<PAGE>
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, 1997
-------------------------------------------------------
or
--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- -------------------------------------------------------------------
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
----------------------------------------------------------------------
COMMISSION FILE NO. 0-17909
---------------------------
Phoenix Network, Inc.
---------------------
(Exact Name of registrant as specified in its charter)
------------------------------------------------------
Delaware 84-0881154
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
- ------------------------------- ----------------
incorporation or organization) Identification No.)
------------------------------ -------------------
13952 Denver West Parkway, Building 53, Golden, Colorado 80401
--------------------------------------------------------------
(Address of principal executive offices)
----------------------------------------
Registrant's telephone number, including area code: (303) 215-5500
- ------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
- -----------------------------------------------------------
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
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 2, 1998, the aggregate market value of the voting stock held by
nonaffiliates of the Registrant was $19,967,556 (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 35,898,958 at March 2, 1998.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II incorporate certain information by reference from the Proxy
Statement/Prospectus included as part of the Registration Statement on Form S-4
of Qwest Communications International Inc. declared effective on February 12,
1998 (File No. 333-46145) (the "Proxy Statement/Prospectus").
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" included herein and in the section entitled "Risk
Factors" included within the Proxy Statement/Prospectus incorporated by
reference herein.
PART I
ITEM 1. Business
GENERAL
Phoenix Network, Inc., together with its subsidiaries ("Phoenix" or the
"Company") is a publicly-owned interexchange carrier 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 Corporation ("AT&T"), MCI Communications
Corporation ("MCI") and Sprint Communications, Inc. ("Sprint"). Moreover,
Phoenix 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 and customized management reports.
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, new products and services,
enhanced marketing capabilities and provided technical and network
infrastructure. See "--Acquisitions."
RECENT DEVELOPMENTS
On January 6, 1998, Phoenix, Qwest Communications International Inc.
("Qwest") and Qwest 1997-5 Acquisition Corp. ("Qwest Subsidiary") entered into a
definitive Agreement and Plan of Merger dated as of December 31, 1997. On
January 29, 1998, the parties amended and restated such Agreement and Plan of
Merger in order to (i) delete certain references to the shares of Series I
Convertible Preferred Stock, par value $.001 per share, of Phoenix, all of which
had been converted into shares of common stock, par value $.001 per share, of
Phoenix ("Phoenix Common Stock"), pursuant to their terms, and certain
requirements relating thereto, (ii) reflect the two-for-one stock split
announced on January 20, 1998 by Qwest's Board of Directors, payable on February
24, 1998 as a dividend to the holders of record of common stock, par value $.01
per share, of Qwest, on February 2, 1998 and (iii) clarify the terms of the
Merger Consideration (as defined in the Merger Agreement). On February 10, 1998,
the parties further amended and restated such Agreement and Plan of Merger in
its entirety pursuant to the Amended and Restated Agreement and Plan of Merger
dated as of December 31, 1997 (the "Merger Agreement"), to further clarify the
terms of the Merger Consideration and to add certain covenants and closing
conditions relating to dissenting stockholders of the Company.
The Merger Agreement provides for a merger (the "Merger") of Qwest
Subsidiary with and into the Company with the Company being the surviving
corporation. The Merger will result in the Company becoming a wholly-owned
subsidiary of Qwest at the time that the Merger becomes effective under
applicable laws. A copy of the Merger
2
<PAGE>
Agreement has been filed with the Commission by Qwest as Exhibit 2 to the
Registration Statement on Form S-4 of Qwest declared effective February 12, 1998
(File No. 333-46145) and included as Exhibit A to the Proxy Statement/Prospectus
included as part of such Registration Statement and is hereby incorporated by
reference herein.
COMPANY STRATEGY
Phoenix's objective is to grow revenue and cash flow by being a leading
provider of telecommunications services. Phoenix's strategy for achieving this
goal is to: (i) provide customers a full range of telecommunications products
and services and (ii) consummate a business combination transaction with a
company operating its own long distance network and loading such network with
Phoenix's long distance traffic.
Phoenix seeks to provide a full range of telecommunications products and
services. As competition increases in the telecommunications industry, Phoenix
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. See
"--Products and Services."
ACQUISITIONS
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, new products and
services, enhanced marketing capabilities and/or provided technical and network
infrastructure:
<TABLE>
<CAPTION>
Approximate
MONTHLY APPROXIMATE
ACQUISITION REVENUE PURCHASE FORM OF TYPE OF
ACQUISITION Date (000s)(1) Price (000s) Consideration Acquisition
----------- ------------- --------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
AMERICOM..................................... July 1995 $ 30 $ 98 Cash Customer base
Bright Telecom, L.P.......................... August 1995 $ 50 $ 356 Cash Company
Interstate Savings, Inc...................... August 1995 $ 367 $ 1,450 Cash Customer base
Tele-Trend Communications, LLC............... August 1995 $ 725 $ 4,430 Cash Company
Education Communications Systems, Inc........ December 1995 $ 175 $ 525 Cash Customer base
Automated Communications, Inc................ January 1996 $1,917 $17,522 Cash, common Company
stock and note
King Communications.......................... January 1996 $ 54 $ 203 Cash Customer base
Baldcor Capital Group........................ January 1996 $ 28 $ 119 Cash Customer base
Connections Communications Source............ March 1996 $ 20 $ 36 Cash Customer base
AmeriConnect, Inc............................ October 1996 $1,442 $12,820(2) Common stock Company
</TABLE>
(1) Monthly revenue for first month's billing following the acquisition.
(2) Represents estimated fair market value, as of the closing date of the
acquisition, of Phoenix Common Stock issued in connection with this
transaction, which was accounted for as a pooling of interests.
OPERATIONS
Phoenix's strategy is to reduce its line costs by either moving traffic to
its lowest cost wholesale provider or placing the traffic on one of its three
switches. Through a combination of use of its three switches and agreements with
vendor carriers, Phoenix 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. Phoenix carries its customers traffic in three ways: (1)
complete switchless resale which entails entirely using the network of another
carrier, (2) switch-based resale which entails using one of its three switches
to originate or terminate the call while using another carrier to provide the
remaining transport of the call and (3) carrier service which entails
originating, transporting and terminating the call using Phoenix's switches and
leased inter-machine trunks which connect the switches. Phoenix chooses the
type of transport based on availability and cost.
3
<PAGE>
PRODUCTS AND SERVICES
Phoenix 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 and debit cards. Phoenix also provides customized management
reports to help its customers better understand and manage their
telecommunications costs. In addition, Phoenix's business strategy includes
opportunistically adding additional telecommunications products and services,
such as local service and cellular service.
Phoenix's pricing structure for its products and services is established on
the basis of cost and competition. Phoenix believes that its customers generally
select Phoenix because it offers lower cost long distance transmission than
larger interexchange carriers, such as AT&T, MCI and Sprint, while providing
more attentive customer service. Phoenix offers a variety of rate plans that it
believes meet the needs of its customers. Under Phoenix'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, 1997, Phoenix's customer base was comprised of over 40,000
customers, consisting primarily of small and medium-size business customers and,
to a much lesser extent, residential customers. Phoenix targets its marketing
efforts primarily to business customers spending $10,000 or less per month on
long distance services. For the year ended December 31, 1997, Phoenix's 20
largest customers accounted for less than 10% of revenue and no one customer
accounted for more than 2% of revenue.
Phoenix is presently serving customers in 49 states. Through its
international call-back service, Phoenix serves approximately 1,000 customers in
various countries worldwide.
MARKETING AND SALES
Overview. Phoenix's marketing and sales efforts are designed to
differentiate Phoenix from its competitors through simple low-cost pricing,
customization of products and services and person-to-person customer service.
Phoenix'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, Phoenix attempts to price its long distance service below the
basic rates of AT&T, MCI and Sprint.
Phoenix 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. Phoenix also highlights the
high level of regular personal contact in its approach to customer service,
including a three to five person team of customer service representatives that
is assigned to each business customer throughout its relationship with Phoenix.
Phoenix 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 most
services provided by Phoenix to a customer on a single bill.
Under Phoenix's "clear billing" program, most of its charges for "1 plus"
calls to new customers are based upon six-second increments and the applicable
per-minute rate charge. Phoenix 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 Phoenix's most recent rate plans, per
call charges are calculated out to four decimal places while many of Phoenix'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
4
<PAGE>
business customers with a high volume of short calls, and Phoenix's billing
method is thus presented to potential customers as a cost-saving feature.
Phoenix views its clear billing policies as a competitive advantage when
compared to the billing practices of certain of its competitors.
Phoenix conducts its marketing efforts through a focused program that
combines direct sales offices located in selected metropolitan areas with a
network of master sales agents and independent distributors, and a group that
focuses on larger volume wholesale and retail customers ("National Accounts").
Phoenix believes that utilizing a staff of dedicated sales employees promotes
lower turnover, better training and more consistency in presenting Phoenix's
image to the marketplace. At the same time, its network of agents and
distributors serves to extend Phoenix's marketing reach and coverage efficiently
and economically.
For the year ended December 31, 1997, Phoenix's direct sales, independent
distributors and National Accounts contributed approximately 51%, 13% and 36%,
respectively, of the total number of new customers.
Direct Sales Offices. Phoenix currently operates 2 sales offices located
in Minneapolis and Tampa. At December 31, 1997, Phoenix employed 15 direct sales
representatives, 2 sales managers that support, train and assist the direct
sales representatives and 2 supervisory and administrative personnel in its
sales offices.
Distribution Network. Phoenix'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. Phoenix 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 Phoenix has approximately 50
standard distributor relationships that occasionally produce sales.
National Accounts. National Accounts consists of 4 employees who solicit
large, nationwide organizations to purchase Phoenix's products and services.
Typically products are offered to those organization at lower prices and Phoenix
provides expanded customer service and sales support in return for higher levels
of business.
CUSTOMER SERVICE
Phoenix places a strong emphasis on customer service and believes that
frequent contact with customers is a significant factor in customer retention.
Phoenix 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
Phoenix's headquarters and houses all of Phoenix's customer service
representatives. Phoenix believes that its new Center further enhances its
ability to serve its customers.
Customer service representatives are available from 6:00 a.m. to 6:00 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. To
assess satisfaction with the services and products being provided by Phoenix,
customer service representatives call existing business customers on a routine
basis.
Phoenix's customer service department is organized into three to five
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. Phoenix employed 27 customer service
representatives as of December 31, 1997.
EMPLOYEES
As of December 31, 1997, Phoenix had approximately 138 full-time employees.
Of the full-time employees, 24 are engaged in sales and marketing, 27 in
customer service, and the remainder in management, development, finance and
administrative capacities.
5
<PAGE>
MCI AND SPRINT COMMUNICATIONS, L.P. CONTRACT ISSUES
MCI. The Carrier Agreement by and between MCI and Phoenix dated March
1996 (the "MCI Agreement") requires that Phoenix place long distance traffic on
MCI's long distance network having a minimum "postalized" (as defined in the MCI
Agreement) value of $900,000 per year during the two year term beginning on
January 1, 1996 and ending on December 31, 1997. During the first year of the
term of the MCI Agreement, Phoenix did not place long distance traffic with a
postalized value of $900,000 on MCI's long distance network. However, Phoenix
was not invoiced for any shortfall amount for that year. During the second year
of the term of the MCI Agreement, Phoenix did not place long distance traffic
with a postalized value of $900,000 on MCI's long distance network. In December
1997, an MCI representative informed Phoenix that a shortfall had occurred for
the second year of the MCI Agreement. The Company has estimated the shortfall
to be approximately $420,000 (the "MCI Shortfall Amount"). As of March 2, 1998,
MCI had not invoiced Phoenix for any portion of the MCI Shortfall Amount and
Phoenix had not received any written or verbal notice from MCI of its intentions
with respect to the MCI Shortfall Amount. Phoenix management has contacted
representatives of MCI and is in the process of attempting to negotiate a
settlement and elimination or reduction of the MCI Shortfall Amount.
Sprint Communications, L.P. The Resale Solutions Switched Services
Agreement by and between Sprint Communications, L.P. ("Sprint Communications")
and Phoenix dated December 1996 (the "Sprint Communications Agreement") requires
that Phoenix pay to Sprint Communications minimum usage fees of $20.0 million
during the two year term beginning October 1, 1996 and ending on September 30,
1998, of which a minimum of $12.0 million must be paid in the first year of the
term. During the first year of the term of the Sprint Communications Agreement,
Phoenix placed long distance traffic having a value of approximately $10.725
million on Sprint Communications's long distance network resulting in a
shortfall amount of approximately $1.275 million (the "Sprint Communications
Shortfall Amount" and together with the MCI Shortfall Amount, the "Shortfall
Amounts") for the first year of the Sprint Communications Agreement. In November
1997 Sprint Communications invoiced Phoenix for the Sprint Communications
Shortfall Amount. Pursuant to the terms of the Sprint Communications Agreement,
Phoenix cannot incur any further shortfall amounts until September 30, 1998. In
addition, if Phoenix places long distance traffic having a value of $20.0
million on Sprint Communications long distance network during the full two year
term of the Sprint Communications Agreement (which term ends on September 30,
1998) the Sprint Communications Shortfall Amount will be eliminated. Phoenix
presently is able, and intends, to place sufficient long distance traffic on the
Sprint Communications long distance network in order to eliminate the Sprint
Communications Shortfall Amount prior to the end of the term of the Sprint
Communications Agreement.
While Phoenix management is in negotiations with each of Sprint
Communications and MCI with respect to the elimination or reduction of the
Shortfall Amounts, there can be no assurance that the Shortfall Amounts will in
fact be eliminated or reduced. In addition, pursuant to the Merger Agreement,
Phoenix will require Qwest's consent prior to entering into any agreement
relating to the Shortfall Amounts.
PHOENIX CREDIT FACILITY
In September 1995, Phoenix renewed its line of credit facility with
Foothill Capital Corporation (the "Phoenix Credit Facility") to make available
to Phoenix a line of credit of up to $10,000,000. Phoenix 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 amended term of the Phoenix Credit Facility is
five (5) years, expiring October 2000, with automatic renewal options. There are
penalties for early termination by Phoenix. Borrowings bear interest at 1.75%
over the "reference rate," as defined in the Phoenix Credit Facility.
The loan is collateralized by Phoenix's accounts receivable, equipment,
general intangibles and other personal property assets. Among other provisions,
Phoenix must maintain certain minimum financial covenants, is prohibited from
paying dividends without the approval of Foothill Capital Corporation, and is
subject to limits on capital expenditures.
On March 12, 1997, the Phoenix Credit Facility was amended to provide for a
$2,000,000 bridge loan with the principal amount to be paid in eight (8) equal
monthly installments between July 1, 1997 and January 1, 1998. Phoenix made
installment payments of $250,000 on the principal amount of the bridge loan
during each of June, July and August, 1997. On September 1, 1997, the parties
entered into an amendment to provide for a temporary moratorium on payments in
respect of the bridge loan with a final payment of all outstanding principal and
accrued and unpaid
6
<PAGE>
interest being due on January 9, 1998. On December 12, 1997, the Phoenix Credit
Facility was amended to provide for an additional bridge loan of $1,825,000 and
the retention of an over-advance of $300,000. On December 31, 1997, the Phoenix
Credit Facility was further amended to provide that Foothill Capital Corporation
may, in its sole discretion, lend Phoenix up to $1.25 million, to be treated
either as an increase to the aggregate principal amount of $3.075 million (the
"Bridge Loan Amount") previously made as bridge loans to Phoenix or as an over-
advance, which must be repaid on the earliest to occur of (a) April 30, 1998,
(b) the effective time of the Merger (the "Effective Time") and (c) termination
of the Phoenix Credit Facility. On February 2, 1998, the Phoenix Credit Facility
was amended to provide for an additional over-advance of $500,000 and to reduce
the amount that Foothill Capital Corporation may lend Phoenix from $1.25 million
to $750,000.
On January 16, 1998, Phoenix failed to make a scheduled payment under the
long term note (the "Van Essen Note") in the principal amount of $1.3 million
held by Judy Van Essen Kenyon ("Van Essen") and is currently in default thereon.
On January 17, 1998, Phoenix received a notice from Van Essen declaring a
default under the Van Essen Note and notifying Phoenix that if the scheduled
payment is not received by February 2, 1998, the entire unpaid principal balance
of the Van Essen Note will become due and payable and that Van Essen will pursue
all remedies available to her. Phoenix has not made the scheduled payment and
currently does not have sufficient cash to make the scheduled payment. Foothill
Capital Corporation has waived the resulting cross-default in the Phoenix Credit
Facility.
From time to time Phoenix has been in violation of certain of its covenants
in the Phoenix Credit Facility. Phoenix has received waivers of its violations
of these covenants so long as it continues to meet the continuing requirements
of the Phoenix Credit Facility. Such requirements include (a) the execution of
the Merger Agreement by January 8, 1998; (b) the filing with the Commission of a
preliminary proxy statement with respect to the Merger Agreement by January 31,
1998; (c) the prompt response to any comments the Commission might have with
respect to such preliminary proxy statement; (d) the registration statement
filed by Qwest with the Commission with respect to the offering of the
securities of Qwest in connection with the Merger being declared effective by
the Commission by April 30, 1998; (e) the filing with the Commission of
Phoenix's Annual Report on Form 10-K for the year ended December 31, 1997 by
March 31, 1998; (f) the approval of the Merger Agreement and Merger by the
holders of a majority of the shares of Phoenix Common Stock by April 30, 1998;
and (g) the consummation of the Merger by April 30, 1998. A failure by Phoenix
to meet any of such requirements would constitute an event of default under the
Phoenix Credit Facility. In the future, should Phoenix violate, or have a
continuing violation of, any of the covenants constituting an event of default
under the Phoenix Credit Facility, there can be no assurance that it will
receive a waiver of such violation. Under the terms of the Phoenix Credit
Facility, upon the occurrence of an event of default, the lender may, among
other things, declare all amounts outstanding under the Phoenix Credit Facility
immediately due and payable, cease advancing money or extending credit to
Phoenix and/or during the continuance of an event of default, increase the
interest rate on amounts outstanding under the Phoenix Credit Facility.
As of March 2, 1998, $4,886,576 was outstanding under the line of credit
(including over-advances of $800,000, in the aggregate) provided by the Phoenix
Credit Facility and the interest rate was 10.25%. The average daily outstanding
borrowing for the year ended December 31, 1997 was $4,092,859. The highest
month-end balance outstanding for the year ended December 31, 1997 was
$5,621,926. As of March 2, 1998, there was approximately $2.3 million available
to Phoenix under the Phoenix Credit Facility, however, the amount available
varies greatly based upon the timing of (i) payments by Phoenix to its vendors,
(ii) collections by Phoenix from customers and (iii) monthly invoicing of
Phoenix's customers.
As of March 2, 1998, Phoenix estimated that it will require financing
between $7 million and $10 million in order to repay the Bridge Loan Amount and
over-advances under the Phoenix Credit Facility and fund operating losses,
working capital requirements and capital expenditures during the remainder of
1998. This amount is in addition to funds provided by operations and funding
available, if any, under the Phoenix Credit Facility. The exact amount and
timing of these working capital requirements and Phoenix's ability to continue
as a going concern will be determined by numerous factors, including (i) the
revenue level of, and gross margin on, sales; (ii) the outcome of outstanding
contingencies and disputes, including the LDDS Litigation and other pending
lawsuits; (iii) payment terms achieved
7
<PAGE>
by Phoenix; (iv) Phoenix's ability to manage selling, general and administrative
expenses and (v) the timing of capital expenditures.
If the Merger is not concluded, there can be no assurance that Phoenix will
be able to obtain additional equity or debt financing on terms that Phoenix will
find acceptable. Any additional equity or debt financing may involve substantial
dilution to the interests of Phoenix Stockholders. If Phoenix is unable to
obtain sufficient funds to satisfy its cash requirements, it will be forced to
curtail operations, dispose of assets, seek extended payment terms from its
vendors or seek protection under federal bankruptcy laws. There can be no
assurance that Phoenix will be able to obtain additional working capital, reduce
expenses or successfully complete other steps necessary to continue as a going
concern. See "ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources."
COMPETITION
The telecommunications services industry is highly competitive and is
significantly influenced by the marketing and pricing decisions of the larger
industry participants. It is characterized by low barriers to entry (e.g., the
major facilities-based carriers' bulk rate tariffs are available to a wide range
of potential market entrants), intense competition for customers and high
customer churn rates. Competition on the basis of price, service offerings, and
customer service is expected to increase in the future.
Furthermore, the Telecommunications Act of 1996 (the "Telecommunications
Act") can be expected to increase competition in the domestic long distance
market as the Regional Bell Operating Companies ("RBOCs") begin providing both
in-region and out-of-region long distance service. The RBOCs may build their own
national networks, resell telecommunications services of others, lease
facilities from others or acquire smaller domestic long distance service
providers. To the extent that the RBOCs enter the domestic long distance market
by acquiring other long distance providers, the domestic long distance service
industry may consolidate.
Certain of Phoenix's competitors are significantly larger, have
substantially greater financial, technical and marketing resources and larger
networks than Phoenix, control transmission lines and have long-standing
relationships with Phoenix's target customers. Phoenix competes with the same
facilities-based carriers from whom Phoenix procures bulk-rate services. Certain
of Phoenix's competitors are able to provide services comparable to or more
extensive than Phoenix's at rates competitive with Phoenix's rates.
Additionally, Phoenix's strategy of partnering with a company that controls a
network can be and has been replicated by some of its competitors.
Phoenix competes with the principal long distance carriers, AT&T, MCI and
Sprint as well as other major providers of long distance services, including
Frontier Communications ("Frontier"), LCI International, Inc. ("LCI") and
WorldCom, Inc. ("WorldCom"). Moreover, as a result of Congress' enactment of the
Telecommunications Act, the nation's largest local telephone companies (i.e.,
the RBOCs) and GTE Corporation and its affiliates ("GTE"), energy utilities,
cable television companies, competitive local exchange carriers ("CLECs"), and
other entities will also be allowed to provide long distance service in the near
future subject to various regulatory requirements and safeguards. An increase in
such competition could have a material adverse effect on Phoenix's business,
financial condition and results of operations, including higher customer
attrition.
There can be no assurance that Phoenix will be able to compete successfully
in the future in the event that the Merger is not completed. Phoenix intends to
compete in the long distance market and in the local market on the basis of
price, service offerings and customer service. Phoenix's ability to compete on
the basis of price is dependent on (i) its ability to consummate a business
combination transaction with a company operating its own long distance network
and loading such network with Phoenix's long distance traffic and (ii) secure
volume-discount pricing from vendor carriers. The same volume-discount pricing
that Phoenix utilizes is available to current and potential competitors, and
current and potential competitors could lease or build networks in order to
lower line costs. Phoenix does not have proprietary contractual arrangements in
this regard. As a result, there are no substantial barriers to the entry of
additional
8
<PAGE>
competitors into the field. Furthermore, to the extent such competitors acquire
or develop facilities-based long distance, such competitors may be able to offer
rates as low as or lower than those available from Phoenix.
Phoenix's competitors may reduce rates or offer incentives to existing and
potential customers of Phoenix, whether caused by general competitive pressures
or the entry of the RBOC's, GTE and other Local Exchange Carriers ("LECs") into
the long distance market. Phoenix has historically attracted customers by
pricing its services at a discount to the basic "1 plus" rates offered by AT&T,
MCI and Sprint. These and other large long distance providers are offering an
increasing number of flat rate and other rate plans in addition to basic
service, and these plans are likely to result in a reduction in the number of
long distance customers using basic "1 plus" rates. Because Phoenix believes
that to maintain its competitive position it must be able to reduce its prices
in order to maintain its relative price position in the market, a decrease in
the rates charged by others for long distance services could have a material
adverse effect on Phoenix's business, results of operations and financial
condition.
In addition, in certain instances LECs have been afforded a degree of
pricing flexibility in differentiating among markets and carriers in setting
access charges and other rates in areas where adequate competition has emerged.
As LECs become free to set rates and to provide discounts to high-volume
customers, the ability of competitors that are substantially larger than Phoenix
to obtain volume discounts for access and termination charges could adversely
affect Phoenix by reducing the operating costs of its larger competitors
relative to those of Phoenix. In particular, it is expected that the largest
players in the long distance market, such as AT&T, MCI, Sprint and WorldCom will
be able to guarantee substantially larger volumes to LECs than will Phoenix. As
deregulation of the local exchange market occurs, LECs may be willing to grant
large interexchange carriers significant discounts in return for guarantees of
volume. There can be no assurance that Phoenix will be able to obtain similar
discounts.
GOVERNMENT REGULATION
The terms and conditions under which Phoenix provides telecommunications
products and services are subject to government regulation. Federal laws and
Federal Communications Commission ("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 Regulation. Phoenix is classified by the FCC as a non-dominant
carrier, and therefore is subject to significantly reduced federal regulation.
After the 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 Phoenix'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 Phoenix 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 Phoenix 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 Phoenix, 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 Telecommunications Act
grants explicit authority to
9
<PAGE>
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 29, 1996, the FCC exercised this authority and
released an order which, among other things, requires nondominant interexchange
carriers 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. However, on February 19, 1997, the United States
Court of Appeals for the District of Columbia Circuit stayed the FCC's order
pending further expedited judicial review or FCC reconsideration or both. In
August 1997, the FCC issued an order on reconsideration in which it affirmed its
decision to impose complete or mandatory detariffing, although it decided to
allow optional or permissive tariffing in certain limited circumstances
(including for interstate, domestic, interexchange dial-around services, which
end users access by dialing a carrier's 10XXX access code). Petitions for
further reconsideration of this order are pending, and this order also remains
subject to the Court of Appeals' stay pending further judicial review and any
appeals of the order on reconsideration. Phoenix cannot predict the ultimate
outcome of these or other proceedings on its service offerings or operations.
The FCC imposes only minimal reporting requirements on non-dominant
resellers, although Phoenix 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 whose annual
operating revenue exceed $100 million. Phoenix 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.
Phoenix currently has two tariffs on file with the FCC, one covering its
domestic interstate services and one covering international services. As an
international non-dominant carrier, Phoenix 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 Telecommunications Act authorizes the RBOCs to provide inter-Local
Access and Transport Area ("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 other conditions, including a checklist of
interconnection and other requirements. The Telecommunications 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, however, the Telecommunications Act 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 Telecommunications Act that impose
interconnection and other requirements on the LECs.
Like substantially all other long distance carriers, Phoenix 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."
Phoenix believes that most of such complaints arose from telemarketing efforts
by Phoenix, a marketing practice that Phoenix discontinued in early 1996.
Phoenix has never been penalized or cited for "slamming" by the FCC. As to all
complaints pending at December 31, 1997 Phoenix has filed or is in the process
of filing responses to such complaints and believes that such complaints will be
resolved without a material adverse impact upon Phoenix.
In addition, the Telecommunications Act adds a new provision that imposes
liability upon all telecommunications carriers to the carrier previously
selected by the subscriber for unauthorized switching of
10
<PAGE>
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 Phoenix cannot be determined
at this time.
State Regulation. Phoenix 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 Phoenix 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 Phoenix 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 Phoenix
has sought retroactive authority in various jurisdictions for certain
acquisitions and other reportable events. While Phoenix expects to receive all
requested approvals with respect to such retroactive filings, Phoenix had not
received all of such approvals as of December 31, 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 Phoenix has taken steps
without obtaining the required authority, they may impose one or more of the
sanctions listed above.
Currently, Phoenix can provide originating interstate and intrastate
service to customers in 47 states and the District of Columbia. Of the states in
which Phoenix provides originating service, 39 have Public Utilities Commissions
("PUCs") that actively assert regulatory oversight over the services offered by
Phoenix.
Additionally, the rules for each state vary in regard to the authorization
of inter-LATA versus intra-LATA service. Upon initial certification, Phoenix
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 Phoenix 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 authority or revise
existing tariffs to comply with state regulations. In those states which issued
directives for companies to apply for intra-LATA authority or revise tariffs,
Phoenix has complied with such orders.
Phoenix continuously monitors regulatory developments in all states in
which it does business in order to ensure regulatory compliance. To the extent
that Phoenix converts from a switchless reseller to a switched reseller,
modification or amendment of Phoenix'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 Phoenix before other state public utilities
commissions. Although such complaints could result in additional legal actions
or proceedings being initiated against Phoenix, Phoenix believes that such
matters would be satisfactorily resolved without a material adverse impact upon
Phoenix's results of operations or financial condition. A final determination by
one or more jurisdictions that Phoenix engaged in the unauthorized switching of
subscribers' long distance carriers or other unauthorized conduct could have a
material adverse effect upon Phoenix's results of operations or financial
condition as, among other things, Phoenix would be subject to financial
penalties and potential revocation of its operating authority in the particular
jurisdiction, as well as other possible restrictions.
11
<PAGE>
Phoenix 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.
ITEM 2. PROPERTIES
Phoenix leases its principal executive offices in Golden, Colorado. In June
1996, Phoenix completed the relocation of its corporate headquarters from San
Francisco. In December 1997, Phoenix relocated its corporate headquarters from
1687 Cole Boulevard, Golden, Colorado to 13952 Denver West Parkway, Golden,
Colorado. Phoenix's headquarters is now located in the same building as its
Customer Service Call Center. Phoenix's lease at that site terminates on October
14, 2001. Phoenix leases office space in the following cities: Lombard,
Illinois; Overland Park, Kansas; Los Angeles, California; San Francisco,
California; Bellevue, Washington; Costa Mesa, California; Roseville, Minnesota;
Mendota Heights, Minnesota and Clearwater, Florida. Phoenix currently leases
approximately 45,000 square feet of office space for an aggregate of $51,174 per
month. In addition, Phoenix currently leases space for switches in Colorado
Springs, Minneapolis and Phoenix for an aggregate of $15,740 per month.
ITEM 3. LEGAL PROCEEDINGS
LDDS Litigation. LDDS Communications, Inc. (now known as WorldCom)
commenced an action styled LDDS/Worldcom, Inc. and Dial-Net, Inc. v. Automated
Communications, Inc. and Judy Van Essen Kenyon, C.A. No. 3:93-CV-463 (WS)
(U.S.D.C. S.D. Miss) (the "LDDS Litigation") in the United States District Court
for the Southern District of Mississippi in July of 1993 against Automated
Communications, Inc., a wholly-owned subsidiary of Phoenix ("ACI"), and Van
Essen, 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 WorldCom was involved. The alleged
breaches primarily relate to ACI's hiring of sales representatives employed by
Dial-Net, Inc., a long distance company WorldCom acquired in a merger
transaction, before the Phoenix/ACI merger was consummated. ACI and Van Essen
filed certain counterclaims against WorldCom. Shortly after the closing of the
Phoenix/ACI merger, ACI informed WorldCom of the acquisition but WorldCom has
taken no steps to add Phoenix to the litigation.
A bench trial was conducted in the United States District Court in Jackson,
Mississippi from October 2 through October 17, 1996; final arguments were made
on November 15, 1996. Pursuant to the Van Essen Indemnification and Hold
Harmless Agreement dated January 16, 1996 by and among Phoenix, Phoenix Network
Acquisition Corp., a wholly-owned subsidiary of Phoenix ("PNAC"), ACI and Van
Essen (the "Van Essen Indemnification and Hold Harmless Agreement"), Van Essen
has the right to control, and did control, the defense on behalf of herself and
ACI. The potential liability of Phoenix and its subsidiaries, based on the
damages asserted by WorldCom, exceeds $4 million, and includes (1) compensatory
damages of approximately $3,020,000; (2) attorneys' fees in excess of $700,000;
(3) punitive damages in an unspecified amount; and (4) pre-judgment interest.
Phoenix is entitled to be indemnified for any liability with respect to the LDDS
Litigation, pursuant to the Van Essen Indemnification and Hold Harmless
Agreement summarized below.
On February 2, 1998, the trial court issued a Memorandum Opinion and Order
("Order") addressing only the liability issues that were tried in the LDDS
Litigation, not causation or damages. With respect to WorldCom's various claims
against ACI and Van Essen, the Order states that ACI and Van Essen breached the
merger agreement and the noncompete agreement arising out of WorldCom's
acquisition of Dial-Net, Inc. The trial court did not impose liability on ACI or
Van Essen for WorldCom's other claims of (1) fraud and misrepresentation, (2)
securities fraud, (3) tortious interference, (4) misappropriation of trade
secrets, and (5) civil conspiracy. The trial court did not find WorldCom liable
for any of the claims asserted in ACI's and Van Essen's counterclaims.
The court heard oral arguments with respect to the issues of causation and
damages at a telephonic hearing held on February 16, 1998. The court took the
matter under advisement following the hearing and has not, as of the date
hereof, indicated when a ruling on those issues will be made.
12
<PAGE>
Van Essen Indemnification and Hold Harmless Agreement. The following
description summarizes the terms of the Van Essen Indemnification and Hold
Harmless Agreement and is qualified in its entirety by the Van Essen
Indemnification and Hold Harmless Agreement, a copy of which has been filed with
the Commission by Qwest as Exhibit D to the Proxy Statement/Prospectus included
as part of the Registration Statement on Form S-4 of Qwest declared effective
February 12, 1998 (File No.333-46145) and is hereby incorporated by reference
herein.
The Van Essen Indemnification and Hold Harmless Agreement was entered into
on January 16, 1996 among Phoenix, PNAC, ACI and Van Essen in connection with a
merger agreement among those parties pursuant to which Phoenix acquired ACI.
Pursuant to the Van Essen Indemnification and Hold Harmless Agreement, Van Essen
agreed, among other things, to (i) be solely responsible for the defense (and
related fees and costs) relating to or arising from all pending and threatened
litigation against ACI (including certain named claims) as well as all claims
that might arise in the future relating solely to actions by ACI prior to
January 16, 1996 (the "ACI Legal Claims") and (ii) fully indemnify, defend and
hold harmless Phoenix, PNAC and ACI against any and all claims, judgments,
payments, expenses, liabilities and actual damages, including reasonable
attorneys' fees, that Phoenix, PNAC and/or ACI incurred relating to any ACI
Legal Claim. The Van Essen Indemnification and Hold Harmless Agreement does not
specifically list the LDDS Litigation as one of the legal claims subject to the
indemnity. However, because the list of claims does not purport to be exhaustive
and based on the parties' course of dealing, Phoenix believes that the LDDS
Litigation qualifies as an ACI Legal Claim, and, therefore, is subject to the
indemnity.
Phoenix expresses no view as to whether Van Essen now has, or in the future
will have, the financial capability to perform her obligations under the Van
Essen Indemnification and Hold Harmless Agreement. The obligations of Van Essen
to indemnify Phoenix under the Van Essen Indemnification and Hold Harmless
Agreement are unsecured, although certain shares of Phoenix Common Stock have
been deposited in escrow in support of Van Essen's indemnification obligations,
as described below. As the value of the shares of Phoenix Common Stock held in
escrow is considerably less than the potential liability that ACI faces,
Phoenix's, and after the Effective Time, Qwest's ability to enforce any right of
indemnification will be dependent on, among other things, the financial
resources of Van Essen. There can be no assurance that Van Essen will have
adequate financial resources to pay Phoenix any or all amounts that may be owed
pursuant to the Van Essen Indemnification and Hold Harmless Agreement.
Van Essen has deposited in escrow 727,273 shares of Phoenix Common Stock
pursuant to an escrow agreement (the "Van Essen Escrow Agreement") among
Phoenix, PNAC, Van Essen and Vectra Bank. Van Essen has asserted that none of
Phoenix, ACI or their subsidiaries has a security interest in the shares subject
to the escrow. The Van Essen Escrow Agreement provides that all or a portion of
the shares of Phoenix Common Stock held in escrow will be released to Phoenix
and/or PNAC upon a showing by PNAC of the liability of Van Essen to make payment
pursuant to the Van Essen Indemnification and Hold Harmless Agreement. The Van
Essen Escrow Agreement does not address whether any shares of the common stock,
par value $.01 per share, of Qwest (the "Qwest Common Stock") issued to Van
Essen in the Merger in substitution for the escrowed shares of Phoenix Common
Stock would be subject to the escrow. Van Essen has asserted that such shares of
Qwest Common Stock will not be subject to the Van Essen Escrow Agreement and
should be released from the escrow and delivered to her. Accordingly, there can
be no assurance that the shares of Qwest Common Stock received after the
Effective Time will be subject to the Escrow Agreement.
Van Essen Threatened Litigation. On January 16, 1998, Phoenix failed to
make a scheduled payment under the Van Essen Note and is currently in default
thereon. On January 17, 1998, Phoenix received a notice from Van Essen declaring
a default under the Van Essen Note and notifying Phoenix that if the scheduled
payment is not received by February 2, 1998, the entire unpaid principal balance
of the Van Essen Note will become due and payable and that Van Essen will pursue
all remedies available to her. Phoenix has not made the scheduled payment and
currently does not have sufficient cash to make the scheduled payment.
Other Legal Proceedings. In addition, Phoenix is a party, from time to
time, in litigation incident to its business. Phoenix is not aware of any such
current or pending litigation that it believes will have a material adverse
affect on Phoenix's results of operations or financial condition.
13
<PAGE>
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
Phoenix 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, 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
YEAR ENDED DECEMBER 31, 1997
First quarter ended March 31, 1997 $2.50 $4.50
Second quarter ended June 30, 1997 $1.63 $3.88
Third quarter ended September 30, 1997 $1.13 $3.50
Fourth quarter ended December 31, 1997 $0.38 $1.69
</TABLE>
The closing sales price of Phoenix Common Stock as reported by the American
Stock Exchange on March 2, 1998 was $0.6875.
As of the close of business on March 2, 1998, there were approximately
1,269 stockholders of record of Phoenix 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 or Preferred Stock without the
consent of Foothill Capital Corporation under the terms of the Phoenix Credit
Facility.
On April 4, 1997, the Company sold to JNC Opportunity Fund Ltd. ("JNC")
150,000 shares of the Company's Series G Convertible Preferred Stock, par value
$.001 per share (the "Series G Preferred Stock"), for an aggregate sales price
of $3,000,000. In connection with such sale, the Company paid financial advisory
fees of $150,000. Also in connection with such sale, Wharton Capital Partners,
Ltd. ("Wharton") received a five year warrant to acquire 50,000 shares of
Phoenix Common Stock on April 4, 1997 with an exercise price of $2.3375 per
share of Phoenix Common Stock in partial payment of financial advisory services
to the Company. In addition, Keith A. Rhodes ("Rhodes") received a five year
warrant to acquire 10,000 shares of Phoenix Common Stock on April 4, 1997 with
an exercise price of $2.3375 per share of Phoenix Common Stock in partial
payment of financial advisory services to the Company. The Series G Preferred
Stock provided for conversion into shares of Phoenix Common Stock on the basis
of a floating conversion ratio tied to a percentage of the market price of
Phoenix Common Stock. The stated value of $20 per share of each share of Series
G Preferred Stock was convertible into shares of Phoenix Common Stock at any
time at the lower of (i) the fixed price conversion of $2.45 and (ii) a 20%
discount to the five day average closing bid price preceding a conversion,
subject to adjustment under certain circumstances. In addition, all dividends
payable with regards to the Series G Preferred Stock were payable in shares of
Phoenix Common Stock at the lower of (i) and (ii) above. As of
14
<PAGE>
October 3, 1997, all of such shares of Series G Preferred Stock had been
converted into an aggregate of 2,491,879 shares of Phoenix Common Stock.
On July 17, 1997, the Company sold to JNC 125,000 shares of the Company's
Series I Convertible Preferred Stock, par value $.001 per share (the "Series I
Preferred Stock"),and a five year warrant to acquire 45,000 shares of Phoenix
Common Stock with an exercise price of $2.00 per share of Phoenix Common Stock
and on July 23, 1997, JNC was issued a five year warrant to acquire 30,000
shares of Phoenix Common Stock with an exercise price of $2.00 per share of
Phoenix Common Stock all for an aggregate sales price of $2,500,000. In
connection with such sales, the Company paid financial advisory fees of
$125,000. Also in connection with such sales, Wharton received a five year
warrant to acquire 19,000 shares of Phoenix Common Stock on July 17, 1997 with
an exercise price of $2.00 per share of Phoenix Common Stock and a five year
warrant to acquire 11,000 shares of Phoenix Common Stock on July 23, 1997 with
an exercise price of $2.00 per share of Phoenix Common Stock in partial payment
of financial advisory services to the Company. In addition, Rhodes received a
five year warrant to acquire 3,500 shares of Phoenix Common Stock on July 17,
1997 with an exercise price of $2.00 per share of Phoenix Common Stock and a
five year warrant to acquire 4,000 shares of Phoenix Common Stock on July 23,
1997 with an exercise price of $2.00 per share of Phoenix Common Stock in
partial payment of financial advisory services to the Company. The Series I
Preferred Stock provided for conversion into shares of Phoenix Common Stock on
the basis of a floating conversion ratio tied to a percentage of the market
price of Phoenix Common Stock. The stated value of $20 per share of each share
of Series I Preferred Stock was convertible into shares of Phoenix Common Stock
at any time at the lower of (i) the fixed price conversion of $1.875 and (ii) a
17% discount to the average of the lowest five closing bid prices during the ten
trading days immediately preceding a conversion, subject to adjustment under
certain circumstances. In addition, all dividends payable with regards to the
Series I Preferred Stock were payable in shares of Phoenix Common Stock at the
lower of (i) and (ii) above. As of December 31, 1997, 85,500 of such shares of
Series I Preferred Stock had been converted into an aggregate of 2,337,355
shares of Phoenix Common Stock. In addition, as of January 15, 1998, the
remaining 39,500 of such shares of Series I Preferred Stock had been converted
into an aggregate of 2,349,011 additional shares of Phoenix Common Stock.
In each case, the issuance of securities by Phoenix to JNC, Wharton and
Rhodes was undertaken pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for, and as of the
end of, the years ended December 31, 1997, 1996, 1995, 1994 and 1993 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.
15
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenue $53,905 $74,405 $75,855 $ 99,307 $ 76,947
Cost of revenue 39,381 52,650 53,776 73,438 57,195
------- ------- -------- -------- -------
Gross profit 14,524 21,755 22,079 25,869 19,752
Selling, general and administrative
expenses 15,851 21,075 22,323 31,115 25,941
Depreciation and Amortization 538 678 1,126 4,358 3,973
Relocation expenses -- -- -- 1,133 --
Acquisition expenses -- -- -- 1,309 513
Loss on abandonment of fixed assets -- -- 1,020 15 3,260
Aborted bond offering expenses -- -- -- 246 --
------- ------- -------- -------- -------
16,389 21,753 24,469 38,176 33,687
------- ------- -------- -------- -------
Operating income (loss) (1,865) 2 (2,390) (12,307) (13,935)
Other income (expense):
Interest income 19 36 103 85 71
Interest expense 186 (425) (260) (626) (1,092)
Miscellaneous income (expense) (10) 43 (7) 4 11
------- ------- -------- -------- -------
(177) (346) (164) (537) (1,010)
------- ------- -------- -------- -------
Income (loss) before income taxes and
cumulative effect of accounting
change (2,042) (344) (2,554) (12,844) (14,945)
Income tax benefit (expense) 494 (16) (500) -- --
------- ------- -------- -------- -------
Income (loss) before cumulative effect
of accounting change (1,548) (360) (3,054) (12,844) (14,945)
------- ------- -------- -------- -------
Cumulative effect of change in
amortization of deferred commissions -- 123 -- -- --
------- ------- -------- -------- -------
Net income (loss) $(1,548) $ (483) $(3,054) $(12,844) $(14,945)
======= ======= ======== ======== =======
Net income (loss) attributable to
common shares:
Net income (loss) $(1,548) $ (483) $(3,054) $(12,844) $(14,945)
Preferred dividends (268) (232) (594) (1,206) (179)
------- ------- -------- -------- -------
$(1,816) $ (715) $(3,648) $(14,050) $(15,124)
======= ======= ======== ======== =======
Loss per common share:
Loss before cumulative effect of
accounting change $ (0.15) $ (0.04) $ (0.24) $ (0.68) $ (0.52)
Cumulative effect of accounting change -- (0.01) -- -- --
------- ------- -------- -------- -------
Net loss per common share $ (0.15) $ (0.05) $(0.24) $ (0.68) $(0.52)
======= ======= ======== ======== =======
BALANCE SHEET DATA (at end of period):
Working capital (deficit) $ 1,478 $ 1,409 $10,252 $(7,786) $(12,840)
Total assets 17,317 17,568 33,028 45,794 35,134
Long term debt -- -- -- 2,213 386
Stockholders' equity (deficit) 3,668 4,512 19,188 18,172 9,696
</TABLE>
The Company has not, since 1983, declared or paid any dividends on its
Common Stock.
16
<PAGE>
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" included herein and the section entitled "Risk Factors" included in
Proxy Statement/Prospectus 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.
INTRODUCTION
Phoenix entered the telecommunications industry as a switchless long
distance reseller in 1985, and Phoenix grew internally on the efforts of its
sales and marketing force during the following decade. Additionally, since May
1995, Phoenix has completed 10 acquisitions of companies or customer bases,
thereby strengthening Phoenix's customer base, product and service offerings and
sales distribution. The largest of these acquisitions include: Bright Telecom
L.P. ("Bright"), a San Francisco-based international call-back company, Tele-
Trend Communications, LLC ("Tele-Trend"), a switchless reseller based in Denver,
and a portion of the customer base of Interstate Savings, Inc. ("ISI"), a
switched reseller, all of which were completed in the last half of 1995. In
January 1996, Phoenix acquired Automated Communications, Inc. ("ACI") and, in
October 1996, Phoenix completed the acquisition of AmeriConnect, Inc. See "ITEM
1 -- BUSINESS--Acquisitions."
Phoenix derives the bulk of its revenue through the sale 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 Phoenix and billed to its customers for the services utilized.
Phoenix's other revenue are primarily derived from calling cards, Internet
access, international call-back and conference calling.
Phoenix's cost of revenue 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
Phoenix 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.
SG&A consist of personnel costs, sales commission 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. Residual commissions are paid
based upon either customers' usage or payment. 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.
SUPPLIER RELATIONSHIPS
Phoenix currently has agreements with major long distance carriers, such as
WorldCom, Sprint, Frontier, AT&T and others, to carry the majority of its long
distance traffic. Phoenix's agreements with vendors specify minimum volume usage
requirements, but, in contrast to many of its competitors, such requirements
scale down or expire over the next 12 months, thereby freeing traffic to be
loaded on another company's network including that of Qwest if the Merger is
consummated.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the years and periods indicated the
respective percentages of revenue represented by certain items in Phoenix's
statements of operations.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1995 1996 1997
-------- -------- --------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Revenue.................................... 100.0% 100.0% 100.0%
Cost of revenue............................ 70.9 74.0 74.3
Gross profit............................... 29.1 26.0 25.7
Selling, general and administrative........ 29.4 31.3 33.7
Depreciation and amortization.............. 1.5 4.4 5.2
Relocation expenses........................ -- 1.1 --
Acquisition expenses....................... -- 1.3 0.7
Loss on abandonment of fixed assets........ 1.3 -- 4.2
Aborted bond offering expenses............. -- 0.2 --
----- ------ ------
32.2 38.3 43.8
Operating income (loss).................... (3.1) (12.3) (18.1)
Interest income............................ 0.1 -- --
Interest expense........................... (0.3) (0.6) (1.4)
Miscellaneous income....................... -- -- --
Income tax benefit (expense)............... (0.7) -- --
---- ------ ------
Loss before cumulative effect of accounting
change........ (4.0) (12.9) (19.5)
Cumulative effect of change in amortization
of deferred commissions................... -- -- --
----- ----- ------
Net income (loss).......................... (4.0)% (12.9)% (19.5)%
===== ====== ======
Preferred dividends........................ (0.8) (1.2) (0.2)
----- ------ ------
Net income (loss) attributable to common
shares.................................... (4.8)% (14.1)% (19.7)%
===== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenue. Revenue decreased by $22.4 million or 22.5%, to $76.9 million
for the year ended December 31, 1997 from $99.3 million for the year ended
December 31, 1996. This decrease was primarily the result of a decrease in
minutes of usage ("MOU") of 95,186,000 minutes, to 533,166,000 minutes for 1997,
from 628,352,000 minutes for 1996 and a 8.7% decrease in the average revenue per
MOU to $.144 per MOU for 1997 from $.158 per MOU for 1996. The average revenue
per MOU decline was due to Phoenix's customers continuing to utilize more
competitively priced services offered by Phoenix. These new services have been a
result of Phoenix's reaction to an overall decline in retail rates and price
sensitivity in the telecommunications industry.
Cost of Revenue. Cost of revenue decreased by $16.2 million or 22.1%, to
$57.2 million for 1997 from $73.4 million for 1996; however, as a percentage of
revenue, cost of revenue increased to 74.3% compared to 74.0% for 1996. Although
Phoenix's average cost per MOU has declined by 8.2% for the year ended December
31, 1997, compared to the prior year, the higher percentage decrease in the
average revenue per minute resulted in the decline in Phoenix's gross profit
margin percentage.
Selling, General and Administrative Expenses. SG&A decreased by $5.2
million, or 16.6%, to $25.9 million for 1997 from $31.1 million for 1996. SG&A
as a percentage of revenue increased to 33.7% for 1997 from 31.3% of revenue for
1996.
Depreciation and Amortization. Depreciation and amortization expense
decreased by $0.4 million to $4.0 million for 1997 from $4.4 million for 1996.
However, as a percentage of revenue, these costs increased by 0.8 percentage
points over 1996.
18
<PAGE>
Acquisition Expenses. Acquisition expenses of $0.5 million were
primarily incurred in connection with the aborted mergers between Midcom
Communications Inc. ("Midcom") and Phoenix and US One Communications Corp.,
Resurgens Capital Group, Inc. and Phoenix. The costs consist of transaction
fees to third parties and legal and accounting fees.
Loss on Abandonment of Fixed Assets. Loss on abandonment of fixed
assets expenses of $3.3 million was incurred in 1997 due to management's
decision to abandon the New Billing and Customer Care Platform (as hereinafter
defined).
Interest Income. Interest income decreased by $14,000 to $71,000 for 1997
from $85,000 for 1996, as a result of lower cash balances in Phoenix's interest
bearing bank accounts.
Interest Expense. Interest expense increased by $466,000 to $1,091,000
for 1997 from $625,000 for 1996. This increase was primarily the result of
increased borrowings under the Phoenix Credit Facility.
Net Loss. Net loss increased by $2.1 million to a net loss of $14.9
million for 1997 from a net loss of $12.8 million for 1996 for the reasons
discussed above.
Preferred Dividends. Preferred dividend requirements decreased by
$1,027,000 to $179,000 for 1997 from $1,206,000 for 1996 primarily as a result
of the conversion of substantially all of its outstanding Preferred Stock to
Phoenix Common Stock during 1997.
Net Loss Attributable to Common Shares. Net loss attributable to common
shares increased by $1.1 million to a net loss attributable to Phoenix Common
Stock of $15.1 million for 1997 from a net loss attributable to Phoenix Common
Stock of $14.0 million for 1996 for the reasons discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue. Revenue increased by $23.4 million or 30.8%, to $99.3 million
for the year ended December 31, 1996 from $75.9 million for the year ended
December 31, 1995. This increase was primarily the result of an increase in
minutes of usage ("MOU") of 214,484,000 minutes, to 628,352,000 minutes for
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. Revenue per MOU decreased primarily as a result of Phoenix's
customers utilizing more competitively priced services offered by Phoenix during
1996 and the effect of acquired companies' rate structures which generally were
lower than those offered by Phoenix. The customers gained from the ACI
acquisition during 1996 accounted for approximately 26.8% of total MOU in the
period.
Cost of Revenue. Cost of revenue 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 revenue
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 Phoenix's, and, to a lesser extent, Phoenix being able to place
new business on its most favorably priced vendor carrier contracts. As a
percentage of revenue, cost of revenue increased to 74.0% for 1996 from 70.9%
for 1995. The increase in cost of revenue as a percentage of revenue was
primarily the result of Phoenix providing lower-priced services to its customers
without a corresponding decrease in the cost of providing such services.
Historically, as Phoenix'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 a network,
Phoenix 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 revenue for 1995. During 1996, Phoenix 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. Phoenix consolidated its San
19
<PAGE>
Francisco operations into the former ACI facilities in July 1996. During 1996,
Phoenix incurred approximately $1.0 million in duplicative operating costs which
were eliminated as of July 1996.
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 Phoenix'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 acquisition and consist primarily of
transaction fees to third parties, legal and accounting fees and a contractual
severance payment to AmeriConnect's chief executive officer.
Aborted Bond Offering Expenses. Aborted bond offering expenses related to
legal and accounting fees in connection with a proposed bond offering Phoenix
began in the last half of 1996. Phoenix 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 Phoenix'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 Phoenix Credit Facility. Interest expense will increase
substantially in future periods as a result of increased indebtedness under the
Phoenix 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 October 1995.
Effective in December 1996, Phoenix converted its outstanding Series F Preferred
Stock into Phoenix Common Stock in accordance with the terms of the Series F
Preferred Stock. As a result of the conversion of the Series F Preferred Stock,
Phoenix'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 Phoenix Common
Stock of $14.0 million for 1996 from a net loss attributable to Phoenix Common
Stock of $3.6 million for 1995 for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations for the year ended December 31, 1997 resulted in
a net negative cash flow of $1.1 million compared to a negative cash flow of
$6.7 million for the year ended December 31, 1996, primarily as a result of the
loss incurred for the period.
Phoenix's capital expenditures were $1.7, $3.6 million and $589,000 in
1997, 1996 and 1995, respectively. Phoenix has financed approximately $1.4
million of the 1996 costs associated with implementation of a new billing and
customer care platform (the "New Billing and Customer Care Platform")
(implementation of which was abandoned as of December 1997) through a financing
company over a three year term. During 1996, and during 1995, Phoenix 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.
Phoenix's principal source of cash to fund its liquidity needs has been
through its borrowings under the Phoenix Credit Facility. The Phoenix Credit
Facility allows for borrowings of up to $10 million based upon Phoenix's
qualified accounts receivable. The loan balance as of December 31, 1997 was $6.7
million. Net cash used in operating activities for 1997 was $5.6 million
compared to $4.0 million for 1996, primarily as a result of the loss incurred
for the period. 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. The total net cash used by operations over the periods discussed
above has generally been a result of the losses incurred by Phoenix over such
periods.
20
<PAGE>
On March 12, 1997, the Phoenix Credit Facility was amended to provide for a
$2,000,000 bridge loan with the principal amount to be paid in eight (8) equal
monthly installments between July 1, 1997 and January 1, 1998. Phoenix made
installment payments of $250,000 on the principal amount of the bridge loan
during each of June, July and August, 1997. On September 1, 1997, the parties
entered into an amendment to provide for a temporary moratorium on payments in
respect of the bridge loan with a final payment of all outstanding principal and
accrued and unpaid interest being due on January 9, 1998. On December 12, 1997,
the Phoenix Credit Facility was amended to provide for an additional bridge loan
of $1,825,000 and the retention of an over-advance of $300,000. On December 31,
1997, the Phoenix Credit Facility was further amended to provide that Foothill
Capital Corporation may, in its sole discretion, lend Phoenix up to $1.25
million, to be treated either as an increase to the Bridge Loan Amount or as an
over-advance, which must be repaid on the earliest to occur of (a) April 30,
1998, (b) the Effective Time and (c) termination of the Phoenix Credit Facility.
On February 2, 1998, the Phoenix Credit Facility was amended to provide for an
additional over-advance of $500,000 and to reduce the amount that Foothill
Capital Corporation may lend Phoenix from $1.25 million to $750,000.
On January 16, 1998, Phoenix failed to make a scheduled payment under the
Van Essen Note (as defined herein) and is currently in default thereon. On
January 17, 1998, Phoenix received a notice from Van Essen declaring a default
under the Van Essen Note and notifying Phoenix that if the scheduled payment is
not received by February 2, 1998, the entire unpaid principal balance of the Van
Essen Note will become due and payable and that Van Essen will pursue all
remedies available to her. Phoenix has not made the scheduled payment and
currently does not have sufficient cash to make the scheduled payment.
From time to time Phoenix has been in violation of certain of its covenants
in the Phoenix Credit Facility. Phoenix has received waivers of its violations
of these covenants so long as it continues to meet the continuing requirements
of the Phoenix Credit Facility. Such requirements include (a) the execution of
the Merger Agreement by January 8, 1998; (b) the filing with the Commission of a
preliminary proxy statement with respect to the Merger Agreement by January 31,
1998; (c) the prompt response to any comments the Commission might have with
respect to such preliminary proxy statement; (d) the registration statement
filed by Qwest with respect to the offering of the securities of Qwest in
connection with the Merger being declared effective by the Commission by April
30, 1998; (e) the filing with the Commission of Phoenix's Annual Report on Form
10-K for the year ended December 31, 1997 by March 31, 1998; (f) the approval of
the Merger Agreement and Merger by the holders of a majority of the shares of
Phoenix Common Stock by April 30, 1998; and (g) the consummation of the Merger
by April 30, 1998. A failure by Phoenix to meet any of such requirements would
constitute an event of default under the Phoenix Credit Facility. In the future,
should Phoenix violate, or have a continuing violation of, any of the covenants
constituting an event of default under the Phoenix Credit Facility, there can be
no assurance that it will receive a waiver of such violation. Under the terms of
the Phoenix Credit Facility, upon the occurrence of an event of default, the
lender may, among other things, declare all amounts outstanding under the
Phoenix Credit Facility immediately due and payable, cease advancing money or
extending credit to Phoenix and/or during the continuance of an event of
default, increase the interest rate on amounts outstanding under the Phoenix
Credit Facility.
As of March 2, 1998, $4,886,576 was outstanding under the line of credit
(including over-advances of $800,000, in the aggregate) provided by the Phoenix
Credit Facility and the interest rate was 10.25%. Average daily outstanding
borrowing for the year ended December 31, 1997 was $4,092,859. The highest
month-end balance outstanding for the year ended December 31, 1997 was
$5,621,926.
As of March 2, 1998, Phoenix estimated that it will require financing
between $7 million and $10 million in order to repay the Bridge Loan Amount and
over-advances under the Phoenix Credit Facility and fund operating losses,
working capital requirements and capital expenditures during the remainder of
1998. This amount is in addition to funds provided by operations and funding
available, if any, under the Phoenix Credit Facility. The exact amount and
timing of these working capital requirements and Phoenix's ability to continue
as a going concern will be determined by numerous factors, including (i) the
revenue level of, and gross margin on, sales; (ii) the outcome of outstanding
contingencies and disputes, including the LDDS Litigation and other pending
lawsuits; (iii) payment terms achieved by Phoenix; (iv) Phoenix's ability to
manage selling, general and administrative expenses; and (v) the timing of
capital expenditures.
21
<PAGE>
If the Merger is not concluded, there can be no assurance that Phoenix will
be able to obtain additional equity or debt financing on terms that Phoenix will
find acceptable. Any additional equity or debt financing may involve substantial
dilution to the interests of Phoenix stockholders. If Phoenix is unable to
obtain sufficient funds to satisfy its cash requirements, it will be forced to
curtail operations, dispose of assets, seek extended payment terms from its
vendors or seek protection under federal bankruptcy laws. There can be no
assurance that Phoenix will be able to obtain additional working capital, reduce
expenses or successfully complete other steps necessary to continue as a going
concern.
Given its history of operating losses and the expectation that the losses
will continue for the foreseeable future, Phoenix will need to raise additional
capital to cover its operating losses and continue to support its business. If
the Merger is not consummated, Phoenix will attempt to raise the capital by
either selling additional stock, expanding its borrowing from its lender or
arranging for more flexible payment terms with its major vendors. There can be
no assurance that Phoenix will be successful in any of these fund raising
efforts.
For additional limitations on Phoenix's liquidity and capital resources,
see "RISK FACTORS--Risk Factors Relating to Phoenix and Its Busines--Substantial
Doubt about Ability to Continue as a Growing Concern; Need for Additional
Working Capital," "--Negative Cash Flow From Operations," "--History of
Operating Losses; Anticipated Future Losses," "--Possible Volatility of Stock
Price," "--Substantial Leverage" and "--Credit Facility Covenants" contained in
the Proxy Statement/Prospectus incorporated by reference herein.
SEASONALITY
Phoenix's revenue, and thus its potential earnings, are affected by holiday
and seasonal variations. A substantial portion of Phoenix's revenue are
generated by direct dial domestic long distance business customers, and,
accordingly, Phoenix experiences a decrease in revenue around holidays,
particularly the quarter ending December 31, when business customers reduce
their usage. Phoenix's fixed operating expenses, however, do not decrease during
the fourth fiscal quarter. Accordingly, Phoenix has experienced, and may
continue to experience, lower revenue and earnings in its fourth fiscal quarter
when compared with the other fiscal quarters.
TAX BENEFIT
As of December 31, 1997, Phoenix had available to offset future federal
taxable income, net operating loss carryforwards ("NOLs") of approximately $35.3
million which expire in varying amounts from 2002 through 2012. A portion of the
NOLs may be subject to limitations as a result of provisions of the Internal
Revenue Code of 1986, as amended, relating to changes in ownership and
utilization of losses by successor entities.
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.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the directors and executive officers of Phoenix and certain
information about them is set forth below:
<TABLE>
<CAPTION>
NAME AGE Position
---- --- --------
<S> <C> <C>
Thomas H. Bell(1)(3)(5)...................... 50 Chairman of the Board and Director
James W. Gallaway(2)......................... 57 Director
Merrill L. Magowan(2)(3)..................... 59 Director
Wallace M. Hammond........................... 52 President, Chief Executive Officer and Director
David Singleton(1)(3)(4)..................... 58 Director
Max E. Thornhill(2)(4)....................... 65 Director
Charles C. McGettigan(1)..................... 52 Director
J. Rex Bell(5)............................... 43 Senior Vice President
Jon Beizer................................... 32 Senior Vice President and Chief Financial Officer
</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 Phoenix Board by the
holders of Phoenix's Series F Preferred Stock. Effective in December, 1996,
all of the Series F Preferred Stock was converted into Phoenix Common Stock.
Messrs. Singleton and Thornhill tendered their resignations from the Phoenix
Board, but the Phoenix Board elected not to accept such resignations.
(5) Thomas H. Bell, a director of Phoenix, and J. Rex Bell, Senior Vice
President of Phoenix, are brothers. With the exception of that relationship,
there are no other family relationships among officers or directors of
Phoenix.
Each director of the Company serves a one-year term.
Thomas H. Bell is the founder of Phoenix. He has served as the Chairman of
the Phoenix Board since its inception under the name Phoenix Telcom, Inc. in
1985, as Phoenix's Chief Executive Officer from 1985 to January 1992, and as
President of Phoenix 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, Phoenix's Senior Vice President.
James W. Gallaway has served as a director of Phoenix 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 the chairman of the board of
directors 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 became a director of Phoenix 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 joined Phoenix as Executive Vice President in February
1994. He was elected to the Phoenix Board and named President and Chief
Operating Officer of Phoenix in May 1994. Mr. Hammond was elected Chief
Executive Officer of Phoenix in December 1994. From 1992 to 1993, he was
President and Chief Executive Officer of ANSCO & Associates, Inc., 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.
23
<PAGE>
David Singleton has served as a director of Phoenix since October 1995. He
was a founding director of WorldCom and served as a director of that company
from 1983 to 1992. 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 has served as a director of Phoenix since October 1995. He
was a founding director of WorldCom and served as a director of that company
from 1983 to September 1993. Mr. Thornhill is currently the owner and president
of Mineral Resources, Inc., a company engaged in real estate development and oil
and gas exploration and production.
Charles C. McGettigan served as a director of Phoenix 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 of
digital dictation, inc.; I-Flow Corporation; Modtech, Inc.; NDE Environmental
Corporation; Onsite Energy, Inc.; PMR Corporation; Sonex Research, Inc.; Wray-
Tech Instruments, Inc.; and Cuisine Solutions, Inc.
J. Rex Bell has been Senior Vice President of Phoenix 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 Phoenix. Prior
to joining Phoenix, 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 Phoenix.
Jon Beizer was promoted to Senior Vice President and Chief Financial
Officer in March 1997. Since joining Phoenix in July 1992, he has held various
management positions. 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.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires Phoenix's directors and
executive officers, and persons who own more than ten percent (10%) of a
registered class of Phoenix's equity securities, to file with the Commission
initial reports of ownership and reports of changes in ownership of Phoenix
Common Stock and other equity securities of Phoenix. Officers, directors and
greater than ten percent (10%) Phoenix Stockholders are required by Commission
regulation to furnish Phoenix with copies of all Section 16(a) forms they file.
To Phoenix's knowledge, based solely on a review of the copies of such
reports furnished to Phoenix and representations that no other reports were
required, during the fiscal year ended December 31, 1997, all Section 16(a)
filing requirements applicable to its officers, directors and greater than ten
percent (10%) beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
No cash fees are paid to directors for serving on the Phoenix Board. The
members of the Phoenix Board are, however, eligible for reimbursement for their
expenses incurred in connection with attendance at Phoenix Board and Committee
meetings in accordance with Phoenix policy. Furthermore, each non-employee
director of Phoenix also receives stock option grants under the 1992 Non-
Employee Directors' Stock Option Plan (the "Phoenix 1992 Plan"), as described
below. Directors who are employees of Phoenix are not eligible to participate in
the Phoenix 1992 Plan, but are eligible to participate in the 1989 Stock Option
Plan (the "Phoenix 1989 Plan"). See "--Compensation of Executive Officers--Stock
Option Grants and Exercises."
24
<PAGE>
Option grants under the Phoenix 1992 Plan are non-discretionary. Each
person who is elected or appointed on or after January 4, 1993 to be a non-
employee director of Phoenix is automatically granted an option to purchase
10,000 shares of Phoenix Common Stock. In addition, on the first business day of
each year thereafter, each non-employee director of Phoenix is automatically
granted an option to purchase shares of Phoenix Common Stock (rounded to the
nearest 100 shares) equal to the Proration Factor (as hereinafter defined)
multiplied by the sum of (i) 10,000 and (ii) 2,500 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 Phoenix 1992 Plan. The exercise price of options
granted under the Phoenix 1992 Plan is equal to the fair market value of the
Phoenix Common Stock subject to the option on the date of grant. The number of
options granted under the Phoenix 1992 Plan is subject to certain anti-dilution
protections in favor of the participants, and options granted under the Phoenix
1992 Plan expire ten years from the date of grant. Options granted under the
Phoenix 1992 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, 1997, 1996 and 1995, compensation awarded or paid to, or
earned by Phoenix's Chief Executive Officer and each other officer at December
31, 1997 who received total annual salary and bonus in excess of $100,000 for
the years ended December 31, 1997 (the "Named Executive Officers"):
SUMMARY ANNUAL COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
Awards
--------------------
SECURITIES
UNDERLYING
YEAR ENDED SALARY OPTIONS(1)/ ALL OTHER
NAME AND PRINCIPAL POSITION DECEMBER 31 (1)($) BONUS ($) SARs(2) (#) COMPENSATION(3)
- --------------------------- ----------- -------- --------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
Mr. Wallace M. Hammond............. 1997 275,000 60,000 -- 1,000
President and Chief Executive 1996 252,500 60,000 400,000 --
Officer 1995 203,511 67,451 300,000 2,320
Mr. Jeffrey L. Bailey(4)........... 1997 110,910 -- -- 28,905
1996 137,934 -- 60,000 23,499
1995 129,219 15,193 50,000 2,320
Mr. J. Rex Bell.................... 1997 126,600 -- -- 1,000
Senior Vice President 1996 127,721 -- 50,000 15,427
1995 117,657 15,193 50,000 2,320
Mr. Jon Beizer..................... 1997 149,166 40,000 -- 11,964
Senior Vice President and Chief 1996 105,417 -- 125,000 10,544
Financial Officer 1995 96,418 -- 60,000 --
</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. Phoenix has no stock appreciation
rights (SARs).
(3) In each case, "All Other Compensation" includes $1,000 in matching Section
401(k) plan contributions made by Phoenix in 1995, $1,000 in 1996 and
$1,000 in 1997. The balance in 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. The balance of the amount reported in 1997 for (i) Mr. Bailey
includes relocation expenses paid for Mr. Bailey's move to California from
Colorado and unused vacation time payments and (ii) Mr. Beizer includes
relocation expenses for Mr. Beizer's move to California from Colorado.
(4) Mr. Bailey resigned as Senior Vice President and Chief Financial Officer of
Phoenix effective March 31, 1997. The amount reported as salary in 1997
includes $70,000 in severance payments made to Mr. Bailey.
25
<PAGE>
Employment Agreements. Effective January 1, 1996, Phoenix and Mr. Hammond
entered into an employment agreement with a term beginning January 1, 1996 and
ending December 31, 1998 which superseded the previous employment agreement
between Phoenix and Mr. Hammond. Upon each annual anniversary of the agreement
the term of the agreement is automatically extended by one year so as to
continually extend the term of the agreement to include subsequent three year
periods, unless sooner terminated as provided in the agreement. The employment
agreement provides for a salary of $250,000 during 1996, $275,000 during 1997
and $300,000 during 1998 and each year thereafter for the duration of the
agreement, unless otherwise increased at the discretion of Phoenix, in exchange
for Mr. Hammond's services to Phoenix as President and Chief Executive Officer.
The agreement further provides for an option grant in 1996 of 200,000 shares of
Phoenix Common Stock vesting at the rate of 12,500 shares per calendar quarter
and an annual bonus equal to 1% of Phoenix's earnings before interest, taxes,
depreciation and amortization. In the event Mr. Hammond is terminated without
cause, the employment agreement provides that he is to receive a severance
amount equal to 18 months salary and bonus. Under terms of the employment
agreement, should an acquisition of Phoenix or a similar corporate event
constituting a "change of control" of Phoenix result in the termination of Mr.
Hammond's employment with Phoenix, any unvested options held by Mr. Hammond will
immediately vest. The Merger will constitute a change of control of Phoenix.
However, in the Merger all options held by Mr. Hammond will terminate on the day
preceding the consummation of the Merger. In the event Phoenix or Mr. Hammond
terminates Mr. Hammond's employment as a result of an acquisition of Phoenix or
a similar corporate event constituting a change of control of Phoenix, Mr.
Hammond shall receive a severance amount equal to the salary he would have
received had he remained employed for the then current three year term of the
employment agreement. In either a termination of Mr. Hammond's employment
without cause or the termination of his employment in the event of a change of
control of Phoenix, the agreement provides that Mr. Hammond shall receive
reimbursement from Phoenix for reasonable relocation expenses, not to exceed
$20,000.
Effective February 1, 1997, Phoenix and Mr. Beizer entered into an
employment agreement with a term beginning February 1, 1997 and ending December
31, 1998. The employment agreement provides for an annual salary of $150,000
during the term of the agreement, unless otherwise increased at the discretion
of Phoenix, in exchange for Mr. Beizer's services to Phoenix as Senior Vice
President and Chief Financial Officer. The agreement further provides for an
annual bonus equal to .75% of Phoenix's earnings before interest, taxes,
depreciation and amortization. In the event Mr. Beizer is terminated without
cause, the employment agreement provides that he is to receive a severance
amount equal to the greater of 12 months salary or the balance of the salary for
the full term of the agreement and all unvested options held by Mr. Beizer will
immediately vest. Under terms of the employment agreement, should an acquisition
of Phoenix or a similar corporate event constituting a "change of control" of
Phoenix result in the termination of Mr. Beizer's employment with Phoenix, any
unvested options held by Mr. Beizer will immediately vest and will be
exercisable for a subsequent period of 36 months. The Merger will constitute a
change of control of Phoenix. Mr. Beizer has agreed to forfeit his rights with
regard to the options held by him and the options will terminate on the day
preceding the consummation of the Merger. In the event Phoenix or Mr. Beizer
terminates Mr. Beizer's employment as a result of an acquisition of Phoenix or a
similar corporate event constituting a change of control of Phoenix, Mr. Beizer
shall receive a severance amount equal to the greater of 18 months salary or the
balance of the salary for the full term of the agreement. In either a
termination of Mr. Beizer's employment without cause or the termination of his
employment in the event of a change of control of Phoenix, the agreement
provides that Mr. Beizer shall receive reimbursement from Phoenix for reasonable
relocation expenses, not to exceed $20,000. Mr. Beizer has previously relocated
and received reimbursement for such relocation. Mr. Beizer will not receive any
additional reimbursement for relocation expenses as a result of the Merger.
Payment of Severance to Messrs. Hammond and Beizer. In the Merger
Agreement, Qwest has agreed to pay (or cause the Surviving Corporation to pay)
all amounts then due to Wallace M. Hammond and Jon F. Beizer, respectively,
pursuant to their respective employment agreements by reason of the occurrence
of a change of control (as defined therein), subject in each case to all
necessary withholdings, and Qwest has also agreed to pay, or cause the Surviving
Corporation to pay, all reasonable out-of-pocket costs, fees and expenses of
such persons (including, without limitation, the reasonable fees and
disbursements to counsel and the expenses of litigation) incurred by them in
connection with collecting such amounts. Pursuant to the employment agreements,
the amounts payable to Mr. Hammond and Mr. Beizer are $875,000 (less any amounts
paid to Mr. Hammond as salary after January 31, 1998, which is approximately
$25,000 per month) and $225,000, respectively. Upon consummation of the Merger,
Mr. Hammond and Mr. Beizer will also be paid approximately $26,538 and $10,800,
respectively, in respect of accrued paid time off pursuant to the terms of their
respective employment agreements.
26
<PAGE>
Stock Option Grants and Exercises. Phoenix grants options to its
executive officers under the Phoenix 1989 Plan. As of December 31, 1997,
options to purchase a total of 1,830,633 shares were outstanding under the
Phoenix 1989 Plan and 1,084,395 shares remained available thereunder.
For the fiscal year ended December 31, 1997 there were no options granted
to the Named Executive Officers.
AGGREGATED 1997 YEAR-END OPTIONS
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SHARES UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT At December 31, 1997
SHARES VALUE December 31, 1997 (#) ($)(2)
ACQUIRED ON REALIZED ----------------------------- --------------------------
Name EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ------- -------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey L. Bailey(3)...... 110,000 244,375 110,000 0 0 0
Jon Beizer................ 52,500 16,406 35,500 87,500 0 0
J. Rex Bell............... 0 0 131,248 43,752 0 0
Wallace M. Hammond........ 50,000 53,625 525,000 375,000 0 0
</TABLE>
(1) Value realized is based on the fair market value of Phoenix 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 Phoenix Common Stock at December 31, 1997 ($0.375)
minus the exercise price of the options.
(3) Mr. Bailey resigned as Senior Vice President and Chief Financial Officer of
Phoenix effective March 31, 1997.
COMPENSATION COMMITTEE REPORT/1/
The Compensation Committee consists of Messrs. Thomas Bell, David Singleton
and Charles McGettigan, all of whom are non-employee directors. The Compensation
Committee is responsible for setting Phoenix's policies governing employee
compensation, administering Phoenix's employee benefit plans and determining the
compensation of Phoenix's executive officers. The Compensation Committee
annually evaluates the performance, and determines the compensation, of the
Chief Executive Officer and the other executive officers of Phoenix based upon a
mix of the achievement of corporate goals, individual performance and
comparisons with comparable companies. The Chief Executive Officer and other
executive officers are not present during the discussion of their compensation.
The Compensation Committee attempts to design compensation policies that
will attract and retain the highest quality executives and will reward them for
Phoenix's progress towards its long-term goal of increasing corporate revenue
and attaining profitability in line with averages for companies within the
telecommunications industry. The Compensation Committee considers a variety of
factors, both personal and corporate, in evaluating Phoenix's executive officers
and making its compensation decisions. These include the compensation paid by
comparable companies to individuals in comparable positions, the individual
contributions of each officer to Phoenix, and, most importantly, the progress of
Phoenix toward its long-term objectives. As Phoenix has progressed the measures
of this progress have changed, and the Compensation Committee expects them to
continue to change.
The Compensation Committee has determined that the stock options granted
under the Phoenix 1989 Plan, as amended, with an exercise price at least equal
to the fair market value of Phoenix Common Stock on the date of grant generally
shall be treated as "incentive stock options" as that term is defined in Section
422 of the Code.
Executive Officer Compensation. Phoenix's executive officer compensation
program is comprised of base salary, annual cash incentive compensation in the
form of a bonus and long-term incentive compensation in the form of stock option
grants at current market prices.
- ------------------------
/1/ The material in this report is not "soliciting material," is not deemed
filed with the Commission and is not to be incorporated by reference in any
filing of Phoenix under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or after the
date hereof and irrespective of any general incorporation language in any such
filing.
27
<PAGE>
Base Salary. In establishing base salaries, the Compensation Committee
first considers a number of surveys of compensation levels at comparably-sized
companies in comparable industries, including companies in the
telecommunications industries. The companies included in the surveys are not
necessarily the same as the companies included in the market indices included in
the performance graph in this Annual Report.
Based on the data generated in the surveys, the Compensation Committee then
sets a target base salary level applicable to all executive officers. The
Compensation Committee then considers the level of responsibility, experience
and contributions of each executive officer. The Compensation Committee then
sets each officer's base salary taking into account the target salary and the
Compensation Committee's evaluation of individual performance.
Annual Cash Incentive Bonus. There were no formal cash incentive bonus
programs in place for executive officers during 1995, 1996 or 1997. Under the
terms of the employment agreements described above in "--Compensation of
Executive Officers," Wallace M. Hammond and Jon Beizer are entitled to receive
bonuses based on Phoenix's operating results. As a result of Phoenix achieving
profitable operating results in the first, second and third quarters of 1995,
executive officers received a total of $24,439 in cash bonuses in 1995 relating
to Phoenix's 1995 performance. Phoenix did not achieve profitable operating
results during 1996 or 1997, and, accordingly, no performance bonuses were
declared with respect to such fiscal years.
Stock Option Grants. Phoenix grants stock options to its executive
officers in order to provide long-term incentives to executive officers and
align executive officer and stockholder long-term interests by creating a direct
link between executive compensation and stockholder return. Stock options are
granted at an option price equal to the fair market value of Phoenix Common
Stock on the date of grant. In order to facilitate long-term incentives through
the option grants, options are generally subject to ratable vesting over four
years.
Executive officer awards are subjectively determined by the Compensation
Committee after considering stock option grant data taken from the compensation
surveys referred to above, as well as the level of responsibility, experience
and contributions of each executive officer. In determining the size of
individual grants, the Compensation Committee also considers the number of
shares subject to options previously granted to each executive officer,
including the number of such shares that have vested and that remain unvested.
Chief Executive Officer Compensation. In determining Mr. Hammond's
compensation package for 1995, Phoenix relied on a report prepared by an
independent executive compensation consulting firm which examined compensation
packages of chief executive officers and presidents of comparable companies. In
determining Mr. Hammond's compensation package for 1996, Phoenix relied on an
update to the report prepared in 1995 by the independent executive compensation
consulting firm. In determining Mr. Hammond's compensation package for 1997,
Phoenix relied on the reports previously prepared by the independent executive
compensation consulting firm.
28
<PAGE>
Option Repricing. The Compensation Committee has from time to time
approved the repricing of option grants to employees, including executive
officers, based upon the Compensation Committee's determination of the value of
the employee's contribution to Phoenix. The intent of these repricings has been
to align the option exercise price with the fair market value of the underlying
Phoenix Common Stock as determined by the marketplace.
Thomas H. Bell
David Singleton
Charles C. McGettigan
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Thomas H. Bell, who is Chairman of the Board of Phoenix and a member of the
Compensation Committee, was the Chief Executive Officer of Phoenix from
inception through January 1992 and of its predecessor from inception to 1989.
Mr. Bell was Phoenix's President from inception through September 1990 and the
President of its predecessor from 1985 to 1989. Under the terms of an agreement
between Phoenix and Mr. Bell, Mr. Bell is enrolled in Phoenix's health benefits
plans and Phoenix pays Mr. Bell's premiums which amounted to $3,994.00 in 1997.
29
<PAGE>
PERFORMANCE MEASUREMENT COMPARISON(1)(2)(3)
The following chart shows the CRSP Total Return Index from December 31,
1992 to December 31, 1997 for (i) Phoenix Common Stock, (ii) Nasdaq Stock Market
(US Companies) and (iii) Nasdaq Telecommunications Stocks. All values assume
reinvestment of the full amount of all dividends.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN ON INVESTMENT
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
12/31/92 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97
<S> <C> <C> <C> <C> <C> <C>
Phoenix Network, Inc. 100.0 600.0 211.1 322.2 300.0 33.3
Nasdaq Stock Market (US Companies) 100.0 114.8 112.2 158.7 195.2 239.5
Nasdaq Telecommunications Stocks
SIC 4800-4899 US & Foreign 100.0 154.2 128.7 168.5 172.3 254.5
</TABLE>
(1) This Section is not "soliciting material," is not deemed filed with the
Commission and is not to be incorporated by reference in any filing of
Phoenix under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, whether made before or after the date
hereof and irrespective of any general incorporation language in any such
filing.
(2) The CRSP Total Return on investment (change in month end stock price plus
reinvested dividends) for Phoenix, the CRSP Total Return for The NASDAQ
Stock Market (US Companies) and the CRSP Total Return Index for NASDAQ
Telecommunications Stocks based on December 31, 1992 = 100.
(3) Phoenix Common Stock was traded in the over-the-counter market from
Phoenix's initial public offering in 1983 and was quoted on the NASDAQ
system under the Symbol "PHXN" from October 24, 1989 through October 4,
1993. On October 5, 1993, Phoenix changed its listing to the American Stock
Exchange and began trading under the symbol "PHX".
30
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF PHOENIX STOCK
The following table sets forth certain information regarding the beneficial
ownership of Phoenix Common Stock as of February 9, 1997 by: (i) each director;
(ii) each executive officer named above; (iii) all executive officers and
directors of Phoenix as a group; and (iv) all those known by Phoenix to be
beneficial owners of more than five percent (5%) of any class of its voting
securities. Unless otherwise indicated, Phoenix believes that each of the
persons indicated below has sole voting and investment power with respect to the
shares owned by such person subject to community property laws where applicable.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
OF BENEFICIAL OF OUTSTANDING
Ownership Shares(1)
----------------- -----------------
5% Stockholders(2):
<S> <C> <C>
Global Capital Management Inc.
601 Carlson Parkway, Suite 200
Minnetonka, MN 55305......................................................... 2,364,900 6.58%
Proactive Investment Managers, L.P.(3)(4)
50 Osgood Place
San Francisco, CA 94133...................................................... 1,864,760 5.16%
DIRECTORS AND EXECUTIVE OFFICERS:
Wallace M. Hammond(3)......................................................... 591,534 1.62%
J. Rex Bell(3)................................................................ 234,374 *
Jon F. Beizer(3).............................................................. 42,375 *
Thomas H. Bell(3)............................................................. 2,752,056 7.65%
James W. Gallaway(3).......................................................... 502,205 1.39%
Merrill L. Magowan(3)......................................................... 143,837 *
Charles C. McGettigan(3)...................................................... 52,726 *
David Singleton(3)............................................................ 193,792 *
Max E. Thornhill(3)(5)........................................................ 1,136,527 3.15%
All directors and executive officers as a group (9 persons)(3)................ 5,649,426 15.26%
</TABLE>
* Less than one percent.
(1) Percentage of ownership is based on 35,898,958 shares of Phoenix Common
Stock outstanding as of February 9, 1997.
(2) Pursuant to the Voting Agreements, Qwest has voting control of approximately
21% of the outstanding shares of Phoenix Common Stock.
(3) Includes shares of Phoenix Common Stock which certain principal
stockholders, directors and officers of Phoenix have the right to acquire
within 60 days after the date of this table pursuant to outstanding options
and warrants as follows: Proactive Investment Managers, L.P., 4,250;
Proactive Partners, L.P., 200,225 shares; Fremont Proactive Partners, L.P.,
2,000 shares; Wallace M. Hammond, 575,000 shares; J. Rex Bell, 134,374
shares; Jon F. Beizer, 42,375 shares; Thomas H. Bell, 48,000 shares; James
W. Gallaway, 131,655 shares; Merrill L. Magowan, 118,218 shares; Charles C.
McGettigan, 24,000 shares; David Singleton, 23,112 shares; and Max E.
Thornhill, 125,112 shares.
(4) Includes only shares held of record by Proactive Investment Managers, L.P.
("PIM"), Proactive Partners, L.P. ("PP") and Fremont Proactive Partners,
L.P. ("FPP"), each California limited partnerships. The general partner of
PP and FPP is PIM, of which Messrs. Charles McGettigan, Myron A. Wick III,
Jon Gruber and J. Patterson McBaine are general partners. Messrs. Wick,
Gruber and McBaine own of record 103,510, 45,840 and 19,460 shares of
Phoenix Common Stock, respectively. In addition, Messrs. McGettigan and Wick
hold options to purchase 24,000 and 28,000 shares of Phoenix Common Stock,
respectively, that are exercisable within 60 days of the date of this table.
Myron A. Wick III is the trustee of the Myron A. Wick III Trust. The Myron
A. Wick III Trust owns of record 28,726 shares of Phoenix Common Stock.
Messrs. Gruber and McBaine are also general partners of Lagunitas Partners,
L.P., an entity that holds 721,334 shares of Phoenix Common Stock, as well
as a warrant, exercisable within 60 days of the date of this table, to
purchase an additional 12,000 shares of Phoenix Common Stock. Messrs. Gruber
and McBaine are also directors and/or general partners of several entities
that may own nominal amounts of Phoenix Common Stock. Due to these
relationships, PIM may be deemed to beneficially own some or all of the
shares of the capital stock of Phoenix held of record or beneficially by
such persons and/or companies.
(5) Does not include 525,875 and 220,700 shares of Phoenix Common Stock held of
record by Bonnie P. Thornhill, Mr. Thornhill's wife, and the Max E. & Bonnie
P. Thornhill Foundations, respectively. Mr. Thornhill disclaims beneficial
ownership of such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEMNIFICATION AGREEMENTS
Phoenix has entered into indemnity agreements with certain officers and
directors which provide, among other things, that Phoenix 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 Phoenix, and
otherwise to the fullest extent permitted under Delaware law and Phoenix's
bylaws.
31
<PAGE>
In connection with the acquisition of AmeriConnect, Inc., Phoenix agreed to
maintain all rights to indemnification existing on the date of the merger
agreement between Phoenix, Phoenix Merger Corp. and AmeriConnect, Inc. in favor
of the former directors and officers of AmeriConnect, Inc. and agreed that the
certificate of incorporation and bylaws of AmeriConnect, Inc., as a subsidiary
of Phoenix, would not be amended to reduce or limit such rights. In addition,
Phoenix agreed that AmeriConnect, Inc. will indemnify to the fullest extent
possible under its certificate of incorporation, its bylaws and applicable law
the present and former directors of AmeriConnect, Inc. against all losses,
damages, liabilities or claims made against them arising from their service in
such capacities prior to and including the effective time of the acquisition of
AmeriConnect, Inc. by Phoenix, to at least the same extent as such persons were
required to be indemnified pursuant to AmeriConnect Inc.'s certificate of
incorporation and bylaws prior to the acquisition of AmeriConnect, Inc. by
Phoenix. Phoenix also agreed, with respect to matters occurring prior to the
effective time of the acquisition of AmeriConnect, Inc. by Phoenix, that
AmeriConnect, Inc. will cause to be maintained in effect for three years from
the effective time of acquisition, directors' and officers' liability insurance
providing at least the same coverage with respect to AmeriConnect, Inc.'s
present and former officers and directors as the policies maintained by or on
behalf of AmeriConnect, Inc. on the date of the merger agreement between
Phoenix, Phoenix Merger Corp. and AmeriConnect, Inc. containing terms and
conditions which are substantially similar thereto, to the extent such insurance
is currently available on commercially reasonable terms with respect to such
matters.
ACQUISITION OF ACI
In January 1996, Phoenix acquired from 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 Phoenix Common Stock valued at $10.5 million and the
issuance of a long-term note in the amount of $1.3 million (the "Van Essen
Note"). As a result of the transaction and her subsequent sale of certain shares
of Phoenix Common Stock, Van Essen held approximately 1,488,900 shares of
Phoenix Common Stock or 4.1% of the Phoenix Common Stock outstanding as of
January 27, 1998.
On January 16, 1998, Phoenix failed to make a scheduled payment under the
Van Essen Note and is currently in default thereon. On January 17, 1998, Phoenix
received a notice from Van Essen declaring a default under the Van Essen Note
and notifying Phoenix that if the scheduled payment is not received by February
2, 1998, the entire unpaid principal balance of the Van Essen Note will become
due and payable and that Van Essen will pursue all remedies available to her.
Phoenix has not made the scheduled payment and currently does not have
sufficient cash to make the scheduled payment.
PREFERRED STOCK CONVERSIONS
The remaining holders of Phoenix's Series A, B and D Preferred Stock
converted such Preferred Stock into Phoenix Common Stock during the first eight
months of 1997. Messrs. Magowan and McGettigan, directors of Phoenix, and
certain of their affiliates were the holders of shares of such Phoenix Preferred
Stock.
INVESTMENT BANKING SERVICES
Charles C. McGettigan, a director of Phoenix, is a Managing Director of
McGettigan, Wick & Co., Inc. ("McGettigan Wick"). Phoenix entered into an
agreement with McGettigan Wick on August 11, 1997 pursuant to which McGettigan
Wick was engaged by Phoenix to provide advice and counsel to the Phoenix Board
regarding the financial terms of the then proposed business combination of
Phoenix and Midcom. In exchange for such services, McGettigan Wick was to
receive a fee of $125,000 only if the business combination with Midcom was
consummated. Since the Midcom merger was aborted, Phoenix did not pay such fee
to McGettigan Wick. Phoenix has agreed, however, to pay McGettigan Wick $125,000
for past services rendered and for providing advice and counsel to the Phoenix
Board regarding the financial terms of the Merger if the Merger is consummated.
32
<PAGE>
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following documents are filed as part of this Annual Report on Form 10-
K:
(a) Financial Statements: The financial statements and schedule filed as
part of this report are set forth following page F-1 of this report.
(b) Reports on Form 8-K: None
(c) Exhibits:
2.1 -- Amended and Restated Agreement and Plan of Merger dated as of
December 31, 1997 among Phoenix Network, Inc., Qwest
Communications International Inc. and Qwest 1997-5 Acquisition
Corp.(1)
3.1 -- Restated Certificate of Incorporation of the Company, as
amended (15)
3.2 -- Bylaws of the Company(2)
10.1 -- 1989 Stock Option Plan(3)
10.2 -- Forms of option grant pursuant to the 1989 Stock Option Plan(4)
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(6)
10.6 -- Series B Preferred Stock Purchase Agreement dated as of
December 27, 1991 with List of Purchasers(7)
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(6)
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")(8)
10.10 -- Amendment Number One to the Original Foothill Agreement, dated
October 17, 1996(8)
10.11 -- Amendment Number Two to the Original Foothill Agreement, dated
December 23, 1996(8)
10.12 -- Amendment Number Three to the Original Foothill Agreement,
dated March 12, 1997(8)
10.13 -- Amendment Number Four to the Original Foothill Agreement, dated
March 28,1997(9)
10.14 -- Amendment Number Six to the Original Foothill Agreement, dated
September 1, 1997
10.15 -- Amendment Number Seven to the Original Foothill Agreement,
dated December 12, 1997
10.16 -- Amendment Number Eight to the Original Foothill Agreement,
dated December 31, 1997
10.17 -- Amendment Number Nine to the Original Foothill Agreement, dated
February 2, 1997
10.18 -- Office Lease Agreement with Itel Rail Corporation, dated June
8, 1994(10)
10.19 -- Stockholders Agreement, dated October 20, 1995(11)
10.20 -- Series F Preferred Stock and Warrant Purchase Agreement, dated
October 20, 1995(11)
10.21 -- Communications Services Agreement, between the Company and US
ONE Communications Corp., dated May 22, 1996 (the "Original US
ONE Agreement")(12)
10.22 -- Amendment No. 1 to the Original US ONE Agreement, dated October
11, 1996(8)
10.23 -- Amendment No. 2 to the Original US ONE Agreement, dated October
11, 1996(8)
10.24 -- Amendment No. 3 to the Original US ONE Agreement, dated January
3, 1997(8)
10.25 -- Amendment No. 4 to the Original US ONE Agreement, dated
December 30, 1996(8)
10.26 -- Amendment No. 5 to the Original US ONE Agreement, dated March
26, 1997(8)
10.27 -- Amendment No. 6 to the Original US ONE Agreement, dated June
21, 1997(9)
10.28 -- Telecommunications Services Agreement, between the Company and
Comdisco Disaster Recovery Services, a Division of Comdisco,
Inc., dated March 25, 1996(12)
10.29 -- Employment Agreement, between the Company and Wallace M.
Hammond, dated January 1, 1996(8)
10.30 -- Employment Agreement, between the Company and Jon Beizer, dated
February 1, 1997(9)
10.31 -- Warrant to Purchase 200,000 Shares of Common Stock issued to
Foothill Capital Corporation, dated as of March 12, 1997(13)
10.32 -- Convertible Preferred Stock Purchase Agreement between Phoenix
Network, Inc. and JNC Opportunity Fund Ltd., dated as of March
31, 1997(14)
33
<PAGE>
10.33 -- Registration Rights Agreement between Phoenix Network, Inc. and
JNC Opportunity Fund Ltd., dated as of March 31, 1997(14)
10.34 -- Form of Warrant dated April 4, 1997, issued to Wharton Capital
Partners, Ltd. and Keith A. Rhodes and exercisable for 50,000
and 10,000 shares of common stock, respectively.
10.35 -- Convertible Preferred Stock Purchase Agreement between Phoenix
Network, Inc. and JNC Opportunity Fund Ltd., dated as of July
17, 1997(15)
10.36 -- Registration Rights Agreement between Phoenix Network, Inc. and
JNC Opportunity Fund Ltd., dated as of July 17, 1997(15)
10.37 -- Form of Warrant issued to (i) JNC Opportunity Fund Ltd.,
Wharton Capital Partners Ltd. and Keith A. Rhodes, exercisable
for 45,000, 19,000 and 3,500 shares of common stock,
respectively, and dated July 17, 1997 and (ii) JNC Opportunity
Fund Ltd., Wharton Capital Partners Ltd. and Keith A. Rhodes,
exercisable for 30,000, 11,000 and 4,000 shares of common
stock, respectively, and dated July 23, 1997.
11.1 -- Computation of earnings per share(16)
18.1 -- Letter re change in accounting principles(17)
21.1 -- Subsidiaries of Phoenix Network, Inc.(8)
23.1 -- Consent of Grant Thornton LLP
27.1 -- Financial Data Schedule
__________
(1) Filed as Exhibit 2 to the Registration Statement on Form S-4 of Qwest
Communications International Inc. declared effective on February 12, 1998
(File No. 333-46145) and included as Exhibit A to the Proxy
Statement/Prospectus included as part of such Registration Statement and
incorporated herein by reference.
(2) 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.
(3) 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.
(4) 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.
(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 Quarterly Report on Form 10-Q for
the quarter ended July 31, 1990, and incorporated herein by reference.
(7) 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.
(8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1996, and incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, 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) 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.
(12) 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.
(13) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, and incorporated herein by reference.
(14) Filed as an Exhibit to the Company's Registration Statement on Form S-3
(file no. 333-26023), as filed with the Commission on April 29, 1997, and
amended on Forms S-3/A on June 18, 1997 and June 27, 1997, and
incorporated herein by reference.
(15) Filed as an Exhibit to the Company's Registration Statement on Form S-3
(file no. 333-33091), as filed with the Commission on August 7, 1997, and
amended on Form S-3/A on September 12, 1997, and incorporated herein by
reference.
(16) This data appears in the Consolidated Statement of Operations included in
the Company's Consolidated Financial Statements.
(17) 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.
34
<PAGE>
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 9, 1998
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 9, 1998
- ------------------- and Director
Thomas H. Bell
/s/ WALLACE M. HAMMOND President, Chief Executive March 9, 1998
- ----------------------- Officer (Principal
Wallace M. Hammond Executive Officer) and
Director
/s/ JON BEIZER Senior Vice President, March 9, 1998
- -------------- Chief Financial Officer
Jon Beizer (Principal Financial and
Accounting Officer)
/s/ JAMES W. GALLAWAY Director March 9, 1998
- ----------------------
James W. Gallaway
/s/ MERRILL L. MAGOWAN Director March 9, 1998
- -----------------------
Merrill L. Magowan
/s/ CHARLES C. MCGETTIGAN Director March 9, 1998
- --------------------------
Charles C. McGettigan
/s/ MAX E. THORNHILL Director March 9, 1998
- --------------------
Max E. Thornhill
/s/ DAVID SINGLETON Director March 9, 1998
- --------------------
David Singleton
</TABLE>
35
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
PHOENIX NETWORK, INC.
AND SUBSIDIARIES
December 31, 1995, 1996 and 1997
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Phoenix Network, Inc.
We have audited the accompanying consolidated balance sheets of Phoenix Network,
Inc. (a Delaware Corporation) and Subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Phoenix Network,
Inc. and Subsidiaries as of December 31, 1996 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements as of December 31, 1997 and
1996, have been prepared assuming that the Company will continue as a going
concern. However, the Company has sustained substantial losses from operations
in recent years and has continually used, rather than provided, cash in its
operations. Such losses, and other items discussed in note B, raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Management's plans in regard to
these matters are also discussed in note B.
GRANT THORNTON LLP
Denver, Colorado
February 19, 1998
F-1
<PAGE>
Phoenix Network, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,548,061 $ 447,983
Accounts receivable, net of allowance for doubtful accounts
of $3,600,830 in 1996 and $1,280,444 in 1997 14,419,829 9,623,721
Prepaid carrier costs - 1,274,790
Deferred commissions 969,940 405,329
Other current assets 686,271 459,808
------------ ------------
Total current assets 17,624,101 12,211,631
Furniture, equipment and data processing systems - at cost,
less accumulated depreciation of $2,495,701 in 1996 and
$3,479,973 in 1997 5,522,771 3,078,020
Deferred commissions 414,873 71,617
Customer acquisition costs, less accumulated amortization
of $3,145,245 in 1996 and $4,664,092 in 1997 2,725,275 1,177,043
Goodwill, less accumulated amortization of $1,059,613
in 1996 and $2,049,731 in 1997 18,553,332 17,816,119
Other assets 953,831 779,245
------------ ------------
$ 45,794,183 $ 35,133,675
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of capital lease $ - $ 140,635
Current maturities of note payable to stockholder - 1,388,206
Current maturities of note payable to finance company 444,839 483,283
Note payable to vendor 1,161,148 -
Line of credit - finance company 4,698,645 6,663,349
Accounts payable 16,686,690 14,533,446
Accrued liabilities 2,418,627 1,842,685
------------ ------------
Total current liabilities 25,409,949 25,051,604
LONG-TERM DEBT
Note payable to stockholder 1,388,206 -
Note payable to finance company, less current maturities 824,306 355,364
Capital lease, less current maturities - 30,464
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value, authorized 5,000,000 shares,
issued and outstanding 546,458 in 1996 and 39,500 in 1997,
liquidation preference aggregating $3,368,020 and $808,181
at December 31, 1996 and 1997, respectively 546 39
Common stock - $.001 par value, authorized 50,000,000 shares,
issued 25,851,894 in 1996 and 33,575,902 in 1997 25,851 33,576
Additional paid-in capital 45,225,554 52,587,282
Accumulated deficit (27,077,707) (42,922,132)
Treasury stock - 1,300 common shares at cost (2,522) (2,522)
------------ ------------
18,171,722 9,696,243
------------ ------------
$ 45,794,183 $ 35,133,675
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
Phoenix Network, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
Revenue $75,854,969 $ 99,307,277 $ 76,947,454
Cost of revenue 53,775,779 73,438,757 57,195,121
----------- ------------ ------------
Gross profit 22,079,190 25,868,520 19,752,333
Selling, general and administrative expenses 22,323,202 31,114,723 25,940,774
Depreciation and amortization 1,125,563 4,357,720 3,972,924
Relocation expenses - 1,133,158 -
Acquisition expenses - 1,308,634 513,457
Loss on abandonment of fixed assets 1,019,648 15,238 3,260,204
Aborted bond offering expenses - 246,083 -
----------- ------------ ------------
24,468,413 38,175,556 33,687,359
----------- ------------ ------------
Operating loss (2,389,223) (12,307,036) (13,935,026)
Other income (expense)
Interest income 103,125 84,627 70,518
Interest expense (260,639) (625,817) (1,091,489)
Miscellaneous income (expense) (6,767) 4,264 11,013
----------- ------------ ------------
Loss before income taxes (2,553,504) (12,843,962) (14,944,984)
Income tax expense (500,000) - -
----------- ------------ ------------
Net loss $(3,053,504) $(12,843,962) $(14,944,984)
Net loss attributable to common shares
Net loss $(3,053,504) $(12,843,962) $(14,944,984)
Preferred dividends (594,381) (1,206,042) (179,126)
----------- ------------ ------------
$(3,647,885) $(14,050,004) $(15,124,110)
=========== ============ ============
Basic loss per common share $(0.24) $(0.68) $(0.52)
=========== ============ ============
Weighted average common shares 15,335,268 20,673,276 28,951,196
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Phoenix Network, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three years ended December 31, 1997
<TABLE>
<CAPTION>
Additional
Preferred Common paid-in Accumulated Treasury
stock stock capital deficit stock
--------- ---------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 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 and
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)
Exercise of stock options
and warrants - 942 921,563 - -
Conversion of preferred
stock into common stock (782) 6,783 893,440 (899,441) -
Issuance of preferred stock 275 - 5,224,725 - -
Issuance of 200,000 common
stock purchase warrants - - 322,000 - -
Net loss - - - (14,944,984) -
--------- ---------- ----------- ------------ --------
Balance at December 31, 1997 $ 39 $33,576 $52,587,282 $(42,922,132) $ (2,522)
========= ========== =========== ============ ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
Phoenix Network, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Cash received from customers $ 72,103,864 $ 98,612,681 $ 78,250,720
Interest received 83,227 84,627 70,518
Cash paid to suppliers and employees (73,638,371) (102,047,484) (82,823,340)
Interest paid (259,919) (625,817) (1,091,489)
Cash paid for income taxes (3,340) (2,245) -
------------ ------------- ------------
Net cash used in operating activities (1,714,539) (3,978,238) (5,593,591)
Cash flows from investing activities
Note receivable - director/shareholder (3,000) - -
Purchases of furniture, equipment and data
processing systems (589,419) (3,620,989) (1,652,566)
Notes receivable - agents (23,115) - -
Payments on agents notes receivable 70,900 - -
Customer base acquisitions (1,553,238) (468,002) -
Business acquisitions, net of cash acquired (4,692,153) (4,085,093) -
Additions to goodwill - - (252,907)
------------ ------------- ------------
Net cash used in investing activities (6,790,025) (8,174,084) (1,905,474)
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 - 5,225,000
Proceeds from notes payable to bank and finance company 6,143,950 6,060,358 3,575,000
Payments on notes payable to bank and finance company (8,686,625) (134,036) (2,040,794)
Payments on note payable to vendor - (1,851,977) (1,161,148)
Payments on capital lease obligation - - (121,576)
Preferred stock dividends (187,288) - -
Proceeds from exercise of options and warrants 526,332 1,328,035 922,505
------------ ------------- ------------
Net cash provided by financing activities 15,186,626 5,402,380 6,398,987
------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH 6,682,062 (6,749,942) (1,100,078)
Cash and cash equivalents at beginning of year 1,615,941 8,298,003 1,548,061
------------ ------------- ------------
Cash and cash equivalents at end of year $ 8,298,003 $ 1,548,061 $ 447,983
============ ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Phoenix Network, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended December 31,
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
Reconciliation of net loss to net cash provided
by (used in) operating activities
Net loss $(3,053,504) $(12,843,962) $(14,944,984)
Adjustments to reconcile net loss to
net cash used in operating activities
Provision for doubtful accounts 2,689,250 3,147,077 3,407,842
Abandonment of fixed assets 1,019,648 15,238 3,260,204
Depreciation and amortization 1,125,563 4,357,720 3,972,924
Deferred taxes 500,000 - -
Changes in assets and liabilities
Accounts receivable (3,751,105) (959,900) 1,388,266
Deferred commissions (1,467,519) 1,718,450 907,867
Prepaid carrier costs - - (1,274,790)
Other current assets (163,740) (217,473) 226,464
Other assets 511 (67,893) 191,802
Accounts payable and accrued liabilities 1,386,357 872,505 (2,729,186)
----------- ------------ ------------
Net cash used in operating activities $(1,714,539) $ (3,978,238) $ (5,593,591)
=========== ============ ============
Noncash financing and investing activities
- ------------------------------------------
Conversion of preferred stock into common stock $ 7,224 $ 1,259,782 $ 900,223
Capital lease obligation - - 292,675
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>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 marketing primarily to 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 AT&T Corporation,
MCI Communications Corporation, Sprint Communications, L.P., Frontier Corp.,
WorldCom, Inc. (formerly Wiltel, Inc.) 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.
Prepaid Carrier Costs
---------------------
Prepaid carrier costs consist of contract shortfall billings which are
anticipated to be recovered through increased usage during the remaining term
of the contract.
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>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Impairment of Long-Lived Assets
-------------------------------
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed of (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows (undiscounted and
without interest) is less than the carrying amount of the asset, an impairment
loss is recognized. Measurement of that loss would be based on the fair value
of the asset. SFAS 121 also generally requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
the carrying amount or the fair value, less cost to sell. SFAS 121 is
effective for the Company's 1997 fiscal year end. Any impairment provisions
recognized in accordance with SFAS 121 are permanent and may not be restored
in the future. No impairment expense was recognized in the years ended
December 31, 1997 and 1996.
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.
F-8
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
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.
Loss per Common Share
---------------------
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS
128 requires the presentation of basic earnings per share (EPS) and, for
companies with potentially dilutive securities such as convertible debt,
options and warrants, diluted EPS.
EPS is computed in accordance with SFAS 128 by dividing net income by
the weighted average number of shares outstanding during the period. All
outstanding securities at the end of 1997 which could be converted into common
shares are anti-dilutive (see note I). Therefore, the basic and diluted EPS
are the same. There is no impact on EPS for prior years as a result of the
adoption of SFAS 128.
NOTE B - REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company has
sustained substantial losses from operations in recent years and has
continually used, rather than provided, cash in its operations. In addition,
the Company is delinquent on a payment of approximately $230,000 on a note
payable to a shareholder, which constitutes a default, rendering the entire
amount of the note payable (approximately $1.4 million) due and payable.
In view of the matters described in the preceding paragraph, recoverability of
a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which in
turn is dependent upon the Company's ability to meet its financial
requirements on a continuing basis, to maintain present financing and to
succeed in its future operations. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or amounts and classifications of liabilities that might be
necessary should the Company be unable to continue in existence.
In 1998, management entered into a merger agreement with a subsidiary
of Qwest Communications International Inc., a facilities-based provider of
multi-media communications services to interexchange carriers and to
businesses and consumers. The merger, subject to approval by Phoenix's
shareholders on March 30, 1998, would result in Phoenix shareholders receiving
stock of Qwest with an aggregate market value of approximately $28.5 million,
subject to certain adjustments and limitations described in the merger
agreement, and up to $4 million in cash, contingent upon the outcome of
certain litigation.
F-9
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - POOLING-OF-INTERESTS, ACQUISITIONS, AND MERGERS
On October 8, 1996, Phoenix Merger Corp., a wholly-owned subsidiary of
Phoenix, was merged with and into Americonnect, Inc. 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 year ended December
31, 1995, are as follows (amounts in 000s):
Net sales
Phoenix $ 58,755
Americonnect 17,100
------
$ 75,855
======
Net income (loss)
Phoenix $ (1,334)
Americonnect (1,719)
------
$ (3,053)
======
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 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.
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 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.
F-10
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - POOLING-OF-INTERESTS, ACQUISITIONS, AND MERGERS (CONTINUED)
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.
Year ended December 31, 1995
----------------------------
Revenue $ 104,729,000
Net loss $ (4,428,000)
Net loss attributable to common shares $ (5,603,000)
Basic loss per common share $ (0.31)
Weighted average number of shares outstanding 18,135,000
NOTE D - FURNITURE, EQUIPMENT AND DATA PROCESSING SYSTEMS
Furniture, equipment and data processing systems consist of the
following:
December 31,
--------------------------
1996 1997
------------ ------------
Data processing systems $ 4,872,174 $ 3,012,879
Switching equipment 1,898,593 2,160,972
Furniture and fixtures 710,234 462,282
Other equipment 537,471 921,860
----------- -----------
8,018,472 6,557,993
Less accumulated depreciation (2,495,701) (3,479,973)
$5,522,771 $ 3,078,020
=========== ===========
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, decided to license an existing billing and
customer service system from a vendor at a cost of approximately $3,000,000.
During the fourth quarter of 1997, management abandoned the current billing
system project, resulting in a loss on abandonment of assets in 1997 of
$3,260,204.
F-11
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - LINE OF CREDIT AND BRIDGE LOAN -- 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 amended term of the Agreement is five years,
expiring October 2000, with automatic renewal options. There are penalties
for early termination by the Company. Borrowings bear interest at 1.75% over
the "reference rate," as defined. In connection with the renewal, fees and
transaction costs were incurred, which are being amortized on a straight-line
basis over the term of the agreement. The loan is collateralized by the
Company's accounts receivable, equipment, general intangibles and other
personal property assets. Among other provisions, the Company must maintain
certain minimum financial covenants, is prohibited from paying dividends
without the approval of the finance company, and is subject to limits on
capital expenditures. At December 31, 1997, 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, 1997, $6,663,349 was outstanding under the line and the
interest rate was 10.25%.
On March 12, 1997, the Phoenix Credit Facility was amended to provide for a
$2,000,000 bridge loan with the principal amount to be paid in eight equal
monthly installments between July 1, 1997 and January 1, 1998. The amendment
included the issuance of 200,000 common stock purchase warrants to the finance
company. Phoenix made installment payments of $250,000 in June, July and
August 1997. On September 1, 1997, the parties entered into an amendment to
provide for a temporary moratorium on payments on the bridge loan with a final
payment of all outstanding principal and accrued and unpaid interest being due
on January 9, 1998. On December 12, 1997, the Phoenix Credit Facility was
again amended to provide for an additional bridge loan of $1,825,000 and the
retention of an over-advance of $300,000. On December 31, 1997, the Phoenix
Credit Facility was further amended to provide that Foothill Capital
Corporation may, in its sole discretion, lend Phoenix an additional amount of
up to $1.25 million, to be treated either as an increase to the bridge loan
amount or as an over-advance. The bridge loan and any overadvance amounts must
be repaid on the earliest to occur of (a) April 30, 1998, (b) the effective
time of the proposed merger with the subsidiary of Qwest, or (c) termination
of the Phoenix Credit Facility. On February 2, 1998, the Phoenix Credit
Facility was amended to provide for an additional over-advance of $500,000 and
to reduce the amount that Foothill Capital Corporation may lend Phoenix from
$1.25 million to $750,000.
Average daily outstanding borrowings for the year ended December 31, 1997, was
$4,092,859 at a weighted average interest rate of 10.25%. The highest month-
end balance outstanding for the year ended December 31, 1997 was $5,621,926.
F-12
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 was payable in annual installments through 2001.
However, in January 1998, the Company failed to make the first installment on
the note and is currently in default thereon. On January 17, 1998, Phoenix
received a notice declaring a default under the note and notifying Phoenix
that if the scheduled payment is not received by February 2, 1998, the entire
unpaid principal balance of the note will become due and payable and that
available remedies would be pursued. Foothill Capital Corporation has waived
the resulting cross default in the Phoenix Credit Facility.
During 1997, the Company entered into a capital lease for the acquisition of
equipment with a cost of $292,675. The lease is payable in monthly
installments of $12,266 through March 1999.
Future minimum payments on long-term debt at December 31, 1997 are as follows:
Year ended Note payable to Note payable Capital
December 31, finance company to stockholder lease Total
------------ --------------- --------------- --------- -----------
1998 $ 483,283 $ 1,388,206 $ 140,635 $ 2,012,124
1999 355,364 - 30,464 385,828
--------------- --------------- --------- -----------
$ 838,647 $ 1,388,206 $ 171,099 $ 2,397,952
=============== =============== ========= ===========
NOTE G - LEASES
The Company has operating leases for office space and equipment which
expire on various dates through 2001 and which require that the Company pay
certain maintenance, insurance and other operating expenses. Rent expense for
the years ended December 31, 1995, 1996 and 1997 was $1,028,462, $1,331,911
and $1,162,274, respectively.
Future minimum lease payments for years ending December 31, are as follows:
1998 $1,896,558
1999 1,680,892
2000 820,160
2001 358,386
----------
$4,755,996
==========
F-13
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - COMMITMENTS AND CONTINGENCIES
Carrier Contracts
-----------------
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, 1997 are as follows:
Year ending December 31, Commitment
------------------------ -----------
1998 $18,350,000
1999 1,000,000
-----------
Total $19,350,000
===========
Litigation
----------
WorldCom, Inc. (formerly LDDS Communications, Inc.) commenced an action
against ACI and its former owner asserting claims relating to alleged breaches
of noncompete and confidentiality agreements signed in connection with two
transactions in which WorldCom was involved. The case was tried in federal
court in Jackson, Mississippi in October 1996. The trial judge has found that
ACI and its former owner breached the parties contracts, but has not ruled on
whether these breaches caused damage or, if so, in what amount. Damages in
excess of $4 million have been requested by WorldCom. Phoenix believes it is
entitled to be indemnified for any liability with respect to the LDDS
litigation pursuant to an Indemnification and Hold Harmless Agreement entered
into between ACI and its former owner as part of the ACI merger. The ultimate
liability to Phoenix, if any, is not determinable at this time, nor is there
any assurance that the former owner of ACI has adequate financial resources to
pay Phoenix any or all amounts that may be owed pursuant to the
Indemnification and Hold Harmless Agreement. No provision has been made in the
consolidated financial statements for any potential loss related to this
contingency.
In addition, Phoenix is a party, from time to time, in litigation incident to
its business. Management and legal counsel do not believe that any additional
current or pending litigation exists which will have a material adverse affect
on the Company's financial condition.
F-14
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1997,
the Company's authorized preferred stock is allocated as follows:
Authorized Issued and
shares outstanding
---------- -----------
Reserved shares:
Series A 300,000 -
Series B 200,000 -
Series C 1,000,000 -
Series D 666,666 -
Series F 1,200,000 -
Series G 150,000 -
Series I 125,000 39,500
Undesignated shares 1,358,334 -
--------- -----------
Total 5,000,000 39,500
========= ===========
Series A Preferred Stock ("Series A"), which were fully converted into common
stock as of December 31, 1997, were entitled to 9% cumulative dividends and
voting rights and were 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
expired in February 1997. 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. During 1997, 98,625 shares of
Series A were converted into 564,779 shares of common stock. The conversions
also include unpaid dividends.
Series B Preferred Stock ("Series B"), which were fully converted into common
stock as of December 31, 1997, were entitled to 9% cumulative dividends and
voting rights and were 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 expired in February 1997. During 1996,
11,750 shares of Series B were converted into 98,717 shares of common stock.
During 1997, 114,500 shares of Series B were converted into 1,055,410 shares
of common stock. The conversions also include unpaid dividends.
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.
F-15
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I - CAPITAL STOCK (CONTINUED)
Preferred Stock (Continued)
---------------
Series D Preferred Stock, which were fully converted into common stock as of
December 31, 1997, were entitled to 6% noncumulative 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 were nonvoting and
convertible into 333,333 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 22,000 shares of common stock, with an exercise price
of $1.50 per share. The warrant expired in December 1997.
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.
In March 1997, the Company raised $2,850,000 through a private placement of
150,000 shares of its Series G Preferred Stock at $20 per share. The shares
are entitled to cumulative dividends at a rate per share of 5% per annum when
and as declared by the Board of Directors. These shares are nonvoting and
convertible into common stock subject to certain anti-dilution provisions. In
connection with the initial offering, the Company issued warrants for 60,000
shares of common stock with an exercise price of $2.34 per share. The warrants
expire in April 2002. During 1997, all outstanding shares of Series G
Preferred Stock were converted to 2,491,879 shares of common stock.
In July 1997, the Company raised $2,375,000 through a private placement of
125,000 shares of its Series I Preferred Stock at $20 per share. The shares
are entitled to cumulative dividends at a rate per share of 5% per annum when
and as declared by the Board of Directors. These shares are nonvoting and
convertible into common stock subject to certain anti-dilution provisions. In
connection with the initial offering, the Company issued warrants for 112,500
shares of common stock, with an exercise
F-16
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I - CAPITAL STOCK (CONTINUED)
Preferred Stock (Continued)
---------------
price of $2.00 per share. The warrants expire in July 2002. During
1997, 85,500 shares of Series I Preferred Stock were converted to 2,337,355
shares of common stock. At December 31, 1997, the outstanding Series I
Preferred shares are convertible into 2,349,011 shares of common stock.
The common shares reserved for issuance upon the conversion of the remaining
Series I Preferred Stock have been registered for resale with the Securities
and Exchange Commission.
At December 31, 1997, the Company had cumulative, unpaid dividends on Series I
Preferred Stock of $18,072 ($.46 per share).
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 ten years
when issued, and generally vest over two to four 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 1996 and 1997 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,
1996.
1996 1997
------------ ------------
Net loss attributable to
common shares
As reported $(14,050,004) $(15,124,110)
Pro forma (14,474,477) (15,745,339)
Basic loss per common share
As reported $ (0.68) $ (0.52)
Pro forma (0.70) (0.54)
F-17
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1996 and 1997, respectively: no
expected dividends; expected volatility of 107%; weighted average risk-free
interest rate of 6.3%; and expected lives of four 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 years from the grant date. All options have been exercised as
of December 31, 1997.
The Company's 1989 Stock Option Plan authorizes the grant of incentive
stock options or supplemental stock options for up to 5,000,000 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.
A summary of the status of the Company's fixed stock option plans as of
December 31, 1997, and changes during each of the three years in the period
ended December 31, 1997 is presented below.
Weighted
average
Number price
of shares per share
--------- ---------
Outstanding at January 1, 1995 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
Exercised (869,521) .91
Granted 127,500 3.38
Canceled (151,479) 3.33
---------
Outstanding at December 31, 1997 2,240,652 2.89
=========
F-18
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I - CAPITAL STOCK (CONTINUED)
Stock Options and Warrants (Continued)
--------------------------
<TABLE>
<CAPTION>
Weighted
average
Range Options Proceeds exercise price
------------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Exercisable at December 31, 1997 $1.00 - $2.38 475,558 $ 798,937 $ 1.68
$2.39 - $4.38 878,600 2,688,516 3.06
$4.39 - $6.38 56,890 356,131 6.26
--------- ----------
1,411,048 $3,843,584 2.72
</TABLE>
Weighted average fair value of options granted during 1995, 1996 and 1997 is
$1.42, $1.70, and $2.51 per share, respectively.
The following information applies to options outstanding at December 31, 1997:
Range of exercise prices $1.00-$2.38 $2.39-$4.38 $4.38-$6.38
Options outstanding 566,077 1,608,025 66,550
Weighted average
exercise price $ 1.79 $ 3.15 $ 6.05
Weighted average
remaining contractual
life (years) 6 8 7
Options exercisable 475,558 878,600 56,890
Weighted average
exercise price $ 1.68 $ 3.06 $ 6.26
F-19
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I - CAPITAL STOCK (CONTINUED)
Stock Options and Warrants (Continued)
--------------------------
Common shares subject to warrants are summarized below:
Number Price
of shares per share
---------- -----------
Outstanding at January 1, 1995 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
Exercised (46,700) $1.81-$2.20
Granted 372,500 $2.00-$2.94
Canceled (114,750) $1.81-$2.20
---------
Outstanding at December 31, 1997 1,249,755 $1.50-$7.00
=========
All warrants are exercisable at grant.
NOTE J - 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, 1997, the Company has available to offset future federal
taxable income, net operating loss carryforwards (NOLs) of approximately $35.3
million which expire in varying amounts from 2002 through 2012. 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.
F-20
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - INCOME TAXES (CONTINUED)
The Company's effective income tax rate is different from the Federal
statutory income tax rate because of the following factors:
Year ended December 31,
--------------------------
1995 1996 1997
-------- ------- -------
Federal tax rate applied to loss before taxes (34.0)% (34.0)% (34.0)%
State tax rate applied to allowable carry-
forward losses (5.9) (4.6) (4.6)
Valuation allowance for deferred taxes 59.5 38.6 38.6
-------- ------- -------
Effective tax rate 19.6% - % - %
======== ======= =======
Deferred federal and state tax assets and valuation allowance are as follows:
December 31,
---------------------------
1996 1997
------------ ------------
Current
Allowance for bad debts $ 1,326,000 $ 531,000
Noncurrent
Noncurrent assets 1,187,000 2,232,000
Net operating loss carryforward 8,496,000 14,774,000
------------ ------------
9,683,000 17,006,000
------------ ------------
11,009,000 17,537,000
Valuation allowance (11,009,000) (17,537,000)
------------ ------------
$ - $ -
============ ============
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 was more
likely than not that it would realize the deferred asset. As a result of this
change in estimate, the valuation allowance was increased by $500,000.
F-21
<PAGE>
Phoenix Network, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - INCOME TAXES (CONTINUED)
The components of income tax benefit (expense) are as follows:
Year ended December 31,
-------------------------------
1995 1996 1997
--------- -------- --------
Current $ - $ - $ -
Deferred (500,000) - -
--------- -------- --------
$(500,000) $ - $ -
========= ======== ========
The increase in the valuation allowance was approximately $1,917,000,
$5,080,000 and $6,528,000 for the years ended December 31, 1995, 1996 and
1997, respectively.
NOTE K - 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 years ended December 31, 1995, 1996 and 1997, were approximately $59,000,
$109,000 and $95,000, respectively.
NOTE L - 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:
Cash and cash
equivalents - Carrying amount approximates fair value because
of the short-term maturity of this instrument
Line of credit - Carrying amount approximates fair value because
of the short-term maturity of this instrument
Long-term debt - Carrying amount approximates fair value because
the interest rate at December 31, 1997
approximates the market rate.
NOTE M - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1997, the Company recorded adjustments
increasing their net loss by $3,260,204 related to the write-off of an
abandoned billing system.
F-22
<PAGE>
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 February 19,
1998, 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, 1995, 1996 and 1997.
In our opinion, this schedule presents fairly, in all material respects, the
information to be set forth therein.
Denver, Colorado
February 19, 1998
S-1
<PAGE>
Phoenix Network, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1995, 1996 and 1997
<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, 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
December 31, 1997 $3,600,830 $3,407,842 $5,728,228 $1,280,444
</TABLE>
(1) Write-offs of uncollectible accounts, net of recoveries.
S-2
<PAGE>
EXHIBIT 10.14
AMENDMENT NUMBER SIX TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER SIX TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT (this "Amendment") is entered into as of September 1, 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;
D. Borrower entered into that certain Amendment Number Three to
Amended and Restated Loan and Security Agreement, dated as of
March 12, 1997 (the "Third Amendment"), with Foothill, to amend
the Original Loan Agreement, as previously amended, 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 the Third
Amendment;
E. Borrower entered into that certain Amendment Number Four to
Amended and Restated Loan and Security Agreement, dated as of
March 28, 1997 (the
<PAGE>
"Fourth Amendment"), with Foothill, to amend the Original Loan
Agreement, as previously amended, to, among other things, provide
for the restatement of certain covenants, the elimination of
certain covenants, the addition of certain covenants, and the
waiver of certain described Events of Default that existed as of
March 28, 1997, prior to the effectiveness of the Fourth
Amendment, in each case as set forth in the Fourth Amendment;
F. Borrower has entered, or intends to enter soon, into that certain
Amendment Number Five to Amended and Restated Loan and Security
Agreement, dated as of ___________, 1997 (the "Fifth Amendment"),
with Foothill, to amend the Original Loan Agreement, as previously
amended, to, among other things, provide for (i) Foothill's
consent to the formation by Phoenix of TNC Sub, (ii) the
acquisition by TNC Sub of certain assets, (iii) the unsecured
(other than by the stock of TNC Sub) guaranty by Phoenix of
certain obligations of TNC Sub to Sprint, subject to the Sprint
Subordination Agreement, and (iv) certain covenants pertaining to
the relationships, transactions, and transfers between Borrower
and TNC Sub, in each case as set forth in the Fifth Amendment (the
Original Agreement, as amended by the First Amendment, by the
Second Amendment, by the Third Amendment, by the Fourth Amendment,
and by the Fifth Amendment, is referred to herein as the
"Agreement");
G. Borrower has requested Foothill to amend the Agreement to, among
other things, provide for (i) an extension of, and certain other
modifications in respect of, the Permitted Overadvance Amount and
(ii) a temporary principal moratorium in respect of the Bridge
Loan, in each case as set forth in this Amendment;
H. Foothill is willing to so amend the Agreement in accordance with
the terms and conditions hereof; and
I. 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:
2
<PAGE>
"Frontier Letter of Credit" means the L/C Guaranty, with a face
-------------------------
amount not to exceed $500,000 and on terms and conditions (including
with respect to, among other things, expiry date and draw conditions)
satisfactory to Foothill, to be issued, on or after the date that the
Sixth Amendment becomes effective by its terms, by or on behalf of
Foothill for the account of Borrower to Frontier Communications as
beneficiary.
"Sixth Amendment" means that certain Amendment Number Six to
---------------
Amended and Restated Loan and Security Agreement, dated as of
September 1, 1997, 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:
"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, (1) if the Frontier Letter of
Credit is issued, $500,000, or (ii) otherwise, $300,000; (i) during
October, 1997, (1) if the Frontier Letter of Credit is issued,
$500,000, or (ii) otherwise, $300,000; (j) during November, 1997, (1)
if the Frontier Letter of Credit is issued, $500,000, or (ii)
otherwise, $300,000; (k) during the period commencing on December 1,
1997 and ending on January 8, 1998, (1) if the Frontier Letter of
Credit is issued, $500,000, or (ii) otherwise, $300,000; and (l) from
and after January 9, 1998, zero dollars.
"Loan Documents" means this Agreement, the First Amendment, the
--------------
Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth
Amendment, the Sixth Amendment, the Suretyship Agreement, any Lock Box
Agreement, the Sprint Subordination 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.
c. The following specified provisions of the Agreement hereby are
amended and restated in their entirety as follows:
(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
3
<PAGE>
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 one-half of the
then extant Permitted Overadvance Amount existed at any time during
-- --- ----
such immediately preceding month, (y) if the Frontier Letter of Credit
is issued, 1.0% times the Permitted Overadvance Amount applicable
during the immediately preceding month, or (z) if the Frontier Letter
of Credit is not issued, 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 monthly installments of principal in the
following amounts:
DUE DATE INSTALLMENT AMOUNT
June 1, 1997 $ 250,000
July 1, 1997 $ 250,000
August 1, 1997 $ 250,000
September 1, 1997 $ -0-
October 1, 1997 $ -0-
November 1, 1997 $ -0-
December 1, 1997 $ -0-
January 9, 1998 $1,250,000
4
<PAGE>
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.
d. The following hereby is added to the Agreement as a new Section
-------
2.2(f) in proper alphanumerical order:
- ------
(f) Anything herein to the contrary notwithstanding, Foothill
shall not be obligated to issue the Frontier Letter of Credit unless,
immediately prior to the issuance of the Frontier Letter of Credit, no
Overadvance then exists.
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 Sixth Amendment Closing Deadline, unless waived or
deferred by Foothill in its sole discretion, shall constitute conditions
precedent to the effectiveness of this Amendment and each and every provision
hereof:
a. Payment to Foothill by Borrower in immediately available funds of
an amendment fee in the amount of $10,000, 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;
5
<PAGE>
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. 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);
f. Except for any non-compliance by Borrower, with respect to the
fiscal quarter ending September 30, 1997, with one or more of the financial
covenants set forth in Section 6.14 of the Agreement, 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;
g. 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
h. 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.
6
<PAGE>
4. 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. Except as expressly set forth
herein, the execution, delivery, and performance of this Amendment shall not
operate as a waiver of, or 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.
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
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, "Sixth Amendment Closing Deadline"
means September 30, 1997.
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,
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.
7
<PAGE>
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 C. Burke
----------------------------------
Title: Senior Vice President
------------------------------
PHOENIX NETWORK, INC., a Delaware corporation
By /s/ Jon F. Beizer
----------------------------------
Title: Chief Financial Officer
------------------------------
PHOENIX NETWORK ACQUISITION CORP., a Delaware
corporation
By /s/ Jon F. Beizer
----------------------------------
Title: Chief Financial Officer
------------------------------
AMERICONNECT, INC., a Delaware corporation
By /s/ Jon F. Beizer
----------------------------------
Title: Chief Financial Officer
------------------------------
8
<PAGE>
EXHIBIT 10.15
AMENDMENT NUMBER SEVEN TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER SEVEN TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT (this "Amendment") is entered into as of December 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;
D. Borrower entered into that certain Amendment Number Three to Amended
and Restated Loan and Security Agreement, dated as of March 12, 1997
(the "Third Amendment"), with Foothill, to amend the Original Loan
Agreement, as previously amended, 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 the Third Amendment;
E. Borrower entered into that certain Amendment Number Four to Amended
and Restated Loan and Security Agreement, dated as of March 28, 1997
(the
<PAGE>
"Fourth Amendment"), with Foothill, to amend the Original Loan
Agreement, as previously amended, to, among other things, provide for
the restatement of certain covenants, the elimination of certain
covenants, the addition of certain covenants, and the waiver of
certain described Events of Default that existed as of March 28, 1997,
prior to the effectiveness of the Fourth Amendment, in each case as
set forth in the Fourth Amendment;
F. Borrower entered into that certain Amendment Number Six to Amended and
Restated Loan and Security Agreement, dated as of September 1, 1997
(the "Sixth Amendment"), with Foothill, to amend the Original Loan
Agreement, as previously amended, to, among other things, provide for
(i) an extension of, and certain other modifications in respect of,
the Permitted Overadvance Amount and (ii) a temporary principal
moratorium in respect of the Bridge Loan, in each case as set forth in
the Sixth Amendment (the Original Agreement, as amended by the First
Amendment, by the Second Amendment, by the Third Amendment, by the
Fourth Amendment, and by the Sixth Amendment, is referred to herein as
the "Agreement");
G. Borrower originally intended to enter into that certain Amendment
Number Five to Amended and Restated Loan and Security Agreement, dated
as of July __, 1997 (the "Fifth Amendment"), with Foothill, to amend
the Original Loan Agreement, as previously amended, to, among other
things, provide for certain consents and amendments in connection with
a contemplated transaction between Phoenix and Sprint Communications
or its Affiliates (collectively, "Sprint"). Inasmuch as Sprint no
longer intends to enter into that contemplated transaction with
Borrower, Borrower no longer intends to enter into the Fifth Amendment
with Foothill and has requested Foothill to amend the Agreement to,
among other things, delete references therein to the Fifth Amendment
and certain documents (including the "Sprint Subordination Agreement")
contemplated therein;
H. Borrower (1) has advised Foothill that Borrower currently is engaged
in discussions with certain prospective purchasers relative to the
acquisition of Borrower by one or more of such prospective purchasers,
(2) has discussed with Foothill the expected timetable of the proposed
acquisition, and (3) has requested Foothill to provide certain
additional working capital financing to Borrower during part or all of
period covered by the expected timetable;
I. Borrower has requested Foothill to further amend the Agreement to,
among other things, change certain pricing with respect to the credit
facilities under the Agreement, provide for an additional bridge loan,
and extend the maturity
2
<PAGE>
date of the bridge loans and the permitted overadvance facility, in
each case, as set forth in this Amendment;
J. Based in part on the mutual expectations of Borrower and Foothill
regarding the timetable for the aforementioned proposed acquisition,
Foothill is willing to so amend the Agreement in accordance with the
terms and conditions hereof; and
K. 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:
"Definitive Purchase Agreement" means a definitive purchase and
-----------------------------
sale agreement or merger agreement, on terms and conditions reasonably
satisfactory to Foothill, for the acquisition by Prospective Purchaser of
Borrower.
"Definitive Purchase Agreement Condition" means the receipt by
---------------------------------------
Foothill, on or before January 1, 1998, of evidence satisfactory to
Foothill that: (a) Borrower and a purchaser reasonably satisfactory to
Foothill ("Prospective Purchaser") have entered into the Definitive
Purchase Agreement; and (b) the Definitive Purchase Agreement is in full
force and effect.
"Prospective Purchaser" has the meaning set forth in the
---------------------
definition of `Definitive Purchase Agreement.'
"Seventh Amendment" means that certain Amendment Number Seven to
-----------------
Amended and Restated Loan and Security Agreement, dated as of December 12,
1997, between Foothill and Borrower.
b. The following definitions contained in Section 1.1 of
-----------
the Agreement are amended and restated in their entirety to read as follows:
"Applicable Margin" means: (a) prior to the Seventh Amendment
-----------------
Closing Date, one and three-quarters percent (1.75%) per annum; and (b) on
and after the Seventh Amendment Closing Date, three percent (3.00%) per
annum.
3
<PAGE>
"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, $300,000; (i) during October, 1997, $300,000; (j)
during November, 1997, $300,000; (k) during the period commencing on
December 1, 1997 and ending on January 30, 1998, $300,000; and (l) from and
after January 31, 1998, zero dollars.
"Loan Documents" means this Agreement, the First Amendment, the
--------------
Second Amendment, the Third Amendment, the Fourth Amendment, the Sixth
Amendment, the Seventh 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.
c. The following specified provisions of the Agreement
hereby are amended and restated in their entirety as follows:
(1) Section 2.5(a)&(b)&(c):
----------------------
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 16.5%
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
20.5% 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.
(c) Minimum Interest. In no event shall the rate of
interest chargeable hereunder be less than ten percent (10.00%) per annum.
4
<PAGE>
(2) Section 2.9:
-----------
2.9 BRIDGE LOAN. Foothill: (a) agreed to make a bridge loan to
Borrower on the closing date of the Third Amendment (the "Initial Bridge
Loan"); and (b) has agreed to make an additional bridge loan to Borrower in
the manner set forth below (the "Additional Bridge Loan"); in the original
aggregate principal amount of $3,075,000 (the Initial Bridge Loan and the
Additional Bridge Loan shall be referred to herein, collectively, as the
"Bridge Loan"). The Additional Bridge Loan shall consist of, and be made
in, three installments as follows: (i) $825,000 concurrently with the
execution and delivery of the Seventh Amendment, of which the first $75,000
shall be used solely to pay Foothill the "Additional Bridge Loan Fee" (as
defined in Section 4.a of the Seventh Amendment); (ii) $750,000 on December
15, 1997; and (iii) solely if and only if the Definitive Purchase Agreement
Condition is fully and timely satisfied, $250,000 on January 1, 1998. The
principal of the Bridge Loan shall be repaid in monthly installments of
principal in the following amounts:
DUE DATE INSTALLMENT AMOUNT
June 1, 1997 $250,000
July 1, 1997 $250,000
August 1, 1997 $250,000
September 1, 1997 $ -0-
October 1, 1997 $ -0-
November 1, 1997 $ -0-
December 1, 1997 $ -0-
January 1, 1998 $ -0-
January 31, 1998 if the third installment of
the Additional Bridge Loan
is funded under clause
(b)(iii) above, $3,075,000;
otherwise, $2,825,000
The outstanding principal balance and all accrued and unpaid interest under
the Bridge Loan shall be due and payable upon the earlier to occur of: (y)
January 31, 1998, and (z) the termination of this Agreement, whether by its
terms, by prepayment, by acceleration, or otherwise. The unpaid principal
balance of the
5
<PAGE>
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.
d. The following provisions hereby are added to the Agreement as a
new Section 6.20 thereof in proper alphanumerical order:
6.20 DEFINITIVE PURCHASE AGREEMENT TIMETABLE.
(a) On or before January 1, 1998, Borrower shall deliver to
Foothill evidence satisfactory to Foothill that: (i) Borrower and
Prospective Purchaser have entered into the Definitive Purchase Agreement;
and (ii) the Definitive Purchase Agreement is in full force and effect.
Borrower promptly shall deliver to Foothill copies of all material interim
drafts of the Definitive Purchase Agreement and promptly provide to
Foothill, upon reasonable request, such other materials or information
relative to the Definitive Purchase Agreement and the transactions
contemplated therein.
(b) On or before January 31, 1998, Borrower shall deliver to
Foothill evidence satisfactory to Foothill that Borrower has duly filed a
Form S-4 registration statement, in respect of the Definitive Purchase
Agreement and the transactions contemplated therein, with the Securities
Exchange Commission ("SEC") in accordance with the rules and regulations of
the SEC promulgated under the Securities Act of 1933, as amended.
(c) On or before March 31, 1998, Borrower shall deliver to
Foothill evidence satisfactory to Foothill that the Form S-4 registration
statement in respect of the Definitive Purchase Agreement and the
consummation of the transactions contemplated therein is effective.
(d) On or before March 31, 1998, Borrower shall deliver to
Foothill evidence satisfactory to Foothill that the audited financial
statements of Borrower described in Section 6.4(b) of the Agreement in
respect of Borrower's fiscal year ended December 31, 1997 shall have been
duly issued in accordance with the rules and regulations of the SEC
promulgated under the Securities Act of 1933, as amended.
(e) On or before April 30, 1998, Borrower shall deliver to
Foothill evidence satisfactory to Foothill that the requisite shareholders
of Phoenix
6
<PAGE>
have approved the Definitive Purchase Agreement and the consummation of the
transactions contemplated therein.
(f) On or before May 31, 1998, Borrower shall deliver to
Foothill evidence satisfactory to Foothill that the transactions
contemplated in the Definitive Purchase Agreement shall have been
consummated in accordance with the terms and conditions thereof and with
all applicable law.
e. All references in the Agreement and each of the
other Loan Documents to any of the following terms or words of like import
therein referring to any of the following terms hereby are deleted from the
Agreement and such other Loan Documents: "the Fifth Amendment"; "the Sprint
Subordination Agreement"; and "TNC Sub".
2. Maturity Date of Bridge Loan and Permitted Overadvance
------------------------------------------------------
Amount; Supplemental Credit. Borrower expressly and unmistakably acknowledges
- ---------------------------
and agrees that Foothill in its sole discretion may, but has no obligation or
commitment (express or implied) to: (a) extend the maturity date of the Bridge
Loan and the Permitted Overadvance Amount beyond January 31, 1998; or (b) extend
supplemental credit in the form of additional bridge loans or additional
permitted overadvance facilities. Despite the fact that Borrower and Foothill
have been engaged in discussions and negotiations that Borrower hopes may lead
to such extensions, Foothill has not agreed to any extensions of either such
maturity date or such supplemental credit and, if Foothill elects not to extend
such maturity date, the Obligations of Borrower in respect of the Bridge Loan
and the Permitted Overadvance Amount will be due and payable on the date
provided for in the Agreement, as amended by this Amendment. Borrower
recognizes that the agreements by Foothill to extend the maturity date of the
Bridge Loan and the Permitted Overadvance Amount from January 9, 1998 to January
31, 1998 and to provide the Additional Bridge Loan pursuant to the amendments to
the Agreement effected by this Amendment are being done solely as an
accommodation to Borrower to allow additional time beyond January 9, 1998 for
Borrower to negotiate and enter into the Definitive Purchase Agreement.
Borrower acknowledges and agrees that the decision, if any, by Foothill to
extend such maturity date or such supplemental credit may be subject to, without
limitation, the approval of and terms and conditions imposed by Foothill's
senior credit committee in its sole discretion and the progress or lack of
progress by Borrower in respect of the Definitive Purchase Agreement and the
transactions contemplated therein as determined by Foothill in its sole
discretion.
3. 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
7
<PAGE>
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.
4. Conditions Precedent to Amendment. The satisfaction of
---------------------------------
each of the following, on or before the Seventh Amendment Closing Deadline,
unless waived or deferred by Foothill in its sole discretion, shall constitute
conditions precedent to the effectiveness of this Amendment and each and every
provision hereof:
a. Payment to Foothill by Borrower in immediately available
funds of a one-time funding fee in the amount of $75,000 in respect of the
Additional Bridge Loan (the "Additional Bridge Loan Fee"), 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 as part of the
Additional Bridge Loan;
b. Payment to Foothill by Borrower in immediately available
funds of a one-time amendment fee in the amount of $50,000 in respect of the
closing of the Seventh Amendment, 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 as a revolving advance under Section 2.1 of
the Agreement;
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 ratifying its
prior execution and delivery of the Sixth Amendment and authorizing its
execution and delivery of this Amendment and the other Loan Documents to which
it is a party and contemplated in the Sixth Amendment and this Amendment and the
performance of the Sixth Amendment, this Amendment, the Agreement as amended by
the Sixth Amendment and 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 ratifying its prior execution and delivery of the Sixth Amendment and
authorizing its execution and delivery of this Amendment and the other Loan
Documents to which it is a party and contemplated in the Sixth Amendment and
this Amendment and the performance of the Sixth Amendment,
8
<PAGE>
this Amendment, the Agreement as amended by the Sixth Amendment and this
Amendment, and such other 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 ratifying its prior execution and delivery of the
Sixth Amendment and authorizing its execution and delivery of this Amendment and
the other Loan Documents to which it is a party and contemplated in the Sixth
Amendment and this Amendment and the performance of the Sixth Amendment, this
Amendment, the Agreement as amended by the Sixth Amendment and this Amendment,
and such other Loan Documents, and authorizing specific officers of AmeriConnect
to execute and deliver the same;
f. Foothill shall have received an opinion of counsel to Borrower
in form and substance satisfactory to Foothill in its reasonable discretion;
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. Except for any non-compliance by Borrower, with respect to the
fiscal quarter ending September 30, 1997, with one or more of the financial
covenants set forth in Section 6.14 of the Agreement, 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.
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. Except as expressly set forth
herein, the execution, delivery,
9
<PAGE>
and performance of this Amendment shall not operate as a waiver of, or 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, "Seventh Amendment Closing Deadline"
means December 31, 1997.
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,
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.
10
<PAGE>
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 R. Marsden
--------------------------
Title: Vice President
----------------------
PHOENIX NETWORK, INC., a Delaware corporation
By /s/ Wallace M. Hammond
--------------------------
Title: President & CEO
----------------------
PHOENIX NETWORK ACQUISITION CORP., a Delaware
corporation
By /s/ Wallace M. Hammond
--------------------------
Title: President & CEO
----------------------
AMERICONNECT, INC., a Delaware corporation
By /s/ Wallace M. Hammond
--------------------------
Title: President & CEO
----------------------
11
<PAGE>
EXHIBIT 10.16
AMENDMENT NUMBER EIGHT TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER EIGHT TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT (this "Amendment") is entered into as of December 31, 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;
D. Borrower entered into that certain Amendment Number Three to Amended
and Restated Loan and Security Agreement, dated as of March 12, 1997
(the "Third Amendment"), with Foothill, to amend the Original Loan
Agreement, as previously amended, 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 the Third Amendment;
E. Borrower entered into that certain Amendment Number Four to Amended
and Restated Loan and Security Agreement, dated as of March 28, 1997
(the
<PAGE>
"Fourth Amendment"), with Foothill, to amend the Original Loan
Agreement, as previously amended, to, among other things, provide for
the restatement of certain covenants, the elimination of certain
covenants, the addition of certain covenants, and the waiver of
certain described Events of Default that existed as of March 28, 1997,
prior to the effectiveness of the Fourth Amendment, in each case as
set forth in the Fourth Amendment;
F. Borrower entered into that certain Amendment Number Six to Amended and
Restated Loan and Security Agreement, dated as of September 1, 1997
(the "Sixth Amendment"), with Foothill, to amend the Original Loan
Agreement, as previously amended, to, among other things, provide for
(i) an extension of, and certain other modifications in respect of,
the Permitted Overadvance Amount and (ii) a temporary principal
moratorium in respect of the Bridge Loan, in each case as set forth in
the Sixth Amendment
G. Borrower entered into that certain Amendment Number Seven to Amended
and Restated Loan and Security Agreement, dated as of December 12,
1997 (the "Seventh Amendment"), with Foothill, to amend the Original
Loan Agreement, as previously amended, to, among other things, change
certain pricing with respect to the credit facilities under the
Agreement, provide for an additional bridge loan, and extend the
maturity date of the bridge loans and the permitted overadvance
facility, in each case, as set forth in the Seventh Amendment (the
Original Agreement, as amended by the First Amendment, by the Second
Amendment, by the Third Amendment, by the Fourth Amendment, by the
Sixth Amendment, and by the Seventh Amendment, is referred to herein
as the "Agreement");
H. Borrower has requested Foothill to further amend the Agreement to,
among other things, (i) extend the maturity date of the bridge loans
and the permitted overadvance facility, (ii) waive certain actual or
potential financial covenant Events of Default that existed as of
December 31, 1997 or may exist as of March 31, 1998, and (iii) amend
the timetable in respect of the covenants relative to the Definitive
Purchase Agreement, in each case, as set forth in this Amendment;
I. Borrower is or will be in violation of one or more of subsections (a),
(b), and (c) of Section 6.14 of the Agreement as a result of its
failure to comply with the respective covenants therein as of the end
of the fiscal quarter that ended on December 31, 1997 and as of the
end of the fiscal quarter ending on March 31, 1998 (such violations
are referred to herein, as to each of the respective aforementioned
subsections and as to each such fiscal period, as a "Designated
Financial Covenant Default", and, collectively, as the "Designated
Financial
2
<PAGE>
Covenant Defaults") and Borrower has requested Foothill to
waive the Designated Financial Covenant Defaults;
J. Borrower has been, is, or will be in violation of one or more of the
provisions of the Agreement as identified as a `VIOLATION' on Schedule
1 hereto through the Trigger Date (such violations are referred to
herein, as to each of such provisions, as a "Designated Other Covenant
Default", and, collectively, as the "Designated Other Covenant
Defaults"; the several Designated Financial Covenant Defaults and
Designated Other Covenant Defaults are referred to herein,
individually, as a "Designated Covenant Default" and, collectively, as
the "Designated Covenant Defaults") and Borrower has requested
Foothill to waive the Designated Other Covenant Defaults and to
consent to the related items in respect thereof as identified as a
`CONSENT' on Schedule 1 hereto through the Trigger Date (such consents
are referred to herein, individually, as a "Designated Consent" and,
collectively, as the "Designated Consents");
K. Based in part on the mutual expectations of Borrower and Foothill
regarding the revised timetable for transactions contemplated by or in
connection with the Definitive Purchase Agreement, Foothill is willing
to so amend the Agreement and waive the Designated Covenant Defaults
and agree to give the Designated Consents, in each case, in accordance
with the terms and conditions hereof; and
L. 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:
"Eighth Amendment" means that certain Amendment Number Eight to
----------------
Amended and Restated Loan and Security Agreement, dated as of December 31,
1997, between Foothill and Borrower.
"Trigger Date" means the earlier to occur of (a) April 30, 1998,
------------
and (b) the first date on which all transactions contemplated in the
Definitive Purchase Agreement shall have been consummated in accordance
with the terms and conditions thereof and with all applicable law.
3
<PAGE>
b. The following definitions contained in Section 1.1 of
-----------
the Agreement are amended and restated in their entirety to read as follows:
"Definitive Purchase Agreement Condition" means the receipt by
---------------------------------------
Foothill, on or before January 8, 1998, of evidence satisfactory to
Foothill that: (a) Borrower and a purchaser reasonably satisfactory to
Foothill ("Prospective Purchaser") have entered into the Definitive
Purchase Agreement; and (b) the Definitive Purchase Agreement is in full
force and effect.
"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, $300,000; (i) during October, 1997, $300,000; (j)
during November, 1997, $300,000; (k) during the period commencing on
December 1, 1997 and ending on the date immediately preceding the Trigger
Date, $300,000; and (l) from and after the Trigger Date, zero dollars.
"Loan Documents" means this Agreement, the First Amendment, the
--------------
Second Amendment, the Third Amendment, the Fourth Amendment, the Sixth
Amendment, the Seventh Amendment, the Eighth 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.
c. The following specified provisions of the Agreement
hereby are amended and restated in their entirety as follows:
(1) Section 2.9:
-----------
2.9 BRIDGE LOAN. Foothill: (a) agreed to make a bridge loan to
Borrower on the closing date of the Third Amendment (the "Initial Bridge
Loan"); and (b) has agreed to make an additional bridge loan to Borrower in
the manner set forth below (the "Additional Bridge Loan"); in the original
aggregate principal amount of $3,075,000 (the Initial Bridge Loan and the
Additional Bridge Loan shall be referred to herein, collectively, as the
"Bridge Loan"). The Additional Bridge Loan shall consist of, and be made
in, three installments as follows: (i) $825,000 concurrently with the
execution and delivery of the Seventh Amendment, of which the first $75,000
shall be used solely to pay Foothill the "Additional Bridge Loan Fee" (as
defined in Section 4.a of the Seventh Amendment); (ii) $750,000 on December
15, 1997; and (iii) solely if and only if the Definitive Purchase Agreement
Condition is fully and timely satisfied, $250,000 on the date that the
Eighth
4
<PAGE>
Amendment by its terms first becomes effective. The principal of the Bridge Loan
shall be repaid in monthly installments of principal in the following amounts:
DUE DATE INSTALLMENT AMOUNT
June 1, 1997 $ 250,000
July 1, 1997 $ 250,000
August 1, 1997 $ 250,000
September 1, 1997 $ -0-
October 1, 1997 $ -0-
November 1, 1997 $ -0-
December 1, 1997 $ -0-
January 1, 1998 $ -0-
February 1, 1998 $ -0-
March 1, 1998 $ -0-
Trigger Date if the third installment of
the Additional Bridge Loan
is funded under clause
(b)(iii) above, $3,075,000;
otherwise, $2,825,000
The outstanding principal balance and all accrued and unpaid interest under
the Bridge Loan shall be due and payable upon the earlier to occur of: (y)
the Trigger Date, and (z) 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.
5
<PAGE>
(2) Section 6.20:
------------
6.20 DEFINITIVE PURCHASE AGREEMENT TIMETABLE.
6
<PAGE>
(a) On or before January 8, 1998, Borrower shall deliver to
Foothill evidence satisfactory to Foothill that: (i) Borrower and
Prospective Purchaser have entered into the Definitive Purchase Agreement;
and (ii) the Definitive Purchase Agreement is in full force and effect.
Borrower promptly shall deliver to Foothill copies of all material interim
drafts of the Definitive Purchase Agreement and promptly provide to
Foothill, upon reasonable request, such other materials or information
relative to the Definitive Purchase Agreement and the transactions
contemplated therein.
(b) On or before January 31, 1998, Borrower shall deliver to
Foothill evidence satisfactory to Foothill that Borrower has duly filed a
preliminary proxy statement, in respect of the Definitive Purchase
Agreement and the transactions contemplated therein, with the Securities
Exchange Commission ("SEC") in accordance with the rules and regulations of
the SEC promulgated under applicable securities laws.
(c) Borrower shall deliver to Foothill evidence satisfactory to
Foothill that, within 10 Business Days following Borrower's receipt of the
comments of the SEC relative to the preliminary proxy statement in respect
of the Definitive Purchase Agreement and the consummation of the
transactions contemplated therein, Borrower has responded in writing to all
such comments.
(d) On or before April 30, 1998, Borrower shall deliver to
Foothill evidence satisfactory to Foothill that the Form S-4 registration
statement filed by Borrower in respect of the Definitive Purchase Agreement
and the consummation of the transactions contemplated therein is effective.
(e) On or before March 31, 1998, Borrower shall deliver to
Foothill evidence satisfactory to Foothill that the annual report on Form
10-K of Borrower has been filed with the SEC in accordance with the rules
and regulations of the SEC promulgated under applicable securities laws.
(f) On or before April 30, 1998, Borrower shall deliver to
Foothill evidence satisfactory to Foothill that the requisite shareholders
of Phoenix have approved the Definitive Purchase Agreement and the
consummation of the transactions contemplated therein.
(g) On or before April 30, 1998, Borrower shall deliver to
Foothill evidence satisfactory to Foothill that the transactions
contemplated in the Definitive Purchase Agreement shall have been
consummated in accordance with the terms and conditions thereof and with
all applicable law.
7
<PAGE>
2. Maturity Date of Bridge Loan and Permitted Overadvance Amount;
--------------------------------------------------------------
Supplemental Credit. Borrower expressly and unmistakably acknowledges and
- -------------------
agrees that Foothill in its sole discretion may, but has no obligation or
commitment (express or implied) to: (a) extend the maturity date of the Bridge
Loan and the Permitted Overadvance Amount beyond the Trigger Date; or (b) during
the period commencing on the effective date of this Amendment and ending on the
Trigger Date, extend supplemental credit in the form of additional bridge loans
or additional permitted overadvance facilities in an aggregate amount not to
exceed $1,250,000. Despite the fact that Borrower and Foothill have been engaged
in discussions and negotiations that Borrower hopes may lead to such extensions,
Foothill has not agreed to any extensions of either such maturity date or such
supplemental credit and, if Foothill elects not to extend such maturity date,
the Obligations of Borrower in respect of the Bridge Loan and the Permitted
Overadvance Amount will be due and payable on the date provided for in the
Agreement, as amended by this Amendment. Borrower recognizes that the agreements
by Foothill to extend the maturity date of the Bridge Loan and the Permitted
Overadvance Amount from January 31, 1998 to the Trigger Date pursuant to the
amendments to the Agreement effected by this Amendment are being done solely as
an accommodation to Borrower to allow time for Borrower to negotiate and enter
into the Definitive Purchase Agreement. Borrower acknowledges and agrees that
the decision, if any, by Foothill to extend such maturity date or such
supplemental credit may be subject to, without limitation, the approval of and
terms and conditions imposed by Foothill's senior credit committee in its sole
discretion and the progress or lack of progress by Borrower in respect of the
Definitive Purchase Agreement and the transactions contemplated therein as
determined by Foothill in its sole discretion.
3. Limited Waivers and Consents.
----------------------------
a. Initially effective upon the fulfillment of each condition set
forth in Section 6 below and remaining effective solely so long as each of the
conditions set forth in Section 7 below remain fully satisfied, Foothill hereby
waives each of the Designated Covenant Defaults and agrees to give each of the
Designated Consents.
b. Each of the limited waivers and consents contained in this
Section 3 is specific in time and in intent and does not constitute, nor should
it be construed as constituting, except to the extent expressly set forth
herein, a waiver or modification of any term of, or right, power, or privilege
under, the Agreement, the other Loan Documents, or any agreement, contract,
indenture, document, or instrument mentioned therein. Nothing herein constitutes
a waiver of any Event of Default, or any potential Event of Default related or
preliminary thereto, based on facts or occurrences other than those on which the
Designated Covenant Defaults or Designated Consents specifically were premised.
8
<PAGE>
c. Each of the limited waivers or consents set forth in this
Section 3 does not preclude any exercise or further exercise of any other right,
power, or privilege under any Loan Document, including without limitation, the
taking of any action or remedy based upon any Event of Default other than the
Designated Covenant Defaults or the Designated Consents.
d. At such time, if ever, as the limited waivers or consents set
forth in this Section 3 no longer are effective, Foothill may exercise any of
its rights, remedies, powers or privileges under the Agreement and the other
Loan Documents, including with respect to the Designated Covenant Defaults or
the Events of Default that would exist but for the Designated Consents and
Borrower's failure to be in compliance with the provisions of the Loan Documents
as in effect prior to the giving of the limited waivers and consents set forth
in this Section 3.
4. Termination of Warrants. Foothill and Borrower hereby agree
-----------------------
that, immediately prior to the "Effective Time" of the "Merger" (as such terms
are defined in the Definitive Purchase Agreement), if ever, the Warrants shall
be terminated and of no further force or effect thereafter.
5. 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.
6. Conditions Precedent to Amendment. The satisfaction of each of
---------------------------------
the following, on or before January 8, 1998, unless waived or deferred by
Foothill in its sole discretion, shall constitute conditions precedent to the
initial effectiveness of this Amendment and each and every provision hereof:
a. Payment to Foothill by Borrower in immediately available funds
of a one-time amendment fee in the amount of $150,000 in respect of the closing
of the Eighth Amendment and any supplemental credit, as described in Section
2(b) above, that may be extended prior to the Trigger Date; the foregoing
$150,000 fee shall be fully earned,
9
<PAGE>
non-refundable, due, and payable, upon the execution and delivery of this
Amendment by Foothill and Borrower, and Borrower hereby authorizes Foothill to
charge such fee to Borrower's loan account as a revolving advance under Section
2.1 of the Agreement;
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 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 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 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 AmeriConnect to execute and deliver the same;
e. 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);
f. After giving effect to the limited waivers and consents set forth
in Section 3 above, 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;
g. No injunction, writ, restraining order, or other order of any
nature prohibiting, directly or indirectly, the consummation of the transactions
contemplated
10
<PAGE>
herein shall have been issued and remain in force by any governmental authority
against Borrower or Foothill; and
h. 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.
7. Continuing Conditions to Amendment. Each of the following, unless
----------------------------------
waived or modified by Foothill in its sole discretion, shall constitute a
continuing condition to the effectiveness of this Amendment and each and every
provision hereof:
a. 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);
b. After giving effect to the limited waivers and consents set forth
in Section 3 above, 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;
c. 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
d. The Definitive Purchase Agreement shall remain in full force and
effect and no party thereto shall have received from any other party thereto any
notice of termination of the Definitive Purchase Agreement or of the obligations
of any party thereunder.
8. 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. Except as expressly set forth
herein, the execution, delivery, and performance of this Amendment shall not
operate as a waiver of, or 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.
11
<PAGE>
9. 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.
10. 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. This Amendment shall be governed by and construed in accordance
with the laws of the State of California.
d. 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.
[remainder of page intentionally left blank]
12
<PAGE>
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 R. Marsden
--------------------------
Title: Vice President
----------------------
PHOENIX NETWORK, INC., a Delaware corporation
By /s/ Wallace M. Hammond
--------------------------
Title: President & CEO
----------------------
PHOENIX NETWORK ACQUISITION CORP., a Delaware
corporation
By /s/ Wallace M. Hammond
--------------------------
Title: President
----------------------
AMERICONNECT, INC., a Delaware corporation
By /s/ Wallace M. Hammond
--------------------------
Title: President
----------------------
13
<PAGE>
Schedule 1
----------
(Designated Other Covenant Defaults and Designated Consents)
I. VIOLATION: In violation of Section 6.2 of the Agreement, prior to December
31, 1997, each of Phoenix, PNAC, and Americonnect have delivered after the
20th day following the end of each month during the term of the 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.
CONSENT: Section 6.2 to the contrary notwithstanding, from and after
December 31, 1997 through the Trigger Date, each of Phoenix, PNAC, and
Americonnect shall deliver, no later than the 40th day following the end of
each month, 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.
II. VIOLATION: In violation of Section 6.4(a) of the Agreement, prior to
the Trigger Date, Borrower has not delivered any company prepared cash flow
statement covering Borrower's operations during each month.
CONSENT: Section 6.4(a) of the Agreement to the contrary notwithstanding,
from and after December 31, 1997 through the Trigger Date, Borrower shall
deliver no later than the 40th day after the end of each month a company
prepared cash flow statement covering Borrower's operations during such
month.
III. VIOLATION: In violation of Section 6.4(a) of the Agreement, prior to
December 31, 1997, Borrower has delivered after the 30th day after the end
of each month a company prepared income statement and balance sheet
covering Borrower's operations during such month.
CONSENT: Section 6.4(a) of the Agreement to the contrary notwithstanding,
from and after December 31, 1997 through the Trigger Date, Borrower shall
deliver no later than the 40th day after the end of each month a company
prepared income statement and balance sheet covering Borrower's operations
during such month.
IV. VIOLATION: In violation of the third paragraph of Section 6.4 of the
Agreement, prior to December 31, 1997, Borrower has failed to deliver a
certificate signed by its chief financial officer to the effect that
Borrower is in default with respect to certain of its obligations to
certain Carriers as more particularly set forth in that certain letter of
January 2, 1998 from Mr. John Beizer of Borrower to Ms. Catherine Burke of
Foothill.
14
<PAGE>
V. VIOLATION: In violation of Section 6.5 of the Agreement, prior to December
31, 1997, Borrower has not delivered to Foothill copies of each of
Borrower's federal income tax returns, and any amendments thereto, within
30 days of the filing thereof with the Internal Revenue Service.
VI. VIOLATION: In violation of Section 6.7 of the Agreement, Borrower has
made, and shall continue to make, all payments due from it to Carriers in
accordance with currently negotiated payment terms with such Carriers
instead of within 10 days of the due date of such payments.
VII. VIOLATION: In violation of Section 4.a of the Second Amendment,
Borrower failed to deliver to Foothill the items identified therein within
30 days after the Second Amendment Closing Deadline.
VIII. VIOLATION: In violation of Section 4.b of the Second Amendment,
Borrower failed to deliver to Foothill the item identified therein within
90 days after the Second Amendment Closing Deadline.
IX. CONSENT: Section 7.9 of the Agreement to the contrary notwithstanding, a
Change of Control arising solely in connection with the Voting Agreements
as contemplated in the Definitive Purchase Agreement shall not constitute
an Event of Default.
X. CONSENT: Section 8.10 of the Agreement to the contrary notwithstanding,
the failure of Borrower to pay the annual installment due January 16, 1998
in respect of Borrower's Indebtedness owing to Judy Van Essen shall not
constitute an Event of Default.
15
<PAGE>
EXHIBIT 10.17
AMENDMENT NUMBER NINE TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER NINE TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT (this "Amendment") is entered into as of February 2, 1998, 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;
D. Borrower entered into that certain Amendment Number Three to Amended
and Restated Loan and Security Agreement, dated as of March 12, 1997
(the "Third Amendment"), with Foothill, to amend the Original Loan
Agreement, as previously amended, 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 the Third Amendment;
E. Borrower entered into that certain Amendment Number Four to Amended
and Restated Loan and Security Agreement, dated as of March 28, 1997
(the
<PAGE>
"Fourth Amendment"), with Foothill, to amend the Original Loan
Agreement, as previously amended, to, among other things, provide for
the restatement of certain covenants, the elimination of certain
covenants, the addition of certain covenants, and the waiver of
certain described Events of Default that existed as of March 28, 1997,
prior to the effectiveness of the Fourth Amendment, in each case as
set forth in the Fourth Amendment;
F. Borrower entered into that certain Amendment Number Six to Amended and
Restated Loan and Security Agreement, dated as of September 1, 1997
(the "Sixth Amendment"), with Foothill, to amend the Original Loan
Agreement, as previously amended, to, among other things, provide for
(i) an extension of, and certain other modifications in respect of,
the Permitted Overadvance Amount and (ii) a temporary principal
moratorium in respect of the Bridge Loan, in each case as set forth in
the Sixth Amendment
G. Borrower entered into that certain Amendment Number Seven to Amended
and Restated Loan and Security Agreement, dated as of December 12,
1997 (the "Seventh Amendment"), with Foothill, to amend the Original
Loan Agreement, as previously amended, to, among other things, change
certain pricing with respect to the credit facilities under the
Agreement, provide for an additional bridge loan, and extend the
maturity date of the bridge loans and the permitted overadvance
facility, in each case, as set forth in the Seventh Amendment;
H. Borrower entered into that certain Amendment Number Eight to Amended
and Restated Loan and Security Agreement, dated as of December 31,
1997 (the "Eighth Amendment"), with Foothill, to amend the Original
Loan Agreement, as previously amended, to, among other things, (i)
extend the maturity date of the bridge loans and the permitted
overadvance facility, (ii) waive certain actual or potential financial
covenant Events of Default that existed as of December 31, 1997 or may
exist as of March 31, 1998, and (iii) amend the timetable in respect
of the covenants relative to the Definitive Purchase Agreement, in
each case, as set forth in the Eighth Amendment (the Original
Agreement, as amended by the First Amendment, by the Second Amendment,
by the Third Amendment, by the Fourth Amendment, by the Sixth
Amendment, by the Seventh Amendment, and by the Eighth Amendment, is
referred to herein as the "Agreement");
I. Borrower has requested Foothill to further amend the Agreement to,
among other things, provide for certain modifications to the Permitted
Overadvance Amount, as set forth in this Amendment;
2
<PAGE>
J. Based in part on the mutual expectations of Borrower and Foothill
regarding the timetable for transactions contemplated by or in
connection with the Definitive Purchase Agreement, Foothill is willing
to so amend the Agreement in accordance with the terms and conditions
hereof; and
K. 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 term in alphabetical order:
"Ninth Amendment" means that certain Amendment Number Nine to
---------------
Amended and Restated Loan and Security Agreement, dated as of February 2,
1998, between Foothill and Borrower.
b. The following definitions contained in Section 1.1 of the
-----------
Agreement are amended and restated in their entirety to read as follows:
"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 the period commencing on September 1, 1997 and ending on the date
immediately preceding the date that the Ninth Amendment first is effective,
$300,000; (i) during the period commencing on the date immediately
preceding the date that the Ninth Amendment first is effective and ending
on the date immediately preceding the Trigger Date, $800,000; and (j) from
and after the Trigger Date, zero dollars.
"Loan Documents" means this Agreement, the First Amendment, the
--------------
Second Amendment, the Third Amendment, the Fourth Amendment, the Sixth
Amendment, the Seventh Amendment, the Eighth Amendment, the Ninth
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.
3
<PAGE>
2. Maturity Date of Bridge Loan and Permitted Overadvance Amount;
--------------------------------------------------------------
Supplemental Credit. Borrower expressly and unmistakably acknowledges and agrees
- -------------------
that Foothill in its sole discretion may, but has no obligation or commitment
(express or implied) to: (a) extend the maturity date of the Bridge Loan and the
Permitted Overadvance Amount beyond the Trigger Date; or (b) after giving effect
to this Amendment and during the period commencing on the effective date of this
Amendment and ending on the Trigger Date, extend supplemental credit in the form
of additional bridge loans or additional permitted overadvance facilities in an
aggregate amount not to exceed $750,000. If Foothill elects not to extend such
maturity date, the Obligations of Borrower in respect of the Bridge Loan and the
Permitted Overadvance Amount will be due and payable on the date provided for in
the Agreement, as amended by this Amendment. Borrower acknowledges and agrees
that the decision, if any, by Foothill to extend such maturity date or such
supplemental credit may be subject to, without limitation, the approval of and
terms and conditions imposed by Foothill's senior credit committee in its sole
discretion and the progress or lack of progress by Borrower in respect of the
Definitive Purchase Agreement and the transactions contemplated therein as
determined by Foothill in its sole discretion.
3. 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.
4. Conditions Precedent to Amendment. The satisfaction of each of
---------------------------------
the following, on or before February 6, 1998, unless waived or deferred by
Foothill in its sole discretion, shall constitute conditions precedent to the
initial effectiveness of this Amendment and each and every provision hereof:
a. 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
4
<PAGE>
Amendment, and such other Loan Documents, and authorizing specific officers of
Phoenix to execute and deliver the same;
b. 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 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 PNAC to execute
and deliver the same;
c. 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 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 AmeriConnect to execute and deliver the same;
d. 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);
e. 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;
f. 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
g. 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.
5
<PAGE>
5. Continuing Conditions to Amendment. Each of the following, unless
----------------------------------
waived or modified by Foothill in its sole discretion, shall constitute a
continuing condition to the effectiveness of this Amendment and each and every
provision hereof:
a. 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);
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 hereof, nor shall result from the consummation of the
transactions contemplated herein;
c. 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
d. The Definitive Purchase Agreement shall remain in full force
and effect and no party thereto shall have received from any other party thereto
any notice of termination of the Definitive Purchase Agreement or of the
obligations of any party thereunder.
6. 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. Except as expressly set forth
herein, the execution, delivery, and performance of this Amendment shall not
operate as a waiver of, or 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.
7. 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.
6
<PAGE>
8. 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. This Amendment shall be governed by and construed in
accordance with the laws of the State of California.
d. 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.
[remainder of page intentionally left blank]
7
<PAGE>
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 R. Marsden
----------------------------------
Title: Vice President
------------------------------
PHOENIX NETWORK, INC., a Delaware corporation
By /s/ Jon F. Beizer
----------------------------------
Title: Chief Financial Officer
-------------------------------
PHOENIX NETWORK ACQUISITION CORP., a Delaware
corporation
By /s/ Jon F. Beizer
----------------------------------
Title: Chief Financial Officer
-------------------------------
AMERICONNECT, INC., a Delaware corporation
By /s/ Jon F. Beizer
----------------------------------
Title: Chief Financial Officer
-------------------------------
8
<PAGE>
EXHIBIT 10.34
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
PHOENIX NETWORK, INC.
WARRANT
-------
Dated April 4, 1997
Phoenix Network, Inc., a Delaware corporation (the "Company"), hereby
certifies that, for value received, ________________, or his registered assigns
("Holder"), is entitled, subject to the terms set forth below, to purchase from
the Company up to a total of ___________ shares of Common Stock, $.001 par value
per share (the "Common Stock"), of the Company (each such share, a "Warrant
Share" and all such shares, the "Warrant Shares") at an exercise price equal to
$2.3375 per share (as adjusted from time to time as provided in Section 8, the
"Exercise Price"), at any time and from time to time from and after the date
hereof and through and including April 4, 2002 (the "Expiration Date"), and
subject to the following terms and conditions:
1. Registration of Warrant. The Company shall register this
-----------------------
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
<PAGE>
2. Registration of Transfers and Exchanges.
---------------------------------------
(a) The Company shall register the transfer of any portion of
this Warrant in the Warrant Register, upon surrender of this Warrant, with the
Form of Assignment attached hereto duly completed and signed, to the Transfer
Agent or to the Company at the office specified in or pursuant to Section 3(b),
provided, however that the Holder shall not make any transfers to any transferee
pursuant to this Section for the right to acquire less than 5,000 Warrant
Shares. Upon any such registration or transfer, a new warrant to purchase Common
Stock, in substantially the form of this Warrant (any such new warrant, a "New
Warrant"), evidencing the portion of this Warrant so transferred shall be issued
to the transferee and a New Warrant evidencing the remaining portion of this
Warrant not so transferred, if any, shall be issued to the transferring Holder.
The acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance of such transferee of all of the rights and obligations of a holder
of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof by
the Holder to the office of the Company specified in or pursuant to Section 3(b)
for one or more New Warrants, evidencing in the aggregate the right to purchase
the number of Warrant Shares which may then be purchased hereunder. Any such New
Warrant will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
---------------------------------
(a) This Warrant shall be exercisable by the registered Holder on
any business day before 5:30 P.M., New York time, at any time and from time to
time on or after the date hereof to and including the Expiration Date. At 5:30
P.M., New York time on the Expiration Date, the portion of this Warrant not
exercised prior thereto shall be and become void and of no value.
(b) Subject to Sections 2(b), 5 and 9, upon surrender of this
Warrant, with the Form of Election to Purchase attached hereto duly completed
and signed, to the Company at its office at 1687 Cole Blvd., Golden, CO 80401,
Attention: Chief Executive Officer, or at such other address as the Company may
specify in writing to the then registered Holder, and upon payment of the
Exercise Price multiplied by the number of Warrant Shares that the Holder
intends to purchase hereunder, in lawful money of the United States of America,
in cash or by certified or official bank check or checks, all as specified by
the Holder in the Form of Election to Purchase, the Company shall promptly (but
in no event later than 3 business days after the date of exercise) issue or
cause to be issued and cause to be delivered to or upon the written order of the
Holder and in such name or names as the Holder may designate, a certificate for
the Warrant Shares issuable upon such exercise, free of restrictive legends
other than as required by applicable law. Any person so designated by the Holder
to receive Warrant Shares shall be deemed to have become holder of record of
such Warrant Shares as of the Date of Exercise of this Warrant.
-2-
<PAGE>
A "Date of Exercise" means the date on which the Company shall have
received (i) this Warrant (or any New Warrant, as applicable), with the Form of
Election to Purchase attached hereto (or attached to such New Warrant)
appropriately completed and duly signed, and (ii) payment of the Exercise Price
for the number of Warrant Shares so indicated by the holder hereof to be
purchased.
(c) This Warrant shall be exercisable, either in its entirety or, from
time to time, for a portion of the number of Warrant Shares. If less than all
of the Warrant Shares which may be purchased under this Warrant are exercised at
any time, the Company shall issue or cause to be issued, at its expense, a New
Warrant evidencing the right to purchase the remaining number of Warrant Shares
for which no exercise has been evidenced by this Warrant.
4. Piggyback Registration Rights. During the term of this Warrant
-----------------------------
the Company may not file any registration statement with the Securities and
Exchange Commission (other than registration statements of the Company filed on
Form S-8 or Form S-4 or, with respect to the Company's Series F and Series G
Convertible Preferred Stock only, on Form S-3, (provided, however, that such
exception with respect to such S-3 registration statements shall only be
available for the initially filed registration statements on such form
(including supplements thereto), but not additionally filed registration
statements in respect of such securities), each as promulgated under the
Securities Act of 1933, as amended, pursuant to which the Company is registering
securities pursuant to a Company employee benefit plan or pursuant to a merger,
acquisition or similar transaction) unless the Company provides the Holder with
not less than five 15 business days notice to each of the Holder and Robinson
Silverman Peace Aronsohn & Berman LLP, attention Eric Cohen, notice of its
intention to file such registration statement and provides the Purchaser the
option to include any or all of the applicable Warrant Shares therein. The
piggyback registration rights granted to the Holder pursuant to this Section
shall continue until all of the Holder's Warrant Shares have been sold in
accordance with an effective registration statement or upon the expiration of
this Warrant. The Company will pay all registration expenses in connection
therewith.
5. Payment of Taxes. The Company will pay all documentary stamp
----------------
taxes attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares or Warrants in a name other than that of
the Holder, and the Company shall not be required to issue or cause to be issued
or deliver or cause to be delivered the certificates for Warrant Shares unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The Holder shall be
responsible for all other tax liability that may arise as a result of holding or
transferring this Warrant or receiving Warrant Shares upon exercise hereof.
-3-
<PAGE>
6. Replacement of Warrant. If this Warrant is mutilated, lost,
----------------------
stolen or destroyed, the Company may in its discretion issue or cause to be
issued in exchange and substitution for and upon cancellation hereof, or in lieu
of and substitution for this Warrant, a New Warrant, but only upon receipt of
evidence reasonably satisfactory to the Company of such loss, theft or
destruction and indemnity, if requested, satisfactory to it. Applicants for a
New Warrant under such circumstances shall also comply with such other
reasonable regulations and procedures and pay such other reasonable charges as
the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants that it
-----------------------------
will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant as herein provided, the
number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holders (taking into
account the adjustments and restrictions of Section 8). The Company covenants
that all Warrant Shares that shall be so issuable and deliverable shall, upon
issuance and the payment of the applicable Exercise Price in accordance with the
terms hereof, be duly and validly authorized, issued and fully paid and
nonassessable.
8. Certain Adjustments. The Exercise Price and number of Warrant
-------------------
Shares issuable upon exercise of this Warrant are subject to adjustment from
time to time as set forth in this Section 8. Upon each such adjustment of the
Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to
the Expiration Date be entitled to purchase, at the Exercise Price resulting
from such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on
outstanding preferred stock as of the date hereof which contain a stated divided
rate, and on the Company's Series G Preferred Convertible Stock of the Company)
or otherwise make a distribution or distributions on shares of its Common Stock
(as defined below) or on any other class of capital stock and not the Common
Stock) payable in shares of Common Stock, (ii) subdivide outstanding shares of
Common Stock into a larger number of shares, or (iii) combine outstanding shares
of Common Stock into a smaller number of shares, the Exercise Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding before such event
and of which the denominator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding after such event. Any adjustment
made pursuant to this Section shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective
-4-
<PAGE>
immediately after the effective date in the case of a subdivision or
combination, and shall apply to successive subdivisions and combinations.
(b) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger, sale,
transfer or share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property equal to the amount of Warrant
Shares such Holder would have been entitled to had such Holder exercised this
Warrant immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange. The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to continue to give to
the Holder the right to receive the securities or property set forth in this
Section 8(b) upon any exercise following any such reclassification,
consolidation, merger, sale, transfer or share exchange.
(c) If the Company, at any time while this Warrant is outstanding,
shall distribute to all holders of Common Stock (and not to holders of this
Warrant) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
8(a), (b) and (d)), then in each such case the Exercise Price shall be
determined by multiplying the Exercise Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Company's independent certified public accountants that regularly examines
the financial statements of the Company (an "Appraiser").
---------
(d) If, at any time while this Warrant is outstanding, the Company
shall issue or cause to be issued rights or warrants to acquire or otherwise
sell or distribute shares of Common Stock to all holders of Common Stock for a
consideration per share less than the Exercise Price then in effect, then,
forthwith upon such issue or sale, the Exercise Price shall be reduced to the
price (calculated to the nearest cent) determined by dividing (i) an amount
equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such issue or sale multiplied by the Exercise Price, and
(B) the consideration, if any, received or receivable by the Company upon such
issue or sale by (ii) the total number of shares of Common Stock outstanding
immediately after such issue or sale.
(e) For the purposes of this Section 8, the following clauses shall
also be applicable:
-5-
<PAGE>
(i) Record Date. In case the Company shall take a record of the
-----------
holders of its Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock or in Convertible
Securities, or (B) to subscribe for or purchase Common Stock or Convertible
Securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
(ii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.
(f) All calculations under this Section 8 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to Section 8(c)
above, the Holder, after receipt of the determination by the Appraiser, shall
have the right to select an additional appraiser (which shall be a nationally
recognized accounting firm), in which case the adjustment shall be equal to the
average of the adjustments recommended by each of the Appraiser and such
appraiser. The Holder shall promptly mail or cause to be mailed to the Company,
a notice setting forth the Exercise Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment. Such adjustment
shall become effective immediately after the record date mentioned above.
(h) If:
(i) the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
(ii) the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
(iii) the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe for
or purchase any shares of capital stock of any class or
of any rights; or
(iv) the approval of any stockholders of the Company shall
be required in connection with any reclassification of
the Common Stock of the Company, any consolidation or
-6-
<PAGE>
merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of
the Company, or any compulsory share exchange whereby
the Common Stock is converted into other securities,
cash or property; or
(v) the Company shall authorize the voluntary dissolution,
liquidation or winding up of the affairs of the
Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, however, that the failure to mail such notice or any
-------- -------
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
9. Fractional Shares. The Company shall not be required to issue or
-----------------
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 9, be issuable
on the exercise of this Warrant, the Company shall pay an amount in cash equal
to the Exercise Price multiplied by such fraction.
10. Notices. Any and all notices or other communications or
-------
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section prior to 4:30 p.m. (Eastern Standard Time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 4:30 p.m. (Eastern Standard Time) on any date and earlier
than 11:59 p.m. (Eastern Standard Time) on such date, (iii) the business day
following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is
required to be given. The addresses for such communications shall be: (1) if
to the Company, to Phoenix
-7-
<PAGE>
Network, Inc., 1687 Cole Blvd., Golden, CO 80401, Attention: Chief Executive
Officer, or to facsimile no. (303) 205-3511, or (ii) if to the Holder, to the
Holder at the address or facsimile number appearing on the Warrant Register or
such other address or facsimile number as the Holder may provide to the Company
in accordance with this Section 10.
11. Warrant Agent.
-------------
(a) The Company shall serve as warrant agent under this Warrant. Upon
thirty (30) days' notice to the Holder, the Company may appoint a new warrant
agent.
(b) Any corporation into which the Company or any new warrant agent
may be merged or any corporation resulting from any consolidation to which the
Company or any new warrant agent shall be a party or any corporation to which
the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder's last
address as shown on the Warrant Register.
12. Miscellaneous.
-------------
(a) This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. This
Warrant may be amended only in writing signed by the Company and the Holder.
(b) Subject to Section 12(a), above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company and the
Holder any legal or equitable right, remedy or cause under this Warrant; this
Warrant shall be for the sole and exclusive benefit of the Company and the
Holder.
(c) This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York without regard to the
principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not constitute a
part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.
(e) In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Warrant shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
-8-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
PHOENIX NETWORK, INC.
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To Phoenix Network, Inc.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of Common Stock ("Common Stock"), $.001 par value per share, of Phoenix
Network, Inc. and encloses herewith $________ in cash, certified or official
bank check or checks, which sum represents the aggregate Exercise Price (as
defined in the Warrant) for the number of shares of Common Stock to which this
Form of Election to Purchase relates, together with any applicable taxes payable
by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
Dated: _____,______ Name of Holder:
(Print)_________________________
(By:)___________________________
(Name:)
(Title:)
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant)
<PAGE>
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________________ the right represented by the
within Warrant to purchase ____________ shares of Common Stock of Phoenix
Network, Inc. to which the within Warrant relates and appoints ________________
attorney to transfer said right on the books of Phoenix Network, Inc. with full
power of substitution in the premises.
Dated:
_______________, ____
__________________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
__________________________________________________
Address of Transferee
__________________________________________________
__________________________________________________
In the presence of:
________________________
<PAGE>
EXHIBIT 10.37
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
PHOENIX NETWORK, INC.
WARRANT
-------
July 23, 1997
Phoenix Network, Inc., a Delaware corporation (the "Company"), hereby
certifies that, for value received, ____________________, or its registered
assigns ("Holder"), is entitled, subject to the terms set forth below, to
purchase from the Company up to a total of ________ shares of Common Stock,
$.001 par value per share (the "Common Stock"), of the Company (each such share,
a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise
price equal to $2.00 per share (as adjusted from time to time as provided in
Section 8, the "Exercise Price"), at any time and from time to time from and
after the date hereof and through and including July 23, 2002 (the "Expiration
Date"), and subject to the following terms and conditions:
1. Registration of Warrant. The Company shall register this
-----------------------
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
2. Registration of Transfers and Exchanges.
---------------------------------------
(a) The Company shall register the transfer of any portion of
this Warrant in the Warrant Register, upon surrender of this Warrant, with the
Form of Assignment
<PAGE>
attached hereto duly completed and signed, to the Transfer Agent or to the
Company at the office specified in or pursuant to Section 3(b), provided,
however that the Holder shall not make any transfers to any transferee pursuant
to this Section for the right to acquire less than 5,000 Warrant Shares. Upon
any such registration or transfer, a new warrant to purchase Common Stock, in
substantially the form of this Warrant (any such new warrant, a "New Warrant"),
evidencing the portion of this Warrant so transferred shall be issued to the
transferee and a New Warrant evidencing the remaining portion of this Warrant
not so transferred, if any, shall be issued to the transferring Holder. The
acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance of such transferee of all of the rights and obligations of a holder
of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof by the
Holder to the office of the Company specified in or pursuant to Section 3(b) for
one or more New Warrants, evidencing in the aggregate the right to purchase the
number of Warrant Shares which may then be purchased hereunder. Any such New
Warrant will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
---------------------------------
(a) This Warrant shall be exercisable by the registered Holder on any
business day before 5:30 P.M., New York time, at any time and from time to time
on or after the date hereof to and including the Expiration Date. At 5:30 P.M.,
New York time on the Expiration Date, the portion of this Warrant not exercised
prior thereto shall be and become void and of no value.
(b) Subject to Sections 2(b), 5 and 9, upon surrender of this Warrant,
with the Form of Election to Purchase attached hereto duly completed and signed,
to the Company at its office at 1687 Cole Blvd., Golden, CO 80401, Attention:
Chief Executive Officer, or at such other address as the Company may specify in
writing to the then registered Holder, and upon payment of the Exercise Price
multiplied by the number of Warrant Shares that the Holder intends to purchase
hereunder, in lawful money of the United States of America, in cash or by
certified or official bank check or checks, all as specified by the Holder in
the Form of Election to Purchase, the Company shall promptly (but in no event
later than 3 business days after the date of exercise) issue or cause to be
issued and cause to be delivered to or upon the written order of the Holder and
in such name or names as the Holder may designate, a certificate for the Warrant
Shares issuable upon such exercise, free of restrictive legends other than as
required by the purchase agreement pursuant to which this Warrant has been
issued. Any person so designated by the Holder to receive Warrant Shares shall
be deemed to have become holder of record of such Warrant Shares as of the Date
of Exercise of this Warrant.
A "Date of Exercise" means the date on which the Company shall have
received (i) this Warrant (or any New Warrant, as applicable), with the Form of
Election to Purchase attached hereto (or attached to such New Warrant)
appropriately completed and duly
-2-
<PAGE>
signed, and (ii) payment of the Exercise Price for the number of Warrant Shares
so indicated by the holder hereof to be purchased.
(c) This Warrant shall be exercisable, either in its entirety or, from
time to time, for a portion of the number of Warrant Shares. If less than all
of the Warrant Shares which may be purchased under this Warrant are exercised at
any time, the Company shall issue or cause to be issued, at its expense, a New
Warrant evidencing the right to purchase the remaining number of Warrant Shares
for which no exercise has been evidenced by this Warrant.
4. Piggyback Registration Rights. At any time during the term of
-----------------------------
this Warrant while there is not an effective registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), registering the
resale of all of the Warrant Shares (which is not subject to selling
restrictions imposed by or on behalf of the Company) and naming the Holder as a
"Selling Stockholder" thereunder, the Company may not file any registration
statement with the Securities and Exchange Commission (other than registration
statements of the Company filed on Form S-8 or Form S-4 (each as promulgated
under the Securities Act) or, with respect to the Company's Series F, Series G,
Series H and Series I Convertible Preferred Stock only, on Form S-3 (as
promulgated under the Securities Act), (provided, however, that such exception
with respect to such Form S-3 registration statements shall only be available
for the initially filed registration statements on such form (including
supplements thereto), but not additionally filed registration statements in
respect of such securities), pursuant to which the Company is registering
securities pursuant to a Company employee benefit plan or pursuant to a merger,
acquisition or similar transaction)unless the Company provides the Holder with
not less than 15 business days notice to each of the Holder and Robinson
Silverman Peace Aronsohn & Berman LLP, attention Eric Cohen, notice of its
intention to file such registration statement and provides the Purchaser the
option to include any or all of the Warrant Shares therein. The piggyback
registration rights granted to the Holder pursuant to this Section shall
continue until all of the Holder's Warrant Shares have been sold in accordance
with an effective registration statement or upon the expiration of this Warrant.
The Company will pay all registration expenses in connection therewith.
5. Payment of Taxes. The Company will pay all documentary stamp
----------------
taxes attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares or Warrants in a name other than that of
the Holder, and the Company shall not be required to issue or cause to be issued
or deliver or cause to be delivered the certificates for Warrant Shares unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The Holder shall be
responsible for all other tax liability that may arise as a result of holding or
transferring this Warrant or receiving Warrant Shares upon exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated, lost,
----------------------
stolen or destroyed, the Company may in its discretion issue or cause to be
issued in exchange and substitution for and
-3-
<PAGE>
upon cancellation hereof, or in lieu of and substitution for this Warrant, a New
Warrant, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and indemnity, if requested,
satisfactory to it. Applicants for a New Warrant under such circumstances shall
also comply with such other reasonable regulations and procedures and pay such
other reasonable charges as the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants that it
-----------------------------
will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant as herein provided, the
number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holders (taking into
account the adjustments and restrictions of Section 8). The Company covenants
that all Warrant Shares that shall be so issuable and deliverable shall, upon
issuance and the payment of the applicable Exercise Price in accordance with the
terms hereof, be duly and validly authorized, issued and fully paid and
nonassessable.
8. Certain Adjustments. The Exercise Price and number of Warrant
-------------------
Shares issuable upon exercise of this Warrant are subject to adjustment from
time to time as set forth in this Section 8. Upon each such adjustment of the
Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to
the Expiration Date be entitled to purchase, at the Exercise Price resulting
from such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is outstanding, (i)
shall pay a stock dividend (except scheduled dividends paid on outstanding
preferred stock as of the date hereof which contain a stated divided rate, and
on the Company's Series G and Series I Preferred Convertible Stock of the
Company) or otherwise make a distribution or distributions on shares of its
Common Stock (as defined below) or on any other class of capital stock and not
the Common Stock) payable in shares of Common Stock, (ii) subdivide outstanding
shares of Common Stock into a larger number of shares, or (iii) combine
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock (excluding treasury shares, if any) outstanding
before such event and of which the denominator shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding after such event.
Any adjustment made pursuant to this Section shall become effective immediately
after the record date for the determination of stockholders entitled to receive
such dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision or combination, and shall apply to
successive subdivisions and combinations.
-4-
<PAGE>
(b) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger, sale,
transfer or share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property equal to the amount of Warrant
Shares such Holder would have been entitled to had such Holder exercised this
Warrant immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange. The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to continue to give to
the Holder the right to receive the securities or property set forth in this
Section 8(b) upon any exercise following any such reclassification,
consolidation, merger, sale, transfer or share exchange.
(c) If the Company, at any time while this Warrant is outstanding,
shall distribute to all holders of Common Stock (and not to holders of this
Warrant) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
8(a), (b) and (d)), then in each such case the Exercise Price shall be
determined by multiplying the Exercise Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Company's independent certified public accountants that regularly examines
the financial statements of the Company (an "Appraiser").
---------
(d) If, at any time while this Warrant is outstanding, the Company
shall issue or cause to be issued rights or warrants to acquire or otherwise
sell or distribute shares of Common Stock to all holders of Common Stock for a
consideration per share less than the Exercise Price then in effect, then,
forthwith upon such issue or sale, the Exercise Price shall be reduced to the
price (calculated to the nearest cent) determined by dividing (i) an amount
equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such issue or sale multiplied by the Exercise Price, and
(B) the consideration, if any, received or receivable by the Company upon such
issue or sale by (ii) the total number of shares of Common Stock outstanding
immediately after such issue or sale.
(e) For the purposes of this Section 8, the following clauses
shall also be applicable:
(i) Record Date. In case the Company shall take a record of the
-----------
holders of its Common Stock for the purpose of entitling them (A) to receive a
dividend or other
-5-
<PAGE>
distribution payable in Common Stock or in Convertible Securities, or (B) to
subscribe for or purchase Common Stock or Convertible Securities, then such
record date shall be deemed to be the date of the issue or sale of the shares of
Common Stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be.
(ii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.
(f) All calculations under this Section 8 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to Section 8(c)
above, the Holder, after receipt of the determination by the Appraiser, shall
have the right to select an additional appraiser (which shall be a nationally
recognized accounting firm), in which case the adjustment shall be equal to the
average of the adjustments recommended by each of the Appraiser and such
appraiser. The Holder shall promptly mail or cause to be mailed to the Company,
a notice setting forth the Exercise Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment. Such adjustment
shall become effective immediately after the record date mentioned above.
(h) If:
(i) the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
(ii) the Company shall declare a special nonrecurring
cash dividend on or a redemption of its Common
Stock; or
(iii) the Company shall authorize the granting to all
holders of the Common Stock rights or warrants to
subscribe for or purchase any shares of capital
stock of any class or of any rights; or
(iv) the approval of any stockholders of the Company
shall be required in connection with any
reclassification of the Common Stock of the
Company, any consolidation or merger to which the
Company is a party, any sale or transfer of all
or substantially all of
-6-
<PAGE>
the assets of the Company, or any compulsory share
exchange whereby the Common Stock is converted into
other securities, cash or property; or
(v) the Company shall authorize the voluntary dissolution,
liquidation or winding up of the affairs of the
Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, however, that the failure to mail such notice or any
-------- -------
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
9. Fractional Shares. The Company shall not be required to issue or
-----------------
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 9, be issuable
on the exercise of this Warrant, the Company shall pay an amount in cash equal
to the Exercise Price multiplied by such fraction.
10. Notices. Any and all notices or other communications or
-------
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section prior to 4:30 p.m. (Eastern Standard Time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 4:30 p.m. (Eastern Standard Time) on any date and earlier
than 11:59 p.m. (Eastern Standard Time) on such date, (iii) the business day
following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is
required to be given. The addresses for such communications shall be: (1) if
to the Company, to Phoenix Network, Inc., 1687 Cole Blvd., Golden, CO 80401,
-7-
<PAGE>
Attention: Chief Executive Officer, or to facsimile no. (303) 205-3511, or (ii)
if to the Holder, to the Holder at the address or facsimile number appearing on
the Warrant Register or such other address or facsimile number as the Holder may
provide to the Company in accordance with this Section 10.
11. Warrant Agent.
-------------
(a) The Company shall serve as warrant agent under this Warrant. Upon
thirty (30) days' notice to the Holder, the Company may appoint a new warrant
agent.
(b) Any corporation into which the Company or any new warrant agent
may be merged or any corporation resulting from any consolidation to which the
Company or any new warrant agent shall be a party or any corporation to which
the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder's last
address as shown on the Warrant Register.
12. Miscellaneous.
-------------
(a) This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. This
Warrant may be amended only in writing signed by the Company and the Holder.
(b) Subject to Section 12(a), above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company and the
Holder any legal or equitable right, remedy or cause under this Warrant; this
Warrant shall be for the sole and exclusive benefit of the Company and the
Holder.
(c) This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York without regard to the
principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not constitute a
part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.
(e) In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Warrant shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
-8-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
PHOENIX NETWORK, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To Phoenix Network, Inc.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of Common Stock ("Common Stock"), $.001 par value per share, of Phoenix
Network, Inc. and encloses herewith $________ in cash, certified or official
bank check or checks, which sum represents the aggregate Exercise Price (as
defined in the Warrant) for the number of shares of Common Stock to which this
Form of Election to Purchase relates, together with any applicable taxes payable
by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
Dated:_____________,____ Name of Holder:
(Print)_________________________
(By:)___________________________
(Name:)
(Title:)
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant)
<PAGE>
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ________________________________ the right represented by the
within Warrant to purchase ____________ shares of Common Stock of Phoenix
Network, Inc. to which the within Warrant relates and appoints ________________
attorney to transfer said right on the books of Phoenix Network, Inc. with full
power of substitution in the premises.
Dated:
_______________, ____
__________________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
__________________________________________________
Address of Transferee
__________________________________________________
__________________________________________________
In the presence of:
__________________________
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Phoenix Network, Inc.
We have issued our reports dated February 19, 1998, 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, 1997. We hereby consent 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), Form S-3, as amended (File No. 333-20923
effective February 12, 1997), Form S-3, as amended (File No. 333-26023 effective
June 27, 1997), Form S-3, as amended (File No. 333-26271 effective June 27,
1997), and Form S-3, as amended (File No. 333-33091 effective September 12,
1997).
GRANT THORNTON LLP
Denver, Colorado
February 19, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 447,983
<SECURITIES> 0
<RECEIVABLES> 10,904,165
<ALLOWANCES> 1,280,444
<INVENTORY> 0
<CURRENT-ASSETS> 12,211,631
<PP&E> 6,557,993
<DEPRECIATION> 3,479,973
<TOTAL-ASSETS> 35,133,675
<CURRENT-LIABILITIES> 25,051,604
<BONDS> 0
0
39
<COMMON> 33,576
<OTHER-SE> 9,662,628
<TOTAL-LIABILITY-AND-EQUITY> 35,133,675
<SALES> 76,947,454
<TOTAL-REVENUES> 76,947,454
<CGS> 57,195,121
<TOTAL-COSTS> 57,195,121
<OTHER-EXPENSES> 30,197,986
<LOSS-PROVISION> 3,407,842
<INTEREST-EXPENSE> 1,091,489
<INCOME-PRETAX> (14,944,984)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,944,984)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,944,984)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
