumbrances . . . . . . . . . . . . . . . . . . . 23
5.2 Eligible Accounts . . . . . . . . . . . . . . . . . . . . . 23
5.3 {Intentionally Omitted} . . . . . . . . . . . . . . . . . . 23
5.4 Location of Inventory and Equipment . . . . . . . . . . . . 23
5.5 Inventory Records . . . . . . . . . . . . . . . . . . . . . 24
5.6 Location of Chief Executive Office . . . . . . . . . . . . . 24
5.7 Due Organization and Qualification . . . . . . . . . . . . . 24
5.8 Due Authorization; No Conflict . . . . . . . . . . . . . . . 24
</TABLE>
<PAGE> 3
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
5.9 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.10 No Material Adverse Change in Financial Condition . . . . . 24
5.11 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.12 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.13 Environmental Condition . . . . . . . . . . . . . . . . . . 25
5.14 Reliance by Foothill; Cumulative . . . . . . . . . . . . . . 26
6. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . 26
6.1 Accounting System . . . . . . . . . . . . . . . . . . . . . 26
6.2 Collateral Reports . . . . . . . . . . . . . . . . . . . . . 26
6.3 Schedules of Accounts . . . . . . . . . . . . . . . . . . . 26
6.4 Financial Statements, Reports, Certificates . . . . . . . . 27
6.5 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . 28
6.6 Guarantor Reports . . . . . . . . . . . . . . . . . . . . . 28
6.7 Performance of Obligations to Carriers . . . . . . . . . . . 28
6.8 Credits and Allowances. . . . . . . . . . . . . . . . . . . 29
6.9 Title to Equipment . . . . . . . . . . . . . . . . . . . . . 29
6.10 Maintenance of Equipment . . . . . . . . . . . . . . . . . . 29
6.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.12 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.13 Foothill Expenses . . . . . . . . . . . . . . . . . . . . . 30
6.14 Financial Covenants . . . . . . . . . . . . . . . . . . . . 30
6.15 No Setoffs or Counterclaims . . . . . . . . . . . . . . . . 31
6.16 Location of Inventory and Equipment . . . . . . . . . . . . 31
6.17 Duplicate Copies of Important Data . . . . . . . . . . . . . 31
7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . 31
7.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . 31
7.2 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.3 Restrictions on Fundamental Changes . . . . . . . . . . . . 32
7.4 Extraordinary Transactions and Disposal of Assets . . . . . 32
7.5 Change Name . . . . . . . . . . . . . . . . . . . . . . . . 32
7.6 Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.7 Restructure . . . . . . . . . . . . . . . . . . . . . . . . 33
7.8 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . 33
7.9 Change of Control . . . . . . . . . . . . . . . . . . . . . 33
7.10 Capital Expenditures . . . . . . . . . . . . . . . . . . . . 33
7.11 {Intentionally Omitted} . . . . . . . . . . . . . . . . . . 33
7.12 Distributions . . . . . . . . . . . . . . . . . . . . . . . 33
7.13 Accounting Methods . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
<PAGE> 4
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
7.14 Investments . . . . . . . . . . . . . . . . . . . . . . . . 33
7.15 Transactions with Affiliates . . . . . . . . . . . . . . . . 34
7.16 Suspension . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.17 Compensation . . . . . . . . . . . . . . . . . . . . . . . . 34
7.18 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . 34
7.19 Contracts with Carriers . . . . . . . . . . . . . . . . . . 34
7.20 Contracts with Integretel . . . . . . . . . . . . . . . . . 35
8. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . 35
9. FOOTHILL'S RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . . . 37
9.1 Rights and Remedies . . . . . . . . . . . . . . . . . . . . 37
9.2 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . 39
10. TAXES AND EXPENSES REGARDING THE COLLATERAL . . . . . . . . . . . . 39
11. WAIVERS; INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . 40
11.1 Demand; Protest; etc. . . . . . . . . . . . . . . . . . . . 40
11.2 Foothill's Liability for Inventory or Equipment . . . . . . 40
11.3 Indemnification . . . . . . . . . . . . . . . . . . . . . . 40
12. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. . . . . . . . . . . . . 41
14. DESTRUCTION OF BORROWER'S DOCUMENTS . . . . . . . . . . . . . . . . 42
15. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . 42
15.1 Effectiveness . . . . . . . . . . . . . . . . . . . . . . . 42
15.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . 42
15.3 Section Headings . . . . . . . . . . . . . . . . . . . . . . 43
15.4 Interpretation . . . . . . . . . . . . . . . . . . . . . . . 43
15.5 Severability of Provisions . . . . . . . . . . . . . . . . . 43
15.6 Amendments in Writing . . . . . . . . . . . . . . . . . . . 43
15.7 Counterparts; Telefacsimile Execution . . . . . . . . . . . 43
15.8 Revival and Reinstatement of Obligations . . . . . . . . . . 43
15.9 Integration . . . . . . . . . . . . . . . . . . . . . . . . 44
SCHEDULES
</TABLE>
<PAGE> 5
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule P-1 Permitted Liens
Schedule 5.9 Litigation
Schedule 6.16 Location of Inventory and Equipment
Schedule 7.1 Scheduled Indebtedness
</TABLE>
<PAGE> 6
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT, is entered into
as of September 26, 1993, between FOOTHILL CAPITAL CORPORATION, a California
corporation ("Foothill"), with a place of business located at 11111 Santa
Monica Boulevard, Suite 1500, Los Angeles, California 90025-3333, and PHOENIX
NETWORK, INC. a Delaware corporation, ("Borrower"), with its chief executive
office located at 550 California Street, 11th Floor, San Francisco, California
94104-1006.
This Agreement amends and restates the Loan and Security Agreement dated
as of August 26, 1993 (as previously amended, the "Prior Agreement") among
Foothill and Borrower. Except for any provisions of the Prior Agreement that,
by their terms, survive its termination (such as indemnities by Borrower in
favor of Foothill), this Agreement supersedes and replaces the Prior Agreement
and all Obligations of Borrower under the Prior Agreement shall become
Obligations of Borrower under this Agreement.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. As used in this Agreement, the following
terms shall have the following definitions:
"Account Debtor" means any Person who is or who may become
obligated under, with respect to, or on account of an Account.
"Accounts" means all currently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the sale or lease of general
intangibles relating to the provision of telecommunications services, or the
rendition of services by Borrower, irrespective of whether earned by
performance, and any and all credit insurance, guaranties, or security
therefor.
"Affiliate" means, as applied to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control
with, that Person. For purposes of this definition, "control" as applied to
any Person means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of that Person, whether
through the ownership of voting securities, by contract, or otherwise;
provided, however, that, in any event: (a) any Person which owns directly or
indirectly five percent (5%) or more of the securities having ordinary voting
power for the election of directors or other members of the governing body of a
Person or five percent (5%) or more of the partnership or other ownership
interests of a Person (other than as a limited partner of such Person) shall be
deemed to control such Person; (b) each director or officer of a Person shall
be deemed to be an Affiliate of such Person; and (c) each partnership or joint
venture in which a Person is a partner or joint venturer shall be deemed to be
an Affiliate of such Person.
"Agreement" means this Amended and Restated Loan and Security
Agreement and any extensions, riders, supplements, notes, amendments, or
modifications to or in connection with this Amended and Restated Loan and
Security Agreement.
1
<PAGE> 7
"Applicable Margin" means, subject to adjustment as provided
below based on Borrower's EBITDA and net income, one and three-quarters percent
(1.75%) per annum. The foregoing notwithstanding, if Borrower's EBITDA and net
income for its fiscal year 1996 each exceed 90% of the amount thereof projected
in the Projections, then, effective January 1, 1997, the Applicable Margin
shall be reduced to one and one half percent (1.50) per annum.
"Authorized Officer" means any officer of Borrower.
"Average Unused Portion of Maximum Amount" means (a) the Maximum
Amount; less (b) (i) the average Daily Balance of advances made by Foothill
under Section 2.1 that were outstanding during the immediately preceding month;
plus (ii) the average Daily Balance of the undrawn L/Cs and L/C Guarantees
issued by Foothill under Section 2.2 that were outstanding during the
immediately preceding month.
"Bankruptcy Code" means the United States Bankruptcy Code (11
U.S.C. Section 101 et seq.), as amended, and any successor statute.
"Borrower" has the meaning set forth in the preamble to this
Agreement.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records indicating, summarizing, or evidencing Borrower's
assets or liabilities, or the Collateral; all information relating to
Borrower's business operations or financial condition; and all computer
programs, disc or tape files, printouts, runs, or other computer prepared
information, and the equipment containing such information.
"Borrowing Base" has the meaning set forth in Section 2.1.
"Business Day" means any day which is not a Saturday, Sunday, or
other day on which national banks are authorized or required to close.
"Carrier" means any provider of long distance telecommunications
access with whom Borrower from time to time does business, such as (without
limitation) Sprint, AT&T, Allnet, and ECI.
"Change of Control" shall be deemed to have occurred at such time
as a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, of more than 20% of the total voting power of all classes of stock
then outstanding of Borrower normally entitled to vote in elections of
directors.
"Closing Date" means October 16, 1995.
"Code" means the California Uniform Commercial Code.
"Collateral" means each of the following: the Accounts;
Borrower's Books; the Equipment; the General Intangibles; the Inventory; the
Negotiable Collateral; any money, or other assets of Borrower which hereafter
come into the possession, custody, or control of Foothill; and the proceeds and
products,
2
<PAGE> 8
whether tangible or intangible, of any of the foregoing including proceeds of
insurance covering any or all of the Collateral, and any and all Accounts,
Equipment, General Intangibles, Inventory, Negotiable Collateral, money,
deposit accounts, or other tangible or intangible property resulting from the
sale, exchange, collection, or other disposition of the Collateral, or any
portion thereof or interest therein, and the proceeds thereof.
"Consolidated Current Assets" means as of any date of
determination the aggregate amount of all current assets of Borrower and its
subsidiaries calculated on a consolidated basis that would, in accordance with
GAAP, be classified on a balance sheet as current assets.
"Consolidated Current Liabilities" means as of any date of
determination the aggregate amount of all current liabilities of Borrower and
its subsidiaries, calculated on a consolidated basis that would, in accordance
with GAAP, be classified on a balance sheet as current liabilities. For
purposes of the foregoing, all advances outstanding under this Agreement shall
be deemed to be current liabilities without regard to whether they would be
deemed to be so under GAAP.
"Consolidated Tangible Net Worth" means, as of the date any
determination thereof is to be made, Borrower's total stockholder's equity,
minus all intangible assets of Borrower, calculated on a consolidated basis.
"Consolidated Working Capital" means the result of subtracting
Consolidated Current Liabilities from Consolidated Current Assets.
"Daily Balance" means the amount of an Obligation owed at the end
of a given day.
"Dilution" means, with respect to any Dilution Measuring Period,
as reasonably determined by Foothill, the fraction, expressed as a percentage,
of which the numerator is the total during such Dilution Measuring Period of
all bad debt write-downs, promotions, and other items with respect to Accounts
of Borrower that could reduce or otherwise impair the full and timely
collection of such Accounts, and of which the denominator is the total during
such Dilution Measuring Period of all collections received with respect to
Accounts of Borrower.
"Dilution Measuring Period" means, in relation to any calendar
month, the preceding three calendar months.
"Early Termination Premium" has the meaning set forth in Section
3.4.
"EBITDA" means, for any fiscal period of Borrower, Borrower's net
income for such period, determined in accordance with GAAP, plus any interest,
taxes, depreciation, and amortization that were deducted in arriving at net
income.
"Eligible Accounts" means those Accounts created by Borrower in
the ordinary course of business that arise out of Borrower's sale of goods,
sale of general intangibles relating to the provision of telecommunication
services, or rendition of services, that strictly comply with all of Borrower's
representations and warranties to Foothill, and that are and at all times shall
continue to be acceptable to Foothill in all respects; provided, however, that
standards of eligibility may be fixed and revised from time
3
<PAGE> 9
to time by Foothill in Foothill's reasonable credit judgment. Eligible
Accounts shall include Eligible Unbilled Accounts. Eligible Accounts shall not
include the following:
(a) Accounts which the Account Debtor has failed to pay
within sixty (60) days of invoice date;
(b) Accounts that are not due upon receipt of
Borrower's invoice by the Account Debtor or within ten (10) days thereafter;
(c) Accounts with respect to which the Account Debtor
is an officer, employee, Affiliate, or agent of Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional;
(e) Accounts with respect to which the Account Debtor
is not a resident of the United States, and which are not either (1) covered by
credit insurance in form and amount, and by an insurer, satisfactory to
Foothill, or (2) supported by one or more letters of credit that are assignable
by their terms and have been delivered to Foothill in an amount and of a tenor,
and issued by a financial institution, acceptable to Foothill;
(f) Accounts with respect to which the Account Debtor
is the United States or any department, agency, or instrumentality of the
United States, any state of the United States;
(g) Accounts with respect to which Borrower is or may
become liable to the Account Debtor for goods sold or services rendered by the
Account Debtor to Borrower;
(h) Accounts with respect to an Account Debtor whose
total obligations owing to Borrower exceed ten percent (10%) of all Eligible
Accounts, to the extent of the obligations of such Account Debtor in excess of
such percentage;
(i) Accounts with respect to which the Account Debtor
disputes liability or makes any claim with respect thereto, or is subject to
any Insolvency Proceeding, or become insolvent, or goes out of business;
(j) Accounts the collection of which Foothill, in its
reasonable credit judgment, believes to be doubtful by reason of the Account
Debtor's financial condition;
(k) Accounts owed by an Account Debtor that has failed
to pay fifty percent (50%) or more of its Accounts owed to Borrower within
sixty (60) days of the date of the applicable invoices;
(l) Accounts that are payable in other than United
States Dollars;
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(m) Accounts, other than Eligible Unbilled Accounts,
that have not yet been billed to the relevant Account Debtor;
(n) Accounts that represent progress payments or other
advance billings that are due prior to the completion of performance by
Borrower of the subject contract for goods or services; and
(o) Accounts arising from services provided by a
Carrier, if Borrower is in default of its obligations to such Carrier in any
material respect that would entitle such Carrier to exercise remedies against
Borrower, if such Carrier in fact is exercising such remedies, or has indicated
its intention to exercise such remedies, or has threatened to exercise such
remedies, and if Foothill in the good faith exercise of Foothill's discretion
has determined that such actual, intended, or threatened exercise of remedies
may interfere with the value or collectibility of the affected Accounts.
"Eligible Unbilled Accounts" means those particular Accounts
created by Borrower in the ordinary course of business that arise out of
Borrower's sale of goods, sale of general intangibles relating to the provision
of telecommunication services, or rendition of services, but have not yet been
billed to the relevant Account Debtor, that are described in a call transaction
record tape or electronic data transfer that has been delivered by a Carrier to
Integretel, and that in all other respects qualify as Eligible Accounts.
"Equipment" means all of Borrower's present and hereafter
acquired machinery, machine tools, motors, equipment, furniture, furnishings,
fixtures, vehicles (including motor vehicles and trailers), tools, parts, dies,
jigs, goods (other than consumer goods, farm products, or Inventory), and any
interest in any of the foregoing, wherever located, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not
incorporated and whether or not foreign) which is or may hereafter become a
member of a group of which Borrower is a member and which is treated as a
single employer under ERISA Section 4001(b)(1), or IRC Section 414.
"Event of Default" has the meaning set forth in Section 8.
"Foothill" has the meaning set forth in the preamble to this
Agreement.
"Foothill Expenses" means all: costs or expenses (including
taxes (other than taxes on Foothill's income and other corporate taxes payable
by Foothill), photocopying, notarization, telecommunication and insurance
premiums) required to be paid by Borrower under any of the Loan Documents that
are paid or advanced by Foothill; documentation filing, recording, publication,
appraisal (including periodic Collateral appraisals), real estate survey (if
real estate is pledged to Foothill), environmental audit (if real estate is
pledged to Foothill), and search fees assessed, paid, or incurred by Foothill
in connection with Foothill's transactions with Borrower; costs and expenses
incurred by Foothill in the disbursement of funds to Borrower (by wire transfer
or otherwise); charges paid or incurred by Foothill resulting from the dishonor
of checks; reasonable costs and expenses paid or incurred by Foothill to
correct
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any default or enforce any provision of the Loan Documents, or in gaining
possession of, maintaining, handling, preserving, storing, shipping, selling,
preparing for sale, or advertising to sell the Collateral, or any portion
thereof, irrespective of whether a sale is consummated; reasonable costs and
expenses paid or incurred by Foothill in examining Borrower's Books; costs and
expenses of third party claims or any other suit paid or incurred by Foothill
in enforcing or defending the Loan Documents; and Foothill's reasonable
attorneys fees and expenses incurred in advising, structuring, drafting,
reviewing, administering, amending, terminating, enforcing (including attorneys
fees and expenses incurred in connection with a "workout," a "restructuring,"
or an Insolvency Proceeding concerning Borrower or any guarantor of the
Obligations), defending, or concerning the Loan Documents, irrespective of
whether suit is brought.
"GAAP" means generally accepted accounting principles as in
effect from time to time in the United States, consistently applied.
"General Intangibles" means all of Borrower's present and future
general intangibles and other personal property (including contract rights,
rights arising under common law, statutes, or regulations, choses or things in
action, goodwill, patents, trade names, trademarks, servicemarks, copyrights,
blueprints, drawings, purchase orders, customer lists, monies due or
recoverable from pension funds, route lists, monies due under any royalty or
licensing agreements, infringements, claims, computer programs, computer discs,
computer tapes, literature, reports, catalogs, deposit accounts, insurance
premium rebates, tax refunds, and tax refund claims), other than goods and
Accounts.
"Hazardous Materials" means all or any of the following: (a)
substances that are defined or listed in, or otherwise classified pursuant to,
any applicable laws or regulations as "hazardous substances," "hazardous
materials," "hazardous wastes," "toxic substances" or any other formulation
intended to define, list or classify substances by reason of deleterious
properties such as ignitability, corrosivity, reactivity, carcinogenicity,
reproductive toxicity or "EP toxicity"; (b) oil, petroleum or petroleum derived
substances, natural gas, natural gas liquids or synthetic gas and drilling
fluids, produced waters and other wastes associated with the exploration,
development or production of crude oil, natural gas or geothermal resources;
(c) any flammable substances or explosives or any radioactive materials; and
(d) asbestos in any form or electrical equipment which contains any oil or
dielectric fluid containing levels of polychlorinated biphenyls in excess of
fifty parts per million.
"Indebtedness" shall mean: (a) all obligations of Borrower for
borrowed money; (b) all obligations of Borrower evidenced by bonds, debentures,
notes, or other similar instruments and all reimbursement or other obligations
of Borrower in respect of letters of credit, letter of credit guaranties,
bankers acceptances, interest rate swaps, controlled disbursement accounts, or
other financial products; (c) all obligations under capitalized leases; (d) all
obligations or liabilities of others secured by a lien or security interest on
any asset of Borrower, irrespective of whether such obligation or liability is
assumed; and (e) any obligation of Borrower guaranteeing or intended to
guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with
recourse to Borrower) any indebtedness, lease, dividend, letter of credit, or
other obligation of any other Person.
"Insolvency Proceeding" means any proceeding commenced by or
against any Person under any provision of the Bankruptcy Code, as amended, or
under any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, formal or informal moratoria, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other similar relief.
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"Integretel" means Integretel, Incorporated, a California
corporation.
"Inventory" means all present and future inventory in which
Borrower has any interest, including goods held for sale or lease or to be
furnished under a contract of service and all of Borrower's present and future
raw materials, work in process, finished goods, and packing and shipping
materials, wherever located, and any documents of title representing any of the
above.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"L/C" has the meaning set forth in Section 2.2(a).
"L/C Guaranty" has the meaning set forth in Section 2.2(a).
"Loan Documents" means this Agreement, the Lock Box Agreement,
any note or notes executed by Borrower and payable to Foothill, and any other
agreement entered into by Borrower or any Affiliate of Borrower in connection
with this Agreement.
"Lock Box" shall have the meaning provided in the Lock Box
Agreement.
"Lock Box Agreement" means that certain Lockbox Operating
Procedural Agreement, in form and substance satisfactory to Foothill, among
Borrower, Foothill, and the Lock Box Bank.
"Lock Box Bank" means Professional Bank of Denver, Colorado, and
any other bank, reasonably acceptable to Foothill, that succeeds Professional
Bank of Denver, Colorado in such capacity.
"Maximum Amount" has the meaning set forth in Section 2.1.
"Multiemployer Plan" means a "multiemployer plan" as defined in
ERISA Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees
of Borrower or any ERISA Affiliate.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit, notes, drafts, instruments, certificated and
uncertificated securities (including the shares of stock of subsidiaries of
Borrower), documents, personal property leases (wherein Borrower is the
lessor), chattel paper, and Borrower's Books relating to any of the foregoing.
"Obligations" means all loans, advances, debts, principal,
interest (including any interest that, but for the provisions of the Bankruptcy
Code, would have accrued), contingent reimbursement obligations owing to
Foothill under any outstanding L/Cs or L/C Guarantees, premiums, liabilities
(including all amounts charged to Borrower's loan account pursuant to any
agreement authorizing Foothill to charge Borrower's loan account), obligations,
fees (including Early Termination Premiums), lease payments, guaranties,
covenants, and duties owing by Borrower to Foothill of any kind and description
(whether pursuant to or evidenced by the Loan Documents, by any note or other
instrument, or by any other agreement between Foothill and Borrower, and
irrespective of whether for the payment of money), whether direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter
arising, and including any debt, liability, or obligation owing from Borrower
to others that Foothill may have obtained by assignment
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or otherwise, and further including all interest not paid when due and all
Foothill Expenses that Borrower is required to pay or reimburse by the Loan
Documents, by law, or otherwise.
"Overadvance" has the meaning set forth in Section 2.3.
"Participant" means any Person, other than Foothill, that has
committed to provide a portion of the financing contemplated herein.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permitted Liens" means: (a) liens and security interests held by
Foothill; (b) liens for unpaid taxes that are not yet due and payable; (c)
liens and security interests set forth on Schedule P-1 attached hereto; (d)
purchase money security interests and liens of lessors under capitalized leases
to the extent that the acquisition or lease of the underlying asset was
permitted under Section 7.10, and so long as the security interest or lien only
secures the purchase price of the asset; (e) easements, rights of way,
reservations, covenants, conditions, restrictions, zoning variances, and other
similar encumbrances that do not materially interfere with the use or value of
the property subject thereto; (f) obligations and duties as lessee under any
leases of personal property existing on the date of this Agreement; (g)
mechanics', materialmen's, warehousemen's, or similar liens; and (h) a security
interest in favor of WilTel, Inc. on the Accounts that are generated through
the use of WilTel, Inc.'s telecommunications system, junior in priority to the
security interest of Foothill and subject to an intercreditor agreement
satisfactory to Foothill.
"Person" means and includes natural persons, corporations,
limited partnerships, general partnerships, joint ventures, trusts, land
trusts, business trusts, or other organizations, irrespective of whether they
are legal entities, and governments and agencies and political subdivisions
thereof.
"Plan" means any plan described in ERISA Section 3(2) maintained
for employees of Borrower or any ERISA Affiliate, other than a Multiemployer
Plan.
"Prohibited Transaction" means any transaction described in
Section 406 of ERISA which is not exempt by reason of Section 408 of ERISA, and
any transaction described in Section 4975(c) of the IRC which is not exempt by
reason of Section 4975(c)(2) of the IRC.
"Projections" means the most current projections of Borrower
relating to its fiscal year 1996, including projections regarding EBITDA and
net income of Borrower for such fiscal year, that have been provided by
Borrower to Foothill, and reviewed and accepted by Foothill in Foothill's sole
discretion.
"Reference Rate" means the highest of the variable rates of
interest, per annum, most recently announced by (i) Bank of America, N.T. &
S.A., San Francisco, California, (ii) Mellon Bank, N.A., Pittsburgh,
Pennsylvania, and (iii) Citibank, N.A., New York, New York, or any successor to
any of the foregoing institutions, as its "prime rate" or "reference rate," as
the case may be, irrespective of whether such announced rate is the best rate
available from such financial institution.
"Renewal Date" has the meaning set forth in Section 3.3.
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"Reportable Event" means a reportable event described in Section
4043 of ERISA or the regulations thereunder, a withdrawal from a Plan described
in Section 4063 of ERISA, or a cessation of operations described in Section
4068(f) of ERISA.
"Solvent" means, with respect to any Person on a particular date,
that on such date (i) at fair valuations, all of the assets of such Person are
greater than the sum of the debts, including contingent liabilities, of such
Person, (ii) the present fair salable value of the assets of such Person is not
less than the amount that will be required to pay the probable liability of
such Person on its debts as they become absolute and matured, (iii) such Person
is able to realize upon its assets and pay its debts and other liabilities,
contingent obligations and other commitments as they mature in the normal
course of business, (iv) such Person does not intend to, and does not believe
that it will, incur debts beyond such Person's ability to pay as such debts
mature, and (v) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
assets would constitute unreasonably small capital after giving due
consideration to the prevailing practices in the industry in which such Person
is engaged. In computing the amount of contingent liabilities at any time, it
is intended that such liabilities will be computed at the amount that, in light
of all the facts and circumstances existing at such time, represents the amount
that can reasonably be expected to become an actual or matured liability.
"Voidable Transfer" has the meaning set forth in Section 15.8.
1.2 ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP. When used herein,
the term "financial statements" shall include the notes and schedules thereto.
Whenever the term "Borrower" is used in respect of a financial covenant or a
related definition, it shall be understood to mean Borrower on a consolidated
basis unless the context clearly requires otherwise.
1.3 CODE. Any terms used in this Agreement which are defined
in the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.
1.4 CONSTRUCTION. Unless the context of this Agreement
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the term "including" is not
limiting, and the term "or" has, except where otherwise indicated, the
inclusive meaning represented by the phrase "and/or." The words "hereof,"
"herein," "hereby," "hereunder," and similar terms in this Agreement refer to
this Agreement as a whole and not to any particular provision of this
Agreement. Section, subsection, clause, schedule, and exhibit references are
to this Agreement unless otherwise specified. Any reference in this Agreement
or in the Loan Documents to this Agreement or any of the Loan Documents shall
include all alterations, amendments, changes, extensions, modifications,
renewals, replacements, substitutions, and supplements, thereto and thereof, as
applicable.
1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits
attached to this Agreement shall be deemed incorporated herein by reference.
2. LOAN AND TERMS OF PAYMENT.
2.1 REVOLVING ADVANCES. Subject to the terms and conditions
of this Agreement, and so long as no Event of Default has occurred and is
continuing, Foothill agrees to make revolving advances
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to Borrower in an amount not to exceed the Borrowing Base. For purposes of this
Agreement "Borrowing Base" shall mean:
(a) subject to adjustment based on Dilution as provided
in Section 2.1(b), an amount equal to the lesser of: (i) the sum of (A) eighty
percent (80%) of the amount of Eligible Accounts (other than Eligible Unbilled
Accounts) plus (B) the lesser of forty percent (40%) of the amount of Eligible
Unbilled Accounts and Three Million Dollars ($3,000,000), and (ii) an amount
equal to Borrower's cash collections for the immediately preceding sixty (60)
day period.
(b) should Dilution during any Dilution Measuring
Period exceed ten percent, the advance rates set forth in Section 2.1(a) shall
be reduced during the next calendar month by one percent for each percent by
which Dilution exceeded ten percent (rounded to the nearest whole number).
(c) anything to the contrary in paragraphs (a) or (b)
above notwithstanding, Foothill may reduce its advance rates based upon
Eligible Accounts without declaring an Event of Default if it determines, in
its reasonable discretion, that there is a material impairment of the prospect
of repayment of all or any portion of the Obligations or a material impairment
of the value or priority of Foothill's security interests in the Collateral.
(d) Foothill shall have no obligation to make advances
hereunder to the extent they would cause the outstanding Obligations to exceed
Ten Million Dollars ($10,000,000) (the "Maximum Amount").
(e) Foothill is authorized to make advances under this
Agreement based upon telephonic or other instructions received from anyone
purporting to be an Authorized Officer of Borrower or, without instructions, if
pursuant to Section 6.12. Borrower agrees to establish and maintain a single
designated deposit account for the purpose of receiving the proceeds of the
advances requested by Borrower and made by Foothill hereunder. Unless
otherwise agreed by Foothill and Borrower, any advance requested by Borrower
and made by Foothill hereunder shall be made to such designated deposit
account. Amounts borrowed pursuant to this Section 2.1 may be repaid and, so
long as no Event of Default has occurred and is continuing, reborrowed at any
time during the term of this Agreement.
2.2 LETTERS OF CREDIT AND LETTER OF CREDIT GUARANTEES.
(a) Subject to the terms and conditions of this
Agreement, Foothill agrees to issue commercial or standby letters of credit for
the account of Borrower (each, an "L/C") or to issue standby letters of credit
or guarantees of payment (each such letter of credit or guaranty, an "L/C
Guaranty") with respect to commercial or standby letters of credit issued by
another Person for the account of Borrower in an aggregate face amount not to
exceed the lesser of: (i) the Borrowing Base less the amount of outstanding
revolving advances pursuant to Section 2.1, and (ii) Seven Hundred Fifty
Thousand Dollars ($750,000). Borrower expressly understands and agrees that
Foothill shall have no obligation to arrange for the issuance by other
financial institutions of L/Cs that are to be the subject of L/C Guarantees and
that certain of such L/Cs may be outstanding on the Closing Date. Each such
L/C (including those that are the subject of L/C Guarantees) shall have an
expiry date no later than sixty (60) days prior to the date on which this
Agreement is scheduled to terminate under Section 3.3 hereof and all such L/Cs
and L/C Guarantees shall be in form and substance acceptable to Foothill in its
sole discretion. Foothill shall not have any
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obligation to issue L/Cs or L/C Guarantees to the extent that the face amount
of all outstanding L/Cs and L/C Guarantees, plus the amount of revolving
advances outstanding pursuant to Section 2.1, would exceed the Maximum Amount.
The L/Cs and the L/C Guarantees issued under this Section 2.2 shall be used by
Borrower, consistent with this Agreement, for its general working capital
purposes or to support its obligations with respect to workers' compensation
premiums or other similar obligations. If Foothill is obligated to advance
funds under an L/C or L/C Guaranty, the amount so advanced immediately shall be
deemed to be an advance made by Foothill to Borrower pursuant to Section 2.1
and, thereafter, shall bear interest on the terms and conditions provided in
Section 2.4.
(b) Borrower hereby agrees to indemnify, save, and hold
Foothill harmless from any loss, cost, expense, or liability, including
payments made by Foothill, expenses, and reasonable attorneys fees incurred by
Foothill arising out of or in connection with any L/Cs or L/C Guarantees.
Borrower agrees to be bound by the issuing bank's regulations and
interpretations of any L/Cs guarantied by Foothill and opened to or for
Borrower's account or by Foothill's interpretations of any L/C issued by
Foothill to or for Borrower's account, even though this interpretation may be
different from Borrower's own, and Borrower understands and agrees that
Foothill shall not be liable for any error, negligence, or mistakes, whether of
omission or commission, in following Borrower's instructions or those contained
in the L/Cs or any modifications, amendments, or supplements thereto. Borrower
understands that the L/C Guarantees may require Foothill to indemnify the
issuing bank for certain costs or liabilities arising out of claims by Borrower
against such issuing bank. Borrower hereby agrees to indemnify, defend, and
hold Foothill harmless with respect to any loss, cost, expense, or liability
incurred by Foothill under any L/C Guaranty as a result of Foothill's
indemnification of any such issuing bank.
(c) Borrower hereby authorizes and directs any bank
that issues an L/C guaranteed by Foothill to deliver to Foothill all
instruments, documents, and other writings and property received by the issuing
bank pursuant to the L/C, and to accept and rely upon Foothill's instructions
and agreements with respect to all matters arising in connection with the L/C
and the related application. Borrower may or may not be the "account party" on
such L/Cs.
(d) Any and all service charges, commissions, fees and
costs incurred by Foothill relating to the L/Cs guaranteed by Foothill shall be
considered Foothill Expenses for purposes of this Agreement and shall be
immediately reimbursable by Borrower to Foothill. On the first Business Day of
each month, Borrower will pay Foothill a fee equal to two percent (2.00%) per
annum times the average Daily Balance of the undrawn L/Cs and L/C Guarantees
that were outstanding during the immediately preceding month. Service charges,
commissions, fees and costs may be charged to Borrower's loan account at the
time the service is rendered or the cost is incurred.
(e) Immediately upon the termination of this Agreement,
Borrower agrees to either: (i) provide cash collateral to Foothill in an
amount equal to the maximum amount of Foothill's obligations under L/Cs plus
the maximum amount of Foothill's obligations to any issuing bank under
outstanding L/C Guarantees, or (ii) cause to be delivered to Foothill releases
of all of Foothill's obligations under its outstanding L/Cs and L/C Guarantees.
At Foothill's discretion, any proceeds of Collateral received by Foothill may
be held as the cash collateral required by this Section 2.2(e).
2.3 {INTENTIONALLY OMITTED}.
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2.4 OVERADVANCES. If, at any time or for any reason, the
amount of Obligations owed by Borrower to Foothill pursuant to Sections 2.1 and
2.2 is greater than either the dollar or percentage limitations set forth in
Sections 2.1 or 2.2 (an "Overadvance"), Borrower shall immediately pay to
Foothill, in cash, the amount of such excess to be used by Foothill to repay
the Obligations or to be held by Foothill as cash collateral to secure
repayment of L/Cs or L/C Guarantees.
2.5 INTEREST: RATES, PAYMENTS, AND CALCULATIONS.
(a) Interest Rate. All Obligations, except for undrawn
L/Cs and L/C Guarantees, shall bear interest, on the average Daily Balance, at
a rate equal to the Reference Rate plus the Applicable Margin.
(b) Default Rate. All Obligations, except for undrawn
L/Cs and L/C Guarantees, shall bear interest, from and after the occurrence and
during the continuance of an Event of Default, at a rate equal to the Reference
Rate plus the Applicable Margin plus four (4.00) percentage points. From and
after the occurrence and during the continuance of an Event of Default, the fee
provided in Section 2.2(d) shall be increased to a fee equal to that certain
percentage per annum equal to the Applicable Margin plus four (4.00) percentage
points times the average Daily Balance of the undrawn L/Cs and L/C Guarantees
that were outstanding during the immediately preceding month.
(c) Minimum Interest. In no event shall the rate of
interest chargeable hereunder be less than eight percent (8.00%) per annum.
(d) Payments. Interest hereunder shall be due and
payable in arrears on the first day of each month during the term hereof.
Foothill shall, at its option, charge such interest, all Foothill Expenses, and
all payments due under any note or other Loan Document to Borrower's loan
account, which amounts shall thereafter accrue interest at the rate then
applicable hereunder. Any interest not paid when due shall be compounded by
becoming a part of the Obligations, and such interest shall thereafter accrue
interest at the rate then applicable hereunder.
(e) Computation. The Reference Rate as of this date is
eight and three-quarters percent (8.75%) per annum. In the event the Reference
Rate is changed from time to time hereafter, the applicable rate of interest
hereunder automatically and immediately shall be increased or decreased by an
amount equal to the Reference Rate change. The rates of interest charged
hereunder shall be based upon the average Reference Rate in effect during the
month. All interest and fees chargeable under the Loan Documents shall be
computed on the basis of a three hundred sixty (360) day year for the actual
number of days elapsed.
(f) Intent to Limit Charges to Maximum Lawful Rate. In
no event shall the interest rate or rates payable under this Agreement, plus
any other amounts paid in connection herewith, exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable. Borrower and Foothill, in executing this
Agreement, intend to expressly and legally agree upon the rate of interest and
manner of payment stated within it; provided, however, that, anything contained
herein to the contrary notwithstanding, if said rate or rates of interest or
manner of payment exceeds the maximum allowable under applicable law, then,
ipso facto as of the date of this Agreement, Borrower is and shall be liable
only for the payment of such maximum as allowed by law, and payment received
from
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Borrower in excess of such legal maximum, whenever received, shall be applied
to reduce the principal balance of the Obligations to the extent of such
excess.
2.6 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The
receipt of any wire transfer of funds, check, or other item of payment by
Foothill (whether from transfers to Foothill by the Lock Box Bank pursuant to
the Lock Box Agreement or otherwise) immediately shall be applied to
provisionally reduce the Obligations, but shall not be considered a payment on
account unless such wire transfer is of immediately available federal funds and
is made to the appropriate deposit account of Foothill or unless and until such
check or other item of payment is honored when presented for payment. From and
after the Closing Date, Foothill shall be entitled to charge Borrower for one
and three-quarters (1.75) Business Days of `float' at the rate set forth in
Section 2.3(a) (applicable to advances under Section 2.1) on all collections,
checks, wire transfers, or other items of payment that are received by Borrower
or processed through the Lock Box (regardless of whether forwarded by the Lock
Box Bank to Foothill, whether owned by Borrower or collected as agent for
another, whether provisionally applied to reduce the Obligations or otherwise).
This across-the-board one and three-quarters (1.75) Business Day float charge
on all Borrower receipts is acknowledged by the parties to constitute an
integral aspect of the pricing of Foothill's facility to Borrower, and shall
apply irrespective of the characterization of whether receipts are owned by
Borrower or Foothill, and irrespective of the level of Borrower's Obligations
to Foothill. Should such check or item of payment not be honored when
presented for payment, then Borrower shall be deemed not to have made such
payment, and interest shall be recalculated accordingly. Anything to the
contrary contained herein notwithstanding, any wire transfer, check, or other
item of payment received by Foothill after 11:00 a.m. Los Angeles time shall be
deemed to have been received by Foothill as of the opening of business on the
immediately following Business Day.
2.7 STATEMENTS OF OBLIGATIONS. Foothill shall render
statements to Borrower of the Obligations, including principal, interest, fees,
and including an itemization of all charges and expenses constituting Foothill
Expenses owing, and such statements shall be conclusively presumed to be
correct and accurate and constitute an account stated between Borrower and
Foothill unless, within thirty (30) days after receipt thereof by Borrower,
Borrower shall deliver to Foothill by registered or certified mail at its
address specified in Section 12, written objection thereto describing the error
or errors contained in any such statements.
2.8 FEES. Borrower shall pay to Foothill the following fees:
(a) Closing Fee. A one time closing fee of Seventy
Five Thousand Dollars ($75,000) which is earned, in full, on the Closing Date
and is due and payable by Borrower to Foothill, in connection with this
Agreement, in three equal installments of Twenty Five Thousand Dollars
($25,000) each, the first due on the Closing Date, the second due one month
after the Closing Date, and the third due two months after the Closing Date;
(b) Unused Line Fee. On the first day of each month
during the term of this Agreement, a fee in an amount equal to one half percent
(0.50%) per annum times the Average Unused Portion of the Maximum Amount;
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(c) Annual Facility Fee. On each anniversary of the
Closing Date, a Fee in an amount equal to one half percent (0.50%) of the
Maximum Amount, such fee shall be fully earned on each such anniversary;
(d) Financial Examination, Documentation and Appraisal
Fees. Foothill's customary fee of Six Hundred Dollars ($600) per day per
examiner, plus out-of-pocket expenses for each financial analysis and
examination of Borrower performed by Foothill or its agents; Foothill's
customary appraisal fee of Seven Hundred Fifty Dollars ($750) per day per
appraiser, plus out-of-pocket expenses for each appraisal of the Collateral
performed by Foothill or its agents; and Foothill's customary fee of One
Thousand Dollars ($1,000) per year for its loan documentation review;
(e) Servicing Fee. On the first day of each month
during the term of this Agreement, and thereafter so long as any Obligations
are outstanding, a servicing fee in an amount equal to One Thousand Five
Hundred Dollars ($1,500) per month.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE, L/C, OR L/C
GUARANTY. The obligation of Foothill to make the initial advance, provide an
L/C, or L/C Guaranty hereunder is subject to the fulfillment, to the
satisfaction of Foothill and its counsel, of each of the following conditions
on or before the Closing Date:
(a) the Closing Date shall occur on or before October
16, 1995;
(b) Foothill shall have received from Borrower evidence
satisfactory to Foothill that Borrower has obtained, in September, 1995, not
less than fifteen million dollars ($15,000,000) of additional investment
capital on terms and conditions acceptable to Foothill in Foothill's sole
discretion;
(c) Foothill shall have received searches reflecting
the filing of its financing statements and fixture filings;
(d) Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force and
effect:
(i) the Lock Box Agreement;
(ii) no-offset, intercreditor, and consent to
assignment agreements in form and substance
satisfactory to Foothill, entered into between
Foothill, Borrower, and each Carrier; and
(iii) a service agreement in form and substance
satisfactory to Foothill, entered into between
Borrower and Integretel;
(e) Foothill shall have received a certificate from the
Secretary of Borrower attesting to the resolutions of Borrower's Board of
Directors authorizing its execution and delivery
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of this Agreement and the other Loan Documents to which Borrower is a party and
authorizing specific officers of Borrower to execute same;
(f) Foothill shall have received copies of Borrower's
Bylaws and Certificate of Incorporation, as amended, modified, or supplemented
to the Closing Date, certified by the Secretary of Borrower;
(g) Foothill shall have received a certificate of
corporate status with respect to Borrower, dated within ten (10) days of the
Closing Date, by the Secretary of State of the state of incorporation of
Borrower, which certificate shall indicate that Borrower is in good standing in
such state;
(h) Foothill shall have received certificates of
corporate status with respect to Borrower, each dated as of a date that is
within a reasonable period prior to the Closing Date, such certificates to be
issued by the Secretary of State of the states in which its failure to be duly
qualified or licensed would have a material adverse effect on the financial
condition or assets of Borrower, which certificates shall indicate that
Borrower is in good standing;
(i) Foothill shall have received the insurance
certificates, or certified copies of the policies of insurance, together with
the endorsements as are required by Section 6.12 hereof, the form and substance
of which shall be satisfactory to Foothill and its counsel;
(j) {intentionally omitted};
(k) {intentionally omitted};
(l) Foothill shall have received an opinion of
Borrower's counsel in form and substance satisfactory to Foothill in its sole
discretion;
(m) Foothill shall have received and reviewed, and
shall have expressed no objection to, the terms of all contracts and agreements
in effect between Borrower and each Carrier; and
(n) all other documents and legal matters in connection
with the transactions contemplated by this Agreement shall have been delivered
or executed or recorded and shall be in form and substance satisfactory to
Foothill and its counsel.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES, L/CS, OR L/C
GUARANTEES. The following shall be conditions precedent to all advances, L/Cs,
or L/C Guarantees hereunder:
(a) the representations and warranties contained in
this Agreement or the other Loan Documents shall be true and correct in all
respects on and as of the date of such advance, L/C, or L/C Guaranty, as though
made on and as of such date (except to the extent that such representations and
warranties relate solely to an earlier date);
(b) no Event of Default or event which with the giving
of notice or passage of time would constitute an Event of Default shall have
occurred and be continuing on the date of such advance, L/C, or L/C Guaranty,
nor shall either result from the making of the advance; and
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(c) no injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the making of such
advance shall have been issued and remain in force by any governmental
authority against Borrower, Foothill, or any of their Affiliates.
3.3 TERM; AUTOMATIC RENEWAL. This Agreement shall become
effective upon the execution and delivery hereof by Borrower and Foothill and
shall continue in full force and effect for a term ending on the date (the
"Renewal Date") that is three (3) years from the Closing Date and shall be
automatically renewed for successive one (1) year periods thereafter, unless
sooner terminated pursuant to the terms hereof. Either party may terminate
this Agreement effective on the Renewal Date or on any one (1) year anniversary
of the Renewal Date by giving the other party at least ninety (90) days prior
written notice by registered or certified mail, return receipt requested. The
foregoing notwithstanding, Foothill shall have the right to terminate its
obligations under this Agreement immediately and without notice upon the
occurrence of an Event of Default.
3.4 EFFECT OF TERMINATION. On the date of termination, all
Obligations (including contingent reimbursement obligations under any
outstanding L/Cs or L/C Guarantees) shall become immediately due and payable
without notice or demand. No termination of this Agreement, however, shall
relieve or discharge Borrower of Borrower's duties, Obligations, or covenants
hereunder, and Foothill's continuing security interest in the Collateral shall
remain in effect until all Obligations have been fully discharged and
Foothill's obligation to provide advances hereunder is terminated. If Borrower
has sent a notice of termination pursuant to the provisions of Section 3.3, but
fails to pay all Obligations within five (5) Business Days of the date set
forth in said notice, then Foothill may, but shall not be required to, renew
this Agreement for an additional term of one (1) year.
3.5 EARLY TERMINATION BY BORROWER. The provisions of Section
3.3 that allow termination of this Agreement by Borrower only on the Renewal
Date and certain anniversaries thereof notwithstanding, Borrower has the
option, at any time upon sixty (60) days prior written notice to Foothill, to
terminate this Agreement by paying to Foothill, in cash, the Obligations
(including any contingent reimbursement obligations of Foothill under any L/Cs
or L/C Guarantees), together with a premium (the "Early Termination Premium")
equal to (subject to adjustment as provided below): (a) during the first year
following the Closing Date, the greater of (i) one and three-quarters percent
(1.75%) of the Maximum Amount, and (ii) the total interest and fees (including
L/C and L/C Guaranty Fees) for the immediately preceding six (6) months; (b)
during the second year following the Closing Date, one and one half percent
(1.50%) of the Maximum Amount; and (c) during the third year following the
Closing Date, three quarters of a percent (0.75%) of the Maximum Amount. The
foregoing notwithstanding, if the termination of this Agreement is in
connection with and as the result of an acquisition of Borrower by another
Person during the second or third year following the Closing Date, then, in
such circumstance only, the Early Termination Premium during the second year
shall be reduced to three quarters of one percent (0.75%) of the Maximum
Amount, and the Early Termination Premium during the third year shall be
reduced to three eighths of one percent (0.375%) of the Maximum Amount.
3.6 TERMINATION UPON INTENTIONAL EVENT OF DEFAULT. If
Foothill terminates this Agreement upon the occurrence of an Event of Default
that is caused intentionally by Borrower for the purpose, in Foothill's
reasonable judgment, of avoiding the Early Termination Premium provided in
Section 3.5, in view of the impracticability and extreme difficulty of
ascertaining actual damages and by mutual agreement of the parties as to a
reasonable calculation of Foothill's lost profits as a result thereof, Borrower
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shall pay to Foothill upon the effective date of such termination, a premium in
an amount equal to the Early Termination Premium. The Early Termination
Premium shall be presumed to be the amount of damages sustained by Foothill as
the result of the early termination and Borrower agrees that it is reasonable
under the circumstances currently existing. The Early Termination Premium
provided for in this Section 3.6 shall be deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST.
4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to
Foothill a continuing security interest in all currently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each
of its covenants and duties under the Loan Documents. Foothill's security
interest in the Collateral shall attach to all Collateral without further act
on the part of Foothill or Borrower.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral,
Borrower shall, immediately upon the request of Foothill, endorse and assign
such Negotiable Collateral to Foothill and deliver physical possession of such
Negotiable Collateral to Foothill.
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, NEGOTIABLE
COLLATERAL. On or before the Closing Date, Foothill, Borrower, and the Lock
Box Bank shall enter into the Lock Box Agreement, in form and substance
satisfactory to Foothill in its sole discretion, pursuant to which all of
Borrower's cash receipts, checks, and other items of payment will be forwarded
to Foothill on a daily basis. At any time that Foothill in good faith deems
itself insecure (in accordance with Section 1208 of the Code) or at any time
that an Event of Default has occurred and is continuing, Foothill or Foothill's
designee may: (a) notify customers or Account Debtors of Borrower that the
Accounts, General Intangibles, or Negotiable Collateral have been assigned to
Foothill or that Foothill has a security interest therein; and (b) collect the
Accounts, General Intangibles, and Negotiable Collateral directly and charge
the collection costs and expenses to Borrower's loan account. Borrower agrees
that it will hold in trust for Foothill, as Foothill's trustee, any cash
receipts, checks, and other items of payment that it receives on account of the
Accounts, General Intangibles, or Negotiable Collateral and immediately will
deliver said cash receipts, checks, and other items of payment to Foothill in
their original form as received by Borrower.
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any
time upon the reasonable request of Foothill, Borrower shall execute and
deliver to Foothill all financing statements, continuation financing
statements, fixture filings, security agreements, chattel mortgages, pledges,
assignments, endorsements of certificates of title, applications for title,
affidavits, reports, notices, schedules of accounts, letters of authority, and
all other documents that Foothill may reasonably request, in form satisfactory
to Foothill, to perfect and continue perfected Foothill's security interests in
the Collateral and in order to fully consummate all of the transactions
contemplated hereby and under the other the Loan Documents.
4.5 POWER OF ATTORNEY. Borrower hereby irrevocably makes,
constitutes, and appoints Foothill (and any of Foothill's officers, employees,
or agents designated by Foothill) as Borrower's true and lawful attorney, with
power to: (a) if Borrower fails to, or refuses timely to execute and deliver
any of the documents described in Section 4.4, sign the name of Borrower on any
of the documents described in Section
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4.4 or on any other similar documents to be executed, recorded, or filed in
order to perfect or continue perfected Foothill's security interest in the
Collateral; (b) at any time that an Event of Default has occurred and is
continuing or Foothill deems itself insecure (in accordance with Section 1208
of the Code), sign Borrower's name on any invoice or bill of lading relating to
any Account, drafts against Account Debtors, schedules and assignments of
Accounts, verifications of Accounts, and notices to Account Debtors; (c) send
requests for verification of Accounts; (d) endorse Borrower's name on any
checks, notices, acceptances, money orders, drafts, or other item of payment or
security that may come into Foothill's possession; (e) at any time that an
Event of Default has occurred and is continuing or Foothill deems itself
insecure (in accordance with Section 1208 of the Code), notify the post office
authorities to change the address for delivery of Borrower's mail to an address
designated by Foothill, to receive and open all mail addressed to Borrower, and
to retain all mail relating to the Collateral and forward all other mail to
Borrower; (f) at any time that an Event of Default has occurred and is
continuing or Foothill deems itself insecure (in accordance with Section 1208
of the Code), make, settle, and adjust all claims under Borrower's policies of
insurance and make all determinations and decisions with respect to such
policies of insurance; and (g) at any time that an Event of Default has
occurred and is continuing or Foothill deems itself insecure (in accordance
with Section 1208 of the Code), settle and adjust disputes and claims
respecting the Accounts directly with Account Debtors, for amounts and upon
terms which Foothill determines to be reasonable, and Foothill may cause to be
executed and delivered any documents and releases which Foothill determines to
be necessary. The appointment of Foothill as Borrower's attorney, and each and
every one of Foothill's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Foothill's obligation to extend credit hereunder is terminated.
4.6 RIGHT TO INSPECT. Foothill (through any of its officers,
employees, or agents) shall have the right, from time to time hereafter to
inspect Borrower's Books and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, quality, value,
condition of, or any other matter relating to, the Collateral; provided that,
so long as no Event of Default has occurred and is continuing and so long as
Foothill does not in good faith deem itself to be insecure (in accordance with
Section 1208 of the Code), such right will only be exercised by Foothill on
reasonable notice during normal business hours, and Collateral audits will be
conducted no more frequently than quarterly.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Foothill as follows:
5.1 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible
title to the Collateral, free and clear of liens, claims, security interests,
or encumbrances except for Permitted Liens.
5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts are, at the time
of the creation thereof and as of each date on which Borrower includes them in
a Borrowing Base calculation or certification, bona fide existing obligations
created by the sale and delivery of Inventory or the rendition of services to
Account Debtors in the ordinary course of Borrower's business, unconditionally
owed to Borrower without defenses, disputes, offsets, counterclaims, or rights
of return or cancellation. The property giving rise to such Eligible Accounts
has been delivered to the Account Debtor, or to the Account Debtor's agent for
immediate shipment to and unconditional acceptance by the Account Debtor. At
the time of the creation of an Eligible Account and as of each date on which
Borrower includes an Eligible Account in a Borrowing Base calculation or
certification, Borrower has not received notice of actual or imminent
bankruptcy, insolvency,
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or material impairment of the financial condition of any applicable Account
Debtor regarding such Eligible Account.
5.3 {INTENTIONALLY OMITTED}.
5.4 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and
Equipment are not stored with a bailee, warehouseman, or similar party (without
Foothill's prior written consent) and are located only at the locations
identified on Schedule 6.16 or otherwise permitted by Sections 6.16.
5.5 INVENTORY RECORDS. Borrower now keeps, and hereafter at
all times shall keep, correct and accurate records itemizing and describing the
kind, type, quality, and quantity of the Inventory, and Borrower's cost
therefor.
5.6 LOCATION OF CHIEF EXECUTIVE OFFICE. The chief executive
office of Borrower is located at the address indicated in the first paragraph
of this Agreement and Borrower covenants and agrees that it will not, without
thirty (30) days prior written notification to Foothill, relocate such chief
executive office.
5.7 DUE ORGANIZATION AND QUALIFICATION. Borrower is and shall
at all times hereafter be duly organized and existing and in good standing
under the laws of the state of its incorporation and qualified and licensed to
do business in, and in good standing in, any state in which the conduct of its
business or its ownership of property requires that it be so qualified or where
the failure to be so licensed or qualified could reasonably be expected to have
a material adverse effect on the business, operations, condition (financial or
otherwise), finances, or prospects of Borrower.
5.8 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery,
and performance of the Loan Documents are within Borrower's corporate powers,
have been duly authorized, and are not in conflict with nor constitute a breach
of any provision contained in Borrower's Certificate of Incorporation, or
Bylaws, nor will they constitute an event of default under any material
agreement to which Borrower is a party.
5.9 LITIGATION. There are no actions or proceedings pending
by or against Borrower before any court or administrative agency and Borrower
does not have knowledge or belief of any pending, threatened, or imminent
litigation, governmental investigations, or claims, complaints, actions, or
prosecutions involving Borrower or any guarantor of the Obligations, except for
ongoing collection matters in which Borrower is the plaintiff, matters
disclosed on Schedule 5.9, and matters arising after the date hereof that, if
decided adversely to Borrower, would not materially impair the prospect of
repayment of any portion of the Obligations or materially impair the value or
priority of Foothill's beneficial security interest in the Collateral.
5.10 NO MATERIAL ADVERSE CHANGE IN FINANCIAL CONDITION. All
financial statements relating to Borrower or any guarantor of the Obligations
that have been or may hereafter be delivered by Borrower to Foothill have been
prepared in accordance with GAAP and fairly present Borrower's financial
condition as of the date thereof and Borrower's results of operations for the
period then ended. There has not been a material adverse change in the
financial condition of Borrower or any guarantor since the date of the latest
financial statements submitted to Foothill on or before the Closing Date.
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5.11 SOLVENCY. Borrower is Solvent. No transfer of property
is being made by Borrower and no obligation is being incurred by Borrower in
connection with the transactions contemplated by this Agreement or the other
Loan Documents with the intent to hinder, delay, or defraud either present or
future creditors of Borrower.
5.12 ERISA. None of Borrower, any ERISA Affiliate, or any Plan
is or has been in violation of any of the provisions of ERISA, any of the
qualification requirements of IRC Section 401(a) or any of the published
interpretations thereunder. No notice of intent to terminate a Plan has been
filed under Section 4041 of ERISA, nor has any Plan been terminated under
Section 4041(e) of ERISA. The PBGC has not instituted proceedings to
terminate, or appoint a trustee to administer, a Plan and no event has occurred
or condition exists that might constitute grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any
Plan. Neither Borrower nor any ERISA Affiliate would be liable for any amount
pursuant to Sections 4062, 4063, or 4064 of ERISA if all Plans terminated as of
the most recent valuation dates of such Plans. Neither Borrower nor any ERISA
Affiliate have: withdrawn from a "multiple employer Plan" during a plan year
for which it was a substantial employer, as defined in Section 4001(a)(2) of
ERISA; or failed to make a payment to a Plan required under Section 302(f)(1)
of ERISA such that security would have to be provided pursuant to Section 307
of ERISA. No lien upon the assets of Borrower has arisen with respect to a
Plan. No prohibited transaction or Reportable Event has occurred with respect
to a Plan. Neither Borrower nor any ERISA Affiliate has incurred any
withdrawal liability with respect to any Multiemployer Plan. Borrower and each
ERISA Affiliate have made all contributions required to be made by them to any
Plan or Multiemployer Plan when due. There is no accumulated funding
deficiency in any Plan, whether or not waived.
5.13 ENVIRONMENTAL CONDITION. None of Borrower's properties or
assets has ever been used by Borrower or, to the best of Borrower's knowledge,
by previous owners or operators in the disposal of, or to produce, store,
handle, treat, release, or transport, any Hazardous Materials. None of
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a Hazardous
Materials disposal site, or a candidate for closure pursuant to any
environmental protection statute. No lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned or operated by Borrower. Borrower has not received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal or state governmental agency concerning any action or omission by
Borrower resulting in the releasing or disposing of Hazardous Materials into
the environment.
5.14 RELIANCE BY FOOTHILL; CUMULATIVE. Each warranty and
representation contained in this Agreement shall be automatically deemed
repeated with each advance or issuance of an L/C or L/C Guaranty and shall be
conclusively presumed to have been relied on by Foothill regardless of any
investigation made or information possessed by Foothill. The warranties and
representations set forth herein shall be cumulative and in addition to any and
all other warranties and representations that Borrower now or hereinafter shall
give, or cause to be given, to Foothill.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the Obligations, and
unless Foothill shall otherwise consent in writing, Borrower shall do all of
the following:
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6.1 ACCOUNTING SYSTEM. Borrower at all times hereafter shall
maintain a standard and modern system of accounting in accordance with GAAP
with ledger and account cards or computer tapes, discs, printouts, and records
pertaining to the Collateral which contain information as from time to time may
be requested by Foothill. Borrower shall also keep proper books of account
showing all sales, claims, and allowances on its Inventory.
6.2 COLLATERAL REPORTS. Borrower shall deliver to Foothill,
no later than the twentieth (20th) day of each month during the term of this
Agreement, a detailed aging, by total, of the Accounts, a reconciliation
statement, and a summary aging, by vendor, of all accounts payable and any book
overdraft. Original sales invoices evidencing daily sales shall be mailed by
Borrower to each Account Debtor with, at Foothill's request on a sampling basis
in connection with quarterly audits, a copy to Foothill, and, at Foothill's
direction if there exists an Event of Default or Foothill in good faith deems
itself insecure (in accordance with Section 1208 of the Code), the invoices
shall indicate on their face that the Account has been assigned to Foothill and
that all payments are to be made directly to Foothill. Borrower shall deliver
to Foothill, as Foothill may from time to time reasonably require, collection
reports, sales journals, invoices, original delivery receipts, customer's
purchase orders, shipping instructions, bills of lading, and other
documentation respecting shipment arrangements. Absent such a request by
Foothill, copies of all such documentation shall be held by Borrower as
custodian for Foothill.
6.3 SCHEDULES OF ACCOUNTS. With such regularity as Foothill
shall require, Borrower shall provide Foothill with schedules describing all
Accounts. Foothill's failure to request such schedules or Borrower's failure
to execute and deliver such schedules shall not affect or limit Foothill's
security interest or other rights in and to the Accounts.
6.4 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower
agrees to deliver to Foothill: (a) as soon as available, but in any event
within thirty (30) days after the end of each month during each of Borrower's
fiscal years, a company prepared balance sheet, income statement, and cash flow
statement covering Borrower's operations during such period; and (b) as soon as
available, but in any event within ninety (90) days after the end of each of
Borrower's fiscal years, financial statements of Borrower for each such fiscal
year, audited by independent certified public accountants reasonably acceptable
to Foothill and certified, without any qualifications, by such accountants to
have been prepared in accordance with GAAP, together with a certificate of such
accountants addressed to Foothill stating that such accountants do not have
knowledge of the existence of any event or condition constituting an Event of
Default, or that would, with the passage of time or the giving of notice,
constitute an Event of Default. Such audited financial statements shall
include a balance sheet, profit and loss statement, and cash flow statement,
and, if prepared, such accountants' letter to management. Borrower shall have
issued written instructions to its independent certified public accountants
authorizing them to communicate with Foothill and to release to Foothill
whatever financial information concerning Borrower that Foothill may request;
provided that failure of such accountants to cooperate is not an Event of
Default under this sentence. If Borrower is a parent company of one or more
subsidiaries, or Affiliates, or is a subsidiary or Affiliate of another
company, then, in addition to the financial statements referred to above,
Borrower agrees to deliver financial statements prepared on a consolidating
basis so as to present Borrower and each such related entity separately, and on
a consolidated basis.
Together with the above, Borrower shall also deliver to Foothill
Borrower's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K
Current Reports, and any other filings made
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by Borrower with the Securities and Exchange Commission, if any, as soon as the
same are filed, or any other information that is provided by Borrower to its
shareholders, and any other report reasonably requested by Foothill relating to
the Collateral and financial condition of Borrower.
Each month, together with the financial statements provided
pursuant to Section 6.4(a), Borrower shall deliver to Foothill a certificate
signed by its chief financial officer to the effect that: (a) all reports,
statements, or computer prepared information of any kind or nature delivered or
caused to be delivered to Foothill hereunder have been prepared in accordance
with GAAP and fully and fairly present the financial condition of Borrower; (b)
Borrower is in timely compliance with all of its covenants and agreements
hereunder; (c) the representations and warranties of Borrower contained in this
Agreement and the Loan Documents are true and correct in all material respects
on and as of the date of such certificate, as though made on and as of such
date (except to the extent that such representations and warranties relate
solely to an earlier date); (d) Borrower is not in default with respect to any
of its obligations to any Carrier, or, if Borrower is in default, specifying
the details of each such default; and (e) on the date of delivery of such
certificate to Foothill there does not exist any condition or event which
constitutes an Event of Default (or, in each case, to the extent of any non-
compliance, describing such non-compliance as to which he or she may have
knowledge and what action Borrower has taken, is taking or proposes to take
with respect thereto).
Borrower hereby irrevocably authorizes and directs all auditors,
accountants, or other third parties to deliver to Foothill, at Borrower's
expense, copies of Borrower's financial statements, papers related thereto, and
other accounting records of any nature in their possession, and to disclose to
Foothill any information they may have regarding Borrower's business affairs
and financial condition; provided that failure of such third parties to
cooperate is not an Event of Default under this sentence.
6.5 TAX RETURNS. Borrower agrees to deliver to Foothill
copies of each of Borrower's future federal income tax returns, and any
amendments thereto, within thirty (30) days of the filing thereof with the
Internal Revenue Service.
6.6 GUARANTOR REPORTS. Borrower agrees to cause any guarantor
of any of the Obligations to deliver its annual financial statements at the
time when Borrower provides its audited financial statements to Foothill and
copies of all federal income tax returns as soon as the same are available and
in any event no later than thirty (30) days after the same are required to be
filed by law.
6.7 PERFORMANCE OF OBLIGATIONS TO CARRIERS. Borrower shall
make all payments due from it to Carriers within ten (10) days of their due
date, and otherwise shall comply in all material respects with Borrower's non-
monetary contractual obligations to Carriers; provided that Borrower shall not
be in breach of this section by virtue of claiming permitted credits and
deductions, or by virtue of immaterial breaches that would not permit Carriers
to enforce default remedies. Should Borrower acquire knowledge that Borrower
is in breach of this section, or should Borrower receive a default notice from
any Carrier, in each such instance Borrower immediately shall notify Foothill
of same and all relevant details pertaining thereto. If Foothill determines in
good faith that Borrower is delinquent with respect to amounts owed to a
Carrier, and that such delinquency may have an adverse effect upon the value or
collectibility of the Accounts (such as, by way of illustration but not by way
of limitation, where a Carrier threatens to contact customers of Borrower and
give notices or assert demands that could confuse such customers or interfere
with collection of the affected Accounts by Borrower or Foothill), then
Foothill in its sole discretion may elect to pay to such Carrier amounts
claimed by such Carrier to be due from Borrower, whereupon such
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amounts so paid by Foothill shall become Foothill Expenses immediately due and
payable from Borrower to Foothill.
6.8 CREDITS AND ALLOWANCES. Credits and allowances, if any,
as between Borrower and its Account Debtors shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist at the
time of the execution and delivery of this Agreement. If at any time prior to
the occurrence of an Event of Default, any Account Debtor seeks any credit or
allowance from Borrower, Borrower promptly shall determine the reason therefor
and, if Borrower accepts such reason, issue a credit memorandum (which credit
memorandum may be contained in such Account Debtor's next monthly billing
statement) in the appropriate amount to such Account Debtor. Borrower shall
notify Foothill, on a basis and with a frequency satisfactory to Foothill in
Foothill's discretion, of all credits and allowances and of all disputes and
claims.
6.9 TITLE TO EQUIPMENT. Upon Foothill's request, Borrower
shall immediately deliver to Foothill, properly endorsed, any and all evidences
of ownership of, certificates of title, or applications for title to any items
of Equipment.
6.10 MAINTENANCE OF EQUIPMENT. Borrower shall keep and
maintain the Equipment in good operating condition and repair (ordinary wear
and tear excepted), and make all necessary replacements thereto so that the
value and operating efficiency thereof shall at all times be maintained and
preserved. Borrower shall not permit any item of Equipment to become a fixture
to real estate or an accession to other property, and the Equipment is now and
shall at all times remain personal property.
6.11 TAXES. All assessments and taxes, whether real, personal,
or otherwise, due or payable by, or imposed, levied, or assessed against
Borrower or any of its property have been paid, and shall hereafter be paid in
full, before delinquency or before the expiration of any extension period.
Borrower shall make due and timely payment or deposit of all federal, state,
and local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Foothill, on demand, appropriate certificates attesting
to the payment or deposit thereof. Borrower will make timely payment or
deposit of all tax payments and withholding taxes required of it by applicable
laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and
local, state, and federal income taxes, and will, upon request, furnish
Foothill with proof satisfactory to Foothill indicating that Borrower has made
such payments or deposits.
6.12 INSURANCE.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses. Borrower also shall maintain business
interruption, public liability, product liability, and property damage
insurance relating to Borrower's ownership and use of the Collateral, as well
as insurance against larceny, embezzlement, and criminal misappropriation.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as may be reasonably
satisfactory to Foothill. All such policies of insurance (except those of
public liability and property damage) shall contain a 438BFU lender's loss
payable endorsement, or an equivalent endorsement in a form satisfactory to
Foothill, showing Foothill as sole loss
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payee thereof, and shall contain a waiver of warranties, and shall specify that
the insurer must give at least ten (10) days prior written notice to Foothill
before canceling its policy for any reason. Borrower shall deliver to Foothill
certified copies of such policies of insurance and evidence of the payment of
all premiums therefor. All proceeds payable under any such policy shall be
payable to Foothill to be applied on account of the Obligations.
6.13 FOOTHILL EXPENSES. Borrower shall immediately, upon
written notice, reimburse Foothill for all sums expended by Foothill which
constitute Foothill Expenses and Borrower hereby authorizes and approves all
advances and payments by Foothill for items constituting Foothill Expenses and
authorizes Foothill, without prior written notice, to charge Borrower's loan
account for the amount thereof as and when incurred or expended.
6.14 FINANCIAL COVENANTS. Borrower shall maintain:
(a) Current Ratio. A ratio of Consolidated Current
Assets divided by Consolidated Current Liabilities of at least one and five
one-hundredths to one (1.05 : 1.00), measured on a fiscal quarter-end basis;
(b) Debt to Consolidated Tangible Net Worth Ratio. A
ratio of Borrower's total liabilities divided by Consolidated Tangible Net
Worth of not more than five to one (5.0 : 1.0), measured on a fiscal quarter-
end basis;
(c) Consolidated Tangible Net Worth. Consolidated
Tangible Net Worth on a fiscal quarter-end basis of at least Three Million
Dollars ($3,000,000); and
(d) Consolidated Working Capital. Consolidated Working
Capital of not less than Five Hundred Seventy Thousand Dollars ($570,000),
measured on a fiscal quarter-end basis.
Anything in this Section 6.14 to the contrary notwithstanding, the foregoing
financial covenants shall be re-set by Foothill within forty five (45) days of
the Closing Date at reasonable levels determined by Foothill based on the
Projections, with such re-set covenant levels to be communicated in writing by
Foothill to Borrower when so determined, and thereafter documented by a future
amendment hereto which the parties agree to negotiate and enter into in good
faith.
6.15 NO SETOFFS OR COUNTERCLAIMS. All payments hereunder and
under the other Loan Documents made by or on behalf of Borrower shall be made
without setoff or counterclaim and free and clear of, and without deduction or
withholding for or on account of, any federal, state, or local taxes.
6.16 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and
Equipment shall not at any time now or hereafter be stored with a bailee,
warehouseman, or similar party without Foothill's prior written consent.
Borrower shall keep the Inventory and Equipment only at the locations
identified on Schedule 6.16; provided, however, that Borrower may amend
Schedule 6.16 so long as such amendment occurs by written notice to Foothill
not less than thirty (30) days prior to the date on which the Inventory or
Equipment is moved to such new location and so long as, at the time of such
written notification, Borrower provides any financing statements or fixture
filings necessary to perfect and continue perfected Foothill's
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security interest in such assets and also provides to Foothill a landlord's
waiver in form and substance satisfactory to Foothill.
6.17 DUPLICATE COPIES OF IMPORTANT DATA. Borrower shall
maintain duplicate copies of the optical disks that contain Borrower's billing
and accounts receivable data, which duplicate copies shall be stored in a
secure, off-site location.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the Obligations,
Borrower will not do any of the following without Foothill's prior written
consent:
7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee,
or otherwise become or remain, directly or indirectly, liable with respect to
any Indebtedness, except:
(a) Indebtedness evidenced by this Agreement;
(b) Indebtedness set forth in the latest financial
statements of Borrower submitted to Foothill on or prior to the Closing Date or
described on Schedule 7.1;
(c) Indebtedness secured by Permitted Liens; and
(d) refinancings, renewals, or extensions of
Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and
continuance or renewal of any Permitted Liens associated therewith) so long as:
(i) the terms and conditions of such refinancings, renewals, or extensions do
not materially impair the prospects of repayment of the Obligations by
Borrower, (ii) the net cash proceeds of such refinancings, renewals, or
extensions do not result in an increase in the aggregate principal amount of
the Indebtedness so refinanced, renewed, or extended, and (iii) such
refinancings, renewals, refundings, or extensions do not result in a shortening
of the average weighted maturity of the Indebtedness so refinanced, renewed, or
extended.
7.2 LIENS. Create, incur, assume, or permit to exist,
directly or indirectly, any lien on or with respect to any of its property or
assets, of any kind, whether now owned or hereafter acquired, or any income or
profits therefrom, except for Permitted Liens (including Permitted Liens that
are continued or renewed as permitted under Section 7.1(d)).
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Enter into any
acquisition, merger, consolidation, reorganization, or recapitalization, or
reclassify its capital stock, or liquidate, wind up, or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, assign, lease,
transfer, or otherwise dispose of, in one transaction or a series of
transactions, all or any substantial part of its business, property, or assets,
whether now owned or hereafter acquired, or acquire by purchase or otherwise
all or substantially all the assets, stock, or other evidence of beneficial
ownership of any Person.
7.4 EXTRAORDINARY TRANSACTIONS AND DISPOSAL OF ASSETS. Enter
into any transaction not in the ordinary and usual course of Borrower's
business, including, but not limited to, the sale, lease, or
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other disposition of, moving, relocation, or transfer, whether by sale or
otherwise, of any of Borrower's assets (other than sales of Inventory in the
ordinary and usual course of Borrower's business as currently conducted), or
the making of any advance or loan except in the ordinary course of business as
currently conducted.
7.5 CHANGE NAME. Change Borrower's name, business structure,
or identity, or add any new fictitious name without first giving thirty (30)
days prior written notice to Foothill.
7.6 GUARANTEE. Guarantee or otherwise become in any way
liable with respect to the obligations of any third party except by endorsement
or instruments or items of payment for deposit to the account of Borrower or
which are transmitted or turned over to Foothill.
7.7 RESTRUCTURE. Make any change in Borrower's financial
structure, the principal nature of Borrower's business operations, or the date
of its fiscal year.
7.8 PREPAYMENTS. Prepay any Indebtedness owing to any third
party.
7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
7.10 CAPITAL EXPENDITURES. Make any capital expenditure, or
any commitment therefor, where the aggregate amount of such capital
expenditures, made or committed for in any fiscal year, is in excess of Five
Hundred Thousand Dollars ($500,000); provided that, for purposes of the
foregoing, moving costs that have been approved in advance by Foothill (which
approval shall not unreasonably be withheld by Foothill) shall not be deemed
capital expenditures. Anything in this Section 7.10 to the contrary
notwithstanding, the foregoing capital expenditure limitations shall be re-set
by Foothill within forty five (45) days of the Closing Date at reasonable
levels determined by Foothill based on the Projections, with such re-set
capital expenditure limitations to be communicated in writing by Foothill to
Borrower when so determined, and thereafter documented by a future amendment
hereto which the parties agree to negotiate and enter into in good faith.
7.11 {INTENTIONALLY OMITTED}.
7.12 DISTRIBUTIONS. Make any distribution or declare or pay
any dividends (in cash or in stock) on, or purchase, acquire, redeem, or retire
any of Borrower's capital stock, of any class, whether now or hereafter
outstanding.
7.13 ACCOUNTING METHODS. Modify or change its method of
accounting or enter into, modify, or terminate any agreement currently
existing, or at any time hereafter entered into with any third party accounting
firm or service bureau for the preparation or storage of Borrower's accounting
records without said accounting firm or service bureau agreeing to provide
Foothill information regarding the Collateral or Borrower's financial
condition. Borrower waives the right to assert a confidential relationship, if
any, it may have with any accounting firm or service bureau in connection with
any information requested by Foothill pursuant to or in accordance with this
Agreement, and agrees that Foothill may contact directly any such accounting
firm or service bureau in order to obtain such information.
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7.14 INVESTMENTS. Directly or indirectly make or acquire any
beneficial interest in (including stock, partnership interest, or other
securities of), or make any loan, advance, or capital contribution to, any
Person; provided that this Section shall not prohibit investments in secure,
liquid, short-term cash equivalents.
7.15 TRANSACTIONS WITH AFFILIATES. Directly or indirectly
enter into or permit to exist any transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms, that are fully disclosed to Foothill, and that
are no less favorable to Borrower than would be obtained in arm's length
transaction with a non-Affiliate.
7.16 SUSPENSION. Suspend or go out of a substantial portion of
its business.
7.17 COMPENSATION. (a) Subject to Section 7.17(b), pay or
accrue total cash compensation, during any year, to officers and senior
management employees in an aggregate amount in excess of one hundred twenty
percent (120%) of that paid or accrued in the prior year; provided, however,
Borrower may pay bonuses to such individuals in accordance with the provisions
of a pre-existing incentive bonus program, provided that, prior to the Closing
Date, Borrower provides a copy thereof to Foothill.
(b) Section 7.17(a) notwithstanding, if Borrower should
propose to adopt a new bonus plan for its officers and senior management, and
if Borrower should request Foothill's consent to its adoption of such a plan,
Foothill shall not unreasonably withhold its consent thereto. Should Borrower,
during any year, adopt such a new plan that has been approved by Foothill, the
compensation provided for in such plan shall be permitted by Section 7.17(a),
and the compensation of officers and senior management of Borrower for such
year, giving effect to such plan, shall serve as the new baseline for future
increases in compensation, applying the 120% aggregate test of Section 7.17(a)
going forward from such plan.
7.18 USE OF PROCEEDS. Use the proceeds of the advances made
hereunder for any purpose other than: (A) to refinance Obligations due Foothill
under the Prior Agreement; (B) to pay transactional costs and expenses incurred
in connection with this Agreement; and (C) thereafter, consistent with the
terms and conditions hereof, for its lawful and permitted corporate purposes.
7.19 CONTRACTS WITH CARRIERS. Enter into any new contractual
arrangements with Carriers, or materially amend, modify, or extend existing
contractual arrangements with Carriers, if the effect would be to prohibit
Foothill from having a security interest in the rights of Borrower thereunder,
to prohibit disclosure of the terms thereof to Foothill, to grant a security
interest to the Carrier in any of the Collateral, to authorize the Carrier to
withhold delivery of call transaction record tapes other than after the
occurrence of a default, or to contact or directly bill customers of Borrower
with respect to services provided by such Carrier to Borrower for resale to
Borrower's customers.
7.20 CONTRACTS WITH INTEGRETEL. Enter into any new contractual
arrangements with Integretel, or materially amend, modify, or extend existing
contractual arrangements with Integretel, except on terms approved in advance
by Foothill in Foothill's discretion.
8. EVENTS OF DEFAULT.
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Any one or more of the following events shall constitute an event
of default (each, an "Event of Default") under this Agreement:
8.1 If Borrower fails to pay when due and payable or when
declared due and payable, any portion of the Obligations (whether of principal,
interest (including any interest which, but for the provisions of the
Bankruptcy Code, would have accrued on such amounts), fees and charges due
Foothill, reimbursement of Foothill Expenses, or other amounts constituting
Obligations);
8.2 If Borrower fails or neglects to perform, keep, or observe
any term, provision, condition, covenant, or agreement contained in this
Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Foothill;
8.3 If there is a material impairment of the prospect of
repayment of any portion of the Obligations owing to Foothill or a material
impairment of the value or priority of Foothill's security interests in the
Collateral;
8.4 If any material portion of Borrower's assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any third Person;
8.5 If an Insolvency Proceeding is commenced by Borrower;
8.6 If an Insolvency Proceeding is commenced against Borrower
and any of the following events occur: (1) Borrower consents to the
institution of the Insolvency Proceeding against it; (2) the petition
commencing the Insolvency Proceeding is not timely controverted; (3) the
petition commencing the Insolvency Proceeding is not dismissed within forty-
five (45) calendar days of the date of the filing thereof; provided, however,
that, during the pendency of such period, Foothill shall be relieved of its
obligation to make additional advances; (4) an interim trustee is appointed to
take possession of all or a substantial portion of the assets of, or to operate
all or any substantial portion of the business of, Borrower; or (5) an order
for relief shall have been issued or entered therein;
8.7 If Borrower is enjoined, restrained, or in any way
prevented by court order from continuing to conduct all or any material part of
its business affairs;
8.8 If a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, or if any taxes or debts
owing at any time hereafter to any one or more of such entities becomes a lien,
whether choate or otherwise, upon any of Borrower's assets and the same is not
paid on the payment date thereof;
8.9 If a judgment or other claim for an amount of one hundred
thousand dollars ($100,000) or more becomes a lien or encumbrance upon any
material portion of Borrower's assets and is not satisfied, stayed, or removed
within thirty (30) days;
8.10 If there is a default in any material agreement to which
Borrower is a party with third parties resulting in a right by such third
parties, whether or not exercised, to accelerate the maturity of
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Borrower's Indebtedness thereunder if the amount of such Indebtedness equals or
exceeds one hundred thousand dollars ($100,000);
8.11 If Borrower makes any payment on account of Indebtedness
that has been contractually subordinated in right of payment to the payment of
the Obligations, except to the extent such payment is permitted by the terms of
the subordination provisions applicable to such Indebtedness;
8.12 If any material misstatement or misrepresentation exists
now or hereafter in any warranty, representation, statement, or report made to
Foothill by Borrower or any officer, employee, agent, or director of Borrower,
or if any such warranty or representation is withdrawn by any officer or
director;
8.13 If the obligation of any guarantor or other third party
under any loan document is limited or terminated by operation of law or by the
guarantor or other third party thereunder, or any guarantor or other third
party becomes the subject of an Insolvency Proceeding; or
8.14 If a Prohibited Transaction or Reportable Event shall
occur with respect to a Plan which could have a material adverse effect on the
financial condition of Borrower; if any lien upon the assets of Borrower in
connection with any Plan shall arise; if Borrower or any ERISA Affiliate shall
completely or partially withdraw from a Multiemployer Plan or Multiple Employer
Plan of which Borrower or such ERISA Affiliate was a substantial employer, and
such withdrawal could, in the opinion of Foothill, have a material adverse
effect on the financial condition of Borrower; if Borrower or any of its ERISA
Affiliates shall fail to make full payment when due of all amounts which
Borrower or any of its ERISA Affiliates may be required to pay to any Plan or
any Multiemployer Plan as one or more contributions thereto; if Borrower or any
of its ERISA Affiliates creates or permits the creation of any accumulated
funding deficiency, whether or not waived; or upon the voluntary or involuntary
termination of any Plan which termination could, in the opinion of Foothill,
have a material adverse effect on the financial condition of Borrower: if
Borrower shall fail to notify Foothill promptly and in any event within ten
(10) days of the occurrence of any event that constitutes an Event of Default
under this clause or would constitute such an Event of Default upon the
exercise of Foothill's judgment.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence of an Event of
Default Foothill may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are
authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due
and payable;
(b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement, under any of the Loan Documents,
or under any other agreement between Borrower and Foothill;
(c) Terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of Foothill, but without
affecting Foothill's rights and security interest in the Collateral and without
affecting the Obligations;
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(d) Settle or adjust disputes and claims directly with
Account Debtors for amounts and upon terms which Foothill considers advisable,
and in such cases, Foothill will credit Borrower's loan account with only the
net amounts received by Foothill in payment of such disputed Accounts after
deducting all Foothill Expenses incurred or expended in connection therewith;
(e) {intentionally omitted};
(f) Without notice to or demand upon Borrower or any
guarantor, make such payments and do such acts as Foothill considers necessary
or reasonable to protect its security interest in the Collateral. Borrower
agrees to assemble the Collateral if Foothill so requires, and to make the
Collateral available to Foothill as Foothill may designate. Borrower
authorizes Foothill to enter the premises where the Collateral is located, to
take and maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest, or compromise any encumbrance, charge, or lien that in
Foothill's determination appears to be prior or superior to its security
interest and to pay all expenses incurred in connection therewith. With
respect to any of Borrower's owned premises, Borrower hereby grants Foothill a
license to enter into possession of such premises and to occupy the same,
without charge, for up to one hundred twenty (120) days in order to exercise
any of Foothill's rights or remedies provided herein, at law, in equity, or
otherwise;
(g) Without notice to Borrower (such notice being
expressly waived) set off and apply to the Obligations, without constituting a
retention of any collateral in satisfaction of the obligation (within the
meaning of Section 9505 of the Code), any and all (i) balances and deposits of
Borrower held by Foothill (including any amounts received in the Lock Box
regardless of whether held in a concentration account of Foothill), or (ii)
indebtedness at any time owing to or for the credit or the account of Borrower
held by Foothill;
(h) Hold, as cash collateral, any and all balances and
deposits of Borrower held by Foothill, and any amounts received in the Lock Box
regardless of whether held in a concentration account of Foothill, to secure
the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Foothill is hereby granted a license or other
right to use, without charge, Borrower's labels, patents, copyrights, rights of
use of any name, trade secrets, trade names, trademarks, service marks, and
advertising matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale, and selling any
Collateral and Borrower's rights under all licenses and all franchise
agreements shall inure to Foothill's benefit;
(j) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as
Foothill determines is commercially reasonable. It is not necessary that the
Collateral be present at any such sale;
(k) Foothill shall give notice of the disposition of
the Collateral as follows:
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(1) Foothill shall give Borrower and each holder
of a security interest in the Collateral who has filed with Foothill a written
request for notice, a notice in writing of the time and place of public sale,
or, if the sale is a private sale or some other disposition other than a public
sale is to be made of the Collateral, then the time on or after which the
private sale or other disposition is to be made;
(2) The notice shall be personally delivered or
mailed, postage prepaid, to Borrower as provided in Section 12, at least five
(5) days before the date fixed for the sale, or at least five (5) days before
the date on or after which the private sale or other disposition is to be made,
unless the Collateral is perishable or threatens to decline speedily in value.
Notice to Persons other than Borrower claiming an interest in the Collateral
shall be sent to such addresses as they have furnished to Foothill;
(3) If the sale is to be a public sale, Foothill
also shall give *notice of the time and place by publishing a notice one time
at least five (5) days before the date of the sale in a newspaper of general
circulation in the county in which the sale is to be held;
(l) Foothill may credit bid and purchase at any public
sale; and
(m) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower. Any excess
will be returned, without interest and subject to the rights of third parties,
by Foothill to Borrower.
9.2 REMEDIES CUMULATIVE. Foothill's rights and remedies under
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Foothill shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by
Foothill of one right or remedy shall be deemed an election, and no waiver by
Foothill of any Event of Default shall be deemed a continuing waiver. No delay
by Foothill shall constitute a waiver, election, or acquiescence by it.
10. TAXES AND EXPENSES REGARDING THE COLLATERAL.
If Borrower fails to pay any monies (whether taxes, rents, assessments,
insurance premiums, or otherwise) due to third Persons, or fails to make any
deposits or furnish any required proof of payment or deposit, all as required
under the terms of this Agreement, then, to the extent that Foothill determines
that such failure by Borrower could have a material adverse effect on
Foothill's interests in the Collateral, in its discretion and without prior
notice to Borrower, Foothill may do any or all of the following: (a) make
payment of the same or any part thereof; (b) set up such reserves in Borrower's
loan account as Foothill deems necessary to protect Foothill from the exposure
created by such failure; or (c) obtain and maintain insurance policies of the
type described in Section 6.12, and take any action with respect to such
policies as Foothill deems prudent. Any amounts paid or deposited by Foothill
shall constitute Foothill Expenses, shall be immediately charged to Borrower's
loan account and become additional Obligations, shall bear interest at the then
applicable rate hereinabove provided, and shall be secured by the Collateral.
Any payments made by Foothill shall not constitute an agreement by Foothill to
make similar payments in the future or a waiver by Foothill of any Event of
Default under this Agreement. Foothill need not inquire as to, or contest the
validity of, any such expense, tax, security interest, encumbrance, or lien and
the receipt of the usual official notice for the payment thereof shall be
conclusive evidence that the same was validly due and owing.
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11. WAIVERS; INDEMNIFICATION.
11.1 DEMAND; PROTEST; ETC. Borrower waives demand, protest,
notice of protest, notice of default or dishonor, notice of payment and
nonpayment, notice of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments, chattel
paper, and guarantees at any time held by Foothill on which Borrower may in any
way be liable.
11.2 FOOTHILL'S LIABILITY FOR INVENTORY OR EQUIPMENT. So long
as Foothill complies with its obligations, if any, under Section 9207 of the
Code, Foothill shall not in any way or manner be liable or responsible for: (a)
the safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the
value thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other Person. All risk of loss, damage, or destruction
of the Collateral shall be borne by Borrower.
11.3 INDEMNIFICATION. Borrower agrees to defend and indemnify
Foothill and its officers, employees, and agents and hold Foothill harmless
against: (a) all obligations, demands, claims, and liabilities claimed or
asserted by any other party arising out of or relating to the transactions
contemplated by this Agreement or any other Loan Document, and (b) all losses
(including reasonable attorneys fees and disbursements) in any way suffered,
incurred, or paid by Foothill as a result of or in any way arising out of,
following, or consequential to the transactions contemplated by this Agreement
or any other Loan Document; save for and excluding any of the foregoing that
are caused by the gross negligence or willful misconduct of Foothill. This
provision shall survive the termination of this Agreement.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection therewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by registered or
certified mail, postage prepaid, return receipt requested, or by prepaid telex,
TWX, telefacsimile, or telegram (with messenger delivery specified) to Borrower
or to Foothill, as the case may be, at its addresses set forth below:
If to Borrower: PHOENIX NETWORK, INC.
550 California Street, 11th Floor
San Francisco, California 94104-1006
Attn: Jeffrey L. Bailey, Senior Vice President and
Chief Financial Officer
If to Foothill: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
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<PAGE> 38
The parties hereto may change the address at which they are to
receive notices hereunder, by notice in writing in the foregoing manner given
to the other. All notices or demands sent in accordance with this Section 12,
other than notices by Foothill in connection with Sections 9504 or 9505 of the
Code, shall be deemed received on the earlier of the date of actual receipt or
three (3) days after the deposit thereof in the mail. Borrower acknowledges
and agrees that notices sent by Foothill in connection with Sections 9504 or
9505 of the Code shall be deemed sent when deposited in the mail or transmitted
by telefacsimile or other similar method set forth above.
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION,
AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL
MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE
PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS
AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS
LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE
OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH FOOTHILL SHALL INITIATE LEGAL
OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE
MATTER IN CONTROVERSY. EACH OF BORROWER AND FOOTHILL WAIVES, TO THE EXTENT
PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE
OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS
BROUGHT IN ACCORDANCE WITH THIS SECTION 13. BORROWER AND FOOTHILL HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND FOOTHILL
REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY
WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE
EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT
TO A TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers
delivered to Foothill may be destroyed or otherwise disposed of by Foothill
four (4) months after they are delivered to or received by Foothill, unless
Borrower requests, in writing, the return of said documents, schedules, or
other papers and makes arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Borrower and Foothill.
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15.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and
inure to the benefit of the respective successors and assigns of each of the
parties; provided, however, that Borrower may not assign this Agreement or any
rights or duties hereunder without Foothill's prior written consent and any
prohibited assignment shall be absolutely void. No consent to an assignment by
Foothill shall release Borrower from its Obligations. Foothill may assign this
Agreement and its rights and duties hereunder and no consent or approval by
Borrower is required in connection with any such assignment. Foothill reserves
the right to sell, assign, transfer, negotiate, or grant participations in all
or any part of, or any interest in Foothill's rights and benefits hereunder.
In connection therewith, Foothill may disclose all documents and information
which Foothill now or hereafter may have relating to Borrower or Borrower's
business. To the extent that Foothill assigns its rights and obligations
hereunder to a third party, Foothill shall thereafter be released from such
assigned obligations to Borrower and such assignment shall effect a novation
between Borrower and such third party.
15.3 SECTION HEADINGS. Headings and numbers have been set
forth herein for convenience only. Unless the contrary is compelled by the
context, everything contained in each paragraph applies equally to this entire
Agreement.
15.4 INTERPRETATION. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against Foothill
or Borrower, whether under any rule of construction or otherwise. On the
contrary, this Agreement has been reviewed by all parties and shall be
construed and interpreted according to the ordinary meaning of the words used
so as to fairly accomplish the purposes and intentions of all parties hereto.
15.5 SEVERABILITY OF PROVISIONS. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
15.6 AMENDMENTS IN WRITING. This Agreement cannot be changed
or terminated orally. All prior agreements, understandings, representations,
warranties, and negotiations, if any, are merged into this Agreement.
15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may
be executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one
and the same Agreement. Delivery of an executed counterpart of this Agreement
by telefacsimile shall be equally as effective as delivery of a manually
executed counterpart of this Agreement. Any party delivering an executed
counterpart of this Agreement by telefacsimile shall also deliver a manually
executed counterpart of this Agreement but the failure to deliver a manually
executed counterpart shall not affect the validity, enforceability, and binding
effect of this Agreement.
15.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the
incurrence or payment of the Obligations by Borrower or any guarantor of the
Obligations or the transfer by either or both of such parties to Foothill of
any property of either or both of such parties should for any reason
subsequently be declared to be void or voidable under any state or federal law
relating to creditors' rights, including provisions of the Bankruptcy Code
relating to fraudulent conveyances, preferences, and other voidable or
recoverable payments of money or transfers of property (collectively, a
"Voidable Transfer"), and if Foothill is required
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<PAGE> 40
to repay or restore, in whole or in part, any such Voidable Transfer, or elects
to do so upon the reasonable advice of its counsel, then, as to any such
Voidable Transfer, or the amount thereof that Foothill is required or elects to
repay or restore, and as to all reasonable costs, expenses, and attorneys fees
of Foothill related thereto, the liability of Borrower or such guarantor
automatically shall be revived, reinstated, and restored and shall exist as
though such Voidable Transfer had never been made.
15.9 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted, modified, or
qualified by any other agreement, oral or written, whether before or after the
date hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed at Los Angeles, California.
PHOENIX NETWORK, INC.,
a Delaware corporation
By /s/ Jeffrey L. Bailey
---------------------------------
Its Senior Vice President
--------------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Lisa Gonzalez
---------------------------------
Its Assistant Vice President
--------------------------------
35
<PAGE> 1
EXHIBIT 10.10
AMENDMENT NUMBER ONE TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER ONE TO AMENDED AND RESTATED LOAN AND
SECURITY AGREEMENT (this "Amendment") is entered into as of October 17, 1996,
by and between Foothill Capital Corporation, a California corporation
("Foothill"), on the one hand, and Phoenix Network, Inc., a Delaware
corporation ("Phoenix"), and Phoenix Network Acquisition Corp., a Delaware
corporation ("PNAC"), on the other hand, with reference to the following facts:
A. Foothill, as lender, and Phoenix, as borrower, heretofore entered
into that certain Amended and Restated Loan and Security
Agreement, dated as of September 26, 1995 (despite the fact that
the recitals thereof erroneously referred to "1993" rather than
"1995") (herein the "Agreement");
B. Phoenix and PNAC (individually and collectively, jointly and
severally, "Borrower") have requested Foothill to amend the
Agreement to, among other things, add PNAC as a secured co-
borrower, and modify the Borrowing Base, in each case as set
forth in this Amendment;
C. Foothill is willing to so amend the Agreement in accordance with
the terms and conditions hereof; and
D. All capitalized terms used herein and not defined herein shall
have the meanings ascribed to them in the Agreement, as amended
hereby.
NOW, THEREFORE, in consideration of the above recitals and the
mutual promises contained herein, Foothill and Borrower hereby agree as
follows:
1. Amendments to the Agreement.
a. Section 1.1 of the Agreement hereby is amended by
adding the following new defined terms in alphabetical order:
"First Amendment" means that certain Amendment Number One
to Amended and Restated Loan and Security Agreement, dated as of October
__, 1996, between Foothill and Borrower.
"Eligible Phoenix Accounts" means Eligible Accounts of
Phoenix.
"Eligible PNAC Accounts" means Eligible Accounts of PNAC.
"Phoenix" means Phoenix Network, Inc., a Delaware
corporation.
"Phoenix Dilution Threshold" means ten percent (10%).
"Phoenix Payables Reserve" means a reserve against the
Borrowing Base, to be determined from time to time by Foothill, in an
amount equal to the aggregate amount of accounts payable of Phoenix to
long distance carriers that are more than 30 days past due.
<PAGE> 2
"PNAC" means Phoenix Network Acquisition Corp., a Delaware
corporation.
"PNAC Dilution Threshold" means five percent (5%).
"PNAC Payables Reserve" means a reserve against the
Borrowing Base, to be determined from time to time by Foothill, in an
amount equal to the aggregate amount of accounts payable of PNAC to long
distance carriers that are more than 30 days past due.
"Subordinated Indebtedness" means any and all Indebtedness
of Phoenix to the Subordinated Indebtedness Holder arising out of the
purchase by Phoenix of the common stock of PNAC, and representing the
obligation of Phoenix to pay the deferred portion of the purchase price
with respect to such purchase.
"Subordinated Indebtedness Holder" means the Person or
Persons that are the holders of the Subordinated Indebtedness or any
notes or instruments evidencing same.
"Subordination Agreement" means a written subordination
agreement, in form and substance satisfactory to Foothill in its
discretion, entered into between Foothill and the Subordinated
Indebtedness Holder, and acknowledged and consented to by Borrower,
pursuant to which repayment of the Subordinated Indebtedness is
subordinated to repayment in full in cash of the Obligations on terms
acceptable to Foothill in its discretion.
"Suretyship Agreement" means a Suretyship Agreement, in
form and substance satisfactory to Foothill, dated as of even date with
the First Amendment, between Foothill and Borrower, incorporating
certain suretyship waivers and other matters pertaining to the co-
borrower status of Phoenix and PNAC.
b. The following definitions contained in Section 1.1
of the Amendment are amended and restated in their entirety to read as follows:
"Borrower" means Phoenix and PNAC, and each of them,
jointly and severally, collectively and individually; provided that,
following any merger of PNAC with and into Phoenix that was approved by
Foothill, "Borrower" shall mean Phoenix as the surviving corporation of
such merger.
"Dilution" means, with respect to any Dilution Measuring
Period, as reasonably determined by Foothill: (a) With respect to
Phoenix, the fraction, expressed as a percentage, of which the numerator
is the total during such Dilution Measuring Period of all bad debt
write-downs, promotions, and other items with respect to Accounts of
Phoenix that could reduce or otherwise impair the full and timely
collection of such Accounts, and of which the denominator is the total
during such Dilution Measuring Period of all collections received with
respect to Accounts of Phoenix; and (b) With respect to PNAC, the
fraction, expressed as a percentage, of which the numerator is the total
during such Dilution Measuring Period of all bad debt write-downs,
promotions, and other items with respect to Accounts of PNAC that could
reduce or otherwise impair the full and timely collection of such
Accounts, and of which the denominator is the total during such Dilution
Measuring Period of all collections received with respect to Accounts of
PNAC.
2
<PAGE> 3
"Eligible Accounts" means those Accounts created by
Borrower in the ordinary course of business that arise out of Borrower's
sale of goods, sale of general intangibles relating to the provision of
telecommunication services, or rendition of services, that strictly
comply with all of Borrower's representations and warranties to
Foothill, and that are and at all times shall continue to be acceptable
to Foothill in all respects; provided, however, that standards of
eligibility may be fixed and revised from time to time by Foothill in
Foothill's reasonable credit judgment. Eligible Accounts shall include
Eligible Unbilled Accounts. Eligible Accounts shall not include the
following:
(a) Accounts which the Account Debtor has failed
to pay within sixty (60) days of invoice date;
(b) Accounts that are not due upon receipt of
Borrower's invoice by the Account Debtor or within ten (10) days
thereafter;
(c) Accounts with respect to which the Account
Debtor is an officer, employee, Affiliate, or agent of Borrower;
(d) Accounts with respect to which goods are
placed on consignment, guaranteed sale, sale or return, sale on
approval, bill and hold, or other terms by reason of which the payment
by the Account Debtor may be conditional;
(e) Accounts with respect to which the Account
Debtor is not a resident of the United States, and which are not either
(1) covered by credit insurance in form and amount, and by an insurer,
satisfactory to Foothill, or (2) supported by one or more letters of
credit that are assignable by their terms and have been delivered to
Foothill in an amount and of a tenor, and issued by a financial
institution, acceptable to Foothill;
(f) Accounts with respect to which the Account
Debtor is the United States or any department, agency, or
instrumentality of the United States, any state of the United States;
(g) Accounts with respect to which Borrower is
or may become liable to the Account Debtor for goods sold or services
rendered by the Account Debtor to Borrower;
(h) Accounts with respect to an Account Debtor
whose total obligations owing to Borrower exceed ten percent (10%) of
all Eligible Accounts, to the extent of the obligations of such Account
Debtor in excess of such percentage;
(i) Accounts with respect to which the Account
Debtor disputes liability or makes any claim with respect thereto, or is
subject to any Insolvency Proceeding, or become insolvent, or goes out
of business;
(j) Accounts the collection of which Foothill,
in its reasonable credit judgment, believes to be doubtful by reason of
the Account Debtor's financial condition;
(k) Accounts owed by an Account Debtor that has
failed to pay fifty percent (50%) or more of its Accounts owed to
Borrower within sixty (60) days of the date of the applicable invoices;
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<PAGE> 4
(l) Accounts that are payable in other than
United States Dollars;
(m) Accounts, other than Eligible Unbilled
Accounts, that have not yet been billed to the relevant Account Debtor;
(n) Accounts that represent progress payments or
other advance billings that are due prior to the completion of
performance by Borrower of the subject contract for goods or services;
(o) Without duplication of any amounts included
in the Phoenix Payables Reserve or the PNAC Payables Reserve, Accounts
arising from services provided by a Carrier, if Borrower is in default
of its obligations to such Carrier in any material respect that would
entitle such Carrier to exercise remedies against Borrower, if such
Carrier in fact is exercising such remedies, or has indicated its
intention to exercise such remedies, or has threatened to exercise such
remedies, and if Foothill in the good faith exercise of Foothill's
discretion has determined that such actual, intended, or threatened
exercise of remedies may interfere with the value or collectibility of
the affected Accounts;
(p) "On Campus" accounts of PNAC; and
(q) Accounts of PNAC owed by residential Account
Debtors.
"Eligible Unbilled Accounts" means those particular
Accounts created by Phoenix in the ordinary course of business that
arise out of Phoenix's sale of goods, sale of general intangibles
relating to the provision of telecommunication services, or rendition of
services, but have not yet been billed to the relevant Account Debtor,
that are described in a call transaction record tape or electronic data
transfer that has been delivered by a Carrier to Integretel, and that in
all other respects qualify as Eligible Accounts. Eligible Unbilled
Accounts shall not include any Accounts of PNAC.
"Loan Documents" means this Agreement, the First
Amendment, the Suretyship Agreement, the Lock Box Agreement, any note or
notes executed by Borrower and payable to Foothill, and any other
agreement entered into by Borrower or any Affiliate of Borrower in
connection with this Agreement.
"Lock Box" shall have the meaning provided in any Lock Box
Agreement.
"Lock Box Agreement" means any and every Lockbox Operating
Procedural Agreement (or agreement of similar import), in form and
substance satisfactory to Foothill, among Borrower, Foothill, and a Lock
Box Bank.
"Lock Box Bank" means Union Bank of California, Norwest
Bank Colorado, N.A., or any other bank, reasonably acceptable to
Foothill, that enters into a Lock Box Agreement.
"Reference Rate" means the variable rate of interest, per
annum, most recently announced by Norwest Bank Minnesota, National
Association, or any successor thereto, as its "base rate," irrespective
of whether such announced rate is the best rate available from such
financial institution.
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<PAGE> 5
c. The following specified provisions of the Agreement
hereby are amended and restated in their entirety as follows:
(1) The first two paragraphs of the Agreement:
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT, is entered
into as of September 26, 1995, between FOOTHILL CAPITAL CORPORATION, a
California corporation ("Foothill"), with a place of business located at
11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025-
3333, PHOENIX NETWORK, INC. a Delaware corporation, ("Phoenix"), with
its chief executive office located at 1687 Cole Boulevard, Golden,
Colorado 80401, and PHOENIX NETWORK ACQUISITION CORP., with its chief
executive office located at 1687 Cole Boulevard, Golden, Colorado 80401.
This Agreement amends and restates the Loan and Security
Agreement dated as of August 26, 1993 (as previously amended, the "Prior
Agreement") among Foothill and Phoenix. Except for any provisions of
the Prior Agreement that, by their terms, survive its termination (such
as indemnities by Phoenix in favor of Foothill), this Agreement
supersedes and replaces the Prior Agreement and all Obligations of
Phoenix under the Prior Agreement shall become Obligations of Borrower
under this Agreement.
(2) Section 2.1:
2.1 REVOLVING ADVANCES. Subject to the terms and
conditions of this Agreement, and so long as no Event of Default has
occurred and is continuing, Foothill agrees to make revolving advances
to Borrower in an amount not to exceed the Borrowing Base. For purposes
of this Agreement "Borrowing Base" shall mean:
(a) subject to adjustment based on Dilution as
provided in subsection 2.1(b), an amount equal to the lesser of: (i) the
sum of (A) the greater of (w) zero, and (x) eighty percent (80%) of the
amount of Eligible Phoenix Accounts (other than Eligible Unbilled
Accounts), less the Phoenix Payables Reserve, plus (B) the greater of
(y) zero, and (z) eighty percent (80%) of the Amount of Eligible PNAC
Accounts, less the PNAC Payables Reserve, plus (C) the amount, not to
exceed Three Million Dollars ($3,000,000), equal to forty percent (40%)
of the amount of Eligible Unbilled Accounts; and (ii) an amount equal to
Borrower's cash collections for the immediately preceding sixty (60) day
period.
(b) Should Dilution with respect to Phoenix
during any Dilution Measuring Period exceed the Phoenix Dilution
Threshold, the advance rates set forth in subsections 2.1(a)(i)(A) and
2.1(a)(i)(C) shall be reduced during the next calendar month by one
percent for each percent by which such Dilution exceeded the Phoenix
Dilution Threshold (rounded to the nearest whole number). Should
Dilution with respect to PNAC during any Dilution Measuring Period
exceed the PNAC Dilution Threshold, the advance rate set forth in
subsection 2.1(a)(i)(B) shall be reduced during the next calendar month
by one percent for each percent by which such Dilution exceeded the PNAC
Dilution Threshold (rounded to the nearest whole number).
(c) Anything to the contrary in paragraphs (a)
or (b) above notwithstanding, Foothill may reduce its advance rates
based upon Eligible Accounts without declaring an Event of Default, with
respect to either or both of Phoenix and PNAC, if it determines, in its
reasonable discretion, that there is a material impairment of the
prospect of repayment of all
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<PAGE> 6
or any portion of the Obligations or a material impairment of the value
or priority of Foothill's security interests in the Collateral.
(d) Foothill shall have no obligation to make
advances hereunder to the extent they would cause the outstanding
Obligations to exceed Ten Million Dollars ($10,000,000) (the "Maximum
Amount").
(e) Foothill is authorized to make advances
under this Agreement based upon telephonic or other instructions
received from anyone purporting to be an Authorized Officer of Borrower
or, without instructions, if pursuant to Section 6.12. Borrower agrees
to establish and maintain a single designated deposit account for the
purpose of receiving the proceeds of the advances requested by Borrower
and made by Foothill hereunder. Unless otherwise agreed by Foothill and
Borrower, any advance requested by Borrower and made by Foothill
hereunder shall be made to such designated deposit account. Amounts
borrowed pursuant to this Section 2.1 may be repaid and, so long as no
Event of Default has occurred and is continuing, reborrowed at any time
during the term of this Agreement.
(3) Section 5.3:
5.3 SUBSIDIARIES; TRADE NAMES; TAXPAYER ID NUMBERS.
PNAC is a wholly-owned subsidiary of Phoenix. Phoenix has no
subsidiaries other than PNAC. PNAC has no subsidiaries. Phoenix does
business under the following trade names or fictitious business names,
and no others (provided that, following any merger of PNAC into Phoenix
that has been approved by Foothill, Phoenix may do business under any
names under which PNAC formerly was permitted to do business): Phoenix
Telcom, Inc.; Office Depot Communications; and Comdial Network Service.
PNAC does business under the following trade names or fictitious
business names, and no others: Automated Communications, Inc.; ACI;
ACAmerica; and MasterCall. The foregoing notwithstanding, either
Phoenix or PNAC may adopt addition trade names or fictitious business
names in compliance with applicable law so long as Foothill receives not
less than thirty (30) days prior written notice thereof, and, after the
passage of thirty (30) days after the giving of such written notice,
such names prospectively shall be deemed included within the foregoing
representations and warranties.The federal taxpayer identification
number of Phoenix is 84-0881154. The federal taxpayer identification
number of PNAC is 84-1335451.
(4) The first sentence of Section 6.2:
Each of Phoenix and PNAC, separately, shall deliver to Foothill, no
later than the twentieth (20th) day of each month during the term of
this Agreement, a detailed aging, by total, of its Accounts, a
reconciliation statement, and a summary aging, by vendor, of all its
accounts payable and any book overdraft.
(5) The first sentence of Section 6.3:
With such regularity as Foothill shall require, each of Phoenix and
PNAC, separately, shall provide Foothill with schedules describing all
its Accounts.
(6) Section 7.3:
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<PAGE> 7
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Enter
into any acquisition, merger, consolidation, reorganization, or
recapitalization, or reclassify its capital stock, or liquidate, wind
up, or dissolve itself (or suffer any liquidation or dissolution), or
convey, sell, assign, lease, transfer, or otherwise dispose of, in one
transaction or a series of transactions, all or any substantial part of
its business, property, or assets, whether now owned or hereafter
acquired, or acquire by purchase or otherwise all or substantially all
the assets, stock, or other evidence of beneficial ownership of any
Person. Without limiting the generality of the foregoing, Phoenix and
PNAC shall not merge or consolidate their operations, and shall not
guaranty or assume each other's obligations to Persons other than
Foothill, without the prior written approval of Foothill.
(7) Section 12:
12 NOTICES.
Unless otherwise provided in this Agreement, all notices
or demands by any party relating to this Agreement or any other
agreement entered into in connection therewith shall be in writing and
(except for financial statements and other informational documents which
may be sent by first-class mail, postage prepaid) shall be personally
delivered or sent by registered or certified mail, postage prepaid,
return receipt requested, or by prepaid telex, TWX, telefacsimile, or
telegram (with messenger delivery specified) to Borrower or to Foothill,
as the case may be, at its addresses set forth below:
If to Borrower: PHOENIX NETWORK, INC.
PHOENIX NETWORK ACQUISITION CORP.
1687 Cole Boulevard
Golden, Colorado 80401
Attn: Jeffrey L. Bailey, Senior Vice
President and Chief Financial Officer
If to Foothill: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
The parties hereto may change the address at which they
are to receive notices hereunder, by notice in writing in the foregoing
manner given to the other. All notices or demands sent in accordance
with this Section 12, other than notices by Foothill in connection with
Sections 9504 or 9505 of the Code, shall be deemed received on the
earlier of the date of actual receipt or three (3) days after the
deposit thereof in the mail. Borrower acknowledges and agrees that
notices sent by Foothill in connection with Sections 9504 or 9505 of the
Code shall be deemed sent when deposited in the mail or transmitted by
telefacsimile or other similar method set forth above.
(8) Schedules P-1, 5.9, 6.16, and 7.1:
The aforementioned schedules are replaced by the revised versions
thereof attached hereto and incorporated herein by this reference.
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<PAGE> 8
d. The following sentence is hereby added to the end
of Section 7.8 of the Agreement, in addition to the existing provisions of such
Section 7.8:
Without limiting the generality of the foregoing, Borrower shall not
repay, repurchase, redeem, or retire the Subordinated Indebtedness
except strictly in accordance with the terms of the Subordination
Agreement.
2. Representations and Warranties. Borrower hereby
represents and warrants to Foothill that (a) the execution, delivery, and
performance of this Amendment and of the Agreement, as amended by this
Amendment, are within its corporate powers, have been duly authorized by all
necessary corporate action, and are not in contravention of any law, rule, or
regulation, or any order, judgment, decree, writ, injunction, or award of any
arbitrator, court, or governmental authority, or of the terms of its charter or
bylaws, or of any contract or undertaking to which it is a party or by which
any of its properties may be bound or affected, and (b) this Amendment and the
Agreement, as amended by this Amendment, constitute Borrower's legal, valid,
and binding obligation, enforceable against Borrower in accordance with its
terms.
3. Conditions Precedent to Amendment. The satisfaction of
each of the following, on or before the First Amendment Closing Deadline,
unless waived or deferred by Foothill in its sole discretion, shall constitute
conditions precedent to the effectiveness of this Amendment:
a. Payment to Foothill by Borrower in immediately
available funds of an amendment fee in the amount of $7,500, which fee shall be
fully earned, non-refundable, due, and payable, upon the execution and delivery
of this Amendment by Foothill and Borrower, and which fee Borrower hereby
authorizes Foothill to charge to Borrower's loan account;
b. Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force and
effect:
(1) a Lockbox Agreement with respect to PNAC;
(2) the Subordination Agreement;
(3) the Suretyship Agreement;
(4) a termination statement from WilTel, Inc.,
with respect to financing statement number
952072809 filed by it against Automated
Communications, Inc. with the Secretary of
State of Colorado on or about October 2,
1995; and
(5) such financing statements, or amendments or
continuations thereof, with respect to
Phoenix or PNAC, as Foothill reasonably may
request to ensure the perfection of its
security interests in the Collateral;
c. Foothill shall have received a certificate from the
Secretary of Phoenix attesting to the incumbency and signatures of authorized
officers of Phoenix and to the resolutions of Phoenix's Board of Directors
authorizing its execution and delivery of this Amendment and the other Loan
Documents to which it is a party and contemplated in this Amendment and the
performance of this
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Amendment, the Agreement as amended by this Amendment, and such other Loan
Documents, and authorizing specific officers of Phoenix to execute and deliver
the same;
d. Foothill shall have received a certificate from the
Secretary of PNAC attesting to the incumbency and signatures of authorized
officers of PNAC and to the resolutions of PNAC's board of directors or
equivalent governing body authorizing its execution and delivery of the Loan
Documents to which it is a party and contemplated in this Amendment and the
performance of such Loan Documents, and authorizing specific officers of PNAC
to execute and deliver the same;
e. Foothill shall have received an opinion of counsel
to Borrower in form and substance satisfactory to Foothill in its reasonable
discretion;
f. Foothill shall have received confirmation UCC
searches reflecting the filing of the financing statements, or amendments or
continuations thereof, referenced in subsection 3(b)(4) of this Amendment, and
reflecting the priority of Foothill's security interest in the Collateral
provided for by the Loan Documents;
g. The representations and warranties in this
Amendment, the Agreement as amended by this Amendment, and the other Loan
Documents shall be true and correct in all respects on and as of the date
hereof, as though made on such date (except to the extent that such
representations and warranties relate solely to an earlier date);
h. No Event of Default or event which with the giving
of notice or passage of time would constitute an Event of Default shall have
occurred and be continuing on the date hereof, nor shall result from the
consummation of the transactions contemplated herein;
i. No injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the consummation of
the transactions contemplated herein shall have been issued and remain in force
by any governmental authority against Borrower or Foothill; and
j. All other documents and legal matters in connection
with the transactions contemplated by this Amendment shall have been delivered
or executed or recorded and shall be in form and substance satisfactory to
Foothill and its counsel.
4. Effect on Agreement; Joinder of PNAC. The Agreement, as
amended hereby, shall be and remain in full force and effect in accordance with
its respective terms and hereby is ratified and confirmed in all respects. The
execution, delivery, and performance of this Amendment shall not operate as a
waiver of or, except as expressly set forth herein, as an amendment, of any
right, power, or remedy of Foothill under the Agreement, as in effect prior to
the date hereof. By executing and delivering this Amendment: (a) PNAC joins
itself as a co-borrower under the Loan Documents, assumes joint and several
liability for all outstanding Obligations of Phoenix, and grants to Foothill
liens and security interests on all its right, title, and interest in and to
any Collateral to secure all present and future Obligations; and (b) Phoenix
consents to such joinder, assumption, and grant by PNAC. All provisions of the
Agreement, as amended by this Amendment, that refer to PNAC or add in PNAC as a
co-borrower, shall be effective prospectively from and after the effective date
of this Amendment.
5. Further Assurances. Borrower shall execute and deliver
all agreements, documents, and instruments, in form and substance satisfactory
to Foothill, and take all actions as Foothill may reasonably request from time
to time, to perfect and maintain the perfection and priority of Foothill's
security
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<PAGE> 10
interests in the Collateral, and to fully consummate the transactions
contemplated under this Amendment and the Agreement, as amended by this
Amendment.
6. Miscellaneous.
a. Upon the effectiveness of this Amendment, each
reference in the Agreement to "this Agreement", "hereunder", "herein", "hereof"
or words of like import referring to the Agreement shall mean and refer to the
Agreement as amended by this Amendment.
b. Upon the effectiveness of this Amendment, each
reference in the Loan Documents to the "Loan Agreement", "thereunder",
"therein", "thereof" or words of like import referring to the Agreement shall
mean and refer to the Agreement as amended by this Amendment.
c. As used in this Amendment, "First Amendment Closing
Deadline" means October 18, 1996.
d. This Amendment shall be governed by and construed
in accordance with the laws of the State of California.
e. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment by signing
any such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed as of the date first written above.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Kurt Marsden
---------------------------
Title: Assistant Vice President
-----------------------
PHOENIX NETWORK, INC., a Delaware
corporation
By /s/ Jeffrey L. Bailey
---------------------------
Title: CFO
-----------------------
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PHOENIX NETWORK ACQUISITION CORP., a
Delaware corporation
By /s/ Jeffrey L. Bailey
---------------------------
Title: Vice President
-----------------------
11
<PAGE> 1
EXHIBIT 10.11
AMENDMENT NUMBER TWO TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER TWO TO AMENDED AND RESTATED LOAN AND
SECURITY AGREEMENT (this "Amendment") is entered into as of December 23, 1996,
by and between Foothill Capital Corporation, a California corporation
("Foothill"), on the one hand, and Phoenix Network, Inc., a Delaware
corporation ("Phoenix"), Phoenix Network Acquisition Corp., a Delaware
corporation ("PNAC"), and AmeriConnect, Inc., a Delaware corporation
("AmeriConnect"), on the other hand, with reference to the following facts:
A. Foothill, as lender, and Phoenix, as borrower, heretofore entered
into that certain Amended and Restated Loan and Security
Agreement, dated as of September 26, 1995 (despite the fact that
the recitals thereof erroneously referred to "1993" rather than
"1995") (herein the "Original Agreement");
B. Phoenix and PNAC entered into that certain Amendment Number One
to Amended and Restated Loan and Security Agreement, dated as of
October __, 1996 (the "First Amendment") with Foothill to amend
the Original Agreement to, among other things, add PNAC as a
secured co-borrower, and modify the Borrowing Base, in each case
as set forth in the First Amendment (the Original Agreement, as
amended by the First Amendment, is referred to herein as the
"Agreement");
C. Phoenix, PNAC, and AmeriConnect (individually and collectively,
jointly and severally, "Borrower") have requested Foothill to
amend the Agreement to, among other things, add AmeriConnect as a
secured co-borrower, and modify the Borrowing Base, in each case
as set forth in this Amendment;
D. Foothill is willing to so amend the Agreement in accordance with
the terms and conditions hereof; and
E. All capitalized terms used herein and not defined herein shall
have the meanings ascribed to them in the Agreement, as amended
hereby.
NOW, THEREFORE, in consideration of the above recitals and the
mutual promises contained herein, Foothill and Borrower hereby agree as
follows:
1. Amendments to the Agreement.
a. Section 1.1 of the Agreement hereby is amended by
adding the following new defined terms in alphabetical order:
"AmeriConnect" means AmeriConnect, Inc., a Delaware
corporation.
"AmeriConnect Accounts" means Accounts of AmeriConnect.
"Eligible AmeriConnect Accounts" means Eligible Accounts
of AmeriConnect.
"AmeriConnect Dilution Threshold" means five percent (5%).
<PAGE> 2
"AmeriConnect Kentucky/South Carolina Reserve" means a
reserve against the Borrowing Base, to be determined from time to time
by Foothill, in an amount equal to the aggregate amount of obligations
owed by AmeriConnect in respect of refunds to its customers in the
States of Kentucky and South Carolina required by the respective
licensing commissions of such States as a result of AmeriConnect's
failure to obtain a license therefrom prior to doing business in such
States. As of the Second Amendment Closing Deadline (as defined in the
Second Amendment), the amount of such reserve shall be approximately
$49,000.
"AmeriConnect Payables Reserve" means a reserve against
the Borrowing Base, to be determined from time to time by Foothill, in
an amount equal to the aggregate amount of accounts payable of
AmeriConnect to long distance carriers that are more than 30 days past
due.
"Mercantile Pay-Off Letter" means a letter, in form and
substance reasonably satisfactory to Foothill from Mercantile Bank of
Kansas respecting the amount necessary to repay in full all of the
obligations of AmeriConnect owing to Mercantile Bank of Kansas and
obtain a termination or release of the Liens existing in favor of
Mercantile Bank of Kansas on the properties and assets of AmeriConnect.
"Second Amendment" means that certain Amendment Number Two
to Amended and Restated Loan and Security Agreement, dated as of
December 23, 1996, between Foothill and Borrower.
b. The following definitions contained in Section 1.1
of the Amendment are amended and restated in their entirety to read as follows:
"Borrower" means Phoenix, PNAC, and AmeriConnect, and each
of them, jointly and severally, collectively and individually.
"Dilution" means, with respect to any Dilution Measuring
Period, as reasonably determined by Foothill: (a) With respect to
Phoenix, the fraction, expressed as a percentage, of which the numerator
is the total during such Dilution Measuring Period of all bad debt
write-downs, promotions, and other items with respect to Accounts of
Phoenix that could reduce or otherwise impair the full and timely
collection of such Accounts, and of which the denominator is the total
during such Dilution Measuring Period of all collections received with
respect to Accounts of Phoenix; (b) With respect to PNAC, the fraction,
expressed as a percentage, of which the numerator is the total during
such Dilution Measuring Period of all bad debt write-downs, promotions,
and other items with respect to Accounts of PNAC that could reduce or
otherwise impair the full and timely collection of such Accounts, and of
which the denominator is the total during such Dilution Measuring Period
of all collections received with respect to Accounts of PNAC; and (c)
With respect to AmeriConnect, the fraction, expressed as a percentage,
of which the numerator is the total during such Dilution Measuring
Period of all bad debt write-downs, promotions, and other items with
respect to Accounts of AmeriConnect that could reduce or otherwise
impair the full and timely collection of such Accounts, and of which the
denominator is the total during such Dilution Measuring Period of all
collections received with respect to Accounts of AmeriConnect.
"Eligible Accounts" means those Accounts created by
Borrower in the ordinary course of business that arise out of Borrower's
sale of goods, sale of general intangibles relating to the provision of
telecommunication services, or rendition of services, that strictly
comply with all of Borrower's representations and warranties to
Foothill, and that are and at all times shall continue
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to be acceptable to Foothill in all respects; provided, however, that
standards of eligibility may be fixed and revised from time to time by
Foothill in Foothill's reasonable credit judgment. Eligible Accounts
shall include Eligible Unbilled Accounts. Eligible Accounts shall not
include the following:
(a) Accounts which the Account Debtor has failed
to pay within sixty (60) days of invoice date;
(b) Accounts other than AmeriConnect Accounts
that are not due upon receipt of Borrower's invoice by the Account
Debtor or within ten (10) days thereafter
(c) AmeriConnect Accounts that are not due upon
receipt of its invoice by the Account Debtor or within thirty (30) days
thereafter;
(d) Accounts with respect to which the Account
Debtor is an officer, employee, Affiliate, or agent of Borrower;
(e) Accounts with respect to which goods are
placed on consignment, guaranteed sale, sale or return, sale on
approval, bill and hold, or other terms by reason of which the payment
by the Account Debtor may be conditional;
(f) Accounts with respect to which the Account
Debtor is not a resident of the United States, and which are not either
(1) covered by credit insurance in form and amount, and by an insurer,
satisfactory to Foothill, or (2) supported by one or more letters of
credit that are assignable by their terms and have been delivered to
Foothill in an amount and of a tenor, and issued by a financial
institution, acceptable to Foothill;
(g) Accounts with respect to which the Account
Debtor is the United States or any department, agency, or
instrumentality of the United States, any state of the United States;
(h) Accounts with respect to which Borrower is
or may become liable to the Account Debtor for goods sold or services
rendered by the Account Debtor to Borrower;
(i) Accounts with respect to an Account Debtor
whose total obligations owing to Borrower exceed ten percent (10%) of
all Eligible Accounts, to the extent of the obligations of such Account
Debtor in excess of such percentage;
(j) Accounts with respect to which the Account
Debtor disputes liability or makes any claim with respect thereto, or is
subject to any Insolvency Proceeding, or become insolvent, or goes out
of business;
(k) Accounts the collection of which Foothill,
in its reasonable credit judgment, believes to be doubtful by reason of
the Account Debtor's financial condition;
(l) Accounts owed by an Account Debtor that has
failed to pay fifty percent (50%) or more of its Accounts owed to
Borrower within sixty (60) days of the date of the applicable invoices;
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(m) Accounts that are payable in other than
United States Dollars;
(n) Accounts, other than Eligible Unbilled
Accounts, that have not yet been billed to the relevant Account Debtor;
(o) Accounts that represent progress payments or
other advance billings that are due prior to the completion of
performance by Borrower of the subject contract for goods or services;
(p) Without duplication of any amounts included
in the Phoenix Payables Reserve or the PNAC Payables Reserve or the
AmeriConnect Payables Reserve, Accounts arising from services provided
by a Carrier, if Borrower is in default of its obligations to such
Carrier in any material respect that would entitle such Carrier to
exercise remedies against Borrower, if such Carrier in fact is
exercising such remedies, or has indicated its intention to exercise
such remedies, or has threatened to exercise such remedies, and if
Foothill in the good faith exercise of Foothill's discretion has
determined that such actual, intended, or threatened exercise of
remedies may interfere with the value or collectibility of the affected
Accounts;
(q) "On Campus" accounts of PNAC;
(r) Accounts of PNAC or AmeriConnect owed by
residential Account Debtors (excluding, however, all Accounts of Phoenix
owed by residential Account Debtors); and
(s) Accounts of AmeriConnect that are "inactive"
(i.e., as to which AmeriConnect has disconnected service to the Account
Debtor that owes such Account.
"Eligible Unbilled Accounts" means those particular
Accounts created by Phoenix in the ordinary course of business that
arise out of Phoenix's sale of goods, sale of general intangibles
relating to the provision of telecommunication services, or rendition of
services, but have not yet been billed to the relevant Account Debtor,
that are described in a call transaction record tape or electronic data
transfer that has been delivered by a Carrier to Integretel, or to any
other similar processing and billing agent acceptable to Foothill in its
sole discretion, and that in all other respects qualify as Eligible
Accounts. Eligible Unbilled Accounts shall not include any Accounts of
PNAC or AmeriConnect.
"Loan Documents" means this Agreement, the First
Amendment, the Second Amendment, the Suretyship Agreement, the Lock Box
Agreement, any note or notes executed by Borrower and payable to
Foothill, and any other agreement entered into by Borrower or any
Affiliate of Borrower in connection with this Agreement.
"Lock Box" shall have the meaning provided in any Lock Box
Agreement.
"Lock Box Agreement" means any and every Lockbox Operating
Procedural Agreement (or agreement of similar import), in form and
substance satisfactory to Foothill, among Borrower, Foothill, and a Lock
Box Bank.
"Lock Box Bank" means Union Bank of California, Norwest
Bank Colorado, N.A., or any other bank, reasonably acceptable to
Foothill, that enters into a Lock Box Agreement.
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<PAGE> 5
"Reference Rate" means the variable rate of interest, per
annum, most recently announced by Norwest Bank Minnesota, National
Association, or any successor thereto, as its "base rate," irrespective
of whether such announced rate is the best rate available from such
financial institution.
"Suretyship Agreement" means an Amended and Restated
Suretyship Agreement, in form and substance satisfactory to Foothill,
dated as of even date with the Second Amendment, between Foothill and
Borrower, incorporating certain suretyship waivers and other matters
pertaining to the co-borrower status of Phoenix, PNAC, and AmeriConnect.
c. The following specified provisions of the Agreement
hereby are amended and restated in their entirety as follows:
(1) The first two paragraphs of the Agreement:
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT, is entered
into as of September 26, 1995, between FOOTHILL CAPITAL CORPORATION, a
California corporation ("Foothill"), with a place of business located at
11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025-
3333, PHOENIX NETWORK, INC. a Delaware corporation, ("Phoenix"), with
its chief executive office located at 1687 Cole Boulevard, Golden,
Colorado 80401, PHOENIX NETWORK ACQUISITION CORP., a Delaware
corporation ("PNAC"), with its chief executive office located at 1687
Cole Boulevard, Golden, Colorado 80401, and AMERICONNECT, INC., a
Delaware corporation ("AmeriConnect"), with its chief executive office
located at 1687 Cole Boulevard, Golden, Colorado 80401.
This Agreement amends and restates the Loan and Security
Agreement dated as of August 26, 1993 (as previously amended, the "Prior
Agreement") among Foothill and Phoenix. Except for any provisions of
the Prior Agreement that, by their terms, survive its termination (such
as indemnities by Phoenix in favor of Foothill), this Agreement
supersedes and replaces the Prior Agreement and all Obligations of
Phoenix under the Prior Agreement shall become Obligations of Borrower
under this Agreement.
(2) Section 2.1:
2.1 REVOLVING ADVANCES. Subject to the terms and
conditions of this Agreement, and so long as no Event of Default has
occurred and is continuing, Foothill agrees to make revolving advances
to Borrower in an amount not to exceed the lesser of (i) the Maximum
Amount less the outstanding balance of all undrawn or unreimbursed L/Cs
and L/C Guarantees, or (ii) the Borrowing Base less (A) the aggregate
amount of all undrawn or unreimbursed L/Cs and L/C Guarantees, less (B)
the aggregate amount of the AmeriConnect Kentucky/South Carolina
Reserve. For purposes of this Agreement "Borrowing Base" shall mean:
(a) subject to adjustment based on Dilution as
provided in subsection 2.1(b), an amount equal to the lesser of: (i) the
sum of (A) the greater of (w) zero, and (x) eighty percent (80%) of the
amount of Eligible Phoenix Accounts (other than Eligible Unbilled
Accounts), less the Phoenix Payables Reserve, plus (B) the greater of
(y) zero, and (z) eighty percent (80%) of the Amount of Eligible PNAC
Accounts, less the PNAC Payables Reserve, plus (C) the greater of (y)
zero, and (z) eighty percent (80%) of the Amount of Eligible
AmeriConnect Accounts, less the AmeriConnect Payables Reserve, plus (D)
the amount, not to exceed Three Million Dollars
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<PAGE> 6
($3,000,000), equal to forty percent (40%) of the amount of Eligible
Unbilled Accounts; and (ii) an amount equal to Borrower's cash
collections for the immediately preceding sixty (60) day period.
(b) Should Dilution with respect to Phoenix
during any Dilution Measuring Period exceed the Phoenix Dilution
Threshold, the advance rates set forth in subsections 2.1(a)(i)(A) and
2.1(a)(i)(D) shall be reduced during the next calendar month by one
percent for each percent by which such Dilution exceeded the Phoenix
Dilution Threshold (rounded to the nearest whole number). Should
Dilution with respect to PNAC during any Dilution Measuring Period
exceed the PNAC Dilution Threshold, the advance rate set forth in
subsection 2.1(a)(i)(B) shall be reduced during the next calendar month
by one percent for each percent by which such Dilution exceeded the PNAC
Dilution Threshold (rounded to the nearest whole number). Should
Dilution with respect to AmeriConnect during any Dilution Measuring
Period exceed the AmeriConnect Dilution Threshold, the advance rate set
forth in subsection 2.1(a)(i)(C) shall be reduced during the next
calendar month by one percent for each percent by which such Dilution
exceeded the AmeriConnect Dilution Threshold (rounded to the nearest
whole number).
(c) Anything to the contrary in paragraphs (a)
or (b) above notwithstanding, Foothill may reduce its advance rates
based upon Eligible Accounts without declaring an Event of Default, with
respect to any one or more of Phoenix, PNAC, and AmeriConnect, if it
determines, in its reasonable discretion, that there is a material
impairment of the prospect of repayment of all or any portion of the
Obligations or a material impairment of the value or priority of
Foothill's security interests in the Collateral.
(d) Foothill shall have no obligation to make
advances hereunder to the extent they would cause the outstanding
Obligations to exceed Ten Million Dollars ($10,000,000) (the "Maximum
Amount").
(e) Foothill is authorized to make advances
under this Agreement based upon telephonic or other instructions
received from anyone purporting to be an Authorized Officer of Borrower
or, without instructions, if pursuant to Section 6.12. Borrower agrees
to establish and maintain a single designated deposit account for the
purpose of receiving the proceeds of the advances requested by Borrower
and made by Foothill hereunder. Unless otherwise agreed by Foothill and
Borrower, any advance requested by Borrower and made by Foothill
hereunder shall be made to such designated deposit account. Amounts
borrowed pursuant to this Section 2.1 may be repaid and, so long as no
Event of Default has occurred and is continuing, reborrowed at any time
during the term of this Agreement.
(3) Section 5.3:
5.3 SUBSIDIARIES; TRADE NAMES; TAXPAYER ID NUMBERS.
PNAC is a wholly-owned subsidiary of Phoenix. AmeriConnect is a wholly-
owned subsidiary of Phoenix. Phoenix has no subsidiaries other than
PNAC and AmeriConnect. PNAC has no subsidiaries. AmeriConnect has no
subsidiaries. Phoenix does business under the following trade names or
fictitious business names, and no others (provided that, following any
merger of PNAC into Phoenix that has been approved by Foothill, Phoenix
may do business under any names under which PNAC formerly was permitted
to do business; provided further that, following any merger of
AmeriConnect into Phoenix that has been approved by Foothill, Phoenix
may do business under any names under which AmeriConnect formerly was
permitted to do business): Phoenix Telcom, Inc.; Office Depot
Communications; and Comdial Network Service. PNAC does business under
the following trade names or fictitious business names, and no others:
Automated Communications, Inc.; ACI; ACAmerica; and MasterCall.
AmeriConnect does business under the following trade
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<PAGE> 7
names or fictitious business names, and no others: AmeriConnect; A-Fax;
and Amerifax. The foregoing notwithstanding, any of Phoenix, PNAC, or
AmeriConnect may adopt addition trade names or fictitious business names
in compliance with applicable law so long as Foothill receives not less
than thirty (30) days prior written notice thereof, and, after the
passage of thirty (30) days after the giving of such written notice,
such names prospectively shall be deemed included within the foregoing
representations and warranties. The federal taxpayer identification
number of Phoenix is 84-0881154. The federal taxpayer identification
number of PNAC is 84-1335451. The federal taxpayer identification
number of AmeriConnect is 48-1056927.
(4) The first sentence of Section 6.2:
Each of Phoenix, PNAC, and AmeriConnect, separately, shall deliver to
Foothill, no later than the twentieth (20th) day of each month during
the term of this Agreement, a detailed aging, by total, of its Accounts,
a reconciliation statement, and a summary aging, by vendor, of all its
accounts payable and any book overdraft.
(5) The first sentence of Section 6.3:
With such regularity as Foothill shall require, each of Phoenix, PNAC,
and AmeriConnect, separately, shall provide Foothill with schedules
describing all its Accounts.
(6) Section 7.3:
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Enter
into any acquisition, merger, consolidation, reorganization, or
recapitalization, or reclassify its capital stock, or liquidate, wind
up, or dissolve itself (or suffer any liquidation or dissolution), or
convey, sell, assign, lease, transfer, or otherwise dispose of, in one
transaction or a series of transactions, all or any substantial part of
its business, property, or assets, whether now owned or hereafter
acquired, or acquire by purchase or otherwise all or substantially all
the assets, stock, or other evidence of beneficial ownership of any
Person. Without limiting the generality of the foregoing, none of
Phoenix, PNAC, and AmeriConnect shall merge or consolidate its
operations with the operations of any other of Phoenix, PNAC, and
AmeriConnect, nor shall any of them guaranty or assume one another's
obligations to Persons other than Foothill, without the prior written
approval of Foothill.
(7) Section 12:
12 NOTICES.
Unless otherwise provided in this Agreement, all notices
or demands by any party relating to this Agreement or any other
agreement entered into in connection therewith shall be in writing and
(except for financial statements and other informational documents which
may be sent by first-class mail, postage prepaid) shall be personally
delivered or sent by registered or certified mail, postage prepaid,
return receipt requested, or by prepaid telex, TWX, telefacsimile, or
telegram (with messenger delivery specified) to Borrower or to Foothill,
as the case may be, at its addresses set forth below:
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If to Borrower: PHOENIX NETWORK, INC.
PHOENIX NETWORK ACQUISITION CORP.
AMERICONNECT, INC.
1687 Cole Boulevard
Golden, Colorado 80401
Attn: Jeffrey L. Bailey, Senior Vice
President and Chief Financial Officer
Fax: 303.232.1250
If to Foothill: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax: 310.478.9788
The parties hereto may change the address at which they
are to receive notices hereunder, by notice in writing in the foregoing
manner given to the other. All notices or demands sent in accordance
with this Section 12, other than notices by Foothill in connection with
Sections 9504 or 9505 of the Code, shall be deemed received on the
earlier of the date of actual receipt or three (3) days after the
deposit thereof in the mail. Borrower acknowledges and agrees that
notices sent by Foothill in connection with Sections 9504 or 9505 of the
Code shall be deemed sent when deposited in the mail or transmitted by
telefacsimile or other similar method set forth above.
(8) Schedules P-1, 5.9, 6.16, and 7.1:
The aforementioned schedules are replaced by the revised versions
thereof attached hereto and incorporated herein by this reference.
d. Additional Covenant. With such regularity as
Foothill shall require, AmeriConnect shall provide Foothill with a detailed
calculation of the amount of the AmeriConnect Kentucky/South Carolina Reserve,
certified by the chief financial officer of AmeriConnect.
2. Representations and Warranties. Borrower hereby
represents and warrants to Foothill that (a) the execution, delivery, and
performance of this Amendment and of the Agreement, as amended by this
Amendment, are within its corporate powers, have been duly authorized by all
necessary corporate action, and are not in contravention of any law, rule, or
regulation, or any order, judgment, decree, writ, injunction, or award of any
arbitrator, court, or governmental authority, or of the terms of its charter or
bylaws, or of any contract or undertaking to which it is a party or by which
any of its properties may be bound or affected, (b) this Amendment and the
Agreement, as amended by this Amendment, constitute Borrower's legal, valid,
and binding obligation, enforceable against Borrower in accordance with its
terms, and (c) as of the Second Amendment Closing Deadline, (i) the chief
executive office of AmeriConnect is located at the address indicated in the
first paragraph of this Agreement, and (ii) the Equipment of AmeriConnect is
located only at such address and at 6750 West 93rd Street, Suite 110, Overland
Park, Kansas 66212.
8
<PAGE> 9
3. Conditions Precedent to Amendment. The satisfaction of
each of the following, on or before the Second Amendment Closing Deadline,
unless waived or deferred by Foothill in its sole discretion, shall constitute
conditions precedent to the effectiveness of this Amendment:
a. Payment to Foothill by Borrower in immediately
available funds of an amendment fee in the amount of $10,000.00, which fee
shall be fully earned, non-refundable, due, and payable, upon the execution and
delivery of this Amendment by Foothill and Borrower, and which fee Borrower
hereby authorizes Foothill to charge to Borrower's loan account;
b. Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force and
effect:
(1) a Lockbox Agreement with respect to
AmeriConnect;
(2) the Suretyship Agreement;
(3) the Mercantile Pay-Off Letter, together with
UCC termination statements and other
documentation evidencing the termination by
Mercantile Bank of Kansas of its Liens in
and to the properties and assets of
AmeriConnect; and
(4) such financing statements, or amendments or
continuations thereof, with respect to
Phoenix or PNAC or AmeriConnect, as Foothill
reasonably may request to ensure the
perfection of its security interests in the
Collateral;
c. Foothill shall have received a certificate from the
Secretary of Phoenix attesting to the incumbency and signatures of authorized
officers of Phoenix and to the resolutions of Phoenix's Board of Directors
authorizing its execution and delivery of this Amendment and the other Loan
Documents to which it is a party and contemplated in this Amendment and the
performance of this Amendment, the Agreement as amended by this Amendment, and
such other Loan Documents, and authorizing specific officers of Phoenix to
execute and deliver the same;
d. Foothill shall have received a certificate from the
Secretary of PNAC attesting to the incumbency and signatures of authorized
officers of PNAC and to the resolutions of PNAC's board of directors or
equivalent governing body authorizing its execution and delivery of the Loan
Documents to which it is a party and contemplated in this Amendment and the
performance of such Loan Documents, and authorizing specific officers of PNAC
to execute and deliver the same;
e. Foothill shall have received a certificate from the
Secretary of AmeriConnect attesting to the incumbency and signatures of
authorized officers of AmeriConnect and to the resolutions of AmeriConnect's
board of directors or equivalent governing body authorizing its execution and
delivery of the Loan Documents to which it is a party and contemplated in this
Amendment and the performance of such Loan Documents, and authorizing specific
officers of AmeriConnect to execute and deliver the same;
f. Foothill shall have received copies of the relevant
merger agreements in respect of the merger of Phoenix's acquisition subsidiary
with and into AmeriConnect, certified by the Secretary of AmeriConnect as true,
correct and complete copies thereof.
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g. Foothill shall have received an opinion of counsel
to Borrower in form and substance satisfactory to Foothill in its reasonable
discretion;
h. Foothill shall have received confirmation UCC
searches reflecting the filing of the financing statements, or amendments or
continuations thereof, referenced in subsection 3(b)(4) of this Amendment, and
reflecting the priority of Foothill's security interest in the Collateral
provided for by the Loan Documents;
i. The representations and warranties in this
Amendment, the Agreement as amended by this Amendment, and the other Loan
Documents shall be true and correct in all respects on and as of the date
hereof, as though made on such date (except to the extent that such
representations and warranties relate solely to an earlier date);
j. No Event of Default or event which with the giving
of notice or passage of time would constitute an Event of Default shall have
occurred and be continuing on the date hereof, nor shall result from the
consummation of the transactions contemplated herein;
k. No injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the consummation of
the transactions contemplated herein shall have been issued and remain in force
by any governmental authority against Borrower or Foothill; and
l. All other documents and legal matters in connection
with the transactions contemplated by this Amendment shall have been delivered
or executed or recorded and shall be in form and substance satisfactory to
Foothill and its counsel.
4. Condition Subsequent. As a condition subsequent to the
initial effectiveness of this Amendment, Borrower shall perform or cause to be
performed the following (the failure by Borrower to so perform or cause to be
performed constituting an Event of Default):
a. within 30 days of the Second Amendment Closing
Deadline, deliver to Foothill the certified copies of the policies of insurance
in respect of AmeriConnect and its assets and properties, together with the
endorsements thereto, as are required by Section 6.12, the form and substance
of which shall be satisfactory to Foothill and its counsel.
b. within 90 days of the Second Amendment Closing
Deadline, deliver to Foothill a duly executed Tri-Party Agreement, in form and
substance satisfactory to Foothill, among Foothill, AmeriConnect, and the tape-
processing agent for AmeriConnect.
5. Effect on Agreement; Joinder of AmeriConnect. The
Agreement, as amended hereby, shall be and remain in full force and effect in
accordance with its respective terms and hereby is ratified and confirmed in
all respects. The execution, delivery, and performance of this Amendment shall
not operate as a waiver of or, except as expressly set forth herein, as an
amendment, of any right, power, or remedy of Foothill under the Agreement, as
in effect prior to the date hereof. By executing and delivering this
Amendment: (a) AmeriConnect joins itself as a co-borrower under the Loan
Documents, assumes joint and several liability for all outstanding Obligations
of Phoenix or PNAC, and grants to Foothill liens and security interests on all
its right, title, and interest in and to any Collateral to secure all present
and future Obligations; and (b) each of Phoenix and PNAC consents to such
joinder, assumption, and grant by AmeriConnect. All provisions of the
Agreement, as amended by this Amendment, that refer to
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<PAGE> 11
AmeriConnect or add in AmeriConnect as a co-borrower, shall be effective
prospectively from and after the effective date of this Amendment.
6. Further Assurances. Borrower shall execute and deliver
all agreements, documents, and instruments, in form and substance satisfactory
to Foothill, and take all actions as Foothill may reasonably request from time
to time, to perfect and maintain the perfection and priority of Foothill's
security interests in the Collateral, and to fully consummate the transactions
contemplated under this Amendment and the Agreement, as amended by this
Amendment.
7. Miscellaneous.
a. Upon the effectiveness of this Amendment, each
reference in the Agreement to "this Agreement", "hereunder", "herein", "hereof"
or words of like import referring to the Agreement shall mean and refer to the
Agreement as amended by this Amendment.
b. Upon the effectiveness of this Amendment, each
reference in the Loan Documents to the "Loan Agreement", "thereunder",
"therein", "thereof" or words of like import referring to the Agreement shall
mean and refer to the Agreement as amended by this Amendment.
c. As used in this Amendment, "Second Amendment
Closing Deadline" means December 31, 1996.
d. This Amendment shall be governed by and construed
in accordance with the laws of the State of California.
e. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment by signing
any such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed as of the date first written above.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Kurt Marsden
----------------------------------
Title: Assistant Vice President
------------------------------
11
<PAGE> 12
PHOENIX NETWORK, INC., a Delaware
corporation
By /s/ Wallace M. Hammond
----------------------------------
Title: President and CEO
------------------------------
PHOENIX NETWORK ACQUISITION CORP., a
Delaware corporation
By /s/ Wallace M. Hammond
---------------------------------
Title: President and CEO
------------------------------
AMERICONNECT, INC., a Delaware corporation
By /s/ Wallace M. Hammond
----------------------------------
Title: President
------------------------------
12
<PAGE> 1
EXHIBIT 10.12
AMENDMENT NUMBER THREE TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER THREE TO AMENDED AND RESTATED LOAN AND
SECURITY AGREEMENT (this "Amendment") is entered into as of March 12, 1997, by
and between Foothill Capital Corporation, a California corporation
("Foothill"), on the one hand, and Phoenix Network, Inc., a Delaware
corporation ("Phoenix"), Phoenix Network Acquisition Corp., a Delaware
corporation ("PNAC"), and AmeriConnect, Inc., a Delaware corporation
("AmeriConnect"), on the other hand, with reference to the following facts:
A. Foothill, as lender, and Phoenix, as borrower, heretofore entered
into that certain Amended and Restated Loan and Security
Agreement, dated as of September 26, 1995 (despite the fact that
the recitals thereof erroneously referred to "1993" rather than
"1995") (herein the "Original Agreement");
B. Phoenix and PNAC entered into that certain Amendment Number One
to Amended and Restated Loan and Security Agreement, dated as of
a date in October, 1996 (the "First Amendment"), with Foothill,
to amend the Original Agreement to, among other things, add PNAC
as a secured co-borrower, and modify the Borrowing Base, in each
case as set forth in the First Amendment;
C. Phoenix, PNAC, and AmeriConnect (individually and collectively,
jointly and severally, "Borrower") entered into that certain
Amendment Number Two to Amended and Restated Loan and Security
Agreement, dated as of December 23, 1996 (the "Second
Amendment"), with Foothill, to amend the Original Loan Agreement,
as previously amended, to, among other things, add AmeriConnect
as a secured co-borrower, and modify the Borrowing Base, in each
case as set forth in the Second Amendment (the Original
Agreement, as amended by the First Amendment and by the Second
Amendment, is referred to herein as the "Agreement");
D. Borrower has requested Foothill to amend the Agreement to, among
other things, provide for a $2,000,000 bridge loan to Borrower,
provide for a reducing Overadvance to Borrower, change certain
pricing with respect to the credit facilities under the
Agreement, provide for the issuance of the Warrants to Foothill,
and modify the Borrowing Base, in each case as set forth in this
Amendment;
E. Foothill is willing to so amend the Agreement in accordance with
the terms and conditions hereof; and
F. All capitalized terms used herein and not defined herein shall
have the meanings ascribed to them in the Agreement, as amended
hereby.
NOW, THEREFORE, in consideration of the above recitals and the
mutual promises contained herein, Foothill and Borrower hereby agree as
follows:
1. Amendments to the Agreement.
<PAGE> 2
a. Section 1.1 of the Agreement hereby is amended by
adding the following new defined terms in alphabetical order:
"Updated Projections" means the updated and current
balance sheet and income statement projections of Borrower relating to
its fiscal year 1997, including projections regarding EBITDA and net
income of Borrower for such fiscal year, that will be provided by
Borrower to Foothill on or before March 26, 1997, subject to review and
acceptance by Foothill in Foothill's sole discretion.
"Bridge Loan" shall have the meaning ascribed to such term
in Section 2.9.
"Existing Acknowledged Defaults" means those certain
Events of Default that specifically are described on Schedule A to the
Third Amendment and that exist as of March 12, 1997, and have not, as of
such date, been waived by Foothill.
"Permitted Overadvance Amount" means: (a) prior to March
1, 1997, zero dollars; (b) during March, 1997, $1,000,000; (c) during
April, 1997, $950,000; (d) during May, 1997, $900,000; (e) during June,
1997, $850,000; (f) during July, 1997, $800,000; (g) during August,
1997, $650,000; (h) during September, 1997, $200,000; (i) during
October, 1997, $150,000; and (j) from and after November 1, 1997, zero
dollars.
"Servicing Fee Amount" means, prior to April 1, 1997,
$1,500, and, commencing April 1, 1997, and thereafter, $5,000, except
that, if Borrower, after March 12, 1997, consolidates all its billing
systems into a single billing system, to the reasonable satisfaction of
Foothill, thereafter such amount shall reduce to $3,000, commencing on
the first day of the first calendar month after such consolidation.
"Third Amendment" means that certain Amendment Number
Three to Amended and Restated Loan and Security Agreement, dated as of
March 12, 1997, between Foothill and Borrower.
"Warrants" means transferable written warrants issued by
Phoenix to Foothill, and from time to time pursuant to which Foothill
shall have the right to acquire 200,000 shares of voting common stock of
Phoenix, which warrants shall have the following attributes: (a) they
shall be exercisable at any time and from time to time from the date of
issuance thereof through and including March 12, 2002; (b) the exercise
price per share shall be the closing price of Phoenix's common stock on
the American Stock Exchange at the close of trading on March 12, 1997,
subject, if and as applicable, to adjustment pursuant to the anti-
dilution provisions referenced below; (c) the holder of such warrants
shall be permitted one underwritten demand registration (plus a second,
if and only if necessitated by cutbacks in the first), and unlimited
piggyback registrations, with respect to shares of common stock of
Phoenix issued upon the exercise of such warrants; (d) the holder of
such warrants shall have reasonable protection against cutbacks with
respect to its registration rights; (e) the holder of such warrants
shall have the benefit of full anti-dilution provisions; and (g) the
written documentation evidencing such warrants or pursuant to which such
warrants are issued shall be in form and substance satisfactory to
Foothill and shall contain such terms and provisions, in addition to
those specifically described above, as Foothill customarily obtains with
respect to warrants issued to Foothill in other financing transactions.
b. The following definitions contained in Section 1.1
of the Amendment are amended and restated in their entirety to read as follows:
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<PAGE> 3
"Eligible Unbilled Accounts" means those particular
Accounts created by Phoenix, PNAC, or AmeriConnect in the ordinary
course of business that arise out of Phoenix's, PNAC's, or
AmeriConnect's sale of goods, sale of general intangibles relating to
the provision of telecommunication services, or rendition of services,
but have not yet been billed to the relevant Account Debtor, that are
described in a call transaction record tape or electronic data transfer
that has been delivered by a Carrier to Integretel, or to any other
similar processing and billing agent acceptable to Foothill in its sole
discretion, and that in all other respects qualify as Eligible Accounts.
"Loan Documents" means this Agreement, the First
Amendment, the Second Amendment, the Third Amendment, the Suretyship
Agreement, any Lock Box Agreement, any note or notes executed by
Borrower and payable to Foothill, and any other agreement entered into
by Borrower or any Affiliate of Borrower in connection with this
Agreement.
"Overadvance" has the meaning set forth in Section 2.4.
c. The following specified provisions of the Agreement
hereby are amended and restated in their entirety as follows:
(1) Section 2.1:
2.1 REVOLVING ADVANCES. Subject to the terms and
conditions of this Agreement, and so long as no Event of Default has
occurred and is continuing, Foothill agrees to make revolving advances
to Borrower in an amount not to exceed the lesser of (i) the Maximum
Amount less the outstanding balance of all undrawn or unreimbursed L/Cs
and L/C Guarantees, or (ii) the Borrowing Base plus the then applicable
Permitted Overadvance Amount less (A) the aggregate amount of all
undrawn or unreimbursed L/Cs and L/C Guarantees, and less (B) the
aggregate amount of the AmeriConnect Kentucky/South Carolina Reserve.
For purposes of this Agreement "Borrowing Base" shall mean:
(a) subject to adjustment based on Dilution as
provided in subsection 2.1(b), an amount equal to the lesser of: (i) the
sum of (A) the greater of (w) zero, and (x) eighty percent (80%) of the
amount of Eligible Phoenix Accounts (other than Eligible Unbilled
Accounts), less the Phoenix Payables Reserve, plus (B) the greater of
(y) zero, and (z) eighty percent (80%) of the Amount of Eligible PNAC
Accounts, less the PNAC Payables Reserve, plus (C) the greater of (y)
zero, and (z) eighty percent (80%) of the Amount of Eligible
AmeriConnect Accounts, less the AmeriConnect Payables Reserve, plus (D)
the amount, not to exceed Three Million Dollars ($3,000,000), equal to
forty percent (40%) of the amount of Eligible Unbilled Accounts; and
(ii) an amount equal to Borrower's cash collections for the immediately
preceding sixty (60) day period.
(b) Should Dilution with respect to Phoenix
during any Dilution Measuring Period exceed the Phoenix Dilution
Threshold, the advance rates set forth in subsections 2.1(a)(i)(A) and
2.1(a)(i)(D) shall be reduced during the next calendar month by one
percent for each percent by which such Dilution exceeded the Phoenix
Dilution Threshold (rounded to the nearest whole number). Should
Dilution with respect to PNAC during any Dilution Measuring Period
exceed the PNAC Dilution Threshold, the advance rate set forth in
subsection 2.1(a)(i)(B) shall be reduced during the next calendar month
by one percent for each percent by which such Dilution exceeded the PNAC
Dilution Threshold (rounded to the nearest whole number). Should
Dilution with respect to AmeriConnect during any Dilution Measuring
Period exceed the AmeriConnect
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<PAGE> 4
Dilution Threshold, the advance rate set forth in subsection
2.1(a)(i)(C) shall be reduced during the next calendar month by one
percent for each percent by which such Dilution exceeded the
AmeriConnect Dilution Threshold (rounded to the nearest whole number).
(c) Anything to the contrary in paragraphs (a)
or (b) above notwithstanding, Foothill may reduce its advance rates
based upon Eligible Accounts or create reasonable reserves, in each case
without declaring an Event of Default, with respect to any one or more
of Phoenix, PNAC, and AmeriConnect, if it determines, in its reasonable
discretion, that there is a material impairment of the prospect of
repayment of all or any portion of the Obligations or a material
impairment of the value or priority of Foothill's security interests in
the Collateral.
(d) Foothill shall have no obligation to make
advances hereunder to the extent they would cause the outstanding
Obligations to exceed Ten Million Dollars ($10,000,000) (the "Maximum
Amount").
(e) Foothill is authorized to make advances
under this Agreement based upon telephonic or other instructions
received from anyone purporting to be an Authorized Officer of Borrower
or, without instructions, if pursuant to Section 6.12. Borrower agrees
to establish and maintain a single designated deposit account for the
purpose of receiving the proceeds of the advances requested by Borrower
and made by Foothill hereunder. Unless otherwise agreed by Foothill and
Borrower, any advance requested by Borrower and made by Foothill
hereunder shall be made to such designated deposit account. Amounts
borrowed pursuant to this Section 2.1 may be repaid and, so long as no
Event of Default has occurred and is continuing, reborrowed at any time
during the term of this Agreement.
(2) Section 2.2(a):
2.2 LETTERS OF CREDIT AND LETTER OF CREDIT GUARANTEES.
(a) Subject to the terms and conditions of this
Agreement, Foothill agrees to issue commercial or standby letters of
credit for the account of Borrower (each, an "L/C") or to issue standby
letters of credit or guarantees of payment (each such letter of credit
or guaranty, an "L/C Guaranty") with respect to commercial or standby
letters of credit issued by another Person for the account of Borrower
in an aggregate face amount not to exceed the lesser of: (i) the
Borrowing Base plus the then applicable Permitted Overadvance Amount
less the amount of outstanding revolving advances pursuant to Section
2.1, and (ii) Seven Hundred Fifty Thousand Dollars ($750,000). Borrower
expressly understands and agrees that Foothill shall have no obligation
to arrange for the issuance by other financial institutions of L/Cs that
are to be the subject of L/C Guarantees and that certain of such L/Cs
may be outstanding on the Closing Date. Each such L/C (including those
that are the subject of L/C Guarantees) shall have an expiry date no
later than sixty (60) days prior to the date on which this Agreement is
scheduled to terminate under Section 3.3 hereof and all such L/Cs and
L/C Guarantees shall be in form and substance acceptable to Foothill in
its sole discretion. Foothill shall not have any obligation to issue
L/Cs or L/C Guarantees to the extent that the face amount of all
outstanding L/Cs and L/C Guarantees, plus the amount of revolving
advances outstanding pursuant to Section 2.1, would exceed the Maximum
Amount. The L/Cs and the L/C Guarantees issued under this Section 2.2
shall be used by Borrower, consistent with this Agreement, for its
general working capital purposes or to support its obligations with
respect to workers' compensation premiums or other similar obligations.
If Foothill is obligated to advance funds under an L/C or L/C Guaranty,
the amount so advanced immediately shall be deemed
4
<PAGE> 5
to be an advance made by Foothill to Borrower pursuant to Section 2.1
and, thereafter, shall bear interest on the terms and conditions
provided in Section 2.5.
(3) Section 2.4:
2.4 OVERADVANCES OR OVERLINE AMOUNTS. If, at any time
or for any reason, the amount of Obligations owed by Borrower to
Foothill pursuant to Sections 2.1 and 2.2 in the aggregate exceeds the
Borrowing Base less (without duplication) any applicable reserves (any
such excess, an "Overadvance") by an amount greater than the then
applicable Permitted Overadvance Amount, Borrower shall immediately pay
to Foothill, in cash, the portion of such Overadvance that exceeds the
then applicable Permitted Overadvance Amount, to be used by Foothill to
repay the Obligations or to be held by Foothill as cash collateral to
secure repayment of L/Cs or L/C Guarantees. If, at any time or for any
reason, the amount of Obligations owed by Borrower to Foothill pursuant
to Sections 2.1 and 2.2 in the aggregate exceeds the the Maximum Amount,
Borrower shall immediately pay to Foothill, in cash, the amount of such
excess, to be used by Foothill to repay the Obligations or to be held by
Foothill as cash collateral to secure repayment of L/Cs or L/C
Guarantees.
(4) Section 2.5(a)&(b):
2.5 INTEREST: RATES, PAYMENTS, AND CALCULATIONS.
(a) Interest Rate. All Obligations, except for
the Bridge Loan and undrawn L/Cs and L/C Guarantees, shall bear
interest, on the average Daily Balance, at a rate equal to the Reference
Rate plus the Applicable Margin. The Bridge Loan shall bear interest at
the rate of 15% per annum.
(b) Default Rate. All Obligations, except for
the Bridge Loan, undrawn L/Cs and L/C Guarantees, shall bear interest,
from and after the occurrence and during the continuance of an Event of
Default, at a rate equal to the Reference Rate plus the Applicable
Margin plus four (4.00) percentage points. From and after the
occurrence and during the continuance of an Event of Default, the Bridge
Loan shall bear interest at the rate of 19% per annum. From and after
the occurrence and during the continuance of an Event of Default, the
fee provided in Section 2.2(d) shall be increased to a fee equal to that
certain percentage per annum equal to the Applicable Margin plus four
(4.00) percentage points times the average Daily Balance of the undrawn
L/Cs and L/C Guarantees that were outstanding during the immediately
preceding month.
(5) Section 2.6:
2.6 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS.
The receipt of any wire transfer of funds, check, or other item of
payment by Foothill (whether from transfers to Foothill by the Lock Box
Bank pursuant to the Lock Box Agreement or otherwise) immediately shall
be applied to provisionally reduce the Obligations, but shall not be
considered a payment on account unless such wire transfer is of
immediately available federal funds and is made to the appropriate
deposit account of Foothill or unless and until such check or other item
of payment is honored when presented for payment. From and after the
Closing Date, Foothill shall be entitled to charge Borrower for three
(3.00) Business Days of `float' at the rate set forth in Section 2.5
(applicable to advances under Section 2.1) on all collections, checks,
wire transfers, or other items of payment that are received by Borrower
or processed through the Lock Box (regardless of whether forwarded by
5
<PAGE> 6
the Lock Box Bank to Foothill, whether owned by Borrower or collected as
agent for another, whether provisionally applied to reduce the
Obligations or otherwise). This across-the-board three (3.00) Business
Day float charge on all Borrower receipts is acknowledged by the parties
to constitute an integral aspect of the pricing of Foothill's facility
to Borrower, and shall apply irrespective of the characterization of
whether receipts are owned by Borrower or Foothill, and irrespective of
the level of Borrower's Obligations to Foothill. Should such check or
item of payment not be honored when presented for payment, then Borrower
shall be deemed not to have made such payment, and interest shall be
recalculated accordingly. Anything to the contrary contained herein
notwithstanding, any wire transfer, check, or other item of payment
received by Foothill after 11:00 a.m. Los Angeles time shall be deemed
to have been received by Foothill as of the opening of business on the
immediately following Business Day.
(6) Section 2.8(e):
(e) Servicing Fee. On the first day of each
month during the term of this Agreement, and thereafter so long as any
Obligations are outstanding, a servicing fee in an amount equal to the
then applicable Servicing Fee Amount.
(7) Section 3.3:
3.3 TERM; AUTOMATIC RENEWAL. This Agreement shall
become effective upon the execution and delivery hereof by Borrower and
Foothill and shall continue in full force and effect for a term ending
on October 6, 2000 (the "Renewal Date") and shall be automatically
renewed for successive one (1) year periods thereafter, unless sooner
terminated pursuant to the terms hereof. Either party may terminate
this Agreement effective on the Renewal Date or on any one (1) year
anniversary of the Renewal Date by giving the other party at least
ninety (90) days prior written notice by registered or certified mail,
return receipt requested. The foregoing notwithstanding, Foothill shall
have the right to terminate its obligations under this Agreement
immediately and without notice upon the occurrence of an Event of
Default.
(8) Section 3.5:
3.5 EARLY TERMINATION BY BORROWER. The provisions of
Section 3.3 that allow termination of this Agreement by Borrower only on
the Renewal Date and certain anniversaries thereof notwithstanding,
Borrower has the option, at any time upon sixty (60) days prior written
notice to Foothill, to terminate this Agreement by paying to Foothill,
in cash, the Obligations (including any contingent reimbursement
obligations of Foothill under any L/Cs or L/C Guarantees), together with
a premium (the "Early Termination Premium") equal to (subject to
adjustment as provided below): (a) during the period following the
Closing Date and through and including October 6, 1996, the greater of
(i) one and three-quarters percent (1.75%) of the Maximum Amount, and
(ii) the total interest and fees (including L/C and L/C Guaranty Fees)
for the immediately preceding six (6) months; (b) during the period
commencing on October 7, 1996, and continuing through and including
March 11, 1997, one and one half percent (1.50%) of the Maximum Amount;
(c) during the period commencing on March 12, 1997, and continuing
through and including December 31, 1997, the greater of (i) five percent
(5.00%) of the Maximum Amount, and (ii) the total interest and fees
(including L/C and L/C Guaranty Fees) for the immediately preceding six
(6) months; (d) during the period commencing on January 1, 1998, and
continuing through and including October 6, 1998, two percent (2.00%) of
the Maximum Amount; and (e) during the period commencing on October 7,
1998, and continuing at all times thereafter, except as otherwise stated
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<PAGE> 7
below, one percent (1.00%) of the Maximum Amount. The foregoing
notwithstanding, (y) no Early Termination Premium shall be payable if
this Agreement is terminated and the Obligations are repaid in full on
the Renewal Date or any subsequent anniversary thereof, if any, to which
the term of this Agreement is extended pursuant to Section 3.3, and (z)
if the termination of this Agreement is in connection with and as the
result of an acquisition of Borrower by another Person, then, in such
circumstance only, the Early Termination Premium shall be reduced by 50%
from what it otherwise would be as set forth above.
d. The following provisions are added to the Agreement
where indicated:
(1) Section 2.8(f):
(f) Overadvance Fee. On the first day of each
month with respect to which the Permitted Overadvance Amount during the
immediately preceding month was greater than zero, an overadvance fee
(in addition to any interest or other amounts otherwise payable under
the Loan Documents) in the dollar amount equal to the sum of the
following three components:
(i) 0.5% times the Permitted Overadvance
Amount applicable during the immediately preceding month; plus
(ii) if an Overadvance of greater than
zero dollars existed at any time during such immediately
preceding month, 0.5% times the Permitted Overadvance Amount
applicable during the immediately preceding month; otherwise,
zero dollars; and plus
(iii) if an Overadvance of greater than
$500,000 existed at any time during such immediately preceding
month, 1.5% times the Permitted Overadvance Amount applicable
during the immediately preceding month; otherwise, zero dollars.
(2) Section 2.9:
2.9 BRIDGE LOAN. On the closing date of the Third
Amendment, Foothill has agreed to make a bridge loan (the "Bridge Loan")
to Borrower in the original principal amount of $2,000,000. The
principal of the Bridge Loan shall be repaid in 8 monthly installments
of principal in the following amounts:
7
<PAGE> 8
<TABLE>
<CAPTION>
================================================================================
DUE DATE INSTALLMENT AMOUNT
<S> <C>
- --------------------------------------------------------------------------------
June 1, 1997 $250,000
- --------------------------------------------------------------------------------
July 1, 1997 $250,000
- --------------------------------------------------------------------------------
August 1, 1997 $250,000
- --------------------------------------------------------------------------------
September 1, 1997 $250,000
- --------------------------------------------------------------------------------
October 1, 1997 $250,000
- --------------------------------------------------------------------------------
November 1, 1997 $250,000
- --------------------------------------------------------------------------------
December 1, 1997 $250,000
- --------------------------------------------------------------------------------
January 1, 1998 $250,000
================================================================================
</TABLE>
The outstanding principal balance and all accrued and unpaid interest
under the Bridge Loan shall be due and payable upon the termination of
this Agreement, whether by its terms, by prepayment, by acceleration, or
otherwise. The unpaid principal balance of the Bridge Loan may be
prepaid in whole or in part without penalty or premium at any time
during the term of this Agreement upon 10 days prior written notice by
Borrower to Foothill, all such prepaid amounts to be applied to the
installments due on the Bridge Loan in the inverse order of their
maturity. All amounts outstanding under the Bridge Loan shall
constitute Obligations.
(3) Section 6.18:
6.18 UPDATED PROJECTIONS AND RESETTING AND ADDITION OF
CERTAIN COVENANTS. On or before March 26, 1997, Borrower shall deliver
to Foothill the Updated Projections, subject to review and acceptance by
Foothill in its sole discretion. The financial covenants set forth in
Section 6.14 shall be re-set by Foothill on or before April 11, 1997, at
reasonable levels determined by Foothill based on the Updated
Projections, with such re-set covenant levels to be communicated in
writing by Foothill to Borrower when so determined, and thereafter
documented by a future amendment hereto which the parties agree to
negotiate and enter into in good faith. In addition, based on the
Updated Projections, Foothill may prescribe additional financial
covenants applicable to Borrower with respect to revenues, gross
margins, net income, and collections, at reasonable levels determined by
Foothill in relation to the Updated Projections, with such covenants to
be communicated in writing by Foothill to Borrower when so determined,
and thereafter documented by a future amendment hereto which the parties
agree to negotiate and enter into in good faith.
(4) Section 6.19:
6.19 HIRING OF CREDIT AND COLLECTION MANAGER. On or
before May 12, 1997, Borrower shall hire, and thereafter retain, a
qualified credit and collection manager acceptable to Foothill in the
reasonable exercise of Foothill's discretion.
2. Representations and Warranties. Borrower hereby
represents and warrants to Foothill that (a) the execution, delivery, and
performance of this Amendment and of the Agreement, as amended by this
Amendment, are within its corporate powers, have been duly authorized by all
necessary
8
<PAGE> 9
corporate action, and are not in contravention of any law, rule, or regulation,
or any order, judgment, decree, writ, injunction, or award of any arbitrator,
court, or governmental authority, or of the terms of its charter or bylaws, or
of any contract or undertaking to which it is a party or by which any of its
properties may be bound or affected, and (b) this Amendment and the Agreement,
as amended by this Amendment, constitute Borrower's legal, valid, and binding
obligation, enforceable against Borrower in accordance with its terms.
3. Conditions Precedent to Amendment. The satisfaction of
each of the following, on or before the Third Amendment Closing Deadline,
unless waived or deferred by Foothill in its sole discretion, shall constitute
conditions precedent to the effectiveness of this Amendment:
a. Payment to Foothill by Borrower in immediately
available funds of a Bridge Loan closing fee in the amount of $40,000.00, which
fee shall be fully earned, non-refundable, due, and payable, upon the execution
and delivery of this Amendment by Foothill and Borrower, and which fee Borrower
hereby authorizes Foothill to charge to Borrower's loan account;
b. Foothill shall have received a certificate from the
Secretary of Phoenix attesting to the incumbency and signatures of authorized
officers of Phoenix and to the resolutions of Phoenix's Board of Directors
authorizing its execution and delivery of this Amendment and the other Loan
Documents to which it is a party and contemplated in this Amendment and the
performance of this Amendment, the Agreement as amended by this Amendment, and
such other Loan Documents, and authorizing specific officers of Phoenix to
execute and deliver the same;
c. Foothill shall have received a certificate from the
Secretary of PNAC attesting to the incumbency and signatures of authorized
officers of PNAC and to the resolutions of PNAC's board of directors or
equivalent governing body authorizing its execution and delivery of the Loan
Documents to which it is a party and contemplated in this Amendment and the
performance of such Loan Documents, and authorizing specific officers of PNAC
to execute and deliver the same;
d. Foothill shall have received a certificate from the
Secretary of AmeriConnect attesting to the incumbency and signatures of
authorized officers of AmeriConnect and to the resolutions of AmeriConnect's
board of directors or equivalent governing body authorizing its execution and
delivery of the Loan Documents to which it is a party and contemplated in this
Amendment and the performance of such Loan Documents, and authorizing specific
officers of AmeriConnect to execute and deliver the same;
e. Foothill shall have received an opinion of counsel
to Borrower in form and substance satisfactory to Foothill in its reasonable
discretion;
f. The representations and warranties in this
Amendment, the Agreement as amended by this Amendment, and the other Loan
Documents shall be true and correct in all respects on and as of the date
hereof, as though made on such date (except to the extent that such
representations and warranties relate solely to an earlier date);
g. Other than the Existing Acknowledged Defaults, no
Event of Default or event which with the giving of notice or passage of time
would constitute an Event of Default shall have occurred and be continuing on
the date hereof, nor shall result from the consummation of the transactions
contemplated herein;
9
<PAGE> 10
h. No injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the consummation of
the transactions contemplated herein shall have been issued and remain in force
by any governmental authority against Borrower or Foothill; and
i. All other documents and legal matters in connection
with the transactions contemplated by this Amendment shall have been delivered
or executed or recorded and shall be in form and substance satisfactory to
Foothill and its counsel.
4. Condition Subsequent. As a condition subsequent to the
initial effectiveness of this Amendment, and in consideration of the additional
credit to Borrower provided for in this Amendment, Borrower shall perform or
cause to be performed the following (the failure by Borrower to so perform or
cause to be performed constituting an Event of Default):
a. On or before April 11, 1997, Borrower shall have
delivered to Foothill the Warrants, or, in lieu thereof, shall have paid to
Foothill a fully-earned non-refundable fee of six hundred thousand dollars
($600,000), which fee shall be due and payable on April 11, 1997, if Foothill
is not then in possession of the Warrants.
5. Effect on Agreement. The Agreement, as amended hereby,
shall be and remain in full force and effect in accordance with its respective
terms and hereby is ratified and confirmed in all respects. The execution,
delivery, and performance of this Amendment shall not operate as a waiver of
or, except as expressly set forth herein, as an amendment, of any right, power,
or remedy of Foothill under the Agreement, as in effect prior to the date
hereof. Borrower ratifies and reaffirms the continuing effectiveness of the
Suretyship Agreement with respect to the Agreement as amended by this Amendment
and the other Loan Documents.
6. Further Assurances. Borrower shall execute and deliver
all agreements, documents, and instruments, in form and substance satisfactory
to Foothill, and take all actions as Foothill may reasonably request from time
to time, to perfect and maintain the perfection and priority of Foothill's
security interests in the Collateral, and to fully consummate the transactions
contemplated under this Amendment and the Agreement, as amended by this
Amendment.
7. Miscellaneous.
a. Upon the effectiveness of this Amendment, each
reference in the Agreement to "this Agreement", "hereunder", "herein", "hereof"
or words of like import referring to the Agreement shall mean and refer to the
Agreement as amended by this Amendment.
b. Upon the effectiveness of this Amendment, each
reference in the Loan Documents to the "Loan Agreement", "thereunder",
"therein", "thereof" or words of like import referring to the Agreement shall
mean and refer to the Agreement as amended by this Amendment.
c. As used in this Amendment, "Third Amendment Closing
Deadline" means March 14, 1997.
d. This Amendment shall be governed by and construed
in accordance with the laws of the State of California.
10
<PAGE> 11
e. This Amendment may be executed in any number of
counterparts, and/or by facsimile (followed promptly by delivery of original
signatures), all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment by signing
any such counterpart.
[balance of page intentionally omitted]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed as of the date first written above.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Catherine Burk
-----------------------------------------
Title: Vice President
-------------------------------------
PHOENIX NETWORK, INC., a Delaware
corporation
By /s/ Jeffrey L. Bailey
-----------------------------------------
Title: CFO
-------------------------------------
PHOENIX NETWORK ACQUISITION CORP., a
Delaware corporation
By /s/ Jeffrey L. Bailey
-----------------------------------------
Title: CFO
-------------------------------------
AMERICONNECT, INC., a Delaware corporation
By /s/ Jeffrey L. Bailey
-----------------------------------------
Title: CFO
-------------------------------------
11
<PAGE> 1
EXHIBIT 10.17
AMENDMENT NO. 1 TO SERVICE AGREEMENT
This Agreement is entered into on October 11, 1996 between US ONE
Communications, Inc. (USOC) and Phoenix Network, Inc. (Phoenix) in order that
USOC compensate Phoenix in connection with engineering, implementation and
testing of the new USOC Network Services under the Communications Services
Agreement dated May 22, 1996 between USOC and Phoenix (as amended to date, the
"Service Agreement"). The parties hereto acknowledge that Phoenix has to date
provided assistance to USOC as a Beta customer in connection with
implementation of the switch network as provided under the Services Agreement.
In recognition of this assistance and of the service difficulties experienced
in the initial phase of the service cutover coincident with the turn up of
Phoenix traffic on the USOC switch in Denver, Colorado, and the continuing
significant expenditure of energy and resources by Phoenix in assisting USOC in
its implementation, engineering and testing of its new service offering in
additional switch sites, USOC agrees to compensate Phoenix with a payment in
the aggregate amount of [ ] payable in 10 equal monthly
installments of [ ] on the 1st of each month retroactive to
August 1, 1996.
In consideration of USOC's Agreement to make such payments, Phoenix agrees to
pay USOC in full for all invoices rendered to date under the Service Agreement
and further agrees to release USOC from any claims for all losses, costs or
expenses of any kind of Phoenix under the Service Agreement, whether actual,
consequential, direct or indirect or otherwise, as a result of USOC's
performance to date. In addition, USOC and Phoenix hereby agree to modify the
Service Agreement to replace the Switch Implementation Schedule attached as
Attachment I thereto with the revised Switch Implementation Schedule attached
to the Agreement.
Barent S. Wagar Wallace M. Hammond
/s/ Barent S. Wagar /s/ Wallace M. Hammond
- -------------------------- ----------------------------
President and COO President and CEO
US ONE Communications, Inc. Phoenix Network, Inc.
<PAGE> 2
US ONE CLASS 4 SWITCH INSTALLATION SCHEDULE
<TABLE>
<CAPTION>
Date Initial Switch Installation
- ------------------------------------ ------------------------------------
<S> <C> <C>
July-1996 Denver
August-1996 --
September-1996 --
October-1996 Chicago
November-1996 --
December-1996 New York City
January-1997 Tampa
February-1997 Los Angeles
March-1997 Boston
April-1997 Dallas & San Francisco
May-1997 Minneapolis & Atlanta
June-1997 Seattle & Washington, D.C.
July-1997 Kansas City & Columbus
August-1997 Philadelphia & Detroit
September-1997 Miami
October-1997 Houston
November-1997 --
December-1997 --
- ------------------------------------ ------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.18
AMENDMENT NO. 2 TO SERVICE AGREEMENT
Amendment No. 2 to Service Agreement (this "Amendment") is entered into
as of this 11th day of October, 1996, between Phoenix Network, Inc., a Delaware
corporation ("Carrier"), and US ONE Communications Corp., a Delaware
corporation ("USOC").
RECITALS
A. Carrier and USOC entered into a Communications Services
Agreement, dated May 22, 1996 (the "Agreement"), regarding the provision of
various services by USOC to Carrier.
B. Carrier and USOC desire to amend the Agreement pursuant to this
Amendment to modify the terms and conditions of the Agreement to more closely
reflect the parties' intentions.
C. Capitalized terms used without definition herein shall have the
meanings assigned to them in the Agreement.
AGREEMENT
Now, therefore, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto agree as follows:
1. Carrier Owned Switches.
1.1 Definition. The definition of Communications Services as set
forth in the Definitions Annex to the Agreement is amended to read:
The term "Communications Services" shall mean any service being provided
by USOC to Carrier at any time pursuant to the terms of the Agreement.
1.2 Termination.
Notwithstanding anything in the Agreement to the contrary, Carrier shall
have the right, at any time upon 30 days prior written notice without penalty,
to: (i) not request any Communications Services in a Switching Service Area
where Carrier currently owns a switch or acquires a switch as a result of the
acquisition of a company in connection with Carrier's acquisition strategy
before USOC deploys a switch in the Switching Service Area, and (ii) not
transfer to a USOC switch any long distance traffic currently originating or
terminating in a switch acquired by Carrier as a result of such a company
acquisition in a Switching Service Area where USOC has previously deployed a
switch in the same Switching Service Area.
<PAGE> 2
2. Local Telephone Service.
The text Section 18.6 of the Agreement is hereby deleted in its entirety
and replaced with the following:
If and when USOC notifies carrier that it is offering local exchange
services (including basic telephone service and enhanced or data services such
as ISDN, Wideband, Broadband, Frame Relay or ATM) in any Service Area, Carrier,
at its option, may elect to officer or resell USOC's local exchange services in
such Service Area under Carrier's private label or otherwise pursuant to the
terms under which USOC is willing to provide such local exchange services to or
through Carrier. In the event Carrier elects to offer or resell USOC's local
exchange services in such Service Area, USOC and Carrier will cooperate to
develop a marketing strategy to market such services to End Users. Nothing in
this Section shall prevent Carrier from entering into any other arrangement or
agreement with respect to the provision by Carrier of local exchange services
offered by any other provider.
3. Miscellaneous.
3. Titles and Subtitles.
The section titles and subtitles used herein are for reference only, and
shall not affect the meaning or interpretation of any provision of this
Amendment.
3.2 Scope of Amendment
This Amendment shall modify and amend the Agreement as set forth herein.
To the extent not modified or amended by this Amendment, the Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment on the date
first above written by their duly authorized representatives.
US ONE COMMUNICATIONS CORP. PHOENIX NETWORK, INC.
("USOC") ("Carrier")
By: /s/ Barent S. Wagar By: /s/ Wallace M. Hammond
----------------------------- --------------------------------
Name: Barent S. Wagar Name: Wallace M. Hammond
------------------------ ---------------------------
Title: President and COO Title: President and CEO
----------------------- --------------------------
<PAGE> 1
EXHIBIT 10.19
AMENDMENT NO. 3
TO SERVICE AGREEMENT
This Amendment No. 3 to Service Agreement (this "Amendment") is entered
into as of the 3rd day of January, 1997, between Phoenix Network, Inc, a
Delaware corporation ("Carrier") and US ONE Communications Corp., a Delaware
corporation ("USOC").
RECITALS
A. Carrier and USOC entered into a Communication Services Agreement,
dated May 22, 1996 (the "Agreement") regarding the provision of various
services by USOC to Carrier.
B. Amendment No. 1 to Service Agreement was entered into by Carrier
and USOC on October 11, 1996, and Amendment No. 2 to Service Agreement was
entered into on October 11, 1996 (collectively, the "Prior Amendments").
C. Carrier and USOC desire to further amend the Agreement pursuant
to this Amendment to modify the terms and conditions of the Agreement to more
closely reflect the parties intentions.
AGREEMENT
<PAGE> 2
Now, therefore, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto agree as follows:
1. Capitalized Terms. Capitalized terms used without definition
herein shall have the meaning assigned to them in the Agreement, as amended.
2. Termination of Communication Services. Notwithstanding anything
in the Agreement and the Prior Amendments to the contrary, if USOC:
a. does not install a switch at any location
within the time frames set forth on the Class 4 Switch Implementation Schedule,
through the first 14 switches, attached as Attachment 1 to Amendment No. 1 to
Service Agreement; or
b. does not complete and offer to Carrier the
requisite products pursuant to a Product Commercially Available schedule to be
provided by USOC by January 15, 1997; or
c. does not meet its obligations pursuant to
the Lata extension schedule to be provided by USOC by January 15, 1997; or
d. does not raise (i) [______________] in debt
or equity capital from the date
-2-
<PAGE> 3
of this Amendment through May 31, 1997, and (ii) a total of [______________] in
debt or equity capital from the date of this Amendment through August 31, 1997;
then Carrier shall have the right to (i) use any alternative provider instead
of USOC for one or more Communications Services in any city in which Carrier
currently has long distance traffic or where Carrier may have long distance
traffic in the future, or (ii) terminate the Agreement upon thirty days written
notice by Carrier to USOC, and in either event without the payment of any
penalty or other sums (except for amounts due and owing under invoices issued
by USOC to Carrier for Communications Services provided by USOC to Carrier
prior to the date of termination of such Communications Services or termination
of the Agreement) by Carrier to USOC for such early termination .
3. Use of Other Providers. Notwithstanding anything in the
Agreement and the Prior Amendments to the contrary, Carrier may use the
Communications Services of other providers in those cities where Carrier
requests in writing that USOC provide switching services and USOC does not
provide such switching services within thirty (30) days of receipt of the
written request from Carrier.
4. Miscellaneous.
e. Titles and Subtitles. The section titles
and subtitles used herein are for
-3-
<PAGE> 4
reference only and shall not effect the meaning or interpretation of any
provision of this Agreement.
f. The Scope of Amendment. This Amendment
shall modify and amend the Agreement and Prior Amendments as set forth herein.
To the extent not modified or amended by this Amendment, the Agreement and the
Prior Amendments shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on
the date first above written by their duly authorized representative.
PHOENIX NETWORK, INC. US ONE COMMUNICATIONS CORP.
By: /s/ Wallace M. Hammond By: /s/ John H. Jacquay
------------------------------ ------------------------------------------
Name: Wallace M. Hammond Name: John H. Jacquay
Title:President and CEO Title:President, Carrier Services Division
-4-
<PAGE> 1
EXHIBIT 10.20
AMENDMENT NO. 4
TO SERVICE AGREEMENT
This Amendment No. 4 to Service Agreement (this "Amendment") is entered
into as of the 30th day of December, 1996, between Phoenix Network, Inc., a
Delaware corporation ("Carrier") and US ONE Communications Corp., a Delaware
corporation ("USOC").
RECITALS
A. Carrier and USOC entered into a Communication Services Agreement,
dated May 22, 1996 (the "Agreement") regarding the provision of various
services by USOC to Carrier.
B. Amendment No. 1 to Service Agreement was entered into by Carrier
and USOC on October 11, 1996, Amendment No. 2 to Service Agreement was entered
into on October 11, 1996 and Amendment No.3 to Service Agreement was entered
into as of December 30, 1996 (hereinafter, the "Prior Amendments").
C. Carrier and USOC desire to amend the Agreement pursuant to this
Amendment to modify the terms and conditions of the Agreement to more closely
reflect the parties intentions.
AGREEMENT
Now, therefore, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto agree as follows:
1. Capitalized Terms. Capitalized terms used without definition
herein shall have the meaning assigned to them in the Agreement, as amended.
<PAGE> 2
2. Switching Service Fee. Notwithstanding anything in the
Agreement and the Prior Amendments to the contrary, USOC hereby agrees that
commencing on January 1, 1997 and continuing for the Term of the Agreement, the
Carrier shall be charged a Switching Service Fee of $.006 per minute for an
amount up to and including Twenty Million minutes per month, which Fee shall be
applicable to all appropriate Switching Minutes pursuant to the terms of the
Agreement, provided that the following conditions are met:
a. Unless Carrier has requested and USOC has approved the
use of any alternate carrier for a certain Service Area, Carrier shall convert
all available originating traffic within thirty (30) days from the date of
Service Area availability; provided, that USOC shall have completed all testing
for each Service Area within seven (7) days before such Service Area's
availability ;
b. Carrier shall Terminate onto USOC the maximum amount of
traffic as is permitted, based upon Carrier's deployment of its IMTs; provided,
that USOC hereby guarantees that the cost incurred by Carrier for any USOC
terminating route shall not exceed the cost for switching services on any other
terminating route provided to Carrier by any alternate provider, pursuant to
the terms of an agreement which Carrier is a party to as of January 10, 1997.
In the event that USOC is unable to match or charge a lower cost to Carrier,
Carrier shall be released from the foregoing traffic carriage requirements for
that certain terminating route; and
c. Carrier shall convert all 800/Dedicated and Calling Card
traffic within sixty (60) days of each Service's respective commercial
availability and completion of successful testing to Carrier's complete
satisfaction.
3. Reversion of Pricing Structure. At such time in any given month
when Carrier shall (i) exceed twenty million minutes or (ii) fail to meet the
conditions set forth in Section 2 of this Amendment, the pricing structure set
forth in this Amendment shall no longer be effective and the provisions
contained in the Agreement with respect to pricing shall again become
effective.
<PAGE> 3
4. Miscellaneous.
a. Titles and Subtitles. The section titles and subtitles
used herein are for reference only and shall not effect the meaning or
interpretation of any provision of this Agreement.
b. The Scope of Amendment. This Amendment shall modify and
amend the Agreement and Prior Amendments as set forth herein. To the extent
not modified or amended by this Amendment, the Agreement and the Prior
Amendments shall remain in full force and effect.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on
the date first above written by their duly authorized representative.
US ONE COMMUNICATIONS CORP. PHOENIX NETWORK, INC.
By: /s/ John H. Jacquay By: /s/ Wallace M. Hammond
-------------------------------- --------------------------------
Name: John H. Jacquay Name: Wallace M. Hammond
Title: President, Carrier Services Title: President and CEO
Division
<PAGE> 1
EXHIBIT 10.21
AMENDMENT NO. 5
TO SERVICE AGREEMENT
This Amendment No. 5 to Service Agreement (this "Amendment") is entered
into as of the 26th day of March, 1997, between Phoenix Network, Inc., a
Delaware corporation ("Carrier") and US ONE Communications Services Corp., a
Delaware corporation ("USOC").
RECITALS
A. Carrier and US ONE Communications Corp., a Delaware corporation
and parent corporation of USOC ("Parent") entered into a Communications
Services Agreement, dated May 22, 1996 (the "Original Agreement") regarding the
provision of various services by Parent to Carrier.
B. With the consent of Carrier, Parent assigned its rights and
obligations under the Original Agreement to USOC on November 9, 1996.
C. Amendment No. 1 to Service Agreement was entered into by Carrier
and Parent on October 11, 1996, Amendment No. 2 to Service Agreement was
entered into by Carrier and Parent on October 11, 1996; Amendment No. 3 to
Service Agreement was entered into on January 3, 1997 and Amendment No. 4 was
entered into on December 30, 1996 (hereinafter, the "Prior Amendments"). (The
Original Agreement, as amended by the Prior Amendments, is referred to herein
as the "Agreement.")
D. Pursuant to this Amendment, Carrier and USOC desire to amend the
Agreement to more closely reflect the parties' intentions.
AGREEMENT
Now, therefore, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto agree as follows:
1. Capitalized Terms. Capitalized terms used without definition
herein shall have the meanings assigned to them in the Agreement.
2. Charges.
a. Postalized Charges. Retroactively effective to January 1,
1997, USOC shall charge Carrier $[ ] per minute for all Eligible
Traffic (as hereinafter defined) and $[ ] per minute for all Carrier
Switched Eligible Traffic (as hereinafter defined). The total monthly
1
<PAGE> 2
charges to Carrier shall be calculated by multiplying the number of Billable
Minutes (as hereinafter defined) of Eligible Traffic and Carrier Switched
Eligible Traffic, respectively, times the applicable rate. Carrier and USOC
agree to revisit the per minute rates set forth in this Section 2.a. on, but no
later than, December 31, 1997, and not less frequently than semi-annually
thereafter from the date of this Amendment, and to reduce (but never increase)
such rates to the same extent and degree that average LEC tariffs for access
charges (originating and terminating) have decreased. As an example of this
computation, if LEC access charge tariffs have decreased by $0.0050 per minute
since the last rate re-evaluation, then, at the next rate re-evaluation, the
per minute rate for Eligible Traffic and the per minute rate for Carrier
Switched Eligible Traffic shall each also be reduced by $0.0050 per minute.
b. Dedicated Services Charges. On behalf of Carrier, USOC
will provision special access service at the DS-1 level and charge Carrier a
monthly recurring charge equal to the LEC tariff rate less [ ]% and a
Carrier Switched Eligible Traffic usage rate of $[ ] per minute for 1+
and 800 interstate and intrastate traffic.
c. Non-Recurring Charges. For network build out on behalf of
Carrier, USOC shall pass through and bill to Carrier any non-recurring charges
billed to USOC by the ILEC for Carrier Identification Code ("CIC") activation,
CIC redirection and trunk installation.
d. Payments to Carrier; Offsets to USOC Charges.
Retroactively effective to January 1, 1997, Carrier shall deduct from the
amounts charged by USOC pursuant to Sections 2(a), 2(b) and 2(c) hereof, and,
to the extent the following items exceed the charges from USOC in any month
hereunder, USOC agrees to promptly pay the excess amount to Carrier of, the
following:
i. All costs incurred by Carrier for termination services
provided by vendor carriers pursuant to Approved Vendor
Contracts (as hereinafter defined) for Eligible Traffic
and Carrier Switched Eligible Traffic;
ii. All costs incurred by Carrier for 800 origination services
provided by vendor carriers pursuant to Approved Vendor
Contracts for Eligible Traffic and Carrier Switched
Eligible Traffic;
iii. All costs incurred by Carrier in securing inter-machine
trunk transmission lines ("IMTs") pursuant to Section 5,
provided that Carrier has used its reasonable efforts to
secure best available pricing for such IMTs; and
iv. Any Vendor Carrier Shortfalls (as hereinafter defined),
provided, however, that as a condition precedent to USOC's
responsibility to Carrier for Vendor Carrier Shortfalls in
any given month, Carrier's Billable Minutes during such
month shall equal or exceed the product of (a) Carrier's
Billable Minutes for January 1997 and (b) the Applicable
Percentage. The Applicable Percentage shall be [ ]%, [
]%, [ ]% and [ ]% during each of the six month periods
2
<PAGE> 3
ending on June 30, 1997, December 31, 1997, June 30, 1998,
and December 31, 1998, respectively. The foregoing
condition precedent shall terminate on December 31, 1998.
e. Network Design Fee. In addition to the foregoing payment
and/or offset obligations, USOC shall pay to Carrier a network design fee of
$[ ], payable in three equal monthly installments of $[ ] each on
each of March 31, April 30 and May 31, 1997.
f. Certain Definitions. As used herein, the following terms
shall have the following meanings:
i. Eligible Traffic shall mean shall mean all of Carrier's 1+
and 800 interstate and intrastate long distance traffic
that is routed by at least one of USOC's long distance
switches, excluding, however, any traffic that is also
routed by a long distance switch owned by Carrier.
ii. Carrier Switched Eligible Traffic shall mean all of
Carrier's 1+ and 800 interstate and intrastate long
distance traffic that is routed by at least one of USOC's
long distance switches, but which is also routed by at
least one long distance switch owned by Carrier.
iii. Billable Minutes shall mean the number of minutes spent by
Carrier's customers on long distance telephone
conversations, measured from the time the person at the
terminating end picks up the telephone to the time the
person at the originating end hangs up the telephone.
iv. Vendor Carrier Shortfalls shall mean the amount by which
Carrier's total monthly minimum dollar usage commitments
to its vendor carriers under Approved Vendor Contracts
exceeds all amounts Carrier has been billed by its vendor
carriers under Approved Vendor Contracts that apply toward
Carrier's monthly minimum dollar usage commitments.
Amounts which Carrier has been billed by its vendor
carriers under Approved Vendor Contracts in any given
month shall be deemed to include all amounts paid by USOC
to Carrier pursuant to Sections 2.d.i., 2.d.ii. and
2.d.iii. on account of services resold to USOC under such
Approved Vendor Contracts, but to exclude any payments
made by Carrier to vendor carriers solely on account of
missed monthly minimum dollar usage commitments.
v. Approved Vendor Contracts shall mean (a) all of Carrier's
vendor carrier contracts entered into on or prior to March
15, 1997 ("Existing Contracts"), (b) any extension of or
successor to an Existing Contract that has an equivalent
or lesser term length, equal or lesser volume commitments,
and
3
<PAGE> 4
pricing and other terms that are at least as favorable as
its predecessor Existing Contract, and (c) any vendor
carrier contract approved by USOC.
3. PIC Management. USOC shall manage the PIC process for Carrier at
no charge to Carrier.
4. Billing Reconciliation and Procedures. USOC shall ensure that
the actual monthly charges submitted to Carrier pursuant to Section 2 are
reconciled with and match the Call Detail Records ("CDRs") for Billable Minutes
of Eligible Traffic and Carrier Switched Eligible Traffic. On the 3rd Monday
of every month, representatives of USOC and Carrier shall meet to agree on the
net charges due from or to Carrier pursuant to Section 2 hereof, and, at the
first such meeting, USOC and Carrier shall reconcile all charges applying
retroactively from the date of this Amendment. Such meetings shall be held at
the offices of USOC and Carrier, on alternating months. In the event of a
dispute as to the amount of any payments or offsets claimed by either party
pursuant to this Amendment, the parties agree to adhere to Section 4.4 of the
Original Agreement regarding billing disputes.
5. Network Services Purchase Arrangement. Carrier agrees to sell
inter-machine trunking services to USOC, subject to availability and required
service intervals. Carrier also agrees that USOC shall have the right to
determine which vendor carrier shall be used by Carrier, pursuant to the
Approved Vendor Contracts, on new routes purchased after the date of this
Amendment by USOC under this Section 5, provided, however, that USOC agrees
that the IMT spans designated on Attachment 1 hereto shall be purchased by the
vendors designated thereon ("CD" denoting Comdisco and "WTG" denoting
LDDS/WorldCom and its affiliates). Carrier shall also resell "off-net" network
termination services to USOC via its Approved Vendor Contracts for Eligible
Traffic and Carrier Switched Eligible Traffic. Notwithstanding anything in
this Amendment or the Agreement to the contrary, USOC agrees that Carrier will
maintain within its discretion one or more contracts with vendor carriers, or
provisions within Approved Vendor Contracts, in order to handle call traffic
other than Eligible Traffic and Carrier Switched Eligible Traffic.
6. Traffic Conversion. Carrier shall convert 100% of its eligible
1+ and 800 interstate and intrastate traffic to Eligible Traffic or Carrier
Switched Eligible Traffic by May 15, 1997, and maintain that percentage
throughout the continued turn-up of USOC's national switching platform, subject
to USOC's capacity and ability to handle such traffic without material service
deficiencies or interruptions. Carrier shall convert at least 90% of its
calling card and international traffic to Eligible Traffic or Carrier Switched
Eligible Traffic by September 15, 1997, subject to Carrier's and USOC's
subsequent agreement on pricing therefor (which Carrier and USOC agree to
negotiate in good faith). USOC hereby represents and warrants that, upon full
deployment of the first fourteen switches listed on Attachment 1 to Amendment
No. 1 to Service Agreement, dated October 11, 1996, and the completion of its
current LATA extension schedule, USOC will be able to accommodate, without
material service deficiencies or interruptions, at least 90% (measured by
minutes) of Carrier's long distance traffic, other than traffic routed by
Carrier's owned switches and originating (a) through Carrier's Feature Group
Ds, or (b) over Carrier's dedicated circuits. USOC
4
<PAGE> 5
and Carrier agree to negotiate in good faith an amendment addressing conversion
of Carrier's Feature Group D and dedicated traffic.
7. Titles and Subtitles. The section titles and subtitles used
herein are for reference only and shall not effect the meaning or
interpretation of any provision of this Amendment.
8. Scope. Except to the extent modified or amended herein, the
Agreement shall remain in full force and effect.
9. Term. The term of this Amendment shall run from the date hereof
through the remaining term of the Agreement, provided, however, that Carrier
shall have the option at any time upon 90 days prior written notice to
terminate this Amendment and return to the unbundled, nonpostalized pricing
arrangement embodied in the Agreement without penalty.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written by their duly authorized representative.
US ONE COMMUNICATIONS CORP. PHOENIX NETWORK, INC.
By: /s/ John H. Jacquay By: /s/ Wallace M. Hammond
-------------------------------- --------------------------------
Name: John H. Jacquay Name: Wallace M. Hammond
Title: President, Network Services Title: President and CEO
5
<PAGE> 1
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
This Employment Agreement is made this 1st day of January, 1996,
between Wallace M. Hammond ("Employee") and Phoenix Network, Inc., a Delaware
corporation ("Employer") and is intended to replace and supersede the
Employment Agreement currently existing between Employer and Employee dated
January 1, 1995.
1. Employment. Employee shall be retained as President and Chief Executive
Officer to perform such specific duties and have such responsibilities as the
Employer's Board of Directors will, from time to time, establish.
2. Term of Employment. Employee's employment in this position shall commence on
Monday, January 1, 1996 and shall continue thereafter for a term of three years
ending December 31, 1998. Upon each annual anniversary of this agreement the
term of this agreement will be automatically extended by one year so as to
continually extend the term of this agreement to include subsequent three year
periods, unless sooner terminated as provided herein.
3. Compensation and Benefits. (a) Upon execution of this agreement Employer
will pay to Employee a Bonus in the amount of $60,000 subject to all
appropriate withholdings or other deductions required by law or by Employer's
established policies.
Beginning January 1, 1996 Employee shall be paid at the rate of $250,000 per
year, beginning January 1, 1997 Employee shall be paid at the rate of $275,000
per year and beginning January 1, 1998 Employee shall be paid at the rate of
$300,000 per year which shall be Employee's compensation through the duration
of this agreement unless otherwise amended as provided for herein. All payments
of salary shall be paid on the regularly scheduled pay dates of the Employer
subject to all appropriate withholdings or other deductions required by law or
by Employer's established policies. Employer may increase Employee's salary at
Employer's sole discretion but shall not reduce such salary below the annual
rates established by this Agreement.
On January 1, 1996 Employee shall receive a stock option grant from Employer of
200,000 options to purchase Phoenix Network, Inc. common stock traded on the
American Stock Exchange subject to the rules and regulations as outlined in the
Employer's 1989 Stock Option Plan, as amended. These options will vest at a
rate of 12,500 options per quarter and will become fully vested on December 31,
2000, unless otherwise accelerated by other conditions as outlined herein or by
a decision of the Board of Directors of Employer. In the event of a merger,
reverse merger, pooling, consolidation, outright sale of the company or any
other event which constitutes a "change of control" of the Employer at any time
during the duration of this agreement Employee shall have the right to
terminate his employment with Employer at will. In the event Employee does
terminate his employment with Employer or if Employer elects to terminate
Employee's employment under paragraph 5(d.) herein, then at that time, all
un-vested options which have previously been granted or will subsequently be
granted, will immediately be granted and will immediately vest upon the closing
date of that merger, reverse merger, pooling, consolidation or sale or upon the
termination of Employee under paragraph 5(d.)
herein.
(d.) Employer agrees to provide to Employee an annual bonus beginning on
January 1, 1996, and on an annual basis thereafter, which shall be calculated
as one percent (1%) of Employer's Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) as reported in the Company's quarterly 10Qs and
annual 10K so long as EBITDA is equal to, or greater than, 70% of budgeted
EBITDA for each calendar year. Budgeted EBITDA, for purposes of this Agreement,
shall mean EBITDA as budgeted in the Employer's 1996 Pro-Forma Income
Statement, a copy of which is attached hereto as Exhibit A. EBITDA budgets for
subsequent years will be attached as subsequent exhibits to this Agreement at
the beginning of each subsequent year.
Said bonus is to be paid on a quarterly basis, subject to all appropriate
withholdings or other deductions required by law or by Employer's established
policies. It is the intent of the Employer that this bonus be equal to 1% of
Employer's EBITDA on an annual basis so long as actual EBITDA is at least 70%
of budgeted EBITDA. Because the bonus will be paid on a quarterly basis there
is the possibility that an actual EBITDA exceeding 70% of budget in one quarter
and an actual EBITDA below 70% in a subsequent quarter could produce a
situation where the Employee has actually been paid a bonus when no bonus was
earned. If this situation occurs it is understood that all bonus payments to
Employee by Employer will be suspended until such time as EBITDA is equal to or
greater than 70% of budgeted EBITDA on a year-to-date basis.
Employer agrees to purchase a "corporate membership" at the country club of
Employee's choice and to designate Employee
<PAGE> 2
as its "representative" with regard to this membership. Employer will pay all
assessments, if any, in connection with this membership, while Employee will
pay all monthly dues and charges incurred in connection with Employee's use of
the club's facilities.
Beginning upon Employee's first day of employment Employee shall have the right
to and be covered by all benefits normally afforded to Employer's full time
Employees. Such benefits may include, but not limited to, Medical, Dental and
Life insurance coverage, Sick and Disability income, 401K Plan, Pension and
Profit Sharing plans, Leave of Absence, personal days and paid holidays.
Employee shall have twenty (20) days of vacation. Employer shall reimburse
Employee for unused days or, at the option of Employee, any unused days may be
carried forward into the next calendar year.
Employer shall reimburse employee for such reasonable out-of-pocket expenses as
Employee may incur for and on behalf of the furtherance of Employer's business
provided that the Employee submits to the Employer satisfactory documentation
or other support for such expenses in accordance with Employer's expense
reimbursement policy.
4. Covenants of Employee. (a.) During the term of this agreement while Employee
is employed by Employer, Employee shall not directly or indirectly engage in
any business, whether as proprietor, partner, joint venturer, employer, agent,
employee, consultant, officer or beneficial or record owner of more than one
percent of the stock of any corporation or association which is competitive to
the business conducted by Employer.
During the term of this agreement or after termination of employment Employee
will not divulge or appropriate to Employee's own use or to the use of others
any trade secrets or confidential information or confidential knowledge
pertaining in any way to the business of Employer.
In the event Employee terminates this agreement by quitting or otherwise
resigning prior to the expiration of the term hereof as set forth in paragraph
5(e.) of this agreement, or if Employee's employment is terminated by Employer
pursuant to paragraph 5(a.) of this agreement, Employee separately agrees,
being fully aware that the performance of this agreement is important to
preserve the present value of the property and business of Employer, that for
12 calendar months following the date of such termination, Employee shall not
directly engage in any business, whether as proprietor, partner, joint
venturer, employer, agent, employee, consultant, officer or beneficial or
record owner of more than one percent of the stock of any corporation or
association which is competitive to the business conducted by Employer. During
such 12 month period, Employee shall not solicit or do business competitive to
the business conducted by Employer.
Employee agrees that the breach by Employee of any of the foregoing covenants
is likely to result in irreparable harm, directly or indirectly, to Employer
and Employee, therefore, consents and agrees that if Employee violates any such
covenants, Employer shall be entitled, among and in addition to any other
rights or remedies available under this agreement or at law or in equity, to
temporary and permanent injunctive relief to prevent Employee from committing
or continuing a breach of such covenant.
It is the desire, intent and agreement of Employee and Employer that the
restrictions placed on Employee by this paragraph 4 be enforced to the fullest
extent permissible under the law and public policy applied by any jurisdiction
in which enforcement is sought. Accordingly, if and to the extent that any
portion of this paragraph 4 shall be adjudicated to be unenforceable, such
portion shall be deemed amended to delete therefrom or to reform the portion
thus adjudicated to be invalid or unenforceable, such deletion or reformation
to apply only with respect to the operation of such portion in the particular
jurisdiction in which such adjudication is made.
5. Termination. (a.) Employer shall have the right to terminate Employee's
employment at any time for cause for any of the following reasons:
(1) Employee shall be convicted by a court of competent and final jurisdiction
of any crime that constitutes a felony in the jurisdiction involved.
(2) Employee shall commit any act of fraud, misappropriation, or embezzlement
against Employer.
(3) Employee shall materially breach this agreement or fail or refuse to
perform any of his material duties as instructed by
2
<PAGE> 3
the Board of Directors or as required by this agreement in any material respect.
In the event Employee is terminated under this agreement for cause the Employer
shall present to Employee, in writing, any and all reasons for this termination
for cause at the time such allegation is raised. Employee shall then have a
period not to exceed thirty (30) to respond to such allegations. Upon receipt
of such response Employer shall have as its option to exercise such termination
of Employee under paragraph 5 (a.) at its sole discretion
In the event Employee's employment is terminated by Employer for cause Employee
shall receive no severance pay.
Employer shall have the right to terminate the services of Employee without
cause.
In the event Employer terminates the Employee's employment without cause,
Employee shall receive as severance pay an amount equal to eighteen (18) months
of Employee's salary and bonus as provided for herein. Said salary will be paid
by Employer to Employee in a lump sum upon termination and said bonus will be
paid quarterly for six consecutive quarters as provided herein. In addition
Employer will pay Employee's relocation expenses from Denver to the location of
Employee's choice. Employer will pay directly to the provider or shall
reimburse Employee for Employee's reasonable relocation expenses based on the
actual amount of such expenses incurred up to a maximum amount of $20,000. for
purposes of this provision, relocation expenses consist of Employee's moving
costs and expenses incidental thereto. Regardless of the actual amount of these
incurred expenses the maximum expense to the Employer for the Employee's
relocation under this provision shall be $20,000.
In the event Employer or Employee, as outlined in 3(c), terminates the
Employee's employment as a result of a merger, reverse merger, pooling,
consolidation, outright sale of the company or any other event which
constitutes a "change of control" Employee shall receive as severance pay any
and all salary which Employee would have received had Employee remained
employed for the duration of the current three year term of this employment
Agreement. this severance pay will be paid by Employer to Employee in a lump
sum immediately upon termination of employment under 3(c.) herein. In addition
Employer will pay Employee's relocation expenses from Denver to the location of
Employee's choice. Employer will pay directly to the provider or shall
reimburse Employee for Employee's reasonable relocation expenses based on the
actual amount of such expenses incurred up to a maximum amount of $20,000. For
purposes of this provision, relocation expenses consist of Employee's moving
costs and expenses incidental thereto. regardless of the actual amount of these
incurred expenses the maximum expense to the Employer for the Employee's
relocation under this provision shall be $20,000.
Employee may terminate this agreement if Employer materially breaches any of
the provisions in this agreement. If Employee shall terminate this agreement as
provided in this paragraph 5(g.) then, provided that Employee is not materially
at fault, Employee shall not be liable to Employer for any damages as a result
thereof and shall not be bound by the provisions of paragraph 4(c.) of this
agreement. Additionally, Employee shall receive as severance pay an amount
equal to eighteen (18) months of Employee's salary and bonus as provided for
herein. Said salary will be paid by Employer to Employee in a lump sum upon
termination and said bonus will be paid quarterly for six consecutive quarters
as proved herein. In addition Employer will pay Employee's relocation expenses
from San Francisco to the location of Employee's choice. Employer will pay
directly to the provider or shall reimburse Employee for Employee's reasonable
relocation expenses based on the actual amount of such expenses incurred up to
a maximum amount of $20,000. for purposes of this provision, relocation
expenses consist of Employee's moving costs and expenses incidental thereto.
Regardless of the actual amount of these incurred expenses the maximum expense
to the Employer for the Employee's relocation under this provision shall be
$20,000.
6. Arbitration. Any controversy, claim or dispute arising out of or relating to
any paragraph or clause of this agreement shall be settled by arbitration in
San Francisco, California in accordance with the rules then in effect of the
American Arbitration Association and judgment upon the award or decision
rendered will be entered in any court having jurisdiction thereon.
7. Notices. Any notice, request or other communication to be given by any party
to this agreement shall be in writing and be sent by certified mail, postage
prepaid, addressed to the parties as follows:
3
<PAGE> 4
If to Employer: C/O Phoenix Network
1687 Cole Blvd.
Golden, CO 80401
If to Employee: C/O Phoenix Network, Inc.
1687 Cole Blvd.
Golden, CO 80401
or mailed to such other address as the parties respectively may designate by
notice given in a like manner and any such notice, request or other
communication shall be deemed to have been given when mailed as described
above.
8. Waiver of Breach. The waiver by Employee or Employer of any breach of any
provision of this agreement by Employer or Employee respectively shall not
operate or be construed as a waiver by Employee or Employer of any subsequent
breach by Employer or Employee respectively.
9. Entire Agreement. All prior negotiation and agreements between the parties
to this agreement with respect to the matters herein contained are superseded
by this agreement and there are no representations, warranties, understandings
or agreements other than those expressly set forth in this agreement.
10. Amendment. This agreement may be amended only by written instrument signed
by all parties hereto.
11. Governing Law. This agreement shall be governed by the laws of the state of
California without giving effect to the choice of law principles.
12. Partial Invalidity. The invalidity or unenforceability of any provision in
this agreement shall in no way affect the validity or enforceability of any
other provision.
IN WITNESS THEREOF, the parties have executed this agreement on the
date above set forth.
PHOENIX NETWORK, INC. (Employer)
BY: /s/ Thomas H. Bell
------------------------------------
Thomas H. Bell
Chairman, Compensation Committee
/s/ Wallace M. Hammond
-----------------------------------
Wallace M. Hammond
Employee
4
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- -----------------------------
<S> <C>
Phoenix Telcom, Inc. California
Phoenix Network, Inc. of New Hampshire New Hampshire
Phoenix Merger Corp. Delaware
Phoenix Network Acquisition Corp. Delaware
Americonnect, Inc. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Phoenix Network, Inc.
We have issued our reports dated March 12, 1997, accompanying the consolidated
financial statements and schedule included in the annual report of Phoenix
Network, Inc. on Form 10-K for the three years in the period ended December 31,
1996. We hereby consent to the use of our name as it appears under the caption
"Selected Financial Data" and to the incorporation by reference of said reports
in the Registration Statements of Phoenix Network, Inc. on Form S-8 (File No.
33-35844 effective July 12, 1990), Form S-3, as amended (File No. 33-70672
effective February 25, 1994), and Form S-3, as amended (File No. 333-20923
effective February 12, 1997).
GRANT THORNTON LLP
/s/ GRANT THORNTON LLP
Denver, Colorado
March 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,548,061
<SECURITIES> 0
<RECEIVABLES> 18,020,659
<ALLOWANCES> 3,600,830
<INVENTORY> 0
<CURRENT-ASSETS> 17,624,101
<PP&E> 8,018,472
<DEPRECIATION> 2,495,701
<TOTAL-ASSETS> 45,794,183
<CURRENT-LIABILITIES> 25,409,949
<BONDS> 0
0
546
<COMMON> 25,851
<OTHER-SE> 18,145,325
<TOTAL-LIABILITY-AND-EQUITY> 45,794,183
<SALES> 0
<TOTAL-REVENUES> 99,307,277
<CGS> 0
<TOTAL-COSTS> 73,438,757
<OTHER-EXPENSES> 35,013,241
<LOSS-PROVISION> 3,147,077
<INTEREST-EXPENSE> 625,817
<INCOME-PRETAX> (12,843,962)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,843,962)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> 0
</TABLE>
