<PAGE>
As filed with the Securities and Exchange Commission on September 7, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
PAC-WEST TELECOMM, INC.
(Exact name of Registrant as specified in its charter)
California 4832 68-0383568
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Classification Identification No.)
ofincorporation or Code Number)
organization)
4210 Coronado Avenue, Stockton, CA 95204
Telephone: (209) 926-3300
(Address, including zip code, and telephone number,
including area code, of Registrant's principal offices)
---------------
Richard E. Bryson
Chief Financial Officer
Pac-West Telecomm, Inc.
4210 Coronado Avenue,
Stockton, CA 95204
Telephone: (209) 926-3300
(Address, including zip code, and telephone number, including area code, of
Registrant's principal offices)
Copies to:
Jeffrey S. O'Connor, Esq. Christopher D. Lueking, Esq.
Kirkland & Ellis Latham & Watkins
200 East Randolph Drive, Sears Tower, Suite 5800
Chicago, IL 60601 Chicago, IL 60606
Telephone: (312) 861-2000 Telephone: (312) 876-7700
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
Calculation of Registration Fee
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Securities to be Aggregate Amount of
Registered Offering Price(1) Registration Fee
- ------------------------------------------------------------------------------
<S> <C> <C>
Common stock, par value $0.001 per
share................................ $125,000,000 $34,750
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
---------------
We hereby amend this Registration Statement on such date or dates as may be
necessary to delay its effective date until we file a further amendment which
specifically states that this Registration Statement will thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or
until this Registration Statement becomes effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell these securities and is not a +
+solicitation for an offer to buy these securities in any state where the +
+offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 7, 1999
PRELIMINARY PROSPECTUS
Shares
Common Stock
-----------
This is the initial public offering of shares of common stock of Pac-West
Telecomm, Inc. Of the shares of common stock being offered, we are
offering shares to the public generally and shares to shareholders of
Safeguard Scientifics, Inc., one of our principal shareholders. In addition,
Safeguard Scientifics is offering up to shares of our common stock to its
shareholders. We will not receive any proceeds from the shares being offered by
Safeguard Scientifics. Safeguard Scientifics is an underwriter with respect to
the shares of our common stock offered to the shareholders of Safeguard
Scientifics. Safeguard Scientifics is not an underwriter with respect to the
other shares of our common stock offered and is not included in the term
"underwriter" as used elsewhere in this prospectus.
There is currently no public market for our shares of common stock. We
currently estimate that the initial public offering price will be between
$ and $ per share. We have applied to have our common stock approved
for quotation on the Nasdaq National Market under the symbol "PACW."
See "Risk Factors" beginning on page 7 to read about risks that you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per
Underwritten Public Offering Share Total
- ---------------------------- --------- ---------
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discount...................................... $ $
Proceeds, before expenses, to us........................... $ $
<CAPTION>
Directed Share Subscription Program
- -----------------------------------
<S> <C> <C>
Public offering price...................................... $ $
Financial advisory fee to Bear, Stearns & Co. Inc.......... $ $
Proceeds, before expenses, to us........................... $ $
Maximum proceeds, before expenses, to Safeguard
Scientifics................................................ $ $
<CAPTION>
Aggregate Offering Proceeds
- ---------------------------
<S> <C> <C>
Proceeds, before expenses, to us from underwritten public
offering and directed share subscription program........... $
</TABLE>
-----------
The underwriters may purchase up to an additional shares of common
stock from us at the initial public offering price less the underwriting
discount to cover over-allotments.
The underwriters expect to deliver the shares against payment in New York, New
York on , 1999.
-----------
Bear, Stearns & Co. Inc.
Banc of America Securities LLC
First Union Capital Markets Corp.
The date of this prospectus is , 1999.
<PAGE>
[Map of United States identifying Pac-West's current markets as of August 1999
andplanned markets through year end 2000.]
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights selected information in this prospectus.
The summary may not contain all of the information that is important to you.
This prospectus includes forward-looking statements which involve risks and
uncertainties. You should carefully read the entire prospectus, including the
risk factors and the financial statements, before deciding whether to invest in
our common stock.
Pac-West Telecomm, Inc.
Our Company
Pac-West is a rapidly growing provider of integrated communications services
in the western United States. Our customers include Internet service providers,
medium and small businesses and enhanced communications service providers, many
of which are communications-intensive users. We believe the breadth of our
product offerings and the structure of our network enable us to generate high
network utilization, substantial revenues, strong profit margins and positive
cash flow.
We began offering long distance service in 1982 and local service in 1996 in
California, which is our primary market. As of June 30, 1999, we had over
76,000 lines in service, a 137% increase from June 30, 1998. We estimate that
over 82% of the current utilization of these lines by our customers is to carry
data traffic and that approximately 96% of our current traffic is terminated on
our network. Since 1994, we have consistently generated positive cash flows
from operations.
To meet demand for communications services in California, we have
established a switching site in each of Los Angeles, Oakland and Stockton, and
digital connections in each of California's 11 local access and transport
areas. In California, our network enables our customers to provide their
business and residential customers with access to Internet, paging and other
data and voice services from almost any point in the state through a local
call. This allows our customers to achieve statewide coverage with lower
capital and operating expenses. According to industry sources, the California
telecommunications market generated over $27 billion in total revenues in 1997.
We are expanding our network into Nevada with a switch in Las Vegas and
digital connections in all of Nevada's local access and transport areas. We
intend to continue our expansion into other western states, where many of our
existing customers have operations. We expect to have eight switches with
operations in ten western states by the end of 2000. As we expand our network,
we plan to leverage our existing customer relationships to provide predictable
usage rates on our network assets, rapid revenue ramp-up and continued strong
profit margins.
Since our inception, we have used a "smart-build" network strategy, building
and owning the intelligent components of our network while leasing unbundled
loops and transport lines from other carriers. Currently, we lease all of our
transport lines, but as traffic on our network increases, we intend to purchase
rights of use in high capacity dark fiber transport lines to interconnect
certain of our markets with an owned backbone network. This will provide us
with greater flexibility in creating and managing data and voice services and
result in cost savings. We also provide our customers with collocation
services, allowing them to house their equipment in space we operate within our
switching centers.
We are a leading supplier of Internet access and other Internet
infrastructure services with 78 Internet service providers who have a
significant existing customer base in our markets. With this large base of
Internet service providers, we believe we are ideally positioned to provide
high-speed data services, such as digital subscriber line or DSL services, to
Internet users. Recently, we signed an agreement with Covad Communications to
provide bundled high-speed services beginning in the fourth quarter of 1999 and
are considering other ways to provide our customers with an easy method of
ordering, installing and managing high-speed Internet access.
1
<PAGE>
In addition, with our network presence and scale, we are well positioned to
serve medium and small business customers. These customers want technologically
advanced communication solutions from a single source. Our complete product
offering of system design, equipment selection and installation, and bundled
local, long distance and data services directly meets the needs of this under-
served market. Our focus on medium and small businesses has resulted in
significant market penetration over the past year, as we have increased our
business lines in service from approximately 2,500 to over 12,000 from June 30,
1998 to June 30, 1999. According to industry sources, our target markets
currently have approximately 1.4 million medium and small businesses and 16.5
million business lines.
Our Strategy
We are focused on becoming the integrated communication provider of choice
for our customers. Our strategy to meet this objective is to:
. Capitalize on growing demand in our current markets. The demand for data
and voice communications services in our current markets is large and
growing rapidly. We intend to increase our market penetration and
capitalize on this growth by adding more switches and transport lines to
increase our capacity, adding new and innovative products to our existing
offerings, and repackaging and repricing our offerings in response to the
changing demands of our customers. We believe we are differentiated by
the architecture of our network, which supports high calling volumes and
long holding times, the ability to access our network throughout our
market area through a local call, and the ability of service providers to
collocate their equipment at our switch locations.
. Leverage existing customer base through geographic expansion. We are a
leading supplier of Internet access and Internet infrastructure services
in California with 78 Internet service provider customers. Our customers
include: Concentric Network Corp., EarthLink, Inc., MindSpring
Enterprises, Inc. and Splitrock Services, Inc. We plan to leverage our
existing customer base by entering new markets where our current
customers have or are beginning operations to achieve predictable usage
rates on our network assets, rapid revenue ramp-up, and continued strong
profit margins. By year end 2000, we plan to have operations in
California, Nevada, Washington, Arizona, Utah, Colorado, Texas, New
Mexico, Idaho and Oregon.
. Focus on the medium and small business market. We believe that most
medium and small business customers are not adequately served by our
competitors. Our offerings are well suited to these customers. In order
to capitalize on this opportunity we have increased our sales, customer
care and service delivery forces to 105 as of June 30, 1999, from 53 as
of June 30, 1998. Of these resources, our direct sales force was
increased to 44 from 21 in the same period.
. Launch new products and services. In order to achieve our growth
objectives, we expect to continue introducing new and innovative products
and services. We recently added several new products to our portfolio,
including:
. Managed modem, a packaged product that includes incoming call access
lines, modems, routers, and authentication services. This product
provides Internet service provider and business customers with a non-
capital intensive means of quickly establishing a local point of
presence throughout our coverage area.
. Remote access services, including mobile or remote office, virtual
office, distance education and training, and telecommuting. These
allow customers to access and interact with home or branch office
communications and information systems from anywhere in our market
area through a local call.
. High-speed data services. We offer high-speed private line data
services and digital subscriber line services to customers. We also
intend to explore wireless and satellite technologies in order to
develop an array of high-speed alternatives for our customers.
. Expand through potential strategic acquisitions. We may acquire other
competitive local exchange carriers or communications providers to grow
our business. We believe that strategic acquisitions will provide us with
opportunities to accelerate our market penetration, cross-sell additional
services, diversify our customer base and improve operating
profitability.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by us in underwritten
public offering.............................. shares
Common stock offered in directed share
subscription program:
by us....................................... shares
by Safeguard Scientifics.................... shares
------------------------
Total..................................... shares
Common stock to be outstanding after the shares
offering.....................................
Use of proceeds............................... We intend to use the net proceeds to us
from this offering to fund:
. capital expenditures in connection
with our planned expansion into new
markets, including the purchase and
installation of switches and
transmission equipment;
. the acquisition of rights of use in
high capacity dark fiber transport
lines and related electronic
equipment;
. working capital and other general
corporate purposes; and
. possible future acquisitions or
strategic investments.
Proposed Nasdaq National Market symbol........ PACW
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the 12,562,470 shares outstanding as of June 30, 1999 and includes
the shares of common stock being sold by us in this offering and the
shares of common stock issuable upon conversion of our outstanding
convertible redeemable preferred stock at an assumed conversion price of $
per share. The shares of common stock to be outstanding after this offering
exclude:
. any shares of common stock to be issued pursuant to the over-allotment
option;
. shares of common stock issuable upon the exercise of outstanding
options with a weighted average exercise price of $ per share; and
. shares of common stock issuable upon the exercise of options reserved
for grant under our stock option plans.
3
<PAGE>
Directed Share Subscription Program
Concurrently with our offering to the public generally and as a part of this
offering, we are offering shares of our common stock and Safeguard
Scientifics is offering shares of our common stock to shareholders
of Safeguard Scientifics who owned at least 100 shares of common stock of
Safeguard Scientifics as of September 7, 1999 in a directed share subscription
program. The directed share subscription program is described in greater detail
under the sections entitled "Directed Share Subscription Program" and
"Underwriting--Directed Share Subscription Program."
----------------
We are incorporated in California. Our headquarters are located at 4210
Coronado Avenue, Stockton, California 95204, and our telephone number at that
location is (209) 926-3300. Our website address is www.pacwest.com. The
information contained on our website is not part of this prospectus or the
registration statement of which it forms a part.
----------------
The terms "the Company," "Pac-West," "we," "our," "us," and similar terms as
used in this prospectus, refer to Pac-West Telecomm, Inc. and, unless the
context otherwise requires, the telephone and answering service divisions of
our predecessor. Except as otherwise noted, the information in this prospectus
(1) assumes that the underwriters' over-allotment option will not be exercised,
(2) assumes that all of the shares offered in the directed share subscription
program are purchased by shareholders of Safeguard Scientifics, (3) assumes
that all of our outstanding convertible redeemable preferred stock will be
converted into common stock concurrent with the closing of this offering at an
assumed conversion price of $ per share, and (4) reflects a 10-for-1 stock
split that was effected on March 19, 1999.
4
<PAGE>
Summary Financial Data
Our statements of operations data for the period from commencement (October
1, 1996) to December 31, 1996 and for the years ended December 31, 1997 and
1998, shown in the table below, are derived from our audited financial
statements. Our statements of operations data for the six month periods ended
June 30, 1998 and 1999 and our balance sheet data as of June 30, 1999 have been
derived from our unaudited financial statements which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the unaudited
interim periods presented. The unaudited balance sheet data as of June 30, 1999
includes the issuance on January 29, 1999 of $150 million of 13 1/2% senior
notes due 2009. The results of our operations for the six month period ended
June 30, 1999 are not necessarily indicative of the results of operations which
we expect for the full 1999 calendar year. This summary should be read in
conjunction with the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements,
including related notes thereto, included elsewhere in this prospectus.
The "As Adjusted" summary balance sheet data reflects the sale of the
shares of common stock offered by us in this offering at an assumed initial
public offering price of $ per share, after deducting the underwriting
discount and estimated offering expenses payable by us, and the conversion of
our outstanding convertible redeemable preferred stock into shares of
common stock at an assumed conversion price of $ per share.
On October 1, 1996, we began operations when our predecessor company
transferred its telephone and answering service divisions to us. As a result,
you have limited comparable historical financial information upon which to base
your evaluation of our past performance and the value of investing in our
common stock.
We recognize reciprocal compensation as revenue only to the extent received
in cash. Pacific Bell and GTE, two incumbent local exchange carriers with which
we have interconnection agreements, have each refused to pay us the portion of
reciprocal compensation which they estimate is the result of inbound calls
terminating to Internet service providers. Pacific Bell and GTE argue that such
calls are not local within the meaning of their interconnection agreements and
therefore assert that no reciprocal compensation is due. See Note 5 to the
audited financial statements, "Risk Factors--We may not be entitled to receive
reciprocal compensation for calls to Internet service providers" and
"Business--Regulatory Proceedings--Interconnection Agreements."
Adjusted EBITDA as used in this prospectus represents earnings before
interest, net; income taxes; depreciation and amortization; further adjusted
for the costs of merger and recapitalization; transaction bonuses and
consultant's costs; and extraordinary item. Included in other (income) expense,
net, is interest income of $5,000, $90,000, $327,000, $128,000 and $1,185,000
for the period from commencement on October 1, 1996 to December 31, 1996, for
the years ended December 31, 1997 and 1998, and for the six month periods ended
June 30, 1998 and 1999, respectively. Although EBITDA is not a measure of
financial performance under generally accepted accounting principles, we
believe it is a common measure used by analysts and investors in comparing a
company's results with those of similar companies as well as to evaluate the
capacity of a company to service its obligations.
5
<PAGE>
<TABLE>
<CAPTION>
Period from
Commencement on Year Ended Six Month Period
October 1, 1996 December 31, Ended June 30,
to December 31, ------------------ ------------------
1996 1997 1998 1998 1999
--------------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues................ $ 4,232 $ 29,551 $ 42,211 $ 19,932 $ 30,264
Costs and expenses:
Operating costs........ 2,064 12,060 15,344 7,791 8,753
Selling, general and
administrative:
Selling, general and
administrative........ 1,519 7,367 10,779 4,219 9,563
Transaction bonuses and
consultant's costs
(1)................... -- -- 3,798 -- --
Depreciation and
amortization.......... 299 2,204 4,106 1,701 3,292
------- -------- -------- -------- --------
Income from operations. 350 7,920 8,184 6,221 8,656
Interest expense........ 105 932 4,199 786 8,502
(Gain) on disposal of
answering service
division............... -- (385) -- -- --
Costs of merger and
recapitalization (1)... -- -- 3,004 81 --
Other (income) expense,
net.................... 11 (119) (330) (128) (1,185)
------- -------- -------- -------- --------
Income before provision
for income taxes and
extraordinary item.... 234 7,492 1,311 5,482 1,339
Provision for income
taxes.................. 94 2,997 1,561 2,193 535
------- -------- -------- -------- --------
Income (loss) before
extraordinary item.... 140 4,495 (250) 3,289 804
Extraordinary item--loss
on early extinguishment
of debt, net of income
tax benefit of $278
(1).................... -- -- (417) -- --
------- -------- -------- -------- --------
Net income (loss)....... $ 140 $ 4,495 $ (667) $ 3,289 $ 804
======= ======== ======== ======== ========
Basic and diluted income
(loss) before
extraordinary item per
share.................. $ 1.40 $ 44.95 $ (0.42) $ 32.89 $ (0.12)
Basic and diluted net
income (loss) per share
....................... $ 1.40 $ 44.95 $ (0.54) $ 32.89 $ (0.12)
Basic and diluted
weighted average shares
outstanding............ 100 100 3,717 100 12,562
Other Financial Data:
Reciprocal compensation
withheld............... $ -- $ 3,793 $ 32,591 $ 12,912 $ 28,371
Adjusted EBITDA......... 633 10,538 16,091 7,922 11,948
Adjusted EBITDA margin
%...................... 15.0% 35.7% 38.1% 39.7% 39.5%
Capital expenditures.... $ 3,899 $ 11,884 $ 42,466 $ 7,863 $ 21,908
Cash provided by (used
in):
Operating activities... 75 5,876 12,033 7,387 20,741
Investing activities... (1,682) (6,619) (42,031) (7,433) (41,604)
Financing activities... 1,549 3,658 41,631 3,018 44,513
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1999
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................ $ 38,886 $
Restricted cash (2)...................................... 20,066
Working capital.......................................... 44,643
Equipment, vehicles and leasehold improvements, net...... 76,010
Total assets............................................. 150,208
Total long-term debt..................................... 150,062
Convertible redeemable preferred stock, including accrued
cumulative dividends of $3,649.......................... 48,649 --
Stockholders' equity (deficit)........................... (75,634)
</TABLE>
- --------
(1) Transaction bonuses and consultant's costs, costs of merger and
recapitalization and the extraordinary item all relate to our
recapitalization described in Note 1 to the audited financial statements
included elsewhere in this prospectus.
(2) Restricted cash represents cash deposited in an interest reserve trust
account to fund the first two interest payments due under our senior notes,
the first of which was paid on August 2, 1999.
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently consider immaterial may also impair our
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In this case, the trading price of the common stock could decline,
and you may lose all or part of your investment.
Failure to continue our expansion would adversely affect our financial
condition.
Our failure to expand our business in order to satisfy the growing needs of
our customers, to achieve economies of scale and to benefit from the
infrastructure we have established would adversely affect our business
prospects, financial condition and results of operations. This could result
from our inability to:
. assess potential markets;
. obtain required governmental authorizations, franchises, and permits;
. implement interconnection and collocation arrangements with incumbent
local exchange carriers;
. lease adequate transmission capacity from inter-exchange carriers,
incumbent local exchange carriers and competitive local exchange
carriers;
. purchase and install switches in additional markets; and
. develop a sufficient customer base.
We may not be able to manage our growth, which could adversely affect our
business.
Future expansion will place significant additional strains on our personnel,
financial and other resources. The failure to efficiently manage our growth
could adversely affect the quality of our services, our business and our
financial condition. Our ability to manage our growth will be particularly
dependent on our ability to develop and retain an effective sales force and
qualified technical personnel. The competition for qualified managers and
technical personnel in the telecommunications industry is intense, and we may
not be able to hire and retain sufficient qualified personnel. In addition, we
may not be able to maintain the quality of our operations, to control our
costs, to maintain compliance with all applicable regulations, and to expand
our internal management, technical, information and accounting systems in order
to support our desired growth.
We may not be able to comply in a cost-effective manner with current or future
regulations.
Our provision of telecommunications services is heavily regulated at the
federal, state, and local levels. Compliance with these regulations imposes
substantial costs on us and restricts our ability to conduct our business. For
example, in each state in which we desire to offer our services, we must obtain
prior authorization from the appropriate state authorities. If we experience
delays in obtaining required approvals or fail to comply with regulatory
requirements, our business and our financial condition could be adversely
affected. In addition, regulatory requirements may change with little notice,
which would adversely affect our business prospects, financial condition and
results of operations.
A failure to establish interconnection agreements on favorable terms would
adversely affect our business.
We must interconnect with incumbent local exchange carriers in order to
service our customers. The Telecommunications Act of 1996 mandates that
incumbent local exchange carriers interconnect with companies like ours to
provide us with individual network services components, such as origination,
termination and other services. However, it does not assure the time frame in
which those services will be offered to us or assure that we will be able to
purchase those services at rates and on terms and conditions that allow us to
remain competitive and profitable. If we have difficulties obtaining high
quality, reliable and reasonably priced services
7
<PAGE>
from the incumbent local exchange carriers, our services will be less
attractive to customers and our business will be adversely affected. Our
primary interconnection agreements are with Pacific Bell and GTE. Our
interconnection agreement with GTE has expired, but will remain in force until
a replacement agreement is finalized. In addition, we will need new
interconnection agreements in each new market we enter. We cannot be certain
that we will be able to enter into replacement or new interconnection
agreements on favorable terms. Based on current market conditions, we expect
that the per minute reciprocal compensation rates under these agreements will
decline from historic rates. See "Business--Regulatory Proceedings--
Interconnection Agreements."
We may not be entitled to receive reciprocal compensation for calls to Internet
service providers.
Two incumbent local exchange carriers with which we have interconnection
agreements, Pacific Bell and GTE, have refused to pay that portion of
compensation under the agreement that they estimate is the result of inbound
calls terminating to Internet service providers, and the obligation to pay this
reciprocal compensation is currently under review by both state and federal
regulators. If it is ultimately determined that we are not entitled to receive
reciprocal compensation for calls to Internet service providers, our business
and financial condition could be adversely affected. The total reciprocal
compensation withheld by these incumbent local exchange carriers and not
included in revenues was $3.8 million, $32.6 million and $28.4 million for the
years ended December 31, 1997 and 1998 and for the six month period ended June
30, 1999, respectively. On June 24, 1999, the California Public Utilities
Commission determined that reciprocal compensation would be payable for
Internet service provider calls under our new interconnection agreement with
Pacific Bell, but did not determine whether Pacific Bell owes reciprocal
compensation withheld under the prior agreement. Pacific Bell has requested a
rehearing of this matter. On August 25, 1999, we, along with the commissioners
of the California Public Utilities Commission and others, were named as
defendants in an action filed by GTE California. The action challenges the
legality of the California Public Utilities Commission's decisions regarding
reciprocal compensation as discussed above. We intend to seek dismissal of the
action and otherwise contest the claims of GTE California. See "Business--
Regulatory Proceedings--Jurisdiction over and Compensation for Internet Service
Provider Traffic," "--Interconnection Agreements" and "Business--Regulation--
State Regulation."
We may not be able to compete effectively against the incumbent local exchange
carrier, which has a vested interest in making it difficult for us to service
customers.
In each of our target markets, we will be competing principally with the
incumbent local exchange carrier serving that area. The incumbent local
exchange carriers are well-established providers of local telephone services
with most of the telephone subscribers within their respective service areas.
In addition, incumbent local exchange carriers have long-standing relationships
with regulatory authorities at the federal and state levels.
Incumbent local exchange carriers also have increased pricing flexibility
for their private line and special access and switched access services. The FCC
has recently adopted an order that gives these carriers additional pricing
flexibility and further deregulates competitive access services, as opposed to
local exchange services, either automatically or after certain competitive
levels are reached. This order allows the incumbent local exchange carriers to
offer discounts to large customers, engage in aggressive volume and term
discount pricing practices for their customers, and/or charge competitors
increased fees for interconnection to their networks.
We may not be able to overcome these advantages and compete successfully
with the incumbent local exchange carriers.
We may not be able to compete effectively in providing local exchange service.
We face competition from long distance carriers, such as AT&T, MCI WorldCom
and Sprint, seeking to enter, reenter or expand entry into the local exchange
marketplace. In addition, we face competition from other competitive local
exchange carriers, resellers, cable television companies, electric utilities,
microwave carriers, wireless telephone system operators and private networks
built by large end users. This places downward pressure on prices, which may
make it difficult for us to provide these services profitably, and we may not
be able to compete effectively with these companies.
8
<PAGE>
We may not be able to compete effectively in providing long distance service.
We face intense competition from long distance carriers in the provision of
long distance services, which places downward pressure on prices for long
distance service and may make it difficult for us to provide these services
profitably. Although the long distance market is dominated by three major
competitors, AT&T, MCI WorldCom and Sprint, hundreds of other companies also
compete in the long distance marketplace. We may not be able to effectively
compete with these industry participants.
We may not be able to compete effectively with the Bell operating companies if
they are permitted to enter the long distance service market.
Federal law currently prohibits regional Bell operating companies, including
Pacific Bell and Nevada Bell, from engaging in certain types of long distance
telephone service. However, this restriction may be removed by the FCC if the
regional Bell operating companies meet certain specified conditions and the FCC
determines that it is in the public interest. If the regional Bell operating
companies obtain permission to provide these services, or if they are able to
enter into teaming agreements with others to circumvent these restrictions, our
business could be adversely affected. It would remove the major incentive
regional Bell operating companies have to cooperate with companies like ours to
foster competition within their service areas, and it would permit them to
offer both long distance and local exchange services, a competitive advantage
which companies such as Pac-West currently are able to offer in those regions.
See "Business--Regulation."
Our competition may have superior resources, placing us at a cost and price
disadvantage.
Many of our current and potential competitors have financial, personnel and
other resources, including brand name recognition, substantially greater than
those of Pac-West. As a result, some of our competitors can raise capital at a
lower cost than we can. Also, our competitors' greater name recognition may
provide them with a competitive advantage in marketing their services. In
addition, our competitors' costs advantages give them the ability to reduce
their prices for an extended period of time if they so choose. We may not be
able to compete effectively with these companies.
We may not be able to obtain or retain our key Internet service provider
customers, which account for a significant portion of our revenues.
For the three month period ended June 30, 1999, ten of our fifteen largest
customers in terms of revenues were Internet service providers. As a result, a
significant reduction in usage by one or more of our key Internet service
provider customers or a general decrease in Internet service provider traffic
could result in a material decrease in our revenues for a given period. We
believe that our success in the foreseeable future will depend in large part on
our ability to develop and maintain a large Internet service provider customer
base. The competition for Internet service provider customers in the
telecommunications industry is intense, and we expect it will continue to
increase. We may not be able to increase or maintain our Internet service
provider customer base.
The technologies that we use may become obsolete, which would limit our ability
to compete effectively.
The telecommunications industry is subject to rapid and significant changes
in technology. If we do not replace or upgrade our technology and equipment
that becomes obsolete, we will not be able to compete effectively because we
will not be able to meet customer expectations.
The development of competing technologies, such as integrated services
digital network lines, cable modems, T-1 circuits and digital subscriber lines,
which provide significantly faster data transfer rates than the fastest current
dial-up modems, may give companies that provide these services a competitive
advantage over Pac-West. Further, if we attempt to incorporate new technologies
or products into our systems, those new technologies and products may not be
compatible with our existing technologies and services. We may not be able to
obtain timely access to new technology on satisfactory terms or incorporate new
technology into our systems in a cost effective manner or at all.
9
<PAGE>
The loss of key executive officers could negatively impact our business
prospects.
We believe that a critical component of our success will be the retention of
our key executive officers. Mr. Wallace W. Griffin, our Chief Executive
Officer, has significant expertise in the telecommunications industry and has
been instrumental in establishing and executing our business plan and strategy.
Mr. John K. La Rue, our Executive Vice President--Technology and Network
Operations and founder, and Mr. Jason R. Mills, our Vice President--Network
Operations, have a unique understanding of our network and have been
instrumental in its development. The loss of the services of one or more of
these individuals or our other executive officers, including Mr. Richard E.
Bryson, Mr. Brian K. Johnson and Mr. Dennis V. Meyer, could adversely affect
our business prospects, financial condition and results of operations.
Our inability to predict our need for resold long distance services could
subject us to various charges or penalties.
We offer long distance services to our customers as part of our strategy to
provide one-stop integrated services. We rely on long distance carriers to
provide transmission and termination services for some of our long distance
traffic through resale arrangements. These arrangements typically provide for
the resale of long distance services on a per-minute basis and may contain
minimum volume commitments. These agreements are based on estimates of future
supply and demand for transmission capacity based on calling patterns and
traffic levels of our future customers. If we do not accurately predict our
long distance service needs, we may have to pay underutilization charges or
seek additional capacity through more expensive alternative means.
Our inability to obtain sufficient leased transport capacity could seriously
limit our operations.
We currently lease transport capacity from various third-party carriers to
connect our switches to the incumbent local exchange carriers. If we cannot
lease sufficient transport capacity, our operations could be limited or we
could be forced to make additional unexpected up-front capital expenditures to
install our own transport capacity. This could adversely affect our business
prospects, financial condition and results of operations. See "Business--
Network."
A system failure could delay or interrupt our services.
Our operations are dependant upon our ability to support our highly complex
network infrastructure. Many of our customers are particularly dependent on an
uninterrupted supply of services. Any damage or failure that causes
interruptions in our operations could result in the loss of these customers and
could have a material adverse effect on our business and our financial
condition. Because of the nature of the services we supply and the complexity
of our network, it is not feasible to maintain backup systems, and the
occurrence of a natural disaster, operational disruption or other unanticipated
problem could cause interruptions in the services we provide. Additionally, the
failure of a major supplier to provide the communications capacity we require,
or of a major customer to continue buying our goods and services, as a result
of a natural disaster, operational disruption or any other reason, could cause
interruptions in the service we provide and adversely affect our business
prospects, financial condition and results of operations.
We may face additional costs or a system failure due to Year 2000 issues.
The Year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. As a
result, many companies' software and computer systems may need to be upgraded
or replaced in order to comply with Year 2000 requirements. Our long distance
billing system and our accounting system are not yet Year 2000 compliant. We
are replacing our billing system to accommodate future anticipated growth with
a new Year 2000 compliant system. The manufacturer of the noncompliant
accounting system has provided software that is represented to be Year 2000
compliant. The failure to implement these systems on a timely basis could
result in erroneous billings as a result of Year 2000 issues or the inability
to correctly process data,
10
<PAGE>
such as changes in applicable taxes. Our expansion into new states could be
delayed or limited as a result of capacity limitations and new product or
service introductions may be delayed. Any of these events could have a material
adverse affect on our business prospects, financial condition and results of
operations.
Many of our customers and suppliers, particularly the incumbent local
exchange carriers and long distance carriers, could be impacted by the Year
2000 issue, which in turn could affect us. We utilize third-party equipment and
software and interact with incumbent local exchange carriers, major suppliers
and major customers that each have equipment and software that may not be Year
2000 compliant. Failure of such third-party or incumbent local exchange carrier
equipment or software to operate properly with regard to the year 2000 and
thereafter could require us to incur unanticipated expenses to remedy any
problems which could have a material adverse effect on our business prospects,
financial condition and results of operations.
We are contacting third-party suppliers of components and our key
subcontractors used in the manufacture of our products to identify and, to the
extent possible, resolve issues relating to the Year 2000 issue. Because we
have no control over the actions of these parties, these third parties may not
remediate any or all of their Year 2000 issues. Any failure of any of these
third parties to timely resolve Year 2000 issues with either their products
sold to us, or their systems could have a material adverse effect on our
business prospects, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Issues."
We may not be able to generate sufficient cash to service our indebtedness.
Failure to generate cash in the future either from operations or from
additional financing will adversely affect our ability to make payments on and
to refinance our indebtedness and to fund capital expenditures and marketing
efforts. Our ability to generate cash from operations will be particularly
dependent on our ability to expand our business and manage our growth, provide
competitive services, comply with applicable governmental regulations and
negotiate favorable agreements. In addition, we may need to refinance all or a
portion of our indebtedness on or before maturity. We may not be able to
refinance this indebtedness on commercially reasonable terms or at all.
Our substantial indebtedness could adversely affect our business operations.
We have a substantial amount of indebtedness and are highly leveraged. On an
unaudited basis, as of June 30, 1999, our long-term debt totaled $150,062,000,
and we had a stockholders' deficit of $75,634,000. We may also incur additional
indebtedness in the future to expand and develop our current business and
services and enter new markets. Our substantial indebtedness could:
. increase our vulnerability to general adverse economic and industry
conditions;
. limit our ability to fund future working capital, capital expenditures,
marketing costs and other general corporate requirements;
. require us to dedicate a substantial portion of our cash flows from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flows to fund working capital, capital
expenditures, marketing efforts and other general corporate purposes;
. limit our flexibility in planning for or reacting to changes in our
business and the industry in which we operate;
. place us at a competitive disadvantage compared to our less leveraged
competitors; and
. limit our ability to borrow additional funds.
We may not have sufficient funds available to expand our business.
We will need to make significant capital expenditures in order to expand and
develop our current business and to enter new markets. We expect to fund these
expenditures through existing resources, through internally generated funds,
and through equity and debt financings. If we are unable to raise sufficient
funds, we may
11
<PAGE>
have to delay or abandon some of our expenditures or plans for future
expansion. This would result in underutilization of our established
infrastructure and reduced profitability and may negatively affect our ability
to compete for and satisfy the demands resulting from the growth and expansion
of our customers.
The covenants in our senior credit facility and senior notes indenture could
adversely affect the operation of our business.
Our senior credit facility and senior notes indenture contain provisions
which limit our management's discretion by restricting our ability to:
. incur additional debt;
. pay dividends and make other distributions;
. prepay subordinated debt;
. make investments and other restricted payments;
. enter into sale and leaseback transactions;
. create liens;
. sell assets; and
. enter into certain transactions with affiliates.
In addition, the senior credit facility requires us to meet certain
financial ratios.
If we fail to comply with the restrictions of the senior credit facility,
senior notes indenture or any other subsequent financing agreements, a default
may occur. This default may allow the creditors to accelerate the related debt
as well as any other debt to which a cross-acceleration or cross-default
provision applies. In addition, the lenders may be able to terminate any
commitments they had made to supply us with further funds. See "Description of
Indebtedness."
We are majority owned by equity investors and their interests may conflict with
your interests and which may have the effect of delaying or preventing a change
in control of our company.
As of June 30, 1999, assuming the conversion of our outstanding convertible
redeemable preferred stock into shares of common stock at an assumed
conversion price of $ per share, Safeguard 98 Capital, L.P., SCP Private
Equity Partners, L.P., TL Ventures III L.P., EnerTech Capital Partners, L.P.,
William Blair Capital Partners, L.L.C. and Bay Alarm Company collectively own
approximately % of our common stock. Following consummation of this offering
and assuming all shares offered pursuant to the directed share
subscription program are purchased by shareholders of Safeguard Scientifics,
these investors will own % of our common stock. If the shareholders of
Safeguard Scientifics do not purchase any of the shares offered in the directed
share subscription program and Safeguard Scientifics purchases all of the
shares offered by us in the directed share subscription program, these
investors together with Safeguard Scientifics will own approximately % of
our common stock after this offering. See "Directed Share Subscription
Program." Some of our directors are affiliated with these investors. Jerry L.
Johnson is an officer of Safeguard Scientifics, the parent of Safeguard
Delaware, Inc., the general partner of Safeguard 98 Capital, L.P.; David G.
Chandler is a managing director of William Blair Capital Partners; Mark J.
DeNino is managing director of the management company for TL Ventures III;
Samuel A. Plum is a general partner of SCP Private Equity Partners; and Bruce
A. Westphal is chairman of Bay Alarm Company. These investors may significantly
influence and ultimately make decisions that are adverse to your interests as
minority stockholders. These investors will be able to exercise control over
all matters requiring approval by our stockholders, including the election of
directors and the approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing a
change in control of our company, which could negatively affect our stock
price. For more information, see "Principal and Selling Shareholders."
12
<PAGE>
In addition to their Pac-West investment, some of these investors have
invested significantly in other telecommunications companies, Internet service
providers, and related businesses, and they or their affiliates may make
further similar investments in the future. Through these investments, these
investors may develop relationships with businesses which are competitive with
us. These relationships may lead to conflicts involving arrangements between
Pac-West and the investors' other holdings. These investors are under no
obligation to bring any investment or business opportunities of which they are
aware to Pac-West, even if the opportunity is directly within the scope of our
business operations. See "Certain Relationships and Related Transactions" and
"Principal and Selling Shareholders."
Our rapid growth and limited historical financial information may make it
difficult for you to completely evaluate us.
On September 30, 1996, our predecessor transferred its telephone and
answering service divisions to us. Before that time, we did not conduct any
operations and, since that time, we have disposed of the answering service
division and have focused our business strategy on operating as a competitive
local exchange carrier. Due to significant changes in our operations since
September 30, 1996, we believe that the financial information of the
predecessor telephone and answering service divisions is not directly
comparable to our results of operations. In addition, since September 30, 1996,
we have had rapid growth and our industry has undergone substantial change. As
a result you have limited comparable historical financial information on which
to base your evaluation of us and this information may not be indicative of
future results.
Variability of quarterly operating results could result in fluctuations in the
trading price of the common stock.
Our quarterly operating results have fluctuated, and will continue to
fluctuate, significantly from period to period depending upon such factors as
the success of our efforts to expand our customer base, changes in and the
timing of expenditures relating to the continued expansion of our network, the
level of reciprocal compensation received, the development of new services, the
success of our sales and marketing efforts, changes in pricing policies by us
and by our competitors, factors relating to our acquisition strategy and
certain other factors. As a result, it is likely that in some future quarters
our operating results will be below the expectations of investors and
securities analysts. If this happens, the trading price of the common stock
could decline.
Our stock price may fluctuate significantly following the offering and you
could lose all or part of your investment as a result.
Prior to the offering, there has been no public market for our common stock.
We intend to have our common stock approved for quotation on the Nasdaq
National Market. We do not know how our common stock will trade in the future.
The initial public offering price will be determined through negotiations
between the underwriters and us. You may not be able to resell your shares at
or above the initial public offering price due to a number of factors,
including:
. actual or anticipated fluctuations in our operating results;
. changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts; and
. the operating and stock price performance of other comparable companies.
In addition, the stock market in general has experienced dramatic price and
volume fluctuations from time to time. These fluctuations may or may not be
based upon any business or operating results. Our common stock may experience
similar or even more dramatic price and volume fluctuation which may continue
indefinitely.
13
<PAGE>
A decrease in a significant stockholder's holdings could result in a loss of
revenue generated by business from that stockholder.
Prior to our recapitalization, Bay Alarm Company held approximately 78.0% of
our common stock. As a result of our recapitalization, Bay Alarm reduced its
interest in Pac-West to 21.7% of our common stock and 22.8% of our outstanding
convertible redeemable preferred stock and their interest will be reduced
further as a result of this offering. Our sales to Bay Alarm Company and its
subsidiary, InReach Internet LLC, collectively accounted for approximately
7.1%, 6.4% and 4.4% of our revenues for the years ended December 31, 1997 and
1998 and for the six month period ended June 30, 1999, respectively. The
reduction in Bay Alarm's holdings in Pac-West may make it and its affiliates
less likely to purchase goods and services from Pac-West in the future, which
could have an adverse affect on our results of operations. See "Certain
Relationships and Related Transactions" and "Principal and Selling
Shareholders."
There will be immediate and substantial dilution to new stockholders in the
offering.
The initial public offering price is substantially higher than the net
tangible book value per share of common stock that will be applicable
immediately after the offering. The common stock you purchase in the offering
will have a post-offering pro forma net tangible book value per share of
$ less than the assumed $ per share price paid in the offering.
See "Dilution."
The market price of our common stock could be adversely affected by sales of
substantial amounts of our common stock in the public market.
Following the offering, we will have a large number of shares of common
stock outstanding and available for resale beginning at various points in the
future. The market price of our common stock could decline as a result of sales
of large numbers of shares of our common stock in the market following this
offering, or the perception that sales could occur. These sales might make it
more difficult for us to sell equity securities in the future at a time and at
a price that we deem appropriate. See "Shares Eligible for Future Sale."
Your stock ownership could be diluted if we need to sell additional shares of
our common stock to finance future acquisitions.
Part of our business strategy is to accelerate our market penetration,
cross-sell additional services, diversify our customer base and improve our
operating profitability through the acquisition of competitive local exchange
carriers or other telecommunications providers. In order to successfully
complete targeted acquisitions, it may be necessary for us to issue additional
equity securities that could dilute your stock ownership.
We will retain broad discretion in using the net proceeds to us from this
offering and may spend a substantial portion in ways with which you do not
agree.
We will retain a significant amount of discretion over the application of
the net proceeds to us from this offering as well as over the timing of our
expenditures. Because of the number and variability of factors that determine
our use of the net proceeds to us from the offering, we may apply the net
proceeds to us from this offering in ways that vary substantially from our
current intentions. For more information, see "Use of Proceeds."
14
<PAGE>
Forward-looking statements may prove to be inaccurate.
Some of the statements contained in this prospectus are forward-looking. The
words "believe," "expect," "intend," "anticipate," "estimate," "plan,"
"future," and other similar expressions generally identify forward-looking
statements. They include statements concerning:
. liquidity and capital expenditures;
. growth strategy;
. acquisition activities;
. regulatory matters affecting the telecommunications industry;
. reciprocal compensation for Internet access services;
. competitive conditions in the telecommunications industry;
. projected growth of the telecommunications industry;
. debt levels and ability to obtain financing and service debt;
. general economic conditions; and
. year 2000 issues.
Actual results may differ materially from those suggested by the forward-
looking statements for various reasons, including those discussed in this
section.
15
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of our common
stock offered by this prospectus of approximately $ , or approximately
$ if the underwriters' over-allotment option is exercised in full. These
estimates are based on an assumed initial public offering price of $ per
share and include the deduction of the underwriting discount and estimated
offering expenses payable by us. We will not receive any proceeds from the sale
of the shares being offered by Safeguard Scientifics.
We intend to use a portion of the net proceeds to us from this offering for
capital expenditures, including:
. the purchase and installation of switches, transmission equipment and
customer premises equipment in connection with our planned expansion;
. the acquisition of rights of use in high-capacity dark fiber transport
lines and related electronic equipment;
. the enhancement of our network to provide additional value-added
services; and
. the improvement of our network management, billing and other back office
systems.
We will also use a portion of the net proceeds to us from this offering to
fund working capital requirements and other general corporate purposes.
In addition, we may use a portion of the net proceeds to us from this
offering for possible future investments, acquisitions or strategic alliances
in businesses or assets that are related or complementary to our existing
business. We periodically evaluate investment, acquisition and strategic
alliance candidates as a key part of our growth strategy. We currently have no
commitments or agreements and are not involved in any negotiations with respect
to these transactions.
We currently intend to allocate substantial proceeds among the foregoing
uses. The precise allocation of funds among these uses will depend on future
commercial, technological, regulatory and other developments in or affecting
our business, the competitive climate in which we operate and the emergence of
future opportunities. Because of the number and variability of factors that
determine our use of the net proceeds to us from this offering, we cannot
assure you that our application of the net proceeds will not vary substantially
from our current intentions. Pending these uses, we intend to invest the net
proceeds to us from this offering in short-term U.S. investment grade and
government securities.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not
anticipate declaring or paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to fund the development and
growth of our business. Declaration or payment of future dividends, if any,
will be at the discretion of our board of directors after taking into account
various factors, including our financial condition, operating results, current
and anticipated cash needs and plans for expansion. In addition, our ability to
pay dividends on the common stock is restricted by the provisions of our senior
credit facility and our senior notes indenture. See "Description of
Indebtedness."
16
<PAGE>
DIRECTED SHARE SUBSCRIPTION PROGRAM
As part of this offering, we are offering shares and Safeguard
Scientifics is offering shares of our common stock in a directed
share subscription program to shareholders of Safeguard Scientifics, one of our
principal shareholders. Safeguard Scientifics is an underwriter with respect to
the shares of our common stock offered to the shareholders of Safeguard
Scientifics. Safeguard Scientifics is not an underwriter with respect to the
other shares of our common stock offered and is not included in the term
"underwriter" as used elsewhere in this prospectus.
Safeguard Scientifics' shareholders may subscribe for one share of our
common stock for every ten shares of Safeguard Scientifics' common stock held
by them, and may not transfer the opportunity to subscribe to another person
except involuntarily by operation of law. Persons who owned at least 100 shares
of Safeguard Scientifics' common stock as of September 7, 1999 are eligible to
purchase shares directly from us or Safeguard Scientifics under the program.
Shareholders who own less than 100 shares of Safeguard Scientifics' common
stock will be ineligible to participate in the directed share subscription
program. Subscription orders will be satisfied first from the shares being sold
by us, and then from the shares offered by Safeguard Scientifics. If any of the
shares offered by us under the program are not purchased by the shareholders of
Safeguard Scientifics, Safeguard Scientifics has agreed that Safeguard
Scientifics or one or more of its designees will purchase these shares from us
at the closing of this offering. Sales under the directed share subscription
program will close on the day of the closing of the sale of the other shares
offered to the public. It is expected that sales under the directed share
subscription program will be reflected in each purchaser's book-entry account
at the Depository Trust Company, if any, as soon as practicable after the
closing of these sales. After the closing of these sales, we will mail stock
certificates to all purchasers who do not maintain book-entry accounts at the
Depository Trust Company.
Prior to this offering, assuming the conversion of our outstanding
convertible redeemable preferred stock into shares of common stock at an
assumed conversion price of $ per share, Safeguard Scientifics beneficially
owned shares or approximately % of our common stock. After this offering,
Safeguard Scientifics will beneficially own shares or approximately
% of our common stock, assuming that all shares offered in the
directed share subscription program are purchased by shareholders of Safeguard
Scientifics. If the shareholders of Safeguard Scientifics do not purchase any
of the shares offered in the directed share subscription program and Safeguard
Scientifics purchases all of the shares offered by us in the directed share
subscription program, Safeguard Scientifics will beneficially own shares
or approximately % of our common stock after this offering. The purchase
price under the program, whether paid by Safeguard Scientifics or its
shareholders, will be the same price per share as set forth on the cover page
of this prospectus. For purposes of this prospectus, when we present
information that reflects this offering, we have assumed that all shares
offered under the directed share subscription program are purchased by
shareholders of Safeguard Scientifics.
17
<PAGE>
CAPITALIZATION
The following table shows our unaudited cash and cash equivalents,
restricted cash and total capitalization as of June 30, 1999:
. on an actual basis; and
. on an as adjusted basis to reflect the sale of the shares of
common stock offered by us in this offering at an assumed initial public
offering price of $ per share, after deducting the underwriting
discount and estimated offering expenses payable by us, and to reflect
the conversion of our outstanding convertible redeemable preferred stock
into shares of common stock at an assumed conversion price of $ per
share.
This table should be read in conjunction with the sections entitled "Use of
Proceeds," "Selected Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our financial statements,
including related notes thereto, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of June 30, 1999
---------------------
Actual As Adjusted
-------- -----------
(in thousands,
except share and per
share data)
<S> <C> <C>
Cash and cash equivalents................................ $ 38,886 $
======== ========
Restricted cash (1)...................................... $ 20,066 $ 20,066
======== ========
Total debt (including current maturities):
13 1/2% senior notes due 2009.......................... $150,000 $150,000
Notes payable.......................................... 176 176
Senior credit facility (2)............................. -- --
-------- --------
Total debt........................................... 150,176 150,176
Convertible redeemable preferred stock, $0.001 par value,
1,750,000 shares authorized, 1,250,000 shares issued and
outstanding, including accrued cumulative dividends of
$3,649, actual and shares authorized, no shares
issued and outstanding,
as adjusted............................................. 48,649 --
Stockholders' equity (deficit):
Common stock, $0.001 par value, 15,000,000 shares
authorized, 12,562,470 shares issued and outstanding,
actual, shares authorized, shares issued
and outstanding, as adjusted.......................... 13
Additional paid-in capital............................. 6,585
Notes receivable from stockholders..................... (233) (233)
Retained earnings (deficit)............................ (81,999) (81,999)
-------- --------
Total stockholders' equity (deficit)................. (75,634)
-------- --------
Total capitalization............................... $123,191 $
======== ========
</TABLE>
- --------
(1) Restricted cash represents cash deposited in an interest reserve trust
account to fund the first two interest payments due under our senior notes,
the first of which was paid on August 2, 1999.
(2) Our senior credit facility provides for initial maximum borrowings of $20.0
million and future borrowings of up to an additional $20.0 million for
working capital and general corporate purposes. See "Description of
Indebtedness--Senior Credit Facility."
The number of shares of common stock as adjusted for this offering excludes:
. any shares of common stock to be issued pursuant to the over-allotment
option;
. shares of common stock issuable upon the exercise of outstanding
options with a weighted average exercise price of $ per share; and
. shares of common stock issuable upon the exercise of options reserved
for grant under our stock option plans.
18
<PAGE>
DILUTION
Our net tangible book value (deficit) as of June 30, 1999 was $(75,634,000)
or $ per share. Net tangible book value (deficit) is total assets minus the
sum of liabilities and intangible assets. Our net tangible book value (deficit)
per share is net tangible book value (deficit) divided by the total number of
shares outstanding before the offering.
After giving effect to adjustments relating to the offering, our unaudited
pro forma net tangible book value as of June 30, 1999, would have been $ or
$ per share. The adjustments made to determine pro forma net tangible book
value per share are the following:
. An increase in the total assets to reflect the net proceeds of the
offering as described under "Use of Proceeds" assuming that the initial
public offering price will be $ per share.
. The addition of the number of shares offered by this prospectus to the
number of common shares outstanding and the conversion of all outstanding
shares of our convertible redeemable preferred stock into common stock.
The following illustrates the increase in pro forma net tangible book value
of $ per share and the dilution, representing the difference between the
offering price per share and pro forma net tangible book value (deficit) per
share, to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $
Pro forma net tangible book value (deficit) per share as of
June 30, 1999................................................ $
Decrease in pro forma net tangible book value (deficit) per
share attributable to the offering...........................
------
Pro forma net tangible book value per share as of June 30,
1999 after giving effect to the offering.....................
------
Dilution per share to new investors in this offering.......... $
======
</TABLE>
The following table shows the difference between existing stockholders and
new investors with respect to the number of shares purchased from us, the total
consideration paid and the average price paid per share. The table assumes that
the initial public offering price will be $ per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... % $ % $
New investors.................
---------- ----- ------------ ----- ------
Total..................... 100.0% 100.0%
========== ===== ============ ===== ======
</TABLE>
The calculations above exclude from the number of outstanding shares of
common stock:
. any shares to be issued pursuant to the underwriters' over-allotment
option;
. shares of common stock issuable upon the exercise of outstanding
options with a weighted average exercise price of $ per share; and
. shares of common stock issuable upon the exercise of options reserved
for grant under our stock option plans,
In addition, the calculations above assume all shares offered pursuant to
the directed share subscription program are purchased by the shareholders of
Safeguard Scientifics.
If all of the options outstanding as of June 30, 1999, had been exercised at
that date, there would be additional dilution to new investors.
19
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of:
. our predecessor's telephone and answering service divisions for the
unaudited years ended December 31, 1994 and 1995 and for the nine month
period ended September 30, 1996, and
. Pac-West for the period from our commencement on October 1, 1996 to
December 31, 1996, for the years ended December 31, 1997 and 1998 and for
the unaudited six month periods ended June 30, 1998 and 1999.
Our selected financial data as of the dates and for the periods indicated were
derived from audited and unaudited financial statements contained elsewhere in
this prospectus and the unaudited financial statements of our predecessor's
telephone and answering service divisions for the years ended December 31, 1994
and December 31, 1995. The unaudited financial data as of June 30, 1998 and
1999 and for the six month periods ended June 30, 1998 and June 30, 1999
include all adjustments, consisting only of normal recurring adjustments, which
management considers necessary for a fair presentation of results for these
unaudited periods. The results of operations for the six month period ended
June 30, 1999 are not necessarily indicative of the results of operations that
we expect for the full 1999 calendar year. The following selected financial
information should be read in conjunction with the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements, including the related notes thereto,
included elsewhere in this prospectus.
The "As Adjusted" selected balance sheet data reflects the sale of the
shares of common stock offered by us in this offering at an assumed
initial public offering price of $ per share, after deducting the
underwriting discount and estimated offering expenses payable by us, and the
conversion of our outstanding convertible redeemable preferred stock into
shares of common stock at an assumed conversion price of $ per share.
On October 1, 1996, we began operations when our predecessor company
transferred its telephone and answering service divisions to Pac-West. As a
result, this prospectus includes our audited financial statements for the
period from our commencement on October 1, 1996 to December 31, 1996, and for
the years ended December 31, 1997 and 1998. Due to the significant changes in
our operations since September 30, 1996, we believe that the financial
information of our predecessor's telephone and answering service divisions is
not directly comparable to our current results of operations. Accordingly, you
have limited comparable historical financial information upon which to base
your evaluation of our past performance and the value of investing in our
common stock.
We recognize reciprocal compensation as revenue only to the extent received
in cash. Pacific Bell and GTE, two incumbent local exchange carriers with which
we have interconnection agreements, have each refused to pay the portion of
reciprocal compensation which they estimate is the result of inbound traffic
terminating to Internet service providers. Pacific Bell and GTE argue that such
calls are not local within the meaning of their interconnection agreements and
therefore assert no reciprocal compensation is due. See Note 5 to the audited
financial statements, "Risk Factors--We may not be entitled to receive
reciprocal compensation for calls to Internet service providers" and
"Business--Regulatory Proceedings--Interconnection Agreements."
Adjusted EBITDA represents earnings before interest, net; income taxes;
depreciation and amortization; further adjusted for the costs of merger and
recapitalization; transaction bonuses and consultant's costs; and extraordinary
item. Included in other (income) expense, net, is interest income of $11,000,
$20,000, $15,000, $5,000, $90,000, $327,000, $128,000 and $1,185,000 for the
predecessor telephone and answering service divisions for the years ended
December 31, 1994 and 1995, and for the nine month period ended September 30,
1996, and for Pac-West for the period from commencement on October 1, 1996 to
December 31, 1996, for the years ended December 31, 1997 and 1998, and for the
six month periods ended June 30, 1998 and 1999, respectively. Although EBITDA
is not a measure of financial performance under generally accepted accounting
principles, we believe it is a common measure used by analysts and investors in
comparing a company's results with those of similar companies as well as to
evaluate the capacity of a company to service its obligations.
20
<PAGE>
<TABLE>
<CAPTION>
Predecessor Telephone and
Answering Service Divisions Pac-West Telecomm, Inc.
-------------------------------- -------------------------------------------------
Period from
Commencement
on
Year Ended Nine Month October 1, Year Ended Six Month Period
December 31, Period Ended 1996 to December 31, Ended June 30,
----------------- September 30, December 31, ----------------- -----------------
1994 1995 1996 1996 1997 1998 1998 1999
------------------ ------------- ------------ ------- -------- ------- --------
(in thousands) (in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues................. $ 6,775 $ 8,900 $ 8,737 $ 4,232 $29,551 $ 42,211 $19,932 $ 30,264
Costs and expenses:
Operating costs......... 2,959 3,498 4,202 2,064 12,060 15,344 7,791 8,753
Selling, general and
administrative:
Selling, general and
administrative......... 2,687 3,011 3,123 1,519 7,367 10,779 4,219 9,563
Transaction bonuses and
consultant's costs (1). -- -- -- -- -- 3,798 -- --
Depreciation and
amortization........... 495 512 549 299 2,204 4,106 1,701 3,292
-------- ------- ------- ------- ------- -------- ------- --------
Income from operations.. 634 1,879 863 350 7,920 8,184 6,221 8,656
Interest expense......... 19 93 33 105 932 4,199 786 8,502
(Gain) on disposal of
answering service
division................ -- -- -- -- (385) -- -- --
Costs of merger and
recapitalization (1).... -- -- -- -- -- 3,004 81 --
Other (income) expense,
net..................... (11) (17) (34) 11 (119) (330) (128) (1,185)
-------- ------- ------- ------- ------- -------- ------- --------
Income before provision
for income taxes and
extraordinary item..... 626 1,803 864 234 7,492 1,311 5,482 1,339
Provision for income
taxes................... 250 722 345 94 2,997 1,561 2,193 535
-------- ------- ------- ------- ------- -------- ------- --------
Income (loss) before
extraordinary item..... 376 1,081 519 140 4,495 (250) 3,289 804
Extraordinary item--loss
on early extinguishment
of debt, net of income
tax benefit of $278 (1). -- -- -- -- -- (417) -- --
-------- ------- ------- ------- ------- -------- ------- --------
Net income (loss)........ $ 376 $ 1,081 $ 519 $ 140 $ 4,495 $ (667) $ 3,289 $ 804
======== ======= ======= ======= ======= ======== ======= ========
Basic and diluted income
(loss) before
extraordinary item per
share................... $ 1.40 $ 44.95 $ (0.42) $ 32.89 $ (0.12)
Basic and diluted net
income (loss) per share. $ 1.40 $ 44.95 $ (0.54) $ 32.89 $ (0.12)
Basic and diluted
weighted average shares
outstanding............. 100 100 3,717 100 12,562
Other Financial Data:
Reciprocal compensation
withheld................ $ -- $ -- $ -- $ -- $ 3,793 $ 32,591 $12,912 $ 28,371
Adjusted EBITDA.......... 1,129 2,388 1,431 633 10,538 16,091 7,922 11,948
Adjusted EBITDA margin %. 16.7% 26.8% 16.4% 15.0% 35.7% 38.1% 39.7% 39.5%
Cash provided by (used
in):
Operating activities.... $ 1,018 $ 1,758 $ 1,092 $ 75 $ 5,876 $ 12,033 $ 7,387 $ 20,741
Investing activities.... (1,155) (1,266) (2,523) (1,682) (6,619) (42,031) (7,433) (41,604)
Financing activities.... 196 (350) 1,778 1,549 3,658 41,631 3,018 44,513
Balance Sheet Data (as of period
end):
Cash and cash
equivalents............. $ 257 $ 399 $ 746 $ 688 $ 3,603 $ 15,236 $ 6,575 $ 38,886
Restricted cash (2)...... -- -- -- -- -- -- -- 20,066
Working capital
(deficit)............... (321) (219) 626 398 2,598 15,532 3,167 44,643
Equipment, vehicles and
leasehold improvements,
net..................... 2,311 3,065 5,883 9,483 19,079 57,294 25,155 76,010
Total assets............. 3,945 5,141 8,641 12,966 27,528 82,493 36,571 150,208
Total long-term debt..... 509 149 2,536 5,690 12,206 100,116 15,048 150,062
Convertible redeemable
preferred stock,
including accrued
cumulative dividends of
$1,324 at December 31,
1998 and $3,649 at June
30, 1999................ -- -- -- -- -- 46,324 -- 48,649
Stockholders' equity
(deficit)............... 1,445 2,526 4,037 4,177 8,672 (74,113) 11,961 (75,634)
</TABLE>
- -------
(1) Transaction bonuses and consultant's costs, costs of merger and
recapitalization and the extraordinary item all relate to our
recapitalization described in Note 1 to the audited financial statements
included elsewhere in this prospectus.
(2) Restricted cash represents cash deposited in an interest reserve trust
account to fund the first two interest payments under our senior notes, the
first of which was paid on August 2, 1999.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Pac-West is a rapidly-growing provider of integrated communications services
in the western United States. Our customers include Internet service providers,
medium and small businesses and enhanced communications service providers, many
of which are communications-intensive users. Our predecessor, also known as
Pac-West Telecomm, Inc., began selling office phone systems in 1980 and
reselling long distance service to medium and small businesses and residential
customers in 1982. Beginning in 1986, our predecessor began offering paging and
telephone answering services to its customers. Effective September 30, 1996,
our predecessor transferred its telephone and answering service divisions to
us. Prior to September 30, 1996, we did not conduct any operations and, since
that time, we have disposed of the answering service division and have focused
our business strategy on operating as a provider of integrated communications
services. For the year ended December 31, 1998 and for the six month period
ended June 30, 1999, recognizing compensation from other communications
companies for completing their customers' calls only to the extent such
compensation was actually received in cash, we had net revenues of
approximately $42.2 million and $30.3 million and adjusted EBITDA of
approximately $16.1 million and $11.9 million, respectively.
Factors Affecting Operations
Revenues. We derive our revenues from monthly recurring charges, usage
charges and initial non-recurring charges and telephone equipment sales and
service. Monthly recurring charges include the fees paid by customers for lines
in service and additional features on those lines, as well as equipment
collocation services. Usage charges consist of fees paid by end users for each
call made, fees paid by incumbent local exchange carriers as reciprocal
compensation for completion of their customers' calls through another carrier,
and access charges paid by carriers for long distance traffic terminated by
Pac-West. Initial non-recurring charges are paid by end users, if applicable,
for the initiation of our service.
We derive a substantial portion of our revenues from reciprocal compensation
paid by incumbent local exchange carriers with which we have interconnection
agreements. Reciprocal compensation revenues increased significantly in recent
fiscal quarters as a result of increasing inbound call volume from our Internet
service provider and other customers. For the years ended December 31, 1997 and
1998 and for the six month periods ended June 30, 1998 and 1999, recorded
reciprocal compensation accounted for approximately 37.4%, 37.1%, 36.9% and
41.8%, respectively, of our revenues. Two incumbent local exchange carriers
with which we have interconnection agreements, Pacific Bell and GTE, have
refused to pay that portion of reciprocal compensation that they estimate is
the result of inbound calls terminating to Internet service providers. These
incumbent local exchange carriers contend that such Internet service provider
calls are not local calls within the meaning of their respective
interconnection agreements and claim that no reciprocal compensation is
therefore payable. The total reciprocal compensation withheld by these
incumbent local exchange carriers and not included in revenues was $3.8 million
for the year ended December 31, 1997, $32.6 million for the year ended December
31, 1998 and $28.4 million for the six month period ended June 30, 1999.
On June 24, 1999, the California Public Utilities Commission adopted a
decision in an arbitration proceeding between us and Pacific Bell which held
that reciprocal compensation would be payable for Internet service provider
calls under our new interconnection agreement with Pacific Bell which became
effective on June 29, 1999. Pacific Bell has requested a rehearing of this
decision, although Pacific Bell paid the full amount of our billings for calls
since the effective date of the new agreement. This decision does not address
reciprocal compensation withheld under the prior agreement. We do not know at
this time what action Pacific Bell will take with respect to the amounts they
have previously withheld. On August 25, 1999, we, along with the commissioners
of the California Public Utility Commission and others, were named as a
defendant in an action filed by GTE California. The action challenges the
legality of the California Public Utility Commission's decisions regarding
reciprocal compensation as discussed above. We intend to seek dismissal of the
action and otherwise contest the claims of GTE California. In the event that
all or a portion of the withheld reciprocal
22
<PAGE>
compensation is paid by either Pacific Bell or GTE, the terms of our
recapitalization require us to pay additional distributions to certain owners
of up to $20.0 million. In 1999, the maximum cash distribution under the terms
of the recapitalization could be up to approximately $15 million, net of the
after tax proceeds from the withheld reciprocal compensation. See "Certain
Relationships and Related Transactions."
We expect that reciprocal compensation will continue to represent a
significant portion of our revenues in the future. We are currently negotiating
and implementing new interconnection agreements and the terms of the related
reciprocal compensation. The per minute reciprocal compensation rate we receive
from Pacific Bell under our new agreement is significantly lower than it was
under our previous agreement. Based on current market conditions, we also
expect that the per minute reciprocal compensation rate will similarly decline
from historic rates under any other future interconnection agreements. See
"Risk Factors--A failure to establish interconnection agreements on favorable
terms would adversely affect our business" and "--We may not be entitled to
receive reciprocal compensation for calls to Internet service providers."
Operating Costs. Operating costs are comprised primarily of leased transport
charges, usage charges for long distance and intrastate calls and, to a lesser
extent, reciprocal compensation related to calls that originate with a Pac-West
customer and terminate on the network of an incumbent local exchange carrier or
other competitive local exchange carrier. Our leased transport charges are the
lease payments we incur for the transmission facilities used to connect our
customers to our switch and to connect to the incumbent local exchange carrier
and other competitive local exchange carrier networks. Our strategy of leasing
rather than building our own transport facilities results in our operating
costs being a significant component of total costs.
Selling, General and Administrative Expenses. Our recurring selling, general
and administrative expenses include network development, administration and
maintenance costs, selling and marketing, customer service, information
technology, billing, corporate administration and personnel. We expect to incur
significant selling and marketing costs as we continue to expand our
operations, a significant amount of which will be incurred in a particular
market before the switch becomes operational and begins to generate revenue.
Consequently, selling and marketing expenses are expected to increase until
implementation of our expansion plan is substantially complete. We will incur
other costs and expenses, including the costs associated with the development
and maintenance of our networks, administrative overhead, premises leases and
bad debts. We expect that these costs will grow significantly as we expand our
operations and that sales and marketing and administrative overhead will be a
large portion of these expenses during the start-up phase in each of our new
markets.
Results of Operations
The following table summarizes the results of operations as a percentage of
revenues for:
(1) Our predecessor's telephone and answering service divisions for the
nine month period ended September 30, 1996 and Pac-West for the period
from our commencement on October 1, 1996 to December 31, 1996 on a
combined basis; and
(2) Pac-West for the years ended December 31, 1997 and 1998 and for the
unaudited six month periods ended June 30, 1998 and 1999.
The "Combined" column in the following table combines the results of operations
of our predecessor's telephone and answering service divisions for the nine
month period ended September 30, 1996 with those of Pac-West for the period
from our commencement on October 1, 1996 to December 31, 1996. Due to the
significant changes in our operations since September 30, 1996, we believe that
the financial information of our predecessor telephone and answering service
divisions is not directly comparable to our results of operations. As a result,
prospective investors are cautioned not to place undue reliance on such
financial information. The following data should be read in conjunction with
the financial statements and notes thereto included elsewhere in this
prospectus.
Selling, general and administrative expenses and income from operations for
the year ended December 31, 1998 include $3.8 million of one-time transaction
bonuses and consultant's costs. Excluding these transaction bonuses and
consultant's costs, selling, general and administrative expenses were 25.5% of
revenues and
23
<PAGE>
income from operations was 28.4% of revenues for that period. The net loss for
1998 includes the costs of the recapitalization of $3.0 million, transaction
bonuses and consultant's costs of $3.8 million and the extraordinary loss on
early extinguishment of debt of $0.7 million before income tax benefit.
<TABLE>
<CAPTION>
Combined Pac-West Telecomm, Inc.
--------- --------------------------
Six Month
Period
Year Ended Ended June
December 31, 30,
---------------------- ------------
1996 1997 1998 1998 1999
--------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating costs....................... 48.3 40.8 36.4 39.1 28.9
Selling, general and administrative
expenses............................. 35.8 24.9 34.5 21.2 31.6
Depreciation and amortization expense. 6.5 7.5 9.7 8.5 10.9
Income from operations................ 9.4 26.8 19.4 31.2 28.6
Net income (loss)..................... 5.1 15.2 (1.6) 16.5 2.7
</TABLE>
Six Month Period Ended June 30, 1999 Compared to Six Month Period Ended June
30, 1998
Revenues for the six month period ended June 30, 1999 increased $10.4
million to $30.3 million from $19.9 million for the corresponding period in
1998. The increase in revenues was primarily attributed to an increase of $5.3
million in paid local interconnection revenues and an increase of $4.1 million
in recurring charges and installation charges billed directly to Internet
service providers.
In the third quarter of 1998, we installed new higher capacity switches at
our Stockton and Los Angeles switching sites. During the fourth quarter of
1998, we expanded switch capacity to existing and new customers. In the second
quarter of 1999, we activated a new higher capacity switch in Oakland and
continued to expand our switching capacity in Los Angeles. Our revenues for the
second quarter of 1999 significantly increased compared to the second quarter
of 1998 as a result of the increased utilization of this newly installed switch
capacity, primarily attributable to Internet service provider customers. In
addition, new service orders from medium and small businesses have accelerated
in the second quarter of 1999 as we have built our sales force.
The number of access lines in service increased 137% to 76,263 as of June
30, 1999 from 32,176 as of June 30, 1998. Billable minutes of use were 6.6
billion in the first half of 1999, up 105% from 3.2 billion for the first half
of 1998.
Inbound local calls and minutes subject to reciprocal compensation revenues
in accordance with interconnection agreements increased 65% and 106%,
respectively, for the first half of 1999 over the first half of 1998. However,
for reasons discussed elsewhere in this prospectus, the incumbent local
exchange carriers paid only 31% of the reciprocal compensation billings for the
first half of 1999 as compared to paying 36% in 1998. The net effect of those
significant increases in inbound local calls and minutes, offset by the lower
payment percentage, resulted in the $5.3 million or 72% increase in paid
interconnection revenues.
The $4.1 million increase in the first half of 1999 over the first half of
1998 in direct billings to Internet service providers represented a 94% year to
year increase. Lines used by our Internet service providers significantly
increased from 1998 to 1999, from 28,108 lines in service by Internet service
providers at June 30, 1998 to 60,401 lines in service at June 30, 1999.
Our operating costs for the six month period ended June 30, 1999 increased
$1.0 million to $8.8 million from $7.8 million for the corresponding period in
1998. Our operating costs as a percentage of revenues decreased to 28.9% for
the six month period ended June 30, 1999 from 39.1% for the corresponding
period in 1998. The increase in operating costs was primarily due to an
increase in network operations associated with a higher level of
telecommunications activity. We made significant investments in our telephone
infrastructure during the second half of 1998 and the first half of 1999 to
accommodate future growth of competitive local exchange carrier services. As a
result of increased utilization of our newly installed switching equipment and
the use of higher capacity transmission facilities, our operating costs
decreased as a percentage of revenues.
24
<PAGE>
Our selling, general and administrative expenses for the six month period
ended June 30, 1999 increased $5.4 million to $9.6 million from $4.2 million
for the corresponding period in 1998. As a percentage of revenues, our selling,
general and administrative expenses increased to 31.6% for the six month period
ended June 30, 1999 from 21.2% in the corresponding period in 1998. The
increase in selling, general and administrative expenses was primarily due to
the addition of 36 employees in sales and marketing; an increase in network
operational, development and administration costs, including 21 additional
network employees; an increase of 20 service technicians; and 11 additional
employees in other administration, customer service and information technology
functions. Total employees almost doubled from 99 at June 30, 1998 to 187 at
June 30, 1999.
Our depreciation and amortization expense for the six month period ended
June 30, 1999 increased $1.6 million to $3.3 million from $1.7 million for the
corresponding period in 1998. Depreciation and amortization as a percentage of
revenues increased to 10.9% for the six month period ended June 30, 1999 from
8.5% in the corresponding period in 1998. The increase in depreciation and
amortization expense was primarily due to the additional depreciation on the
portion of the $42.5 million of equipment acquired during 1998 which has been
placed in service. As the equipment acquired in 1999 is placed in service,
depreciation expense as a percentage of revenues is expected to increase in
subsequent quarters.
Our interest expense for the six month period ended June 30, 1999 increased
$7.7 million to $8.5 million from $0.8 million in the corresponding period in
1998. The increase in interest expense was primarily due to the financing of a
significant portion of the $42.5 million of equipment acquired during 1998 and
interest on the $150 million senior notes issued on January 29, 1999, including
amortization over 10 years of the related deferred financing costs associated
with that offering. In addition, the interest rate on the senior notes since
January 29, 1999 is a higher interest rate than the rates paid on the equipment
financings outstanding in the first half 1998.
Our combined effective federal and state tax rate was 40% for the first half
of both 1999 and 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Our revenues for the year ended December 31, 1998 increased $12.6 million to
$42.2 million from $29.6 million for 1997. The increase in revenues was
primarily attributed to an increase of $4.6 million in paid interconnection
revenues, an increase of $5.1 million in recurring charges and installation
charges billed directly to Internet service providers, an increase of $1.2
million in local and long distance usage revenues, and an increase of $0.8
million in dedicated transport revenues.
Inbound local calls and minutes subject to reciprocal compensation revenues
in accordance with interconnection agreements increased 128% and 232%,
respectively, 1998 over 1997. However, for reasons discussed elsewhere in this
prospectus, the incumbent local exchange carriers paid only 32% of the
reciprocal compensation billings in 1998 as compared to paying 74% in 1997. The
net effect of these significant increases in inbound local calls and minutes,
partially offset by the significantly lower payment percentage, resulted in the
$4.6 million or 42% increase in paid interconnection revenues.
The $5.1 million increase in 1998 over 1997 in direct billings to Internet
service providers represented a 106% year over year increase. Lines used by our
Internet service providers significantly increased from 1997 to 1998, from
18,430 lines in service by Internet service providers at December 31, 1997 to
41,135 lines in service at December 31, 1998.
The $1.2 million increase in outbound local and long distance revenues,
including 800 number and travel card calls, represented a 23% increase in 1998
over 1997. This increase is directly related to our focus on providing services
to high-volume, telecommunication intensive users and to medium and small
businesses.
The $0.8 million or 25% increase in dedicated transport revenues primarily
related to increased data networking services for private corporate networks.
25
<PAGE>
Our operating costs for the year ended December 31, 1998 increased $3.2
million to $15.3 million from $12.1 million for 1997. Our operating costs as a
percentage of revenues decreased to 36.4% for the year ended December 31, 1998
from 40.8% for 1997. The increase in operating costs was primarily due to an
increase in network operations associated with the higher level of revenues. We
made significant investments in our telephone infrastructure beginning in the
second half of 1996 through 1998 to accommodate future growth of competitive
local exchange carrier services. As a result of increased utilization of our
newly installed switching equipment and the use of higher capacity transmission
facilities, our operating costs decreased as a percentage of revenues.
Excluding $3.8 million of bonuses paid to certain key executives in
connection with their assistance with our recapitalization and consulting
payments made to our current President in connection with services provided by
him prior to his joining Pac-West, our selling, general and administrative
expenses for the year ended December 31, 1998 increased $3.4 million to $10.8
million from $7.4 million for 1997. Excluding the $3.8 million of transaction
bonuses and consultant's costs, our selling, general and administrative
expenses as a percentage of revenues increased to 25.5% for the year ended
December 31, 1998 from 24.9% in 1997. Selling, general and administrative
expense in 1998 reflects a 79% increase in the number of employees, a $0.6
million increase in facility costs and a $1.6 million increase in payroll costs
related to the increased hiring of technology, sales, administrative and
support personnel.
Our depreciation and amortization expense for the year ended December 31,
1998 increased $1.9 million to $4.1 million from $2.2 million for 1997.
Depreciation and amortization as a percentage of revenues increased to 9.7% for
the year ended December 31, 1998 from 7.5% in 1997. The increase in
depreciation and amortization expense was primarily due to the additional
depreciation on the $7.7 million of equipment acquired during the second half
of 1997 and the $20.1 million of equipment acquired during the first nine
months of 1998.
Our interest expense for the year ended December 31, 1998 increased $3.3
million to $4.2 million from $0.9 million in 1997. The increase in interest
expense was primarily due to an increase in long-term debt during 1998. The
increase in long-term debt in 1998 was primarily due to $10.5 million of new
borrowings during the year to finance the purchase of network equipment, and
due to incremental borrowings of approximately $53.0 million in connection with
the merger and recapitalization.
Our tax provision for 1998 reflects the impact of the nondeductibility of a
substantial portion of the costs associated with the recapitalization.
Excluding the impact of these one-time costs, our combined effective federal
and state tax rate for 1998 was 40%, consistent with 1997's effective tax rate.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Our revenues for 1997 increased $16.6 million to $29.6 million from $13.0
million in 1996. The increase in revenues was primarily attributed to an
increase of $10.4 million in local interconnection revenues, an increase of
$3.7 million in recurring charges and installation charges billed directly to
Internet service providers, an increase of $0.7 million in local and long
distance usage revenues and an increase of $1.0 million in dedicated transport
revenues.
Both local interconnection revenues and billings to Internet service
providers were new types of revenues in mid 1996 with less than $1.0 million of
each type of revenue being recorded in 1996. Local and long distance usage
revenues increased 15% in 1997 over 1996, which increase was due to our focus
on business customers. Dedicated transport revenues increased 42% 1997 over
1996 primarily due to increased data networking services for private corporate
networks.
Our operating costs for 1997 increased $5.8 million to $12.1 million from
$6.3 million in 1996. Our operating costs as a percentage of revenues decreased
to 40.8% in 1997 from 48.3% in 1996. The decrease in operating costs as a
percentage of revenues was primarily due to an increase in revenues from
higher-margin, competitive local exchange carrier related services.
26
<PAGE>
Our selling, general and administrative expenses increased $2.8 million to
$7.4 million from $4.6 million in 1996. Our selling, general and administrative
expenses as a percentage of revenues decreased to 24.9% for the year ended
December 31, 1997 from 35.8% for 1996. The increase in selling, general and
administrative expenses was primarily due to an increase in hiring of
additional sales, marketing and administrative personnel and a $0.5 million
increase in facility costs. The decrease in selling, general and administrative
expenses, as a percentage of revenues, was primarily due to the lower selling
and marketing expenses associated with the addition of Internet service
provider customers and a rapid increase in revenues from Internet service
provider customers.
Our depreciation and amortization expense in 1997 increased $1.4 million to
$2.2 million from $0.8 million in 1996. Depreciation and amortization as a
percentage of revenues increased to 7.5% for the year ended December 31, 1997
from 6.5% in 1996. The increase in depreciation and amortization expense was
primarily due to the additional depreciation on the $3.9 million of equipment
acquired during the fourth quarter of 1996 and the $11.9 million of capital
equipment acquired during 1997.
Our interest expense in 1997 increased $0.8 million to $0.9 million from
$0.1 million in 1996. The increase in interest expense was primarily due to the
additional interest expense on the $4.7 million of equipment financings entered
into during the fourth quarter of 1996 and $10.7 million of equipment
financings entered into during 1997. Total debt increased from $7.0 million at
December 31, 1996 to $15.7 million at December 31, 1997.
Our combined effective federal and state tax rate was 40% for both 1997 and
1996.
Quarterly Operating and Statistical Data
The following table sets forth unaudited operating and statistical data for
each of the specified quarters of 1998 and 1999. The operating and statistical
data for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
1998 1999
----------------------------------- ----------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Ports equipped............. 90,000 90,000 174,000 220,800 251,520 309,120
Lines sold to date......... 29,930 34,176 39,641 62,088 74,026 80,984
Lines in service to date... 27,930 32,176 35,141 48,517 67,691 76,263
Estimated data lines (% of
installed lines).......... 93% 92% 89% 88% 85% 82%
Lines on switch %.......... 95% 95% 95% 96% 96% 96%
Internet service provider
and enhanced
communications service
provider customer lines
collocated %.............. 89% 90% 90% 89% 83% 81%
Quarterly minutes of use
switched (in millions).... 1,488 1,745 2,002 2,494 3,116 3,523
Metropolitan statistical
areas served.............. 25 25 25 25 25 25
Capital expenditures (in
thousands)................ $1,275 $6,588 $13,031 $21,572 $ 3,633 $18,275
Employees.................. 84 99 112 140 168 187
</TABLE>
Liquidity and Capital Resources
Net cash provided by operating activities was $20.7 million for the six
month period ended June 30, 1999 compared to $7.4 million for the six month
period ended June 30, 1998. This increase primarily reflects an increase in
accounts payable for new switching equipment received in late June 1999 plus
$8.5 million of accrued interest on our senior notes. Net cash provided by
operating activities was $12.0 million for the year ended December 31, 1998
compared to $5.9 million for the year ended December 31, 1997. This increase
primarily reflects increased accounts payable and accrued liabilities of $5.9
million. Net cash provided by operating activities for the period from our
commencement on October 1, 1996 to December 31, 1996 and for our predecessor's
telephone and answering service divisions for the nine month period ended
September 30, 1996 were $75,000 and $1,092,000, respectively.
27
<PAGE>
Net cash used in investing activities was $41.6 million for the six month
period ended June 30, 1999 compared to $7.4 million for the six month period
ended June 30, 1998. During the six month period ended June 30, 1999, we
invested $21.9 million in new switching and related equipment as compared to
$7.9 million during the comparable 1998 period. Further, in the first half of
1999, $19.7 million of the proceeds from the issuance of our senior notes was
used to purchase short-term investments to fund the interest reserve trust
account for the notes. Net cash used in investing activities was $42.0 million
for the year ended December 31, 1998 compared to $6.6 million for the year
ended December 31, 1997. During 1998, we invested approximately $41.0 million
in new switching and related equipment and leasehold improvements to expand
switching capacity in Los Angeles, Oakland and Stockton, California. During
1997, our investment of approximately $6.7 million in new switching and related
equipment and leasehold improvements was partially offset by $0.5 million of
proceeds from the disposition of assets. Net cash used in investing activities
for the period from our commencement on October 1, 1996 to December 31, 1996
and for our predecessor's telephone and answering service divisions for the
nine month period ended September 30, 1996 were $1.7 million and $2.5 million,
respectively.
Net cash provided by financing activities was $44.5 million for the six
month period ended June 30, 1999 compared to $3.0 million for the six month
period ended June 30, 1998. The net cash provided in the six month period ended
June 30, 1999 was primarily attributable to proceeds from the issuance of $150
million of our senior notes reduced by the payoff of $100 million of senior
secured borrowings. Net cash provided by financing activities was $41.6 million
for the year ended December 31, 1998 compared to $3.7 million for 1997. The net
cash provided in 1998 was primarily attributable to $37.8 million of proceeds
from the sale of our common and convertible redeemable preferred stock, $75.4
million of proceeds from senior secured borrowings in connection with the
recapitalization, less $74.0 million of payments to existing stockholders. See
"Certain Relationships and Related Transactions--Recapitalization." Net cash
provided by financing activities for the period from our commencement on
October 1, 1996 to December 31, 1996 and for our predecessor's telephone and
answering service divisions for the nine month period ended September 30, 1996
was $1.5 million and $1.8 million, respectively.
The local telecommunications services business is capital intensive. Our
operations have required and will continue to require substantial capital
investment for the design, acquisition, construction and implementation of our
network. Capital expenditures, including amounts financed under capital leases,
were $21.9 million for the first half of 1999, $42.5 million for the year ended
December 31, 1998, $11.9 million for the year ended December 31, 1997 and $3.9
million for the period from our commencement on October 1, 1996 to December 31,
1996. Of the $42.5 million of capital expenditures during 1998, $25.6 million
was included in construction in progress at December 31, 1998 and therefore is
not being depreciated until placed in service in 1999. We expect to make
additional capital expenditures between $20 and $30 million during the balance
of 1999. Planned capital expenditure projects during the remainder of 1999
include: completion of an upgraded and expanded switch at the existing Oakland,
California facility; construction of switching facilities in Seattle,
Washington; addition of a second switch in Los Angeles, California; and
implementation of a new billing and operations support system. Our business
plan, as currently contemplated, including the capital expenditures for the
remainder of 1999, anticipates capital expenditures of approximately $175
million through 2001. The actual cost of our planned expansion will depend on a
variety of factors, including the cost of the development of our network in
each of our new markets, the extent of competition and pricing of the
telecommunications services in such markets, and the acceptance of our
services. Accordingly, our actual capital requirements may exceed the amounts
described above.
Our senior credit facility provides for initial maximum borrowings of $20.0
million and future borrowings of up to an additional $20.0 million for working
capital and other general corporate purposes, and bears interest, at our
option, at:
(1) the base rate, as defined in the senior credit facility; or
(2) the LIBOR rate, as defined in the senior credit facility, plus between
2.25% and 3.5%.
28
<PAGE>
As of June 30, 1999, there were no amounts outstanding under this facility and
the borrowing rate would have been approximately 8.0%. Our borrowings under the
senior credit facility will be secured by all of our assets. The senior credit
facility has a three year term. See "Description of Indebtedness."
Our principal sources of funds following this offering are anticipated to be
current unrestricted cash balances, cash flows from operating activities,
borrowings under the senior credit facility and restricted cash. We believe
that these funds together with the net proceeds to us from this offering will
provide us with sufficient liquidity to fund our business plan through 2001. No
assurance can be given, however, that this will be the case. Depending upon our
rate of growth and profitability, especially if we pursue any significant
acquisitions, we may require additional equity or debt financing to meet our
working capital requirements or capital equipment needs. There can be no
assurance that additional financing will be available when required or, if
available, will be on terms satisfactory to us.
Instruments governing our indebtedness, including the senior credit facility
and the senior notes indenture, contain financial and other covenants that
restrict, among other things, our ability to incur additional indebtedness,
incur liens, pay dividends or make certain other restricted payments,
consummate certain asset sales, enter into certain transactions with
affiliates, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of substantially all of our
assets. Such limitations, together with our highly leveraged nature, could
limit corporate and operating activities, including our ability to respond to
market conditions to provide for unanticipated capital investments or to take
advantage of business opportunities. We have purchased and pledged to the
trustee for the benefit of the holders of the notes approximately $19.7 million
of U.S. government securities to provide for the payment of the first two
scheduled interest payments on our senior notes, the first of which was paid on
August 2, 1999. These U.S. government securities are classified as restricted
cash.
Quantitative and Qualitative Disclosures About Market Risks
The SEC's rule related to market risk disclosure requires that we describe
and quantify our potential losses from market risk sensitive instruments
attributable to reasonably possible market changes. Market risk sensitive
instruments include all financial or commodity instruments and other financial
instruments that are sensitive to future changes in interest rates, currency
exchange rates, commodity prices or other market factors. We are not exposed to
market risks from changes in foreign currency exchange rates or commodity
prices. We do not hold derivative financial instruments nor do we hold
securities for trading or speculative purposes. At December 31, 1998, we had
$100 million of long-term debt and other long-term obligations subject to
variable interest rates. However, all of this $100 million was replaced by the
issuance of $150 million of fixed rate notes in January 1999, and consequently
we currently have no risk exposure associated with changing interest rates on
debt. We are exposed to changes in interest rates on our investments in cash
equivalents. All of our investments in cash equivalents are in money market
funds that hold short-term investment grade commercial paper, treasury bills or
other U.S. government obligations. Therefore this investment policy reduces our
exposure to long-term interest rate changes. Under our current policies, we do
not use interest rate derivative instruments to manage our exposure to interest
rate changes. A hypothetical 100 basis point decline in short-term interest
rates would reduce the annualized earnings on our $38.9 million of cash
equivalent investments at June 30, 1999 by approximately $389,000. We do,
however, have market risk exposure associated with the market price on the $150
million of our senior notes outstanding. These notes are recorded at book value
which could vary from current market prices in the future, especially if
interest rates decline. As of June 30, 1999, the market value of the notes
approximated their book value.
Inflation
We do not believe that inflation has had any material effect on our business
over the past three years.
29
<PAGE>
Year 2000 Issues
Year 2000 Compliance Issues. The information in this section is a "Year 2000
Readiness Disclosure" as defined in the Year 2000 Information and Readiness
Disclosure Act of 1998 and contains forward-looking statements. These
statements include, but are not limited to, anticipated costs and the date by
which we expect to complete actions and are based on management's current
estimates, which are in turn based on assumptions about future events,
including, but not limited to, the availability of resources, representations
received from third parties and other factors. There can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from those anticipated. Specific factors that might cause material differences
include, but are not limited to, our ability to identify and remediate all
relevant systems, results of Year 2000 testing, adequate resolution of Year
2000 issues by business and other third parties that are service providers,
suppliers and customers of ours, unanticipated system costs, the adequacy of
and ability to implement contingency plans and similar uncertainties. The
forward-looking statements made in this Year 2000 discussion speak only as of
the date on which these statements are made.
Impact of the Year 2000 computer problem. The Year 2000 computer problem
refers to the potential for system and processing failures of date-related data
as a result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have time-
sensitive software may recognize a date represented as "00" as the year 1900
rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. To date, we have not experienced any
Year 2000 issues with any of our internal systems or our products, and we do
not expect to experience any of them.
Assessment. The Year 2000 problem affects the computers, software and other
equipment that we use, operate or maintain for our operations. Accordingly, we
have organized a program team responsible for monitoring the assessment and
remediation status of our Year 2000 issues and reporting to our management.
This project team is currently assessing the potential effect and costs of
remediating Year 2000 issues for our internal systems. To date, we have not
obtained independent verification or validation to assure the reliability of
our risk and cost estimates because we do not feel that the scope of our
program warrants this time and expense.
Internal infrastructure. We believe that we have identified all major
computers, software applications and related equipment used in connection with
our internal operations that will need to be evaluated to determine if they
must be modified, upgraded or replaced to minimize the possibility of a
material disruption to our business. We have completed assessing the potential
impact of Year 2000 issues on these computers, equipment and applications and
are currently modifying, upgrading and replacing major systems that we believe
have Year 2000 issues. Our long distance billing system and our accounting
system are not yet Year 2000 compliant. We are in process of replacing our
billing system to accommodate future anticipated growth with a new Year 2000
compliant system. The manufacturer of the noncompliant accounting system has
provided software that is represented to be Year 2000 compliant.
Systems other than information technology systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, security systems and other common devices may have Year 2000
issues. We are currently assessing the potential effect on and the costs of
remediating these issues, if any, for our office equipment and our facilities
in Stockton, Los Angeles, and Oakland, California and Las Vegas, Nevada.
Products. We have designed our products to be Year 2000 compliant and
believe that using our products as documented should not cause any Year 2000-
related issues. We have tested and intend to continue to test all of our
products for Year 2000 issues. While we believe our products are Year 2000
compliant, it is impractical for us to test our products in every
telecommunications systems environment or with all available combinations of
our products with components supplied by our customers or other third party
suppliers. As a result, there may be situations where the combination of our
products working with components supplied by other third parties could result
in Year 2000 issues.
30
<PAGE>
Costs of remediation. We currently anticipate that our total cost of
addressing our Year 2000 issues will be $150,000, of which approximately
$110,000 has been incurred and expensed through June 30, 1999. We do not have a
separate information technology or similar budget. The cost of addressing Year
2000 issues will be reported as a general and administrative expense. We have
not deferred any material information technology projects due to our Year 2000
efforts. Since we have been working on a Year 2000 resolution for over one
year, all major decisions regarding replacement of equipment and software was
done with Year 2000 compliance as a major purchase criteria. Costs of software
upgrades and additions, as well as hardware upgrades which were required for
compatibility, enhancement, capability/capacity, or efficiency were not
considered as a Year 2000 cost.
Suppliers. We are contacting third-party suppliers of components and our key
subcontractors used in the manufacture of our products to identify, and to the
extent possible, resolve issues relating to the Year 2000 issue. While we
expect that we will be able to resolve any significant Year 2000 issue
identified with these third parties, because we have no control over the
actions of these parties, these third parties may not remediate any or all of
the Year 2000 issues identified. Any failure of any of these third parties to
timely resolve Year 2000 issues with either their products sold to us, or their
systems could have a material adverse effect on our business, operating results
and financial condition. We believe that many incumbent local exchange carriers
and long distance carriers are also impacted by the Year 2000 issue, which in
turn could affect us.
Most reasonably likely worst case consequence of Year 2000 issues. We expect
to identify and resolve all Year 2000 issues that could materially adversely
affect our business operations. However, for the reasons discussed above, we
believe that it is not possible to determine with complete certainty that all
Year 2000 issues affecting us have been identified or corrected. As a result,
we believe that the following consequences are possible:
. operational inconveniences and inefficiencies for us, our contract
manufacturers and our customers that will divert our management's time
and attention and our financial and human resources from ordinary
business activities;
. business disputes and claims for pricing adjustments or penalties by our
customers due to Year 2000 issues, which we believe will be resolved in
the ordinary course of business; and
. business disputes alleging that we failed to comply with the terms and
conditions of contracts or industry standards of performance that result
in litigation on contract termination.
Contingency plans. We are currently developing contingency plans to be
implemented if our efforts to identify and correct Year 2000 issues affecting
our internal systems are not effective. We expect to complete our contingency
plans by the end of October 1999. Depending on the systems affected, these
plans could include:
. accelerated replacement of affected equipment or software;
. short to medium-term use of backup equipment and software;
. increased work hours for our personnel; and
. use of contract personnel to correct on an accelerated schedule any Year
2000 issues that arise or to provide manual workarounds for information
systems.
Our implementation of any of these contingency plans could have a material
adverse effect on our business, operating results and financial conditions.
31
<PAGE>
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
Statement No. 133, Accounting for Derivative Instruments and for Hedging
Activities. Statement No. 133 is effective for years beginning after June 15,
1999. Statement No. 133 provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities. We do
not anticipate that the adoption of Statement No. 133 will have a material
impact on our financial position or the results of our operations.
32
<PAGE>
BUSINESS
Our Company
We are a rapidly growing provider of integrated communications services in
the western United States. Our customers include Internet service providers,
medium and small businesses, and enhanced communications service providers,
many of which are communications-intensive users. We built our network to
capitalize on the significant growth in national Internet usage and in the
related demand for local telephone service by Internet service providers, as
well as the increasing demand of medium and small businesses for customized and
integrated communications services. We believe the structure of our network
and, in California, our presence in each local access and transport area,
provide us with significant competitive advantages over incumbent local
exchange carriers and other competitive local exchange carriers, particularly
for Internet service providers. In California, our network enables these
companies to provide their business and residential customers with access to
Internet, paging and other data and voice services from almost any point in the
state through a local call. We believe the breadth of our product offerings and
the structure of our network enable us to generate high network utilization,
substantial revenues, strong profit margins and positive cash flows.
Markets
According to data published by the FCC, total local exchange service
revenues, including business and residential services in the United States,
were approximately $103.0 billion in 1997. We believe that the rapid opening of
local markets to competition, accelerated growth in local traffic related to
increases in Internet access, and the desire for one-stop integrated services
by medium and small businesses present a significant opportunity for new
entrants to achieve significant penetration of this large, established market.
We believe that the primary determinants of success will be the construction of
a network that meets the needs of target customers, rapid deployment of network
assets, building of a direct local sales force to market to medium and small
businesses and the ability to provide competitively priced services.
We own and operate switches in Los Angeles, Oakland and Stockton, California
and have local points of presence in all 11 California local access and
transport areas with over 500 assigned local prefixes and 5.0 million telephone
numbers available for use. Pac-West's local prefixes cover 400 California rate
areas and allow virtually all California callers to access our network through
a local call. Industry sources indicate that the California market generated
approximately $27.2 billion in local exchange and long distance revenues in
1997 and currently has 1,176 Internet service providers, over 600,000 medium
and small businesses and about 8.4 million total business lines. We are
expanding our network into Nevada with a switch in Las Vegas and digital
connections in all of Nevada's local access and transport areas. We expect to
have eight switches with operations in ten western states, including
California, Nevada, Arizona, Washington, Colorado, Texas, Utah, Idaho, New
Mexico and Oregon, by the end of 2000. We believe that the use of
communications services is rapidly expanding in each of these areas and that we
will be able to effectively use our experience in California and our customer
relationships to enter these markets.
33
<PAGE>
The following table sets forth certain information regarding the markets in
which Pac-West currently operates and our anticipated geographic network
buildouts. Internet service providers are often present in more than one state
and are therefore included in the total for each such state. Medium and small
businesses are defined as businesses with fewer than 100 employees. The
following information is taken from the electronic publication "Boardwatch.com"
and publications issued by the FCC and United States Small Business
Administration.
<TABLE>
<CAPTION>
1997 Telecommunications Revenues
1999 Target Customer Base ($ Millions)
--------------------------------------- --------------------------------------
Number of Number of
Services Internet Medium & Total Local Local Long
Launch Service Small Business Exchange Exchange Distance Total
Date Providers Business Lines Intrastate Interstate Carriers Market
-------- --------- --------- ---------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current Markets:
California............. 1982 1,176 609,996 8,362,883 $ 8,706 $2,434 $16,096 $27,236
Nevada................. 1999 376 31,589 411,952 333 165 991 1,489
---------- ------- ------ ------- -------
Total Current Markets.. 8,774,835 9,039 2,599 17,087 28,725
Planned Markets:
Arizona................ 2000 551 82,454 816,349 1,008 423 2,236 3,667
Colorado............... 2000 524 100,979 869,445 1,279 492 2,235 4,006
Idaho.................. 2000 284 28,778 188,212 255 141 571 967
New Mexico............. 2000 355 33,396 243,928 430 166 774 1,370
Oregon................. 1999 583 79,046 593,120 798 340 1,582 2,720
Texas.................. 2000 876 348,146 3,644,183 5,286 1,670 8,987 15,943
Utah................... 2000 351 38,830 357,867 430 190 823 1,443
Washington............. 1999 713 128,293 1,039,521 1,269 564 2,780 4,613
---------- ------- ------ ------- -------
Total Planned Markets.. 7,752,625 10,755 3,986 19,988 34,729
---------- ------- ------ ------- -------
Total Current and
Planned Markets..... 16,527,460 $19,794 $6,585 $37,075 $63,454
========== ======= ====== ======= =======
</TABLE>
Network
We built our network to capitalize on the significant growth in demand for
switched data and voice communications and the increasing demands of medium and
small businesses for customized, integrated communications services. Since our
inception, we have used a "smart-build" strategy, building and owning
intelligent components of our network while leasing unbundled loops and
transport lines from other carriers. We believe that this strategy has provided
us with significant cost and time-to-market advantages over competitors that
own both their switches and fiber lines. By owning our switches, we can
configure our network to provide high performance, high reliability and cost-
effective solutions for our customers' needs. By leasing our transport lines,
we can reduce up-front capital expenditures, rapidly enter new markets, and
provide low-cost redundancy. In addition, we seek to maximize our operating
profits by carrying a high percentage of our customer-originated traffic on our
network. As traffic on our network increases, we intend to purchase rights of
use in high capacity dark fiber transport lines to interconnect certain of our
markets with an owned backbone network. This will provide us with greater
flexibility in creating and managing data and voice services and result in cost
savings.
To meet demand for communications services in California, we have
established three California switching sites, one in each of Los Angeles,
Oakland, and Stockton, and digital connections in each of California's 11 local
access and transport areas. We believe the structure of our network and, in
California, our presence in each California local access and transport area
provides us with significant competitive advantages over incumbent local
exchange carriers and other competitive local exchange carriers, particularly
for Internet service providers, medium and small business and enhanced
communications service providers. In California, our network enables our
customers to provide their business and residential customers with access to
Internet, paging and other services from almost any point in the state through
a local call. In this way, our customers can achieve statewide coverage with
significantly lower capital and operating expenses. Our switching sites offer
Internet service providers highly reliable, low cost tandem switching and the
ability to build lower cost networks by collocating equipment at our three
California switching sites rather than in all 11 local access and
34
<PAGE>
transport areas. In addition, our interconnection arrangements and statewide
leased transport network allow Internet service providers to obtain statewide
coverage at local calling rates, which reduces switching and transmission
costs.
As of June 30, 1999, we had an installed capacity of 309,120 ports in
California and Nevada. We expect to have eight switches with operations in ten
western states by the end of 2000 with statewide local coverage in each of our
target markets. We intend to install a second switch in Los Angeles in late
1999 as well as build switching sites in Washington in 1999 and in Colorado in
early 2000.
Switching Platform. We have chosen Alcatel USA's digital tandem switches to
switch calls between originating locations and final destinations. Due to their
high call carrying capacity, multiple path call routing capabilities and
ability to switch multiple digital, voice and data applications of varying
bandwidths, tandem switches are ideally suited for handling the high volumes
and long holding times involved in serving Internet service provider customers.
Tandem switches, software and customer collocation facilities provide the
scale, switching capacity and standardization needed to efficiently and
reliably serve our target customers. Our uniform and advanced switching
platform combined with the structure of our computer network enable us to:
. deploy features and functions quickly throughout our entire network;
. expand switch and transport capacity in a cost-effective, demand-based
manner;
. lower maintenance costs through reduced training and spare parts
requirements; and
. achieve direct connectivity to wireless and other personal communication
system applications in the future.
Transmission Capacity. We currently lease our transmission facilities from
inter-exchange carriers, incumbent local exchange carriers and other
competitive local exchange carriers. We generally seek to lease fiber optic
transmission facilities from multiple sources in each of our current and target
markets. We believe that our broad market coverage results in:
(1) an increased number of buildings that can be directly connected to our
switching network, which should maximize the number of customers to
which we can offer our services;
(2) a higher volume of communications traffic both originating and
terminating on our network, which should result in improved operating
margins;
(3) enhanced reliability at competitive prices;
(4) the ability to leverage our investment in high capacity switching
equipment and electronics; and
(5) the opportunity for our network to provide backhaul carriage for other
telecommunications service providers, such as long distance and
wireless carriers.
Interconnection. Our primary interconnection agreements are with Pacific
Bell and GTE. Our interconnection agreement with GTE has expired and is
currently being renegotiated. In accordance with its terms, however, this
agreement will remain in force during renegotiation. We believe that
interconnection arrangements between the incumbent local exchange carriers and
other competitive local exchange carriers will be in place at appropriate times
in other markets that we may enter. Interconnection agreements between us and
incumbent local exchange carriers are subject to approval of the relevant state
commission, and under the terms of the Telecommunications Act of 1996, each
incumbent local exchange carrier which is subject to the Telecommunications Act
of 1996 is required to negotiate an interconnection agreement with us. Where an
interconnection agreement cannot be reached on terms and conditions
satisfactory to us, we may pursue arbitration of any disputes before the state
utility commissions as provided under the Telecommunications Act of 1996. Pac-
West currently is in arbitration with Citizens Telecommunications Company of
California, Inc. See "--Regulatory Proceedings--Interconnection Agreements."
35
<PAGE>
Strategy
We are focused on becoming the integrated communications provider of choice
for our customers. Our strategy to meet this objective is to:
Capitalize on growing demand in our current markets. The demand for data and
voice communication services in our current markets is large and growing
rapidly. Significant increases in dial-up access to the Internet have resulted
in the creation of over 5,000 Internet service providers in the United States,
which, in turn, has created strong demand for local access lines nationwide. We
intend to increase our market penetration and capitalize on this growth in our
current markets by adding more switches and transport lines to increase our
capacity, adding new and innovative products to our existing offerings, and
repackaging and repricing our offerings in response to the changing demands of
our customers. In addition, we believe that we are differentiated by the
architecture of our network, which offers the following benefits:
. switching systems which support high calling volumes and long holding
times for Internet service provider calls;
. statewide local calling capabilities through established physical
locations in each local access and transport area within a state, which
reduces Internet service providers' transmission costs; and
. the ability to collocate Internet modems and servers in fewer locations,
which enables Internet service providers to achieve broad geographic
coverage while minimizing capital expenditures.
Leverage existing customer base through geographic expansion. We are a
leading supplier of Internet access and other Internet infrastructure services
in California with 78 Internet service providers, all of which have operations
in California, including Concentric Network Corp., EarthLink, Inc., MindSpring
Enterprises, Inc. and Splitrock Services, Inc. We plan to leverage the
expansion of these customers into other western states by entering new markets
where our current customers have or are beginning operations. In addition, we
refine our selection of target markets based on a number of considerations,
including the number of potential customers and other competitors in those
markets and the presence of multiple transmission facility suppliers. Our
target markets have approximately 2,300 Internet service providers,
approximately 1.4 million medium and small businesses, 16.5 million business
lines and generated approximately $63.4 billion of local exchange and long
distance revenues in 1997. We believe that our geographically clustered network
will enable us to take advantage of regional calling patterns to transmit a
large percentage of customer traffic on our network. We also believe that by
originating and terminating calls on our network, we can continue to achieve
significant cost savings and may develop some pricing advantages over our
competition.
Focus on the medium and small business market. We believe that medium and
small businesses have significant and increasing needs for advanced
communication services. Many of our target customers want technologically
advanced communications systems along with low cost bundled local, long
distance, data and other enhanced services but do not have the expertise to
design, purchase and maintain these kinds of systems and services themselves.
We believe that these target customers are not adequately served by incumbent
local exchange carriers and other competitive local exchange carriers. We
intend to become a leading provider of integrated communications services to
medium and small businesses by offering a complete product offering of system
design, equipment selection and installation along with bundled local and long
distance services. We believe that this product mix will enable us to quickly
penetrate target markets and build customer loyalty.
In addition, we have and will continue to expand our sales, customer care
and service delivery forces in selected markets. From June 30, 1998 to June 30,
1999, our sales, customer care and service delivery forces increased from 53 to
105 professionals. Of these resources, the direct sales force increased from 21
to 44 in the same period. We believe that employing a direct sales force and
independent sales agents with extensive local market and telecommunications
sales experience enhances the likelihood of success in new markets. Salespeople
with experience in a particular market provide us with extensive knowledge of
our target customer base through existing relationships with target customers.
As a result, our salespeople are able to pre-sell our products and services
before we initiate network operations in a particular market.
36
<PAGE>
Expand portfolio of products and services. In order to achieve our growth
objectives, we expect to continue introducing new and innovative products and
services. We recently added several new products to our portfolio, including:
. Managed modem, a packaged product that includes incoming call access
lines, modems, routers, and authentication services. This product
provides Internet service providers and business customers with a non-
capital intensive means of quickly establishing a local point of presence
throughout our coverage area.
. Remote access services, including mobile or remote office, virtual
office, distance education and training, and telecommuting. These
services allow customers to access and interact with home or branch
office communications and information systems from anywhere in our market
area through a local call.
. High-speed data services. We currently offer high-speed private line data
services and digital subscriber line services to our customers. We also
intend to explore wireless and satellite technologies in order to develop
an array of high-speed alternatives for our customers.
Expand through potential strategic acquisitions. We may acquire other
competitive local exchange carriers or other communications providers to grow
our business. We believe that strategic acquisitions may enable us to
accelerate our market penetration, cross-sell additional services, diversify
our customer base and improve operating profitability.
Products and Services
Our products and services are designed to appeal to the sophisticated
telecommunications needs of our target customers.
Local Services. We provide local dial-tone services to customers, allowing
them to complete calls in a local calling area and to access long distance
carriers. Local services and long distance services can be bundled together
using the same transport facility. Our network is designed to allow a customer
to easily increase or decrease capacity and alter enhanced communications
services as the communications requirements of the business change. In addition
to our core local services, we also provide access to third party directory
assistance and operator services.
Long Distance Services. We provide domestic and international long distance
services. Long distance calls which do not terminate on our network are passed
to long distance carriers which route the remaining portion of the call. Our
ability to integrate local and long distance services allows us to aggregate
customers' monthly recurring, local usage and long distance charges on a
single, consolidated invoice.
Specialized Application Services. We tailor products and services for target
industries with special communications needs. These services typically include
rated local calling, expanded local calling area, discounted long distance
rates and tailored trunking configurations.
Internet Service Provider Services. We provide Internet service providers
collocation services at each of our switch locations. Collocation enables an
Internet service provider to install its equipment in any or all of our switch
facilities and interconnect directly to our tandem switches to switch calls
from their originating locations to their final destinations. Collocated
equipment is protected by the same cooling, power back-up and security systems
protecting our switches. In California, an Internet service provider's ability
to collocate equipment at only three sites, rather than in all 11 local access
and transport areas, reduces its capital expenditures and maintenance
requirements. We receive monthly rental revenue from the Internet service
provider for the space used. Pac-West is also in the process of introducing a
managed modem service where we provide modem pools and dedicated circuits into
the worldwide web for our Internet service provider customers.
37
<PAGE>
Enhanced Services. In addition to providing typical enhanced services such
as voicemail, call transfer and conference calling, we offer additional value-
added enhanced services to complement our core local and long distance
services. These enhanced service offerings include:
Internet Access Services--Enables customers to use their available
capacity for access to Internet service providers.
Data Networking Services--We provide high-speed, broadband services to
use for data communications, such as private corporate networks.
Digital Subscriber Line Services--We offer high-speed digital subscriber
line service to our Internet service provider and business customers
through a reseller relationship with one or more major digital subscriber
line supplier. Recently, we signed an agreement with Covad Communications
to provide bundled high-speed services beginning in the fourth quarter of
1999.
Equipment Sales. System design and equipment sales and installation are
essential components of our strategy of marketing to medium and small
businesses. We offer our business customers technologically advanced systems
bundled together with local and long distance services.
Sales and Marketing
Sales. We are building an experienced direct sales force. Our direct sales
force was increased to 44 as of June 30, 1999, from 21 as of June 30, 1998. We
recruit salespeople with strong sales backgrounds in our existing and target
markets, including salespeople from long distance companies, telecommunications
equipment manufacturers, network systems integrators and incumbent local
exchange carriers. We plan to continue to attract and retain highly qualified
salespeople by offering them an opportunity to work with an experienced
management team in an entrepreneurial environment and to participate in the
potential economic rewards made available through a results-oriented
compensation program that emphasizes sales commissions.
During the months prior to initiating service in a new market, our
salespeople will begin pre-selling our services to target customers. This pre-
selling effort is designed to shorten the period between the availability of
service and the receipt of customer orders and to generate customers in each
market who may enter into service agreements before the local Pac-West network
becomes operational.
Marketing. In our existing markets, we seek to position ourselves as a high
quality alternative to incumbent local exchange carriers for local
telecommunication services by offering network reliability and superior
customer support at competitive prices. We intend to build our reputation and
brand identity by working closely with our customers to develop services
tailored to their particular needs and by implementing targeted advertising and
promotional efforts, which will be gradually expanding to mass media.
Customer and Technical Service. We believe that our ability to provide
superior customer and technical service is a key factor in acquiring new
customers and reducing churn of existing customers. We have developed a
customer service strategy designed to effectively meet the service requirements
of our target customers. The principal salesperson for each customer will
provide the first line of customer service by identifying and resolving any
customer concerns. Customer service representatives will provide real time
problem identification and resolution and superior customer service. All of
these services will be supported by our experienced engineering and technical
staff.
Customers
We focus on providing integrated communications services to Internet service
providers, medium and small businesses, enhanced communications service
providers, paging companies and call centers, many of which are communications-
intensive users. For the three month period ended June 30, 1999, ten of our top
fifteen customers were Internet service providers. For the years ended December
31, 1997 and 1998 and for the six month period ended June 30, 1999, Internet
service providers accounted for approximately 16.2%, 23.3% and 28.2%,
respectively, of our revenues, not including reciprocal compensation related to
terminating calls to Internet service providers.
38
<PAGE>
In addition to Internet service providers, we have targeted enhanced
communications service providers as potential large volume users of our
services. Enhanced communications service providers offer unified messaging
platforms and fax mail services, in addition to recently introduced free fax
and voice mail services. The characteristics of this market segment not only
offer us the potential to sell more trunks and bill more minutes of use but
also allows us to improve the utilization of our resources.
The following is a list of some of our Internet service providers, enhanced
communications service providers, and paging customers:
<TABLE>
<CAPTION>
Enhanced Communications
Internet Service Providers Service Providers Paging Companies
-------------------------- ----------------------- ----------------
<S> <C> <C>
Concentric Network Corp. CalChat Metrocall, Inc
EarthLink, Inc. CallWave PageMart Wireless, Inc.
Frontier Global Center, Jfax.com
Incorporated Legacy Communications
The Grid Inc. Corporation
InReach Internet LLC General Electric Information
JPS.Net Corp. Services
MindSpring Enterprises, Inc. Talkstar.com
Slip.Net, Inc. (a First World Net CoTel
Communication, Inc. company)
Splitrock Services, Inc.
StarNet, Inc.
</TABLE>
Our medium and small business customers include regional banks, alarm
companies, universities, healthcare providers, real estate agencies, law firms
and others.
Additional customer market segments we have targeted as potential large
volume users of our services include businesses with significant numbers of
telecommuters and businesses with substantial customer service call center
operations. Businesses with substantial numbers of telecommuters will be
targeted with our managed modem product, including our new 64k and 128k
integrated service digital network, or ISDN, service as well as our new digital
subscriber line service, to provide a secure, reliable, reasonably priced
remote access service to connect telecommuters with corporate local area
networks or LANs.
We have also targeted businesses with substantial customer service call
center operations, including the banking, public utilities, cable television
industries. Companies within these industries often send bills or statements
with a toll-free telephone number. With our services, these companies can offer
a local telephone number on bills and statements, eliminating the need for the
company to pay for toll-free service to enable their customers to contact them.
Sales to Bay Alarm Company and InReach Internet LLC collectively accounted
for approximately 7.1%, 6.4% and 4.4%, respectively, of our revenues for the
years ended December 31, 1997 and 1998 and for the six month period ended June
30, 1999. Mr. Bruce A. Westphal, who serves on our board of directors, is the
chairman of the board of both Bay Alarm Company and InReach Internet LLC.
Competition
The telecommunications industry is highly competitive. We believe that the
principal competitive factors affecting our business will be pricing levels and
pricing policies, customer service, accurate billing and, to a lesser extent,
variety of services. Our ability to compete effectively will depend upon our
continued ability to maintain high quality, market-driven services at prices
generally equal to or below those charged by our competitors. To maintain our
competitive posture, we believe that we must be in a position to reduce our
prices in order to meet reductions in rates, if any, by others. Any such
reductions could adversely affect us. Many of our current and potential
competitors have financial, personnel and other resources, including brand name
recognition, substantially greater than ours as well as other competitive
advantages over us.
39
<PAGE>
Incumbent Local Exchange Carriers. In each of the markets we target, we will
compete principally with the incumbent local exchange carrier serving that
area, such as Pacific Bell and GTE in California. Some incumbent local exchange
carriers, including GTE, are offering long distance services to their local
telephone customers. The regional Bell operating companies, including Pacific
Bell, are actively seeking removal of federal regulatory restrictions that
prevent them from entering the long distance market. Many experts expect the
regional Bell operating companies to be successful in entering the long
distance market in a few states within the next two years and in most states
within a year or two thereafter. We believe the regional Bell operating
companies expect to offset market share losses in their local markets by
capturing a significant percentage of the long distance market, especially in
the residential segment where the regional Bell operating companies' strong
regional brand names and extensive advertising campaigns may be very
successful. See "--Regulation."
As a relatively recent entrant in the integrated telecommunications services
industry, we have not achieved and do not expect to achieve a significant
market share for any of our services. In particular, the regional Bell
operating companies and other local telephone companies have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially greater than ours, have the potential to subsidize
competitive services with revenues from a variety of businesses, have long-
standing relationships with regulatory authorities at the federal and state
levels, and currently benefit from certain existing regulations that favor the
incumbent local exchange carriers over us in certain respects. While recent
regulatory initiatives, which allow competitive local exchange carriers such as
ourselves to interconnect with incumbent local exchange carrier facilities,
provide us with increased business opportunities, such interconnection
opportunities have been, and likely will continue to be, accompanied by
increased pricing flexibility for and relaxation of regulatory oversight of the
incumbent local exchange carriers.
The FCC recently adopted an order that provides for increased incumbent
local exchange carrier pricing flexibility and deregulation of some access
services and provides a framework for increased pricing flexibility of other
services based on a showing by the incumbent local exchange carrier that there
is facilities-based competition in specified geographic areas. After meeting
these requirements, incumbent local exchange carriers will be allowed to offer
discounts to large customers through contract arrangements. The order also
permits incumbent local exchange carriers to offer new access services by
filing tariffs without prior approval and dispensing with the requirement for
them to provide cost supports for their pricing. The FCC also issued a Notice
of Proposed Rulemaking that would permit added pricing flexibility for local
exchange carriers for additional services conditioned on to be determined
competitive criteria and initiates an inquiry into whether competitive local
exchange carrier access rates should be regulated. Implementation of the FCC's
order could have a material adverse effect on us. As purchasers of access
services, we may see increased competition for those services which could lower
prices we have to pay for such services.
Competitive Access Carriers/Competitive Local Exchange Carriers/Other Market
Entrants. We also face, and expect to continue to face, competition from other
current and potential market entrants, including long distance carriers seeking
to enter, reenter or expand entry into the local exchange market such as AT&T,
MCI Worldcom, and Sprint, and from other competitive local exchange carriers,
out-of-region incumbent local exchange carriers, resellers of local exchange
services, cable television companies, electric utilities, microwave carriers,
wireless telephone system operators and private networks built by large end
users. In addition, a continuing trend toward mergers, acquisitions and
strategic alliances in the telecommunications industry could also increase the
level of competition we face. Consolidation is also occurring in the incumbent
local exchange carrier industry, such as the proposed plans for mergers between
SBC and Ameritech, and between Bell Atlantic and GTE. These types of
consolidations and alliances could put us at a competitive disadvantage.
The Telecommunications Act of 1996 imposes certain regulatory requirements
on all local exchange carriers, including competitors such as ourselves, while
granting the FCC expanded authority to reduce the level of regulation
applicable to any or all telecommunications carriers, including incumbent local
exchange carriers. The manner in which these provisions of the
Telecommunications Act of 1996 are implemented and enforced could have a
material adverse effect on our ability to successfully compete against
incumbent local exchange carriers and other telecommunications service
providers.
40
<PAGE>
The changes in the Telecommunications Act of 1996 radically altered the
market opportunity for traditional competitive local exchange carriers. Because
many existing competitive local exchange carriers initially entered the market
providing dedicated access in the pre-1996 era, they had to build a fiber
infrastructure before offering services. Switches were added by most
competitive local exchange carriers since 1996 to take advantage of the opening
of the local market. With the Telecommunications Act of 1996 requiring
unbundling of the incumbent local exchange carrier networks, competitive local
exchange carriers are now able to enter the market more rapidly by installing
switches and leasing fiber transport capacity until traffic volume justifies
building facilities. New competitive local exchange carriers will not have to
replicate existing facilities and can be more opportunistic in designing and
implementing networks.
Competition for Provision of Long Distance Services. The long distance
telecommunications industry has numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline.
Internet Service Providers. The competition for Internet service provider
customers in the telecommunications industry is high and we expect that
competition will intensify. In addition, alternative competing technologies
regarding this service may emerge. Our competitors in this market include other
telecommunications companies, including integrated online services providers
with their own communications networks. Many of these competitors have greater
financial, technological, marketing, personnel and other resources than ours.
Competition from International Telecommunications Providers. Under the
recent World Trade Organization agreement on basic telecommunications services,
the United States and 68 other members of the World Trade Organization
committed themselves to opening their respective telecommunications markets to
foreign ownership and/or to adopting regulatory measures to protect competitors
against anticompetitive behavior by dominant telecommunications companies,
effective in some cases as early as January 1998. Although we believe that the
World Trade Organization agreement could provide us with significant
opportunities to compete in markets that were not previously accessible and to
provide more reliable services at lower costs than we could have provided prior
to implementation of the World Trade Organization agreement, it could also
provide similar opportunities to our competitors. There can be no assurance
that the pro-competitive effects of the World Trade Organization agreement will
not have a material adverse effect on our business, financial condition and
results of operations or that members of the World Trade Organization will
implement the terms of the World Trade Organization agreement.
Regulation
Our telecommunications services business is subject to varying degrees of
federal, state and local regulation.
Federal Regulation
The FCC regulates interstate and international telecommunications services.
We provide service on a common carrier basis. The FCC imposes certain
regulations on common carriers such as the regional Bell operating companies
that have some degree of market power. The FCC imposes less regulation on
common carriers without market power including, to date, competitive local
exchange carriers. Among other obligations, common carriers are generally
subject to nondiscrimination and tariff filing requirements, as well as certain
service reporting requirements. The FCC also requires common carriers to
receive an authorization to construct and operate telecommunications
facilities, and to provide or resell telecommunications services, between the
United States and international points.
In August 1996, the FCC released an interconnection decision establishing
rules implementing the Telecommunications Act of 1996 requirements that
incumbent local exchange carriers negotiate interconnection
41
<PAGE>
agreements and providing guidelines for review of such agreements by state
public utilities commissions. On July 18, 1997, the Eighth Circuit vacated
certain portions of the interconnection decision, including provisions
establishing a pricing methodology and a procedure permitting new entrants to
pick and choose among various provisions of existing interconnection agreements
between incumbent local exchange carriers and their competitors. On October 14,
1997, the Eighth Circuit issued a decision vacating additional FCC rules
affecting the use of combinations of an incumbent local exchange carrier's
unbundled network elements. On January 25, 1999, the Supreme Court reversed
most aspects of the Eighth Circuit's holdings with respect to FCC jurisdiction
and, among other things, declared that the FCC has general authority under the
Telecommunications Act of 1996 to promulgate regulations governing local
interconnection pricing, including regulations governing reciprocal
compensation. The Supreme Court also found that the FCC had the authority to
promulgate a pick and choose rule, and upheld most of the FCC's rules governing
access to unbundled network elements. The Court, however, remanded to the FCC
its designation of unbundled network elements based on the FCC's use of an
improper standard to determine whether an unbundled element must be made
available.
The Eighth Circuit decisions and their recent reversal by the Supreme Court
perpetuate continuing uncertainty about the rules governing the pricing, terms
and conditions of interconnection agreements. The Supreme Court's action in
particular may require or trigger the renegotiation of existing agreements.
Although state public utilities commissions have continued to conduct
arbitrations, and to implement and enforce interconnection agreements during
the pendency of the Eighth Circuit proceedings, the Supreme Court's recent
ruling and further proceedings on remand at the Eighth Circuit or the FCC may
affect the scope of state commissions' authority to conduct such proceedings or
to implement or enforce interconnection agreements. They could also result in
new or additional rules being promulgated by the FCC. Given the general
uncertainty surrounding the effect of the Eighth Circuit decisions and the
recent decision of the Supreme Court reversing them, there can be no assurance
that we will be able to continue to obtain or enforce interconnection terms
that are acceptable to us or that are consistent with our business plans.
The Telecommunications Act of 1996 is intended to increase competition. The
act opens the local services market by requiring incumbent local exchange
carriers to permit interconnection to their networks and establishing incumbent
local exchange carrier obligations with respect to:
Reciprocal Compensation. Requires all incumbent local exchange carriers
and competitive local exchange carriers to complete calls originated by
competing carriers under reciprocal arrangements at prices based on a
reasonable approximation of incremental cost or through mutual exchange of
traffic without explicit payment.
Resale. Requires all incumbent local exchange carriers and competitive
local exchange carriers to permit resale of their telecommunications
services without unreasonable restrictions or conditions. In addition,
incumbent local exchange carriers are required to offer wholesale versions
of all retail services to other telecommunications carriers for resale at
discounted rates, based on the costs avoided by the incumbent local
exchange carrier in the wholesale offering.
Interconnection. Requires all incumbent local exchange carriers and
competitive local exchange carriers to permit their competitors to
interconnect with their facilities. Requires all incumbent local exchange
carriers to permit interconnection at any technically feasible point within
their networks, on nondiscriminatory terms, at prices based on cost, which
may include a reasonable profit. At the option of the carrier seeking
interconnection, collocation of the requesting carrier's equipment in the
incumbent local exchange carriers' premises must be offered, except where
an incumbent local exchange carrier can demonstrate space limitations or
other technical impediments to collocation.
Unbundled Access. Requires all incumbent local exchange carriers to
provide nondiscriminatory access to unbundled network elements, including
certain network facilities, equipment, features, functions, and
capabilities, at any technically feasible point within their networks. Such
access must be on nondiscriminatory terms, at prices based on cost, which
may include a reasonable profit.
42
<PAGE>
Number Portability. Requires all incumbent local exchange carriers and
competitive local exchange carriers to permit users of telecommunications
services to retain existing telephone numbers without impairment of
quality, reliability or convenience when switching from one
telecommunications carrier to another.
Dialing Parity. Requires all incumbent local exchange carriers and
competitive local exchange carriers to provide "1+" equal access to
competing providers of telephone exchange service and toll service, and to
provide nondiscriminatory access to telephone numbers, operator services,
directory assistance, and directory listing, with no unreasonable dialing
delays.
Access to Rights-of-Way. Requires all incumbent local exchange carriers
and competitive local exchange carriers to permit competing carriers access
to poles, ducts, conduits and rights-of-way at regulated prices.
Incumbent local exchange carriers are required to negotiate in good faith
with carriers requesting any or all of the above arrangements. If the
negotiating carriers cannot reach agreement within a prescribed time, either
carrier may request arbitration of the disputed issues by the state regulatory
commission. Where an agreement has not been reached, incumbent local exchange
carriers remain subject to interconnection obligations established by the FCC
and state telecommunication regulatory commissions.
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. For example, the FCC
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries with an annual cap of $2.3 billion
and for services provided to rural health care providers with an annual cap of
$400.0 million. The FCC also expanded the federal subsidies for local exchange
telephone service provided to low-income consumers. Providers of interstate
telecommunications service, such as ourselves, as well as certain other
entities, must pay for these programs. Our share of these federal subsidy funds
will be based on our share of certain defined telecommunications end-user
revenues. Currently, the FCC is assessing such payments on the basis of a
provider's revenue for the previous year. We are paying approximately $16,000
per month in subsidy payments during the first half of 1999. To offset this
expense, we currently charge our customers a surcharge on all interstate usage,
subject to periodic adjustment. The FCC is currently in the process of revising
its rules for subsidizing service provided to consumers in high cost areas,
which may result in further substantial increases in the overall cost of the
subsidy program. The FCC postponed the projected effective date of this
revision to January 1, 2000. Several parties appealed the May 8th order. Such
appeals were consolidated and transferred to the United States Court of Appeals
for the Fifth Circuit. On July 30, 1999, the Fifth Circuit affirmed most
portions of the May 8th order, but remanded certain aspects of the order to the
FCC to conduct further proceedings. The FCC and a federal-state joint board
also are continuing to examine and revise various aspects of universal service.
We cannot predict the effect that further regulatory or judicial revision of
the universal service regime will have on our business, financial condition or
results of operations.
The Telecommunications Act of 1996 codifies the incumbent local exchange
carriers' equal access and nondiscrimination obligations and preempts
inconsistent state regulation. The Telecommunications Act of 1996 also contains
special provisions that eliminate the AT&T Antitrust Consent Decree and similar
antitrust restrictions on the regional Bell operating companies restricting the
regional Bell operating companies from providing long distance services and
engaging in telecommunications equipment manufacturing. The Telecommunications
Act of 1996 permitted the regional Bell operating companies to enter the out-
of-region long distance market immediately upon its enactment. Further,
provisions of the Telecommunications Act of 1996 permit a regional Bell
operating company to enter the long distance market in its traditional service
area if it satisfies several procedural and substantive requirements in those
states in which it seeks long distance relief. These requirements include
obtaining FCC approval upon a showing that the regional Bell operating company
has entered into interconnection agreements or, under some circumstances, has
offered to do so. The interconnection agreements must satisfy a 14-point
checklist of competitive requirements and the FCC must be satisfied that the
regional Bell operating companies' entry into long distance markets is in the
public interest.
43
<PAGE>
To date, several petitions by regional Bell operating companies for such entry
have been denied by the FCC and none has been granted.
Under the Telecommunications Act of 1996, any entity, including cable
television companies and electric and gas utilities, may enter any
telecommunications market, subject to reasonable state regulation of safety,
quality and consumer protection. Because implementation of the
Telecommunications Act of 1996 is subject to numerous federal and state policy
rulemaking proceedings and judicial review there is still uncertainty as to
what impact such legislation will have on us, but it is likely to encourage
additional competitive entry in markets we serve.
In accordance with authority granted by the FCC, we resell the international
telecommunications services of other common carriers between the United States
and international points. In connection with such authority, we have filed
tariffs with the FCC stating the rates, terms and conditions for our
international services.
With respect to our domestic service offerings, we have filed tariffs with
the FCC stating the rates, terms and conditions for our interstate services.
Our tariffs are generally not subject to pre-effective review by the FCC, and
can be amended on one day's notice. Our interstate services are provided in
competition with interexchange carriers and, with respect to access services,
the incumbent local exchange carriers.
In October 1996, the FCC adopted an order eliminating the requirement that
non-dominant interstate carriers such as ourselves maintain tariffs on file
with the FCC for domestic interstate services. This order applies to all non-
dominant interstate carriers, including AT&T. The order does not apply to the
switched and special access services of the regional Bell operating companies
or other local exchange providers. On February 13, 1997, the United States
Court of Appeals for the District of Columbia Circuit stayed the implementation
of the FCC order pending its review of the order on the merits. Currently, that
temporary stay remains in effect. If the stay is lifted and the FCC order
becomes effective, telecommunications carriers such as ourselves will no longer
be able to rely on the filing of tariffs with the FCC as a means of providing
notice to customers of prices, terms and conditions on which they offer their
interstate services. In June 1997, the FCC issued another order which allows
non-dominant carriers, such as ourselves, to offer interstate access services
without the filing of tariffs. The obligation to provide non-discriminatory,
just and reasonable prices remains unchanged under the Communications Act of
1934. While tariffs provided a means of providing notice of prices, terms and
conditions, we intend to rely primarily on our sales force and direct marketing
to provide such information to our customers.
To the extent we provide interexchange telecommunications service, we are
required to pay access charges to incumbent local exchange carriers and other
competitive local exchange carriers when we use the facilities of those
companies to originate or terminate interexchange calls. Also, as a competitive
local exchange carrier, we provide access services to other interexchange
service providers. The interstate access charges of incumbent local exchange
carriers are subject to extensive regulation by the FCC, while those of
competitive local exchange carriers are subject to a lesser degree of FCC
regulation but remain subject to the requirement that all charges be just,
reasonable, and not unreasonably discriminatory. In two orders released on
December 24, 1996, and May 16, 1997, the FCC made major changes to the
interstate access charge structure. In the December 24th order, the FCC removed
restrictions on incumbent local exchange carriers' ability to lower access
prices and relaxed the regulation of new switched access services in those
markets where there are other providers of access services. If this increased
pricing flexibility is not effectively monitored by federal regulators, it
could have a material adverse effect on our ability to compete in providing
interstate access services. The May 16th order substantially increased the
costs that price cap incumbent local exchange carriers subject to the FCC's
price cap rules, recover through monthly, non-traffic-sensitive access charges
and substantially decreased the costs that price cap incumbent local exchange
carriers recover through traffic-sensitive access charges. In the May 16th
order, which was upheld on appeal by the United States Court of Appeals for the
Eighth Circuit, the FCC also announced its plan to bring interstate access rate
levels more in line with costs. On August 5, 1999, the FCC adopted an order
granting price cap local exchange carriers additional pricing flexibility,
implementing certain access charge reforms, and seeking comment on others. The
order provides certain immediate regulatory
44
<PAGE>
relief to price cap carriers and sets a framework of "triggers" to provide
these companies with greater flexibility to set interstate access rates as
competition increases. The order also initiated rulemaking to determine whether
the FCC should regulate competitive local exchange carriers access charges. The
manner in which the FCC continues to implement its approach to lowering access
charge levels and a decision to regulate competitive local exchange carrier
access rates could have a material effect on our ability to compete in
providing interstate access services.
On February 26, 1999, the FCC issued a declaratory ruling on the issue of
inter-carrier compensation for calls bound to Internet service providers. The
FCC ruled that the calls are jurisdictionally mixed, but largely interstate
calls. The FCC, however, determined that this issue did not resolve the
question of whether inter-carrier reciprocal compensation is owed for such
calls under existing interconnection agreements. The FCC noted a number of
factors that would allow the state public utilities commissions to continue to
require the payment of reciprocal compensation. Since the issuance of the FCC
decision, twenty states have issued decisions either initially or on
reconsideration of existing decisions. In nineteen states, the commission
determined compensation is owed. In Massachusetts, however, the commission
vacated its earlier decision because, in its view, its decision was based
solely on a ground rejected by the FCC and in Missouri the commission
determined that the parties payments would be subject to a reconciliation once
the FCC determines the issue of the amount of compensation owed. Until then,
compensation should be tracked but it does not have to be paid. New Jersey is
the only state to find reciprocal compensation does not apply . We cannot
predict the impact of the FCC's ruling on existing state decisions, the outcome
of pending appeals or future litigation on this issue.
State Regulation
State regulatory agencies have regulatory jurisdiction when Pac-West
facilities and services are used to provide intrastate services. A significant
portion of our current traffic is classified as intrastate and therefore
subject to state regulation. To provide intrastate services, we generally must
obtain a certificate of public convenience and necessity from the state
regulatory agency and comply with state requirements for telecommunications
utilities, including state tariffing requirements. We have obtained such
certificates to provide local exchange and intrastate toll service in
California, Nevada, Washington, Oregon and Colorado, an application is pending
in Arizona, and we intend to file applications for such authority in the near
future for Idaho, Utah, New Mexico and Texas. There can be no assurance that
such state authorizations will be granted. Most states in which we operate or
propose to operate also requires us to seek approval for any transfers of
control.
In addition, the implementation of the Telecommunications Act of 1996 is
subject to numerous state rulemaking proceedings on these issues, it is
currently difficult to predict how quickly full competition for local services,
including local dial tone, will be introduced. Furthermore, the
Telecommunications Act of 1996 provides that state public utilities commissions
have significant roles in determining the content of interconnection
agreements, including the responsibility to conduct the mandatory arbitration
proceedings called for by the Telecommunications Act of 1996. The actions of
the state public utilities commissions are subject to the Telecommunications
Act of 1996 and, in several respects, the FCC's interpretations thereof. For
example, the FCC has determined that the state public utilities commissions
will continue to determine whether reciprocal compensation will be included in
arbitrated interconnection agreements at least until the FCC adopts a federal
rule.
On October 22, 1998, the California Public Utilities Commission issued a
decision holding that local telephone calls placed to Internet service
providers terminate at the Internet service providers' modem and are thus local
calls entitled to reciprocal compensation. On November 30, 1998, Pacific Bell
and GTE filed applications for rehearing of the October 22, 1998 decision,
which were denied on July 22, 1999. On August 25, 1999, we, along with the
commissioners of the California Public Utilities Commission and others, were
named as a defendant in an action filed by GTE California. The action
challenges the legality of the California Public Utilities Commission's
decisions regarding reciprocal compensation as discussed above. We intend to
seek dismissal of the action and otherwise contest the claims of GTE
California.
45
<PAGE>
The California Public Utilities Commission may commence a separate generic
proceeding to develop its prospective policy regarding reciprocal compensation.
We cannot predict the outcome of the California Public Utilities Commission or
GTE proceedings, future appeals or additional pending cases involving related
issues, or of the applicability of such proceedings to our interconnection
agreement with Pacific Bell or GTE. As a result, no assurance can be given that
we will collect the reciprocal compensation previously withheld by Pacific Bell
and GTE or whether we will be entitled to reciprocal compensation for these
types of calls in the future. Internet service providers currently form a
significant part of our customer base in California and adverse decisions in
these proceedings could limit our ability to serve this group of customers
profitably and have a material adverse effect on us.
We expect that reciprocal compensation will continue to represent a
significant portion of our revenues in the future although we expect that the
per minute reciprocal compensation rate may decline significantly under new
interconnection agreements. We are currently in the process of renegotiating
our interconnection agreement and the terms of our reciprocal compensation
arrangements with GTE, and no assurance can be given concerning the outcome of
these negotiations or any arbitration under Section 252 which may occur in the
absence of successful negotiations.
On November 16, 1998, Pacific Bell filed a Petition for Arbitration of an
interconnection agreement in accordance with Section 252(b) of the
Telecommunications Act of 1996. This agreement would replace the
interconnection agreement which was executed in 1996. This petition proposed
that telephone calls to Internet service providers be excluded from calls
subject to reciprocal compensation. This petition also proposed that calls made
to a number assigned to the calling party's rate center but routed to a second
rate center be deemed interexchange toll-free calls for which Pacific Bell
would be entitled to compensation for providing switched access. Pacific Bell
asserts that, because such calls would allow certain calling parties to
complete calls to Internet service providers or other customers in another rate
center without toll charges, these calls are essentially toll-free in nature. A
previous decision of general application issued by the California Public
Utilities Commission in October of 1998 held that calls to Internet service
providers are subject to the payment of reciprocal compensation. We have
asserted that because calls routed to a second rate center are placed by
dialing a number assigned to the calling party's rate center and not using 8XX
toll-free processing that these calls should not be considered toll-free. See
"Risk Factors--A failure to establish interconnection agreements on favorable
terms would adversely affect our business" and "--We may not be entitled to
receive reciprocal compensation for calls to Internet service providers."
On June 24, 1999, the California Public Utilities Commission adopted a
decision (D.99-06-088) which adopted the terms of the interconnection agreement
between Pac-West and Pacific Bell resulting from the arbitration process
commenced by the petition. The decision provides that until such time as the
October 1998 decision regarding reciprocal compensation is modified, reciprocal
compensation is payable by Pacific Bell for calls to Internet service provider
customers of Pac-West, and that Pacific Bell's position concerning toll free
calls was rejected. The decision also adopts per minute rate levels for
reciprocal compensation based on Pacific Bell's approved costs, and these rate
levels are substantially lower than the rates under the 1996 interconnection
agreement. The parties were ordered to sign an interconnection agreement
incorporating these and other results of the arbitration process, and the new
interconnection agreement became effective on June 29, 1999. Pacific Bell has
requested a rehearing of this matter although they did pay the full amount of
our billings for calls after the effective date of the new agreement. The
California Public Utilities Commission decision does not address reciprocal
compensation withheld under the prior agreement and we do not know at this time
what action Pacific Bell will take with respect to the amounts previously
withheld.
On July 22, 1998, the California Public Utilities Commission issued a ruling
soliciting comments on the rating and routing of telephone calls between rate
centers. Specifically, the California Public Utilities Commission inquired
whether a carrier should be allowed to provide customers with local telephone
numbers for rate centers in which the customers are not located and where a
carrier has no physical facilities and, if so, how inter-carrier compensation
should be accomplished for calls to such customers. Comments were filed in
August and September 1998. We often provide service to our Internet service
provider customers using this
46
<PAGE>
method. A prohibition on this service would impair our ability to provide
service to our customers. The new interconnection agreement described above
which results from the arbitration process is subject to the outcome of this
proceeding. We presently claim reciprocal compensation based on these calls. A
California Public Utilities Commission decision holding that such calls are not
entitled to reciprocal compensation could result in a substantial loss of
revenue to us. On July 6, 1999, an administrative law judge released a draft
decision in this proceeding finding that carriers can provide customers with
local telephone numbers for rate centers in which the customer is not located
and where a carrier has no physical facilities. The draft decision defers the
resolution of intercarrier compensation issues in such circumstances to further
evidentiary proceedings. After receiving comments, the California Public
Utilities Commission will vote on the draft decision. While the ultimate
results of this proceeding are unknown, we expect that we will not be
prohibited from providing service using this method although the reciprocal
compensation rate may be lessened. See "Risk Factors--A failure to establish
interconnection agreements on favorable terms would adversely affect our
business," "--We may not be entitled to receive reciprocal compensation for
calls to Internet service providers" and "--We may not be able to obtain or
retain our key Internet service provider customers, which account for a
significant portion of our revenues."
Local Regulation
Our networks are subject to numerous local regulations such as building
codes and licensing requirements. Such regulations vary on a city by city and
county by county basis. To the extent we decide in the future to install our
own fiber optic transmission facilities, we will need to obtain rights-of-way
over private and publicly owned land and pole attachment authorizations. There
can be no assurance that such rights-of-way or authorizations will be available
to us on economically reasonable or advantageous terms. We could also be
subject to unexpected franchise requirements and could be required to pay
license or franchise fees based on a percentage of gross revenues or some other
formula.
Regulatory Proceedings
Litigation
On October 8, 1997, Pacific Bell filed a complaint against us in the San
Francisco County Superior Court seeking a declaratory ruling that the
interconnection agreement between it and ourselves does not require it to pay
reciprocal compensation for calls that its end users make to our Internet
service provider customers. Pacific Bell argued that such calls to Internet
service providers are not local calls within the meaning of the agreement even
though they are dialed and billed as local calls. In addition to the
declaratory ruling, Pacific Bell sought an accounting and restitution by Pac-
West of all payments Pacific Bell made to us under that agreement for calls
which we completed to Internet service providers. We filed a demurrer to the
complaint, seeking a stay of any further action by the court on the basis that
the California Public Utilities Commission has primary jurisdiction over the
complaint. The court granted our demurrer in part on October 23, 1997, staying
Pacific Bell's action pending California Public Utilities Commission review of
issues in Pacific Bell's complaint.
Jurisdiction over and Compensation for Internet Service Provider Traffic
We derive a substantial portion of our revenue from incumbent local exchange
carriers in the form of reciprocal compensation payments. For the years ended
December 31, 1997 and 1998 and the six month period ended June 30, 1999,
reciprocal compensation payments accounted for approximately 37.4%, 37.1% and
41.8%, respectively, of our revenue. We expect that reciprocal compensation
will continue to represent a significant portion of our revenue for the
foreseeable future. Two of the incumbent local exchange carriers with which we
have interconnection agreements, Pacific Bell and GTE, have refused to pay that
portion of reciprocal compensation that they estimate is the result of
terminating calls to Internet service providers. These incumbent local exchange
carriers contend that such calls are not local calls within the meaning of
their respective interconnection agreements and claim that reciprocal
compensation is therefore not payable. The total reciprocal compensation
withheld by these incumbent local exchange carriers and not included in revenue
was $3.8 million, $32.6 million and $28.4 million for the years ended December
31, 1997 and 1998 and for the six month period ended June 30, 1999,
respectively. See "Risk Factors--A failure to establish interconnection
47
<PAGE>
agreements on favorable terms would adversely affect our business" and "--We
may not be entitled to receive reciprocal compensation for calls to Internet
service providers."
On November 21, 1997, we filed a complaint against Pacific Bell requesting,
among other things, that the California Public Utilities Commission order that
calls to Internet service providers are local calls and, more specifically,
that the agreement with Pacific Bell requires it to compensate us for
completing those calls. In March 1998, Pac-West and Pacific Bell filed cross-
motions by stipulation for summary judgment on all issues pending in this
proceeding. These motions are currently pending. We cannot predict the ultimate
outcome of the California Public Utilities Commission proceeding, future
appeals or additional pending cases. Therefore, we cannot assure you that we
will collect the withheld compensation from GTE or Pacific Bell or that we will
have the right to compensation for these types of calls in the future. If the
California Public Utilities Commission acts contrary to our position, the
ability to serve our customer base could be severely limited since a large part
of that base consists of Internet service providers. If the California Public
Utilities Commission acts contrary to our position, and it is determined that
the compensation associated with past Internet service provider traffic is
greater than the amount already withheld, we could be required to reimburse the
incumbent local exchange carriers the difference between these two amounts.
On October 22, 1998, the California Public Utilities Commission issued a
decision holding that calls placed to Internet service providers are local
calls and are subject to reciprocal compensation. On November 30, 1998, Pacific
Bell and GTE filed applications for rehearing, which was denied on July 22,
1999. On August 25, 1999, we, along with the commissioners of the California
Public Utilities Commission and others, were named as a defendant in an action
filed by GTE California. The action challenges the legality of the California
Public Utilities Commission's decisions regarding reciprocal compensation as
discussed above. We intend to seek dismissal of the action and otherwise
contest the claims of GTE California. We cannot predict the outcome of the
California Public Utilities Commission or GTE proceedings, future appeals or
additional pending cases. Therefore, we cannot assure you that we will collect
the withheld compensation from GTE or Pacific Bell or that we will have the
right to compensation for these types of calls in the future. If the California
Public Utilities Commission does act contrary to our position, our ability to
serve our customer base could be severely limited since a large part of that
base consists of Internet service providers. If the California Public Utilities
Commission acts contrary to our position and the compensation associated with
past Internet service provider traffic is greater than the amount already
withheld, we could be required to reimburse the incumbent local exchange
carriers for the difference between these two amounts.
On February 26, 1999, the FCC issued a declaratory ruling on the issue of
inter-carrier compensation for calls bound to Internet service providers. The
FCC ruled that the calls are jurisdictionally mostly interstate calls. The FCC,
however, determined that this issue did not resolve the question of whether
inter-carrier reciprocal compensation is owed for such calls under existing
interconnection agreements. The FCC noted a number of factors that would allow
the state public utilities commissions to require the payment of reciprocal
compensation. Since the issuance of the FCC decision, twenty states have issued
decisions either initially or on reconsideration of existing decisions. In
nineteen states, the relevant state commission determined compensation is owed.
In Massachusetts, however, the state commission vacated its earlier decision
because, in its view, its decision was based solely on a ground rejected by the
FCC and in Missouri the state commission determined that the parties would be
subject to a reconciliation once the FCC determines the issue of the amount of
compensation owed. Until then, compensation should be tracked but it does not
have to be paid. New Jersey is the only state to find reciprocal compensation
does not apply. Several of these cases are being appealed. So far, U.S.
District courts in the states of Texas, Washington, Oregon, Michigan, Alabama
and Illinois have upheld state commission decisions and no court has reversed
such a decision. Recently the 7th Circuit Court of Appeals upheld the decision
of the Illinois Commerce Commission requiring the payment of reciprocal
compensation for Internet service provider-bound calls. The U.S. District Court
in Wisconsin dismissed Ameritech's appeal of the Wisconsin Public Utilities
Commission's order on the grounds that the Commission was not subject to being
sued in federal court. We cannot predict the impact of the FCC's ruling on
existing state decisions, the outcome of pending appeals or future litigation
on this issue. However, our ability to serve our customer base could be
severely limited since a large part of that base consists of Internet service
providers. If the FCC's decision results in action being taken that is contrary
to our position, and it is
48
<PAGE>
determined that the compensation associated with past Internet service provider
traffic is greater than the amount already withheld, we could be required to
reimburse the incumbent local exchange carriers for the difference between
these two amounts.
Rating and Routing of Calls
By California Public Utilities Commission Decision No. 97-12-094 in Case No.
96-10-018, which was brought by Pac-West against two small rural incumbent
local exchange carriers, Volcano Telephone Company and Evans Telephone Company,
the California Public Utilities Commission found that Pac-West's method of
providing foreign exchange service did not violate any existing law or policy
and that Volcano and Evans were required to properly deliver calls to Pac-West.
However, the California Public Utilities Commission also determined that it
should examine our method of service from a general policy standpoint in
another proceeding. Although the outcome of the subsequent proceeding could
affect our future provision of foreign exchange like services, the California
Public Utilities Commission held that any order adverse to us would be applied
only on a prospective basis and would not affect any contracts for services
executed prior to a final decision. On July 22, 1998, the California Public
Utilities Commission issued a ruling soliciting comments on the continuing
propriety of Pac-West's service methods. Specifically, the California Public
Utilities Commission inquired whether a carrier should be allowed to provide
customers with local telephone numbers for rate centers in which customers are
not located and where a carrier has no physical facilities and, if so, how
inter-carrier compensation should be accomplished for calls to such customers.
Comments were filed in August and September 1998. We often provide service to
our customers using this method. A prohibition on this service would impair our
ability to provide service to our customers. We presently claim reciprocal
compensation based on these calls. A California Public Utilities Commission
holding that such calls are not entitled to reciprocal compensation could
result in a significant loss of revenue to us.
Interconnection Agreements
We are currently in the process of renegotiating our interconnection
agreement which governs the terms of our reciprocal compensation arrangements
with GTE. We cannot give any assurances concerning the outcome of these
negotiations or any arbitration that may follow unsuccessful negotiations. On
November 16, 1998, Pacific Bell filed a petition for Arbitration of an
interconnection agreement in accordance with Section 252(b) of the
Telecommunications Act of 1996. In its petition, Pacific Bell requested
arbitration on three issues:
(1) the jurisdiction of calls placed to Internet service providers;
(2) reciprocal compensation rates; and
(3) term of the agreement.
On November 18, 1998, Pacific Bell filed a complaint against us at the
California Public Utilities Commission seeking unspecified compensation under
the interconnection agreement with us. This complaint, which was amended on
March 12, 1999, argues that many of the calls to our Internet service provider
customers are toll-free interexchange calls for which Pacific Bell is entitled
to compensation for providing switched access. Pacific Bell believes that a
call placed from a dialing party in one rate center to a number assigned to the
same rate center is potentially a toll call if such a call is routed for
completion in a second rate center. Because the dialing party is sometimes not
charged for this call, Pacific Bell believes these calls to be toll-free calls
for which Pacific Bell is entitled to compensation under the agreement. We
presently claim reciprocal compensation based on these calls. On June 24, 1999,
the California Public Utilities Commission adopted a decision in the
arbitration proceeding between us and Pacific Bell which held that reciprocal
compensation would be payable for Internet service provider calls under our new
interconnection agreement with Pacific Bell which became effective on June 29,
1999. Pacific Bell has requested a rehearing of this matter although they did
pay the full amount of our billings for calls after the effective date of the
new agreement. This decision does not address reciprocal compensation withheld
under the prior agreement. We do not know at this time what other action
Pacific Bell will take with respect to the amounts they have previously
withheld. If the California Public Utilities Commission ultimately determines
that such calls are not entitled to reciprocal compensation, such a
determination could result in a significant loss of revenue to us and an
obligation to pay significant amounts to Pacific Bell.
49
<PAGE>
On October 12, 1998, we filed at the Public Utilities Commission of Nevada a
petition for arbitration of an interconnection agreement with Nevada Bell in
accordance with Section 252(b) of the Telecommunications Act of 1996. The
issues in this arbitration are whether reciprocal compensation is payable for
calls placed to Internet service providers and whether reciprocal compensation
is payable for a local-rated call placed by a dialing party in one local
calling area that is routed to a second local calling area for completion. On
April 8, 1999, the Public Utilities Commission of Nevada held that calls placed
to Internet service providers are subject to reciprocal compensation in the
same manner as other calls, but held that, under current Nevada regulatory
policy, calls routed from one local calling area to another local calling area
for completion should not be deemed local calls. Due to the geographic
centralization of Nevada populations within large local calling areas, we do
not believe that Public Utilities Commission of Nevada's ruling on the
classification of local calls will have a material effect on our planned
operations in Nevada.
On February 2, 1999, we filed at the California Public Utilities Commission
a petition for arbitration of an interconnection agreement with Citizens
Telecommunications Company of California, Inc., in accordance with Section
252(b) of the Telecommunications Act of 1996. The issues in this arbitration
are whether reciprocal compensation is payable for calls placed to Internet
service providers and what compensation arrangement should apply when calls are
exchanged through indirect interconnection over the facilities of a third party
carrier. A California Public Utilities Commission holding contrary to our
position could materially adversely affect our ability to economically serve
customers in Citizens Telecommunications Company of California, Inc.'s service
area.
We are not party to any other pending legal or regulatory proceedings that
we believe would, individually or in the aggregate, have a material adverse
effect on our financial condition or results of operations.
For additional information regarding regulatory matters, see "Risk Factors--
We may not be entitled to receive reciprocal compensation for calls to Internet
service providers."
Employees
As of June 30, 1999, we had 187 full time employees. We believe that our
future success will depend on our continued ability to attract and retain
highly skilled and qualified employees. None of our employees are currently
represented by a collective bargaining agreement. We believe that we enjoy good
relationships with our employees.
Facilities
We are headquartered in Stockton, California and lease offices and space in
a number of locations primarily for sales offices and network equipment
installations. As of June 30, 1999, we had 17 premise leases. The table below
lists our material facilities:
<TABLE>
<CAPTION>
Lease Approximate
Location Use Expiration Square Footage
- -------- --- ---------- --------------
<S> <C> <C> <C>
Stockton, CA Corporate headquarters and switching facility June 2002 33,000
Oakland, CA Switching facility November 2003 9,971
Los Angeles, CA Switching facility September 2006 8,458
Las Vegas, NV Switching facility September 2009 12,065
</TABLE>
Since June 30, 1999, we entered into a lease for an additional 6,062 square
feet of space in Los Angeles, California. The lease has an initial expiration
date of September 30, 2006 and contains two five-year renewal options. We are
also in the process of entering into a lease in Seattle, Washington to
establish a new switching facility which we expect to be operational by the end
of 1999. This lease will be for 16,851 usable square feet, have an initial term
of 10 years, and contain two five-year renewal options.
50
<PAGE>
We believe that our leased facilities are adequate to meet our current needs
in the markets in which we currently operate. Additional facilities will be
required as our business in existing markets grows and we expand into new
markets. Each of our material leases is extendable at our option. Our Stockton,
California lease is extendable for five two-year periods, and each of our
Oakland, Los Angeles and Las Vegas leases are extendable for two five-year
periods.
51
<PAGE>
MANAGEMENT
Executive Officers, Key Employees and Directors
Our executive officers, key employees and directors and their ages as of
August 25, 1999 are set forth below:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Executive Officers:
Wallace W. Griffin.... 60 President, Chief Executive Officer and Director
John K. La Rue........ 50 Executive Vice President--Technology and
Network Operations and Director
Richard E. Bryson..... 46 Chief Financial Officer
Brian K. Johnson...... 38 Senior Vice President and General Manager--Business Segment
Joel A. Effron........ 55 Senior Vice President--Sales and Marketing
Dennis V. Meyer....... 61 Vice President--Finance and Treasurer
Jason R. Mills........ 27 Vice President--Network Operations
Gregory Joksch........ 43 Vice President--Information Technologies
Jeff M. Webster....... 35 Vice President--Business Operations
John F. Sumpter....... 51 Vice President--Regulatory
H. Ravi Brar.......... 30 Vice President--Business Development
Directors:
Jerry L. Johnson...... 51 Chairman of the Board of Directors
David G. Chandler..... 41 Director
Mark J. DeNino........ 46 Director
Mark S. Fowler........ 57 Director
Samuel A. Plum........ 55 Director
Dr. Jagdish N. Sheth.. 61 Director
Bruce A. Westphal..... 59 Director
</TABLE>
The present principal occupations and recent employment history of each of
our executive officers, key employees and directors listed above are set forth
below.
Wallace W. Griffin has served as the President, Chief Executive Officer and
a Director of Pac-West since September 1998. From 1994 to 1997, Mr. Griffin
served as a Group President for a number of Jones International companies,
including Jones Lightwave, Ltd., a competitive local exchange carrier, and
Jones Education Company, a leader in using technology to deliver education.
Concurrently, he was co-owner of a consulting and business development company,
Griffin Enterprises, Inc. From 1987 through 1992, Mr. Griffin served as the
President and Chief Executive Officer of U S West Marketing Resources Group,
where he managed the $1 billion publishing, media software and advertising
services division. Mr. Griffin has over thirty-five years experience in
telecommunications, cable television, publishing and advertising.
John K. La Rue founded Pac-West's predecessor, also known as Pac-West
Telecomm, Inc., in 1980 and served as its President from 1980 until September
30, 1996 and as our President from our incorporation in 1996 until September
1998. Since September 1998, Mr. La Rue has served as our Executive Vice
President of Technology and Network Operations and as a Director.
Richard E. Bryson has served as our Chief Financial Officer since November
1998. From 1992 to 1998, Mr. Bryson worked at Bank of America as a Managing
Director in the Telecommunications Group providing emerging telecommunications
companies with corporate finance and capital markets services. From 1989 to
1992, he was President and founder of MBIC, a fund investing in growth
companies. From 1980 to 1989, he worked at Citibank in Mezzanine Investments
and Capital Markets.
52
<PAGE>
Brian K. Johnson has served as our Senior Vice President and General
Manager--Business Segment since August 1999 and prior to that served as our
Vice President of Sales since September 1998. Mr. Johnson has over 15 years of
sales and sales management experience. Most recently, Mr. Johnson served for
two years as Vice President and General Manager of WinStar Telecommunications,
overseeing competitive local exchange carrier operations in the San Francisco
Bay Area. Prior to joining WinStar, Mr. Johnson was employed by Metrocall for
two years as Vice President and General Manager for the California and Nevada
markets. His telecommunications sales management experience includes positions
at Comverse Technology, LA Cellular and Harris Corporation.
Joel A. Effron has served as our Senior Vice President of Sales and
Marketing since April 1997. From 1994 through 1997, Mr. Effron ran his own
management consulting company called J. Effron & Associates. Prior to that, Mr.
Effron served as President of three corporations, including Compath, a $35
million marketing, installation and service company for business telephone
systems, Codart, a communication and entertainment start-up, and Zendex, a
computer manufacturer. Mr. Effron has over 25 years of experience in the
telecommunications industry with extensive senior management experience in
marketing, planning, policies and procedures and manpower development.
Dennis V. Meyer served as our and our predecessor's Chief Financial Officer
and Treasurer from 1994 until November 1998. In November 1998, Mr. Meyer was
appointed Vice President--Finance and Treasurer. Prior to 1994, Mr. Meyer spent
12 years in public accounting at Ernst & Ernst, now Ernst & Young, a national
accounting firm. Mr. Meyer is a certified public accountant with over twenty
years of experience as a senior financial officer of several manufacturing and
regulated transportation companies. Mr. Meyer also served as an officer in the
Air Artillery Branch of the U.S. Army.
Jason R. Mills has served as Vice President of Network Operations since
1997. Mr. Mills joined our predecessor in 1986 and has been serving as our
Director of Network Operations for the past five years.
Gregory Joksch has served as our Vice President of Information Technologies
since September 1998. From 1992 to 1998, he served as Director of Information
Technologies and was responsible for our information technology systems.
Jeff M. Webster has served as Vice President-Business Operations since
September 1998 and before that served as Vice President of Operations since
1991. His current areas of responsibility include human resource management.
Mr. Webster began with Pac-West as an Account Executive in 1987 and was later
promoted to general management of business operations, human resources,
administration and customer service management.
John F. Sumpter has served as our Vice President of Regulatory since July,
1999. He has over 28 years of experience in the telecommunications industry.
Prior to joining us, he was employed with AT&T from 1984 to 1999, where he held
several executive legal regulatory positions, including Division Manager of Law
and Government Affairs, District Manager of Switched Services Product
Management, and District Manager of Marketing. Mr. Sumpter is responsible for
our relations with government regulatory agencies, regulatory compliance and
intercarrier relations.
H. Ravi Brar has served as our Vice President of Business Development since
July, 1999. Prior to joining us, Mr. Brar was employed with Xerox Corporation
from 1991 to 1999, where he held several senior level business development and
financial management positions, including Business Development Manager of
Xerox's developing markets operations in China and Russia, and Area General
Manager and Controller of Xerox's business services division in Pittsburgh, PA.
Mr. Brar is responsible for oversight of Pac-West's business development and
strategic planning activities, including mergers and acquisitions, growth
markets, and strategic alliances.
Jerry L. Johnson has served as our Chairman of the Board since September
1998. Since 1995, Mr. Johnson has been employed by Safeguard Scientifics, where
he is the Executive Vice President
53
<PAGE>
overseeing the partner companies in the network infrastructure group. From 1985
to 1995, he worked at U S West in various positions, including Vice President,
Network and Technology Services, which included managing U S West's largest
division, supervising 21,000 management, engineering, technical and clerical
employees. From 1983 to 1985, Mr. Johnson was President and CEO of Northwestern
Bell Information Technologies. Mr. Johnson also serves as a director of OAO
Technologies Solutions, Inc.
David G. Chandler has served as one of our Directors since September 1998.
Mr. Chandler is a Managing Director of William Blair Capital Partners, L.L.C.,
a Chicago-based private equity firm. In addition, Mr. Chandler is a Principal
of William Blair & Company where he has been employed since 1987. Prior to
joining William Blair & Company, he was an investment banker with Morgan
Stanley & Co. Incorporated from 1984 to 1987. Mr. Chandler serves as a director
of the following companies: Electronic Manufacturing Systems, Inc., Encore
Paper Company, Gibraltar Packaging Group, Harmonic Systems Incorporated, Morton
Grove Pharmaceuticals, Inc., PharmaResearch Corporation, Engineering Materials
Corp., PreDelivery Services Corp, DJ Pharma and Sweetwater Sound, Inc.
Mark J. DeNino has served as one of our Directors since September 1998. Mr.
DeNino has served as a Managing Director of TL Ventures since 1994. Prior to
that time, Mr. DeNino was an investment banker for eight years, starting with
Fidelity Bank, now First Union National Bank, where he ran its investment
banking group and was president of its venture capital SBIC. Mr. DeNino also
co-founded or has been involved in the start-up of three technology ventures.
Mr. DeNino also serves as a director of the following companies: Coastal
Security Systems, Inc., FlowWise Networks, Inc., Argus Networks Inc., Blaze
Software, Inc. and Adaptive Media, Inc.
Mark S. Fowler has served as one of our Directors since August 1999. Mr.
Fowler is the founder and current Chairman of Unisite, Inc. a builder of
antenna towers that can accommodate multiple wireless operators, and AssureSat,
Inc., a business formed for the purpose of constructing telecommunications
satellites that provide "backup" protection to satellite operators. In
addition, Mr. Fowler founded and served as CEO of PowerFone, a business sold to
Nextel Communications in 1994 for $400 million. Previously, Mr. Fowler served
as Chairman of the Federal Communications Commission and practiced
communications law with the law firm of Latham & Watkins from 1987 to 1994 as
Senior Communications Counsel, and, from 1994 to present, as of counsel to the
firm.
Samuel A. Plum has served as one of our Directors since September 1998. Mr.
Plum has been a Managing General Partner of the general partner of SCP Private
Equity Partners, L.P. since its commencement in August 1996 and was employed by
Safeguard from 1993 to 1996. From February 1989 to January 1993, Mr. Plum
served as President of Charterhouse, Inc. and Charterhouse North American
Securities, Inc., the U.S. investment banking and broker-dealer divisions of
Charterhouse PLC, a merchant bank located in the United Kingdom. From 1973 to
1989, Mr. Plum served in various capacities in the investment banking divisions
of PaineWebber Inc. and Blyth Eastman Dillon & Co., Inc. Mr. Plum has 22 years
of investment banking, mergers and acquisitions and private equity investment
experience. Mr. Plum also serves as a director of Index Stock Photography, Inc.
and Metallurg Holdings, Inc.
Dr. Jagdish N. Sheth has served as one of our Directors since July 1999. Dr.
Sheth has also been the Charles H. Kellstadt Professor of Marketing in the
Goizueta Business School since 1991 and is the founder of the Center for
Relationship Marketing at Emory University. From 1984 to 1991, Dr. Sheth was
the Robert E. Brookner Professor of Marketing at the University of Southern
California and is the founder of its Center for Telecommunications Management.
Dr. Sheth also serves as a director of Norstan, Inc.
Bruce A. Westphal has served as one of our Directors since September 1998.
Mr. Westphal served as the Chairman of our board of directors from our
inception in 1996 until the recapitalization. Mr. Westphal currently serves as
the Chairman of the Board of Bay Alarm and InReach Internet as well as
President of Balco Properties. Mr. Westphal served as the Chief Executive
Officer and Chairman of Bay Alarm from 1984 to 1997 and as its President from
1977 to 1984. Mr. Westphal is currently or has been active in a number of
professional organizations, including the Security Network of America, the
Central Station Alarm Association and California Alarm Association.
54
<PAGE>
All members of the board of directors set forth in this prospectus have been
elected in accordance with a shareholders agreement that was entered into in
connection with our recapitalization in September 1998. There are no family
relationships between any of our directors or executive officers. Our executive
officers are elected by and serve at the discretion of the board of directors.
See "Certain Relationships and Related Transactions--Shareholders Agreement."
Committees of the Board of Directors
Our board has standing executive, compensation and audit committees. The
executive committee currently consists of Jerry L. Johnson, Wallace W. Griffin
and Samuel A. Plum. The compensation committee consists of Samuel A. Plum, Mark
J. DeNino and David G. Chandler. The audit committee consists of David G.
Chandler, Bruce A. Westphal and John K. La Rue.
Director Compensation
Directors who are employed by our company, including Mr. Griffin and Mr. La
Rue, and directors who are affiliated with our principal shareholders,
including Messrs. Chandler, DeNino, Johnson, Plum and Westphal, are not
currently entitled to receive any compensation for serving on our board of
directors. Our outside directors, Dr. Sheth and Mr. Fowler, receive $5,000 per
quarter as compensation for serving on our board of directors. Since June 30,
1999, we granted each of Dr. Sheth and Mr. Fowler stock options to purchase
25,000 shares of our common stock at a strike price of $3.00. The stock options
will vest over a three-year period with 33 1/3% vesting at the end of each
year. We pay for the reasonable out-of-pocket expenses incurred by each
director in connection with attending board and committee meetings.
Executive Compensation
The following table summarizes the compensation we paid to our named
executive officers, consisting of our chief executive officer and four most
highly compensated executive officers for the fiscal year ended December 31,
1998. None of the perquisites and other benefits paid to each named executive
officer exceeded the lesser of $50,000 or 10% of the total annual salary and
bonus received by that officer. "All Other Compensation" reflects matching
contributions we made under our 401(k) plan on behalf of such officer. The
amount listed under "All Other Compensation" for Mr. La Rue includes $2,539 of
long-term disability insurance premiums we paid on behalf of Mr. La Rue and
100% dental reimbursements in the amount of $1,015. Mr. Griffin's salary is
from September 16, 1998, when he became our employee. Prior to that time but in
that same year, Mr. Griffin received additional compensation from us in the
total amount of $203,000 under a consulting agreement. See "Certain
Relationships and Related Transactions--Consulting Agreement."
1998 Summary Compensation Table
<TABLE>
<CAPTION>
Special Non-Compete
Name and Principal Regular Transaction Covenant All Other
Position Held Salary Bonus Bonus Payment Compensation
------------------ -------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Wallace W. Griffin...... $ 87,500 $ 70,000 -- -- --
President, Chief
Executive Officer
and Director
John K. La Rue.......... 327,081 140,000 $1,625,000 $300,000 $7,898
President, Chief
Executive Officer and
Director
Jason R. Mills ......... 160,667 13,500 900,000 -- 4,820
Vice President--Network
Operations
Dennis V. Meyer......... 106,614 40,250 300,000 -- 3,198
Chief Financial Officer
and Treasurer
Jeff M. Webster......... 85,136 19,948 300,000 -- 2,554
Vice President--
Business Operations
</TABLE>
55
<PAGE>
Stock Incentive Plan
We have established the Pac-West Telecomm, Inc. 1999 Stock Incentive Plan,
which authorizes the granting of stock options, including restricted stock,
SARS, dividend equivalent rights, performance units, performance shares or
other similar rights or benefits to our or our subsidiaries' current or future
employees, directors, consultants, advisors. Under the 1999 Stock Incentive
Plan, the board of directors is authorized to issue options to purchase shares
of common stock in such quantity, at such exercise prices, on such terms and
subject to such conditions as established by the board. An aggregate of
2,250,000 shares of common stock have been reserved for option grants under the
1999 Stock Incentive Plan and the employment agreements of Messrs. Griffin and
Bryson, subject to adjustment upon the occurrence of certain events to prevent
any dilution or expansion of the rights of participants that might otherwise
result from the occurrence of such events. In 1999, options to purchase 335,000
shares were granted under the Pac-West 1999 Stock Incentive Plan to Messrs.
John K. La Rue, Dennis V. Meyer, Jason R. Mills and Jeff M. Webster. As of June
30, 1999, we had granted options outstanding with respect to 1,020,500 shares
of common stock, including those granted under the employment agreements. No
options have been exercised through June 30, 1999.
The amounts shown for realizable potential value are calculated assuming
that the market value of the common stock was equal to the exercise price per
share as of the date of grant of the options. This value is the approximate
price per share at which shares of the common stock would have been sold in
private transactions on or about the date on which the options were granted.
The dollar amounts under these columns assume a compounded annual market price
increase for the underlying shares of the common stock from the date of grant
to the end of the option term of 5% and 10%. This format is prescribed by the
SEC and is not intended to forecast future appreciation of shares of the common
stock. The actual value, if any, a named officer may realize will depend on the
excess of the market price for shares of the common stock on the date the
option is exercised over the exercise price. Accordingly, there is no assurance
that the value realized by a named officer will be at or near the value
estimated above.
Option Grants in 1998
<TABLE>
<CAPTION>
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted to Price Appreciation
Underlying Employees Exercise or for Option Term
Options in Fiscal Base Price Expiration ---------------------
Name Granted (#) Year ($/Sh) Date 5% ($) 10% ($)
- ---- ----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Wallace W. Griffin...... 250,000 61.5% $0.67 09/16/2008 105,000 267,000
Richard E. Bryson....... 156,250 38.5% $0.67 10/30/2008 66,000 167,000
</TABLE>
Qualified 401(k) and Profit Sharing Plan
We maintain a tax-qualified 401(k) plan. Employees who are 18 years of age
may elect to participate in the plan after completing six months of service
with us. We match 50% of employee contributions up to 6% of compensation
deferred. Our matching contributions vest at a rate 20% per year starting with
the employee's second year of service. Although we have not historically done
so, we may also make discretionary profit-sharing contributions to all
employees who satisfy plan participation requirements.
Pension Plans
We do not maintain a pension plan.
56
<PAGE>
Employment Agreements
Messrs. Wallace W. Griffin, John K. La Rue, Richard E. Bryson, Dennis V.
Meyer, Jason R. Mills and Gregory Joksch have each entered into employment
agreements with us. The employment agreements provide for initial base salaries
and bonuses upon our achievement of certain objective and subjective criteria
and contain terms as follows:
<TABLE>
<CAPTION>
Initial
Employee Effective Date Term Base Salary Bonus
- -------- ------------------ ------- ----------- -----
<S> <C> <C> <C> <C>
Wallace W. Griffin................. September 16, 1998 3 years $350,000 40%
John K. La Rue..................... September 16, 1998 2 years $350,000 40%
Richard E. Bryson.................. October 30, 1998 2 years $225,000 40%
Dennis V. Meyer.................... October 21, 1998 1 year $115,000 25%
Jason R. Mills..................... September 16, 1998 2 years $180,000 25%
Gregory Joksch..................... September 11, 1998 2 years $110,000 25%
</TABLE>
The employment agreements also provide for participation in all benefit plans
made available to Pac-West executives.
Each of the employment agreements may be terminated earlier by us or the
respective executive under certain conditions and Mr. Meyer's employment
agreement is automatically extended for successive one-year periods unless
terminated by either party upon 60 days notice.
In connection with their respective employment agreements, Mr. Griffin
purchased 375,000 shares of common stock for an aggregate purchase price of
$250,000 and Mr. Bryson purchased 62,470 shares of common stock for an
aggregate purchase price of $41,667. In each case, the executives purchased
said shares through a combination of cash and promissory notes, the payments of
which notes were secured by pledge agreements pledging all of stock so
purchased. We have a right to repurchase such shares in the event of the
termination of such executive's employment with us for any reason. In addition,
their respective employment agreements granted to Mr. Griffin and Mr. Bryson
options to purchase 250,000 shares and 156,250 shares, respectively, of common
stock at a purchase price of $0.67 per share.
Upon termination by us without cause, as defined in the respective
employment agreement, that executive will be entitled to receive severance
payments which, subject to certain conditions, equal:
. in the case of Mr. La Rue, base salary for the remainder of the term of
employment under the employment agreement plus the one-year period
thereafter;
. in the case of Mr. Griffin, base salary for the greater of the remainder
of the term of employment under the employment agreement or the six-month
period thereafter;
. in the case of Mr. Bryson, base salary for one year following termination
plus our payment of all health insurance premiums with respect to Mr.
Bryson's continuation coverage rights under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended, or any similar statute or
regulation then in effect, for a maximum of the one-year period after
such termination;
. in the case of Mr. Meyer, base salary for the one-year period after such
termination; and
. in the case of Mr. Mills and Mr. Joksch, base salary for the remainder of
the term of employment under the employment agreement.
If the employment period is terminated as a result of the executive's
disability, then the executive and/or his estate or beneficiaries, as the case
may be, will be entitled to receive benefits under our employee benefit
programs as in effect on the date of such termination to the extent permitted
under such programs and, in addition, will be entitled to receive:
(1) an amount equal to that executive's base salary for the one-year period
after the termination of the employment period; and
57
<PAGE>
(2) the amount of any annual bonus otherwise payable to the executive for
the fiscal year in which executive's employment is terminated, except
that the amount of any such annual bonus otherwise payable will be
allocated on the basis of the number of days during such fiscal year
that executive was employed by us.
If the employment period is terminated as a result of the executive's death,
then the executive and/or his estate or beneficiaries, as the case may be, will
be entitled to receive benefits under our employee benefit programs as in
effect on the date of such termination to the extent permitted under such
programs and, in addition, will be entitled to receive the amount of any annual
bonus otherwise payable to the executive for the fiscal year in which the
executive's employment is terminated, except that the amount of any such annual
bonus otherwise payable will be allocated on the basis of the number of days
during such fiscal year that the executive was employed by us. If we terminate
the employment period for cause or if the executive resigns for any reason,
other than a termination without cause under the respective employment
agreement, then the executive will be entitled to receive his base salary
through the date of termination and we will have no further liability
whatsoever to executive.
Each of the executives have agreed to forfeit any severance obligations
owing to such executives in the event they breach certain noncompetition
provisions. See "Certain Relationships and Related Transactions--Non-
Competition; Non-Solicitation; Confidentiality Agreements."
58
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Recapitalization
Our recapitalization was completed on September 16, 1998 in accordance with
the merger agreement between us, Bay Alarm Company and John K. La Rue, the
preexisting investors, and PWT Acquisition Corp. a corporation newly formed by
an equity investment group led by Safeguard 98 Capital, L.P. and William Blair
Capital Partners VI, L.P. to effect the recapitalization. PWT was capitalized
through an investment of approximately $31.5 million in preferred stock and
$0.9 million in common stock of PWT by certain equity investors, including
Safeguard 98 Capital, L.P., SCP Private Equity Partners, L.P., TL Ventures III
L.P., EnerTech Capital Partners, William Blair Capital Partners VI, L.P., and
Mr. Wallace W. Griffin, who was named our President and Chief Executive Officer
upon the completion of the recapitalization. Immediately following the merger,
we sold approximately $4.7 million of additional common stock to the equity
investors.
In accordance with the merger agreement:
(1) PWT was merged with and into Pac-West, with Pac-West being the
surviving corporation;
(2) the outstanding preferred stock of PWT Acquisition Corp. was converted
into our convertible redeemable preferred stock and the outstanding
common stock of PWT Acquisition Corp. was converted into Pac-West's
common stock;
(3) the existing stockholders received an aggregate of $73.6 million in
cash, shares of convertible redeemable preferred stock and common stock
having an aggregate value for purposes of the recapitalization of
approximately $15.5 million, and an aggregate of $400,000 for their
respective agreements not to compete with us following the
recapitalization; and
(4) we paid bonuses to certain of our executive officers and employees in
the aggregate amount of approximately $3.5 million.
Prior to the recapitalization, Mr. John K. La Rue and Bay Alarm Company held
22% and 78%, respectively, of our outstanding common stock. In connection with
the recapitalization, Mr. La Rue received approximately $16.2 million in cash,
80,395 shares of convertible redeemable preferred stock and 763,800 shares of
common stock and Bay Alarm Company received $57.4 million in cash, 285,038
shares of convertible redeemable preferred stock and 2,707,900 shares of common
stock. Immediately after the recapitalization, Mr. La Rue and Bay Alarm held
6.1% and 21.7%, respectively, of our outstanding common stock.
Under the merger agreement, Mr. La Rue and Bay Alarm Company will also be
entitled to receive additional consideration in the form of an earnout payment
in the event we achieve certain adjusted EBITDA levels following the
recapitalization. The amount of such payment will be based upon:
(1) our adjusted EBITDA for the earnout period from January 1, 1998 through
December 31, 1998, which includes the amount of unpaid reciprocal
compensation from Pacific Bell and GTE for the earnout period we
receive before December 31, 1999, if any; and
(2) the amount of unpaid reciprocal compensation for the earnout period we
receive from Pacific Bell and GTE after December 31, 1999.
The earnout payment will be equal to:
(1) $2.50 for every $1.00 that our adjusted EBITDA for the fiscal year
ended December 31, 1998, including any unpaid reciprocal compensation
related to the earnout period received on or prior to December 31,
1999, exceeds $17.0 million; plus
(2) the amount by which the sum of:
(A) the amount of any unpaid reciprocal compensation we receive after
December 31, 1999 with respect to the earnout period; plus
(B) the amount our adjusted EBITDA during the earnout period
exceeds $17.0 million.
The earnout payment cannot exceed $20.0 million.
59
<PAGE>
The earnout payment will be calculated and paid after the delivery of the
final audited financial statements for the earnout period and on each separate
occasion thereafter that we receive any unpaid compensation. Any earnout
payment will take into account any prior earnout payment made under the merger
agreement. The earnout payment is also subject to possible adjustment under the
merger agreement by agreement between us and Mr. LaRue and Bay Alarm Company as
a result of a material acquisition, divestiture or other material transaction
outside of the ordinary course of our business during the earnout period. No
earnout payment was payable as of December 31, 1998. In 1999, the maximum cash
distribution under the terms of the recapitalization could be up to
approximately $15 million, net of the after tax proceeds from the withheld
reciprocal compensation.
In accordance with the merger agreement, Mr. La Rue and Bay Alarm Company
have agreed to indemnify us and certain of our related parties for all
liabilities and other losses arising from, among other things:
(1) any breach by Pac-West of any representation, warranty, covenant or
agreement we made in the merger agreement or in any schedule, exhibit,
or other related document;
(2) any claims of any brokers, finders, our employees or consultants
relating to the transactions contemplated by the merger agreement not
specifically set forth in or contemplated by the merger agreement; or
(3) any claim by any person other than PWT Acquisition Corp. or its
affiliates with respect to, or arising as a result of, any
reorganization, liquidation, dissolution, recapitalization, non due
course borrowing, merger, consolidation, sale or purchase of assets or
similar transactions proposed prior to closing of the merger; provided
that Mr. La Rue and Bay Alarm Company receive notice of such loss
within the applicable time periods set forth in the merger agreement.
Subject to certain exceptions, Mr. La Rue and Bay Alarm Company do not have any
obligation to indemnify any of the indemnified parties from any losses caused
by the breach or alleged breach of any representation or warranty contained in
the merger agreement until the indemnified parties collectively suffer related
aggregate losses in excess of $500,000, which acts as a deductible. Mr. La Rue
and Bay Alarm Company have an obligation to indemnify the indemnified parties
for all losses suffered by any of the indemnified parties in excess of the
deductible, provided that Mr. La Rue and Bay Alarm Company do not have any
obligation to indemnify the indemnified parties from such aggregate losses in
excess of an indemnity cap of $15.0 million. Despite the above, breaches or
alleged breaches of certain post-closing covenants or agreements contained in
the merger agreement will not be subject to the deductible or the indemnity
cap.
The merger agreement contains representations and warranties typical of
those kinds of agreements, including, for example, those relating to corporate
organization and capitalization, the valid authorization, execution, delivery
and enforceability of all transaction documents, the financial statements, the
absence of material adverse changes in the business, assets, financial
condition and results of operations, the absence of material undisclosed
liabilities, tax matters, the quality and title of personal and real property,
material contracts, intellectual property, employee benefits plans,
environmental matters, compliance with laws, governmental authorizations,
permits and licenses and insurance matters. Generally, our representations and
warranties expire thirty days after receipt of the audited financial statements
for fiscal 1999 except that those relating to tax matters survive until the
expiration of the applicable statute of limitations and certain other
representations and warranties which survive indefinitely.
The foregoing summary of the material terms of the merger agreement and
related matters does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all of the provisions of the merger
agreement, including the definitions of certain terms therein and the exhibits
and schedules hereto.
60
<PAGE>
Consulting Agreement
On June 30, 1998, we entered into a Consulting Agreement with Wallace W.
Griffin which terminated September 16, 1998. In accordance with such agreement,
Mr. Griffin provided financial and management consulting services to us and
received fees totaling approximately $60,000. In addition, in accordance with
the merger agreement, we reimbursed Safeguard for payments of $143,000 made to
Mr. Griffin in connection with services rendered prior to June 30, 1998. After
the recapitalization, Mr. Griffin became our President and Chief Executive
Officer in accordance with his employment agreement with us.
Shareholders Agreement
In connection with the recapitalization, all of our shareholders entered
into a shareholders agreement. This agreement provides for, among other things,
the nomination of and voting for a total of nine directors of Pac-West, as
follows:
(1) one representative to be designated by John K. La Rue, provided that
John K. La Rue initially serves as that representative;
(2) one representative to be designated by Bay Alarm Company, provided that
Bruce A. Westphal initially serves as that representative;
(3) one representative to be designated by the holders of a majority of the
common stock originally purchased by William Blair Capital Partners VI,
L.P. and its permitted transferees, provided that David G. Chandler
initially serves as that representative;
(4) one representative to be designated by the holders of a majority of the
common stock originally purchased by SCP Private Equity Partners, L.P.
and its permitted transferees, provided that Samuel A. Plum initially
serves as that representative;
(5) one representative to be designated by the holders of a majority of the
common stock originally purchased by Safeguard 98 Capital, L.P. and its
permitted transferees, provided that Jerry L. Johnson initially serves
as that representative;
(6) one representative to be designated by TL Ventures III, L.P. and its
permitted transferees for so long as it holds any shares, provided that
Mark J. DeNino initially serves as that representative;
(7) our chief executive officer; and
(8) two independent directors.
One of the independent directors will serve on our compensation committee and
one will serve on our audit committee. The shareholders agreement generally
restricts the transfer of any shares of convertible redeemable preferred or
common stock held by the parties thereto by granting certain parties thereto
rights of first offer and participation rights in connection with any proposed
transfer by any other party, subject to certain exceptions. In addition, the
shareholders agreement requires each party to consent to a sale of Pac-West to
an independent third party if such sale is approved by the board of directors.
Subject to certain exceptions, we have agreed not to issue, sell or otherwise
transfer for consideration to any person at any time prior to a registered
public offering, any shares of common stock, or securities convertible or
exercisable into common stock, unless certain of the parties to the
shareholders agreement are given the opportunity to subscribe for and purchase
their pro rata portion of such additional shares at the same price and on the
same terms. The provisions of the shareholders agreement automatically
terminate upon the closing of this offering.
Registration Agreement
In connection with the recapitalization, all of our shareholders entered
into a registration agreement. In accordance with the registration agreement,
at any time prior to the third anniversary of the closing of the
recapitalization, Safeguard may request we grant a rights offering to the
holders of our common stock, consisting of the right to purchase a number of
shares of our common stock as determined by our board of directors. The
exercise price of such rights in the rights offering will be determined by
negotiation among
61
<PAGE>
ourselves, the underwriters and the selling stockholders. After the earlier of
180 days after the consummation of the rights offering or the third anniversary
of the closing of the recapitalization, the registration agreement will grant
demand registration rights to each of the four equity investors in the
recapitalization and their successors. Each of the four equity investors in the
recapitalization may request one registration at our expense under the
Securities Act of 1933 of all or any portion of their Pac-West common stock on
Form S-1 or other similar long-form registration and an unlimited number of
Form S-2 or S-3 or other similar short-form registrations, provided that the
aggregate offering value of the registrable securities requested to be
registered in any long-form registration must equal at least $25 million if the
registration is our initial registered public offering, at least $5 million in
all other long-form registrations and at least $1 million in all short-form
registrations. In the event that any one of the four equity investors in the
recapitalization makes such a demand registration request, all other parties to
the registration agreement will be entitled to participate in such
registration. The registration agreement will also grant to the parties thereto
piggyback registration rights with respect to all other registrations of our
common stock and we, subject to limited exceptions, will pay all expenses
related to the piggyback registrations.
Non-Competition; Non-Solicitation; Confidentiality Agreements
In connection with the recapitalization and in accordance with the terms of
the merger agreement, Mr. La Rue and Bay Alarm Company each have entered into a
covenant not to compete with Pac-West, not to engage, and not to permit any
affiliate to engage, for a noncompete period of two years after the closing
date of the recapitalization in any business which:
(1) provides telecommunication services of the type provided as of the
closing date by Pac-West; or
(2) provides services of the type which we have taken significant actions
as of the closing date to begin providing or of the type we have
indicated that we plan to begin providing in any business plan or
similar document delivered to PWT Acquisition Corp. or our shareholders
prior to the closing date, in each case within Arizona, California,
Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and
Washington, the province of British Columbia, Canada and the
territories and jurisdictions of Mexico.
The noncompete restrictions do not prohibit any party from being a passive
owner of not more than 5% of the outstanding stock of any class of a
corporation which is publicly traded; and provided further that the noncompete
restrictions do not restrict the activities of any party to the extent such
party has received the consent of our board of directors to such activities.
In accordance with their respective employment agreements, Messrs. La Rue,
Griffin, Bryson, Meyer and Mills have agreed to forfeit any severance
obligations owing to such executives in the event of their breach of similar
noncompetition provisions. For purposes of Mr. Meyer's and Mr. Mills'
respective agreements, the restricted territories include Arizona, California,
Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and Washington, the
province of British Columbia, Canada and the territories and jurisdictions of
Mexico. For purposes of Mr. Griffin's and Mr. Bryson's respective agreements,
the restricted territories include the United States of America, Canada and the
territories and jurisdictions of Mexico.
Messrs. La Rue, Griffin, Bryson, Meyer, Mills and Bay Alarm have also agreed
to maintain the confidentiality of our information and not to solicit our
employees and customers as provided in the merger agreement or their respective
employment agreements, as the case may be.
62
<PAGE>
Transaction Bonuses
In accordance with the terms of the merger agreement, each of the following
Pac-West officers and directors received a cash bonus upon consummation of the
merger, as follows:
<TABLE>
<CAPTION>
Transaction
Employee Bonus
-------- -----------
<S> <C>
Wallace W. Griffin............................................... --
John K. La Rue................................................... $1,625,000
Richard E. Bryson................................................ --
Brian K. Johnson................................................. --
Joel A. Effron................................................... $ 50,000
Dennis V. Meyer.................................................. $ 300,000
Jason R. Mills................................................... $ 900,000
Gregory Joksch................................................... $ 200,000
Jeff M. Webster.................................................. $ 300,000
</TABLE>
Transactions with Significant Stockholders
Prior to the recapitalization, Bay Alarm Company held approximately 78% of
our outstanding common stock. Sales to Bay Alarm accounted for approximately
$245,000, $987,000, $1,211,000 and $498,000, or 5.8%, 3.3%, 2.9% and 1.6%, of
our revenues for the period from date of commencement on October 1, 1996 to
December 31, 1996, the years ended December 31, 1997 and 1998 and for the six
month period ended June 30, 1999, respectively. In addition, Bay Alarm Company
provides us with security monitoring services at its normal commercial rates.
Bay Alarm Company purchased the real property at which our Oakland switch
facility is located. In connection with that purchase, we negotiated a lease
with Bay Alarm Company for our continued use of that commercial space. The
monthly lease payments under the lease are approximately $13,000 effective
December 1998.
Sales to InReach Internet LLC accounted for approximately $151,000,
$1,122,000, $1,469,000 and $835,000, or 3.6%, 3.8%, 3.5% and 2.8%, of our
revenue for the period from date of commencement on October 1, 1996 to December
31, 1996, the years ended December 31, 1997 and 1998 and for the six month
period ended June 30, 1999, respectively.
Mr. Bruce A. Westphal, who served as our chairman of the board until the
recapitalization and as a director of the Board since the recapitalization, is
the chairman of the board of both Bay Alarm Company and InReach Internet.
In accordance with the terms of the La Rue/Mills Stock Transfer Agreement
dated November 23, 1998, and after giving effect to our ten for one stock
split, Mr. La Rue has transferred 127,300 shares of common stock to Mr. Mills.
We and Mr. La Rue retain the right to repurchase this stock upon the
termination of Mr. Mills' employment with Pac-West for any reason. Upon
repurchase, the purchase price of Mr. Mills' stock will be at fair market value
unless he is terminated with cause, in which case the purchase price will be
the lesser of original cost or fair market value.
63
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
Principal Shareholders
The following table sets forth certain information regarding ownership of
our common stock and convertible redeemable preferred stock as of August 1,
1999 by:
(1) each person who we know to own beneficially more than 5% of the
outstanding common stock or convertible redeemable preferred stock;
(2) each of our directors and named executive officers; and
(3) all of our directors and executive officers as a group.
Data shown on this chart relating to TL Ventures III L.P. and related equity
investors includes, after giving effect to the Pac-West ten for one stock
split:
(a) 153,133 shares of convertible redeemable preferred stock and 1,433,100
shares of common stock held by TL Ventures III L.P., located at the
address shown below;
(b) 32,054 shares of convertible redeemable preferred stock and 300,000
shares of common stock held by TL Ventures III Offshore L.P., located
at c/o Trident Trust Company (Cayman) Limited, P.O. Box 847, One
Capital Place, Fourth Floor, Grand Cayman, Cayman Islands; and
(c) 5,000 shares of convertible redeemable preferred stock and 46,800
shares of common stock held by TL Ventures III Interfund L.P., located
at c/o TL Ventures L.L.C., 700 The Safeguard Building, 435 Devon Park
Drive, Wayne, PA 19087-1515.
The data in the following table assumes the conversion of our outstanding
convertible redeemable preferred stock into shares of common stock at an
assumed conversion price of $ per share and that all shares of our
common stock offered by us and by Safeguard Scientifics in the directed share
subscription program are purchased by shareholders of Safeguard Scientifics.
Safeguard Delaware, Inc. is the general partner of Safeguard 98 Capital,
L.P. and a wholly-owned subsidiary of Safeguard Scientifics, Inc. Each of these
entities may be deemed to beneficially own the shares owned by Safeguard 98
Capital.
All shares of stock shown in the following table for Messrs. Chandler,
DeNino, Plum and Westphal are owned by William Blair Capital Partners VI, L.P.;
TL Ventures III, L.P., TL Ventures III Offshore L.P. or TL Ventures III
Interfund L.P.; SCP Private Equity Partners, L.P. and Bay Alarm Company,
respectively. Mr. Chandler is a Managing Director of William Blair Capital
Partners VI, L.L.C., which is the sole general partner of William Blair Capital
Partners VI, L.P. Mr. DeNino is a Managing Director of the management company
for each of the TL Ventures investment funds above listed. Mr. Plum is a
Managing General Partner of SCP Private Equity Partners, L.P. and Mr. Westphal
is chairman of the board of Bay Alarm Company. As a result of these
relationships, each of these individuals may be deemed to be a beneficial owner
of such shares. Each of Messrs. Chandler, DeNino, Plum and Westphal, however,
disclaim beneficial ownership with respect to all such shares in which he does
not have a pecuniary interest. The addresses of each of these officers or
directors is as follows:
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Chandler.................................. c/o William Blair Capital Partners
222 W. Adams Street
Chicago, IL 60606
DeNino.................................... c/o TL Ventures III L.P.
700 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Plum................................... c/o SCP Private Equity Partners, L.P.
435 Devon Park Drive
Building 300
Wayne, PA 19087
Westphal............................... c/o Bay Alarm Company
925 Ygnacio Valley Road
Walnut Creek, CA 94596
</TABLE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to the Offering Owned After the Offering
----------------------------- ---------------------------
Beneficial Owner Number Percent Number Percent
---------------- ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Significant Stockholders:
Bay Alarm Company......
925 Ygnacio Valley
Road
Walnut Creek, CA 94596
SCP Private Equity
Partners, L.P.........
435 Devon Park Drive,
Building 300
Wayne, PA 19087
William Blair Capital
Partners VI, L.P......
222 West Adams Street
Chicago, IL 60606
Safeguard 98 Capital,
L.P. and related
entities..............
800 The Safeguard
Building
435 Devon Park Drive
Wayne, PA 19087
TL Ventures III L.P.
and related equity
investors.............
700 Building
435 Devon Park Drive
Wayne, PA 19087-1990
Directors and Named
Executive Officers:
David G. Chandler......
Richard E. Bryson......
Mark J. DeNino.........
Wallace W. Griffin.....
John K. La Rue.........
Jason R. Mills.........
Samuel A. Plum.........
Bruce A. Westphal......
All of Pac-West's
directors and executive
officers as a group (18
persons)................
</TABLE>
65
<PAGE>
Selling Shareholder
Safeguard Scientifics may sell up to shares of our common stock to
its shareholders in connection with the directed share subscription program.
Assuming that all the shares offered in the directed share subscription program
are purchased by shareholders of Safeguard Scientifics and the conversion of
our outstanding convertible redeemable preferred stock into shares of
common stock at an assumed conversion price of $ per share, Safeguard
Scientifics will own shares or approximately % of our common
stock after completion of this offering. If the shareholders of Safeguard
Scientifics do not purchase any of the shares offered in the directed share
subscription program and Safeguard Scientific purchases all of the shares
offered by us in the directed share subscription program, Safeguard Scientifics
will beneficially own shares or approximately % of our common stock
after completion of this offering.
66
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General Matters
Immediately prior to the offering, the total amount of our authorized
capital stock will consist of 15,000,000 shares of common stock, par value
$0.001 per share, and 1,750,000 shares of convertible redeemable preferred
stock, par value $0.001 per share. Upon completion of the offering, all
1,250,000 shares of convertible redeemable preferred stock outstanding will be
converted into common stock and shares of common stock will be issued
and outstanding. The discussion below describes our capital stock, the articles
of incorporation and by-laws as anticipated to be in effect upon consummation
of the offering. The following summary of the provisions of our capital stock
describes material provisions of, but does not purport to be complete and is
subject to, and qualified in its entirety by, our articles of incorporation and
by-laws that are included as exhibits to the registration statement of which
this prospectus forms a part and by the provisions of applicable law.
Common Stock
All outstanding shares of our common stock are fully paid and non-
assessable. Subject to the prior rights of the holders of our preferred stock,
the holders of our common stock are entitled to receive dividends at such time
and in such amounts as our board of directors may determine. See "Dividend
Policy" for a further description of your dividend rights.
The shares of our common stock are not convertible and holders thereof have
no preemptive or subscription rights to purchase any of our securities nor will
holders be entitled to the benefits of any redemption or sinking fund
provisions. Upon our liquidation, dissolution or winding up, the holders of our
common stock are entitled to receive pro rata all of our assets which are
legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of our preferred
stock which is then outstanding. Each outstanding share of our common stock is
entitled to one vote on all matters submitted to a vote of stockholders. There
are cumulative voting rights with respect to the election of directors.
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol PACW.
Convertible Redeemable Preferred Stock
The convertible redeemable preferred stock has a preference amount over the
common stock with respect to any distribution by Pac-West to the holders of our
capital stock or with respect to any liquidation, dissolution or winding up of
Pac-West equal to the liquidation value of such shares, $36, plus an amount
which accrues on a daily basis at a rate of 10% per annum on the original cost
of such shares, $36, compounded quarterly. After payment of the preference
amount, the convertible redeemable preferred stock and the common stock share
ratably in any distribution made by us to the holders of our capital stock or
with respect to any liquidation, dissolution or winding up of Pac-West.
In connection with a registered public offering by us of equity or debt
securities, or rights to acquire equity or debt securities, the holders of a
majority of the outstanding convertible redeemable preferred stock have the
right to convert all outstanding convertible redeemable preferred stock into
shares of common stock by delivering written notice to us at least 15 days
prior to the expected consummation of such public offering. In addition, any
holder of the outstanding convertible redeemable preferred stock may convert
its shares of convertible redeemable preferred stock to shares of common stock
in connection with a public offering by delivering written notice to us at
least 30 days prior to the expected consummation of such public offering. In
connection with this offering, each share of convertible redeemable preferred
stock will be converted into that number of shares of common stock determined
by dividing the preference amount by the initial public offering price of the
common stock.
67
<PAGE>
The convertible redeemable preferred stock is subject to immediate
redemption upon certain events of bankruptcy and insolvency. The foregoing
redemption rights are all subject to our having sufficient funds that are:
(1) legally available in accordance with the General Corporation Law of
California for the redemption of the shares of convertible redeemable
preferred stock; and
(2) permitted to be used for the redemption of such shares of convertible
redeemable preferred stock in accordance with any debt financing
agreements of Pac-West, including the indenture governing the senior
notes.
The holders of convertible redeemable preferred stock have no right to vote
on matters submitted to a vote of our stockholders, except as otherwise
required by law.
Limitations on Liability and Indemnification of Officers and Directors
Our articles of incorporation provide that the liability of our directors
for monetary damages shall be eliminated to the fullest extent permissible
under California law. However, this provision does not affect the directors'
responsibilities under any other laws, such as the federal securities laws.
Our articles of incorporation also provide that we are authorized to provide
indemnification of our agents through bylaw provisions, agreements with agents,
votes of shareholders or disinterested directors, or otherwise, to the fullest
extent permissible under California law. Accordingly, our bylaws provide
indemnification, to the maximum extent and in the manner permitted by
California law, to each of our directors, officers, employees and agents
against expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that such person is or was a director, officer, employee or agent of us.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is .
68
<PAGE>
DESCRIPTION OF INDEBTEDNESS
Senior Credit Facility
Our senior credit facility provides for initial borrowings of $20.0 million
and future borrowings from time to time of up to an additional $20.0 million
for working capital and other corporate purposes. The senior credit facility
has a three-year term ending June 15, 2002, and our indebtedness under that
facility is secured by all of our assets, including but not limited to our
equipment, inventory, receivables and related contracts, investment property,
computer hardware and software, bank accounts and all other goods and rights of
every kind and description.
Our borrowings under the senior credit facility will bear interest, at our
option, at:
(1) the base rate, as defined in the senior credit facility, or
(2) the LIBOR rate, as defined in the senior credit facility, plus between
2.25% and 3.5%. As of June 30, 1999, the borrowing rate under this
facility would have been approximately 8.00%.
We are required to pay the lender under the senior credit facility a
commitment fee, payable in arrears on a quarterly basis, on the average unused
portion of the senior credit facility during such period. We may also be
required to pay an annual agency fee to the agent of the lender. In addition,
we paid an arrangement fee. The agent and the lender will receive and continue
to receive such other fees as may be separately agreed upon with the agent.
The senior credit facility requires us to meet certain financial tests,
including, for example, maximum levels of debt as a ratio of EBITDA, as defined
in the senior credit facility, minimum interest coverage and maximum amount of
capital expenditures. The senior credit facility contains certain covenants
which, among other things, limit the incurrence of additional indebtedness,
investments, dividends, transactions with affiliates, asset sales,
acquisitions, mergers and consolidations, prepayments of other indebtedness,
liens and encumbrances and other matters customarily restricted in such
agreements.
The senior credit facility contains customary events of default including,
for example, payment defaults, breaches of representations and warranties,
covenant defaults, cross-defaults to certain other indebtedness, certain events
of bankruptcy and insolvency, judgment defaults, failure of any guaranty or
security document supporting the senior credit facility to be in full force and
effect and change of control of Pac-West.
Senior Notes
The following description is a summary of the material provisions of our
senior notes and the senior notes indenture. It does not restate those
agreements in their entirety. We urge you to read the senior notes indenture
and sample note, which have been previously filed with the SEC.
General Characteristics
The senior notes mature on February 1, 2009 and are limited to an aggregate
stated principal amount at maturity of $150 million. They accrue interest at
the rate of 13 1/2% per annum payable semi-annually in arrears and are a
general unsecured obligation. However, we have purchased and pledged to the
trustee, as security for the benefit of the holders of the senior notes, a
portfolio of U.S. government securities in an amount sufficient to provide for
payment in full of the first two scheduled interest payments due under the
senior notes, the first of which was paid on August 2, 1999.
Optional Redemption
At any time prior to February 1, 2002, we may redeem up to 35% of the
aggregate principal amount of senior notes originally issued at a redemption
price of 113.50% plus accrued and unpaid interest with the net
69
<PAGE>
cash proceeds of one or more underwritten public equity offerings of common
stock in which the gross proceeds to us are at least $20 million; provided
that:
. at least $97.5 million in aggregate principal amount of the notes remains
outstanding immediately after such a redemption and
. the redemption occurs within 45 days of the date of the closing of such
public equity offering.
After February 1, 2004, we may redeem all or a part of the senior notes at
the redemption prices set forth below plus accrued and unpaid interest if
redeemed during the twelve-month period beginning February 1 of the years
indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2004.......................................................... 106.75%
2005.......................................................... 104.50%
2006.......................................................... 102.25%
2007.......................................................... 100.00%
</TABLE>
Repurchase at the Option of Holders
If we sell certain assets or experience a change of control, each holder of
the senior notes will have the right to require us to repurchase all or any
part of that holder's senior notes for 101% of the aggregate principal amount
of the senior notes repurchased plus accrued and unpaid interest.
Certain Covenants
The senior notes are under an indenture with Norwest Bank Minnesota, N.A.,
as trustee. The senior notes indenture will, among other things, restrict our
ability to:
. borrow money;
. pay dividends on stock or repurchase stock;
. make investments;
. use assets as security in other transactions; and
. sell certain assets or merge with or into other companies.
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately following this offering, there will be shares of our
common stock issued and outstanding. Of these shares, the shares of
common stock to be sold in this offering will be immediately eligible for sale
in the public market, except for shares owned at any time by our affiliates
within the meaning of Rule 144 under the Securities Act. The remaining
issued and outstanding shares are restricted securities within the
meaning of Rule 144 and may not be publicly resold, except in compliance with
the registration requirements of the Securities Act or pursuant to an exemption
from registration, including that provided by Rule 144. Prior to the date of
this prospectus, no public market has existed for our common stock. We expect
that trading of our common stock on the Nasdaq National Market will commence on
the date of this prospectus. We do not make any prediction regarding the
effect, if any, that future sales of shares, or the availability of our shares
for future sale, will have on the market price of our common stock. The market
price of our common stock can be adversely affected by sales of substantial
amounts of common stock or by the perception that these sales could occur.
Rule 144
In general, under Rule 144, a person, or persons whose shares are
aggregated, who has beneficially owned restricted securities for at least one
year, including a person who may be deemed affiliate, is entitled to sell
within any three month period a number of our shares of common stock that does
not exceed the greater of:
. 1% of the then-outstanding shares of our common stock; or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about us. A person
who is not our affiliate at any time during the 90 days preceding a sale and
who has beneficially owned shares for at least two years would be entitled to
sell shares following this offering under Rule 144(k) without regard to the
volume limitations, manner of sale provisions or notice requirements of Rule
144.
Rule 701
Our employees, directors, officers or consultants who purchased our shares
in connection with a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 permits non-affiliates to
sell their Rule 701 shares without having to comply with the public
information, holding period, volume limitation or notice provisions of Rule
144. Affiliates may sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions. In each of these cases, Rule 701 allows
the shareholders to sell 90 days after the date of this prospectus.
Lock-up agreements
Our directors, executive officers, and some of our shareholders, who
collectively hold of the outstanding shares of our common stock,
have agreed, subject to limited exceptions, not to sell, offer to sell or
otherwise dispose of our common stock or securities convertible into or
exercisable or exchangeable for our common stock for a period of 180 days after
the date of this prospectus without the prior written consent of Bear, Stearns
& Co. Inc., on behalf of the underwriters.
Registration Statement on Form S-8
Following this offering, we intend to file a registration statement on Form
S-8 under the Securities Act to register the shares of common stock reserved
for issuance under our employee benefit plans. The stock registered under that
registration statement will thereafter be available for sale in the public
market, subject to the resale limitations of Rule 144 applicable to our
affiliates.
71
<PAGE>
UNDERWRITING
Of the shares of our common stock offered by this prospectus, we are
offering shares to the public generally in an underwritten public offering
and shares to the shareholders of one of our shareholders, Safeguard
Scientifics, and Safeguard Scientifics is offering up to shares, in a
directed share subscription program.
Subject to the terms and conditions set forth in an underwriting agreement
dated , 1999, each of the underwriters named below, through their
representatives Bear, Stearns & Co. Inc., Banc of America Securities LLC, and
First Union Capital Markets Corp., has severally agreed to purchase from us the
aggregate number of shares of common stock set forth opposite its name below at
the public offering price less the underwriting discount set forth on the cover
page of this prospectus. The shares of common stock being purchased
by the underwriters does not include the shares of common stock being
offered by us and the shares of our common stock being offered by
Safeguard Scientifics in the directed share subscription program.
<TABLE>
<CAPTION>
Underwriters Number of Shares
- ------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc........................................
Banc of America Securities LLC.................................
First Union Capital Markets Corp...............................
---------
Total......................................................
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of legal matters by their counsel and to
various other conditions. Under the underwriting agreement, the underwriters
are obligated to purchase and pay for all of the shares of common stock set
forth in the table above, other than those covered by the over-allotment option
described below, if they purchase any of the shares.
The underwriters propose to initially offer some of the shares directly to
the public at the offering price set forth on the cover page of this prospectus
and some of the shares to dealers at this price less a concession not in excess
of $ per share. The underwriters may allow, and dealers may re-allow,
concessions not in excess of $ per share on sales to other dealers. After
the initial offering of the shares to the public, the underwriters may change
the offering price, concessions and other selling terms. The underwriters do
not intend to confirm sales to any accounts over which they exercise
discretionary authority.
We have granted the underwriters an option exercisable for 30 days from the
date of the underwriting agreement to purchase up to additional shares
at the offering price less the underwriting discount. The underwriters may
exercise this option solely to cover over-allotments, if any, made in
connection with this
72
<PAGE>
offering. To the extent underwriters exercise this option in whole or in part
then each of the underwriters will become obligated, subject to conditions, to
purchase a number of additional shares approximately proportionate to each
underwriter's initial purchase commitment as indicated in the preceding table.
We and Safeguard Scientifics have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act.
Our directors and executive officers and some of our shareholders, who
collectively hold a total of shares of common stock, have agreed, subject
to limited exceptions, not to sell or offer to sell or otherwise dispose of any
shares of common stock or securities convertible into or exercisable or
exchangeable for our common stock, for a period of 180 days after the date of
this prospectus without the prior written consent of Bear, Stearns & Co. Inc.,
on behalf of the underwriters.
In addition, we have agreed that for a period of 180 days after the date of
this prospectus we will not offer, sell or otherwise dispose of any shares of
common stock except for the shares offered in this offering and any shares
offered in connection with employee benefit plans and other limited exceptions,
without the consent of Bear, Stearns & Co. Inc., on behalf of the underwriters.
Prior to the offering, there has been no public market for our common stock.
Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in these negotiations will be:
. our results of operations in recent periods;
. estimates of our business potential;
. an assessment of our management;
. prevailing market conditions; and
. the prices of similar securities of generally comparable companies.
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "PACW." We cannot assure you, however,
that an active or orderly trading market will develop for the common stock or
that our common stock will trade in the public markets subsequent to the
offering at or above the initial offering price.
In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock during and after the offering. Specifically, the underwriters may
over-allot or otherwise create a short position in the common stock for their
own account by selling more shares of common stock than we have actually sold
to them. The underwriters may elect to cover any short position by purchasing
shares of common stock in the open market or by exercising the over-allotment
option granted to the underwriters. In addition, the underwriters may stabilize
or maintain the price of the common stock by bidding for or purchasing shares
of common stock in the open market and may impose penalty bids, under which
selling concessions allowed to syndicate members or other broker-dealers
participating in the offering are reclaimed if shares of common stock
previously distributed in the offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may
be to stabilize or maintain the market price at a level above that which might
otherwise prevail in the open market and these transactions may be discontinued
at any time. The imposition of a penalty bid may also affect the price of the
common stock to the extent that it discourages resales. No representation is
made as to the magnitude or effect of these activities.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of common stock for employees, directors and other
persons associated with us who express an interest in purchasing these shares
of common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase reserved shares. Any reserved shares not purchased by these persons
will be offered by the underwriters to the general public on the same terms as
the other shares offered in this offering.
73
<PAGE>
Banc of America Securities LLC and its affiliates own approximately 1.9% of
our convertible redeemable preferred stock and 1.8% of our common stock, which
were acquired in the recapitalization of Pac-West on September 16, 1998. Banc
of America Securities LLC and First Union Capital Markets Corp. also own a
portion of our senior notes as part of their market-making activities in the
senior notes. The underwriters have and may, from time to time, engage in
transactions with, and perform services for, us in the ordinary course of their
business.
The following table shows the underwriting discount to be paid to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares of common stock.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per share.................................................. $ $
Total ..................................................... $ $
</TABLE>
Other expenses of this offering (including the registration fees and the
fees of financial printers, counsel and accountants) payable by us are expected
to be approximately $ .
Directed Share Subscription Program
As part of this offering, we are offering shares and Safeguard
Scientifics is offering up to shares of our common stock in a
directed share subscription program to shareholders of Safeguard Scientifics,
one of our principal shareholders. Safeguard Scientifics is an underwriter with
respect to the shares of our common stock offered to the shareholders of
Safeguard Scientifics. Safeguard Scientifics is not an underwriter with respect
to the other shares of our common stock offered and is not included in the term
"underwriter" as used elsewhere in this prospectus. The underwriters are not
purchasing the shares in the directed share subscription program, and are not
an "underwriter" with respect to those shares.
Safeguard Scientifics' shareholders may subscribe for one share of our
common stock for every ten shares of Safeguard Scientifics' common stock held
by them, and may not transfer the opportunity to subscribe to another person
except involuntarily by operation of law. Persons who owned at least 100 shares
of Safeguard Scientifics' common stock as of September 7, 1999 are eligible to
purchase shares directly from us or Safeguard Scientifics under the program.
Shareholders who own less than 100 shares of Safeguard Scientifics' common
stock will be ineligible to participate in the directed share subscription
program. Subscription orders will be satisfied first from the shares being sold
by us, and then from the shares offered by Safeguard Scientifics. If any of the
shares offered by us under the program are not purchased by the shareholders of
Safeguard Scientifics, Safeguard Scientifics has agreed that Safeguard
Scientifics or one or more of its designees will purchase these shares from us
at the closing of this offering. Although these shares were purchased directly
from us as part of a registered offering, Safeguard Scientifics is one of our
affiliates and may only sell these shares in accordance with Rule 144
restrictions or in subsequent registered offerings. See "Shares Eligible For
Future Sale." In addition, Safeguard Scientifics has agreed, subject to limited
exceptions, not to offer, sell or otherwise dispose of any shares of our common
stock, including shares purchased by it in the directed share subscription
program, for a period of 180 days after the date of this prospectus other than
in connection with this offering. Sales under the directed share subscription
program will close on the closing of the sale of the other shares offered to
the public. It is expected that sales under the directed share subscription
program will be reflected in each purchaser's book-entry account at the
Depository Trust Company, if any, shortly after the closing of these sales.
After the closing of these sales, we will mail stock certificates to all
purchasers who do not maintain book-entry accounts at the Depository Trust
Company.
Prior to this offering, assuming conversion of our outstanding convertible
redeemable preferred stock into shares of common stock at an assumed
conversion price of $ per share, Safeguard Scientifics
74
<PAGE>
beneficially owned shares or approximately % of our common stock.
After this offering, Safeguard Scientifics will beneficially own
shares or approximately % of our common stock, assuming that all shares
offered in the directed share subscription program are purchased by
shareholders of Safeguard Scientifics. If the shareholders of Safeguard
Scientifics do not purchase any of the shares offered in the directed share
subscription program and Safeguard Scientifics purchases all of the shares
offered by us in the directed share subscription program, Safeguard Scientifics
will beneficially own shares or approximately % of our common stock
after this offering. The purchase price under the program, whether paid by
Safeguard Scientifics or its shareholders, will be the same price per share as
set forth on the cover page of this prospectus. For purposes of this
prospectus, when we present information that reflects this offering, we have
assumed that all shares offered under the directed share subscription program
are purchased by shareholders of Safeguard Scientifics.
We have entered into an agreement to pay Bear, Stearns & Co. Inc. a
financial advisory fee of up to $ or an amount equal to % of the
aggregate initial public offering price of all the shares being sold by us
through the directed share subscription program, including shares that may be
sold to Safeguard Scientifics. In addition, Safeguard Scientifics has agreed to
pay Bear, Stearns & Co. Inc. a financial advisory fee of up to $ or
an amount equal to % of the aggregate initial public offering price of all
the shares being sold by Safeguard Scientifics through the directed share
subscription program. The financial advisory fees compensate Bear, Stearns &
Co. Inc. for its financial advice relating to the directed share subscription
program. Safeguard Scientifics will not receive any compensation from us or any
other person with respect to this offering, including any underwriting
discounts or commissions.
The following table shows the per share and total offering price, financial
advisory fee to be paid by us to Bear, Stearns & Co. Inc. and the proceeds,
before expenses, to us.
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public offering price............................... $ $
Financial advisory fee to Bear, Stearns & Co. Inc... $ $
Proceeds, before expenses, to us.................... $ $
Maximum proceeds, before expenses, to Safeguard
Scientifics........................................ $ $
</TABLE>
The expenses of the directed share subscription program, exclusive of the
financial advisory fee to be paid to Bear, Stearns & Co. Inc., are estimated at
$ , and Safeguard Scientifics will reimburse us for all expenses
incurred by us in connection with the directed share subscription program
including the amount equal to % of the aggregate initial public offering
price of the shares sold by Safeguard Scientifics through the directed share
subscription program.
75
<PAGE>
LEGAL MATTERS
The validity of the common stock offered in this prospectus will be passed
upon on behalf of Pac-West by and certain other legal matters will be
passed upon on behalf of Pac-West by Kirkland & Ellis, Chicago, Illinois and on
behalf of the underwriters by Latham & Watkins, Chicago, Illinois. One of our
directors, Mark Fowler, is of counsel at Latham & Watkins. Mr. Fowler receives
compensation as a director. See "Management--Director Compensation."
EXPERTS
The financial statements and schedule included in this prospectus or
elsewhere in the registration statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen LLP,
independent public accountants and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, Washington, D.C. 20549, a registration statement
on Form S-1 under the Securities Act of 1933 with respect to the common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules thereto.
Certain items are omitted in accordance with the rules and regulations of the
SEC. For further information with respect to Pac-West and the common stock,
reference is made to the registration statement and the exhibits and any
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance, if such contract or document is filed as an
exhibit, reference is made to the copy of such contract or other documents
filed as an exhibit to the registration statement, each statement being
qualified in all respects by such reference. A copy of the registration
statement, including the exhibits and schedules thereto, may be read and copied
at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains
an Internet site at http://www.sec.gov, from which interested persons can
electronically access the registration statement, including the exhibits and
any schedules thereto.
We are subject to the full informational requirements of the Securities
Exchange Act of 1934, as amended. We fulfill our obligations with respect to
such requirements by filing periodic reports and other information with the
SEC. Such periodic reports and other information will be available for
inspection and copying at the SEC's public reference rooms and the SEC's
website. We also maintain an Internet site at http://www.pacwest.com. Our web
site and the information contained therein or connected thereto will not be
deemed to be incorporated into this prospectus or the registration statement of
which it forms a part.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants.............. F-3
Balance Sheets............................................................. F-4
Statements of Operations................................................... F-6
Statements of Changes in Stockholders' Equity (Deficit).................... F-7
Statements of Cash Flows................................................... F-8
Notes to Financial Statements.............................................. F-9
Interim Condensed Balance Sheet (unaudited)................................ F-25
Interim Condensed Statements of Income (unaudited)......................... F-26
Interim Condensed Statements of Cash Flows (unaudited)..................... F-27
Notes to Interim Condensed Financial Statements (unaudited)................ F-28
</TABLE>
F-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Pac-West Telecomm, Inc.:
We have audited the accompanying balance sheets of Pac-West Telecomm, Inc.
(a California corporation) as of December 31, 1997 and 1998, and the related
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the three-month period from date of commencement (October 1, 1996) to
December 31, 1996, and for the years ended December 31, 1997 and 1998. In
addition, we have audited the statements of operations and cash flows of the
predecessor telephone and answering service divisions of Pac-West Telecomm,
Inc. (see Note 1) for the nine-month period ended September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pac-West Telecomm, Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for the three-month period from date of commencement (October 1, 1996) to
December 31, 1996, and for the years ended December 31, 1997 and 1998, and the
results of operations and cash flows of the predecessor telephone and answering
service divisions of Pac-West Telecomm, Inc. for the nine-month period ended
September 30, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Francisco, California,
February 10, 1999 except with respect to Note 12 for which the date is March
19, 1999
F-3
<PAGE>
PAC-WEST TELECOMM, INC.
BALANCE SHEETS
As of December 31, 1997 and 1998
ASSETS
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................... $ 3,603,000 $15,236,000
Trade accounts receivable, net of allowances for
doubtful accounts of $300,000 and $400,000 at
December 31, 1997 and 1998, respectively.......... 3,662,000 4,623,000
Accounts receivable from related parties........... 161,000 64,000
Income taxes receivable............................ 0 1,971,000
Inventories........................................ 330,000 447,000
Prepaid expenses and other current assets.......... 398,000 861,000
Deferred financing costs, net...................... 0 457,000
Deferred tax assets................................ 160,000 151,000
----------- -----------
Total current assets........................... 8,314,000 23,810,000
----------- -----------
Equipment, Vehicles and Leasehold Improvements:
Communications equipment........................... 17,193,000 29,817,000
Office furniture and equipment..................... 1,176,000 1,965,000
Vehicles........................................... 301,000 717,000
Leasehold improvements............................. 2,869,000 5,581,000
Construction-in-progress (Note 5).................. 0 25,597,000
----------- -----------
21,539,000 63,677,000
Less: Accumulated depreciation and amortization...... (2,460,000) (6,383,000)
----------- -----------
Equipment, vehicles and leasehold improvements,
net........................................... 19,079,000 57,294,000
----------- -----------
Other Assets, net.................................. . 135,000 1,389,000
----------- -----------
Total assets................................... $27,528,000 $82,493,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PAC-WEST TELECOMM, INC.
BALANCE SHEETS
As of December 31, 1997 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Current Liabilities:
Current portion of notes payable.................. $ 2,034,000 $ 132,000
Current portion of capital lease obligations...... 1,432,000 0
Accounts payable.................................. 1,159,000 5,147,000
Accrued payroll and related expenses.............. 331,000 846,000
Other accrued liabilities......................... 760,000 2,153,000
----------- ------------
Total current liabilities................... 5,716,000 8,278,000
----------- ------------
Senior Secured Borrowings and Other Long-Term
Obligations (Note 3)............................... 0 100,000,000
Notes Payable, less current portion................. 6,627,000 116,000
Capital Lease Obligations, less current portion..... 5,579,000 0
----------- ------------
Total long-term debt and capital lease
obligations................................ 12,206,000 100,116,000
----------- ------------
Deferred Income Taxes............................... 934,000 1,888,000
----------- ------------
Total liabilities........................... 18,856,000 110,282,000
----------- ------------
Commitments and Contingencies (Note 5)
Convertible Redeemable Preferred Stock, $0.001 par
value; 1,750,000 shares authorized; 1,250,000
issued and outstanding at December 31, 1998
(preference in liquidation of $45,000,000, plus
accrued cumulative dividends of $1,324,000)........ 0 46,324,000
Stockholders' Equity (Deficit):
Common stock:
December 31, 1997, no par value:
Authorized shares--10,000,000
Issued and outstanding shares--100,000........ 4,037,000 0
December 31, 1998, $0.001 par value:
Authorized shares--15,000,000
Issued and outstanding shares--12,562,470..... 0 13,000
Additional paid-in capital........................ 0 8,910,000
Notes receivable from stockholders................ 0 (233,000)
Retained earnings (deficit)....................... 4,635,000 (82,803,000)
----------- ------------
Total stockholders' equity (deficit)........ 8,672,000 (74,113,000)
----------- ------------
Total liabilities and stockholders' equity
(deficit).................................. $27,528,000 $ 82,493,000
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PAC-WEST TELECOMM, INC.
STATEMENTS OF OPERATIONS
For the Predecessor Telephone and Answering Service Divisions of Pac-West
Telecomm, Inc.
for the nine-month period ended September 30, 1996, and
for Pac-West Telecomm, Inc.
for the three-month period from date of commencement (October 1, 1996) to
December 31, 1996, and for the years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Predecessor
Telephone and
Answering
Service Divisions
(Note 1) Pac-West Telecomm, Inc.
----------------- ---------------------------------------------
Nine-Month Period Period from Date of
Ended Commencement Year Ended Year Ended
September 30, (October 1, 1996) to December December
1996 December 31, 1996 31, 1997 31, 1998
----------------- -------------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues (Note 5)....... $8,737,000 $4,232,000 $29,551,000 $42,211,000
---------- ---------- ----------- -----------
Costs and Expenses:
Operating.............. 4,202,000 2,064,000 12,060,000 15,344,000
Selling, general and
administrative:
Selling, general and
administrative....... 3,123,000 1,519,000 7,367,000 10,779,000
Transaction bonuses
and consultant's
costs (Note 1)....... 0 0 0 3,798,000
Depreciation and
amortization.......... 549,000 299,000 2,204,000 4,106,000
---------- ---------- ----------- -----------
Total costs and
expenses............ 7,874,000 3,882,000 21,631,000 34,027,000
---------- ---------- ----------- -----------
Income from
operations.......... 863,000 350,000 7,920,000 8,184,000
---------- ---------- ----------- -----------
Other Expense (Income):
Interest expense....... 33,000 105,000 932,000 4,199,000
Gain on disposal of
answering service
division.............. 0 0 (385,000) 0
Costs of merger with
PWT Acquisition Corp.
and recapitalization
(Note 1).............. 0 0 0 3,004,000
Other (income) expense,
net................... (34,000) 11,000 (119,000) (330,000)
---------- ---------- ----------- -----------
Total other expense
(income), net....... (1,000) 116,000 428,000 6,873,000
---------- ---------- ----------- -----------
Income before
provision for income
taxes and
extraordinary item.. 864,000 234,000 7,492,000 1,311,000
Provision for Income
Taxes.................. 345,000 94,000 2,997,000 1,561,000
---------- ---------- ----------- -----------
Income (loss) before
extraordinary item.. 519,000 140,000 4,495,000 (250,000)
---------- ---------- ----------- -----------
Extraordinary Item: Loss
on early extinguishment
of debt, net of income
tax benefit of
$278,000............... 0 0 0 (417,000)
---------- ---------- ----------- -----------
Net income (loss).... $ 519,000 $ 140,000 $ 4,495,000 $ (667,000)
========== ========== =========== ===========
Basic and diluted income
(loss) before
extraordinary item per
share.................. $ 1.40 $ 44.95 $ (0.42)
========== =========== ===========
Basic and diluted net
income (loss) per
share.................. $ 1.40 $ 44.95 $ (0.54)
========== =========== ===========
Basic and diluted
weighted average shares
outstanding............ 100,000 100,000 3,716,536
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PAC-WEST TELECOMM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the three-month period from date of commencement (October 1, 1996) to
December 31, 1996, and for the years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Notes Total
Common Stock Additional Receivable Retained Stockholders'
---------------------- Paid-in from Earnings Equity
Shares Amount Capital Stockholders (Deficit) (Deficit)
---------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1996................... 0 $ 0 $ 0 $ 0 $ 0 $ 0
Issuance of common
stock for contribution
of predecessor
telephone and
answering service
divisions by CalPage
(Note 1).............. 100,000 4,037,000 0 0 0 4,037,000
---------- ----------- ----------- --------- ------------ ------------
Balance, October 1,
1996................... 100,000 4,037,000 0 0 0 4,037,000
Net income for the
three-month period
from date of
commencement (October
1, 1996) to December
31, 1996.............. 0 0 0 0 140,000 140,000
---------- ----------- ----------- --------- ------------ ------------
Balance, December 31,
1996................... 100,000 4,037,000 0 0 140,000 4,177,000
Net income for the year
ended December 31,
1997.................. 0 0 0 0 4,495,000 4,495,000
---------- ----------- ----------- --------- ------------ ------------
Balance, December 31,
1997................... 100,000 4,037,000 0 0 4,635,000 8,672,000
Conversion to $0.001
par value stock....... 0 (4,037,000) 4,037,000 0 0 0
Effect of merger with
PWT Acquisition Corp.
and recapitalization
(Note 1).............. 5,126,420 6,000 1,194,000 0 (86,771,000) (85,571,000)
Issuance of common
stock................. 6,898,580 7,000 4,711,000 0 0 4,718,000
Accrued cumulative
dividends--preferred
stock................. 0 0 (1,324,000) 0 0 (1,324,000)
Issuances of common
stock for cash and
notes receivable...... 437,470 0 292,000 (233,000) 0 59,000
Net loss for the year
ended December 31,
1998.................. 0 0 0 0 (667,000) (667,000)
---------- ----------- ----------- --------- ------------ ------------
Balance, December 31,
1998................... 12,562,470 $ 13,000 $ 8,910,000 $(233,000) $(82,803,000) $(74,113,000)
========== =========== =========== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
PAC-WEST TELECOMM, INC.
STATEMENTS OF CASH FLOWS
For the Predecessor Telephone and Answering Service Divisions of Pac-West
Telecomm, Inc.
for the nine-month period ended September 30, 1996, and
for Pac-West Telecomm, Inc.
for the three-month period from date of commencement (October 1, 1996) to
December 31, 1996, and for the years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Predecessor
Telephone and
Answering
Service Divisions
(Note 1) Pac-West Telecomm, Inc.
----------------- -----------------------------------------------
Nine-Month Period Period from Date of
Ended Commencement Year Ended Year Ended
September 30, (October 1, 1996) to December 31, December 31,
1996 December 31, 1996 1997 1998
----------------- -------------------- ------------ ------------
<S> <C> <C> <C> <C>
Operating Activities:
Net income (loss)................................ $ 519,000 $ 140,000 $ 4,495,000 $ (667,000)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary item--loss on early extinguishment
of debt, net of income tax benefit.............. 0 0 0 417,000
Costs of merger with PWT Acquisition Corp. and
recapitalization................................ 0 0 0 3,004,000
Depreciation and amortization.................... 549,000 299,000 2,204,000 4,106,000
Amortization of deferred financing costs......... 0 0 0 1,438,000
Gain on disposal of answering service division... 0 0 (385,000) 0
Gain on disposal of equipment.................... 0 0 (15,000) 0
Provision for doubtful accounts.................. (19,000) 6,000 216,000 100,000
Deferred income tax provision.................... 0 93,000 711,000 963,000
Changes in operating assets and liabilities:
Increase in trade accounts receivable........... (442,000) (413,000) (2,034,000) (1,061,000)
(Increase) decrease in accounts receivable from
related parties................................ 200,000 (94,000) (67,000) 97,000
Increase in income tax receivable............... 0 0 0 (1,971,000)
(Increase) decrease in inventories.............. (102,000) (177,000) 195,000 (117,000)
Increase in prepaid expenses and other current
assets......................................... (17,000) (90,000) (175,000) (263,000)
(Increase) decrease in other assets............. 45,000 (15,000) (56,000) 91,000
Increase (decrease) in accounts payable......... (267,000) 527,000 654,000 3,988,000
Increase (decrease) in accrued compensation and
other liabilities.............................. 626,000 (201,000) 133,000 1,908,000
----------- ----------- ----------- ------------
Net cash provided by operating activities...... 1,092,000 75,000 5,876,000 12,033,000
----------- ----------- ----------- ------------
Investing Activities:
Purchase of equipment, vehicles and leasehold
improvements.................................... (2,730,000) (1,682,000) (7,103,000) (42,176,000)
Proceeds from disposal of answering service
division........................................ 0 0 402,000 0
Proceeds from disposal of equipment.............. 207,000 0 82,000 145,000
----------- ----------- ----------- ------------
Net cash used in investing activities.......... (2,523,000) (1,682,000) (6,619,000) (42,031,000)
----------- ----------- ----------- ------------
Financing Activities:
Proceeds from notes payable...................... 2,274,000 2,508,000 5,931,000 10,514,000
Repayments on notes payable...................... (87,000) (892,000) (1,332,000) (2,658,000)
Principal payments on capital leases............. (366,000) (67,000) (730,000) (828,000)
Payment for deferred financing costs associated
with senior notes............................... 0 0 0 (1,195,000)
Proceeds from senior secured borrowings.......... 0 0 0 15,587,000
Increase in other long-term obligations.......... 0 0 0 9,000,000
Proceeds from issuance of common stock........... 0 0 0 9,000
Merger with PWT Acquisition Corp. and
recapitalization:
Proceeds from the issuance of preferred stock.... 0 0 0 31,844,000
Proceeds from the issuances of common stock...... 0 0 0 5,968,000
Proceeds from senior secured borrowings.......... 0 0 0 75,413,000
Payments to existing stockholders................ 0 0 0 (74,015,000)
Extinguishments of notes payable and capital
leases.......................................... 0 0 0 (23,159,000)
Payment for deferred financing costs............. 0 0 0 (1,895,000)
Costs of merger with PWT Acquisition Corp. and
recapitalization................................ 0 0 0 (2,954,000)
Repayment of loans payable to officers and
stockholder..................................... (43,000) 0 (211,000) 0
----------- ----------- ----------- ------------
Net cash provided by financing activities...... 1,778,000 1,549,000 3,658,000 41,631,000
----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents................................... 347,000 (58,000) 2,915,000 11,633,000
Cash and Cash Equivalents:
Beginning of period.............................. 399,000 746,000 688,000 3,603,000
----------- ----------- ----------- ------------
End of period.................................... $ 746,000 $ 688,000 $ 3,603,000 $ 15,236,000
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Organization:
Pac-West Telecomm, Inc. (the Company) is engaged in the business of
providing switched local and long-distance telecommunications services and
"one-stop" integrated telecommunications services to Internet Service Providers
(ISPs), paging companies and other inbound call service providers, as well as
to medium and small businesses, principally within California.
The Company was incorporated in May 1996 in the state of California as a
wholly owned subsidiary of CalPage (a telephone, answering and paging services
company), also formerly named Pac-West Telecomm, Inc. CalPage transferred its
telephone and answering service divisions (the Predecessor Telephone and
Answering Service Divisions or the "Predecessor") to the Company effective
September 30, 1996 (the Initial Transfer). In conjunction with the Initial
Transfer, CalPage spun off the Company to the stockholders of CalPage. The
accompanying financial statements are presented on the same historical cost
basis as was used prior to the Initial Transfer.
During 1997, the Company sold the customer base and other assets of its
answering service division (see Note 10).
The success of the Company is highly dependent upon several factors. These
factors include the Company's ability to penetrate additional markets and to
manage network growth and technological change within the telecommunications
industry, the successful implementation of local and enhanced services to its
customers including ISPs, and competition from preexisting and new providers of
local and long-distance services, as well as positive and timely responses
regarding governmental regulations.
Additionally, the Company is managed by a limited number of key individuals,
several of whom are subject to employment contracts. The Company is also
dependent on the development of an effective sales force and the retention of
skilled and qualified personnel.
As of December 31, 1998, the Company's borrowings and other long-term
obligations totaled $100,248,000 and the Company had a stockholders' deficit of
$74,113,000. As discussed in Note 11, in January 1999, the Company issued
$150,000,000 of 13.5 percent senior notes due on February 1, 2009. A portion of
the proceeds from these notes was used to repay the senior secured borrowings.
The balance of the proceeds will be used for future capital expenditures and
working capital needs, including the establishment of an interest reserve to
cover certain initial interest payments due under the senior notes.
Basis of Presentation
The accompanying financial statements present the financial position of the
Company as of December 31, 1997 and 1998, and the results of its operations and
its cash flows for the period from commencement (October 1, 1996) to December
31, 1996, and for the years ended December 31, 1997 and 1998. In addition, the
accompanying financial statements present the results of the Predecessor's
operations and cash flows for the nine-month period ended September 30, 1996.
The Predecessor was a division of CalPage during the nine-month period ended
September 30, 1996. Accordingly, the results of the Predecessor's operations
and its cash flows were recorded and reported by CalPage as an integral part of
CalPage's total operations. The Company has used its best efforts to derive the
appropriate information from the books and records of CalPage and has by
necessity applied certain
F-9
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
assumptions in identifying and allocating costs and expenses to separately
report the results of operations and cash flows of the Predecessor for the
nine-month period ended September 30, 1996 in the accompanying financial
statements.
Allocated selling, general and administrative expenses for the nine-month
period ended September 30, 1996, were $1,111,000.
Assumptions used were based on headcount and job descriptions, facility
utilization, and divisional revenues. Management believes this method is a
reasonable allocation method and that the resulting amounts approximate the
amounts that would have been incurred if the Predecessor was operated on a
stand-alone basis. Revenues, direct costs, depreciation and amortization and
interest expense have been recorded based on the specific activities of the
Predecessor.
Due to the significant changes in the Company's operations since September
30, 1996, the Company believes that the financial information of the
Predecessor is not directly comparable to the Company's results of operations.
Merger and Recapitalization
On September 16, 1998, the Company completed a merger with PWT Acquisition
Corp. (PWT) and a recapitalization of the Company (the Transaction). PWT was
formed by a group of investors (the New Stockholders) for the purpose of
injecting additional equity into the Company and effecting the
recapitalization. In connection with the Transaction, PWT was merged into the
Company, with the Company being the surviving corporation.
In connection with the Transaction, Bay Alarm Company and Mr. John La Rue
(the Existing Stockholders) received cash payments of approximately $74 million
(primarily financed through senior secured borrowings--see Note 3), as well as
shares of newly issued preferred and common stock of the Company in exchange
for a substantial portion of their ownership interests. Additionally, at the
consummation of the Transaction, the Company paid transaction bonuses and
consultant's costs totaling approximately $3.8 million which are included in
the accompanying statements of operations. Under the terms of the Transaction,
the Existing Stockholders of the Company are entitled to receive additional
consideration up to $20 million in the event that the Company achieves certain
earnings targets (including receipt of certain billings under dispute--see Note
5) subsequent to the recapitalization. As of December 31, 1998, none of these
earnings targets were achieved and accordingly, no amounts have been accrued at
December 31, 1998 for payment of any additional consideration. Immediately
following consummation of the Transaction, the Existing Stockholders continued
to hold approximately 28 percent of the issued and outstanding common stock of
the Company. As a result of the continued significant ownership interests of
the Existing Stockholders, no adjustments have been made to the historical
carrying amounts of the Company's assets and liabilities as a result of the
Transaction.
F-10
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of the Transaction is as follows:
<TABLE>
<S> <C>
Issuance of convertible redeemable preferred stock*....... $ 31,844,000
Issuance of common stock, $0.001 par value................ 5,968,000
Proceeds from senior secured borrowings................... 75,413,000
-------------
Total sources of cash................................... 113,225,000
-------------
Payments to Existing Stockholders including $400,000 for
noncompete agreements*................................... (74,015,000)
Extinguishment of debt**.................................. (23,437,000)
Transaction bonuses and consultant's costs................ (3,798,000)
Transaction costs***...................................... (4,593,000)
-------------
Total uses of cash...................................... (105,843,000)
-------------
Net cash provided from Transaction...................... $ 7,382,000
=============
</TABLE>
- --------
* Net of $13,156,000 of noncash convertible redeemable preferred stock issued
as part of the Transaction payments to Existing Stockholders.
** Includes $695,000 of early extinguishment costs before income tax benefit
(see Note 4).
*** Includes costs of merger with PWT Acquisition Corp. and recapitalization of
$3,004,000 (less amortization of noncompete agreements of $50,000 during
1998) and deferred financing costs incurred in connection with the senior
secured borrowings of $1,895,000; net of $256,000 of common stock issued as
payment for professional services provided.
In order to effect the above, the Company amended its articles of
incorporation such that the authorized capital of the Company consists of
15,000,000 shares of common stock and 1,750,000 shares of convertible
redeemable preferred stock (the Preferred Stock). The issued and outstanding
preferred stock and common stock of PWT was converted into Preferred Stock and
common stock of the Company, respectively, on a one-for-one basis.
2. Summary of Significant Accounting Policies:
Concentration of Customers and Suppliers
The relative concentrations of customers and suppliers are:
<TABLE>
<CAPTION>
Predecessor
(Note 1) Pac-West Telecomm, Inc.
------------- --------------------------------------
Period from
Date of
Commencement
Nine-Month (October 1,
Period Ended 1996) to Year Ended Year Ended
September 30, December 31, December 31, December 31,
1996 1996 1997 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues (percent of
revenues):
Incumbent Local
Exchange Companies
(ILECs, see Note 5).. 2% 14% 37% 37%
Suppliers (percent of
operating costs):
Largest supplier...... 58 54 44 50
Next largest supplier. 9 11 9 7
</TABLE>
F-11
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The largest supplier is also the largest ILEC, as shown above in the
concentration of revenues. See Note 8 for revenues from related parties.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates. See
Note 1 for assumptions used for Predecessor financial reporting.
Regulation and Competition
Rates charged by the Company for certain telephone services are subject to
the approval of various regulatory authorities. Trends in the
telecommunications industry point toward increased competition in virtually all
markets and the continued deregulation or alternative regulation of
telecommunications services in many jurisdictions.
Revenue Recognition
Except for certain billings under dispute with two significant ILEC's as
described in Note 5, the Company recognizes revenues for telecommunications
services when service is provided. Revenues from the sale of telecommunications
products are recognized upon installation, or if no installation is required,
upon shipment. Initial non-recurring revenues from the installation of
telecommunication products are recognized upon completion of installation to
the extent of direct costs incurred. Any initial non-recurring installation
revenue in excess of direct costs is deferred and amortized over the expected
service contract period, generally two years or less.
Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
Inventories
Inventories consist of telephone equipment, parts and installation
materials, which are valued at the lower of cost or market. Cost is determined
by the average-cost method. Provision is made to reduce slow moving inventory
to reflect its estimated net realizable value.
Other Comprehensive Income
There were no items of other comprehensive income in any period presented.
Segment Reporting
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
As an integrated telecommunications provider, the Company has one reportable
operating segment. While the Company's chief decision-maker monitors the
revenue streams of various services, operations are managed and financial
performance is evaluated based upon the delivery of multiple services over
common networks and facilities. This allows the Company to leverage its costs
in an effort to maximize return. As a result, there are many shared expenses
generated by the various revenue streams; because management believes that any
allocation of the expenses to multiple revenue streams would be impractical and
arbitrary, management does not currently make such allocations internally. The
chief decision-maker does however, monitor revenues streams at a more detailed
level than those depicted in the Company's historical general purpose financial
statements.
F-12
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Specifically, the following table presents revenues by service type:
<TABLE>
<CAPTION>
Pac-West Telecomm, Inc.
--------------------------------------------
Period from Date of
Commencement Year Ended Year Ended
(October 1, 1996) to December December
December 31, 1996 31, 1997 31, 1998
-------------------- ----------- -----------
<S> <C> <C> <C>
Local services.............. $1,515,000 $17,810,000 $28,147,000
Long distance services...... 1,223,000 5,133,000 6,328,000
Dedicated transport
services................... 651,000 3,312,000 4,155,000
Product and services........ 577,000 2,073,000 2,104,000
Other....................... 266,000 1,223,000 1,477,000
---------- ----------- -----------
$4,232,000 $29,551,000 $42,211,000
========== =========== ===========
</TABLE>
Reclassifications
Certain reclassifications have been made to the Company's comparative
financial statements to conform to the current year presentation.
Equipment, Vehicles and Leasehold Improvements
Equipment, vehicles and leasehold improvements transferred to the Company
are stated at the net book value on the date of the Initial Transfer.
Subsequent additions are stated at cost. Equipment includes assets acquired
under capital leases. Expenditures for maintenance are charged to expense as
incurred. Upon retirement, the asset cost and the related accumulated
depreciation are removed from the accounts. Gains and losses associated with
dispositions of equipment, vehicles and leasehold improvements are reflected as
a component of other income, net in the accompanying statements of operations.
Equipment, vehicles and leasehold improvements from the Initial Transfer are
depreciated or amortized over their remaining useful lives as of the date of
the Initial Transfer. For subsequent additions including assets acquired under
capital leases, depreciation and amortization is computed using the straight-
line method based on the following estimated useful lives:
<TABLE>
<C> <S>
Equipment........................ 3 to 7 years
Vehicles......................... 5 years
Leasehold improvements........... 10 years or life of lease, whichever
is shorter
</TABLE>
The Company capitalizes interest on self-constructed capital projects when
construction involves considerable time and major expenditures. Such interest
is capitalized as part of the cost of the equipment and leasehold improvement
and is amortized over the remaining life of the assets. Interest is capitalized
based on rates for borrowings that are outstanding over the period required to
complete the asset. In 1998, the Company capitalized $303,000 of interest
related to the construction of assets. Capitalizable interest in all other
periods presented was insignificant.
Depreciation and amortization of equipment, vehicles and leasehold
improvements was $299,000, $2,204,000 and $4,106,000, for the period from
commencement (October 1, 1996) to December 31, 1996, and for the years ended
December 31, 1997 and 1998, respectively. Depreciation and amortization of
equipment, vehicles and leasehold improvements was $549,000 for the
Predecessor's nine-month period ended September 30, 1996.
F-13
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred Financing Costs, Net
Deferred financing costs, net consist of capitalized amounts for bank
financing fees, professional fees, and other expenses related to the senior
secured borrowings obtained on September 16, 1998 (see Note 3). Amortization is
computed using the straight-line method over the term of the borrowings through
January 29, 1999. Amortization expense for the year ended December 31, 1998,
was $1,438,000 and is included within interest expense in the accompanying
statements of operations.
Other Assets
At December 31, 1998, other assets consist primarily of deferred financing
costs of $1,195,000 associated with the Company's subsequent issuance of senior
notes (see Note 11) and the long-term portion of covenants not to compete of
$150,000. Upon issuance of the senior notes, the deferred financing costs will
be amortized over the estimated maturity of the debt of 10 years.
Other Accrued Liabilities
Other accrued liabilities include approximately $424,000 and $1,018,000 as
of December 31, 1997 and 1998, respectively, of amounts collected from
customers for taxes due to various governmental and regulatory authorities.
Supplemental Statements of Cash Flow Information
<TABLE>
<CAPTION>
Predecessor
(Note 1) Pac-West Telecomm, Inc.
------------- ---------------------------------------------
Period from Date of
Nine-Month Commencement
Period Ended (October 1, 1996) Year Ended Year Ended
September 30, to December 31, December 31, December 31,
1996 1996 1997 1998
------------- ------------------- ------------ ------------
<S> <C> <C> <C> <C>
Cash paid during the
period for:
Interest (net of
amounts capitalized). $ 33,000 $ 101,000 $ 924,000 $ 2,565,000
Income taxes.......... 145,000 0 2,351,000 2,195,000
Supplemental disclosure
of non-cash
transactions:
Acquisition of fixed
assets using capital
lease obligations.... 844,000 2,217,000 4,781,000 290,000
Issuance of the
Preferred Stock in
conjunction with the
Transaction.......... 0 0 0 13,156,000
Refinancing of capital
lease obligation with
note payable......... 0 0 0 1,599,000
</TABLE>
Income Taxes
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying the applicable statutory
tax rate to the differences between the financial statement carrying amounts
and the tax basis of existing assets and liabilities. Under SFAS No. 109, the
effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date based on the applicable tax rate.
F-14
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and for Hedging Activities," effective
for fiscal years beginning after June 15, 1999. Management does not expect
adoption of SFAS No. 133 in future periods to have a significant impact on the
Company's financial statements.
Income (Loss) Per Share
Income (loss) per share has been calculated under SFAS No. 128, "Earnings
per Share." SFAS No. 128 requires companies to compute income (loss) per share
under two methods (basic and diluted). Basic net income (loss) per share is
calculated by dividing net income (loss) by the weighted average shares of
common stock outstanding during the period. Diluted net income (loss) per share
information is presented in the accompanying statements of operations as being
the same as basic net income (loss) per share information since the impact of
the issuance of potential common shares from the conversion of preferred stock
and from the exercise of common stock options is antidilutive. The Company
evaluated the requirements of the Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 98 and concluded that there are no nominal
issuances of common stock or potential common stock which would be required to
be shown as outstanding for all periods presented herein as outlined in SAB No.
98.
Net income (loss) applicable to common stockholders has been calculated as
follows:
<TABLE>
<CAPTION>
Period from Date of
Commencement
(October 1, 1996) to Year Ended Year Ended
December 31, 1996 December 31, 1997 December 31, 1998
-------------------- ----------------- -----------------
<S> <C> <C> <C>
Net income (loss)....... $140,000 $4,495,000 $ (667,000)
Accrued preferred stock
dividends.............. 0 0 (1,324,000)
-------- ---------- -----------
Net income (loss)
applicable to common
stockholders........... $140,000 $4,495,000 $(1,991,000)
======== ========== ===========
</TABLE>
3. Senior Secured Borrowings:
On September 16, 1998, concurrent with the Transaction discussed in Note 1,
the Company entered into a senior secured borrowing agreement with several
financial institutions allowing for borrowings up to $100,000,000. The
outstanding balance under this agreement was due at the earlier of the
completion of a high-yield debt offering (see Note 11) or March 16, 1999, with
interest due monthly, bearing interest at a floating rate equal to, at the
Company's option, the base rate (defined as the higher of (a) 0.5 percent above
the latest Federal Funds Rate; and (b) the rate of interest in effect as
publicly announced by the principal lender as its "reference rate"), or the
offshore rate (as defined in the senior secured borrowings agreement) plus 2.0
percent. As of December 31, 1998, the Company had elected to utilize the
offshore rate, which was 8.625 percent, including the additional 2.0 percent.
The borrowings were secured by substantially all assets of the Company. The
Company was subject to certain covenants, which included limitations on
additional debt, restrictions on the payment of dividends and maintenance of
certain interest coverage requirements.
At December 31, 1998, the Company had senior secured borrowings outstanding
of $91,000,000 and other obligations of $9,000,000. The $9,000,000 of other
obligations related to equipment purchases incurred as of December 31, 1998,
which were subsequently financed through additional senior secured borrowings
(see Note 5).
F-15
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
On January 29, 1999, the Company paid off all outstanding senior secured
borrowings and accrued interest through the issuance of a high-yield debt
offering due February 1, 2009 (see Note 11). As a result of the subsequent
refinancing, the senior secured borrowings and other obligations have been
classified as long-term debt and other long-term obligations in the
accompanying balance sheet as of December 31, 1998.
4. Notes Payable, Extraordinary Item and Line of Credit:
Notes Payable
Notes payable consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------- ---------
<S> <C> <C>
Contracts payable to banks and finance companies for
equipment, requiring monthly principal and interest
payments of $1,474 to $69,921 at interest rates
from 8.6 percent to 9.6 percent, due through June
2003, repaid in full in September 1998............. $ 8,454,000 $ 0
Contracts payable to banks and finance companies for
vehicles, requiring monthly principal and interest
payments of $355 to $1,510 at interest rates from
0.9 percent to 8.3 percent due through June 2001... 207,000 248,000
----------- ---------
8,661,000 248,000
Less: Current portion............................... (2,034,000) (132,000)
----------- ---------
$ 6,627,000 $ 116,000
=========== =========
</TABLE>
Notes payable are secured by all of the Company's owned equipment and
vehicles. Aggregate future principal payments by year on notes payable are as
follows:
<TABLE>
<S> <C>
1999............................ $132,000
2000............................ 99,000
2001............................ 17,000
--------
$248,000
========
</TABLE>
Extraordinary Item--Loss on Early Extinguishment of Debt
In conjunction with the Transaction (see Note 1) and the receipt of the
senior secured borrowings during 1998, as discussed in Note 3, the Company
repaid amounts outstanding under notes payable and capital leases for
equipment. The resulting loss from the early extinguishment of the debt of
$695,000, less the applicable income tax benefit of $278,000, has been
reflected as an extraordinary item in the accompanying statements of
operations.
Line of Credit
The Company maintained a credit agreement with a bank that provided for a
line of credit with a maximum borrowing limit of $2,500,000. The credit
agreement and related security agreement contained various restrictive
covenants, including restrictions on the incurrence of new liens and long-term
indebtedness except for the financing of new equipment, the payment of
dividends, the entering into business combinations or mergers, and requirements
to maintain certain financial ratios. For the years ended December 31, 1997 and
1998, no amounts were borrowed under this line of credit. During 1998, the
Company terminated the line of credit.
F-16
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Commitments and Contingencies:
Leases
The Company leases its four principal facilities in Stockton, Oakland, Los
Angeles and Las Vegas pursuant to noncancelable operating leases that expire in
2002, 2003, 2006 and 2009, respectively. The lease expiring in 2002 also
contains five two-year renewal options. The leases expiring in 2003, 2006 and
2009 also contain two five-year renewal options. Prior to September 16, 1998,
the Company leased certain equipment under capital leases that were repaid in
connection with the Transaction (see Note 1). The Company also leases telephone
equipment and telephone circuits on both a month-to-month basis, as well as
under annual and long-term noncancellable leases. Management of the Company
expects that these leases will be renewed or replaced by other leases in the
normal course of business.
The Company's future minimum lease payments with initial terms in excess of
one year for the years ending December 31 are as follows:
<TABLE>
<CAPTION>
Operating Leases
----------------------
Telephone
Circuits
and
Space Equipment
---------- -----------
<S> <C> <C>
1999............................................... $ 947,000 $ 4,516,000
2000............................................... 908,000 4,114,000
2001............................................... 907,000 3,982,000
2002............................................... 768,000 2,456,000
2003............................................... 640,000 599,000
2004 and thereafter................................ 1,911,000 0
---------- -----------
$6,081,000 $15,667,000
========== ===========
</TABLE>
Rental expense charged to operations for the period from commencement
(October 1, 1996) to December 31, 1996, and for the years ended December 31,
1997 and 1998, for all operating leases for space was $76,000, $432,000 and
$650,000, respectively. Rental expense charged to operations by the Predecessor
for space for the nine-month period ended September 30, 1996 was $125,000.
Rental expense for space is included in selling, general and administrative
expense in the accompanying statements of operations. Rental expense charged to
operations for telephone circuits and equipment was approximately $1,000,000,
$6,000,000 and $9,935,000 for the period from commencement (October 1, 1996) to
December 31, 1996, and for the years ended December 31, 1997 and 1998,
respectively. Rental expense charged to operations by the Predecessor for
telephone circuits and equipment for the nine-month period ended September 30,
1996 was approximately $1,700,000. Rental expense for telephone circuits and
equipment is included in operating costs in the accompanying statements of
operations.
Rental expense paid to related parties was approximately $35,000 for the
year ended December 31, 1998 and $0 for all other periods presented.
Purchase Commitments
At December 31, 1998, the Company had commitments under various contracts
for the purchase of telephone switch equipment. The Company has recorded
$25,597,000 of construction-in-progress in the accompanying balance sheet as of
December 31, 1998, for equipment received prior to year-end but not yet
installed. This amount includes $9,000,000 of purchases that were subsequently
financed through the issuance of additional senior secured borrowings (see Note
3).
F-17
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In addition, at December 31, 1998, the Company had approximately $52,000,000
of purchase orders outstanding for telephone switching equipment due for
delivery during 1999 and 2000. These purchase orders are cancelable up to 60
days prior to delivery and are expected to be financed from proceeds received
from the senior notes (see Note 11) and from internally generated cash flows.
Employment Agreements
The Company has entered into employment agreements with certain key
executives that provide for minimum annual base salaries, bonus entitlements
upon the achievement of certain objectives, and the issuance of stock options.
These employment agreements, which were approved by the Company's
stockholders in 1998 in connection with the Transaction (see Note 1), granted
options to two executives to purchase up to 406,250 shares of the Company's
common stock. The exercise price of these options of $0.67 per share
approximated the fair market value of the Company's common stock at the date of
grant. These options vest over various dates through October 2001 and expire at
various dates through October 2008.
The Company accounted for the option grants under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and accordingly, no compensation
cost has been recognized in the accompanying financial statements as the option
exercise price approximated the estimated fair market value of the stock on the
date of grant.
Had compensation cost for the options been determined in accordance with
SFAS No. 123, "Accounting for Stock Based Compensation," the Company's pro
forma net loss would have increased $3,000 to $670,000 for the year ended
December 31, 1998. No options were exercisable at December 31, 1998. The
weighted average fair value of options granted during 1998 was $0.09 and the
weighted average contractual life remaining at December 31, 1998 was 9.8 years.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model, with the following weighted-average
assumptions used for grants during the year ended December 31, 1998: weighted
average risk-free interest rate of 5.0 percent; expected dividend yields of
0 percent; expected lives of two to three years; and expected volatility of 0
percent.
The employment agreements were effective as of or subsequent to the close of
the Transaction and have terms varying from one to three years; however, they
may be terminated by either party at an earlier date under certain
circumstances. As of December 31, 1998, the Company accrued approximately
$304,000 in accrued payroll and related expenses in the accompanying balance
sheet for bonuses payable under these agreements.
Revenue Recognition--Billings under Dispute
The Company has established interconnection agreements with certain
Incumbent Local Exchange Companies (ILECs) in California. The
Telecommunications Act of 1996 requires ILECs to enter into interconnection
agreements with Competitive Local Exchange Companies (CLECs, such as the
Company) and other competitors and requires state Public Utilities Commissions
(PUCs) to arbitrate such agreements.
The interconnection agreements outline, among other items, compensation
arrangements for calls originating or terminating in the other party's
switching equipment, payment terms, and level of services.
F-18
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Two ILECs with which the Company has interconnection agreements have
withheld payments from amounts billed by the Company under their agreements
during the years ended December 31, 1997 and 1998, as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Total amount billed to specified ILECs during the
year............................................. $14,858,000 $ 48,264,000
Amount withheld by specified ILECs and not
recorded as revenue in the Company's statements
of operations.................................... (3,793,000) (32,845,000)
Amounts received for prior withholding and
recorded as revenue.............................. 0 254,000
----------- ------------
Net amount recorded as revenue from the
specified ILECs during the year................ $11,065,000 $ 15,673,000
=========== ============
</TABLE>
The ILECs withheld no payments before August 1997. The first ILEC withheld
payment of 48 percent of the Company's August 1997 billing and continued to
withhold payments monthly, at declining percentages, including a withholding of
20 percent of the December 1997 billing. During 1998, this ILEC withheld an
average of 69 percent of amounts billed. The ILEC has indicated that it has
paid the withheld amounts into an escrow account pursuant to a dispute claim.
The other ILEC has withheld payments on 100 percent of the monthly amounts
billed by the Company for October 1997 through December 1997 and has withheld
an average of 59 percent of amounts billed during 1998. In 1998, this ILEC paid
$254,000 of amounts previously withheld from 1997 billings. This ILEC has made
no escrow payments.
Both ILECs have continued to withhold significant percentages of payments
during 1999.
The issue giving rise to the dispute, based on correspondence with the first
ILEC, relates to the classification of telephone calls entering the Company's
system and terminating to an ISP. Under the interconnection agreements, the
ILECs are obligated to pay the Company for calls originating in the ILECs'
systems and terminating in the Company's system. Local calls are the most
prevalent calls compensated for under the interconnection agreements.
The first ILEC filed a complaint with the Superior Court of the State of
California that outlined its opinion that Internet traffic calls made to an ISP
are not local calls (but rather interstate calls), and as such are not covered
by the interconnection agreement and are not subject to the jurisdiction of the
PUC. Management understands a similar position was taken by the other ILEC. The
Superior Court ordered this complaint stayed pending the California PUC's
(CPUC's) review of the issues raised by the complaint.
The first ILEC has requested (without specifying any particular monetary
claims) that the Company refund, with interest, all amounts previously paid to
the Company for Internet traffic calls. All revenues recognized from this ILEC
in the Company's financial statements since the Company's commencement,
including those amounts associated with ISP calls previously paid to the
Company, total $24,998,000, consisting of $10,533,000 and $13,861,000 for the
years ended December 31, 1997 and 1998, respectively. It is not possible for
the Company or for the ILECs (based on the Company's understanding of their
systems) to determine which calls to an ISP telephone number are then
connected, by way of the ISP's equipment, on to the Internet network.
Accordingly, it is not possible to identify amounts specifically billed to or
paid by the ILECs for calls actually connected, by way of the ISP's equipment,
on to the Internet network.
Management, after consultation with its regulatory attorneys, believes that
calls originated in the ILECs' systems and terminated in the Company's system
at an ISP, including all calls actually connected by way of the
F-19
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
ISP's equipment on to the Internet network, are local calls, and, accordingly,
the Company is entitled to compensation pursuant to its interconnection
agreements with the ILECs. Further, the Company believes decisions and actions
taken by PUCs of various states, including California, support the Company's
position. As a result, no amounts have been accrued for in the Company's
financial statements for any potential refunds of any amounts previously
received from these ILECs. In October 1998, the CPUC issued a decision
supporting the Company's position that local telephone calls placed to ISPs
terminate at the ISP and, therefore, are local calls entitled to reciprocal
compensation. Subsequent to this decision, the ILEC involved in this complaint
filed an Application for Rehearing of the above decision. In addition, in
February 1999, the Federal Communications Commission (FCC) issued a Declaratory
Ruling on the issue of reciprocal compensation for calls bound to ISP's. The
FCC ruled that these calls are jurisdictionally interstate calls. The FCC,
however, determined that this issue did not resolve the question of whether
reciprocal compensation is owed. The FCC noted a number of factors that would
allow the state PUC's to leave their decisions requiring the payment of
compensation undisturbed. The Company cannot predict the impact of the FCC's
ruling on existing state decisions, or the outcome of pending appeals or on
additional cases in this matter. Given the uncertainty concerning the final
outcome of the CPUC proceedings, the possibility of future extended appeals or
additional litigation, and future decisions by the FCC, management continues to
record the revenue associated with reciprocal compensation billings to the two
ILECs discussed above on a cash-received basis.
6. Stockholders' Equity:
Common Stock
Pursuant to the Transaction, the stockholders of the Company entered into a
Shareholders' Agreement that provides for, among other things, the election of
certain individuals as Directors of the Company, restrictions on transfers,
rights of first-offer, and participation rights in any shares of Preferred
Stock or common stock. Under this agreement, the Company has agreed not to
issue or sell additional shares of common stock prior to an initial public
offering, unless certain parties to the Shareholders' Agreement are given the
opportunity to subscribe for and purchase their pro rata portion of the
additional shares at the same price and same terms.
The stockholders of the Company also entered into a Registration Agreement,
whereby at any time prior to September 26, 2001, a certain stockholder may
request the Company grant holders of its common stock the right to purchase a
certain number of shares of the Company's common stock (the Rights Offering).
Within a certain period after the Rights Offering closes, the Company's
stockholders may request that the Company register all or any portion of the
stockholders' common stock in the Company with the Securities and Exchange
Commission (SEC), when the offering value of the Company's securities in an
initial public offering is at least $25,000,000.
Convertible Redeemable Preferred Stock
On September 16, 1998, the Company, as discussed in Note 1, amended and
restated its articles of incorporation to allow for the issuance of the
1,750,000 shares of nonvoting $0.001 par value Preferred Stock. The Preferred
Stock has preference over common stock in liquidation equal to the liquidation
value of $36 per share, plus accrued dividends computed at a 10 percent rate,
compounded quarterly (the Preference Amount). After payment of the Preference
Amount, the Preferred Stock and the common stock share ratably in any
distribution by the Company. At December 31, 1998, $1,324,000 (or $1.059 per
outstanding share of Preferred Stock) is accrued for cumulative preferred
dividends.
The holders of a majority of the outstanding Preferred Stock have the right
to convert all of the outstanding Preferred Stock into shares of common stock
in connection with the consummation of a public
F-20
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
offering of debt or equity securities or rights to acquire any debt or equity
securities of the Company offered to the public (a Public Offering).
Additionally, any holder of at least 5 percent of the outstanding Preferred
Stock may convert its shares of Preferred Stock to shares of common stock in
connection with a Public Offering. Each share of Preferred Stock will be
convertible into a number of shares of common stock determined by dividing the
Preference Amount by the initial Public Offering price of the common stock.
The Company is required to redeem at the request of a majority of the
holders in the event of a Public Offering or after December 31, 2003, all of
the Preferred Stock outstanding. In addition, any 5 percent holder may require
the Company to redeem its shares of Preferred Stock with the net proceeds of a
Public Offering at a redemption price equal to 100 percent of the liquidation
preference thereof, plus accumulated and unpaid dividends at the date of
redemption.
7. Income Taxes:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Pac-West Telecomm, Inc.
----------------------------------------------
Period from Date of
Commencement Year Ended Year Ended
(October 1, 1996) to December 31, December 31,
December 31, 1996 1997 1998
-------------------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal.................. $ 0 $1,783,000 $ 353,000
State.................... 1,000 503,000 245,000
Deferred:
Federal.................. 76,000 546,000 861,000
State.................... 17,000 165,000 102,000
------- ---------- ----------
$94,000 $2,997,000 $1,561,000
======= ========== ==========
</TABLE>
The provision for income taxes for the nine-month period of the Predecessor
has been calculated using the Company's overall effective tax rate for the
period from commencement (October 1, 1996) to December 31, 1996. In conjunction
with the Initial Transfer, CalPage assumed various liabilities of the
Predecessor including deferred taxes of $280,000 at September 30, 1996.
F-21
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company's provision for income tax differed from the amount computed by
applying the statutory federal income tax rate to income before income taxes
and extraordinary item, as follows:
<TABLE>
<CAPTION>
Predecessor
(Note 1) Pac-West Telecomm, Inc.
------------- ---------------------------------------------
Period from Date of
Nine-Month Commencement
Period Ended (October 1, 1996) Year Ended Year Ended
September 30, to December 31, December 31, December 31,
1996 1996 1997 1998
------------- ------------------- ------------ ------------
<S> <C> <C> <C> <C>
Income tax determined by
applying the statutory federal
income tax rate to income
before income taxes and
extraordinary item............. $294,000 $79,000 $2,547,000 $ 446,000
State income taxes, net of
federal income tax benefit..... 51,000 15,000 450,000 230,000
Federal income tax effect of
nondeductible costs related to
the Transaction (see Note 1)... 0 0 0 885,000
-------- ------- ---------- ----------
Provision for income taxes...... $345,000 $94,000 $2,997,000 $1,561,000
======== ======= ========== ==========
</TABLE>
The cumulative balance sheet effects of deferred tax items are:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Trade accounts receivable allowances.............. $ 129,000 $ 171,000
Vacation and other accrued expenses............... 26,000 76,000
Inventory reserves................................ 46,000 46,000
Tax credits....................................... 0 876,000
State taxes....................................... 250,000 163,000
----------- -----------
Deferred tax assets............................. 451,000 1,332,000
----------- -----------
Depreciation...................................... (1,097,000) (2,834,000)
Capitalized interest.............................. 0 (130,000)
Prepaid expenses and other........................ (128,000) (105,000)
----------- -----------
Deferred tax liabilities........................ (1,225,000) (3,069,000)
----------- -----------
Net deferred tax liability........................ (774,000) (1,737,000)
Less: Amounts classified as current deferred tax
assets........................................... 160,000 151,000
----------- -----------
Net noncurrent deferred tax liability........... $ (934,000) $(1,888,000)
=========== ===========
</TABLE>
Tax credits of $876,000, shown above, represent tax credits associated with
the payment of Alternative Minimum Tax (AMT) arising in 1998. Such credits,
which do not expire, may be used to offset future income taxes payable.
8. Related-Party Transactions:
Loans Payable to Officers and Stockholder
The Predecessor and the Company had loans payable to certain former officers
and a stockholder of the Company. The loans payable bore interest at 9.5
percent to 10.0 percent and did not contain specified
F-22
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
repayment terms. Interest expense related to these loans was $4,000 and $7,000,
for the period from commencement (October 1, 1996) to December 31, 1996, and
for the year ended December 31, 1997, respectively. Interest expense related to
these loans was $14,000 for the Predecessor's nine-month period ended September
30, 1996. The principal and related accrued interest were paid in full for all
such loans during 1997.
Bay Alarm Company (Bay Alarm)
Bay Alarm (a major stockholder of the Company) and its subsidiary, InReach
Internet, LLC, are collectively one of the Company's largest customers of
telephone network services, comprising approximately $396,000, $2,109,000, and
$2,680,000, or 9.4 percent, 7.1 percent and 6.4 percent of the Company's
revenues for the three-month period from commencement (October 1, 1996) to
December 31, 1996, and for the years ended December 31, 1997 and 1998,
respectively. Revenues from Bay Alarm and InReach Internet LLC comprised
approximately $891,000, or 10.2 percent of the Predecessor's revenues for the
nine-month period ended September 30, 1996.
The Company also had amounts due from Bay Alarm as of December 31, 1997 and
1998. These amounts are included in accounts receivable from related parties in
the accompanying balance sheets. The Company owed Bay Alarm $850,000 at the
date of commencement (October 1, 1996) related to debt assumed from the Initial
Transfer. This amount was repaid in full by December 31, 1996.
Bay Alarm provides the Company with security monitoring services at its
normal commercial rates. The Company has recorded $10,000, $48,000 and $58,000
as selling, general and administrative expense for these services for the
three-month period from commencement (October 1, 1996) to December 31, 1996,
and for the years ended December 31, 1997 and 1998, respectively. The
Predecessor recorded approximately $11,000 as selling, general and
administrative expense for services received from Bay Alarm for the nine-month
period ended September 30, 1996.
As outlined in Note 5, Leases, the company began leasing its facility in
Oakland from Bay Alarm during 1998. In addition to rent paid under this lease,
the company recorded selling, general and administrative expense of $59,000 for
the year ended 1998 for related utility charges.
Notes Receivable from Stockholders
In 1998, in connection with the Transaction, a stockholder of the Company,
who is also an officer, purchased 375,000 shares of common stock from the
Company for $250,000. The Company received $50,000 in cash from the stockholder
and entered into a note receivable for the remaining balance of $200,000.
Subsequent to the Transaction, another officer of the Company acquired 62,470
shares of common stock for $42,000. The Company received $9,000 in cash and
entered into a note receivable for the remaining $33,000 due from the officer.
The notes accrue interest at 5.54 percent and 5.12 percent, respectively,
compounded annually, with any unpaid accrued interest and principal due at the
earlier of (1) the sale of the above stock with proceeds received first applied
to unpaid interest, then to principal; (2) sale of the Company; (3) 60 days
from the date the stockholder is no longer an employee of the Company or a
subsidiary; or (4) September 16, 2003 and October 16, 2003, respectively.
9. Retirement Plan:
In October 1996, the Company adopted a 401(k) retirement plan (the Plan) for
all full-time employees who have completed six months of service. The plan year
is from January 1 to December 31, and the Company will contribute $0.50 for
every $1.00 contributed by the employee, subject to the Company's contribution
not
F-23
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
exceeding 3 percent of the employee's salary. Participants become fully vested
after six years of service, although they vest incrementally on an annual basis
after two years of service and until the six-year period is completed. The
Company recorded selling, general and administrative expense of $63,000 and
$58,000 for the years ended December 31, 1997 and 1998, respectively, for the
Company's matching contributions.
Employees of the Company previously contributing to the CalPage 401(k)
retirement plan (with identical provisions to the Plan) were able to roll their
accumulated benefits into the Plan at date of commencement (October 1, 1996),
with all prior employer contributions becoming fully vested on the date of
rollover.
10. Sale of Answering Service Division:
In March 1997, the Company sold the customer base and other assets of its
answering service division for $420,000, payable $200,000 in cash and a
promissory note of $220,000. The promissory note was paid in October 1997 at a
discount of $18,000. The Company recognized a net gain of $385,000 on the sale
in the year ended December 31, 1997.
11. Subsequent Events:
On January 29, 1999, the Company issued $150,000,000 of senior unsecured
ten-year notes (the Senior Notes) at par. The Senior Notes bear interest at
13.5 percent payable in semiannual installments, with principal due on February
1, 2009.
Proceeds of the Senior Notes were used to repay the senior secured
borrowings (see Note 3) and to establish an interest reserve account to cover
certain initial interest payments due under the Senior Notes.
The Senior Notes carry provisions that allow the Company, at its option, to
(i) redeem up to 35 percent of the notes with proceeds of certain public
offerings of equity prior to February 1, 2002, (ii) redeem all or part of the
notes at specified prices on or after February 1, 2004, or (iii) offer to
exchange the notes within 180 days from the issue date for a new issue of
identical debt securities registered under the Securities Act of 1933, as
amended (the Securities Act). The Company intends to register these notes under
the Securities Act during the first six months of 1999.
Basic covenants of these notes restrict the Company's future ability to pay
dividends, repurchase stock, pledge or sell assets as security for other
transactions, or engage in mergers and business combinations. The covenants
allow the Company to incur additional debt subject to various limitations.
In January 1999, the Company's Board of Directors approved the terms of the
1999 Employee Stock Option Plan (the 1999 Stock Plan) pursuant to which
qualified employees and members of the Board of Directors can be issued options
to purchase the Company's common stock at the fair market value at the date of
grant. An aggregate of 2,250,000 shares of common stock have been reserved for
option grants under the 1999 Stock Plan.
12. Ten-for-One Stock Split:
On March 19, 1999, the board of directors authorized a ten-for-one split of
the Company's authorized and outstanding common stock and Preferred Stock. All
share and per share data have been restated to reflect the ten-for-one split.
F-24
<PAGE>
PAC-WEST TELECOMM, INC.
INTERIM CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
------
June 30,
1999
------------
<S> <C>
Current Assets:
Cash and cash equivalents...................................... $ 38,886,000
Restricted cash................................................ 20,066,000
Trade accounts receivable, net of allowance for doubtful
accounts of $463,000.......................................... 5,107,000
Accounts receivable from related parties....................... 68,000
Income taxes receivable........................................ 374,000
Inventories.................................................... 629,000
Prepaid expenses and other current assets...................... 862,000
Deferred financing costs, net.................................. 600,000
Deferred tax assets............................................ 1,640,000
------------
Total current assets......................................... 68,232,000
Equipment, Vehicles and Leasehold Improvements, net.............. 76,010,000
Deferred Financing Costs, net.................................... 5,692,000
Other Assets..................................................... 274,000
------------
Total assets................................................. $150,208,000
============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C>
Current Liabilities:
Current portion of notes payable............................... $ 114,000
Accounts payable............................................... 11,936,000
Accrued payroll and related expenses........................... 915,000
Accrued interest on Senior Notes............................... 8,547,000
Other accrued liabilities...................................... 2,077,000
------------
Total current liabilities.................................... 23,589,000
Senior Notes and Other Long-Term Debt............................ 150,062,000
Deferred Income Taxes............................................ 3,542,000
------------
Total liabilities............................................ 177,193,000
------------
Commitment and Contingencies
Convertible Redeemable Preferred Stock, $0.001 par value;
1,750,000 shares authorized; 1,250,000 issued and outstanding
(preference in liquidation of $45,000,000, plus accrued
cumulative dividends of $3,649,000)............................. 48,649,000
Stockholders' Equity (Deficit):
Common stock, $0.001 par value, 15,000,000 shares authorized
and 12,562,470 shares issued and outstanding.................. 13,000
Additional paid-in capital..................................... 6,585,000
Notes receivable from stockholders............................. (233,000)
Retained earnings (deficit).................................... (81,999,000)
------------
Total stockholders' equity (deficit)......................... (75,634,000)
------------
Total liabilities and stockholders' equity (deficit)......... $150,208,000
============
</TABLE>
See notes to the interim condensed financial statements.
F-25
<PAGE>
PAC-WEST TELECOMM, INC.
INTERIM CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended Six Month Period Ended
--------------------------- ---------------------------
June 30, 1998 June 30, 1999 June 30, 1998 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................ $9,680,000 $15,848,000 $19,932,000 $30,264,000
---------- ----------- ----------- -----------
Costs and Expenses:
Operating............. 4,060,000 4,691,000 7,791,000 8,753,000
Selling, general and
administrative....... 2,217,000 5,260,000 4,219,000 9,563,000
Depreciation and
amortization......... 856,000 1,843,000 1,701,000 3,292,000
---------- ----------- ----------- -----------
Total costs and
expenses........... 7,133,000 11,794,000 13,711,000 21,608,000
---------- ----------- ----------- -----------
Income from
operations......... 2,547,000 4,054,000 6,221,000 8,656,000
Other Expense (Income):
Interest expense...... 409,000 4,452,000 786,000 8,502,000
Interest income....... (80,000) (658,000) (128,000) (1,185,000)
Cost of merger with
PWT Acquisition Corp.
and recapitalization. 58,000 -- 81,000 --
---------- ----------- ----------- -----------
Total other expense,
net................ 387,000 3,794,000 739,000 7,317,000
---------- ----------- ----------- -----------
Income before
provision for
income taxes....... 2,160,000 260,000 5,482,000 1,339,000
Provision for Income
Taxes.................. 864,000 103,000 2,193,000 535,000
---------- ----------- ----------- -----------
Net income.......... $1,296,000 $ 157,000 $ 3,289,000 $ 804,000
========== =========== =========== ===========
Accrued preferred stock
dividends.............. -- (1,183,000) -- (2,325,000)
---------- ----------- ----------- -----------
Net income (loss)
applicable to common
stockholders........... $1,296,000 $(1,026,000) $ 3,289,000 $(1,521,000)
========== =========== =========== ===========
Basic and diluted net
income (loss) per
share.................. $ 12.96 $ (0.08) $ 32.89 $ (0.12)
========== =========== =========== ===========
Basic and diluted
weighted average shares
outstanding............ 100,000 12,562,470 100,000 12,562,470
========== =========== =========== ===========
</TABLE>
See notes to the interim condensed financial statements.
F-26
<PAGE>
PAC-WEST TELECOMM, INC.
INTERIM CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Month Period Ended
---------------------------
June 30, 1998 June 30, 1999
------------- -------------
<S> <C> <C>
Operating Activities:
Net income...................................... $ 3,289,000 $ 804,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 1,701,000 3,292,000
Amortization of deferred financing costs...... -- 775,000
Interest earned on restricted cash............ -- (370,000)
Provision for doubtful accounts............... 6,000 63,000
Deferred income taxes provision............... 517,000 165,000
Changes in operating assets and liabilities:
Accounts receivable......................... 768,000 (551,000)
Income taxes receivable..................... -- 1,597,000
Inventories................................. (28,000) (182,000)
Prepaid expenses and other current assets... (738,000) (1,000)
Other assets................................ (4,000) (180,000)
Accounts payable and accrued liabilities.... 1,876,000 6,782,000
Accrued interest on Senior Notes............ -- 8,547,000
----------- -------------
Net cash provided by operating activities. 7,387,000 20,741,000
----------- -------------
Investing Activities:
Purchase of equipment, vehicles and leasehold
improvements................................... (7,520,000) (21,908,000)
Purchase of investments (classified as
restricted cash)............................... -- (19,696,000)
Proceeds from disposal of equipment............. 87,000 --
----------- -------------
Cash used in investing activities......... (7,433,000) (41,604,000)
----------- -------------
Financing Activities:
Proceeds from issuance of Senior Notes.......... -- 150,000,000
Payments for financing costs.................... -- (5,415,000)
Repayment of senior secured borrowings.......... -- (100,000,000)
Borrowings under notes payable and capital
leases......................................... 5,723,000 --
Principal payments on notes payable and capital
leases......................................... (2,705,000) (72,000)
----------- -------------
Net cash provided by financing activities. 3,018,000 44,513,000
----------- -------------
Net increase in cash and cash equivalents. 2,972,000 23,650,000
Cash and Cash Equivalents:
Beginning of period............................. 3,603,000 15,236,000
----------- -------------
End of period................................... $ 6,575,000 $ 38,886,000
=========== =============
</TABLE>
See notes to the interim condensed financial statements.
F-27
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited interim condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, considered necessary for a
fair presentation for the periods indicated have been included. Operating
results for the six month period ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. These unaudited interim condensed financial statements should be read in
conjunction with the audited financial statements and the notes thereto of Pac-
West Telecomm, Inc. (the Company) as of and for the year ended December 31,
1998.
2. Restricted Cash:
Restricted cash represents short-term investments deposited in an interest
reserve trust account to fund initial interest payments due through February 1,
2000 under the $150,000,000 of Senior Notes.
3. Equipment, Vehicles and Leasehold Improvements:
Equipment, vehicles and leasehold improvements include network and other
communication equipment, office furniture and equipment, vehicles, leasehold
improvements and projects-in-progress. These assets are stated at cost, which
includes direct costs and capitalized interest, and are depreciated once placed
in service using the straight-line method. Capitalized interest of $0 and
$1,387,000 was recorded during the six month periods ended June 30, 1998 and
1999, respectively. Repair and maintenance costs are expensed as incurred.
Equipment, vehicles and leasehold improvements at June 30, 1999 consist of
the following:
<TABLE>
<S> <C>
Network and other communication equipment.................... $51,815,000
Office furniture and equipment............................... 2,567,000
Vehicles..................................................... 906,000
Leasehold improvements....................................... 7,834,000
Projects-in-progress......................................... 22,464,000
-----------
85,586,000
Less: Accumulated depreciation and amortization.............. (9,576,000)
-----------
Equipment, vehicles and leasehold improvements, net.......... $76,010,000
===========
</TABLE>
4. Deferred Financing Costs, Net:
Deferred financing costs, net consist primarily of capitalized amounts for
underwriter fees, professional fees and other expenses related to the issuance
of the $150,000,000 of Senior Notes. The deferred financing costs are being
amortized over the estimated 10-year term of the Notes beginning January 29,
1999. Amortization expense for the six month period ended June 30, 1999 was
$250,000, which is included in interest expense in the accompanying condensed
statements of income.
F-28
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
5. Income Taxes:
The provision for income taxes for the six month periods ended June 30, 1998
and 1999 consist of the income tax determined by applying the applicable
statutory federal income tax rate of 34% plus 6% for state income taxes net of
federal income tax benefit.
6. Senior Notes and Other Long-term Obligations:
Senior Notes and other long-term obligations at June 30, 1999 consist of the
following:
<TABLE>
<S> <C>
Senior Notes................................................ $150,000,000
Notes payable, less current portion......................... 62,000
------------
Total....................................................... $150,062,000
============
</TABLE>
On January 29, 1999, the Company issued $150,000,000 of Senior Notes at par.
The Senior Notes bear interest at 13.5 percent payable in semiannual
installments, with principal due on February 1, 2009.
Proceeds of the Senior Notes were used to repay $100,000,000 of senior
secured borrowings (including $9,000,000 of other long-term obligations
subsequently financed through senior secured borrowings) and to establish an
interest reserve account to cover interest payments due under the Senior Notes
through February 1, 2000.
The Senior Notes carry provisions that allow the Company, at its option, to
(i) redeem up to 35 percent of the notes with proceeds of certain public
offerings of equity prior to February 1, 2002, (ii) redeem all or part of the
notes at specified prices on or after February 1, 2004, or (iii) offer to
exchange the notes within 180 days from the issue date for a new issue of
identical debt securities registered under the Securities Act of 1933, as
amended (the Securities Act). The Company is in the process of registering
these notes under the Securities Act.
Basic covenants of these notes restrict the Company's future ability to pay
dividends, repurchase stock, pledge or sell assets as security for other
transactions, or engage in mergers and business combinations. The covenants
allow the Company to incur additional debt subject to various limitations.
The Company has a three-year senior credit facility that provides for
initial borrowings of $20.0 million and future borrowings of up to an
additional $20.0 million to finance working capital, the cost of the Company's
planned capital expansion and other corporate transactions. The borrowings are
secured by substantially all of the Company's assets. Borrowings under this
senior credit facility bear interest, at the Company's option, at (1) the Base
Rate (as defined) or (2) the LIBOR rate plus between 2.25% and 3.5%. As of June
30, 1999, there were no amounts outstanding under this facility and the
borrowing rate would have been approximately 8%. The credit facility requires
the Company to meet certain financial tests, including, without limitation,
maximum levels of debt as a ratio of EBITDA (as defined), minimum interest
coverage and maximum amount of capital expenditures. The credit facility
contains certain covenants which, among other things, limit the incurrence of
additional indebtedness, investments, dividends, transactions with affiliates,
asset sales, acquisitions, mergers and consolidations, prepayments of other
indebtedness (including the Senior Notes), liens and encumbrances and other
matters customarily restricted in such agreements.
F-29
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
7. Purchase Commitments:
At June 30, 1999, the Company had approximately $38,000,000 of purchase
orders outstanding for network equipment due for delivery during 1999 and 2000.
These purchase orders are cancelable without penalty up to 60 days prior to
delivery and are expected to be financed from proceeds received from the Senior
Notes (see Note 6) and from internally generated cash flows.
In addition, the Company is in the process of implementing a new billing and
operations support system. Total estimated costs for this system aggregate
approximately $15,000,000 of which approximately $7,500,000 is estimated to be
incurred in 1999, $6,000,000 in 2000, and $1,500,000 in 2001. Of the estimated
$7,500,000 costs to be incurred in 1999, $2,700,000 is recorded in projects-in-
progress at June 30, 1999.
8. Revenue Recognition:
Service revenues are recognized in the month in which the service is
provided, except for reciprocal compensation generated by calls placed to
Internet service providers connected through the Company's network. The rights
of CLECs (such as the Company) to receive this type of compensation is the
subject of numerous regulatory and legal challenges (see Note 12). Until this
issue is ultimately resolved, the Company will recognize this revenue on a
cash-received basis.
The two ILECs with which the Company has interconnection agreements have
withheld payments from amounts billed by the Company under their agreements
since August 1997. Amounts withheld during the six month periods ended June 30,
1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Six Month Period Ended
--------------------------
June June
30, 1998 30, 1999
------------ ------------
<S> <C> <C>
Total amount billed to specified ILECs....... $ 20,266,000 $ 41,022,000
Amount withheld by specified ILECs and not
recorded as revenue in the Company's
statements of operations.................... (12,912,000) (28,371,000)
------------ ------------
Net amount recorded as revenue from the
specified ILECs............................. $ 7,354,000 $ 12,651,000
============ ============
</TABLE>
The cumulative amount of reciprocal compensation withheld by the specified
ILECs and not recorded as revenue by the Company through June 30, 1999 is
$64,760,000.
9. Stockholders' Equity:
Ten-for-One Stock Split
On March 19, 1999, the board of directors authorized a ten-for-one split of
the Company's authorized and outstanding common stock and Preferred Stock. All
share and per share data have been restated to reflect the ten-for-one split.
Convertible Redeemable Preferred Stock
The Preferred Stock has preference over common stock in liquidation equal to
the liquidation value of $36 per share, plus accrued dividends computed at a 10
percent rate, compounded quarterly (the Preference
F-30
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Amount). After payment of the Preference Amount, the Preferred Stock and the
common stock share ratably in any distribution by the Company. At June 30,
1999, $3,649,000 (or $2.919 per outstanding share of Preferred Stock) is
accrued for cumulative preferred dividends.
Stock Options
In January 1999, the Company's Board of Directors approved the terms of the
1999 Stock Incentive Plan (the Plan) which authorizes the granting of stock
options, including restricted stock, stock appreciation rights, dividend
equivalent rights, performance units, performance shares or other similar
rights or benefits to employees, directors, consultants and advisors. Options
granted under the Plan have a term of ten years.
An aggregate of 2,250,000 shares of common stock have been reserved for
option grants. Options to purchase 623,750 shares of common stock were granted
and options to purchase 9,500 shares of common stock were canceled during the
six month period ended June 30, 1999.
The following table summarizes information about the Company's stock options
outstanding as of June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------
Number Number
Outstanding Weighted Average Exercisable
at June 30, Contractual Life Weighted Average at June 30, Weighted Average
1999 Remaining (Years) Exercise Price 1999 Exercise Price
----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
406,250 9.3 $0.67 250,000 $0.67
614,250 9.7 $3.00 -- --
--------- -------
1,020,500 9.5 $2.07 250,000 $0.67
========= =======
</TABLE>
10. Income (Loss) Per Share:
Diluted income (loss) per share information is presented in the accompanying
statements of income as being the same as basic income (loss) per share
information since the impact of the issuance of potential common shares from
the conversion of preferred stock and from the exercise of common stock options
is antidilutive.
11. Comprehensive Income:
In September 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes reporting and disclosure requirements for
comprehensive income and its components within the financial statements. There
were no items of other comprehensive income for the six month periods ended
June, 1998 and 1999; therefore comprehensive income is the same as net income
for both periods.
12. Legal Proceedings:
The Company is a party to the Pacific Bell and California Public Utility
Commission proceedings related to reciprocal compensation payment and other
interconnection agreement issues. See Note 8 to these condensed financial
statements and the Company's 1998 audited financial statements.
On June 24, 1999, the California Public Utilities Commission adopted a
decision in the arbitration proceeding between the Company and Pacific Bell
which held that reciprocal compensation would be payable for Internet service
provider calls under the new interconnection agreement with Pacific Bell, which
became
F-31
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
effective on June 29, 1999. Pacific Bell has requested a rehearing of this
decision, although Pacific Bell has paid the full amount of billings for calls
since the effective date of the new agreement. This decision does not address
reciprocal compensation withheld under the prior agreement and management does
not know at this time what action Pacific Bell will take with respect to the
amounts they have previously withheld.
13. Segment Reporting:
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
As an integrated telecommunications provider, the Company has one reportable
operating segment. While the Company's chief decision-maker monitors the
revenue streams of various services, operations are managed and financial
performance is evaluated based upon the delivery of multiple services over
common networks and facilities. This allows the Company to leverage its costs
in an effort to maximize return. As a result, there are many shared expenses
generated by the various revenue streams; because management believes that any
allocation of the expenses to multiple revenue streams would be impractical and
arbitrary, management does not currently make such allocations internally. The
chief decision-maker does however, monitor revenue streams at a more detailed
level than those depicted in the Company's historical general purpose financial
statements.
Specifically, the following table presents revenues by service type:
<TABLE>
<CAPTION>
Six Month Period Ended
-----------------------
June 30, June 30,
1998 1999
----------- -----------
<S> <C> <C>
Local services................................... $12,901,000 $22,812,000
Long distance services........................... 3,243,000 3,780,000
Dedicated transport services..................... 1,957,000 2,253,000
Product and services............................. 1,042,000 608,000
Other............................................ 789,000 811,000
----------- -----------
$19,932,000 $30,264,000
=========== ===========
</TABLE>
F-32
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this
prospectus. Neither Pac-West Telecomm, Inc. nor any underwriter has authorized
anyone to provide prospective investors different or additional information.
This prospectus is not an offer to sell nor is it seeking an offer to buy
these securities in any jurisdiction where the offer or sale is not permitted.
The information contained in this prospectus is accurate only as of the date
of this prospectus, regardless of the time of delivery of this prospectus or
of any sale of these securities.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe the restrictions of that jurisdiction
related to this offering and the distribution of this prospectus.
---------------
TABLE OF CONTENTS
---------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Directed Share Subscription Program....................................... 17
Capitalization............................................................ 18
Dilution.................................................................. 19
Selected Financial Data................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 33
Management................................................................ 52
Certain Relationships and Related Transactions............................ 59
Principal and Selling Shareholders........................................ 64
Description of Capital Stock.............................................. 67
Description of Indebtedness............................................... 69
Shares Eligible for Future Sale........................................... 71
Underwriting.............................................................. 72
Legal Matters............................................................. 76
Experts................................................................... 76
Where You Can Find More Information....................................... 76
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[PAC WEST TELECOMM, INC. LOGO]
Shares
Common Stock
---------------
PROSPECTUS
---------------
Bear, Stearns & Co. Inc.
Banc of America Securities LLC
First Union Capital Markets Corp.
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following is a statement of estimated expenses, to be paid solely by the
Company, of the issuance and distribution of the securities being registered:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $34,750
NASD filing fee.................................................. 13,000
Nasdaq National Market original listing fee...................... *
Blue Sky fees and expenses (including attorneys' fees and
expenses)....................................................... *
Printing expenses................................................ *
Accounting fees and expenses..................................... *
Transfer agent's fees and expenses............................... *
Legal fees and expenses.......................................... *
Miscellaneous expenses........................................... *
-------
Total........................................................ $ *
=======
</TABLE>
- --------
*To be provided by amendment.
Item 14. Indemnification of Directors and Officers.
We are incorporated under the laws of the State of California. Section 317
of the General Corporation Law of the State of California provides that a
California corporation may indemnify any person who is, or is threatened to be
made, party to any proceeding (other than an action by or in the right of the
corporation to procure a judgment in its favor) by reason of the fact that the
person is or was an agent of the corporation, against expenses, judgments,
fines, settlements, and other amounts actually and reasonably incurred in
connection with the proceeding if that person acted in good faith and in a
manner the person reasonably believed to be in the best interests of the
corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of the person was unlawful. A corporation has power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person is or was an agent of the corporation, against expenses actually and
reasonably incurred by that person in connection with the defense or settlement
of the action if the person acted in good faith, in a manner the person
believed to be in the best interests of the corporation and its shareholders.
Under Article IV of our Amended and Restated Articles of Incorporation and
Article VI of our Amended and Restated By-Laws, we will indemnify each person
who was or is made a party or is threatened to be made a party to or is
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she, is or
was a director or officer, of Pac-West or is or was serving at the request of
Pac-West as a director, officer, employee, fiduciary, or agent of another
corporation or of a partnership, joint venture, trust or other enterprise
including service with respect to employee benefit plans, whether the basis of
such action, suit or proceeding is alleged action in an official capacity as a
director, officer, employee, fiduciary or agent or in any other capacity while
serving as a director, officer, employee, fiduciary or agent, to the fullest
extent which we are empowered to do so by the General Corporation Law of the
State of California, as the same exists or may hereafter be amended against all
expense, liability and loss including attorneys' fees actually and reasonably
incurred by such person in connection with such action, suit or proceeding. We
may, by action of our board of directors, provide indemnification to our
employees and agents with the same scope and effect as the foregoing
indemnification of directors and officers. Such right of indemnification will
be a contract right and will not be exclusive of any other right which such
directors, officers or representatives may have or hereafter acquire under any
statute, our Certificate of Incorporation, our By-Laws, agreement, vote of
stockholders or disinterested directors or otherwise.
II-1
<PAGE>
In addition, Section 204 of the General Corporation Law of the State of
California allows a corporation to eliminate the personal liability of a
director of a corporation to the corporation or to any of its stockholders for
monetary damages for a breach of fiduciary duty as a director, provided,
however, that:
(A) such a provision may not eliminate or limit the liability of directors:
(1) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law;
(2) for acts or omissions that a director believes to be contrary to
the best interests of the corporation or its shareholders or that
involve the absence of good faith on the part of the director;
(3) for any transaction from which a director derived an improper
personal benefit;
(4) for acts or omissions that show a reckless disregard for the
director's duty to the corporation or its shareholders in
circumstances in which the director was aware, or should have been
aware, in the ordinary course of performing a director's duties, of
a risk of serious injury to the corporation or its shareholders;
(5) for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to
the corporation or its shareholders,
(6) under Section 310, or (7) under Section 316;
(B) no such provision will eliminate or limit the liability of a director
for any act or omission occurring prior to the date when the provision becomes
effective; and
(C) no such provision will eliminate or limit the liability of an officer
for any act or omission as an officer, notwithstanding that the officer is also
a director or that his or her actions, if negligent or improper, have been
ratified by the directors.
Article IV of our Amended and Restated Articles of Incorporation includes a
provision which eliminates directors' personal liability to the full extent
permitted under the General Corporation Law of the State of California.
We maintain a policy of directors and officers liability insurance covering
certain liabilities incurred by our directors and officers in connection with
the performance of their duties.
Item 15. Recent Sales of Unregistered Securities.
Pac-West has issued securities in the following transactions, each of which,
unless otherwise indicated, was intended to be exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) or Regulation D
thereunder. All share amounts described below are adjusted for our ten for one
stock split in March 1999.
On September 16, 1998, in connection with the recapitalization of Pac-West,
the preexisting investors, Mr. John K. La Rue and Bay Alarm Company received
approximately 80,395 shares of convertible redeemable preferred stock and
763,800 shares of common stock, and 285,038 shares of convertible redeemable
preferred stock and 2,707,900 shares of common stock, respectively. For the
purposes of the recapitalization, the aggregate value of the securities
received by Mr. La Rue and Bay Alarm Company was approximately $15.5 million.
II-2
<PAGE>
Also in connection with the recapitalization of Pac-West, investors in PWT
Acquisition Corp., a corporation newly formed to effect the recapitalization,
received convertible redeemable preferred stock and common stock in exchange
for securities issued by PWT Acquisition and purchased additional shares of
common stock. The amounts of securities acquired are set forth below:
. SCP Private Equity Partners, L.P. acquired 213,170 shares of convertible
redeemable preferred stock and 332,500 shares of common stock in exchange
for its interests in PWT Acquisition Corp. and purchased 1,662,500 shares
of common stock for a total purchase price of $1,136,900.
. William Blair Capital Partners VI, L.P. acquired 213,170 shares of
convertible redeemable preferred stock and 332,500 shares of common stock
in exchange for its interests in PWT Acquisition Corp. and purchased
1,662,500 shares of common stock for a total purchase price of
$1,136,900.
. Safeguard 98 Capital, L.P. acquired 213,170 shares of convertible
redeemable preferred stock and 332,500 shares of common stock in exchange
for its interests in PWT Acquisition Corp. and purchased 1,662,500 shares
of common stock for a total purchase price of $1,136,900.
. TL Ventures III L.P. acquired 153,133 shares of convertible redeemable
preferred stock and 238,850 shares of common stock in exchange for its
interests in PWT Acquisition Corp. and purchased 1,194,250 shares of
common stock for a total purchase price of $816,686.67.
. TL Ventures III Offshore L.P. acquired 32,054 shares of convertible
redeemable preferred stock and 50,000 shares of common stock in exchange
for its interests in PWT Acquisition Corp. and purchased 250,000 shares
of common stock for a total purchase price of $170,957.50.
. TL Ventures III Interfund L.P. acquired 5,000 shares of convertible
redeemable preferred stock and 7,800 shares of common stock in exchange
for its interests in PWT Acquisition Corp. and purchased 39,000 shares of
common stock for a total purchase price of $26,670.00.
. EnerTech Capital Partners, L.P. acquired 22,983 shares of convertible
redeemable preferred stock and 35,850 shares of common stock in exchange
for its interests in PWT Acquisition Corp. and purchased 179,250 shares
of common stock for a total purchase price of $122,585.83.
. BankAmerica Investment Corporation acquired 18,868 shares of convertible
redeemable preferred stock and 29,413.3 shares of common stock in
exchange for its interest in PWT Acquisition Corp. and purchased
147,066.70 shares of common stock for a total purchase price of
$100,626.67.
. MIG Partners VII acquired 4,717 shares of convertible redeemable
preferred stock and 7,353.3 shares of common stock in exchange for its
interests in PWT Acquisition Corp. and purchased 36,766.7 shares of
common stock for a total purchase price of $25,156.67.
. Segal Holdings, Inc. received 8,302 shares of convertible redeemable
preferred stock and 12,950 shares of common stock in consideration for
services rendered and purchased 64,750 shares of common stock for a total
purchase price of $44,273.33.
. Skibo Family Limited Partnership received 375,000 shares of common stock
in consideration for a release.
On September 16, 1998, Pac-West sold 375,000 shares of common stock to the
Chief Executive Officer and President, Mr. Wallace W. Griffin, for the
aggregate purchase price of $250,000. On October 30, 1998, Pac-West sold 62,470
shares of common stock to the Chief Financial Officer, Mr. Richard Bryson, for
an aggregate purchase price of $41,667.
On January 29, 1999, Pac-West offered and sold to NationsBanc Montgomery
Securities LLC, CIBC Oppenheimer Corp. and First Union Capital Markets
$90,000,000, $30,000,000 and $30,000,000 aggregate principal amounts,
respectively, of our 13 1/2% Senior Notes due 2009 for resale to "qualified
institutional buyers" (as defined in Rule 144A under the Securities Act of
1933, a amended). The Senior Notes were sold by Pac-West at par less a 3%
discount.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
The following exhibits are filed in connection with Item 601 of Regulation
S-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
*1.1 Form of Underwriting Agreement among Pac-West Telecomm,
Inc., Bear, Stearns & Co. Inc., Banc of America Securities
LLC and First Union Capital Markets Corp.
2.1 Agreement of Merger, dated September 16, 1998, between PWT
Acquisition Corp. and Pac-West Telecomm, Inc., as amended
(Incorporated by reference to Exhibit 2.1 to the
Registrant's Registration Statement (No. 333-76779)).
2.2 Agreement and Plan of Merger, dated June 30, 1998, between
PWT Acquisition Corp., Pac-West Telecomm, Inc., Bay Alarm
Company and John K. La Rue, as amended (Incorporated by
reference to Exhibit 2.2 to the Registrant's Registration
Statement (No. 333-76779)).
3.1 Amended and Restated Articles of Incorporation of Pac-West
Telecomm, Inc. (Incorporated by reference to Exhibit 3.1
to the Registrant's Registration Statement
(No. 333-76779)).
3.2 Amended and Restated By-Laws of Pac-West Telecomm, Inc.
(Incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement (No. 333-76779)).
*4.1 Form of certificate representing common stock of Pac-West
Telecomm, Inc.
*5.1 Opinion of regarding legality of securities being
registered.
10.1 Shareholders Agreement, dated September 16, 1998, between
Pac-West, John K. La Rue, Bay Alarm Company, certain named
investors and certain named executives (Incorporated by
reference to Exhibit 10.1 to the Registrant's Registration
Statement (No. 333-76779)).
10.2 Registration Rights Agreement, dated September 16, 1998,
between Pac-West, John K. La Rue, Bay Alarm Company,
certain investors and certain executives.
10.3 Stock Purchase Agreement, dated September 16, 1998,
between PWT Acquisition Corp. and certain named investors
(Incorporated by reference to Exhibit 10.3 to the
Registrant's Registration Statement (No. 333-76779)) .
10.4 Stock Purchase Agreement, dated September 16, 1998,
between Pac-West and certain named investors (Incorporated
by reference to Exhibit 10.4 to the Registrant's
Registration Statement (No. 333-76779)).
10.5 Pledge and Security Agreement, dated January 29, 1999,
between Pac-West and Norwest Bank Minnesota, N.A.
(Incorporated by reference to Exhibit 10.5 to the
Registrant's Registration Statement (No. 333-76779)).
10.6(a) Pac-West Telecomm, Inc. 1999 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.6(a) to the
Registrant's Registration Statement (No. 333-76779)).
10.6(b) Pac-West Telecomm, Inc. 1999 Stock Incentive Plan form of
notice of Stock Option Award and Stock Option Award
Agreement between Pac-West and its grantees as designated
(Incorporated by reference to Exhibit 10.6(b) to the
Registrant's Registration Statement (No. 333-76779)).
10.7 Employment Agreement, dated June 30, 1998, between Pac-
West and John K. La Rue (Incorporated by reference to
Exhibit 10.7 to the Registrant's Registration Statement
(No. 333-76779)).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
10.8 Executive Agreement, dated September 16, 1998, between
Pac-West and Wallace W. Griffin (Incorporated by reference
to Exhibit 10.8 to the Registrant's Registration Statement
(No. 333-76779)).
10.9 Executive Agreement, dated October 30, 1998, between Pac-
West and Richard E. Bryson (Incorporated by reference to
Exhibit 10.9 to the Registrant's Registration Statement
(No. 333-76779)).
10.10 Employment Agreement, dated October 21, 1998, between Pac-
West and Dennis V. Meyer (Incorporated by reference to
Exhibit 10.10 to the Registrant's Registration Statement
(No. 333-76779)).
10.11 Employment Agreement, dated September 14, 1998, between
Pac-West and Jason R. Mills (Incorporated by reference to
Exhibit 10.11 to the Registrant's Registration Statement
(No. 333-76779)).
10.12 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and John K. La Rue (Incorporated by
reference to Exhibit 10.12 to the Registrant's
Registration Statement (No. 333-76779)).
10.13 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and Wallace W. Griffin (Incorporated by
reference to Exhibit 10.13 to the Registrant's
Registration Statement (No. 333-76779)).
10.14 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and Richard E. Bryson (Incorporated by
reference to Exhibit 10.14 to the Registrant's
Registration Statement (No. 333-76779)).
10.15 Confidentiality Agreement, dated October 22, 1998, between
Pac-West and Dennis V. Meyer (Incorporated by reference to
Exhibit 10.15 to the Registrant's Registration Statement
(No. 333-76779)).
10.16 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and Jason R. Mills (Incorporated by
reference to Exhibit 10.16 to the Registrant's
Registration Statement (No. 333-76779)).
10.17 Lease Agreement, dated as of June 23, 1995, as amended, by
and between Geremia Brothers and Pac-West for 4202 and
4210 Coronado Avenue, Stockton, California (Incorporated
by reference to Exhibit 10.17 to the Registrant's
Registration Statement (No. 333-76779)).
10.18 Lease Agreement, dated as of July 3, 1996, as amended, by
and between One Wilshire Arcade Imperial, Ltd., Paramount
Group, Inc. and Pac-West for 624 South Grand Avenue, Suite
1210, Los Angeles, California (Incorporated by reference
to Exhibit 10.18 to the Registrant's Registration
Statement (No. 333-76779)).
10.19 Balco Properties Office Lease, dated as of November 10,
1998, by and between Balco Properties and Pac-West for
Franklin Building, 1624 Franklin Street, Suites 40, 100,
Mezzanine, 201, 203, 210, 214 and 222, Oakland, California
(Incorporated by reference to Exhibit 10.19 to the
Registrant's Registration Statement (No. 333-76779)).
10.20 Lease Agreement, dated as of December 17, 1998, by and
between Wing Fong & Associates LLC and Pac-West for 302
and 304 East Carson Street, Las Vegas, Nevada
(Incorporated by reference to Exhibit 10.20 to the
Registrant's Registration Statement (No. 333-76779)).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
10.21 Promissory Note, dated September 16, 1998, between Pac-
West and Wallace W. Griffin, and related Executive Stock
Pledge Agreement between same parties of even date
(Incorporated by reference to Exhibit 10.21 to the
Registrant's Registration Statement (No. 333-76779)).
10.22 Promissory Note, dated October 30, 1998, between Pac-West
and Richard Bryson, and related Executive Stock Pledge
Agreement between same parties of even date (Incorporated
by reference to Exhibit 10.22 to the Registrant's
Registration Statement (No. 333-76779)).
10.23 Loan and Security Agreement, dated June 15, 1999, between
Pac-West, Union Bank of California, N.A., and other
lenders as designated.
10.24 Interconnection Agreement under Sections 251 and 252 of
the Telecommunications Act of 1996, dated June 29, 1999,
between Pac-West and Pacific Bell, and related Errata to
Approved Interconnection Agreement dated June 30, 1999
(Incorporated by reference to Exhibit 10.24 to the
Registrant's Registration Statement (No. 333-76779)).
10.25 Telecommunication Facility Interconnection Agreement,
dated June 21, 1996, between Pac-West and GTE California
Inc. (Incorporated by reference to Exhibit 10.25 to the
Registrant's Registration Statement (No. 333-76779)).
10.26 Master Interconnection and Resale Agreement for the State
of Nevada, dated January 15, 1999, between Pac-West and
The Nevada Division of Central Telephone Company d/b/a
Sprint of Nevada (Incorporated by reference to Exhibit
10.26 to the Registrant's Registration Statement (No. 333-
76779)).
10.27 Indenture, dated January 29, 1999 between Pac-West
Telecomm, Inc. and Norwest Bank Minnesota, N.A., pursuant
to which the Series B 13 1/2% Notes due 2009 will be
issued (Incorporated by reference to Exhibit 4.2 to the
Registrant's Registration Statement (No. 333-76779)).
10.28 Registration Rights Agreement, dated January 29, 1999
between Pac-West Telecomm, Inc. and NationsBanc Montgomery
Securities LLC, CIBC Oppenheimer Corp. and First Union
Capital Markets, as initial purchasers of notes
(Incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement (No. 333-76779)).
10.29 Employment Agreement, dated September 11, 1998, between
Pac-West and Gregory Joksch.
10.30 Confidentiality Agreement, dated September 11, 1998,
between Pac-West and Gregory Joksch.
23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of (included in Exhibit 5.1).
24.1 Powers of Attorney (included on the signature page to this
filing).
27.1 Financial Data Schedule.
99.1 Form of Letter from Pac-West to Safeguard Scientifics
shareholders describing the directed share subscription
program.
99.2 Form of Letter from Pac-West to brokers describing the
directed share subscription program.
99.3 Form of Subscription Agreement for the directed share
subscription program.
</TABLE>
- --------
* To be filed by amendment.
II-6
<PAGE>
(b) Financial Statement Schedules.
The following financial statement schedules are included in this
registration statement:
Schedule II--Valuation and Qualifying Accounts
All other schedules for which the provision is made in the applicable
accounting regulations of the SEC are not required under the related
instructions, are inapplicable or not material, or the information called for
thereby is otherwise included in the financial statements and therefore has
been omitted.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Pac-West
pursuant to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by a director, officer or
controlling person of Pac-West in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification
by us is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, Pac-West
Telecomm, Inc. has duly caused this registration statement to be signed on its
behalf by the undersigned, who is duly authorized to do so, in the City of
Stockton, California, as of September 7, 1999.
PAC-WEST TELECOMM, INC.
/s/ Wallace W. Griffin
By: _________________________________
Wallace W. Griffin
Chief Executive Officer
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Wallace W. Griffin and Richard E. Bryson, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any or all amendments (including post-
effective amendments) to this registration statement (and any registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1993, as
amended, for the offering which this Registration Statement relates), and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement and power of attorney have been signed by the following
persons in the capacities indicated as of
September 7, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Wallace W. Griffin President, Chief Executive Officer and
___________________________________________ Director
Wallace W. Griffin (Principal Executive Officer)
/s/ Richard E. Bryson Chief Financial Officer (Principal
___________________________________________ Financial Officer)
Richard E. Bryson
/s/ Dennis V. Meyer Vice President--Finance and Treasurer
___________________________________________ (Principal Accounting Officer)
Dennis V. Meyer
/s/ Jerry L. Johnson Chairman of the Board of Directors
___________________________________________
Jerry L. Johnson
/s/ John K. La Rue Director and Executive Vice President--
___________________________________________ Technology and Network Operations
John K. La Rue
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ David G. Chandler Director
___________________________________________
David G. Chandler
/s/ Mark J. DeNino Director
___________________________________________
Mark J. DeNino
/s/ Mark S. Fowler Director
___________________________________________
Mark S. Fowler
/s/ Samuel A. Plum Director
___________________________________________
Samuel A. Plum
/s/ Dr. Jagdish N. Sheth Director
___________________________________________
Dr. Jagdish N. Sheth
/s/ Bruce A. Westphal Director
___________________________________________
</TABLE> Bruce A. Westphal
II-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE
We have audited in accordance with generally accepted auditing standards,
the financial statements of Pac-West Telecomm, Inc. included in this
registration statement and have issued our report thereon dated February 10,
1999 except with respect to Note 12 for which the date is March 19, 1999. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying Schedule II--Valuation and
Qualifying Accounts is the responsibility of the company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California,
February 10, 1999
S-1
<PAGE>
PAC-WEST TELECOMM, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Balance Balance
at Charged to Charged to at End
Beginning Costs and Other of
Description of Period Expenses Accounts Deductions Period
----------- --------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts.................. $300,000 $100,000 -- -- $400,000
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Balance
Balance at Charged to Charged to at End
Beginning Costs and Other of
Description of Period Expenses Accounts Deductions Period
----------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts................. $84,000 $216,000 -- -- $300,000
</TABLE>
FOR THE THREE-MONTH PERIOD FROM
DATE OF COMMENCEMENT (OCTOBER 1, 1996) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts............... $78,000 $6,000 -- -- $84,000
</TABLE>
S-2
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
*1.1 Form of Underwriting Agreement among Pac-West Telecomm,
Inc., Bear, Stearns & Co. Inc., Banc of America Securities
LLC and First Union Capital Markets Corp.
2.1 Agreement of Merger, dated September 16, 1998, between PWT
Acquisition Corp. and Pac-West Telecomm, Inc., as amended
(Incorporated by reference to Exhibit 2.1 to the
Registrant's Registration Statement (No. 333-76779)).
2.2 Agreement and Plan of Merger, dated June 30, 1998, between
PWT Acquisition Corp., Pac-West Telecomm, Inc., Bay Alarm
Company and John K. La Rue, as amended (Incorporated by
reference to Exhibit 2.2 to the Registrant's Registration
Statement (No. 333-76779)).
3.1 Amended and Restated Articles of Incorporation of Pac-West
Telecomm, Inc. (Incorporated by reference to Exhibit 3.1
to the Registrant's Registration Statement
(No. 333-76779)).
3.2 Amended and Restated By-Laws of Pac-West Telecomm, Inc.
(Incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement (No. 333-76779)).
*4.1 Form of Certificate Representing Common Stock of Pac-West
Telecomm, Inc.
*5.1 Opinion of regarding legality of securities being
registered.
10.1 Shareholders Agreement, dated September 16, 1998, between
Pac-West, John K. La Rue, Bay Alarm Company, certain named
investors and certain named executives (Incorporated by
reference to Exhibit 10.1 to the Registrant's Registration
Statement (No. 333-76779)).
10.2 Registration Rights Agreement, dated September 16, 1998,
between Pac-West, John K. La Rue, Bay Alarm Company,
certain investors and certain executives.
10.3 Stock Purchase Agreement, dated September 16, 1998,
between PWT Acquisition Corp. and certain named investors
(Incorporated by reference to Exhibit 10.3 to the
Registrant's Registration Statement (No. 333-76779)).
10.4 Stock Purchase Agreement, dated September 16, 1998,
between Pac-West and certain named investors (Incorporated
by reference to Exhibit 10.4 to the Registrant's
Registration Statement (No. 333-76779)).
10.5 Pledge and Security Agreement, dated January 29, 1999,
between Pac-West and Norwest Bank Minnesota, N.A.
(Incorporated by reference to Exhibit 10.5 to the
Registrant's Registration Statement (No. 333-76779)).
10.6(a) Pac-West Telecomm, Inc. 1999 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.6(a) to the
Registrant's Registration Statement (No. 333-76779)).
10.6(b) Pac-West Telecomm, Inc. 1999 Stock Incentive Plan form of
notice of Stock Option Award and Stock Option Award
Agreement between Pac-West and its grantees as designated
(Incorporated by reference to Exhibit 10.6(b) to the
Registrant's Registration Statement (No. 333-76779)).
10.7 Employment Agreement, dated June 30, 1998, between Pac-
West and John K. La Rue (Incorporated by reference to
Exhibit 10.7 to the Registrant's Registration Statement
(No. 333-76779)).
10.8 Executive Agreement, dated September 16, 1998, between
Pac-West and Wallace W. Griffin (Incorporated by reference
to Exhibit 10.8 to the Registrant's Registration Statement
(No. 333-76779)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
10.9 Executive Agreement, dated October 30, 1998, between Pac-
West and Richard E. Bryson (Incorporated by reference to
Exhibit 10.9 to the Registrant's Registration Statement
(No. 333-76779)).
10.10 Employment Agreement, dated October 21, 1998, between Pac-
West and Dennis V. Meyer (Incorporated by reference to
Exhibit 10.10 to the Registrant's Registration Statement
(No. 333-76779)).
10.11 Employment Agreement, dated September 14, 1998, between
Pac-West and Jason R. Mills (Incorporated by reference to
Exhibit 10.11 to the Registrant's Registration Statement
(No. 333-76779)).
10.12 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and John K. La Rue (Incorporated by
reference to Exhibit 10.12 to the Registrant's
Registration Statement (No. 333-76779)).
10.13 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and Wallace W. Griffin (Incorporated by
reference to Exhibit 10.13 to the Registrant's
Registration Statement (No. 333-76779)).
10.14 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and Richard E. Bryson (Incorporated by
reference to Exhibit 10.14 to the Registrant's
Registration Statement (No. 333-76779)).
10.15 Confidentiality Agreement, dated October 22, 1998, between
Pac-West and Dennis V. Meyer (Incorporated by reference to
Exhibit 10.15 to the Registrant's Registration Statement
(No. 333-76779)).
10.16 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and Jason R. Mills (Incorporated by
reference to Exhibit 10.16 to the Registrant's
Registration Statement (No. 333-76779)).
10.17 Lease Agreement, dated as of June 23, 1995, as amended, by
and between Geremia Brothers and Pac-West for 4202 and
4210 Coronado Avenue, Stockton, California (Incorporated
by reference to Exhibit 10.17 to the Registrant's
Registration Statement (No. 333-76779)).
10.18 Lease Agreement, dated as of July 3, 1996, as amended, by
and between One Wilshire Arcade Imperial, Ltd., Paramount
Group, Inc. and Pac-West for 624 South Grand Avenue, Suite
1210, Los Angeles, California (Incorporated by reference
to Exhibit 10.18 to the Registrant's Registration
Statement (No. 333-76779)).
10.19 Balco Properties Office Lease, dated as of November 10,
1998, by and between Balco Properties and Pac-West for
Franklin Building, 1624 Franklin Street, Suites 40, 100,
Mezzanine, 201, 203, 210, 214 and 222, Oakland, California
(Incorporated by reference to Exhibit 10.19 to the
Registrant's Registration Statement (No. 333-76779)).
10.20 Lease Agreement, dated as of December 17, 1998, by and
between Wing Fong & Associates LLC and Pac-West for 302
and 304 East Carson Street, Las Vegas, Nevada
(Incorporated by reference to Exhibit 10.20 to the
Registrant's Registration Statement (No. 333-76779)).
10.21 Promissory Note, dated September 16, 1998, between Pac-
West and Wallace W. Griffin, and related Executive Stock
Pledge Agreement between same parties of even date
(Incorporated by reference to Exhibit 10.21 to the
Registrant's Registration Statement (No. 333-76779)).
10.22 Promissory Note, dated October 30, 1998, between Pac-West
and Richard Bryson, and related Executive Stock Pledge
Agreement between same parties of even date (Incorporated
by reference to Exhibit 10.22 to the Registrant's
Registration Statement (No. 333-76779)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
10.23 Loan and Security Agreement, dated June 15, 1999, between
Pac-West, Union Bank of California, N.A., and other
lenders as designated.
10.24 Interconnection Agreement under Sections 251 and 252 of
the Telecommunications Act of 1996, dated June 29, 1999,
between Pac-West and Pacific Bell, and related Errata to
Approved Interconnection Agreement dated June 30, 1999
(Incorporated by reference to Exhibit 10.24 to the
Registrant's Registration Statement (No. 333-76779)).
10.25 Telecommunication Facility Interconnection Agreement,
dated June 21, 1996, between Pac-West and GTE California
Inc. (Incorporated by reference to Exhibit 10.25 to the
Registrant's Registration Statement (No. 333-76779)).
10.26 Master Interconnection and Resale Agreement for the State
of Nevada, dated January 15, 1999, between Pac-West and
The Nevada Division of Central Telephone Company d/b/a
Sprint of Nevada (Incorporated by reference to Exhibit
10.26 to the Registrant's Registration Statement (No. 333-
76779)).
10.27 Indenture, dated January 29, 1999 between Pac-West
Telecomm, Inc. and Norwest Bank Minnesota, N.A., pursuant
to which the Series B 13 1/2% Notes due 2009 will be
issued (Incorporated by reference to Exhibit 4.2 to the
Registrant's Registration Statement (No. 333-76779)).
10.28 Registration Rights Agreement, dated January 29, 1999
between Pac-West Telecomm, Inc. and NationsBanc Montgomery
Securities LLC, CIBC Oppenheimer Corp. and FirstUnion
Capital Markets, as initial purchasers of notes
(Incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement (No. 333-76779)).
10.29 Employment Agreement, dated September 11, 1998, between
Pac-West and Gregory Joksch.
10.30 Confidentiality Agreement, dated September 11, 1998,
between Pac-West and Gregory Joksch.
23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of (included in Exhibit 5.1).
24.1 Powers of Attorney (included on the signature page to this
filing).
27.1 Financial Data Schedule.
99.1 Form of Letter from Pac-West to Safeguard Scientifics
shareholders describing the directed share subscription
program.
99.2 Form of Letter from Pac-West to brokers describing the
directed share subscription program.
99.3 Form of Subscription Agreement for the directed share
subscription program.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 10.2
Execution Copy
REGISTRATION AGREEMENT
----------------------
THIS REGISTRATION AGREEMENT (this "Agreement") is made as of September
---------
16, 1998, by and among Pac-West Telecomm, Inc., a California corporation (the
"Company"), John K. La Rue ("La Rue"), Bay Alarm Company, a California
------- ------
corporation ("Bay Alarm," and collectively with La Rue, the "Existing
--- ----- --------
Shareholders"), each of the Persons listed on the Schedule of New Investors
- ------------ -------------------------
attached hereto (the "New Investors") and each of the individuals listed on the
-------------
Schedule of Executives attached hereto (the "Executives"). The Existing
- ---------------------- ----------
Shareholders the New Investors are collectively referred to herein as the
"Investors" and individually as an "Investor." Unless otherwise indicated
--------- --------
herein, capitalized terms used herein are defined in paragraph 9 hereof.
WHEREAS, the Existing Shareholders hold shares of the Company's Class
A Participating Preferred Stock, par value $.01 per share (the "Preferred
---------
Stock"), and shares of the Common Stock, par value $.01 per share (the "Common
------
Stock");
- -----
WHEREAS, the New Investors received shares of the Company's Preferred
Stock and Common Stock pursuant to a merger agreement among the Company, the
Existing Shareholders and PWT Acquisition Corp., dated as of June 30, 1998 (as
the same may be amended and modified from time to time in accordance with its
terms, the "Merger Agreement") and shares of the Company's Common Stock pursuant
----------------
to a Stock Purchase Agreement, dated as of the date hereof, between the Company
and certain of the New Investors (as the same may be amended and modified from
time to time in accordance with its terms, the "Purchase Agreement");
------------------
WHEREAS, the Company and certain of the Executives are parties to
executive agreements, stock purchase agreements and/or stock option agreements,
pursuant to which such Executives purchased shares of the Company's Common Stock
or received stock options to purchase shares of the Company's Common Stock;
WHEREAS, in order to induce PWT Acquisition Corp. to enter into the
Merger Agreement the Company has agreed to provide the registration rights set
forth in this Agreement and the execution and delivery of this Agreement is a
condition to the closing under the Merger Agreement (the "Closing").
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:
-1-
<PAGE>
1. Rights Offering.
---------------
(a) Rights.
------
(i) In consideration of Acquisition's entering into the Merger
Agreement the Company shall, upon receipt of the Rights Offering Notice (as
defined below), grant to the holders of common stock of Safeguard
Scientifics, Inc. rights (the "Rights") to purchase from the Company such
------
number of shares of Common Stock as determined by the Company's board of
directors (the "Board"), up to a maximum of one-third of the sum of (1) all
issued shares of Common Stock and (2) all shares of Common Stock subject to
issuance pursuant to options, warrants or other agreements, instruments or
understandings all as of the effective date of the registration statement.
The Rights shall be issued in an offering (the "Rights Offering") pursuant
---------------
to a registration statement under the Securities Act shall be exercisable
for a period of not greater than 45 days after the commencement of the
Rights Offering and shall be transferable by the holder thereof during that
period. The Company shall engage an investment banking firm selected by the
Board, which firm shall underwrite, on a standby, firm commitment basis,
any portion of the offered Common Stock not purchased through the exercise
of Rights. The Company shall also engage legal counsel selected by the
Board, which counsel shall represent the Company in connection with the
conduct of the Rights Offering.
(ii) Safeguard may request, subject to the approval of the
Board. The initiation of the Rights Offering by giving written notice to
the Company (a "Rights Offering Notice") at any time during the Rights
----------------------
Exclusivity Period (as hereinafter defined). The exercise price of the
Rights shall be determined by negotiation among the Company. The
underwriters and the selling stockholders, if any; provided that in the
--------------
event the equity value of the Company immediately prior to the Rights
Offering (based upon the exercise price of the Rights in such offering) is
less than $100 million, then in such event, the Company shall not initiate
a Rights Offering unless such Rights Offering is approved by each of the
Investor Directors (as defined in the Shareholders Agreement). The
obligations of the Company pursuant to this Section 1 shall commence as of
the Closing and expire on the third anniversary of the Closing (such
period, the "Rights Exclusivity Period") unless a registration statement
-------------------------
relating the Rights Offering has been filed with the Commission by such
date, in which case the Rights shall not expire until 150 days after the
date such filing was made.
(iii) The Company agrees that it will not undertake any
registration of any of its securities under the Securities Act or the
Exchange Act other than pursuant to the paragraph 1 prior to the earlier of
the expiration of the Rights Exclusivity Period or the completion of a
Rights Offering, except with the consent of each of the Investor Directors.
(b) Services. Each Qualified Holder shall diligently and in a timely
--------
fashion assist the Company in structuring the Rights Offering, in preparing the
necessary registration statement and related disclosure documentation, in
clearing the Rights Offering with the Commission and applicable state securities
commissions and shall provide such other services and assistance in
-2-
<PAGE>
connection with the Rights Offering as the Company shall reasonably request;
provided that nothing contained herein shall require any Qualified Holder to
- --------------
provide to the Company any services or assistance which would require any of
them to register as broker-dealers under Section 15 of the Exchange Act, or as
an investment adviser under the Investment Advisor Act of 1940, as amended.
(c) Stock Split. After the Board has approved the commencement of the
-----------
Rights Offering, the Company shall, prior to the filing of such registration
statement as provided hereinafter (or at such earlier date as agreed to by the
Company and Safeguard), take all such actions as shall be necessary to cause a
split of its authorized Common Stock in such ratio as Safeguard shall determine.
All references to share amounts in this Agreement other than as specifically
noted shall be deemed to refer to share amounts prior to such split.
(d) Use of Proceeds. The Company shall apply all proceeds of the
---------------
Rights Offering first to the payment of the expenses of the Rights Offering, and
thereafter to general working capital purposes or such other purposes as
determined by the Company's board of directors and as shall be described in the
prospectus relating to the Rights Offering.
(e) Termination. The provisions of this paragraph 1 shall terminate
-----------
and be of no further force and effect at such time as Safeguard and its
Permitted Transferees: (as defined in the Shareholders Agreement) shall hold
less than 25% of the Investor Registrable Securities held by Safeguard as of the
Closing.
2. Demand Registrations.
--------------------
(a) Requests for Registration. After the earlier to occur of (i) 180
-------------------------
days after the consummation of the Rights Offering and (ii) the expiration of
the Rights Exclusivity Period, any of (i) the Safeguard Holders, (ii) the SCP
Holders, (iii) the TL Holders or (iv) the Blair Holders may request registration
under the Securities Act of all or any portion of their Registrable Securities
on Form S-1 or any similar long-form registration ("Long-Form Registrations") or
-----------------------
Form S-2 or S-3 or any similar short-form registration ("Short-Form
----------
Registrations"), if available. All registrations requested pursuant to this
- -------------
paragraph 2(a) are referred to herein as "Demand Registrations." Each request
--------------------
for a Demand Registration shall specify the approximate number of Registrable
Securities requested to be registered and the anticipated per share price range
for such offering. Within ten days after receipt of a request for a Demand
Registration, the Company shall give written notice of such requested
registration to all holders of Registrable Securities (collectively, "Holders")
-------
and, subject to paragraph 2(d) below, shall include in such registration all
Registrable Securities with respect to which the Company has received written
requests for inclusion therein within 20 days after the receipt of the Company's
notice.
(b) Long-Form Registrations. The (i) Safeguard Holders, (ii) the SCP
-----------------------
Holders, (iii) the TL Holders and (iv) the Blair Holders shall each be entitled
to request one Long-Form Registration in which the Company shall pay all
Registration Expenses (".Company-paid Long-Form Registrations"); provided that
----------------------- -------- ----
the aggregate offering value of the Registrable Securities requested to be
registered in any Long-Form Registration must equal at least $25 million if the
registration is the Company's initial registered public offering and at least $5
million in all other Long-Form
-3-
<PAGE>
Registrations. A registration shall not count as one of the permitted Company-
paid Long-Form Registrations until it has become effective, and neither the last
nor any subsequent Company paid Long-Form Registration shall count as one of the
permitted Company-paid Long-Form Registration unless the holders of Investor
Registrable Securities are able to register and sell at least 90% of the
Investor Registrable Securities requested to be included in such registration;
provided that in any event the Company shall pay all Registration Expenses in
- -------- ----
connection with any registration initiated as a Company-paid Long-Form
Registration whether or not it has become effective and whether or not such
registration has counted as one of the permitted Company-paid Long-Form
Registration hereunder. All Long-Form Registrations shall be underwritten
registrations.
(c) Short-Form Registrations. In addition to the Long-Form
------------------------
Registration provided pursuant to paragraph 2(b) above, any of the Safeguard
Holders, the SCP Holders, the TL Holders or the Blair Holders shall be entitled
to request one or more of Short-Form Registrations in which the Company shall
pay all Registration Expenses; provided that the aggregate offering value
-------- ----
of the Registrable Securities requested to be registered in any Short-Form
Registration must equal to at least $1 million. Demand Registrations shall be
Short-Form Registrations whenever the Company is permitted to use any applicable
short form. After the Company has become subject to the reporting requirements
of the Securities Exchange Act, the Company shall use its best efforts to make
Short-Form Registrations available for the sale of Registrable Securities. The
Company shall pay all Registration Expenses in connection with any registration
initiated as a Short-Form Registration whether or not it has become effective.
(d) Priority on Demand Registrations. The Company shall not include
--------------------------------
in any Demand Registration any securities which are not Registrable Securities
without the prior written consent of the holders of Investor Registrable
Securities initially requesting such registration, If a Demand Registration is
an underwritten offering and the managing underwriters advise the Company in
writing that in their opinion the number of Registrable Securities and. if
permitted hereunder, other securities requested to be included in such offering
exceeds the number of Registrable Securities and other securities, if any, which
can be sold in an orderly manner in such offering within a price range
acceptable to the holders of Investor Registrable Securities initially
requesting such registration, the Company shall include in such registration (i)
first, the Investor Registrable Securities requested to be included in such
- -----
registration, pro rata among the holders of Investor Registrable Securities on
the basis of the number of Investor Registrable Securities owned by each such
holder, (ii) second, the Executive Registrable Securities requested to be
------
included in such registration, pro rata among the holders of Executive
Registrable Securities on the basis of the number of such securities owned by
each such holder and (iii) third, any other securities requested to be included
-----
in such registration, pro rata among the holders thereof.
(e) Expenses. Any Person other than a Holder who participates in
--------
Demand Registrations which are not at the Company's expense must pay their share
of the Registration Expenses as provided in paragraph 6 hereof.
(f) Selection of Underwriters. The holders of Investor Registrable
-------------------------
Securities initially requesting a registration shall have the right to select
the investment banker(s) and
-4-
<PAGE>
manager(s) to administer the offering, subject to the approval of the Board
which shall not be unreasonably withheld.
(g) Other Registration Rights. Except as provided in this Agreement,
-------------------------
the Company shall not grant to any Persons the right to request the Company to
register any equity securities of the Company (whether as a demand registration
or piggyback registration), or any securities convertible or exchangeable into
or exercisable for such securities, without the prior written consent of each of
the Investor Directors.
3. Piggyback Registrations.
------------------------
(a) Right to Piggyback. Whenever the Company proposes to register any
------------------
of its securities under the Securities Act (other than pursuant to the Rights
Offering, a Demand Registration or a registration on Form S-4 or S-8 or any
successor or similar forms) and the registration form to be used may be used for
the registration of Registrable Securities (a "Piggyback Registration"), the
----------------------
Company shall give prompt written notice to all Holders of its intention to
effect such registration and, subject to paragraphs 3(c) and 3(d) below, shall
include in such registration all Registrable Securities with respect to which
the Company has received written requests for inclusion therein within 20 days
after the receipt of the Company's notice.
(b) Piggyback Expenses. The Registration Expenses of the Holders shall
------------------
be paid by the Company in all Piggyback Registrations whether or not such
registration is consummated.
(c) Priority on Primary- Registrations. If a Piggyback Registration is
----------------------------------
an underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering without adversely affecting the marketability
of the offering, the Company shall include in such registration (i) first, the
-----
securities the Company proposes to sell, (ii) second, the Investor Registrable
------
Securities requested to be included in such registration, pro rata among the
holders of Investor Registrable Securities on the basis of the number of
Investor Registrable Securities owned by each such holder, (iii) third, the
-----
Exclusive Registrable Securities requested to be included in such registration,
pro rata among the holders of Executive Registrable Securities on the basis of
the number of Executive Registrable Securities owned by each such holder and
(iv) fourth, any other securities requested to be included in such registration,
------
pro rata among the holders thereof.
(d) Priority on Secondary Registrations. If a Piggyback Registration
-----------------------------------
is an underwritten secondary registration on behalf of holders of the Company's
securities (other than the holders of Registrable Securities), and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering without adversely affecting the marketability
of the offering, the Company shall include in such registration (i) first, the
-----
securities requested to be included therein by the holders requesting such
registration and the Investor Registrable Securities requested to be included in
such registration, pro rata among the holders of such securities and such
Investor Registrable Securities on the basis of the number of securities owned
by each such holder,
-5-
<PAGE>
(ii) second, the Executive Registrable Securities requested to be included in
------
such registration, pro rata among the holders of Executive Registrable
Securities on the basis of the number of Executive Registrable Securities owned
by each such holder, and (iii) third, any other securities requested to be
-----
included in such registration, pro rata among the holders thereof.
(e) Withdrawal by the Company. If, at any time after giving written
-------------------------
notice of an intention to register any of its securities as set forth in
paragraph 3(a) and prior to the effective date of such registration statement
filed in connection with such registration, the Company's board of directors
shall determine in its good faith judgment for any reason not to register such
securities, the Company may, at its election, give written notice of such
determination to each Holder and thereupon shall be relieved of its obligation
to register any Registrable Securities in connection with such registration (but
not from its obligation to pay the Registration Expenses in connection therewith
as provided herein).
4. Holdback Agreements.
--------------------
(a) No Holder shall effect any public sale or distribution (including
sales pursuant to Rule 144) of equity securities of the Company, or any
securities convertible into or exchangeable or exercisable for such securities,
during the seven days prior to the date of any proposed registered public
offering of the Company's Common Stock or the Rights as set forth in a written
notice delivered to such Holder at least seven days prior to such date (or of
which such Holder is otherwise aware at least seven days prior to such date) and
the 90-day period beginning on the effective date of the Company's initial
public offering of its Common Stock or the Rights under the Securities Act or
during the seven days prior to the date of any proposed registered public
offering of the Company's Common Stock or the Rights as set forth in a written
notice delivered to such Holder at least seven days prior to such date (or of
which such Holder is otherwise aware at least seven days prior to such date) and
the 90-day period beginning on the effective date of (A) any registered public
offering of the Company's Common Stock other than the initial public offering
and (B) any underwritten Demand Registration or any underwritten Piggyback
Registration in which Registratable Securities are included (except as part of
such underwritten registration); provided that any Holder shall be released from
-------- ----
the obligations of this paragraph 4 if the underwriters managing the registered
public offering otherwise agree.
(b) The Company (i) shall not effect any public sale or distribution
of its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities during the seven days prior to and the 90-day
period beginning on the effective date of the Company's initial public offering
of its Common Stock or the Rights under the Securities Act or during the seven
days prior to and the 90-day period beginning on the effective date of (A) any
registered public offering of the Company's Common Stock other than the initial
public offering and (B) any underwritten Demand Registration. or any
underwritten Piggyback Registration in which Registrable Securities are included
(except as part of such underwritten registration or pursuant to registrations
on Form S-8 or any successor or similar form), unless the underwriters managing
the registered public offering otherwise agree, and (ii) shall cause each holder
of at least 2% of its Common Stock, or any securities convertible into or
exchangeable or exercisable for Common Stock, purchased from the Company at any
time after the date of this Agreement (other than in a
-6-
<PAGE>
registered public offering) to agree not to effect any public sale or
distribution (including sales pursuant to Rule 144) of any such securities
during such periods (except as part of such underwritten registration, if
otherwise permitted), unless the underwriters managing the registered public
offering otherwise agree.
5. Registration Procedures.
-----------------------
(a) Rights Offering: Upon notice by Safeguard to the Company of its
----------------
desire to commence the Rights Offering and the Board's approval of such Rights
Offering, the Company shall promptly prepare a Registration Statement to
register under the Securities Act, the Rights and the shares of the Common Stock
to be acquired upon exercise of the Rights (the "Rights Shares"). The Company
-------------
covenants that such Registration Statement and the prospectus included therein
shall be in form reasonably satisfactory to Safeguard, shall comply in all
respects with the Securities Act and the rules and regulations of the Commission
promulgated thereunder, and shall not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. In connection with such Rights offering,
the Company shall:
(i) use its best efforts to cause such registration statement to be
filed with the Commission and to become effective as promptly as
practicable;
(ii) prepare and file with the Commission, promptly upon any
Qualified Holder's request, any amendments or supplements to the
registration statement or prospectus that, in such Qualified Holder's
opinion, may be necessary or advisable in connection with the Rights
Offering, subject to the reasonable approval of counsel for the Company;
(iii) not file any amendment or supplement to the registration
statement or prospectus unless (A) it has furnished each Qualified Holder
with a copy of such amendment or supplement a reasonable time prior to
filing and (B) no Qualified Holder has reasonably objected to such
amendment or supplement by notice to the Company;
(iv) not issue any advertisement, press release, mailing or other
solicitation material of which any Qualified Holder reasonably disapproves
by prompt written notice to the Company after receiving reasonable notice
thereof;
(v) comply with the Securities Act and the roles and regulations
thereunder in connection with the Rights Offering and, until the
termination of the Rights Offering, shall use its best efforts to qualify
the Rights Shares under the securities laws of all jurisdictions in which
qualification is required and there are holders of Safeguard common stock
and to continue such qualifications in effect during the exercise period of
the Rights;
(vi) at the time of mailing the prospectus relating to the Rights
Offering and at the time of the closing of the Rights Offering, deliver to
any Qualified Holder (A) such certificates and documents evidencing
compliance with such representations and warranties of the Company as any
Qualified Holder shall reasonably request, and (B) such opinions and
-7-
<PAGE>
documents from the Company's counsel and independent accountants as any
Qualified Holder may reasonably request thereof as if it were applicable to
the Rights Offering, and
(vii) cause its counsel and auditors and the Company's employees to
render such assistance in consummating the Rights Offering, at the
Company's expense, as is customary in the consummation by a company of its
initial public offering. In addition, in rendering services under this
paragraph 5, the holders of a majority of the Investor Registrable
Securities may engage special legal counsel, one or more rights, registrar
and transfer agents and such other consultants as they may deem necessary
or desirable in connection with the Rights Offering. the expense of which
shall be paid by the Company in addition to the expenses paid by the
Company described in paragraph 6 below. In addition, the holders of
majority of the Investor Registrable Securities may require the Company to
engage a registered broker-dealer as they may designate, subject to the
reasonable approval of the Company. to provide such services in connection
with the Rights Offering as such holders may deem reasonably necessary or
desirable, including without limitation, to effect XXX underwrite the
offering of the Rights or the Rights Shares in states in which applicable
state laws require that a registered broker-dealer effect such offering.
(b) Generally. Whenever any Holders have requested that any
---------
Registrable Securities be registered pursuant to this Agreement, the Company
shall use its best efforts the registration and the sale of such Registrable
Securities in accordance with the intended method of disposition thereof, and
pursuant thereto the Company shall as expeditiously as possible:
(i) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use
its best efforts to cause such registration statement to become effective;
provided that before filing a registration statement or prospectus or any
-------- ----
amendments or supplements thereto, the Company shall furnish to the counsel
selected by the holders of a majority of the Investor Registrable
Securities covered by such registration statement copies of all such
documents proposed to be filed, which documents shall be subject to the
review and comment of such counsel;
(ii) notify each Holder of the effectiveness of each registration
statement filed hereunder and prepare and file with the Securities and
Exchange Commission such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for period of
either (i) not less than six months or, if such registration statement
relates to an underwritten offering, such longer period as in the opinion
of counsel for the underwriter, a prospectus is required by law to be
delivered in connection with sales of Registrable Securities by an
underwriter or dealer or (ii) such shorter period as will terminate when
all of the securities covered by such registration statement have been
disposed of in accordance with the intended methods of disposition by the
seller or sellers thereof as set forth in such registration statement (but
in any event not before the expiration of any longer period required under
the Securities Act), and to comply with the provisions of the Securities
Act with respect to the disposition of all securities covered by such
registration statement until such time as all such securities have been
disposed of in accordance with the intended
-8-
<PAGE>
methods of disposition by the seller or sellers thereof set forth in such
registration statement and the prospectus used in connection therewith;
(iii) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement
thereto, the prospectus included in such. registration statement (including
each preliminary prospectus) and such other documents as such seller may
reasonably request in order to facilitate the disposition of the
Registrable Securities owned by such seller;
(iv) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such
jurisdictions as any seller (including any underwriter) reasonably requests
and do any and all other acts and things which may be reasonably necessary
or advisable to enable such seller to consummate the disposition in such
jurisdictions of the Registrable Securities owned by such seller; provided
--------
that the Company shall not be required to (i) qualify generally to do
----
business in any jurisdiction where it would not otherwise be required to
qualify but for this subparagraph, (ii) subject itself to taxation in any
such jurisdiction or (iii) consent to general service of process in any
such jurisdiction;
(v) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue
statement of a material fact or omits any fact necessary to make the
statements therein not misleading, and, at the request of any such seller,
the Company shall prepare a supplement or amendment to such prospectus so
that, as thereafter delivered 1o the purchasers of such Registrable
Securities, such prospectus shall not contain an untrue statement of a
material fact or omit to state any fact necessary to make the statements
therein not misleading;
(vi) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are
then listed and, if not so listed, to be listed on the NASD automated
quotation system and, if listed on the NASD automated quotation system, use
its best efforts to secure designation of all such Registrable Securities
covered by such registration statement as a NASDAQ "national market system
security" within the meaning of Rule 11Aa2-1 of the Securities and Exchange
Commission or, failing that, to secure NASDAQ authorization for such
Registrable Securities and, without limiting the generality of the
foregoing, to arrange for at least two market makers to register as such
with respect to such Registrable Securities with the NASD;
(vii) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration
statement;
(viii) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the
holders of a majority of the Investor Registrable Securities being sold or
the underwriters, if any, reasonably request in order to
-9-
<PAGE>
expedite or facilitate the disposition of such Registrable Securities
(including XXXXXX stock split or a combination of shares);
(ix) make available for inspection by one counsel selected by the
holder XX majority of the Investor Registrable Securities included in such
registration statement XX underwriter participating in any disposition
pursuant to such registration statement and XX attorney, accountant or
other agent retained by any such underwriter, all financial and XXX
records, pertinent corporate documents and properties of the Company, and
XXXX Company's officers, directors, employees and independent accountants
to XXXX information reasonably requested by any such attorney, underwriter,
or XXXXXXX attorney, accountant or agent in connection with such
registration statement (provided XXX the Company may impose reasonable
confidentiality restrictions on the recipients XXXX confidential
information);
(x) otherwise use its best efforts to comply with all applicable
rules and regulations of the Securities and Exchange Commission, and make
available to its XXXX holders, as soon as reasonably practicable, an
earnings statement covering the period XXX least twelve months beginning
with the first day of the Company's first full calendar XXXX after the
effective date of the registration statement, which earnings statement
shall XXXX the provisions of Section 11 (a) of the Securities Act and Rule
158 thereunder;
(xi) permit any Holder which, in its sole and exclusive judgment,
might be deemed to be an underwriter or a controlling person of the
Company, to participate in the preparation of such registration or
comparable statement and to require the insertion therein of material,
furnished to the Company in writing, which in the reasonable judgment of
the Holder and its counsel should be included;
(xii) in the event of the issuance of any stop order suspending
the XXXXXX registration statement, or of any order suspending or preventing
the use of any XXXX prospectus or suspending the qualification of any
Common Stock included in XXXX registration statement for sale in any
jurisdiction, the Company shall use its best XXXXXX promptly to obtain the
withdrawal of such order;
(xiii) use its best efforts to cause such Registrable Securities
covered by XXXX registration statement to be registered with or approved by
such other governmental XXXX or authorities as may be necessary to enable
the sellers thereof to consummate the XXXXX of such Registrable Securities;
(xiv) obtain a cold comfort letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily XXXXX by cold comfort letters as the holders of a majority of
the Investor Registrable XXXXXX being sold reasonably request; and
(xv) provide a legal opinion of the Company's outside counsel,
dated the effective date of such registration statement (and, if such
registration includes an underwritten XXXXX
-10-
<PAGE>
offering, dated the date of the closing under the underwriting agreement),
with respect to the registration statement, each amendment and supplement
thereto, the prospectus included therein (including the preliminary
prospectus) and such other documents relating thereto in customary form and
covering such matters of the type customarily covered by legal opinions of
such nature (in a form reasonably acceptable to the holder of a majority of
the Investor Registrable Securities included in the registration).
6. Registration Expenses.
----------------------
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, fees and disbursements
of custodians, and fees and disbursements of counsel for the Company and all
independent certified public accountants, underwriters (excluding discounts and
commissions), valuation firms and consultants and other Persons retained by the
Company (all such expenses being herein called "Registration Expenses"), shall
be borne as provided in this Agreement, except that the Company shall, in any
event, pay its internal expenses (including, without limitation, all salaries
and expenses of its officers and employees performing legal or accounting
duties), the expense of any annual audit or quarterly review, the expense of any
liability insurance and the expenses and fees for listing the securities to be
registered on each securities exchange on which similar securities issued by the
Company are then listed or on the NASD automated quotation system.
(b) In connection with each Demand Registration and each Piggyback
Registration, the Company shall reimburse the Holders included in such
registration for the reason-able fees and disbursements of one counsel chosen by
the holders of a majority of the Investor Registerable Securities initially
requesting such registration.
(c) To the extent Registration Expenses are not required to be paid
by the Company, each holder of securities included in any registration hereunder
shall pay those Registration Expenses allocable to the registration of such
holder's securities so included, and any Registration Expenses not so allocable
shall be borne by all sellers of securities included in such Registration in
proportion to the aggregate selling price of the securities to be so registered.
7. Indemnification.
----------------
(a) The Company agrees to indemnify, to the extent permitted by law,
each holder, its officers and directors and each Person who controls such Holder
(within the meaning of the Securities Act) against all losses, claims, damages,
liabilities and expenses caused by, or relating XXX any action or proceeding
arising out of or based upon, any untrue or alleged untrue statement of material
fact contained in any registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, except insofar as the same are
caused by or contained in any information furnished in writing to the Company by
such Holder expressly for use therein or by such Holder's failure to deliver a
copy of XXXX registration statement or prospectus or any amendments or
supplements thereto after the
-11-
<PAGE>
Company has furnished such Holder with a sufficient number of copies of the
same. In XXXXXX with an underwritten offering, the Company shall indemnify such
underwriters, their officers directors and each Person who controls such
underwriters (within the meaning of the Securities to the same extent as
provided above with respect to the indemnification of the Holders.
(b) In connection with any registration statement in which a Holder
participating, each such Holder shall furnish to the Company in writing such
information XXX affidavits as the Company reasonably requests for use in
connection with any such registraXX statement or prospectus and, to the extent
permitted by law, shall indemnify the Company, XXX directors and officers and
each Person who controls the Company (within the meaning of the Securities Act)
against any losses, claims, damages, liabilities and expenses resulting from XXX
untrue or alleged untrue statement of material fact contained in the
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission XX alleged omission of a material
fact required to be stated therein or necessary to make the statement therein
not misleading, but only to the extent that such untrue statement or omission is
contained any information or affidavit so furnished in writing by such Holder;
provided that the obligation indemnify shall be individual, not joint and
- -------- ----
several, for each Holder and shall be limited to the amount of proceeds received
by such Holder from the sale of Registrable Securities pursuant to XXX
registration statement.
(c) Any Person entitled to indemnification hereunder shall (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification provided that the failure to give prompt notice
-------- ----
shall not impair any Person's right to indemnification hereunder to the extent
such failure has not prejudiced the indemnifying party and (ii) unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist with respect to such claim,
permit such indemnifying party to XXX the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is assumed,
the indemnifying party shall not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent shall not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of XX claim shall not be obligated to pay the fees
and expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which the Company exercising
its rights under this paragraph makes a claim for indemnification pursuant to
this paragraph, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding that this
paragraph provides for indemnification, then, in such case, the Company and the
Holders will contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (after contribution from others) in such proportion
as is appropriate to reflect the relative fault of the Company on the one hand
and of the Holders on the other XXX, connection with the statements or omissions
which resulted in such losses, claims, damages or
-12-
<PAGE>
liabilities, as well as any other relevant equitable considerations. The
relative fault of the Company on the one hand and of the Holders on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company on the one
hand or by the Holders on the other, and each party's relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided that, in any such case, (1) the Holder will not
-------- ----
be required to contribute any amount in excess of the lower of the net proceeds
received or the net offering price of all such securities offered by such Holder
pursuant to such registration statement; and (2) no person or entity guilty of
fraudulent misrepresentation (within the meaning of Section 11 (f) of the
Securities Act) will be entitled to contribution from any person or entity who
was not guilty of such fraudulent misrepresentation.
(e) The indemnification provided for under this Agreement shall
remain in full force and effect regardless of any investigation made by or on
behalf of the indemnified party or any officer, director or controlling Person
of such indemnified party and shall survive the transfer of securities. The
Company also agrees to make such provisions, as are reasonably requested by any
indemnified party, for contribution to such party in the event the Company's
indemnification is i, unavailable for any reason.
8. Participation in Underwritten Registrations. No Person may
-------------------------------------------
participate in any registration hereunder which is underwritten unless such
Person (i) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements.
9. Definitions.
------------
"Blair" means William Blair Capital Partners VI, L.P.
-----
"Blair Holders" means the holders of a majority of the Blair
-------------
Registrable Securities.
"Blair Registrable Securities" means (i) any Common Stock originally
----------------------------
held by Blair and (ii) any securities issued or issuable with respect to the
securities referred to in clause (i) above , by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. As to any particular Blair Registrable
Securities, such securities shall cease to be Blair Registrable Securities when
they have been distributed to the public pursuant to an offering registered
under the Securities Act or sold to the public through a broker, dealer or
market maker in compliance with Rule 144 under the Securities :t Act (or any
similar role then in force) or repurchased by the Company, any Subsidiary or any
Executive.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
-13-
<PAGE>
"Executive Registrable Securities" means (i) any Common Stock held by
--------------------------------
the Executives, (ii) any Common Stock issued or issuable with respect to the
Common Stock referred to in clause (i) above by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization and (iii) any other shares of Common Stock
held by Persons holding securities described in clauses (i) or (ii) above. As to
any particular Executive Registrable Securities, such securities shall cease to
be Executive Registrable Securities when they have been distributed to the
public pursuant to an offering registered Under the Securities Act or sold to
the public through a broker, dealer or market maker in compliance Rule 144 under
the Securities Act (or any similar role then in force) or repurchased by the
Company, any Subsidiary or any Investor.
"Investor Registrable Securities" means (i) any Common Stock
-------------------------------
originally held by any Investor, (ii) securities issued or issuable with respect
to the securities referred to in clause (i) above by way of a stock dividend or
stock split or in connection with a combination of shares recapitalization,
merger, consolidation or other reorganization and (iii) any other shares of
Common Stock held by Persons holding securities described in clauses (i) or (ii)
above (including, without limitation, any shares of Common Stock issued upon the
conversion of any shares of preferred stock of the Company). As to any
particular Investor Registrable Securities, such securities shall cease to be
Investor Registrable Securities when they have been distributed to the public
pursuant to an offering registered under the Securities Act or sold to the
public through a broker, dealer or market maker in compliance with Rule 144
under the Securities Act (or any similar rule then in force) or repurchased by
the Company, any Subsidiary or any Executive.
"Qualified Holder" means any holder of at least 10% of the Investor
----------------
Registrable Securities; provided that notwithstanding the foregoing, but subject
-------- ----
to the additional proviso set fort below, La Rue shall be a Qualified Holder for
so long as he and his Permitted Transferees (as defined in the Shareholders
Agreement) hold at least 50% of the Investor Registrable Securities held by La
Rue on the date hereof; provided further that any Existing Shareholder shall
-------- ------- ----
cease to be a Qualified Holder in the event such holder, directly or indirectly,
engages in any business which is competitive with that of the Company or any of
its Subsidiaries.
"Registrable Securities" means, collectively, the Investor Registrable
----------------------
Securities and the Executive Registrable Securities. For purposes of this
Agreement, a Person shall be deemed to be a Holder, and the Registrable
Securities shall be deemed to be in existence, whenever such Person has the
right to acquire directly or indirectly such Registrable Securities (upon
conversion or exercise in connection with a transfer of securities or otherwise,
but disregarding any restrictions or limitations upon the exercise of such
right), whether or not such acquisition has actually been effected, and such
Person shall be entitled to exercise the rights of a Holder hereunder (it being
understood, however, that any Registrable Securities which are not shares of
Common Stock shall be converted or otherwise exchanged into shares of Common
Stock immediately prior to the effectiveness of any registration statement
pursuant to which such Common Stock is to be registered).
"Safeguard" means Safeguard 98 Capital, L.P.
---------
-14-
<PAGE>
"Safeguard Holders" means the holders of a majority of the Safeguard
-----------------
Registrable Securities.
"Safeguard Registrable Securities" means (i) any Common Stock
--------------------------------
originally held by Safeguard and (ii) any securities issued or issuable with
respect to the securities referred to in clause (i) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Safeguard Registrable Securities, such securities shall cease to be
Safeguard Registrable Securities when they have been distributed to the public
pursuant to an offering registered under the Securities Act or sold Securities
Act (or any similar rule then in force) or repurchased by the Company, any
Subsidiary or any Executive.
"SCP" means SCP Private Equity Partners, L.P.
---
"SCP Holders" means the holders of a majority of the SCP Registrable
-----------
Securities.
"SCP Registrable Securities" means (i) any Common Stock originally
--------------------------
held by SCP and (ii) any securities issued or issuable with respect to the
securities referred to in clause (i) above by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. As to any particular SCP Registrable
Securities, such securities shall cease to be SCP Registrable Securities when
they have been distributed to the public pursuant to an offering registered
under the Securities Act or sold to the public through a broker, dealer or
market maker in compliance with Rule 144 under the Securities Act (or any
similar rule then in force) or repurchased by the Company, any Subsidiary or any
Executive.
"Securities Act" means the Securities Act of 1934, as amended.
--------------
"Shareholders Agreement" means that certain Shareholders Agreement,
----------------------
dated as of the date hereof, by and among the Company, La Rue, Bay Alarm and the
other parties signatory thereto, as the same may be amended and modified from
time to time in accordance with its terms.
"TL" means, collectively, TL Ventures III L.P., TL Ventures III
--
Offshore L.P., TL Ventures III Interfund L.P. and EnerTech Capital Partners,
L.P.
"TL Holders" means the holders of a majority of the TL Registrable
----------
Securities.
"TL Registrable Securities" means (i) any Common Stock originally held
-------------------------
by TL and (ii) any securities issued or issuable with respect to the securities
referred to in clause (i) above by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular TL Registrable Securities, such
securities shall cease to be TL Registrable Securities when the have been
distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker,
-15-
<PAGE>
dealer or market maker in compliance with Rule 144 under the Securities Act (or
any similar rule then in force) or repurchased by the Company, any Subsidiary or
any Executive.
10. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The Company shall not hereafter enter
--------------------------
into any agreement with respect to its securities which is inconsistent with or
violates the rights granted to the Holders in this Agreement.
(b) Remedies. Any Person having rights under any provision of this
--------
Agreement shall be entitled to enforce such rights, specifically, to recover
damages cause by reason of any breach of any provision of this Agreements and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
(c) Amendments and Waivers. Except as otherwise provided herein, the
----------------------
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company, the holders of a 85% of the Investor Registrable
Securities and, to the extent that any holder or holders of Executive
Registrable Securities would be adversely affected by such amendment or waiver
in a manner different from the holders of Investor Registrable Securities, the
holders of a majority of such adversely affected Executive Registrable
Securities and, to the extent that any holder or holders of Investor Registrable
Securities would be adversely affected by such amendment or waiver in a manner
different from the other holders of Investor Registrable Securities the holders
of such adversely affected Investor Registrable Securities.
(d) Successors and Assigns. All covenants and agreements in this
----------------------
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or Holders are also for the benefit of, and enforceable by, any
subsequent Holder except as expressly provided herein.
(e) Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
(f) Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts (including by means of telecopied signature pages), any
one of which need not contain the signatures of more than one party, but all
such counterparts taken together shall constitute one and the same Agreement.
-16-
<PAGE>
(g) Descriptive Headings. The descriptive headings of this Agreement
--------------------
are inserted for convenience only and do not constitute a part of this
Agreement.
(h) Governing Law. All issues and questions concerning the
-------------
construction. validity, interpretation and enforcement of this Agreement shall
be governed by, and construed in accordance with, the laws of the State of
California, without giving effect to any choice of law or conflict of law rules
or provisions (whether of the State of California or any other jurisdiction)that
would cause the application of the laws of any jurisdiction other than the State
of California.
(i) Notices. All notices, demands or other communications to be given
-------
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid) or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid or sent to the recipient by facsimile
(with an additional copy by U.S. mail). Such notices, demands and other
communications shall be sent to each Investor at the address indicated on the
Schedule of Investors attached hereto, to each Executive at the address
- ---------------------
indicated on the Schedule of Executive attached hereto, and to the Company at
---------------------
the address indicated below:
To the Company:
--------------
Pac-West Telecomm, Inc.
4210 Coronado Avenue
Stockton, CA 95204
Attn: President
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
* * * * *
-17-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
from written above.
PAC-WEST TELECOMM, INC.
By: /s/ John K LaRue
-------------------------------------------
Name: John K LaRue
-----------------------------------------
Its: President
------------------------------------------
By: /s/ Roger L. XXXX
-------------------------------------------
Name: Roger L. XXXX
-----------------------------------------
Its: Secretary
------------------------------------------
BAY ALUM COMPANY
By: /s/ Bruce A. Westphal
-------------------------------------------
Name: Bruce A. Westphal
-----------------------------------------
Its: XXXX
------------------------------------------
/s/ John K LaRue
----------------------------------------------
JOHN K. LA RUE
WILLIAM BLAIR CAPITAL PARTNERS VI,
L.P.
By: William Blair Capital Partners VI, L.L.C., its
General Partner
By: /s/ XXXXX
-------------------------------------------
Name: David G. Chandler
Its Managing Director
[SIGNATURE PAGE TO REGISTRATION AGREEMENT]
<PAGE>
SCP PRIVATE EQUITY PARTNERS, L.P.
By: SCP Private Equity Management, L.P.,
its General Partner
By:______________________________________
Name:____________________________________
Its General Partner
SAFEGUARD 98 CAPITAL, L.P.
By: Safeguard Delaware, Inc.
its General Partner
By: /s/ Jerry L. Johnson
--------------------------------------
Name: Jerry L. Johnson
------------------------------------
Title: Senior Vice President
-----------------------------------
TL VENTURES III L.P.
By: TL Ventures III Management L.P.,
its General Partner
By: TL Ventures III LLC,
its General Partner
By: /s/ XXXX
--------------------------------------
Name: Mark J. DeNino
------------------------------------
Title: Managing Director
[SIGNATURE PAGE TO REGISTRATION AGREEMENT]
<PAGE>
TL VENTURES III OFFSHORE L.P.
By: TL Ventures III Offshore Partners L.P.,
its General Partner
By: TL Ventures III Offshore Ltd.,
its General Partner
By: /s/ XXXX
--------------------------------------------
Name: Mark J. DeNino
------------------------------------------
Title: Managing Director
TL VENTURES III INTERFUND L.P.
By: TL Ventures III LLC,
its General Partner
By: /s/ XXXX
--------------------------------------------
Name: Mark J. DeNino
------------------------------------------
Title: Managing Director
ENERTECH CAPITAL PARTNERS, L.P.
By: EnerTech Management, L.P.
its General Partner
By: EnerTech Management Company, L.L.C.,
its General Partner
By: /s/ XXXX
--------------------------------------------
Name: Scott Ungerer
------------------------------------------
Title: Managing Director
SEGAL HOLDINGS, INC.
By:____________________________________________
Name:__________________________________________
Title:_________________________________________
[SIGNATURE PAGE TO REGISTRATION AGREEMENT]
<PAGE>
TL VENTURES III OFFSHORE L.P.
By: TL Ventures III Offshore Partners L.P.,
its General Partner
By: TL Ventures III Offshore Ltd.,
its General Partner
By:____________________________________________
Name:__________________________________________
Title:
TL VENTURES III INTERFUND L.P.
By: TL Ventures III LLC,
its General Partner
By:____________________________________________
Name:__________________________________________
Title: Managing Director
ENERTECH CAPITAL PARTNERS, L.P.
By: EnerTech Management, L.P.
its General Partner
By: EnerTech Management Company, L.L.C.,
its General Partner
By:____________________________________________
Name:__________________________________________
Title: Managing Director
SEGAL HOLDINGS, INC.
By: /s/ XXXX
--------------------------------------------
Name: Robert B. Segal
------------------------------------------
Title: President
-----------------------------------------
[SIGNATURE PAGE TO REGISTRATION AGREEMENT]
<PAGE>
BANKAMERICA INVESTMENT
CORPORATION
By: /s/ M. Ann O'Brien
---------------------------------------
Name: M. Ann O'Brien
-------------------------------------
Title: Managing Director
------------------------------------
MIG PARTNERS VII
By: /s/ M. Ann O'Brien
---------------------------------------
Name: M. Ann O'Brien
-------------------------------------
Title: General Partner
------------------------------------
__________________________________________
WALLACE W. GRIFFIN
SKIBO FAMILY LIMITED PARTNERSHIP
By:_______________________________________
Name:_____________________________________
Title:____________________________________
[SIGNATURE PAGE TO REGISTRATION AGREEMENT]
<PAGE>
BANKAMERICA INVESTMENT
CORPORATION
By:_______________________________________
Name:_____________________________________
Title:____________________________________
MIG PARTNERS VII
By:_______________________________________
Name:_____________________________________
Title:____________________________________
/s/ Wallace W. Griffin
------------------------------------------
WALLACE W. GRIFFIN
SKIBO FAMILY LIMITED PARTNERSHIP
By: /s/ XXXX
---------------------------------------
Name: Charles M. Skibo
-------------------------------------
Title: General Partner
------------------------------------
[SIGNATURE PAGE TO REGISTRATION AGREEMENT]
<PAGE>
BANKAMERICA INVESTMENT
CORPORATION
By:_______________________________________
Name:_____________________________________
Title:____________________________________
MIG PARTNERS VII
By:_______________________________________
Name:_____________________________________
Title:____________________________________
__________________________________________
WALLACE W. GRIFFIN
SKIBO FAMILY LIMITED PARTNERSHIP
By: /s/ XXXX
---------------------------------------
Name: Charles M. Skibo
-------------------------------------
Title: General Partner
------------------------------------
[SIGNATURE PAGE TO REGISTRATION AGREEMENT]
<PAGE>
SCHEDULE OF INVESTORS
SCP Private Equity Partners, L.P.
800 The Safeguard Bldg.
435 Devon Park Drive
Wayne, PA 19087
Safeguard 98 Capital, L.P.
c/o Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
TL Ventures III L.P.
c/o TL Ventures LLC
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1515
Attention: Chief Financial Officer
Telephone: (610) 971-1515
Telecopier: (610) 975-9330
TL Ventures III Offshore L.P.
c/o Trident Trust Company (Cayman) Limited
P.O. Box 847
One Capital Place, Fourth Floor
Grand Cayman, Cayman Islands
with a copy to:
TL Ventures LLC
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1515
Attention: Chief Financial Officer
Telephone: (610) 971-1515
Telecopier: (610) 975-9330
<PAGE>
TL Ventures III Interfund L.P.
c/o TL Ventures LLC
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1515
Attention: Chief Financial Officer
Telephone: (610) 971-1515
Telecopier: (610) 975-9330
EnerTech Capital Partners
435 Devon Park Drive, Suite 410
Wayne, PA 19087
William Blair Capital Partners VI, L.P.
227 West Monroe Street
Chicago, IL 60606
Segal Holdings, Inc.
c/o Segal & Co. Inc.
1350 Avenue of the Americas, Suite 1802
New York, NY 10019
BankAmerica Investment Corporation
c\o Bank of America Mezzanine Investments Group
231 South LaSalle Street, 12th Floor
Chicago, IL 60697
MIG Partners VII
c\o Bank of America Mezzanine Investments Group
231 South LaSalle Street, 12th Floor
Chicago, IL 60697
Skibo Family Limited Partnership
9045 Holly Leaf Lane
Bethesda, PA 20817
<PAGE>
SCHEDULE OF EXECUTIVES
Wallace W. Griffin
6669 Embarcadero Drive, #16
Stockton, CA 95219
<PAGE>
EXHIBIT 10.23
- --------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT
Dated for reference as of June 15, 1999
Among
THE FINANCIAL INSTITUTIONS NAMED HEREIN
as the Lenders
--------------
and
UNION BANK OF CALIFORNIA, N.A.
as Agent
--------
and
PAC-WEST TELECOMM, INC.
as Borrower
-----------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I. INTERPRETATION OF THIS AGREEMENT............................................ 1
1.1 Definitions............................................................... 1
1.2 Accounting Terms.......................................................... 20
1.3 Interpretive Provisions................................................... 20
1.4 Documents, Instruments, and Chattel Paper................................. 21
1.5 Right to Cure............................................................. 21
1.6 Power of Attorney......................................................... 22
1.7 Agent's and Lenders' Rights, Duties and Liabilities....................... 22
ARTICLE II. LOANS AND LETTERS OF CREDIT................................................ 23
2.1 Total Facility............................................................ 23
2.2 Revolving Loans........................................................... 23
2.3 Making of Revolving Loans................................................. 25
2.4 Settlement................................................................ 27
2.5 Notation.................................................................. 28
2.6 Lenders' Failure to Perform............................................... 28
2.7 Letters of Credit......................................................... 28
ARTICLE III. INTEREST AND FEES......................................................... 33
3.1 Interest.................................................................. 33
3.2 Maximum Interest Rate..................................................... 34
3.3 Unused Line Fee........................................................... 34
3.4 Letter of Credit Fee...................................................... 35
3.5 Audit Fees................................................................ 35
3.6 Fee Letter................................................................ 35
ARTICLE IV. PAYMENTS AND PREPAYMENTS................................................... 36
4.1 Principal of Revolving Loans.............................................. 36
4.2 Reduction and Termination of Facility..................................... 36
4.3 Payments by Borrower...................................................... 37
4.4 Apportionment, Application and Reversal of Payments....................... 37
4.5 Indemnity for Returned Payments........................................... 38
4.6 Agent's and Lender's Books and Records; Monthly Statements................ 39
ARTICLE V. TAXES, YIELD PROTECTION AND ILLEGALITY...................................... 39
5.1 Taxes..................................................................... 39
5.2 Increased Costs, Reduction of Return and Illegality; Capital Adequacy..... 40
5.3 Funding Losses............................................................ 41
5.4 Breakage Costs............................................................ 41
5.5 Certificates of Lenders................................................... 41
5.6 Survival.................................................................. 41
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE VI. COLLATERAL.............................................................. 42
6.1 Grant of Security Interest............................................. 42
6.2 Perfection and Protection of Security Interest......................... 43
6.3 Chief Executive Office; Locations of Collateral........................ 44
6.4 Title to, Liens on and Sale and Use of Collateral...................... 44
6.5 Appraisals............................................................. 45
6.6 Access and Examination................................................. 45
6.7 Collateral Reporting................................................... 45
6.8 Accounts............................................................... 45
6.9 Collection of Accounts; Payments....................................... 47
6.10 Equipment............................................................. 48
6.11 Assigned Contracts.................................................... 48
ARTICLE VII. FINANCIAL INFORMATION; NOTICES......................................... 49
7.1 Books and Records...................................................... 49
7.2 Financial Information.................................................. 50
7.3 Notices to Agent and Lenders........................................... 52
7.4 Authorization for Agent and Lenders to Deliver Certain Information..... 54
7.5 Authorization to Deliver Information to Agent and the Lenders.......... 54
ARTICLE VIII. GENERAL WARRANTIES AND REPRESENTATIONS................................ 54
8.1 Authorization, Validity and Enforceability............................. 54
8.2 Validity and Priority of Security Interest............................. 55
8.3 Organization and Qualification......................................... 55
8.4 Corporate Name, Prior Transactions..................................... 55
8.5 Subsidiaries and Affiliates............................................ 55
8.6 Financial Statements and Projections................................... 55
8.7 Capitalization......................................................... 56
8.8 Solvency............................................................... 56
8.9 Debt................................................................... 56
8.10 Distributions......................................................... 56
8.11 Title to Property..................................................... 56
8.12 Real Estate; Leases................................................... 56
8.13 Proprietary Rights Collateral......................................... 56
8.14 Trade Names........................................................... 56
8.15 Litigation............................................................ 56
8.16 Restrictive Agreements................................................ 57
8.17 Labor Disputes........................................................ 57
8.18 Environmental Laws.................................................... 57
8.19 No Violation of Law; Telecommunications Laws and Licenses............. 58
8.20 No Default............................................................ 59
8.21 ERISA Compliance...................................................... 59
8.22 Taxes................................................................. 59
8.23 Regulated Entities.................................................... 59
8.24 Margin Regulations.................................................... 60
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
8.25 Intellectual Property.......................................................... 60
8.26 No Material Adverse Change..................................................... 60
8.27 Full Disclosure................................................................ 60
8.28 Material Agreements............................................................ 60
8.29 Governmental Authorization..................................................... 60
ARTICLE IX. AFFIRMATIVE AND NEGATIVE COVENANTS............................................... 60
9.1 Taxes and Other Debt........................................................... 60
9.2 Corporate Existence and Good Standing.......................................... 61
9.3 Compliance with Law and Agreements; Maintenance of Licenses.................... 61
9.4 Insurance...................................................................... 61
9.5 Condemnation................................................................... 62
9.6 Environmental Laws............................................................. 62
9.7 Compliance with ERISA.......................................................... 63
9.8 Mergers, Consolidations or Sales of Assets..................................... 64
9.9 Distributions; Capital Change; Restricted Investments and Expenditures......... 64
9.10 Material Adverse Effect........................................................ 65
9.11 Guaranties..................................................................... 65
9.12 Debt........................................................................... 65
9.13 Transactions with Affiliates................................................... 65
9.14 Investment Banking and Finder's Fees........................................... 65
9.15 Business Conducted; Maintenance of Property.................................... 65
9.16 Liens.......................................................................... 65
9.17 Sale and Leaseback Transactions................................................ 65
9.18 New Subsidiaries............................................................... 65
9.19 Fiscal Year; Accounting Method................................................. 66
9.20 Financial Covenants............................................................ 66
9.21 Use of Proceeds................................................................ 66
9.22 Further Assurances............................................................. 66
9.23 Amendments to Documents........................................................ 66
9.24 Amendments to Documents........................................................
ARTICLE X. CONDITIONS OF LENDING............................................................. 67
10.1 Conditions Precedent to Making of Loans on the Closing Date.................... 67
10.2 Conditions Precedent to Each Loan.............................................. 70
ARTICLE XI. DEFAULT; REMEDIES................................................................ 71
11.1 Events of Default.............................................................. 71
11.2 Remedies....................................................................... 73
ARTICLE XII. TERM AND TERMINATION............................................................ 74
12.1 Term and Termination........................................................... 74
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE XIII. AMENDMENTS; WAIVER; PARTICIPATIONS; ASSIGNMENTS; SUCCESSORS.... 75
13.1 No Waivers; Cumulative Remedies............................... 75
13.2 Amendments and Waivers........................................ 75
13.3 Assignments; Participations................................... 76
13.4 Additional Commitments........................................ 78
ARTICLE XIV. AGENT........................................................... 79
14.1 Appointment and Authorization................................. 79
14.2 Delegation of Duties.......................................... 79
14.3 Liability of Agent............................................ 79
14.4 Reliance by Agent............................................. 79
14.5 Notice of Default............................................. 80
14.6 Credit Decision............................................... 80
14.7 Indemnification............................................... 81
14.8 Union Bank of California N.A., in its Individual Capacity..... 81
14.9 Successor Agent............................................... 81
14.10 Withholding Tax............................................... 82
14.11 Collateral Matters............................................ 83
14.12 Restrictions on Actions by Lenders; Sharing of Payments....... 84
14.13 Agency for Perfection......................................... 84
14.14 Payments to Agent and Lenders................................. 84
14.15 Concerning the Collateral and the Related Loan Documents...... 85
14.16 Disclaimer by Lenders......................................... 85
ARTICLE XV. MISCELLANEOUS.................................................... 86
15.1 Cumulative Remedies; No Prior Recourse to Collateral.......... 86
15.2 Limitation of Liability....................................... 86
15.3 Survival of Representations and Warranties.................... 86
15.4 Other Security and Guaranties................................. 86
15.5 Fees and Expenses............................................. 86
15.6 Notices....................................................... 87
15.7 Waiver of Notices............................................. 88
15.8 Binding Effect................................................ 88
15.9 Indemnity of Agent and the Lenders by Borrower................ 88
15.10 Final Agreement............................................... 89
15.11 Counterparts.................................................. 89
15.12 Captions...................................................... 89
15.13 Right of Setoff............................................... 89
15.14 Use of Name; Confidentiality.................................. 89
15.15 Severability.................................................. 90
15.16 Governing Law; Dispute Resolution; Choice of Forum............ 90
</TABLE>
iv
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT, dated for reference as of June 15, 1999
(this "Agreement"), is by and among the financial institutions that execute a
---------
counterpart signature page hereto and/or to an Assignment and Acceptance (as
hereinafter defined; such financial institutions, together with their respective
successors and assigns, are referred to hereinafter each individually as a
"Lender," and collectively as the "Lenders"), UNION BANK OF CALIFORNIA, N.A, as
------ -------
administrative agent for the Lenders (in its capacity as administrative agent,
"Agent"), and PAC-WEST TELECOMM, INC., a California corporation, as borrower
-----
("Borrower").
--------
W I T N E S S E T H:
-------------------
WHEREAS, Borrower has requested that the Lenders make available to Borrower
a revolving line of credit for loans and Letters of Credit in an initial amount
not to exceed twenty million dollars ($20,000,000), with the ability to increase
such revolving line of credit to forty million dollars ($40,000,000) upon the
terms and conditions set forth herein, which will be used by Borrower for
permitted acquisitions and capital expenditures, and Borrower's ordinary working
capital needs and general business purposes; and
WHEREAS, the Lenders have agreed to make available to Borrower a revolving
credit facility upon the terms and conditions set forth in this Agreement.
A G R E E M E N T:
-----------------
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows.
ARTICLE I.
INTERPRETATION OF THIS AGREEMENT
1.1 Definitions. As used herein, the following terms shall have the
-----------
following meanings:
"Account Debtor" means each Person obligated in any way on or in
--------------
connection with an Account.
"Accounts" means all of Borrower's now owned or hereafter acquired or
--------
arising accounts and any other rights to payment for the sale or lease of goods
or rendition of services, whether or not they have been earned by performance,
together with amounts owed to Borrower from any and all credit insurance,
Guarantees, Letters of Credit and other security therefor, and all security
agreements, leases, Guarantees and other contracts securing or otherwise
relating to the Accounts.
"Accounts Collateral" means all Collateral consisting of cash, cash
-------------------
equivalents, bank accounts, Accounts and, as they relate to any of the
foregoing, General Intangibles and all substitutions, accessions and proceeds of
any of the foregoing.
"Additional Amounts" has the meaning set forth in Section 5.2(b)
------------------ --------------
hereof.
"Additional Commitments" has the meaning specified in Section 13.4
---------------------- ------------
hereof.
<PAGE>
Loan and Security Agreement
"Affiliate" means, as to any Person, any other Person which, directly
---------
or indirectly, is in control of, is controlled by, or is under common control
with, such Person. A Person shall be deemed to control another Person if the
controlling Person possesses, directly or indirectly, the power to direct or
cause the direction of the management and policies of the other Person, whether
through the ownership of voting securities, by contract, or otherwise.
"Agent" means Union Bank of California, N.A., in its capacity as
-----
administrative agent for the Lenders, and any successor thereto in such capacity
appointed pursuant to Section 14.9 hereof.
------------
"Agent Advances" has the meaning specified in Section 2.3(b) hereof.
-------------- --------------
"Agent-Related Persons" means Agent and any successor Agent, together
---------------------
with their respective Affiliates, and the officers, directors, employees, agents
and attorneys-in-fact of such Persons.
"Agent's Liens" means the Liens granted to Agent, for the ratable
-------------
benefit of the Lenders in proportion to their Pro Rata Shares, pursuant to this
Agreement.
"Agreement" means this Loan and Security Agreement.
---------
"Arbitration Agreement" means the Alternative Dispute Resolution
---------------------
Agreement, dated as of the date hereof, among Borrower, Agent and Lenders, in
the form of Exhibit 1 attached hereto.
---------
"Assigned Contracts" means all of Borrower's rights and remedies
------------------
under, and all money and claims for money due or to become due to Borrower under
all contracts and agreements in favor of Borrower and/or to which Borrower is a
party, including the Material Agreements.
"Assignee" has the meaning set forth in Section 13.3(a) hereof.
-------- ---------------
"Assignment and Acceptance" has the meaning set forth in Section
------------------------- -------
13.3(a) hereof and shall be in the form of Exhibit 2 attached hereto.
- ------- ---------
"Attorney Costs" means and includes all fees, expenses, and
--------------
disbursements of any law firm or other external counsel engaged by Agent, the
allocated cost of internal legal services of Agent, and all expenses and
disbursements of internal counsel of Agent; provided, however, that if Agent
uses a law firm or other external counsel with respect to any matter, Borrower
shall be obligated to reimburse Agent for the fees, expenses, and disbursements
of such law firm or other external counsel, but not also the allocated cost of
internal legal services of Agent with respect to such matter.
"Available Receivables and Equipment Balance" means the sum of
-------------------------------------------
(a) eighty percent (80%) of the sum of (i) the Net Amount of Eligible
Accounts minus (ii) the Reserve; plus
----- ----
(b) thirty percent (30%) of the gross book value of Eligible
Equipment.
"Availability" means, as of the Borrowing Base Date, the amount
------------
computed in the Borrowing Base Certificate delivered by Borrower (subject
however to the revisions and adjustments described in Sections 2.2 hereof) to
------------
be: (a) the lesser of (i) the Maximum Amount, or (ii) the Available Receivables
and Equipment Balance; minus (b) the aggregate net proceeds of any Debt incurred
-----
by Borrower after the Closing Date that is not specifically permitted hereunder
or otherwise approved by
2
<PAGE>
Loan and Security Agreement
Agent; minus (c) the aggregate net proceeds from the sale of any of Borrower's
-----
assets made after the Closing Date and otherwise than in the ordinary course of
Borrower's business, unless otherwise approved by Agent, or unless all of such
proceeds are reinvested in comparable replacement assets (as determined in
Agent's sole discretion) within one hundred eighty (180) days after such sale;
minus (d) all insurance proceeds received by Borrower in respect of any of its
- -----
assets, unless otherwise approved by Agent, or unless all of such insurance
proceeds are reinvested in comparable replacement assets (as determined in
Agent's sole discretion) within one hundred eighty (180) days after Borrower's
receipt thereof. For purposes of determining the amount of Availability, any
amount that is denominated in a currency other than dollars shall be valued in
dollars based on the applicable Exchange Rate for such currency, as determined
by Agent. Notwithstanding the foregoing, upon delivery to Agent of Financial
Statements evidencing that the ratio of Borrower's Total Debt to EBITDA has
remained less than 5:1 for two (2) consecutive Fiscal Quarters, and for as long
thereafter as such ratio remains less than 5:1, then "Availability" shall mean
------------
the sum of (a) the Maximum Amount of the Commitments; minus clauses (b), (c) and
-----
(d) of this paragraph above.
"Bankruptcy Code" means Title 11 of the United States Code (11 U.S.C.
---------------
(S)101 et seq.).
"Base Rate" means the U.S. dollar rate of interest established by
---------
Agent from time to time as its prime or base rate, with any change in such prime
or base rate to be effective on the date of such change, plus the margin set
----
forth below corresponding to the applicable ratio of Borrower's Total Debt to
EBITDA as of the most recent Financial Statements of Borrower delivered prior to
or on the date of the applicable Borrowing:
Ratio of Total Debt to EBITDA Margin
----------------------------- ------
Greater than or equal to 8.5:1............................. 2.00%
Greater than or equal to 8:1 but less than 8.5:1........... 1.75%
Greater than or equal to 7:1 but less than 8:1............. 1.50%
Greater than or equal to 6:1 but less than 7:1............. 1.25%
Greater than or equal to 5:1 but less than 6:1............. 1.00%
Less than 5:1.............................................. 0.75%
The Base Rate is not the lowest or best rate actually charged to any
customer by Union Bank of California, N.A. or by Agent or any Lender, and each
such Person may make various commercial and other loans at rates of interest
which have no relationship to the Base Rate.
"Base Rate Loan" means a Loan at any time bearing interest at the Base
--------------
Rate.
"Bonds" means the Senior Notes issued by Borrower in the maximum
-----
amount of one hundred fifty million dollars ($150,000,000) pursuant to the
Indenture, which Bonds are general unsecured obligations of Borrower.
"Bonds Security" means that certain portfolio of U.S. government
--------------
securities pledged to the trustee under the Indenture, as security for the
holders of the Bonds, for the payment of the first two (2) scheduled interest
payments due on the Bonds.
"Borrower" means Pac-West Telecomm, Inc., a California corporation,
--------
and its permitted successors and assigns.
3
<PAGE>
Loan and Security Agreement
"Borrower Business Day" means any day, excluding Saturdays and
---------------------
Sundays, that Borrower is open for business.
"Borrower's Account" shall mean the account established by Borrower at
------------------
Union Bank of California, N.A., San Francisco, for the purpose of receiving Loan
proceeds advanced by the Lenders, as set forth in the certificate of Borrower
delivered to Agent pursuant to Section 2.2(d) hereof.
--------------
"Borrowing" means a borrowing hereunder consisting of Loan advances
---------
made by the Lenders to Borrower or by an Agent in the case of a Borrowing
consisting of an Agent Advance.
"Borrowing Base Certificate" means a fully completed certificate in
--------------------------
the form of Exhibit 3 hereto, addressed to Agent and certified by Borrower to be
---------
true and correct as of the related Borrowing Base Date, which Borrowing Base
Certificate is subject to revision and adjustment pursuant to Section 2.2
-----------
hereof.
"Borrowing Base Date" means the date that is one (1) Borrower Business
-------------------
Day prior to the date of delivery of the Borrowing Base Certificate.
"Breakage Costs" has the meaning set forth in Section 5.4 hereof.
-------------- -----------
"Business Day" means any day that is not a Saturday, Sunday or a day
------------
on which banks in San Francisco, California or in any other city where a Lender
is located, are required or permitted to be closed and, if such Business Day is
relating to the LIBOR Rate or a Borrowing at the LIBOR Rate, a day that dealings
in U.S. dollar deposits are carried out in the London interbank market.
"Capital Adequacy Regulation" means any guideline, request or
---------------------------
directive of any central bank or other Governmental Authority, or any other law,
rule or regulation, whether or not having the force of law, in each case,
regarding the capital adequacy of any bank or of any corporation controlling a
bank.
"Capital Lease" means any lease of property by any Person that, in
-------------
accordance with GAAP, is or should be capitalized on such Person's balance sheet
or for which the amount of the asset and liability thereunder, as if so
capitalized, should be disclosed in a footnote to such balance sheet.
"Change of Control" means the occurrence of any of the following:
-----------------
(a) the sale, transfer, conveyance or other disposition (other than
by way of merger or consolidation) in one or a series of related transactions,
of all or substantially all of the assets of Borrower;
(b) the adoption of a plan relating to the liquidation or dissolution
of Borrower;
(c) the consummation of any transaction (including any merger or
consolidation) the result of which is that any Person, other than the Principals
and their Affiliates, becomes the beneficial owner, directly or indirectly, of
more than thirty-five percent (35%) of Borrower's Voting Stock, measured by
voting power rather than number of shares; or
(d) the consolidation of Borrower with, or merger of Borrower into,
any Person, or the consolidation of any Person with, or merger of any Person
into, Borrower, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of Borrower is converted into or exchanged
4
<PAGE>
Loan and Security Agreement
for cash, securities or other property, other than any such transaction where
the Voting Stock of Borrower outstanding immediately prior to such transaction
is converted into or exchanged for Voting Stock of the surviving or transferee
Person constituting a majority of the outstanding shares of such Voting Stock of
such surviving or transferee Person immediately after giving effect to such
issuance.
"Change of Law" has the meaning set forth in Section 5.2(c) hereof.
------------- --------------
"Closing Date" means the date that each of Borrower and Agent has
------------
authorized the delivery of the Loan Documents executed by it and each of the
conditions set forth in Section 10.1 have been satisfied or waived by Agent.
------------
"Code" means the Internal Revenue Code of 1986, as amended from time
----
to time, and any successor statute, and regulations promulgated thereunder.
"Collateral" has the meaning specified in Section 6.1 hereof.
---------- -----------
"Commitment" means, at any time with respect to a Lender, the
----------
principal amount set forth beside such Lender's name under the heading
"Commitment" on the signature pages hereto or in the Assignment and Acceptance
pursuant to which such Lender became a Lender hereunder in accordance with the
provisions of Section 13.3, and Section 13.4 hereof, as such Commitment may be
------------ ------------
adjusted from time to time in accordance with the provisions of Section 13.3,
------------
and "Commitments" means, collectively, the aggregate amount of the then
-----------
commitments of all of the Lenders.
"Contaminant" means any chemical, compound, waste, material, mixture,
-----------
living organism or substance (a) the presence, Release or threatened Release of
which may result in potential liability; and/or (b) that is now or hereafter
defined or listed in, or otherwise classified or regulated in any way pursuant
to, any Environmental Laws as a "hazardous waste," "hazardous substance,"
"hazardous material," "extremely hazardous waste," "infectious waste," "toxic
substance," "toxic pollutant," "pollutant," contaminant or any other formulation
or description intended to define, list, or classify substances by reason of
deleterious properties, including without limitation, ignitability, corrosivity,
reactivity, carcinogenicity or toxicity, such materials, to include without
limitation, gasoline, oil, petroleum or other hydrocarbons, polychlorinated
biphenyls (PCBs), asbestos, asbestos-containing material, radon, natural gas,
natural gas liquids, liquefied natural gas or synthetic gas usable for fuel (or
mixtures of natural gas and such synthetic gas).
"Debt" means, with respect to any Person, the sum of the following
----
determined on a consolidated basis, without duplication, in accordance with
GAAP: (a) all liabilities, obligations and indebtedness for borrowed money,
including obligations evidenced by bonds, debentures, notes or similar
instruments; (b) all obligations to pay the deferred purchased price of property
or services, including all obligations under noncompetition agreements, except
trade payables, accrued expenses and other current indebtedness (other than
indebtedness for borrowed money), income tax payable and deferred income tax
arising in the ordinary course of business and not reduced to a promissory note;
(c) all obligations as lessee under Capital Leases; (d) all indebtedness of any
other Person secured by a Lien on any asset of such first Person; (e) all
Guaranty obligations; (f) all obligations, contingent or otherwise, relative to
the face amounts of letters of credit, whether or not drawn, and banker's
acceptances; (g) all obligations to redeem, purchase, exchange, defease or to
otherwise make payments in respect of capital stock or other securities; (h) all
termination payments which would be due and payable pursuant to any hedging
agreement; and (i) all rents and obligations payable under synthetic leases.
5
<PAGE>
Loan and Security Agreement
"Default" means any event or circumstance which, with the giving of
-------
notice, the lapse of time, or both, would (if not cured or otherwise remedied
during such time) constitute an Event of Default.
"Defaulting Lender" has the meaning set forth in Section 2.3(c)
----------------- --------------
hereof.
"Default Rate" means a fluctuating per annum interest rate at all
------------
times equal to the sum of (a) the higher of: (i) the Rate which would be
applicable to Base Rate Loans, or (ii) the highest Rate then in effect for any
Revolving Loan outstanding; plus (b) two percent (2%). The Default Rate shall
be adjusted simultaneously with any change in the Base Rate or the highest Rate
then in effect for any Revolving Loan outstanding, as applicable. In addition,
with respect to Letters of Credit, the Default Rate shall mean an increase in
the Letter of Credit Fee by two (2) percentage points.
"Deposit Account" means each bank account of Borrower established at a
---------------
Deposit Bank, which Deposit Accounts as of the Closing Date are listed in
Schedule 6.9 (a) hereof.
- ----------------
"Deposit Bank" means each bank at which Borrower maintains a Deposit
------------
Account, which Banks, as of the Effective Date, are listed on Schedule 6.9(a).
---------------
"Deposit Control Agreement" means a control agreement substantially in
-------------------------
the form of Exhibit 5 hereto between Agent and each of Borrower's Deposit Banks.
---------
"Distribution" means, in respect of any corporation: (a) the payment
------------
or making of any dividend or other distribution of property in respect of
capital stock (or any options or warrants for such stock) of such corporation,
other than distributions payable solely in additional shares of the capital
stock already held by the equity holder or in shares of Borrower's common stock;
or (b) the redemption or other acquisition of any capital stock (or any options
or warrants for such stock) of such corporation.
"DOL" means the United States Department of Labor or any successor
---
department or agency.
"Dollar," "dollar" and "$" each means dollars in the lawful currency
------
of the United States.
"EBITDA" means, for any period, the sum of the following, without
------
duplication, in accordance with GAAP: (a) Net Income for such period; plus (b)
the sum of the following to the extent deducted in determining Net Income: (i)
income taxes and franchise taxes, (ii) Interest Expense, and (iii) depreciation,
amortization and other noncash charges; less (c) any extraordinary gains. For
purposes of calculating EBITDA for Fiscal Year 1998, all one time fees and
charges related to the costs of Borrower's merger with PWT Acquisition Corp. and
its recapitalization in connection therewith, and relating to the issuance of
the Bonds (all of which one time fees and charges total seven million two
hundred nineteen thousand dollars ($7,219,000)) shall be added back into EBITDA.
For purposes of clause (ii) above, the amortization of deferred financing costs
shall not be included in the definition of Interest Expense, but shall be added
back in the definition of EBITDA. Revenues for purposes of calculating EBITDA
shall not include unpaid, disputed reciprocal compensation.
"Eligible Accounts" means all Accounts of Borrower which have been
-----------------
validly assigned to Agent, on behalf of the Lenders, and which Agent in the
exercise of its reasonable commercial discretion determines to be Eligible
Accounts. Without limiting the discretion of Agent to establish other criteria
of ineligibility, Eligible Accounts shall not include any Account:
6
<PAGE>
Loan and Security Agreement
(a) with respect to which more than three (3) calendar months has
elapsed since the issuance date of the original invoice therefore;
(b) with respect to which any of the representations, warranties,
covenants and agreements contained in Article 6 are not or have ceased to be
---------
complete and correct or have been breached;
(c) with respect to which, in whole or in part, a check, promissory
note, draft, trade acceptance, or other instrument for the payment of money has
been received, presented for payment, and returned uncollected for any reason;
(d) which represents a progress billing (as hereinafter defined) or
as to which Borrower has extended the time for payment without the consent of
Agent; for the purposes hereof, "progress billing" means any invoice for goods
sold or leased or services rendered under a contract or agreement pursuant to
which the Account Debtor's obligation to pay such invoice is conditioned upon
Borrower's completion of any further performance under the contract or
agreement;
(e) as to which any one or more of the following events has occurred
with respect to the Account Debtor on such Account: death or judicial
declaration of incompetency of an Account Debtor who is an individual; the
filing by or against the Account Debtor of a request or petition for
liquidation, reorganization, arrangement, adjustment of debts, adjudication as a
bankrupt, winding-up or other relief under the bankruptcy, insolvency or similar
laws of the United States, any state or territory thereof, or any foreign
jurisdiction, now or hereafter in effect; the making of any general assignment
by the Account Debtor for the benefit of creditors; the appointment of a
receiver or trustee for the Account Debtor or for any of the assets of the
Account Debtor, including, without limitation, the appointment of or taking
possession by a "custodian," as defined in the Federal Bankruptcy Code; the
institution by or against the Account Debtor of any other type of insolvency
proceeding (under the bankruptcy laws of the United States or otherwise) or of
any formal or informal proceeding for the dissolution or liquidation of,
settlement of claims against, or winding up of affairs of, the Account Debtor;
the sale, assignment or transfer of all or any material part of the assets of
the Account Debtor; the nonpayment generally by the Account Debtor of its debts
as they become due; or the cessation of the business of the Account Debtor as a
going concern;
(f) if fifty percent (50%) or more of the aggregate dollar amount of
outstanding Accounts on Borrower's books and owed at such time by an Account
Debtor are classified as ineligible under the other criteria set forth herein or
otherwise established by Agent;
(g) owed by an Account Debtor which: (i) does not maintain its chief
executive office in the United States; or (ii) is not organized under the laws
of the United States or any state thereof; or (iii) is the government of any
foreign country or sovereign state, or of any state, province, municipality or
other political subdivision thereof, or of any department, agency, public
corporation or other instrumentality thereof; except to the extent that such
Account is secured or payable by a letter of credit satisfactory to Agent in its
discretion;
(h) which is evidenced by a promissory note or other instrument;
(i) if Agent believes, in the exercise of its reasonable judgment,
that the prospect of collection of such Account is impaired or that the Account
may not be paid by reason of the Account Debtor's financial inability to pay;
7
<PAGE>
Loan and Security Agreement
(j) which arises other than in the ordinary course of Borrower's
business;
(k) the services giving rise to such Account have not been performed
by Borrower, and, if applicable, accepted by the Account Debtor, or the Account
Debtor revokes its acceptance of such services;
(l) is owed by Pacific Bell, if Pacific Bell is obligated to Borrower
respecting Accounts the aggregate unpaid balance of which exceeds fifty-five
percent (55%) of the aggregate unpaid balance of all otherwise Eligible Accounts
owed to Borrower at such time by all of Borrower's Account Debtors, but only to
the extent of such excess; or is owed by any other Account Debtor which is
obligated to Borrower respecting Accounts the aggregate unpaid balance of which
exceeds ten percent (10%) of the aggregate unpaid balance of all otherwise
Eligible Accounts owed to Borrower at such time by all of Borrower's Account
Debtors, but only to the extent of such excess;
(m) arises out of a contract or order which, by its terms, forbids,
restricts or makes void or unenforceable the granting of a Lien by Borrower to
Agent with respect to such Account;
(n) which is not subject to a first priority and perfected security
interest in favor of Agent for the benefit of the Lenders; or
(0) any other Account subject to a Prior Claim or which in the future
may be subject to a Prior Claim.
If any Account at any time ceases to be an Eligible Account by reason
of any of the foregoing exclusions or any failure to meet any other eligibility
criteria established by Agent in its exercise of its reasonable discretion, then
such Account shall promptly be excluded from the calculation of Eligible
Accounts.
"Eligible Equipment" means all Equipment of Borrower as to which Agent
------------------
has a first priority perfected Lien on behalf of the Lenders and which Agent in
its sole discretion determines to be Eligible Equipment. Without limiting the
discretion of Agent to establish other criteria of ineligibility, Eligible
Equipment shall not include any Equipment:
(a) with respect to which any of the representations, warranties,
covenants, and agreements contained in Article 6 are not or have ceased to be
---------
complete and correct or have been breached;
(b) with respect to which Agent, for the benefit of the Lenders, does
not have a perfected, first priority Lien;
(c) which is located at any location, other than the locations set
forth in Schedule 6.3 hereof, or which is located at any location for which
------------
Agent does not have a currently valid and uncontested Landlord's Waiver;
(d) which is subject to a Prior Claim or which in the future may be
subject to a Prior Claim;
(e) which Agent would not be authorized, after an Event of Default,
to sell without violating any agreement, statute, rule, right or regulation
affecting such Equipment or governing the sale or disposition thereof,
including, without limitation, any Equipment which is subject to any Proprietary
8
<PAGE>
Loan and Security Agreement
Rights requiring the consent or agreement of a third party in order for Agent to
sell such Equipment, or any Equipment which contains or has embedded within such
Equipment software which is subject to such Proprietary Rights requiring the
consent or agreement of a third party in order for Agent to sell such Equipment,
unless such software is readily removed from the Equipment as determined by
Agent in its sole discretion; or
(f) which is unmarketable, obsolete or otherwise not fit for use in
Borrower's business, or which does not meet all applicable standards for
operation of such Equipment of any Governmental Authority.
If any Equipment at any time ceases to be Eligible Equipment by reason
of any of the foregoing exclusions or any failure to meet any other eligibility
criteria established by Agent in the exercise of its reasonable discretion, then
such Equipment shall promptly be excluded from the calculation of Eligible
Equipment.
"Environmental Claims" means all claims, however asserted, by any
--------------------
Governmental Authority or other Person alleging potential liability or
responsibility for actual or alleged violation of any Environmental Law, or any
liability or responsibility arising from the Release or threatened Release or
other presence of a Contaminant.
"Environmental Laws" means all federal, state, provincial or local
------------------
laws, statutes, common law duties, rules, regulations, consent decrees,
ordinances and codes, together with all administrative orders, directed duties,
requests, licenses, authorizations, and permits of, agreements with and
requirements of, any Governmental Authority, in each case relating to
environmental, health, safety and land use matters, such laws including without
limitation, the following: the Clean Air Act (42 U.S.C. (S)(S)7401, et seq.),
Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C.
(S)(S)9601, et seq. ("CERCLA")), Federal Water Pollution Control Act (33 U.S.C.
(S)(S)1251, et seq.), Occupational Safety and Health Act (29 U.S.C. (S)(S)651,
et seq. Resource Conservation and Recovery Act (42 U.S.C. (S)(S)6901, et seq.)
and the Toxic Substances Control Act (15 U.S.C. (S)(S)2601, et seq.).
"Environmental Lien" means a Lien in favor of any Person or
------------------
Governmental Authority for any actual or alleged (a) liability under any
Environmental Laws, or (b) damages arising from, or costs incurred by, such
Person or Governmental Authority in response to, a Release or threatened Release
or other presence of a Contaminant into the environment.
"Equipment" means all of Borrower's now owned and hereafter acquired
---------
telecommunications switches, computer hardware, fiber optic cable and other
fiber optic transmission facilities, transmission equipment, machinery,
equipment, furniture, furnishings, fixtures and other tangible personal property
(except Inventory), including motor vehicles with respect to which a certificate
of title has been issued, aircraft, dies, tools, jigs, and office equipment, as
well as all of such types of property leased by Borrower and all of Borrower's
rights and interests with respect thereto under such leases (including, without
limitation, options to purchase); together with all present and future additions
and accessions thereto, replacements therefor, component and auxiliary parts and
supplies used or to be used in connection therewith, and all substitutes for any
of the foregoing, and all manuals, drawings, instructions, warranties and rights
with respect thereto; wherever any of the foregoing is located.
9
<PAGE>
Loan and Security Agreement
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended and regulations promulgated thereunder.
"ERISA Affiliate" means any trade or business (whether or not
---------------
incorporated) under common control with Borrower within the meaning of Section
414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes
of provisions relating to Section 412 of the Code).
"ERISA Event" means (a) a Reportable Event with respect to a Pension
-----------
Plan; (b) a withdrawal by Borrower or any ERISA Affiliate from a Pension Plan
subject to Section 4063 of ERISA during a plan year in which it was a
substantial employer (as deemed in Section 4001(a)(2) of ERISA) or a cessation
of operations which is treated as such a withdrawal under Section 4062(e) of
ERISA; (c) a complete or partial withdrawal by Borrower or any ERISA Affiliate
from a Multiemployer Plan or notification that a Multiemployer Plan is in
reorganization; (d) the filing of a notice of intent to terminate, the treatment
of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or
the commencement of proceedings by the PBGC to terminate a Pension Plan or
Multiemployer Plan; (e) an event or condition which might reasonably be expected
to constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Pension Plan or Multiemployer Plan;
(f) the imposition of a Lien under Section 412 of the Code or Section 302 of
ERISA or of any liability under Title IV of ERISA, other than PBGC premiums due
but not delinquent under Section 4007 of ERISA, upon Borrower or any ERISA
Affiliate; (g) the engagement of Borrower or any ERISA Affiliate in a
"prohibited transaction" (as such term is defined in Section 4975 of the Code
and such as 406 and 408 of ERISA; or (h) a violation of fiduciary duty set forth
in Section 404 of ERISA in connection with any Plan.
"Event of Default" has the meaning set forth in Section 11.1 hereof.
---------------- ------------
"Excess Availability" means the amount calculated to be equal to: (a)
-------------------
the Availability, minus (b) the Revolving Loan Usage, as set forth in the most
recent Borrowing Base Certificate delivered by Borrower (subject however to the
revisions and adjustments described in Section 2.2 hereof).
-----------
"Exchange Act" means the Securities and Exchange Act of 1934, as
------------
amended, and the rules and regulations promulgated thereunder.
"Exchange Rate" means the nominal rate of exchange available to Agent
-------------
(or its Affiliates) from or through recognized brokers in a recognized foreign
exchange market for the purchase by Agent or such Affiliate, expressed as the
number of units of such currency per one dollar ($1.00).
"FCC" means the Federal Communications Commission or any successor
---
thereto.
"FDIC" means the Federal Deposit Insurance Corporation, and any
----
Governmental Authority succeeding to any of its principal functions.
"Federal Reserve Board" means the Board of Governors of the Federal
---------------------
Reserve System or any successor thereto.
"Fee Letter" means the Fee Letter, dated as of the date hereof,
----------
between Borrower and Agent.
10
<PAGE>
Loan and Security Agreement
"Financial Statements" means, according to the context in which it is
--------------------
used, the financial statements attached hereto, or any financial statements
required to be given to Agent and Lenders pursuant to this Agreement.
"Fiscal Quarter" means each three-month period ending the last day
--------------
each March, June and September, and on December 31 during any Fiscal Year.
"Fiscal Year" means Borrower's fiscal year for financial accounting
-----------
purposes, which fiscal year ends December 31.
"Forecasts" means the forecasts of Borrower's financial condition,
---------
results of operations, and cash flows received by Agent and Lenders pursuant to
Section 7.2(f).
- --------------
"Funding Date" means the date on which a Borrowing occurs.
------------
"GAAP" means generally accepted accounting principles set forth from
----
time to time in the opinions and pronouncements of the Accounting Principles
Board and the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the U.S. accounting
profession), which are applicable to the circumstances as of the date of
determination.
"General Intangibles" means all of Borrower's now owned or hereafter
-------------------
acquired general intangibles, choses in action and causes of action and all
other intangible personal property of Borrower of every kind and nature (other
than Accounts), including, without limitation, all contract rights (including
switch installation and testing contracts, and electronic data processing and
switch related software contracts), Assigned Contracts, leases (including real
property leases and leases of fiber capacity), Proprietary Rights, rights-of-
way, corporate or other business records, inventions, designs, blueprints,
plans, specifications, slogan marks, trade secrets, goodwill, computer software,
customer lists, registrations, licenses (including all of Borrower's rights in
or with respect to any Telecommunications License, as more fully set forth in
Section 6.1(a) hereof), franchises, tax refund claims, any funds which may
- --------------
become due to Borrower in connection with the termination of any Plan or other
employee benefit plan or any rights thereto and any other amounts payable to
Borrower from any Plan or other employee benefit plan, rights and claims against
carriers and shippers, rights to indemnification, business interruption
insurance and proceeds thereof, property, casualty or any similar type of
insurance and any proceeds thereof, proceeds of insurance covering the lives of
key employees on which Borrower is beneficiary, and any letter of credit,
guarantee, claim, security interest or other security held by or granted to
Borrower to secure payment by an Account Debtor of any of the Accounts.
"Governmental Authority" means any nation or government, any state,
----------------------
province, or other political subdivision thereof, any central bank (or similar
monetary or regulatory authority) thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.
"Guaranty" means, with respect to any Person, all obligations of such
--------
Person which in any manner directly or indirectly guarantee or assure, or in
effect guarantee or assure, the payment or performance of any indebtedness,
dividend or other obligations or Debt of any other Person (the "guaranteed
obligations"), or assure or in effect assure the holder of the guaranteed
obligations against loss in respect thereof, including, without limitation, any
such obligations incurred through an
11
<PAGE>
Loan and Security Agreement
agreement, contingent or otherwise: (a) to purchase the guaranteed obligations
or any property constituting security therefor; (b) to advance or supply funds
for the purchase or payment of the guaranteed obligations or to maintain a
working capital or other balance sheet condition; or (c) to lease property or to
purchase any debt or equity securities or other property or services.
"Indenture" means that certain Indenture, dated January 29, 1999,
---------
between Borrower and NationsBanc Montgomery Securities LLC, CIBC Opperheimer
Corp. and First Union Capital Markets, as Initial Purchasers of the Senior
Notes.
"Intercompany Accounts" means all assets and liabilities, however
---------------------
arising, which are due to Borrower from, which are due from Borrower to, or
which otherwise arise from any transaction by Borrower with any Affiliate of
Borrower.
"Interest Expense" means, with respect to any period, without
----------------
duplication, the sum of: (a) interest expense for such period, as determined in
accordance with GAAP, including, without limitation; (i) any amortization of
Debt discount; (ii) the net cost under any interest rate hedging arrangement
(including any amortization of discounts); (iii) the interest portion of any
deferred payment obligation; (iv) all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance financing
and similar transactions; and (v) all capitalized interest and accrued interest;
(b) the interest component of Capital Leases paid, accrued and/or scheduled to
be paid or accrued during such period as determined in accordance with GAAP; and
(c) the portion of any rental obligation in respect of any permitted
sale/leaseback transaction allocable to interest expense (determined as if it
were treated as a Capital Lease).
"Interest Period" shall mean, (a) with respect to each Borrowing
---------------
bearing interest at the LIBOR Rate, the period commencing on the date of the
disbursement of such Borrowing and ending on the same calendar date one (1)
month, three (3) months or six (6) months later (as selected by Borrower in its
Loan Request); (b) with respect to each Borrowing bearing interest at the Base
Rate, the period commencing on the date of the disbursement of such Borrowing
and ending on the Business Day selected by Borrower in its Loan Request;
provided, however, that:
(a) any Interest Period which would otherwise end on a day which is
not a Business Day shall be extended to the next succeeding Business Day unless,
with respect to a Borrowing bearing interest at the LIBOR Rate, such Business
Day falls in another calendar month, in which case, such Interest Period shall
end on the preceding Business Day; and
(b) in no event shall the Interest Period for any Borrowing extend
beyond the Stated Termination Date.
"Inventory" means all of Borrower's now owned and hereafter acquired
---------
inventory, goods, merchandise, works in progress, finished goods and other
personal property, including telephone equipment, parts and installation
materials, wherever located, to be furnished under any contract of service or
held for sale or lease, all returned or repossessed goods, all raw materials,
component parts, other materials and supplies of any kind, nature or description
which are or might be consumed in Borrower's business or used in connection with
the manufacturing, packing, shipping, advertising, selling or finishing of such
goods, merchandise and such other personal property, and all documents of title
or other documents representing them, together with all additions and accessions
thereto, replacements therefor and products thereof.
12
<PAGE>
Loan and Security Agreement
"Investment Property" shall have the meaning given such term in
-------------------
Section 9-115 of the UCC, but shall exclude the Bonds Security.
"IRS" means the Internal Revenue Service and any Governmental
---
Authority succeeding to any of its principal functions under the Code.
"Landlord Waiver" means any landlord waiver, mortgagee waiver, bailee
---------------
letter or any similar acknowledgment agreement of any warehouseman or third
Person in possession of Inventory, in form and substance satisfactory to Agent.
"Lender" and "Lenders" shall mean each financial institution that is
------ -------
at any time a signatory hereto and/or to an Assignment and Acceptance, and their
permitted successors and assigns. The term "Lender" shall include, under this
Agreement and each of the other Loan Documents, Agent, if and to the extent that
Agent makes Commitments hereunder.
"Lender Advances" has the meaning set forth in Section 2.3(a) hereof.
--------------- --------------
"Letter of Credit" has the meaning set forth in Section 2.7(a) hereof.
---------------- --------------
"Letter of Credit Fee" has the meaning set forth in Section 3.4
-------------------- -----------
hereof.
"Letter of Credit Request" has the meaning set forth in Section
------------------------ -------
2.7(c)(vi) hereof.
- ----------
"Letter of Credit Sublimit" shall mean four million dollars
-------------------------
($4,000,000).
"LIBOR Loan" means a Loan at any time bearing interest at the LIBOR
----------
Rate.
"LIBOR Rate" means the sum of (a) the per annum rate of interest at
----------
which U.S. dollar deposits in the principal amount of the relevant Borrowing for
an Interest Period (as selected by Borrower in its Loan Request) are offered to
Agent by prime banks in the London interbank market at 11:00 a.m. (London time)
on the date which is two (2) Business Days prior to the date the Borrowing is to
be disbursed hereunder, plus (b) the margin (the "LIBOR Margin") set forth below
---- ------------
corresponding to the applicable ratio of Borrower's Total Debt to EBITDA as of
the most recent Financial Statements of Borrower delivered prior to or on the
date of the applicable Borrowing:
Ratio of Total Debt to EBITDA Margin
----------------------------- ------
Greater than or equal to 8.5:1............................ 3.50%
Greater than or equal to 8:1 but less than 8.5:1.......... 3.25%
Greater than or equal to 7:1 but less than 8:1............ 3.00%
Greater than or equal to 6:1 but less than 7:1............ 2.75%
Greater than or equal to 5:1 but less than 6:1............ 2.50%
Less than 5:1............................................. 2.25%
"Lien" means: (a) any interest in property securing an obligation owed
----
to, or a claim by, a Person other than the owner of the property, whether such
interest is based on the common law, statute or contract, and, including,
without limitation, a security interest, charge, claim or lien arising from a
mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit
arrangement, agreement, security agreement, conditional sale or trust receipt or
a lease, consignment or bailment for
13
<PAGE>
Loan and Security Agreement
security purposes; and (b) to the extent not included under clause (a), any
reservation, exception, encroachment, easement, right-of-way, covenant,
condition, restriction, lease or other title exception or encumbrance affecting
property.
"Liquidation Value" means the net amount which can be expected to be
-----------------
realized upon a forced liquidation sale of the Inventory, as initially
determined by Borrower and approved and revised by Agent from time to time in
reliance upon the advice of any liquidation company, auctioneer or consultant
selected by Agent for such purpose.
"Loan" means any loan extended hereunder to Borrower.
----
"Loan Documents" means this Loan Agreement, the Arbitration Agreement,
--------------
the Fee Letter, each Landlord Waiver, each Deposit Control Agreement, each of
the other documents described in Section 10.1(a) hereof, and any other
---------------
agreements, instruments, and documents heretofore, now or hereafter evidencing,
securing, guaranteeing or otherwise relating to the Obligations, the Collateral,
or any other aspect of the transactions contemplated by this Agreement.
"Loan Request" means Borrower's written request for a Borrowing
------------
pursuant to Section 2.2(b) hereof, which Loan Request shall be in the form of
--------------
Exhibit 4 hereto.
- ---------
"Majority Lenders" means Lenders whose Pro Rata Shares aggregate
----------------
sixty-six and two thirds percent (66 2/3%) or more of the Commitments.
"Margin Stock" means "margin stock" as such term is defined in
------------
Regulation G, T, U or X of the Federal Reserve Board.
"Material Adverse Effect" means (a) a material adverse change in, or a
-----------------------
material adverse effect upon, the operations, business, properties, condition
(financial or otherwise) of Borrower or the Collateral; (b) a material
impairment of the ability of Borrower to perform under any Loan Document and to
avoid any Event of Default; or (c) a material adverse effect upon (i) the
legality, validity, binding effect or enforceability against Borrower of any
Loan Document, or (ii) the perfection or priority of any Lien granted to Agent,
other than as permitted under the Loan Documents and other than as results from
the Agent's or any Lender's own actions; or (d) the loss, termination or
revocation of any Telecommunication License or other license, permit or other
authorization required or necessary for Borrower to conduct its business in the
manner contemplated as of the Closing Date.
"Material Agreements" means all agreements and contracts (and all
-------------------
amendments, supplements, extensions, and renewals thereof) to which Borrower is
a party or is bound, the termination or breach of which, at the time of such
termination or breach, could have a Material Adverse Effect. The Material
Agreements in effect as of the Closing Date include, without limitation, the
agreements listed on Schedule 1.1A hereto.
-------------
"Maximum Amount" means the aggregate amount of the Commitments, which
--------------
amount on the Closing Date shall be twenty million dollars ($20,000,000), and
which amount thereafter shall be increased to the extent of the Commitments made
by Lenders added after the Closing Date, if any, but which Maximum Amount in no
event shall be greater than forty million dollars ($40,000,000) (subject to
reduction under Section 4.2(b) hereof).
--------------
"Maximum Rate" has the meaning specified in Section 3.2.
------------ -----------
14
<PAGE>
Loan and Security Agreement
"Merger Agreement" means that certain Agreement and Plan of Merger,
----------------
dated as of June 30, 1998, among PWT Acquisition Corp., Borrower, Bay Area Alarm
Company and John K. La Rue.
"Multiemployer Plan" means a "multiemployer plan" as defined in
------------------
Section 4001(a)(3) of ERISA which is or was at any time contributed to by
Borrower or any ERISA Affiliate.
"Negotiable Collateral" has the meaning set forth in Section
--------------------- -------
6.1(a)(iii) hereof.
- -----------
"Net Amount of Eligible Accounts" means, at any time, the gross amount
-------------------------------
of Eligible Accounts, less returns, discounts, claims, credits, and allowances
of any nature at any time issued, owing, granted, outstanding, available, or
claimed other than allowances for price protection, cooperative advertising and
special sales promotion allowances in amounts which are consistent with the past
practices of Borrower generally in effect during the six (6) month period
immediately preceding the date hereof.
"Obligations" means all present and future loans, advances,
-----------
liabilities, obligations, covenants, duties and debts owing by Borrower to any
of Agent and/or any Lender, arising under or pursuant to this Agreement or any
of the other Loan Documents, whether or not evidenced by any note or other
instrument or document, whether arising from an extension of credit, opening of
a letter of credit, acceptance, loan, guaranty, indemnification or otherwise,
whether direct or indirect (including, without limitation, those acquired by
assignment from others, and any participation by any of Agent and/or any Lender
in Borrower's debts owing to others), absolute or contingent, due or to become
due, primary or secondary, as principal or guarantor, and including, without
limitation, all principal, interest, charges, expenses, fees, attorneys' fees,
filing fees and any other sums chargeable to Borrower hereunder or under any of
the other Loan Documents. "Obligations" includes, without limitation, all debts,
liabilities, and obligations now or hereafter owing from Borrower to any of
Agent and/or any Lender under or in connection with the Letters of Credit.
"Other Taxes" means any present or future stamp or documentary taxes
-----------
or any other excise or property taxes, charges or similar levies which arise
from any payment made hereunder or from the execution, delivery or registration
of, or otherwise with respect to, this Agreement or any other Loan Documents.
"Participant" has the meaning set forth in Section 13.3(e) hereof.
----------- ---------------
"PBGC" means the Pension Benefit Guaranty Corporation or any
----
Governmental Authority succeeding to the functions thereof.
"Pending Revolving Loans" means, at any time, the aggregate principal
-----------------------
amount of all Revolving Loans requested in any Loan Request received by Agent
which have not yet been advanced.
"Pension Plan" means a pension plan (as defined and deemed in Section
------------
3(2) of ERISA) subject to Title IV of ERISA which Borrower or an ERISA Affiliate
sponsors, maintains, or has maintained, or to which Borrower or an ERISA
Affiliate makes, is making, or is obligated to make, contributions, or in the
case of a Multiemployer Plan, has made contributions.
15
<PAGE>
Loan and Security Agreement
"Permitted Liens" means:
---------------
(a) Liens for taxes not delinquent or for taxes being contested in
good faith by appropriate proceedings and as to which adequate financial
reserves have been established on Borrower's books and records and a stay of
enforcement of any such Lien is in effect;
(b) Agent's Liens and Liens in favor of the trustee under the
Indenture in respect of the Bonds Security;
(c) deposits under worker's compensation, unemployment insurance,
social security and other similar laws, or to secure the performance of bids,
tenders or contracts (other than for the repayment of borrowed money) or to
secure indemnity, performance or other similar bonds for the performance of
bids, tenders or contracts (other than for the repayment of borrowed money) or
to secure statutory obligations (other than liens arising under ERISA or
Environmental Liens) or surety or appeal bonds, or to secure indemnity,
performance or other similar bonds in the ordinary course of business;
(d) inchoate Liens securing the claims or demands of materialmen,
mechanics, carriers, warehousemen, landlords and other like Persons, provided
that the payment thereof is not at the time required by Section 9.1;
-----------
(e) reservations, exceptions, encroachments, easements, rights of
way, covenants running with the land, and other similar title exceptions or
encumbrances affecting any Real Estate; provided that they do not in the
aggregate materially detract from the value of the Real Estate or materially
interfere with its use in the ordinary conduct of Borrower's business;
(f) judgment and other similar Liens arising in connection with court
proceedings, provided that (i) the existence of such Liens is being contested in
good faith and by proper proceedings diligently pursued, (ii) reserves or other
appropriate provision, if any, as are required by GAAP have been made therefor,
(iii) a stay of enforcement of any such Liens is in effect, (iv) the priority of
any such Liens is subordinate to that of Agent's Liens, and (v) the existence of
any judgment or court proceedings upon which such Liens are based does not
otherwise constitute an Event of Default under this Agreement;
(g) purchase money Liens upon any specific fixed assets hereafter
acquired or Liens existing on any such future fixed assets at the time of
acquisition thereof and including in any event any capital or finance leases;
provided, that: (i) no such purchase money Lien (or capital or finance lease, as
the case may be) with respect to specific future fixed assets, or as refinances,
shall extend to or cover any property other than the specific fixed assets so
acquired or acquired subject to such Lien (or lease) and the proceeds thereof;
(ii) such Lien only secures the obligation to pay the purchase price of such
specific fixed assets (or the obligations under the capital or finance lease);
(iii) the principal amount secured thereby shall not exceed one hundred (100%)
percent of the cost of the fixed assets so acquired; (iv) no Default or Event of
Default shall exist or have occurred; and (v) the amount of Debt evidenced by
such purchase money lien does not exceed the amount of Debt permitted pursuant
to Section 9.12 hereof;
(h) Liens in existence as of the Closing Date and identified on
Schedule 1.1B attached hereto.
- -------------
"Permitted Repurchase Amount of Bonds" means (a) five million dollars
------------------------------------
($5,000,000) at any time that the Maximum Amount is equal to or greater than
twenty million dollars ($20,000,000) and less
16
<PAGE>
Loan and Security Agreement
than forty million dollars ($40,000,000), and (b) ten million dollars
($10,000,000) at any time that the Maximum Amount is forty million dollars
($40,000,000).
"Person" means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation, limited
liability company, Governmental Authority, or any other entity.
"Plan" means (a) any employee benefit plan (as defined in Section 3(3)
----
of ERISA) which Borrower sponsors or maintains or to which Borrower makes, is
making, has made, or has sponsored or maintained, or is or has been obligated to
make, contributions, and (b) any Pension Plan.
"Premises" means the land identified by addresses on Schedule 8.12,
-------- -------------
together with all buildings, improvements, and fixtures thereon and all
tenements, hereditaments and appurtenances belonging or in any way appertaining
thereto, and which constitutes all of the real property in which Borrower has
any interests on the Closing Date.
"Principals" means Mr. John La Rue, William Blair & Company, L.L.C.,
----------
William Blair Capital Partners VI, L.P., Safeguard Scientifics, Inc., SCP
Private Equity Partners, L.P., Safeguard 98 Capital, L.P., TL Ventures III L.P.,
Mr. Wallace W. Griffin, Bay Alarm Company and Richard E Bryson.
"Prior Claims" means, at any time, all Liens created by applicable
------------
laws which rank, or are capable of ranking, prior to or pari passu with Agent's
Liens against all or part of the Collateral including, without limitation, for
amounts owing for wages, employee deductions, goods and services taxes, sales
taxes, income taxes, employee health taxes, municipal taxes, workers'
compensation, government royalties, pension fund obligations and overdue rents.
"Pro Rata Share" means, with respect to a Lender, a fraction
--------------
(expressed as a percentage), the numerator of which is the amount of such
Lender's Commitment and the denominator of which is the sum of the amounts of
all of the Lenders' then Commitments.
"Proprietary Rights" means all now owned and hereafter arising or
------------------
acquired licenses, franchises, permits, patents, patent rights, copyrights,
works which are the subject matter of copyrights, trademarks, service marks,
trade names, trade styles, patent, trademark and service mark applications, and
all licenses and rights related to any of the foregoing, including, without
limitation, those patents, trademarks, service marks and copyrights set forth on
Schedule 8.13 hereto, and all other rights under any of the foregoing, all
- -------------
extensions, renewals, reissues, divisions, continuations, and continuations-in-
part of any of the foregoing, and all rights to sue for past, present and future
infringement of any of the foregoing.
"Proprietary Rights Collateral" means all now owned and hereafter
-----------------------------
arising or acquired Collateral consisting of Proprietary Rights.
"Rate" shall mean the rate of interest applicable to any Revolving
----
Loans or other Obligations, as set forth in Section 3.1 hereof.
-----------
"Real Estate" means all of the present and future interests of
-----------
Borrower, as owner, lessee or otherwise, in the Premises, including, without
limitation, any interest arising from an option to purchase or lease any
Premises or any portion thereof.
17
<PAGE>
Loan and Security Agreement
"Release" means a release, spill, emission, leaking, pumping,
-------
injection, deposit, disposal, discharge, dispersal, leaching or migration of a
Contaminant into the indoor or outdoor environment or into or out of any Real
Estate or other property, including the movement of Contaminants through or in
the air, soil, surface water, groundwater or Real Estate or other property.
"Reportable Event" means, any of the events set forth in Section
----------------
4043(c) of ERISA or the regulations thereunder, other than any such event for
which the thirty (30)-day notice requirement of Section 4043(a) of ERISA has
been waived in regulations issued by the PBGC but including any such event for
which advance notice is required to be given to the PBGC under Section 4043(b)
of ERISA.
"Requirement of Law" means, as to any Person, any law (statutory or
------------------
common), treaty, rule or regulation or determination of an arbitrator or of a
Governmental Authority, in each case applicable to or binding upon the Person or
any of its property or to which the Person or any of its property is subject.
"Requisite Lenders" means at any time, Lenders whose Pro Rata Shares
-----------------
aggregate one hundred percent (100%) of the Commitments.
"Reserve" means the greater of (a) five hundred thousand dollars
-------
($500,000); or (b) the amount certified by Borrower to Agent from time to time
as the maximum aggregate amount of Borrower's Accounts of the types described in
Section 6.8(e) hereof.
- --------------
"Reserve Requirements" means the aggregate (without duplication) of
--------------------
the rates (expressed as a decimal fraction) of reserve requirements in effect on
any given day (including, without limitation, basic, supplemental, marginal and
emergency reserves under any regulations of the Board of Governors of the
Federal Reserve System ("Board") or other governmental authority having
-----
jurisdiction with respect thereto) dealing with reserve requirements prescribed
for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in
Regulation D of the Board) maintained by a member bank of the Federal Reserve
System.
"Restricted Investment(s) or Expenditure(s)" means any acquisition of
------------------------------------------
property by Borrower in exchange for cash or other property (including if in the
form of an acquisition of stock, debt or other indebtedness or obligation), or
the acquisition of any other property, or a loan, advance, capital contribution
or subscription. Notwithstanding the foregoing, the following investments and
other acquisitions shall not be deemed Restricted Investments or Expenditures
for purposes of Section 9.9(c) hereof (so long as, prior to and subsequent to
--------------
any such investment or acquisition, Borrower is and remains in compliance with
all of its covenants herein, including all financial covenants): (a) capital
expenditures not to exceed fifty million dollars ($50,000,000) in the aggregate
for the Fiscal Year ending December 31, 1999, and sixty million dollars
($60,000,000) in the aggregate for each of the Fiscal Years ending December 31,
2000 and December 31, 2001; (b) acquisitions of businesses in the same line of
business as Borrower, in an aggregate amount not to exceed fifteen million
dollars ($15,000,000) per Fiscal Year, provided that Borrower is in compliance
with all of its covenants hereunder at the time of such acquisition, and
Borrower has demonstrated to Agent that it shall remain in compliance with its
covenants hereunder after and as a result of such acquisition; (c) Equipment,
inventory, supplies and proprietary assets purchased, leased or licensed in the
ordinary course of Borrower's business, including fiber transport lines; (d)
current assets arising from the sale or lease of goods or the rendition of
services in the ordinary course of business of Borrower, exclusive, however, of
Intercompany Accounts; (e) direct obligations of the United States of America,
or any agency thereof, or obligations guaranteed by the United States of
America, provided that such obligations mature within one year from the date of
18
<PAGE>
Loan and Security Agreement
acquisition thereof; (f) certificates of deposit maturing within one year from
the date of acquisition, bankers' acceptances, eurodollar bank deposits, or
overnight bank deposits, in each case issued by, created by, or with a bank or
trust company organized under the laws of the United States or any state thereof
having capital and surplus aggregating at least one hundred million dollars
($100,000,000); and (g) commercial paper given a rating of "A2" or better by
Standard & Poor's Corporation or "P2" or better by Moody's Investors Service,
Inc. and maturing not more than ninety (90) days from the date of creation
thereof.
"Revolving Loans" has the meaning set forth in Section 2.2(a) hereof.
--------------- --------------
"Revolving Loan Usage" means, as of the date of determination, the sum
--------------------
of (a) the unpaid balance of Revolving Loans at such time, (b) the aggregate
amount of Pending Revolving Loans at such time, and (c) the aggregate undrawn
amount of all outstanding Letters of Credit.
"Settlement Date" has the meaning set forth in Section 2.4(a) hereof.
--------------- --------------
"Solvent" means when used with respect to any Person that (a) the fair
-------
value of all its assets is in excess of the total amount of its debts (including
contingent liabilities); (b) it is able to pay its debts as they mature; (c) it
does not have unreasonably small capital for the business in which it is engaged
or for any business or transaction in which it is about to engage; and (d) it is
not "insolvent" as such term is defined in Section 101(32) of the Bankruptcy
Code.
"SPUC" means any state administrative agency that has primary
----
jurisdiction for the regulation of telecommunications services, including the
California Public Utilities Commission.
"Stated Termination Date" means the date that is three (3) years from
-----------------------
the Closing Date.
"Subsidiary" means any corporation of which more than fifty percent
----------
(50%) of the Voting Stock is at the time, directly or indirectly through one or
more intermediaries, owned by Borrower and/or one or more of its Subsidiaries.
"Subsidiary Joinder" means a Subsidiary Joinder executed by each new
------------------
Subsidiary in favor of Agent and the Lenders in the form of Exhibit 6 attached
---------
hereto and otherwise in form and substance satisfactory to Agent, pursuant to
which all obligations of Borrower hereunder shall become the joint and several
obligations of Borrower and the Subsidiary, and the Subsidiary shall undertake
all covenants hereunder and under the other Loan Documents, and all grants,
covenants, representations, warranties, notices, reporting requirements, events
of default, Schedules and all other provisions hereunder and under the other
Loan Documents shall thereafter be deemed to refer to each of Borrower, such
Subsidiary and all other Subsidiaries, individually and on a consolidated basis,
where applicable. From and after the date that any Subsidiary Joinder is
executed by a new Subsidiary, "Borrower" shall mean Borrower and each such
Subsidiary, jointly and severally.
"Supporting Letter of Credit" has the meaning set forth in Section
--------------------------- -------
2.7(k) hereof.
- ------
"Taxes" means any and all present or future taxes, levies, imposts,
-----
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of each Lender and Agent, such taxes (including income
taxes or franchise taxes) as are imposed on or measured by each Lender's net
income by the jurisdiction (or any political subdivision thereof) under the laws
of which such Lender or Agent, as the case may be, is organized or maintains a
lending office.
19
<PAGE>
Loan and Security Agreement
"Telecommunications Laws" means all laws specifically related to the
-----------------------
telecommunications industry and the provision of telecommunications services,
including the Telecommunications Act of 1996, as amended, and the rules and
regulations issued thereunder, the rules and regulations of the FCC and any
SPUC, and applicable public utilities laws and regulations.
"Telecommunications Licenses" means any license, permit, certificate,
---------------------------
approval or other authorization, or any renewal or extension thereof, issued by
the FCC or any SPUC to Borrower.
"Termination Date" means the earliest to occur of (i) the Stated
----------------
Termination Date, (ii) the date this Agreement is terminated either by Borrower
pursuant to Section 4.2 or by the Majority Lenders pursuant to Section 11.2, or
----------- ------------
(iii) the date this Agreement is otherwise terminated for any reason whatsoever.
"Total Debt" means, as of any date, all Debt of Borrower and its
----------
Subsidiaries, if any, on a consolidated basis.
"UCC" means the Uniform Commercial Code (or any successor statute) of
---
the State of California or of any other state the laws of which are required by
Section 9-103 thereof to be applied in connection with the perfection of
security interests.
"Unfunded Pension Liability" means the excess of a Pension Plan's
--------------------------
benefit liabilities under Section 4001(a)(16) of ERISA, over the current value
of that Pension Plan's assets, determined in accordance with the assumptions
used for funding the Pension Plan pursuant to Section 412 of the Code for the
applicable plan year.
"Voting Stock" means any and all shares, interests, participations,
------------
rights or other equivalents (however designated) of corporate stock of any class
or kind ordinarily (without regard to the occurrence of any contingency) having
the power to vote for the election of directors or convertible into stock having
the power to vote for the election of directors.
"Year 2000 Problem" means the inability of Borrower's computer
-----------------
programs to distinguish the year 1900 from the year 2000.
1.2 Accounting Terms. Any accounting term used in this Agreement shall
----------------
have, unless otherwise specifically provided herein, the meaning customarily
given in accordance with GAAP, and all financial computations hereunder shall be
computed, unless otherwise specifically provided herein, in accordance with GAAP
as consistently applied.
1.3 Interpretive Provisions.
-----------------------
(a) Singular and Plural Terms. The meanings of defined terms are
-------------------------
equally applicable to the singular and plural forms of the defined terms.
(b) Particular Terms.
----------------
(i) The words "hereof," "herein," "hereunder" and similar words
refer to this Agreement as a whole and not to any particular provision of this
Agreement.
(ii) Subsection, Section, Schedule and Exhibit references are to
this Agreement unless otherwise specified.
20
<PAGE>
Loan and Security Agreement
(iii) The term "documents" includes any and all instruments,
documents agreements, certificates, indentures, notices and other writings,
however evidenced.
(iv) The term "including" is not limiting and means "including
without limitation."
(v) In the computation of periods of time from a specified date
to a later specified date, the word "from" means "from and including", the words
"to" and "until" each mean "to but excluding" and the word "through" means "to
and including."
(c) References to Agreements and Statutes. Unless otherwise expressly
-------------------------------------
provided herein, (i) references to agreements (including this Agreement) and
other contractual instruments shall be deemed to include all subsequent
amendments, restatements and other modifications thereto, but only to the extent
such amendments and other modifications are not prohibited by the terms of any
Loan Document; and (ii) references to any statute or regulation are to be
construed as including all statutory and regulatory provisions consolidating,
amending, replacing, supplementing or interpreting the statute or regulation.
(d) Captions and Headings. The captions and headings of this
---------------------
Agreement are for convenience of reference only and shall not affect the
interpretation of this Agreement.
(e) Limitations, Tests and Measurements. This Agreement and the other
-----------------------------------
Loan Documents may use several different limitations, tests or measurements to
regulate the same or similar matters. All such limitations, tests and
measurements are cumulative and shall each be performed in accordance with their
terms.
(f) No Construction Against Lenders. This Agreement and the other
-------------------------------
Loan Documents are the result of negotiations among and have been reviewed by
counsel to Agent, the Lenders, Borrower and the other parties, and are the
products of all parties. Accordingly, they shall not be construed against the
Lenders or Agent merely because of Agent's or the Lenders' involvement in their
preparation.
(g) UCC Terms. Unless otherwise expressly provided herein, terms used
---------
and not defined in this Agreement which are defined in the UCC shall be
construed and defined in accordance with the meaning and definition ascribed to
such terms under the UCC.
1.4 Documents, Instruments, and Chattel Paper. Borrower represents and
-----------------------------------------
warrants to Agent and Lenders as follows:
(a) Valid and Genuine. All documents, instruments, and chattel paper
-----------------
describing, evidencing, or constituting Collateral, and all signatures and
endorsements thereon, are and will be complete, valid and genuine.
(b) Ownership. All goods evidenced by such documents, instruments,
---------
and chattel paper are and will be owned by Borrower, free and clear of all Liens
other than Permitted Liens.
1.5 Right to Cure. Agent may, in its discretion and, at the direction of
-------------
the Majority Lenders, shall, pay any amount or do any act required of Borrower
hereunder or under any other Loan Document in order to preserve, protect,
maintain or enforce the Obligations, the Collateral or Agent's Liens therein,
and which Borrower fails to pay or do, including, without limitation, payment of
any
21
<PAGE>
Loan and Security Agreement
judgment against Borrower, any insurance premium, any warehouse charge, any
finishing or processing charge, any landlord's claim, and any other Lien upon or
with respect to the Collateral. All payments that Agent makes under this Section
and all out-of-pocket costs and expenses that Agent pays or incurs in connection
with any action taken by it hereunder shall be charged to Borrower's Account as
a Revolving Loan bearing interest at the Default Rate. Any payment made or other
action taken by Agent under this Section shall be without prejudice to any right
to assert an Event of Default hereunder and to proceed thereafter as herein
provided.
1.6 Power of Attorney. Borrower hereby appoints Agent and Agent's
-----------------
designees as Borrower's attorney, with the following powers:
(a) Endorsement of Checks, etc. To endorse Borrower's name on any
--------------------------
checks, notes, acceptances, money orders, or other forms of payment or security
that come into Agent's or any Lender's possession.
(b) Sign Invoices, etc. To sign Borrower's name on any invoice, bill
------------------
of lading, warehouse receipt or other document of title relating to any
Collateral, on drafts against customers, on assignments of Accounts, on notices
of assignment, financing statements and other public records.
(c) Change Address. To notify the post office authorities, when an
--------------
Event of Default exists, to change the address for delivery of Borrower's mail
to an address designated by Agent and to receive, open and dispose of all mail
addressed to Borrower.
(d) Verification of Accounts. To send requests for verification of
------------------------
Accounts to customers or Account Debtors.
(e) Other Acts. To do all things necessary or desirable to carry out
----------
this Agreement. Borrower ratifies and approves all acts of such attorney. None
of the Lenders, Agent or their attorneys will be liable for any acts or
omissions or for any error of judgment or mistake of fact or law. This power,
being coupled with an interest, is irrevocable until this Agreement has been
terminated and the Obligations have been fully satisfied.
1.7 Agent's and Lenders' Rights, Duties and Liabilities. Borrower assumes
---------------------------------------------------
all responsibility and liability arising from or relating to the use, sale or
other disposition of the Collateral. None of Agent, any Lender or any of their
respective officers, directors, employees, representatives or agents shall be
liable or responsible in any way for the safekeeping of any of the Collateral,
or for any loss or damage thereto, or for any diminution in the value thereof,
or for any act of default of any warehouseman, carrier, forwarding agency or
other Person whomsoever, all of which shall be at Borrower's sole risk. The
Obligations shall not be affected by any failure of Agent or any Lender to take
any steps to perfect Agent's Liens or to collect or realize upon the Collateral,
nor shall loss of or damage to the Collateral release Borrower from any of the
Obligations. Agent may (but shall not be required to) and, at the direction of
the Majority Lenders, shall, without notice to or consent from Borrower, sue
upon or otherwise collect, extend the time for payment of, modify or amend the
terms of, compromise or settle for cash, credit, or otherwise upon any terms,
grant other indulgences, extensions, renewals, compositions, or releases, and
take or omit to take any other action with respect to the Collateral, any
agreement relating thereto, any insurance applicable thereto, or any Person
liable directly or indirectly in connection with any of the foregoing, without
discharging or otherwise affecting the liability of Borrower for the Obligations
or under this Agreement or any other agreement now or hereafter existing between
Agent and/or Lender and Borrower.
22
<PAGE>
Loan and Security Agreement
ARTICLE II.
LOANS AND LETTERS OF CREDIT
2.1 Total Facility. Subject to all of the terms and conditions of this
--------------
Agreement, each Lender severally, but not jointly, agrees to make available its
Pro Rata Share of a revolving line of credit consisting of Revolving Loans and
Letters of Credit up to the Maximum Amount, as described in this Article 2, for
---------
Borrower's use from time to time during the term of this Agreement.
2.2 Revolving Loans.
---------------
(a) Amounts. Subject to the terms and conditions contained herein,
-------
each Lender severally, and not jointly, agrees, upon Borrower's request from
time to time as provided in Section 2.2(b) hereof during the period from the
--------------
Closing Date to but not including the Termination Date, to make revolving Loans
(the "Revolving Loans") to Borrower in an aggregate amount not to exceed such
---------------
Lender's Pro Rata Share of the Excess Availability. Agent may (but shall not be
obligated to), rely on each Borrowing Base Certificate, Loan Request and any
other schedules or reports in determining or verifying the eligibility of
Accounts and Equipment and the amount of the Availability and Excess
Availability, or for any other purpose. Agent, in the exercise of its
discretion, may (i) impose additional restrictions (or eliminate the same) to
standards of eligibility set forth in the definition of "Eligible Accounts"
and/or "Eligible Equipment;" (ii) revise or adjust Borrower's calculation of
"Availability," "Available Receivables and Equipment Balance," "Excess
Availability," "Net Amount of Eligible Accounts or "Liquidation Value of
Eligible Equipment" set forth in any Borrowing Base Certificate; and (iii)
otherwise revise, adjust, approve or disapprove any Borrowing Base Certificate
delivered by Borrower or any calculation or determination set forth therein.
(b) Procedure for Borrowing. Each Borrowing shall be made upon
-----------------------
Borrower's delivery to Agent of an irrevocable written notice (the "Loan
----
Request"), executed by an authorized officer of Borrower, which Loan Request
- -------
must be received by Agent no later than 1:00 p.m. (San Francisco time), three
(3) Business Days prior to a requested Borrowing of a LIBOR Loan, or one (1)
Business Day prior to a requested Borrowing of a Base Rate Loan, and which Loan
Request shall:
(i) specify the amount of the Borrowing, which shall not be
less than one million dollars ($1,000,000), nor more than the Excess
Availability;
(ii) certify that the amount of the Borrowing requested is not
more than the amount of the Excess Availability, as determined by reference to
the last Borrowing Base Certificate delivered to, and approved by, Agent as
described in paragraph (c) below;
(iii) specify the Interest Period selected by Borrower for the
Borrowing requested;
(iv) specify whether the Revolving Loan requested by Borrower
shall be a LIBOR Loan or a Base Rate Loan;
(v) specify the requested Funding Date, which shall be a
Business Day not less than three (3) Business Days after the delivery of a Loan
Request for a LIBOR Loan, or not less than one (1) Business Day after the
delivery of a Loan Request for a Base Rate Loan;
23
<PAGE>
Loan and Security Agreement
(vi) certify that, as of the date of the Loan Request, all
conditions precedent to the Borrowing set forth in Article 10 hereof have been
----------
met or waived in writing, and no Default or Event of Default has occurred and is
continuing;
(vii) certify that, as of the date of the Loan Request, no
material adverse change has occurred in the business prospects, financial
condition, or results of operations of Borrower since the date of the last
Financial Statements delivered by Borrower; and
(viii) certify that, as of the date of the Loan Request, each of
the representations and warranties of Borrower contained in each of the Loan
Documents is true and correct in all respects as if made on and as of the date
of such Loan Request.
Any Loan Request delivered after 1:00 p.m (San Francisco time) on a Business Day
shall be deemed to be received on the next Business Day. Borrower may submit up
to six (6) Loan Requests in any calendar month, in addition to any Letter of
Credit Requests submitted by Borrower under Section 2.7 hereof.
-----------
(c) Borrowing Base Certificate. No later than 2:00 p.m. (San
--------------------------
Francisco time) on the last Business Day of each month, Borrower shall deliver
to Agent a Borrowing Base Certificate certified by Borrower to be true and
correct as of the end of the immediately preceding Borrowing Base Date;
provided, however, that until Agent has received a revised Borrowing Base
Certificate, Agent shall be entitled to rely on the most recent Borrowing Base
Certificate delivered to Agent. Each Borrowing Base Certificate shall be
effective only as accepted by Agent in its discretion (and with such revisions
and adjustments, if any, as Agent may require as a condition to such
acceptance); and Agent shall forward to the Lenders a copy of the Borrowing Base
Certificate, along with such revisions and adjustments as are made by Agent,
together with any funding request forwarded to the Lenders based upon Borrower's
Loan Request. Notwithstanding the foregoing, upon delivery to Agent of Financial
Statements evidencing that the ratio of Borrower's Total Debt to EBITDA has
remained less than 5:1 for two (2) consecutive Fiscal Quarters, and for as long
thereafter as such ratio remains less than 5:1, then Borrower's obligation
hereunder to deliver a Borrowing Base Certificate to Agent shall cease.
(d) Reliance Upon Authority. On or prior to the Closing Date and
-----------------------
thereafter prior to any change with respect to any of the information contained
in the following clauses (i) and (ii), Borrower shall deliver to Agent a writing
setting forth (i) the account of Borrower to which Agent is authorized to
transfer the proceeds of the Revolving Loans requested pursuant to this Section
-------
2.2, and (ii) the names of the officers authorized to request Revolving Loans
- ---
on behalf of Borrower, and shall provide Agent with a specimen signature of each
such officer. Agent shall be entitled to rely conclusively on each such
officer's authority to request Revolving Loans on behalf of Borrower, the
proceeds of which are to be transferred to any of the accounts specified by
Borrower pursuant to the immediately preceding sentence, until Agent receives
written notice to the contrary. Agent shall have no duty to verify the identity
of any individual representing himself or herself as one of the officers
authorized by Borrower to make such requests on its behalf.
(e) No Liability. Agent shall not incur any liability to Borrower as
------------
a result of acting upon any Loan Request, Borrowing Base Certificate or other
notice referred to in this Section 2.2, which Loan Request, Borrowing Base
-----------
Certificate or notice Agent believes in good faith to have been given by an
officer duly authorized by Borrower to request Revolving Loans on its behalf or
for otherwise acting in good faith under this Section 2.2, and the crediting of
-----------
Revolving Loans to Borrower's deposit account, or transmittal to such Person as
Borrower may direct, shall conclusively establish the obligation of Borrower to
repay such Revolving Loans as provided herein.
24
<PAGE>
Loan and Security Agreement
(f) Loan Request Irrevocable. Any Loan Request made pursuant to
------------------------
Section 2.2(b) shall be irrevocable and Borrower shall be bound to borrow the
- --------------
funds requested therein in accordance therewith.
2.3 Making of Revolving Loans.
-------------------------
(a) Lender Advances. Provided that Agent is satisfied in its
---------------
discretion with Borrower's Loan Request and the representations and warranties
contained therein, Agent shall forward to each Lender such Loan Request not
later than 1:00 p.m. (San Francisco time) one (1) Business Day after the date of
Agent's receipt of a Loan Request for a LIBOR Loan, or not later than 10:00 a.m.
(San Francisco time) on the date of funding with respect to the funding of a
Base Rate Loan, together with most recent Borrowing Base Certificate, if
required, and Agent's request to the Lenders to fund the Borrowing requested (or
such lesser amount as Agent shall determine to be appropriate, in the exercise
of its discretion). Each Lender shall make the amount of such Lender's Pro Rata
Share of the requested Borrowing available to Agent in same day funds, to such
account of Agent as Agent may designate, not later than 1:00 p.m. (San Francisco
time) on the Funding Date applicable thereto. Revolving Loans made by the
Lenders pursuant to this Section 2.3(a) are sometimes referred to herein as
--------------
"Lender Advances" and the Lender Advances shall constitute Revolving Loans for
---------------
all purposes of this Agreement and the other Loan Documents. After Agent's
receipt of the proceeds of any such Lender Advances, unless Agent determines
that any applicable condition set forth in Article 10 has not been satisfied,
----------
Agent shall make the proceeds of such Lender Advances available to Borrower on
the applicable Funding Date by transferring same day funds equal to the proceeds
of such Lender Advances received by Agent to the account of Borrower designated
in writing by Borrower; provided, however, that the amount of Lender Advances
and other Revolving Loans so made on any date shall in no event exceed the
Excess Availability of Borrower, except as permitted in Section 2.3(b)(ii)
------------------
below.
(b) Agent Advances.
--------------
(i) Notwithstanding anything to the contrary contained herein,
for administrative convenience and in order to reduce the number of funds
transfers among Borrower and the Lenders, Agent may (but shall not be obligated
to), and Borrower and the Lenders hereby authorize Agent to, make Revolving
Loans on behalf of the Lenders, subject to the procedures for settlement set
forth in Section 2.4 below. Any such Revolving Loans made by Agent on behalf of
-----------
Lenders pursuant to this Section 2.3(b)(i) and any Revolving Loans made by Agent
-----------------
on behalf of Lenders pursuant to Section 2.3(b)(ii) below are referred to herein
------------------
as "Agent Advances." Agent Advances shall constitute Revolving Loans for all
--------------
purposes of this Agreement and the other Loan Documents. Agent may apply or
cause to be applied any payments or other amounts which it receives for the
repayment of the outstanding Revolving Loans pursuant to the terms hereof to the
Revolving Loans constituting Agent Advances prior to the payment of any of the
other Revolving Loans. Agent shall have no duty to make or to continue to make
any Agent Advances.
(ii) Any contrary provision of this Agreement notwithstanding,
but subject to the limitations set forth in the provisos contained in this
Section 2.3(b)(ii), Agent is hereby authorized by Borrower and the Lenders to
- ------------------
make Revolving Loans to Borrower on behalf of the Lenders which Agent, in its
reasonable business judgment, deems necessary or desirable (A) to preserve or
protect the Collateral or any portion thereof; (B) to enhance the likelihood of,
or maximize the amount of, repayment of the Loans and other Obligations, or to
otherwise avoid a Default or an Event of Default hereunder, or to prevent or
minimize the occurrence of a Material Adverse Effect; (C) to pay any other
amount chargeable to Borrower pursuant to the terms of this Agreement,
including, without limitation,
25
<PAGE>
Loan and Security Agreement
costs, fees and expenses as described in Section 15.5; or (D) if the conditions
------------
for Borrowing under Section 10.2(c) cannot be fulfilled, to advance a Revolving
---------------
Loan to repay any principal or interest or other amounts, including
reimbursement obligations in connection with Letters of Credit, and fees and
premiums payable to the Lenders hereunder (any advances made pursuant to this
Section 2.3(b)(ii) are also referred to herein as "Agent Advances"); and
- ------------------ --------------
provided, that Agent shall have no obligation to Borrower to make an Agent
Advance under any circumstances. In no event shall Agent make an Agent Advance
if the aggregate Revolving Loan Usage (including such Agent Advance) would
exceed the Maximum Amount. Agent shall notify each Lender and Agent in writing
of each Agent Advance made pursuant to this Section 2.3(b)(ii).
------------------
(iii) Any Agent Advance made pursuant to a Loan Request under
Section 2.3(b)(i) hereof shall be repayable at the end of the Interest Period
- -----------------
selected by the Borrower in such Loan Request. Agent Advances made pursuant to
Section 2.3(b)(ii) shall be repayable on demand and secured by the Collateral
- ------------------
and shall constitute Revolving Loans and Obligations hereunder. Any Agent
Advance made pursuant to a Loan Request under Section 2.3(b)(i) hereof shall
-----------------
bear interest at the Rate(s) applicable to the Revolving Loan(s) requested by
the Borrower in such Loan Request. Any Agent Advance made pursuant to Section
-------
2.3(b)(ii) hereof shall bear interest at the Default Rate without regard to the
- ----------
presence or absence of a Default or Event of Default. Agent shall request that
each Lender make available to Agent its Pro Rata Share of each Agent Advance
made pursuant to this Section 2.3(b), and each Lender agrees that it shall make
--------------
available to Agent, promptly upon Agent's demand, in immediately available
funds, an amount equal to such Lenders' Pro Rata Share of each Agent Advance
made by Agent pursuant to this Section 2.3(b).
--------------
(c) Defaulting Lenders. Unless Agent receives notice from a Lender at
------------------
least one (1) Business Day prior to the date of a Borrowing that such Lender
will not make available as and when required hereunder to Agent for the account
of Borrower the amount of that Lender's Pro Rata Share of the Borrowing, Agent
may assume that each Lender has made such amount available to Agent in
immediately available funds on the Funding Date and Agent may (but shall not be
so required), in reliance upon such assumption, make available to Borrower on
such date a Revolving Loan in the corresponding amount. If and to the extent any
Lender shall not have made its full amount available to Agent in immediately
available funds and Agent in such circumstances has made available to Borrower
such amount, then Lender shall on the Business Day following such Funding Date
make such amount available to Agent, together with interest, to be retained by
Agent for its own account, at the Base Rate for each day after the Funding Date
until (but not including) the date paid. A notice of Agent submitted to any
Lender with respect to amounts owing under this subsection shall be prima facia
evidence of the truth thereof, absent manifest error. If such amount is so made
available, such payment to Agent shall constitute such Lender's Loan on the date
of Borrowing for all purposes of this Agreement. If such amount is not made
available to Agent on the Business Day following the Funding Date, Agent will
notify Borrower of such failure to fund and, upon demand by Agent, Borrower
shall pay such amount to Agent for Agent's account, together with interest
thereon for each day elapsed since the date of such Borrowing, at a rate per
annum equal to the Rate applicable at the time to the Loan comprising such
Borrowing. The failure of any Lender to make any Loan on any Funding Date shall
not relieve any other Lender of any obligation hereunder to make a Loan on such
Funding Date, but no Lender shall be responsible for the failure of any other
Lender to make the Loan to be made by such other Lender on any Funding Date. Any
Lender that fails to make any Loan on any Funding Date and continues to fail to
make such Loan within one (1) Business Day after written demand upon it by Agent
to do so, shall constitute a "Defaulting Lender" for purposes of this Agreement.
-----------------
26
<PAGE>
Loan and Security Agreement
(i) In addition, any Lender that fails to make any payment to
Agent pursuant to Section 2.4 hereof or as required by any other Section hereof
-----------
in connection with any Agent Advance made pursuant to Section 2.4(b) hereof and
--------------
continues to fail to make such payment within one (1) Business Day after written
demand upon it by Agent to do so, shall constitute a "Defaulting Lender" for
-----------------
purposes of this Agreement.
(ii) For purposes of voting or consenting to matters with respect
to the Loan Documents and determining Pro Rata Shares, any Defaulting Lender
shall be deemed not to be a "Lender" and such Lender's Commitment shall be
deemed to be zero (-0-). This Section shall remain effective with respect to
such Lender until the Majority Lenders and Agent shall have waived such Lender's
default in writing. The operation of this Section shall not be construed to
increase or otherwise affect the Commitment of any Lender, or relieve or excuse
the performance by Borrower of its duties and obligations hereunder.
2.4 Settlement. It is agreed that each Lender's funded portion of the
----------
Revolving Loans is intended by the Lenders to be equal at all times to such
Lender's Pro Rata Share of the outstanding Revolving Loans. Notwithstanding such
agreement, Agent and the Lenders agree (which agreement shall not be for the
benefit of or enforceable by Borrower) that in order to facilitate the
administration of this Agreement and the other Loan Documents, settlement among
them as to the Revolving Loans (including Lender Advances and Agent Advances)
shall take place on a periodic basis in accordance with the following
provisions.
(a) Computation of Pro Rata Shares. The amount of the Pro Rata Share
------------------------------
of each Lender of the Revolving Loans shall be computed monthly (or on a more
frequent basis if so determined by Agent) and the amounts actually funded by
each Lender shall be adjusted monthly (or on a more frequent basis if determined
by Agent) upward or downward based on all Revolving Loans (including Lender
Advances and Agent Advances) and repayments of Revolving Loans received by Agent
as of the close of business in San Francisco on the last Business Day of the
monthly (or shorter) period specified by Agent (such date being referred to
herein as the "Settlement Date"). Agent shall deliver to each of the Lenders
---------------
periodically a summary statement of the amount of outstanding Revolving Loans
(including Lender Advances and Agent Advances) and Letters of Credit, and shall
use its best efforts to deliver such a summary statement no later than two (2)
Business Days after the relevant Settlement Date (although the failure to so
deliver such a summary statement at such time shall not affect the obligation of
the Lenders under this Section 2.4).
-----------
(b) Transfers. Upon receipt of the summary statement, each Lender
---------
shall transfer to Agent, as provided below, or Agent shall transfer to each
Lender, as provided below, such amounts as are necessary to ensure that after
giving effect to all such transfers, the amount of Revolving Loans made by each
Lender shall be equal to such Lender's Pro Rata Share of the aggregate amount of
the Revolving Loans outstanding as of such Settlement Date. If the then
outstanding balance funded by a Lender in respect of the Revolving Loans exceeds
such Lender's Pro Rata Share of the aggregate amount of the Revolving Loans
outstanding as of the Settlement Date, then Agent shall promptly transfer to
such Lender in immediately available funds to such account of such Lender as it
may designate, the amount required so that such Lender shall, upon receipt of
such amount, have funded its Pro Rata Share of the Revolving Loans as of the
Settlement Date. If the then outstanding balance funded by a Lender in respect
of the Revolving Loans is less than such Lender's Pro Rata Share of the
aggregate amount of the Revolving Loans outstanding as of the Settlement Date,
such Lender shall by no later than 1:00 p.m. (San Francisco time) on the
Business Day subsequent to the receipt of the summary statement, transfer in
immediately available funds to such account of Agent as Agent may designate, the
amount required so
27
<PAGE>
Loan and Security Agreement
that such Lender shall, upon transfer of such amount, have funded its Pro Rata
Share of the Revolving Loans as of the Settlement Date. The obligations of each
Lender to transfer such funds is irrevocable, unconditional and without recourse
to, or warranty by, Agent. If any such amount is not transferred to Agent by any
Lender when required, Agent shall be entitled to recover for its account such
amount promptly on demand upon such Lender, together with interest thereon at
Base Rate for each day after the date such sums are due until (but not
including) the date paid.
2.5 Notation. Agent shall record on its books the principal amount of the
--------
Revolving Loans owing to each Lender, including Lender Advances and Agent
Advances, the Rates applicable to such Revolving Loans, Lender Advances and
Agent Advances, and the interests therein of each Lender, from time to time,
which information shall be made available to any Lender upon request therefor.
In addition, each Lender is authorized, at such Lender's option, to note the
date and amount of each payment or prepayment of principal of such Lender's
Revolving Loans in its books and records, including computer records, such books
and records constituting rebuttably presumptive evidence, absent manifest error,
of the accuracy of the information contained therein.
2.6 Lenders' Failure to Perform. All Revolving Loans (other than Agent
---------------------------
Advances) shall be made by the Lenders simultaneously and in accordance with
their Pro Rata Shares. It is understood that (a) no Lender shall be responsible
for any failure by any other Lender to perform its obligation to make any
Revolving Loans hereunder, nor shall any Commitment of any Lender be increased
or decreased as a result of any failure by any other Lender to perform its
obligation to make any Revolving Loans hereunder, and (b) no failure by any
Lender to perform its obligation to make any Revolving Loans hereunder shall
excuse any other Lender from its obligation to make any Revolving Loans
hereunder.
2.7 Letters of Credit.
-----------------
(a) Agreement to Cause Issuance. Subject to the terms and conditions
---------------------------
of this Agreement, and in reliance upon the representations and warranties of
Borrower herein set forth, Agent agrees to take reasonable steps to cause to be
issued for the account of Borrower one or more stand-by or documentary Letters
of Credit (each such letter of credit, a "Letter of Credit" and such Letters of
----------------
Credit, collectively, the "Letters of Credit") in accordance with this Section
----------------- -------
2.7 from time to time during the term of this Agreement, which Letters of Credit
- ---
will be opened for trade purposes or to secure workers compensation obligations.
Any Letter of Credit may be issued by Union Bank of California, N.A. or any
Affiliate or Agent-Related Person, provided, however, that neither Union Bank of
California, N.A. nor any of its Affiliates or Agent-Related Persons shall have
any obligation to issue a Letter of Credit for the account of Borrower. Upon the
issuance of any Letter of Credit, Agent shall establish a reserve to reduce the
Availability in an amount equal to the face amount of such Letter of Credit,
plus such additional amounts with respect thereto as Agent determines are
appropriate. Promptly after the issuance of any Letter of Credit, Agent shall
give notice to each Lender of the issuance of such Letter of Credit.
(b) Terms of Letters of Credit. Any Letter of Credit shall contain
--------------------------
terms and conditions acceptable to Agent and the issuer thereof. Without
limiting the generality of the foregoing, in no event: (i) may the term of any
documentary Letter of Credit exceed one hundred eighty (180) days, (ii) may any
Letter of Credit, whether documentary or standby, have a term in excess of one
(1) year, or (iii) may any Letter of Credit, whether documentary or standby,
expire on a date that is later than five (5) Business Days prior to the Stated
Termination Date. Any Letter of Credit containing an automatic renewal provision
shall also contain a provision pursuant to which, notwithstanding any other
provision thereof, it shall expire no later than the date that is five (5)
Business Days prior to the Stated Termination
28
<PAGE>
Loan and Security Agreement
Date and a provision pursuant to which the issuer thereof may, by notice to the
beneficiary of such Letter of Credit at least thirty (30) days prior to the
expiration of its term, elect not to renew such Letter of Credit for an
additional term.
Agent shall not be obligated to cause any Letter of Credit to be
extended or amended unless the requirements of this Section 2.7 are met as
-----------
though a new Letter of Credit were being requested and issued. With respect to
any Letter of Credit which contains any "evergreen" or automatic renewal
provision, each Lender shall be deemed to have consented to any such extension
or renewal unless any such Lender shall have provided to Agent, not less than
thirty (30) days prior to the last date on which the applicable issuer can in
accordance with the terms of the applicable Letter of Credit decline to extend
or renew such Letter of Credit, written notice that it declines to consent to
any such extension or renewal, provided that if all of the requirements of this
Section 2.7 are met, no Lender shall, or shall have any right to, decline to
- -----------
consent to any such extension or renewal.
(c) Other Conditions. In addition to being subject to the
----------------
satisfaction of the applicable conditions precedent contained in Article 10, the
----------
obligation of Agent to take reasonable steps to cause to be issued any Letter of
Credit is subject to the following conditions precedent having been satisfied in
a manner satisfactory to Agent:
(i) Borrower shall have delivered to the proposed issuer of
such Letter of Credit, at such times and in such manner as such proposed issuer
may prescribe, an application in form and substance satisfactory to such
proposed issuer for the issuance of the Letter of Credit and such other
documents as may be required pursuant to the terms thereof, and the form and
terms of the proposed Letter of Credit shall be satisfactory to Agent and such
proposed issuer;
(ii) as of the date of issuance, no order of any court,
arbitrator or Governmental Authority shall purport by its terms to enjoin or
restrain money center banks generally from issuing Letters of Credit of the type
and in the amount of the proposed Letter of Credit, and no law, rule or
regulation applicable to money center banks generally and no request or
directive (whether or not having the force of law) from any Governmental
Authority with jurisdiction over money center banks generally shall prohibit, or
request that the proposed issuer of such Letter of Credit refrain from, the
issuance of Letters of Credit generally or the issuance of such Letters of
Credit;
(iii) Agent shall not have received a currently effective written
notice from any Lender that one or more of the conditions set forth in Article
-------
10 are not satisfied, or otherwise have actual knowledge that one or more of the
- --
conditions set forth in Article 10 will not be satisfied or waived by the
----------
Majority Lenders after giving effect to the issuance of the proposed Letter of
Credit;
(iv) the face amount of the proposed Letter of Credit requested
by Borrower shall not exceed an amount equal to (A) the Letter of Credit
Sublimit, minus (B) the aggregate amount of all Obligations arising pursuant to
-----
or in connection with the Letters of Credit outstanding as of the date of the
proposed Letter of Credit, as determined by Agent;
(v) the face amount of the proposed Letter of Credit shall not
exceed an amount equal to the Excess Availability as of the date of the proposed
Letter of Credit; and
(vi) Agent shall have received a written request from Borrower
(the "Letter of Credit Request"), executed by Borrower, for such Letter of
------------------------
Credit at least five (5) Business Days prior
29
<PAGE>
Loan and Security Agreement
to the requested date of issuance, which Letter of Credit Request shall contain
the original signature of an authorized officer of Borrower, shall be
irrevocable and shall:
(A) specify the original face amount of the Letter of
Credit requested;
(B) specify the effective date (which date shall be a
Business Day) of the issuance of the proposed Letter of Credit;
(C) specify whether such Letter of Credit may be drawn in a
single or in partial draws;
(D) specify the date on which the requested Letter of
Credit is to expire (which date shall be a Business Day);
(E) specify the purpose for which such Letter of Credit is
to be issued;
(F) specify the beneficiary of the requested Letter of
Credit;
(G) certify that, as of the date of the Letter of Credit
Request, all conditions to a Borrowing set forth in Article 10 hereof have been
----------
met or waived, and no Event of Default or Default has occurred and is
continuing;
(H) certify that, as of the date of the Letter of Credit
Request, no material adverse change has occurred in the business prospects,
financial condition or results of operations of Borrower since the date of the
last Financial Statements delivered by Borrower;
(I) certify that, as of the date of the Letter of Credit
Request, each of the representations and warranties of Borrower contained in
each of the Loan Documents is true and correct in all respects as if made on and
as of the date of such Loan Request; and
(J) include an application for such Letter of Credit in
form and substance satisfactory to the proposed issuer thereof and Agent.
Borrower may submit up to four (4) Letter of Credit Requests in any calendar
month, in addition to any Loan Requests submitted by Borrower under Section
-------
2.2(b) hereof..
- ------
(d) Notice of Issuance. Promptly after the issuance of any Letter of
------------------
Credit, Agent shall give notice to each Lender of the issuance of such Letter of
Credit.
(e) Payments Pursuant to Letters of Credit. In the event of any
--------------------------------------
drawing under any Letter of Credit by the beneficiary thereof, Borrower shall be
deemed to have concurrently given a Loan Request and Agent shall, at its option,
either notify the Lenders to make Lender Advances pursuant to Section 2.3(a) or
--------------
make an Agent Advance and, in either case, the proceeds of such Lender Advances
or Agent Advance, as the case may be, shall be used to reimburse the issuer of
the Letter of Credit for such draw and to pay the issuer the amount of all other
obligations and other amounts payable to such issuer under or in connection with
such Letter of Credit. Any payments made by Agent or the Lenders to any issuer
of a Letter of Credit or related parties in connection therewith shall
constitute Revolving Loans payable by Borrower upon demand by Agent and bearing
interest as a Base Rate Loan for all
30
<PAGE>
Loan and Security Agreement
purposes of this Agreement and the other Loan Documents. At any time that a
Default or Event of Default exists, promptly upon the request of Agent, Borrower
shall either, as directed by Agent, furnish cash collateral to the issuers of
the Letters of Credit to secure the reimbursement obligations to the issuers in
connection with such Letters of Credit or furnish cash collateral to Agent in an
amount equal to the then outstanding Letters of Credit, plus such amounts with
respect thereto as Agent determines are appropriate.
(f) Participations.
--------------
(i) Immediately upon the issuance of any Letter of Credit in
accordance with this Section, each Lender shall be deemed to have irrevocably
and unconditionally purchased and received, without recourse or warranty, an
undivided interest and participation in such letter of credit and in the credit
support or enhancement provided through Agent to such issuer in connection with
the issuance of such Letter of Credit, in an amount equal to such Lender's Pro
Rata Share of the face amount of such Letter of Credit (including, without
limitation, all obligations of Borrower with respect thereto, and any security
therefor or guaranty pertaining thereto).
(ii) Whenever Agent receives a payment from Borrower on account
of reimbursement obligations in respect of a Letter of Credit as to which Agent
has previously received for the account of the issuer thereof payment from a
Lender pursuant to this Section, Agent shall promptly pay to such Lender such
Lender's Pro Rata Share of such payment from Borrower in dollars. Each such
payment shall be made by Agent on the Business Day on which Agent receives from
Borrower immediately available funds paid to such Person pursuant to the
immediately preceding sentence, if received prior to 1:00 p.m. (San Francisco
time) on such Business Day and otherwise on the next succeeding Business Day.
(iii) Upon the request of any Lender, Agent shall furnish to such
Lender copies of any Letter of Credit, reimbursement agreement executed in
connection therewith, application for any Letter of Credit and credit support or
enhancement provided through Agent in connection with the issuance of any Letter
of Credit, and such other documentation as may reasonably be requested by such
Lender.
(g) Obligations Irrevocable. The obligations of each Lender to make
-----------------------
payments to Agent with respect to any Letter of Credit or with respect to any
credit support or enhancement provided through Agent with respect to a Letter of
Credit, and the obligations of Borrower to make payments to Agent, for the
account of the Lenders, shall be irrevocable, not subject to any qualification
or exception whatsoever, including, without limitation, any of the following
circumstances:
(i) any lack of validity or enforceability of this Agreement,
any of the other Loan Documents, the Letter of Credit or any document executed
in connection therewith;
(ii) the existence of any claim, setoff, defense or other right
which Borrower may have at any time against a beneficiary named in a Letter of
Credit or any transferee of any Letter of Credit (or any Person for whom any
such transferee may be acting), any Lender, Agent, the issuer of such Letter of
Credit or any other Person, whether in connection with this Agreement, any
Letter of Credit, the transactions contemplated herein or any unrelated
transactions (including any underlying transactions between Borrower or any
other Person and the beneficiary named in any Letter of Credit);
31
<PAGE>
Loan and Security Agreement
(iii) any draft, certificate or any other document presented
under the Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or inaccurate
in any respect;
(iv) the surrender or impairment of any security for the
performance or observance of any of the terms of any of the Loan Documents; or
(v) the occurrence of any Default or Event of Default.
(h) Recovery or Avoidance of Payments. In the event any payment by or
---------------------------------
on behalf of Borrower received by Agent with respect to any Letter of Credit (or
any guaranty by Borrower or reimbursement obligation of Borrower relating
thereto) and distributed by Agent to the Lenders on account of their respective
participations therein is thereafter set aside, avoided or recovered from Agent
in connection with any receivership, liquidation or bankruptcy proceeding, the
Lenders shall, upon demand by Agent, promptly pay to Agent their respective Pro
Rata Shares of such amount set aside, avoided or recovered, together with
interest at the rate required to be paid by Agent upon the amount required to be
repaid by it.
(i) Compensation for Letters of Credit.
----------------------------------
(i) Borrower agrees to pay to Agent with respect to each Letter
of Credit, for the account of the Lenders, the Letter of Credit Fee specified
in, and in accordance with the terms of, Section 3.4.
-----------
(ii) Borrower shall pay to the issuer of any Letter of Credit,
or to Agent for the account of the issuer of any such Letter of Credit, solely
for such issuer's account, such fees and other charges as are charged by such
issuer for Letters of Credit issued by it, including, without limitation, its
standard fees for issuing, administering, amending, renewing, paying and
canceling Letters of Credit and all other fees associated with issuing or
servicing Letters of Credit, as and when assessed.
(j) Indemnification; Exoneration.
----------------------------
(i) In addition to amounts payable as elsewhere provided in
this Section, Borrower hereby agrees to protect, indemnify, pay and save the
Lenders and Agent harmless from and against any and all claims, demands,
liabilities, damages, losses, costs, charges and expenses (including reasonable
attorneys' fees) which any Lender or Agent may incur or be subject to as a
consequence, direct or indirect, of the issuance of any Letter of Credit or the
provision of any credit support or enhancement in connection therewith.
(ii) As among Borrower, the Lenders and Agent, Borrower assumes
all risks of the acts and omissions of, or misuse of any of the Letters of
Credit by, the respective beneficiaries of such Letters of Credit. In
furtherance and not in limitation of the foregoing, the Lenders and Agent shall
not be responsible for: (A) the form, validity, sufficiency, accuracy,
genuineness or legal effect of any document submitted by any Person in
connection with the application for and issuance of and presentation of drafts
with respect to any of the Letters of Credit, even if it should prove to be in
any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B)
the validity or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign any Letter of Credit or the rights or benefits
thereunder or proceeds thereof, in whole or in part, which may prove to be
invalid or ineffective for any reason; (C) the failure of the beneficiary of any
Letter of Credit to comply duly with
32
<PAGE>
Loan and Security Agreement
conditions required in order to draw upon such Letter of Credit; (D) errors,
omissions, interruptions or delays in transmission or delivery of any messages
by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher;
(E) errors in interpretation of technical terms; (F) any loss or delay in the
transmission or otherwise of any document required in order to make a drawing
under any Letter of Credit or of the proceeds thereof; (G) the misapplication by
the beneficiary of any Letter of Credit of the proceeds of any drawing under
such Letter of Credit; or (H) any consequences arising from causes beyond the
control of the Lenders or Agent, including, without limitation, any act or
omission, whether rightful or wrongful, of any present or future de jure or de
facto Governmental Authority. None of the foregoing shall affect, impair or
prevent the vesting of any rights or powers of Agent and the Lenders under this
Section.
(iii) In furtherance and extension, and not in limitation, of the
specific provisions set forth above, any action taken or omitted by Agent or any
Lender under or in connection with any of the Letters of Credit or any related
certificates, if taken or omitted in the absence of gross negligence or willful
misconduct, shall not put Agent or any Lender under any resulting liability to
Borrower or relieve Borrower of any of its obligations hereunder to any such
Person.
(iv) The undertaking in this Section shall survive the
termination of this Agreement and the repayment of all Obligations hereunder.
(k) Supporting Letter of Credit; Cash Collateral. If, notwithstanding
--------------------------------------------
the provisions of Section 2.7(b), any Letter of Credit is outstanding upon the
--------------
termination of this Agreement, then upon such termination Borrower shall deposit
with Agent, for the ratable benefit of the Lenders in proportion to their Pro
Rata Shares, with respect to each Letter of Credit then outstanding, as the
Majority Lenders, in their discretion shall specify, either (i) a standby letter
of credit (a "Supporting Letter of Credit") in form and substance satisfactory
---------------------------
to Agent, issued by an issuer satisfactory to Agent in an amount equal to the
greatest amount for which such Letter of Credit may be drawn, under which
Supporting Letter of Credit Agent is entitled to draw amounts necessary to
reimburse Agent and the Lenders for payments made by Agent and the Lenders under
such Letter of Credit or under any credit support or enhancement provided
through Agent with respect thereto, or (ii) cash in amounts necessary to
reimburse Agent and the Lenders for payments made by Agent or the Lenders under
such Letter of Credit or under any credit support or enhancement provided
through Agent with respect thereto. Each such Supporting Letter of Credit or
deposit of cash shall be held by Agent, for the ratable benefit of the Lenders
in proportion to their Pro Rata Shares, as security for, and to provide for the
payment of, the aggregate undrawn amount of such Letters of Credit remaining
outstanding.
ARTICLE III.
INTEREST AND FEES
3.1 Interest.
--------
(a) Interest Rate. All outstanding Obligations shall bear interest on
-------------
the unpaid principal amount thereof (including, to the extent permitted by law,
on interest thereon not paid when due) from the date made until paid in full in
cash as follows:
(i) Interest on the principal balance of any LIBOR Loan
requested by Borrower pursuant to a Loan Request will be payable at the LIBOR
Rate;
33
<PAGE>
Loan and Security Agreement
(ii) Interest on the principal balance of any Base Rate Loan
requested by Borrower pursuant to a Loan Request will be payable at the Base
Rate;
(iii) Interest on the principal balance of any Loan at any time
for which Borrower has failed to submit an effective Loan Request will be
payable at the Base Rate;
(iv) Except as otherwise provided in this Section 3.1(a) or in
--------------
Section 3.1(b) hereof, interest on the principal balance of any other
- --------------
outstanding Obligations will be payable at the Base Rate;
provided, however, that in no event shall the interest rate on any Obligations
exceed the Maximum Rate described in Section 3.2. All interest charges shall be
-----------
computed on the basis of a year of three hundred sixty (360) days and actual
days elapsed, and, with respect to Revolving Loans, shall be payable by Borrower
to Agent (for the ratable benefit of the Lenders in proportion to their Pro Rata
Shares), on the last day of each calendar month, and on the last day of the
---
Interest Period selected by Borrower in its Loan Request therefor, and on the
---
date of the repayment or prepayment of the principal amount of such Revolving
Loan, and on the Termination Date. Interest charges with respect to any other
---
Obligations shall be payable by Borrower on demand by Agent.
(b) Default Rate. Notwithstanding anything to the contrary contained
------------
in this Agreement or any other Loan Document, any Obligations payable by
Borrower and not paid on the due date thereof, and any Obligations outstanding
after an Event of Default, shall bear interest at the Default Rate.
3.2 Maximum Interest Rate. Notwithstanding anything to the contrary
---------------------
contained in Section 3.1 hereof, in no event shall any interest rate provided
-----------
for hereunder exceed the maximum rate permissible for corporate borrowers under
applicable law for loans of the type provided for hereunder (the "Maximum
--------
Rate"). If, during any period of time, any Rate applicable to any Obligations,
- ----
absent such limitation, would have exceeded the Maximum Rate, then the Rate for
such Obligations for such period shall be the Maximum Rate and, if thereafter
that Rate applicable to such Obligations would otherwise be less than the
Maximum Rate, then that Rate shall remain at the Maximum Rate until such time as
the amount of interest paid hereunder equals the amount of interest which would
have been paid if the same had not been limited by the Maximum Rate. In the
event that, upon payment in full of the Obligations under this Agreement, the
total amount of interest paid or accrued under the terms of this Agreement is
less than the total amount of interest which would, but for this Section 3.2,
-----------
have been paid or accrued if the interest rates otherwise set forth in this
Agreement had at all times been in effect, then Borrower shall, to the extent
permitted by applicable law, pay Agent, for the account of the Lenders, an
amount equal to the difference between (a) the lesser of (i) the amount of
interest which would have been charged if the Maximum Rate had, at all times,
been in effect; or (ii) the amount of interest which would have accrued had the
interest rates otherwise set forth in this Agreement, at all times, been in
effect; and (b) the amount of interest actually paid or accrued under this
Agreement. In the event that a court determines that Agent and/or any Lender has
received interest and other charges hereunder in excess of the Maximum Rate,
such excess shall be deemed received on account of, and shall automatically be
applied to reduce, the Obligations other than interest, in the inverse order of
maturity, and if there are no Obligations outstanding, Agent and/or such Lender,
as applicable, shall refund to Borrower such excess.
3.3 Unused Line Fee. On the last Business Day of each Fiscal Quarter and
---------------
on the Termination Date, Borrower agrees to pay to Agent, for the ratable
benefit of the Lenders in proportion to their Pro Rata Shares, an unused line
fee equal to three hundred seventy-five one thousandths of a
34
<PAGE>
Loan and Security Agreement
percent (0.375%) per annum on the average daily amount by which the Maximum
Amount exceeded the sum of the average daily outstanding amount of Revolving
Loans and the undrawn amount of all outstanding Letters of Credit during the
immediately preceding three (3)-month period (or shorter period if calculated on
the Termination Date). In the event that the average daily outstanding amount of
Revolving Loans and the undrawn amount of all outstanding Letters of Credit is
less than thirty three percent (33%) of the Maximum Amount for any twelve (12)
month-period, as measured on each anniversary of the Closing Date, then, on the
applicable anniversary of the Closing Date, Borrower agrees to pay to Agent, for
the ratable benefit of the Lenders in proportion to their Pro Rata Shares, an
additional unused line fee equal to one hundred twenty-five one thousandths of a
percent (0.125%) per annum on the average daily amount by which the Maximum
Amount exceeded the sum of the average daily outstanding amount of Revolving
Loans and the undrawn amount of all outstanding Letters of Credit during the
immediately preceding twelve (12)-month period. The unused line fee and the
additional unused line fee shall be computed on the basis of a three hundred
sixty (360)-day year for the actual number of days elapsed. All payments
received by Agent on account of Accounts or as proceeds of other Collateral
shall be deemed to be credited to the outstanding Loans hereunder immediately
upon the application of such amounts by Agent to repay any Revolving Loans
hereunder pursuant to Section 4.4 hereof for purposes of calculating the unused
-----------
line fee and the additional unused line fee pursuant to this Section 3.3.
-----------
3.4 Letter of Credit Fee. On the first Business Day of each month,
--------------------
Borrower agrees to pay to Agent, for the ratable benefit of the Lenders in
proportion to their Pro Rata Shares, for all Letters of Credit issued hereunder,
a fee (the "Letter of Credit Fee") equal to the sum of (a) one percent (1%) per
--------------------
annum of the average daily stated amounts of each such Letters of Credit issued
for Borrower's account during the immediately preceding month, during such
periods that Borrower is in compliance with all of the covenants set forth in
Section 9.20 hereof; plus (b) all out-of-pocket costs, fees and expenses
- ------------ ----
incurred by Agent in connection with the application for, issuance of or
amendment to each such Letter of Credit in the immediately preceding month,
which costs, fees and expenses shall include all "fronting fees" required to be
paid by Agent to such issuer for the assumption of the settlement risk in
connection with the issuance of such Letter of Credit. The Letter of Credit Fee
shall be payable monthly, in arrears, commencing with the first Business Day of
the month following the issuance of any Letter of Credit and continuing on the
first day of each month during which any Letter of Credit remains outstanding.
The Letter of Credit Fee shall be computed on the basis of a three hundred sixty
(360)-day year for the actual number of days elapsed.
3.5 Audit Fees. Borrower agrees to pay to Agent, solely for its own
----------
account, and to the Lenders, for their respective own accounts, all costs, fees
and expenses (including travel expenses) reasonably incurred by their internal
auditors or in connection with auditors engaged by Agent in connection with
audits of Borrower performed by such auditors during the term of this Agreement;
provided, however, that unless a Default or an Event of Default shall have
occurred, Borrower shall have an obligation to pay such costs, fees, and
expenses in connection with one (1) audit during each Fiscal Year of Borrower.
3.6 Fee Letter. Borrower agrees to pay to Agent all of the fees set forth
----------
in the Fee Letter.
35
<PAGE>
Loan and Security Agreement
ARTICLE IV.
PAYMENTS AND PREPAYMENTS
4.1 Principal of Revolving Loans.
----------------------------
(a) Revolving Loan Repayment. Borrower shall repay the outstanding
------------------------
principal balance of each Revolving Loan on the earlier of (i) the last day of
the Interest Period for such Revolving Loan selected by Borrower in the Loan
Request therefor, or (ii) the Termination Date; provided, however, that with
respect to repayment of principal on the last day of an Interest Period,
Borrower may simultaneously repay and reborrow any such Revolving Loan on such
date, subject to the terms of this Agreement.
(b) Mandatory Prepayments. In addition to the repayments required in
---------------------
Section 4.1(a) above, immediately upon Borrower's knowledge thereof or upon
- --------------
demand of Agent, Borrower shall make a mandatory prepayment to Agent, for the
account of the Lenders, of the following amounts: (i) the amount, without
duplication, by which the Revolving Loan Usage exceeds the Availability; (ii)
the aggregate net proceeds of any offering of any equity securities of Borrower
after the Closing Date (with the exception of any initial public offering of
Borrower's equity securities made on or before June 30, 2000, provided that
Borrower's existing shareholders do not sell their shares in connection with
such initial public offering); and (iii) any amounts received by Borrower which
are described in clauses (b), (c) or (d) of the definition of "Availability." In
the event of any such mandatory prepayment, Borrower shall pay the Breakage
Costs specified in Section 5.4 hereof.
-----------
(c) Prepayment of Revolving Loans. Borrower may, upon at least (1)
-----------------------------
one Business Day's written notice to Agent and each Lender, prepay any Revolving
Loan prior to the last day of the Interest Period therefor, in whole or in part,
provided that (i) Borrower shall pay all accrued interest to the date of such
prepayment on the amount prepaid, (ii) if Borrower makes a prepayment of any
LIBOR Loan, whether voluntarily or involuntarily, Borrower shall pay the
Breakage Costs specified in Section 5.4 hereof.
-----------
4.2 Reduction and Termination of Facility.
-------------------------------------
(a) Termination. Borrower may terminate this Agreement upon at least
-----------
thirty (30) Business Days' prior written notice to Agent and the Lenders,
without the payment of any special prepayment fee or premium (with the exception
of any Breakage Costs payable as a result of the prepayment of any LIBOR Loan
prior to the last day of the applicable Interest Period therefor), upon (i) the
indefeasible payment in full of all outstanding Revolving Loans, together with
accrued interest thereon, and the cancellation of all outstanding Letters of
Credit, and (ii) the payment in full in cash of all other Obligations together
with accrued interest thereon.
(b) Reduction. Borrower may permanently reduce the unused portion of
---------
the Maximum Amount under this Agreement in a principal amount of five million
dollars ($5,000,000) or integral multiples thereof, upon at least thirty (30)
Business Days' prior written notice to Agent and the Lenders; provided, however,
that Borrower shall, contemporaneously with each such reduction, repay or prepay
the Revolving Loans and Letters of Credit to the extent that the aggregate
principal amount thereof then outstanding exceeds the Maximum Amount as so
reduced, together with any Breakage Costs amounts payable by Borrower hereunder
upon prepayment. From the effective date of any such reduction, the term
"Maximum Amount" shall mean the Maximum Amount of the Commitments, as so
reduced. Once reduced, the Maximum Amount of the Commitments may not be
subsequently increased.
36
<PAGE>
Loan and Security Agreement
Each partial reduction made by Borrower hereunder shall be shared pro rata among
the Lenders in proportion to their Pro Rata Shares.
4.3 Payments by Borrower.
--------------------
(a) No Setoffs, etc. All payments to be made by Borrower shall be
---------------
made without set-off, recoupment or counterclaim. Borrower hereby irrevocably
authorizes Agent to automatically deduct from Borrower's account at any branch
of Union Bank of California, N.A., all amounts payable by Borrower to Agent or
any Lender, on the due date thereof. If, for any reason, Agent can not or does
not so deduct any such amount payable by Borrower, Borrower shall make such
payment to Agent, for itself or for the account of the Lenders, as applicable,
at Agent's payment address as follows:
Union Bank of California N.A.
Monterey Park, California
Account Number: 070-196431
Account Name: Wire Transfer Clearing
Attn: Commercial Loan Operations
Reference: Pac-West Telecomm, Inc.
ABA Number: 122-000-496
which payment shall be made in dollars and in immediately available funds no
later than 11:00 a.m. (San Francisco time) on the due date specified herein.
Any payment received by Agent later than 11:00 a.m. (San Francisco time), for
any reason, shall, at the option of Agent, be deemed to have been received on
the following Business Day and any applicable interest or fee shall accrue.
(b) Business Day Payments. Whenever any payment is due on a day other
---------------------
than a Business Day, such payment shall be made on the following Business Day,
and such extension of time shall in such case be included in the computation of
interest or fees, as the case may be.
(c) Distributions by Agent. Unless Agent receives notice from
----------------------
Borrower prior to the date on which any payment is due to the Lenders that
Borrower will not make such payment in full as and when required, Agent may
assume that Borrower has made such payment in full to Agent on such date in
immediately available funds and Agent may (but shall not be so required, unless
Agent actually receives such payment by 11:00 a.m. (San Francisco time), on such
date), in reliance upon such assumption, distribute to each Lender on such due
date an amount equal to the amount then due such Lender. If and to the extent
Borrower has not made such payment in full to Agent, each Lender shall repay to
Agent, promptly on demand, such amount distributed to such Lender (provided,
however, that if such Lender shall not make such funds available within one (1)
Business Day of Agent's demand, interest shall accrue on such funds and shall be
payable by such Lender at the Base Rate for each day from and after the date
such amount is distributed to such Lender until (but not including) the date
repaid).
4.4 Apportionment, Application and Reversal of Payments. All payments made
---------------------------------------------------
by Borrower and all proceeds of Accounts or other Collateral received by Agent
or any Lender shall be applied, subject to the provisions of this Agreement
(including, without limitation, Section 2.3(c) hereof), as follows:
--------------
37
<PAGE>
Loan and Security Agreement
first, to pay any unpaid fees or expense reimbursements then due to Agent
-----
from Borrower for actions taken by Agent on behalf of the Lenders, which
amounts shall be remitted to, or retained by, Agent for its own account;
second, to repay to Agent the outstanding principal and interest in respect
------
of any Agent Advance (or portion thereof) made by Agent pursuant to Section
-------
2.3(b) hereof, and for which Agent has not received reimbursement in full
------
by the Lenders, as required by Section 2.3(b)(iii) hereof, which amounts
-------------------
shall be remitted to, or retained by, Agent for its own account;
third, to pay any other fees or expense reimbursements then due to Agent
-----
and to pay any fees or expense reimbursements then due to the Lenders from
Borrower on a ratable basis in proportion to their Pro Rata Shares, which
amounts shall be apportioned ratably between Agent and among the Lenders in
proportion to their Pro Rata Shares;
fourth, to pay any fees or expense reimbursements then due to any Lender
------
from Borrower for its own account, including any Breakage Costs, which
amounts shall be remitted to the Lender entitled thereto;
fifth, to pay interest which is due and payable in respect of all Revolving
-----
Loans, including Lender Advances and Agent Advances (except as provided in
"Second," above), which amounts shall be apportioned ratably among the
------
Lenders entitled thereto in proportion to their Pro Rata Shares;
sixth, to pay or prepay the principal of Agent Advances (except as provided
-----
in "Second," above), which amounts shall be apportioned ratably among the
------
Lenders entitled thereto in proportion to their Pro Rata Shares;
seventh, to pay the principal of any Revolving Loan which is then due and
-------
payable, which amounts shall be apportioned ratably among the Lenders in
proportion to their Pro Rata Shares;
eighth, to pay the principal of any Revolving Loans bearing interest at the
------
Base Rate, in the inverse order of maturity, which amounts shall be
apportioned ratably among the Lenders in proportion to their Pro Rata
Shares;
ninth, to pay the principal of any Revolving Loans bearing interest at the
-----
LIBOR Rate, in the inverse order of maturity, which amounts shall be
apportioned ratably among the Lenders in proportion to their Pro Rata
Shares; and
tenth, to pay any other Obligations due to Agent or Lender by Borrower,
-----
which amounts shall be paid to Agent or Lender entitled thereto or, if owed
to all of the Lenders, which amounts shall be apportioned ratably among the
Lenders in proportion to their Pro Rata Shares.
Agent shall promptly distribute to each Lender, pursuant to the applicable wire
transfer instructions received from each Lender in writing, such funds as such
Lender may be entitled to receive. Agent shall have the continuing and
exclusive right to apply and reverse and reapply any and all such proceeds and
payments to any portion of the Obligations.
4.5 Indemnity for Returned Payments. If, after receipt of any payment of,
-------------------------------
or proceeds applied to the payment of, all or any part of the Obligations, Agent
or any Lender is for any reason compelled to surrender such payment or proceeds
to any Person, because such payment or application of
38
<PAGE>
Loan and Security Agreement
proceeds is invalidated, declared fraudulent, set aside, determined to be void
or voidable as a preference, impermissible setoff, or a diversion of trust
funds, or for any other reason, then the Obligations or part thereof intended to
be satisfied shall be revived and continue and this Agreement shall continue in
full force as if such payment or proceeds had not been received by Agent or such
Lender, and Borrower shall be liable to pay to Agent, and hereby does indemnify
Agent and the Lenders and hold Agent and the Lenders harmless for, the amount of
such payment or proceeds surrendered, plus interest thereon at the Default Rate
from the date so surrendered and any other costs, expenses and penalties paid by
Agent and Lenders in connection therewith. The provisions of this Section shall
be and remain effective notwithstanding any contrary action which may have been
taken by Agent or any Lender in reliance upon such payment or application of
proceeds, and any such contrary action so taken shall be without prejudice to
Agent's and the Lenders' rights under this Agreement and shall be deemed to have
been conditioned upon such payment or application of proceeds having become
final and irrevocable. The provisions of this Section shall survive the
termination of this Agreement and the repayment of the Obligations.
4.6 Agent's and Lenders' Books and Records; Monthly Statements. Borrower
----------------------------------------------------------
agrees that Agent's and each Lender's books and records showing the Obligations
and the transactions pursuant to this Agreement and the other Loan Documents
shall be admissible in any action or proceeding arising therefrom, and shall
constitute prima facia proof thereof, absent manifest error. Agent will provide
to Borrower and each Lender a monthly statement of Loans, payments and other
transactions pursuant to this Agreement. Such statement shall be deemed correct,
accurate, and binding on Borrower and an account stated (except for reversals
and reapplications of payments made as provided in Section 4.5 and corrections
-----------
of errors discovered by Agent), unless Borrower notifies Agent in writing to the
contrary within ninety (90) days after such statement is rendered. In the event
a timely written notice of objections is given by Borrower, only the items to
which exception is expressly made will be considered to be disputed by Borrower.
ARTICLE V.
TAXES, YIELD PROTECTION AND ILLEGALITY
5.1 Taxes.
-----
(a) Payments Free From Taxes. Any and all payments by Borrower to
------------------------
each Lender and Agent under this Agreement and any other Loan Document shall be
made free and clear of, and without deduction or withholding for, any Taxes. In
addition, Borrower shall pay all Other Taxes.
(b) Indemnification. Borrower agrees to indemnify and hold harmless
---------------
Agent and each Lender for the full amount of Taxes or Other Taxes (including any
Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this
Section) paid by any of the Lenders or Agent and any liability (including
penalties, interest, additions to tax and expenses) arising therefrom or with
respect thereto, whether or not such Taxes or Other Taxes were correctly or
legally asserted. Payment under this indemnification shall be made within thirty
(30) days after the date any Lender or Agent makes written demand therefor. The
undertaking in this Section shall survive the termination of this Agreement and
the payment of all Obligations hereunder.
(c) Withholdings. If Borrower shall be required by law to deduct or
------------
withhold any Taxes or Other Taxes from or in respect of any sum payable
hereunder or under any other Loan Document to any Lender or Agent, then:
39
<PAGE>
Loan and Security Agreement
(i) the sum payable shall be increased as necessary so that
after making all required deductions and withholdings (including deductions and
withholdings applicable to additional sums payable under this Section) such
Lender or Agent, as the case may be, receives an amount equal to the sum it
would have received had no such deductions or withholdings been made;
(ii) Borrower shall make such deductions and withholdings;
(iii) Borrower shall pay the full amount deducted or withheld to
the relevant taxing authority or other authority in accordance with applicable
law; and
(iv) Borrower shall also pay to each Lender and Agent, for the
account of such Lender or Agent, as applicable, at the time interest is paid,
all additional amounts which the respective Lender or Agent specifies as
necessary to preserve the after-tax yield such Lender or Agent would have
received if such Taxes or Other Taxes had not been imposed.
(d) Receipt. Within thirty (30) days after the date of any payment by
-------
Borrower of Taxes or Other Taxes, Borrower shall furnish to Agent the original
or a certified copy of a receipt evidencing payment thereof, or other evidence
of payment satisfactory to Agent.
(e) Elimination of Additional Payments. If Borrower is required to
----------------------------------
pay additional amounts to any Lender or Agent pursuant to subsection (c) of this
Section, then such Lender shall use reasonable efforts (consistent with legal
and regulatory restrictions) to change the jurisdiction of its lending office so
as to eliminate any such additional payment by Borrower which may thereafter
accrue, if such change in the judgment of such Lender is not otherwise
disadvantageous to such Lender.
5.2 Increased Costs, Reduction of Return and Illegality; Capital Adequacy.
---------------------------------------------------------------------
(a) Regulation D Compensation. If any Lender shall have determined
-------------------------
that (a) the introduction of any Capital Adequacy Regulation, (b) any change in
any Capital Adequacy Regulation, (c) any change in the interpretation or
administration of any Capital Adequacy Regulation by any central bank or other
Governmental Authority charged with the interpretation or administration
thereof, or (d) compliance by the Lender or any corporation controlling the
Lender with any Capital Adequacy Regulation, affects or would affect the amount
of capital required or expected to be maintained by such Lender (or its funding
office) or any corporation controlling the Lender and (taking into consideration
such Lender's or such funding office's or corporation's policies with respect to
capital adequacy and such Lender's desired return on capital) determines that
the amount of such capital is increased as a consequence of its Commitment,
loans, credits or obligations under this Agreement, then, upon demand of such
Lender to Borrower, Borrower shall pay to such Lender, from time to time as
specified by such Lender, additional amounts sufficient to compensate such
Lender for such increase.
(b) Regulation D Compensation. For so long as any Lender is required
-------------------------
to maintain reserves against Eurocurrency Liabilities (or any other category of
liabilities which include deposits by reference to which any Rate is determined
or any category of extensions of credit or other assets which includes loans by
a non-United States office of any Lender to United States residents) and, as a
result, the cost to such Lender (or its funding office) of making or maintaining
any Revolving Loans (including LIBOR Loans) is increased, then such Lender may
require Borrower to pay, upon written demand, an additional amount ("Additional
----------
Amount") at a rate per annum determined by such Lender in its reasonable
- ------
judgment to be the excess of (i) the Rate applicable to such Loan divided by one
minus the Reserve Requirements, over (ii) the Rate applicable to such Loan.
- -----
40
<PAGE>
Loan and Security Agreement
(c) Illegality. If, after the date of this Agreement, any Lender
----------
determines (which determination shall be prima facia evidence of the truth
thereof for all purposes, in the absence of manifest error) that the adoption,
enactment or change after the date of this Agreement of any applicable law or
any rule, requirement, guideline, order or regulation of any Governmental
Authority, or any change in the interpretation or administration thereof by any
judicial or Governmental Authority, central bank, comparable agency or other
Person charged with the interpretation or administration thereof, or compliance
by such Lender (or any funding office or Affiliate of such Lender with any
request or directive (whether or not having the force of law) of any such
authority (a "Change of Law") shall make it unlawful, impossible or
-------------
impracticable for such Lender (or its funding office or Affiliate) to make or
maintain a Loan at the LIBOR Rate, such Lender shall immediately notify Agent
and Borrower of such Change of Law. Thereafter, Borrower's right to request the
making of, and such Lender's obligation to make, a Loan at the LIBOR Rate shall
be terminated, and any outstanding Loan Request requesting any LIBOR Loan shall
automatically be deemed to be rescinded. The portion funded by such Lender of
any Loan so affected shall be prepaid immediately if such Lender shall notify
Borrower (which notice shall be prima facia evidence of the truth thereof for
all purposes, in the absence of manifest error) that such Lender may not
lawfully continue to fund or maintain such Loan. Borrower shall additionally pay
to such Lender, on the effective date of each such prepayment, any fee
(including any Breakage Costs) required pursuant to the provisions of this
Agreement.
5.3 Funding Losses. Borrower shall reimburse each Lender and hold each
--------------
Lender harmless from any loss or expense which the Lender may sustain or incur
as a consequence of the failure of Borrower to borrow a Loan after Borrower has
given (or is deemed to have given) a Loan Request, including any such loss or
expense arising from the liquidation or reemployment of funds obtained by it to
maintain its Loans or from fees payable to terminate the deposits from which
such funds were obtained.
5.4 Breakage Costs. In the event that Borrower prepays any LIBOR Loan
--------------
prior to the last day of the Interest Period therefor, whether voluntarily or
involuntarily, Borrower shall, upon demand by any Lender, reimburse such Lender
for all costs, losses and expenses in respect of any interest paid or premium or
penalty incurred by such Lender (or its lending branch or Affiliate) to lenders
or otherwise in respect of funds borrowed by or deposited with it to make or
maintain the LIBOR Loan which such Lender (or its lending branch or Affiliate)
may sustain as a result of such prepayment ("Breakage Costs"). Borrower
--------------
understands that such Breakage Costs may include losses incurred by such Lender
as a result of funding and other contracts entered into by such Lender in order
to fund any LIBOR Loan hereunder.
5.5 Certificates of Lenders. Any Lender claiming reimbursement or
-----------------------
compensation under this Article 5 shall deliver to Borrower (with a copy to
Agent) a certificate setting forth in reasonable detail the amount payable to
the Lender hereunder and such certificate shall be prima facia evidence of the
truth thereof, in the absence of manifest error.
5.6 Survival. The agreements and obligations of Borrower in this Article 5
--------
shall survive the payment of all other Obligations.
41
<PAGE>
Loan and Security Agreement
ARTICLE VI.
COLLATERAL
6.1 Grant of Security Interest.
--------------------------
(a) Collateral. As security for all present and future Obligations,
----------
Borrower hereby grants to Agent, for the ratable benefit of the Lenders in
proportion to their Pro Rata Shares, a continuing security interest in, lien on,
and right of setoff against, all of Borrower's personal (tangible and
intangible) property, whether now owned or existing or hereafter acquired or
arising, regardless of where located, including, without limitation:
(i) all Accounts;
(ii) all Inventory;
(iii) all letters of credit, advices of credit, negotiable
documents, warehouse receipts, bills of lading, certificates of title,
certificates of deposit, chattel paper, instruments and notes ("Negotiable
----------
Collateral");
- ----------
(iv) all Investment Property;
(v) all General Intangibles;
(vi) all Equipment, including, without limitation, the
Equipment specified in Schedule 6.1(a)(vi) hereof;
-------------------
(vii) all money, securities and other property of any kind of
Borrower in the possession or under the control of Agent or any Lender, any
assignee of or participant in the Obligations, or a bailee of any such party or
such party's Affiliates;
(viii) each Deposit Account, Borrower's Account and all other
deposit accounts, credits and balances with and other claims against Agent or
any Lender or any of their Affiliates or any other financial institution in
which Borrower maintains deposits;
(ix) all books, records and other property related to or
referring to any of the foregoing, including, without limitation, books,
records, account ledgers, data processing records, computer prepared information
and software and other property and General Intangibles at any time evidencing
or relating to any of the foregoing;
(x) all money, deposit accounts and other assets of Borrower
in which Agent, on behalf of the Lenders, receives a Lien or which hereafter
comes into the custody or control of Agent, on behalf of the Lenders, or any
bailee of Agent, on behalf of the Lenders;
(xi) all accessions to, substitutions for and replacements,
products and proceeds of any of the foregoing, including, but not limited to,
proceeds of any insurance policies, claims against third parties, condemnation
or requisition payments with respect to all or any of the foregoing and any
Accounts, Inventory, Negotiable Collateral, Investment Property, General
Intangibles, Equipment, money, deposit accounts and other tangible or intangible
property of Borrower resulting from the sale or disposition of the
aforementioned Collateral.
42
<PAGE>
Loan and Security Agreement
statements disclosing Agent's Liens. Borrower agrees that a carbon,
photographic, photostatic, or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement.
6.3 Chief Executive Office; Locations of Collateral. Borrower represents
-----------------------------------------------
and warrants to Agent and the Lenders that Schedule 6.3 is a correct and
------------
complete list of Borrower's chief executive office, the location of its books
and records, the locations of Equipment and other tangible Collateral, and the
locations of all of its other places of business. Schedule 6.3 correctly
------------
identifies any of such facilities and locations that are not owned by Borrower
and sets forth the names of the owners and lessors or sublessors of such
facilities and locations. Borrower covenants and agrees that it will not:
(i) maintain any Equipment or other tangible Collateral with a
value in excess of five hundred thousand dollars ($500,000) at any location
other than those locations listed for Borrower on Schedule 6.3, unless Agent has
------------
received a currently valid Landlord's Waiver with respect to such new location;
(ii) change the location of Borrower's books, records and
Accounts, except upon thirty (30) days prior written notice to Agent; or
(iii) change the location of its chief executive office from the
location identified in Schedule 6.3, except upon thirty (30) days prior written
------------
notice to Agent.
6.4 Title to, Liens on and Sale and Use of Collateral. Borrower represents
-------------------------------------------------
and warrants to Agent and the Lenders and agrees with Agent and the Lenders as
follows:
(a) Free and Clear of Liens. All of the Collateral is and will
-----------------------
continue to be owned by Borrower, free and clear of all Liens whatsoever, except
that all Collateral may be subject to Permitted Liens.
(b) Lawful Purposes. Borrower will use, store, and maintain the
---------------
Collateral with all reasonable care and will use such Collateral for lawful
purposes only.
(c) No Sales of Collateral. Borrower will not, without Agent's prior
----------------------
written approval (which must be obtained by Agent in compliance with Section
-------
13.2 hereof), sell, or dispose of or permit the sale or disposition of any of
- ----
the Collateral, except for sales of Equipment as permitted by Section 6.10 and
------------
sales of Inventory in the ordinary course of business. The inclusion of proceeds
in the Collateral shall not be deemed to constitute Agent's or any Lender's
consent to any sale or other disposition of the Collateral, except as expressly
permitted herein.
(d) Proprietary Rights Collateral. Notwithstanding anything to the
-----------------------------
contrary contained in any Loan Document, Borrower may enforce its rights and
remedies with respect to, grant rights under, license, maintain, abandon or
otherwise deal with the Proprietary Rights Collateral as it deems appropriate in
its business judgment; provided, however, that Borrower shall not, without the
consent of Agent and the Majority Lenders, take any actions or fail to take any
actions with respect to any Proprietary Rights Collateral that could (i) result
in a Default or Event of Default hereunder, (ii) result in a Material Adverse
Effect, (iii) result in the termination or impairment of any Material Agreement,
(iv) result in any Lien upon any Proprietary Rights Collateral (except for a
Permitted Lien), (v) result in the sale or disposition of any material
Proprietary Rights Collateral, or (vi) result in a permanent or irrevocable
waiver or other loss of any material right or remedy of Borrower under any
material Proprietary Rights Collateral; and provided further, however, that upon
the occurrence and
44
<PAGE>
Loan and Security Agreement
during the continuance of a Default or an Event or Default, Borrower shall
comply strictly with the covenants set forth in the Loan Documents and shall not
take any actions otherwise permitted in this Section 6.4(d), in each case,
--------------
without the consent of Agent and the Majority Lenders.
6.5 Appraisals. Whenever an Event of Default exists and the Majority
----------
Lenders so request, Borrower shall, at its expense provide to Agent (and, at the
request of a Lender, Agent will provide to such Lender) with appraisals or
updates thereof of any or all of the Collateral from an appraiser, and prepared
on a basis, satisfactory to Agent, such appraisals and updates to include,
without limitation, information required by applicable law and regulation and by
the internal policies of the Lenders.
6.6 Access and Examination. Agent and any Lender which so elects, may at
----------------------
all reasonable times (and at any time when a Default or Event of Default exists)
have access to, examine, audit, make extracts from or copies of and inspect any
or all of Borrower's records, files and books of account and the Collateral, and
discuss Borrower's affairs with Borrower's officers and management. Borrower
will deliver to Agent any instrument necessary for Agent to obtain records from
any service bureau maintaining records for Borrower. Agent may, and at the
direction of the Majority Lenders Agent shall at any time when a Default or
Event of Default exists, and at Borrower's expense, make copies of all of
Borrower's books and records, or require Borrower to deliver such copies to
Agent. Agent may, without expense to Agent, use such of Borrower's personnel,
supplies and premises as may be reasonably necessary for maintaining or
enforcing Agent's Liens. Agent shall have the right, at any time, in its name or
in the name of its nominee, to verify the validity, amount or any other matter
relating to the Accounts or other Collateral, by mail, telephone or otherwise.
6.7 Collateral Reporting. Borrower shall provide to Agent and each Lender
--------------------
the documents and information with respect to the Collateral required in Section
-------
7.2(g) hereof.
- ------
6.8 Accounts.
--------
(a) Representations and Warranty of Borrower. Borrower hereby
----------------------------------------
represents and warrants to Agent and the Lenders, with respect to its Accounts,
that:
(i) each existing Account represents, and each future Account
will represent, a bona fide sale or lease and delivery of goods by Borrower, or
rendition of services by Borrower, in the ordinary course of Borrower's
business;
(ii) each existing Account is, and each future Account will be,
for a liquidated amount payable by the Account Debtor thereon on the terms set
forth in the invoice therefor or in the schedule thereof delivered to Agent,
without any offset, deduction, defense or counterclaim;
(iii) no payment will be received with respect to any Account,
and no credit, discount, or extension, or agreement therefor will be granted on
any Account, except as reported to Agent and the Lenders in accordance with this
Agreement;
(iv) each copy of an invoice delivered to Agent by Borrower
will be a genuine copy of the original invoice sent to the Account Debtor named
therein; and
(v) all goods described in each invoice will have been
delivered to the Account Debtor and all services of Borrower described in each
invoice will have been performed.
45
<PAGE>
Loan and Security Agreement
(b) Re-Dating of Invoices and Sales. Borrower shall not re-date any
-------------------------------
invoice or sale or make sales on extended dating beyond that customary in
Borrower's business or extend or modify any Account. If Borrower becomes aware
of any matter adversely affecting the collectibility of any Account or Account
Debtor involving an amount greater than five hundred thousand dollars
($500,000), including information regarding the Account Debtor's
creditworthiness and disputes or claims with respect to any Account, Borrower
will promptly so advise Agent.
(c) No Acceptance of Notes. Borrower shall not accept any note or
----------------------
other instrument (except a check or other instrument for the immediate payment
of money) with respect to any Account without Agent's written consent. If Agent
consents to the acceptance of any such instrument, it shall be considered as
evidence of the Account and not payment thereof and Borrower will promptly
deliver such instrument to Agent, endorsed by Borrower to Agent in a manner
satisfactory in form and substance to Agent.
(d) Notification of Disputes and Claims. Borrower shall notify Agent
-----------------------------------
promptly of all disputes and claims in excess of five hundred thousand dollars
($500,000), individually or in the aggregate, with any Account Debtor, and
agrees to settle, contest or adjust such dispute or claim at no expense to Agent
or any Lender. No discount, credit or allowance shall be granted to any such
Account Debtor without the prior written consent of Agent, except for discounts,
credits and allowances made or given in the ordinary course of Borrower's
business when no Event of Default exists hereunder. Borrower shall send to Agent
a report summarizing credit memoranda in excess of one million dollars
($1,000,000) as soon as issued. Agent may, and at the direction of the Majority
Lenders, Agent shall, at all times when an Event of Default exists hereunder,
settle or adjust disputes and claims directly with Account Debtors for amounts
and upon terms which Agent or the Majority Lenders, as applicable, shall
consider advisable and shall apply the net amounts received by Agent in payment
of any Accounts in accordance with Section 4.4 hereof and, in all cases, Agent
-----------
will credit Borrower's Account with only such net amounts so received in payment
of such Accounts.
(e) Certain Covenants Regarding Accounts. Borrower represents that
------------------------------------
Borrower's Accounts of the following types do not have, and at no time will
have, a value in excess of the Reserve, in the aggregate for all such types:
(i) the portion of Accounts which are subject to any right of
setoff or recoupment by the Account Debtor, unless the Account Debtor has
entered into an agreement acceptable to Agent to waive setoff or recoupment
rights;
(ii) Accounts which are owed by the government of the United
States of America, or any department, agency, public corporation, or other
instrumentality thereof, unless Borrower has complied with the provisions of the
Federal Assignment of Claims Act of 1940, as amended (31 U.S.C. (S) 3727 et
seq.), and has taken all other steps necessary to perfect Agent's Lien therein;
(iii) Accounts which are owed by any state, province,
municipality or other political subdivision of the United States of America, or
any department, agency, public corporation, or other instrumentality thereof ;
(iv) Accounts which are owned by an Account Debtor which is an
Affiliate or employee of Borrower or which has common officers or directors with
Borrower;
46
<PAGE>
Loan and Security Agreement
(v) any portion of Accounts representing late fees or interest;
and
(vi) any portion of Accounts representing sales, excise or
similar taxes.
Borrower shall promptly notify Agent of any increase in the value of the
Accounts described in this Section that would necessitate an increase in the
Reserve.
6.9 Collection of Accounts; Payments.
--------------------------------
(a) Deposit Service. Schedule 6.9(a) is a true, correct and complete
--------------- ---------------
listing of all of Deposit Accounts. Borrower will not establish or open any
other Deposit Account or other bank or lock box account without first notifying
Agent and delivering to Agent a fully executed Deposit Control Agreement with
the Deposit Bank or other bank where such account is located. Borrower has
instructed each Deposit Bank (other than Union Bank of California, N.A.) to
remit all receipts in such Deposit Account to Borrower's Deposit Account at
Union Bank of California, N.A, at such time that monies received or accumulated
in any Deposit Bank aggregate in excess of two million dollars ($2,000,000). If,
notwithstanding such instructions, Borrower receives any proceeds of Accounts,
it shall receive such payments as Agent's trustee, and shall immediately notify
each Agent as to its receipt of such proceeds and shall deposit such payments
into its Deposit Account at Union Bank of California, N.A.. All collections
received in any Deposit Account or received directly by Borrower or Agent shall
be subject to Agent's sole control; provided, however, that as long as (i) no
Event of Default shall have occurred and be continuing, and (ii) no Agent
Advance made pursuant to Section 2.3(b)(ii) is outstanding, Borrower may use all
------------------
moneys deposited in a Deposit Account to be used for Borrower's working capital
needs and general corporate purposes; provided further, however, that
immediately (A) upon the occurrence and during the continuance of any Event of
Default, or (B) upon the making of any Agent Advance pursuant to Section
-------
2.3(b)(ii) hereof, until such Agent Advance is repaid by Borrower in full, Agent
- ----------
may and, upon the instruction of the Majority Lenders, shall, reassume sole
control of such Deposit Account(s) and shall transfer all collections deposited
in such Deposit Account(s) to Agent for application to the Obligations pursuant
to Section 4.4 hereof. Agent may (and upon the instruction of the Majority
-----------
Lenders, shall), at any time (y) following the occurrence and during the
continuation of an Event of Default, or (z) following the making of any Agent
Advance pursuant to Section 2.3(b)(ii) hereof until such Agent Advance is repaid
------------------
in full, notify the Account Debtors that the Accounts have been assigned to
Agent and of Agent's security interest therein, and may (and upon the
instruction of the Majority Lenders, shall) collect them directly and charge the
collection costs and expenses to Borrower's Loan Account as a Revolving Loan
bearing interest at the Default Rate. Upon the occurrence of any of the events
described in clause (y) or (z) of the immediately preceding sentence and upon
Agent's request, Borrower shall execute and deliver to Agent such documents as
Agent shall require to grant Agent access to any post office box or bank in
which collections of Accounts are received.
(b) Crediting of Payments on Accounts or Collateral. All payments,
-----------------------------------------------
including immediately available funds received into any Deposit Account or
otherwise received by Agent on account of Accounts or as proceeds of other
Collateral, will be Agent's sole property for the benefit of Agent and the
Lenders; provided, however, unless (i) an Event of Default has occurred and is
continuing, or (ii) any Agent Advance has been made pursuant to Section
-------
2.3(b)(ii) hereof, until such Agent Advance is repaid in full, such payments and
- ----------
funds shall be transferred to Borrower's Account (or, upon Borrower's written
instructions, to such other account designated by Borrower in such instructions)
to be used for Borrower's working capital needs and general corporate purposes;
provided further, however, that immediately upon the occurrence of any event
described in the foregoing clauses (i),or (ii), Agent
47
<PAGE>
Loan and Security Agreement
may and, upon the instruction of the Majority Lenders, shall, transfer all such
payments and funds to Agent for application to the Obligations pursuant to
Section 4.4 hereof.
- -----------
(c) Crediting of Other Funds. All payments, including immediately
------------------------
available funds, received by Agent from Borrower, whether for principal,
interest, fees or otherwise, will be Agent's sole property for the benefit of
Agent and Lenders and will be credited to Borrower's Account (conditional upon
final collection) on the date of receipt thereof provided that such payments are
received no later than 11:00 a.m..(California time), and if received later than
11:00 a.m. (California time), shall be credited to Borrower's Account on the
next Business Day.
6.10 Equipment.
---------
(a) Borrower's Representations. Borrower represents and warrants to
--------------------------
Agent and the Lenders and agrees with Agent and the Lenders that all of the
Equipment owned by Borrower is and will be used or held for use in Borrower's
business, and is and will be fit for such purposes. Borrower shall keep and
maintain its Equipment in good operating condition and repair (ordinary wear and
tear excepted) and shall make all necessary replacements thereof.
(b) Additions and Deletions. Borrower shall promptly inform Agent of
-----------------------
any material additions to or deletions from the Equipment in an amount in excess
of five hundred thousand dollars ($500,000) at any location. Borrower shall not
permit any Equipment to become a fixture with respect to real property or to
become an accession with respect to other personal property with respect to
which real or personal property Agent does not have a Lien. Borrower will not,
without Agent's prior written consent, alter or remove any identifying symbol or
number on any of Borrower's Equipment consisting of Collateral.
(c) Dispositions. Borrower shall not, without Agent's prior written
------------
consent, sell, lease as a lessor, or otherwise dispose of any of Borrower's
Equipment; provided, however, that Borrower may dispose of Equipment in the
ordinary course of business or to replace obsolete Equipment without Agent's
consent, subject to the conditions set forth in the next sentence. In the event
any of such Equipment is sold, transferred or otherwise disposed of pursuant to
the proviso contained in the immediately preceding sentence, (i) if such sale,
transfer or disposition is effected without replacement of such Equipment, or
such Equipment is replaced by Equipment leased by Borrower or by Equipment
purchased by Borrower subject to a Lien, then Borrower shall deliver all of the
cash proceeds of any such sale, transfer or disposition to Agent for application
in accordance with Section 4.4 hereof; or (ii) if such sale, transfer or
-----------
disposition is made in connection with the purchase by Borrower of replacement
Equipment, then Borrower shall use the proceeds of such sale, transfer or
disposition to purchase such replacement Equipment and shall deliver to Agent
written evidence of the use of the proceeds for such purchase. All replacement
Equipment purchased by Borrower shall be free and clear of all Liens, except
Agent's Lien and Permitted Liens.
6.11 Assigned Contracts. Borrower shall fully perform all of its
------------------
obligations under each of the Assigned Contracts and shall enforce all of its
rights and remedies thereunder as it deems appropriate in its business judgment;
provided, however, that Borrower shall not take any actions or fail to take any
actions under any Assigned Contract that could (a) result in any violation of
any covenant of Borrower contained in this Agreement or any other Loan Document,
(b) result in a Default or Event of Default hereunder or under any other Loan
Document, (c) result in a Material Adverse Effect, (d) result in the termination
or impairment of any Material Agreement, (e) result in any Lien upon any
Collateral (except for a Permitted Lien), or (f) result in a permanent or
irrevocable waiver or other loss of any material right
48
<PAGE>
Loan and Security Agreement
or remedy of Borrower thereunder; and provided further, however, that upon the
occurrence and during the continuance of a Default or an Event or Default,
Borrower shall not modify, amend, supplement, compromise, satisfy, release or
discharge any of its Assigned Contracts, any collateral securing the same, any
Person liable directly or indirectly with respect thereto or any agreement
relating to any of its Assigned Contracts or the collateral therefor, and shall
not take any actions or fail to take any actions with respect to its Assigned
Contracts which could adversely effect the full enforcement of all
indemnification rights of Borrower thereunder, in each case, without the consent
of Agent and the Majority Lenders. Borrower shall notify Agent and the Lenders
in writing, promptly after Borrower becomes aware thereof, of any event or fact
which could give rise to a claim by it for indemnification under any of its
Assigned Contracts, and shall report to Agent on all further developments with
respect thereto. Borrower shall remit directly to Agent for application to the
Obligations in such order as Agent shall determine, all amounts received by
Borrower as indemnification pursuant to its Assigned Contracts. If Borrower
shall fail after Agent's demand to comply with this Section, or if a Default or
an Event of Default then exists, Agent may, and at the direction of the Majority
Lenders Agent shall, directly enforce such right in its own or Borrower's name
and may enter into such settlements or other agreements with respect thereto as
Agent or Majority Lenders, as applicable, shall determine. In any suit,
proceeding or action brought by Agent for the benefit of the Lenders under any
Assigned Contract for any sum owing thereunder or to enforce any provision
thereof, Borrower shall indemnify and hold Agent and the Lenders harmless from
and against all expense, loss or damage suffered by reason of any defense,
setoff, counterclaims, recoupment or reduction of liability whatsoever of the
obligor thereunder arising out of a breach by Borrower of any obligation
thereunder or arising out of any other agreement, indebtedness or liability at
any time owing from Borrower to or in favor of such obligor or its successors or
assigns. All such obligations of Borrower shall be and remain enforceable only
against Borrower and shall not be enforceable against Agent or Lender.
Notwithstanding any provision hereof to the contrary, Borrower shall at all
times remain liable to observe and perform all of its duties and obligations
under its Assigned Contracts, and Agent's or Lenders' exercise of any of their
respective rights with respect to the Collateral shall not release Borrower from
any of such duties and obligations. None of Agent or Lenders shall be obligated
to perform or fulfill any of Borrower's duties or obligations under its Assigned
Contracts or to make any payment thereunder, or to make any inquiry as to the
nature or sufficiency of any payment or property received by it thereunder or
the sufficiency of performance by any party thereunder, or to present or file
any claim, or to take any action to collect or enforce any performance, any
payment of any amounts, or any delivery of any property. The undertaking of
Borrower in this Section shall survive the termination of this Agreement and the
payment of all Obligations hereunder.
ARTICLE VII.
FINANCIAL INFORMATION; NOTICES
7.1 Books and Records. Borrower shall maintain, at all times, correct and
-----------------
complete books, records and accounts in which complete, correct and timely
entries are made of its transactions in accordance with GAAP applied consistency
with the audited Financial Statements required to be delivered pursuant to
Section 7.2(a). Borrower shall, by means of appropriate entries, reflect in such
- --------------
accounts and in all Financial Statements proper liabilities and reserves for all
taxes and proper provision for depreciation and amortization of property and bad
debts, all in accordance with GAAP. Borrower shall maintain at all times books
and records pertaining to the Collateral in such detail, form and scope as Agent
shall reasonably require, including, but not limited to, records of all payments
received and all credits and extensions granted with respect to the Accounts,
and all other dealings affecting the Collateral.
49
<PAGE>
Loan and Security Agreement
7.2 Financial Information. Borrower shall promptly furnish to Agent (and
---------------------
Agent shall promptly furnish to the Lenders), in sufficient copies for
distribution by Agent to each Lender, all such financial information as Agent or
any Lender shall reasonably request, and notify its auditors and accountants
that Agent, on behalf of the Lenders, is authorized to obtain such information
directly from them. Without limiting the foregoing, Borrower will furnish to
Agent in sufficient copies for distribution by Agent to each Lender, in such
form and detail as Agent or any Lender shall request, the following:
(a) Annual Financials. As soon as available, but in any event not
-----------------
later than one hundred twenty (120) days after the close of each Fiscal Year,
audited balance sheets, statements of income and expense and changes in
stockholders' equity and statements of cash flow for Borrower for such Fiscal
Year, and the accompanying notes thereto, setting forth in each case in
comparative form figures for the previous Fiscal Year, all in reasonable detail,
fairly presenting the financial position and the results of operations of
Borrower as at the date thereof and for the Fiscal Year then ended, and prepared
in accordance with GAAP. Such statements shall be examined in accordance with
generally accepted auditing standards and accompanied by a report of independent
certified public accountants selected by Borrower and satisfactory to Agent.
Simultaneously with retaining such independent public accountants to conduct
such annual audit, Borrower shall send a letter to such accountants, with a copy
to Agent and the Lenders, notifying such accountants that one of the primary
purposes for retaining such accountants' services and having audited Financial
Statements is for use by Agent and the Lenders.
(b) Quarterly Financials. As soon as available, but in any event not
--------------------
later than forty-five (45) days after the end of each Fiscal Quarter other than
the fourth quarter of the Fiscal Year, an unaudited balance sheet, statement of
income and expense and of cash flow of Borrower as at the end of such quarter,
for such Fiscal Quarter and for the period from the beginning of the Fiscal Year
to the end of such Fiscal Quarter, all in reasonable detail, fairly presenting
the financial position and results of operations of Borrower as at the date
thereof and for such periods, and prepared in accordance with GAAP applied
consistently with the audited Financial Statements required to be delivered
pursuant to Section 7.2(a). Borrower shall certify, by a certificate signed by
--------------
its chief financial officer, that all such statements have been prepared in
accordance with GAAP and present fairly, subject to normal year-end adjustments,
the financial position of Borrower as at the dates thereof and its results of
operations for the periods then ended.
(c) Monthly Financial Statements. As soon as available, but in any
----------------------------
event not later than thirty (30) days after the end of each month, an unaudited
balance sheet, statements of income and expense and cash flow of Borrower for
such month and for the period from the beginning of the Fiscal Year to the end
of such month, all in reasonable detail, fairly presenting the financial
position and results of operations of Borrower as at the date thereof and for
such periods, and prepared in accordance with GAAP applied consistently with the
audited Financial Statements required to be delivered pursuant to Section
-------
7.2(a). Borrower shall certify, by a certificate signed by its chief financial
- ------
officer, that all such statements have been prepared in accordance with GAAP and
present fairly, subject to normal quarterly and year-end adjustments, the
financial position of Borrower as at the dates thereof and its results of
operations for the periods then ended.
(d) Left Blank.
----------
(e) Certificate of CFO. Simultaneously with the delivery of each of
------------------
the annual, quarterly and monthly Financial Statements delivered pursuant to
Section 7.2(a), Section 7.2(b) and Section 7.2(c), a certificate of the chief
- -------------- -------------- --------------
financial officer of Borrower (i) setting forth in reasonable detail the
calculations required to establish that Borrower was in compliance with the
covenants set forth in
50
<PAGE>
Loan and Security Agreement
Sections 9.9(c) and 9.20 during the period covered in such Financial Statements
- ------------------------
and as at the end thereof: (ii) stating that, except as explained in reasonable
detail in such certificate, (A) all of the representations and warranties of
Borrower contained in this Agreement and the other Loan Documents are correct
and complete in all material respects as at the date of such certificate as if
made at such time; (B) Borrower is, at the date of such certificate, in
compliance in all material respects with all of its respective covenants and
agreements in this Agreement and the other Loan Documents; (C) no Default or
Event of Default then exists or existed during the period covered by such
Financial Statements; (D) with respect to the quarterly and annual Financial
Statements only, describing and analyzing in reasonable detail all material
trends, changes and developments in each and all Financial Statements; (E) with
respect to the quarterly and annual Financial Statements only, explaining the
variances of the figures in the prior Fiscal Year Financial Statements; and
(iii) with respect to the quarterly and annual Financial Statements only,
setting forth in comparative form (A) the corresponding figures for the
corresponding period of the previous Fiscal Year; and (B) the corresponding
figures for the corresponding period set forth in Borrower's operating budget.
If such certificate discloses that a representation or warranty is not correct
or complete, or that a covenant has not been complied with, or that a Default or
Event of Default existed or exists, such certificate shall describe the same
with specificity and shall set forth what action Borrower has taken or proposes
to take with respect thereto.
(f) Forecasts. No later than sixty (60) days after to the beginning
---------
of each Fiscal Year, (i) annual forecasts (to include forecasted balance sheets,
statements of income and expenses, statements of cash flow, and forecasts of
Availability, Excess Availability and Revolving Loan Usage) for Borrower as at
the end of and for each Fiscal Quarter of such Fiscal Year, and (ii) an annual
operating plan and budget approved by the chief executive officer and chief
financial officer of Borrower acceptable to the Lenders and Agent.
(g) Collateral Reporting. Borrower shall provide Agent with the
--------------------
following documents at the following times, in form and substance satisfactory
to Agent: (i) no later than twenty (20) days after last Business Day of each
month, a summary schedule of Borrower's newly created Accounts, credit
memoranda, collections and other activity with respect to its Accounts, in each
case, since the last schedule delivered to the Agents; (ii) no later than twenty
(20) days after the last Business Day of each month, a summary aging of
Borrower's Accounts, together with a reconciliation to the previous month's
aging of Borrower's Accounts and to Borrower's general ledger; (iii) upon
request, copies of invoices in connection with Borrower's Accounts, customer
statements, credit memos, remittance advices and reports, deposit slips,
shipping and delivery documents in connection with Borrower's Accounts and for
Equipment acquired by Borrower, purchase orders and invoices; and (iv) such
other reports as to the Collateral as Agent shall reasonably request from time
to time. With the delivery of each of the foregoing Collateral reports, Borrower
shall deliver to Agent a certificate of an officer of Borrower certifying as to
the accuracy and completeness of such Collateral reports.
(h) Plan Filings. Promptly after filing with the PBGC, the DOL or the
------------
IRS, a copy of each annual report or other filing filed with respect to each
Plan of Borrower. In addition, Borrower shall provide to Agent any filing
required to be made with the PBGC, the DOL or the IRS, even if Borrower has not
complied with such filing requirement, together with an explanation of why
Borrower has not so complied.
(i) SEC Reports. Promptly upon the filing thereof, copies of all
-----------
reports, if any, to or other documents filed by Borrower with the Securities and
Exchange Commission under the Exchange Act, and all reports, notices, or
statements sent or received by Borrower to or from the holders of any
51
<PAGE>
Loan and Security Agreement
equity interests of Borrower or of any Debt for borrowed money of Borrower
registered under the Securities Act of 1933 or to or from the trustee under any
indenture under which the same is issued.
(j) Management Reports. As soon as available, but in any event not
------------------
later than seven (7) days after Borrower's receipt thereof, a copy of all
management reports and management letters prepared for Borrower by its
independent certified public accountants.
(k) Proxy Statements. Promptly after their preparation, copies of any
----------------
and all proxy statements, Financial Statements, and reports which Borrower makes
available to its stockholders.
(l) Tax Returns. Promptly after filing with the IRS, a copy of each
-----------
tax return filed by Borrower.
(m) Additional Information. Such additional information as Agent or
----------------------
any Lender may from time to time reasonably request regarding the financial and
business affairs of Borrower.
7.3 Notices to Agent and Lenders. Borrower shall notify Agent and the
----------------------------
Lenders, in writing, of the following matters at the following times:
(a) Defaults. Immediately after becoming aware of any Default or
--------
Event of Default.
(b) Other Defaults. Immediately after becoming aware of the assertion
--------------
by the holder of any capital stock or Debt of Borrower in excess of five hundred
thousand dollars ($500,000) that a default exists with respect thereto or that
Borrower is not in compliance with the terms thereof, or the threat or
commencement by such holder of any enforcement action because of such asserted
default or noncompliance.
(c) Material Adverse Effect. Immediately after becoming aware of any
-----------------------
event that could have a Material Adverse Effect on Borrower.
(d) Litigation. Immediately after becoming aware of any pending or
----------
threatened action, suit, proceeding or counterclaim by any Person, or any
pending or threatened investigation by a Governmental Authority, which action,
suit, proceeding, counterclaim or investigation seeks damages in excess of five
hundred thousand dollars ($500,000) (which amount shall not be fully covered by
insurance), or which may otherwise materially and adversely affect the
Collateral, the repayment of the Obligations, Agent's or any Lender's rights
under the Loan Documents, or Borrower's property, business, operations or
condition (financial or otherwise).
(e) Labor Disputes. Immediately after becoming aware of any pending
--------------
or threatened strike, work stoppage, unfair labor practice claim or other labor
dispute affecting Borrower in a manner which could reasonably be expected to
have a Material Adverse Effect.
(f) Violation of Law. Immediately after becoming aware of, or after
----------------
receiving any notice of claim from any Person alleging or claiming, any
violation of any law, statute, regulation or ordinance of a Governmental
Authority by or affecting Borrower which could reasonably be expected to have a
Material Adverse Effect.
(g) Violation of Environmental Laws. Immediately after receipt of any
-------------------------------
notice or assertion of an Environmental Claim by or against Borrower which could
reasonably be expected to have
52
<PAGE>
Loan and Security Agreement
a Material Adverse Effect or any investigation by a Person or Governmental
Authority with respect thereto.
(h) Releases. Immediately after receipt of any written notice that
--------
Borrower is or may be liable to any Person as a result of the Release or
threatened Release or other presence of any Contaminant or that Borrower is
subject to investigation by any Governmental Authority evaluating whether any
remedial action is needed to respond to the Release or other presence or
threatened Release of any Contaminant which, in either case, is reasonably
likely to give rise to liability in excess of five hundred thousand dollars
($500,000).
(i) Environmental Lien. Immediately after receipt of any written
------------------
notice of the imposition or threatened imposition of any Environmental Lien
against any property of Borrower.
(j) Change of Borrower's Name, etc. Any change in Borrower's name,
------------------------------
state of incorporation or form of organization, trade names or styles under
which Borrower will create Accounts, or to which instruments in payment of
Accounts may be made payable, in each case at least thirty (30) days prior
thereto.
(k) ERISA Events and Related Matters. Within five (5) Business Days
--------------------------------
after Borrower or any ERISA Affiliate knows or has reason to know that an ERISA
Event or a prohibited transaction (as defined in Sections 406 of ERISA and 4975
of the Code) or a breach of fiduciary responsibility under Section 404 of ERISA
has occurred with respect to a Plan, and, when Borrower or any ERISA Affiliate
knows or has reason to know, any action taken or threatened by the IRS, the DOL,
the PBGC or any Plan participants or beneficiaries with respect thereto.
(l) ERISA Filings. Upon request or, in the event that such filing
-------------
reflects a significant change with respect to the matters covered thereby,
within three (3) Business Days after the filing thereof with the PBGC, the DOL
and/or the IRS, as applicable, copies of the following: (i) each annual report
(Form 5500 series), including Schedule B thereto, filed with the PBGC, the DOL
and/or the IRS with respect to each Plan, (ii) a copy of each funding waiver
request filed with the PBGC, the DOL and/or the IRS with respect to any Plan and
all communications received by Borrower or any ERISA Affiliate from the PBGC,
the DOL and/or the IRS with respect to such request, and (iii) a copy of each
other filing or notice filed with the PBGC, the DOL and/or the IRS, with respect
to each Plan of Borrower or any ERISA Affiliate.
(m) ERISA Reports. Upon request or, in the event that such filing
-------------
reflects a significant change with respect to the matters covered thereby,
within three (3) Business Days after the filing thereof, copies of each
actuarial report for any Plan or Multiemployer Plan and annual report for any
Multiemployer Plan; and within three (3) Business Days after receipt thereof by
Borrower or any ERISA Affiliate, copies of the following: (i) any notices of the
PBGC's intention to terminate a Plan or to have a trustee appointed to
administer such Plan; (ii) any favorable or unfavorable determination letter
from the IRS regarding the qualification of a Plan under Section 401(a) of the
Code; (iii) any notice from a Multiemployer Plan regarding the imposition of
withdrawal liability; or (iv) an audit or other action by the IRS, the DOL or
the PBGC.
(n) Changes to ERISA Plans. Within three (3) Business Days after the
----------------------
occurrence thereof: (i) any changes in the benefits of any existing Plan which
increase Borrower's annual costs with respect thereto by an amount in excess of
$500,000, or the establishment of any new Plan or the commencement of
contributions to any Plan to which Borrower or any ERISA Affiliate was not
53
<PAGE>
Loan and Security Agreement
previously contributing or the acquisition of an ERISA Affiliate that maintains
a Pension Plan; or (ii) any failure by Borrower or any ERISA Affiliate to make a
required installment or any other required payment under Section 412 of the Code
on or before the due date for such installment or payment.
(o) Termination of ERISA Plans. Within three (3) Business Days after
--------------------------
Borrower or any ERISA Affiliate knows or has reason to know that any of the
following events has or will occur: (i) a Plan has been or will be terminated;
(ii) the administrator or plan sponsor of a Plan intends to terminate a
Multiemployer Plan; or (iii) the PBGC has instituted or will institute
proceedings under Section 4042 of ERISA to terminate a Plan.
(p) Required Contribution. Within three (3) Business Days after
---------------------
Borrower or any ERISA Affiliate knows or has reason to know that required
contributions to any Plan were not made in a timely manner.
(q) Telecommunications Laws and Licenses. Immediately upon receipt or
------------------------------------
transmittal by Borrower of any notice or other communication in respect of any
Telecommunications Laws or Telecommunications Licenses that could have a
Material Adverse Effect.
Each notice given under this Section shall describe the subject matter
thereof in reasonable detail, and shall set forth the action that Borrower or
any ERISA Affiliates, as applicable, has taken or proposes to take with respect
thereto.
7.4 Authorization for Agent and Lenders to Deliver Certain Information.
------------------------------------------------------------------
Each of Agent and Lenders is hereby authorized to deliver a copy of any
financial statement or any other information relating to the business,
operations or financial condition of Borrower or its Affiliates, which may be
furnished to them hereunder or otherwise, to any court, regulatory body or
agency having jurisdiction over Agent or Lender, or to any other Person which
shall, or shall have any right or obligation to, succeed to all or any part of
Agent's or Lenders' interests in any of the Loans, this Agreement, the other
Loan Documents or the Collateral, including, without limitation, any participant
or prospective participant.
7.5 Authorization to Deliver Information to Agent and the Lenders.
-------------------------------------------------------------
Borrower hereby irrevocably authorizes and directs all accountants, auditors or
other third parties to deliver to Agent and the Lenders, as requested by any of
them, at Borrower's expense, copies of the Financial Statements in the
possession of such accountants, auditors or third parties.
ARTICLE VIII.
GENERAL WARRANTIES AND REPRESENTATIONS
Borrower warrants and represents to Agent and Lenders as follows:
8.1 Authorization, Validity and Enforceability. Borrower has the corporate
------------------------------------------
power and authority to execute, deliver and perform this Agreement and the other
Loan Documents to which it is a party. Borrower has the corporate power and
authority to incur the Obligations and to grant to Agent, for the benefit of
Lenders, Liens upon and security interests in the Collateral. Borrower has taken
all necessary corporate action (including, without limitation, obtaining
approval of its stockholders if necessary) to authorize its execution, delivery
and performance of this Agreement and the other Loan Documents to which it is a
party. No consent, approval or authorization of, or declaration or filing with,
any Governmental Authority, and no consent of any other Person, is required in
connection with
54
<PAGE>
Loan and Security Agreement
Borrower's execution, delivery and performance of this Agreement and the other
Loan Documents to which it is a party, except for those already duly obtained.
This Agreement and the other Loan Documents to which Borrower is a party have
been duly executed and delivered by Borrower and constitute the legal, valid and
binding obligation of Borrower, enforceable against it in accordance with their
terms without defense, setoff or counterclaim. The execution, delivery and
performance of this Agreement and the Loan Documents to which Borrower is a
party do not and will not conflict with, or constitute a violation or breach of,
or constitute a default under, or result in the creation or imposition of any
Lien upon the property of Borrower by reason of the terms of, (a) any contract,
mortgage, Lien, lease, agreement, indenture, instrument or other document to
which Borrower is a party or which is binding upon it; (b) any Requirement of
Law applicable to Borrower; or (c) the certificate or articles of incorporation
or bylaws or other corporate organizational documents, or shareholders
agreements of Borrower.
8.2 Validity and Priority of Security Interest. The provisions of this
------------------------------------------
Agreement and the other Loan Documents create legal and valid Liens on all the
Collateral in favor of Agent, for the ratable benefit of the Lenders in
proportion to their Pro Rata Shares, and such Liens constitute perfected and
continuing Liens on all the Collateral, having priority over all other Liens on
the Collateral (other than Permitted Liens), securing all the Obligations, and
enforceable against Borrower.
8.3 Organization and Qualification. Borrower (a) is duly incorporated and
------------------------------
organized and validly existing in good standing under the laws of the State of
California, (b) is qualified to do business as a foreign corporation and is in
good standing in the jurisdictions set forth on Schedule 8.3, which are the only
------------
jurisdictions in which the failure to so qualify or be in good standing could
reasonably be expected to have a Material Adverse Effect, and (c) has all
requisite power and authority to conduct its business and to own its property.
8.4 Corporate Name, Prior Transactions. Except as set forth on Schedule
----------------------------------
8.4 attached hereto, Borrower has not during past five (5) years, been known by
or used any other corporate or fictitious name, or been a party to any merger or
consolidation, or acquired all or substantially all of the assets of any Person,
or acquired any of its property outside of the ordinary course of business.
8.5 Subsidiaries and Affiliates. Schedule 8.5 is a correct and complete
--------------------------- ------------
list of the name and relationship to Borrower of each and all of Borrower's
Subsidiaries and other Affiliates. Each Subsidiary is (a) duly incorporated and
organized and validly existing in good standing under the laws of its state of
incorporation set forth on Schedule 8.5, and (b) qualified to do business as a
------------
foreign corporation and in good standing in each jurisdiction in which the
failure to so qualify or be in good standing could reasonably be expected to
have a material adverse effect on the business, operations, prospects, property
or condition (financial or otherwise) of Borrower and/or such Subsidiary, and
(c) has all requisite power and authority to conduct its business and own its
property.
8.6 Financial Statements and Projections.
------------------------------------
(a) Financial Statements. All Financial Statements of Borrower that
--------------------
have been delivered to Agent have been prepared in accordance with GAAP and
present accurately and fairly the financial position of Borrower as at the dates
thereof and their results of operations for the periods then ended.
(b) Forecasts. The Forecasts, when submitted to Agent and the Lenders
---------
as required herein, represent Borrower's best estimate of the future financial
performance of Borrower for the
55
<PAGE>
Loan and Security Agreement
periods set forth therein. The Forecasts have been prepared on the basis of the
assumptions set forth therein, which Borrower believes are fair and reasonable
in light of current and reasonably foreseeable business conditions at the time
submitted to Agent and the Lenders.
8.7 Capitalization. Schedule 8.7 hereto sets forth the classes and number
-------------- ------------
of authorized and outstanding shares of capital stock of Borrower and all
options and warrants with respect thereto. Schedule 8.7 also sets forth the
------------
owners of all of such outstanding shares of capital stock and warrants and
options. All of the shares of the capital stock of Borrower has been duly and
validly issued and are fully paid and nonassessable.
8.8 Solvency. Borrower is Solvent.
--------
8.9 Debt. On the Closing Date, after giving effect to the making of the
----
Revolving Loans to be made on the Closing Date, Borrower has no Debt, except (a)
the Obligations, (b) the Bonds and such other Debt as described on Schedule 8.9
------------
hereto, and (c) trade payables, accrued expenses and other current liabilities
(other than indebtedness for borrowed money) and current and deferred income
taxes payable and other contractual obligations arising in the ordinary course
of business.
8.10 Distributions. Since September 16, 1998, no Distribution has been
-------------
declared, paid or made upon or in respect of any capital stock or other
securities of Borrower.
8.11 Title to Property. Borrower has good, indefeasible and merchantable
-----------------
title to all of its property (including, without limitation, the assets
reflected on the most recent Financial Statements delivered to Agent and the
Lenders, except as disposed of in accordance with the terms of this Agreement
since the date thereof), free and clear of all Liens except Permitted Liens.
8.12 Real Estate; Leases. Schedule 8.12 sets forth a correct and complete
------------------- -------------
list of all Real Estate owned by Borrower, all leases and subleases of real or
personal property by Borrower as lessee or sublessee (other than leases of
personal property as to which Borrower is lessee or sublessee for which the
value of such personal property is less than five hundred thousand dollars
($500,000). Each of such leases and subleases is valid and enforceable in
accordance with its terms and is in full force and effect, and no default by any
party to any such lease or sublease exists.
8.13 Proprietary Rights Collateral. Schedule 8.13 sets forth a correct and
----------------------------- -------------
complete list of all Proprietary Rights Collateral owned by Borrower, including
the registration number and jurisdiction, if applicable, with respect to each
such item of Proprietary Rights Collateral. None of the Proprietary Rights
Collateral is subject to any licensing agreement or similar arrangement except
as set forth on Schedule 8.13. To the best of Borrower's knowledge, none of the
-------------
Proprietary Rights Collateral infringes on or conflicts with any other Person's
property, and no other Person's property infringes on or conflicts with the
Proprietary Rights Collateral. The Proprietary Rights Collateral described on
Schedule 8.13 constitutes all of the property of such type necessary to the
- -------------
current and anticipated future conduct of Borrower's business, except as
disclosed on Schedule 8.13.
-------------
8.14 Trade Names. All trade names or styles under which Borrower will
-----------
create Accounts, or to which instruments in payment of Accounts may be made
payable, are listed on Schedule 8.14.
-------------
8.15 Litigation. Except as set forth on Schedule 8.15, there is no pending
---------- -------------
or (to the best of Borrower's knowledge) threatened, action, suit, proceeding or
counterclaim by any Person, or
56
<PAGE>
Loan and Security Agreement
investigation by any Governmental Authority, or any basis for any of the
foregoing, which could reasonably be expected to cause a Material Adverse
Effect.
8.16 Restrictive Agreements. Borrower is not a party to any contract or
----------------------
agreement, or subject to any charter or other corporate restriction, which
affects its ability to execute, deliver and perform the Loan Documents to which
it is a party and repay the Obligations. Borrower is not a party to any contract
or agreement, or subject to any charter or other corporate restriction which
materially and adversely affects or, insofar as Borrower can reasonably foresee,
could materially and adversely affect, the property, business, operations or
condition (financial or otherwise) of Borrower or could in any respect cause a
Material Adverse Effect.
8.17 Labor Disputes. Except as set forth on Schedule 8.17, (a) there is no
-------------- -------------
collective bargaining agreement or other labor contract covering employees of
Borrower, (b) no such collective bargaining agreement or other labor contract is
scheduled to expire during the term of this Agreement, (c) no union or other
labor organization is seeking to organize, or to be recognized as, a collective
bargaining unit of employees of Borrower or for any similar purpose, and (d)
there is no pending or (to the best of Borrower's knowledge) threatened, strike,
work stoppage, material unfair labor practice claim or other material labor
dispute against or affecting Borrower.
8.18 Environmental Laws.
------------------
(a) Compliance. Borrower has complied in all material respects with
----------
all Environmental Laws applicable to its Premises and business, and neither
Borrower nor any of its present Premises or operations, nor its past property or
operations, is subject to any enforcement order from or liability agreement with
any Governmental Authority or private Person respecting any Environmental Claim.
(b) Permits. Borrower has obtained all permits necessary for its
-------
current operations under Environmental Laws, and all such permits are in good
standing and Borrower is in compliance with all terms and conditions of such
permits.
(c) Hazardous Waste. Neither Borrower nor, to the best of Borrower's
---------------
knowledge, any of its predecessors in interest, has stored, treated or disposed
of any hazardous waste on any Premises, as defined pursuant to 40 CFR Part 261
or any similar Environmental Law, except in compliance with applicable
Environmental Law or to the extent such noncompliance, either individually or in
the aggregate, would not have a material adverse effect on Borrower.
(d) Notice of Noncompliance. Borrower has not received any summons,
-----------------------
complaint, order or similar written notice that it is not currently in
compliance with, or that any Governmental Authority is investigating its
compliance with, any Environmental Laws or that it is or may be liable to any
other Person as a result of a Release or threatened Release or other presence of
a Contaminant other than any summons, complaint, order or similar notice
relating to any of the aforementioned events to the extent such events would not
individually or in the aggregate have a material adverse effect on Borrower.
(e) No Investigations. None of the present or past operations of
-----------------
Borrower is the subject of any pending, or, to Borrower's knowledge, threatened,
investigation by any Governmental Authority regarding a Release or threatened
Release or other presence of a Contaminant.
57
<PAGE>
Loan and Security Agreement
(f) Representations Regarding Hazardous Materials. There is not now,
---------------------------------------------
nor to the best of Borrower's knowledge has there ever been on or in the
Premises: (i) any underground storage tanks or surface impoundments, (ii) any
asbestos containing material, or (iii) any polychlorinated biphenyls used in
hydraulic oils, electrical transformers or other equipment.
(g) No Accidental Releases. Borrower has not filed any notice under
----------------------
any requirement of Environmental Law reporting a spill or accidental and
unpermitted Release of a Contaminant into the environment. To the best of
Borrower's knowledge, there have been no material Releases of Contaminants on
any of Borrower's Premises which have not been fully remedied in accordance with
applicable law.
(h) No Remedial Obligations. Borrower has not entered into any
-----------------------
negotiations or settlement agreements with any Person (including, without
limitation, the prior owner of its property) or is otherwise subject to any
agreement imposing material obligations or liabilities on Borrower with respect
to any remedial action in response to the Release of a Contaminant or
environmentally related claim.
(i) No Environmental Lien. No Environmental Lien has attached to any
---------------------
Premises of Borrower .
(j) No Litigation. There are no civil, criminal or administrative
-------------
actions, suits, demands, claims, hearings or proceedings pending or, to the best
of Borrower's knowledge, threatened against Borrower by any Person or
Governmental Authority under any Environmental Laws or related to any
Environmental Claims.
(k) Occupational Safety. Borrower is not in actual or alleged
-------------------
material violation of OSHA or any regulations promulgated thereunder. No action,
proceeding, claim, suit or the like is pending or, to the best of Borrower's
knowledge, threatened against Borrower, by any Person or Governmental Authority
with respect to occupational health or safety issues, nor is Borrower aware of
any potential claims thereof.
(l) No Listing. None of the Premises or any property currently or
----------
formerly owned, operated or used by Borrower, or any property to which Borrower
may have transported, treated or disposed or arranged for the transport, or
disposal of any "contaminant" is listed as a site on the National Priorities
list (as defined in CERCLA) or other comparable list of sites of environmental
concern.
8.19 No Violation of Law; Telecommunications Laws and Licenses. Borrower is
---------------------------------------------------------
not in violation of any law, statute, regulation, ordinance, judgment, order or
decree applicable to it which violation could reasonably be expected to have a
Material Adverse Effect. In furtherance thereof, except as set forth on Schedule
--------
8.19 hereto: (i) Borrower operates its business in material compliance with all
- ----
material and applicable Telecommunications Laws and all of its
Telecommunications Licenses; (ii) Borrower has all Telecommunications Licenses
necessary for the operation of its existing business; (iii) to the best of
Borrower's knowledge, all such Telecommunications Licenses are validly issued
and in full force and effect; (iv) Borrower has no reason to believe that its
Telecommunications Licenses will not be renewed by the applicable issuing
authority on a routine basis; and (v) Borrower has no reason to believe that it
is or will be threatened with any material investigation, liability, forfeiture,
order or complaint issued by any Governmental Authority under any
Telecommunications Law that would have a Material Adverse Effect.
58
<PAGE>
Loan and Security Agreement
8.20 No Default. Borrower is not in default with respect to any note,
----------
indenture, loan agreement, mortgage, lease, deed or other agreement to which
Borrower is a party or by which it is bound, which default could reasonably be
expected to have a Material Adverse.
8.21 ERISA Compliance.
----------------
(a) Plans in Compliance. Each Plan is in compliance with the
-------------------
applicable provisions of ERISA, the Code, the regulations, rulings, case law and
published annotations thereto and other federal or state law and Borrower and
each of its ERISA Affiliates is in compliance with the requirements imposed upon
them by ERISA, the Code and other federal or state laws, and the regulations,
rulings, case law and published annotations thereto with respect to such Plan.
Borrower and the ERISA Affiliates have performed all of their obligations under
all Plans. Each Plan which is intended to qualify under Section 401(a) of the
Code has received a favorable determination letter from the IRS stating that
such Plan is qualified under Section 401(a) of the Code and that the trust under
such Plan is exempt from tax under Section 501(a) of the Code and to the best
knowledge of Borrower, nothing has occurred in the operation of the Plan which
would cause the loss of such qualification or tax-exempt status. No event has
occurred that would subject any Plan to tax under Section 511 of the Code, and
Borrower has delivered to Agent a copy or copies of the most recent
determination letter received from the IRS with respect to each Plan. Borrower
and each ERISA Affiliate has made all required contributions to any Plan subject
to Section 412 of the Code, and no application for a funding waiver or an
extension of any amortization period pursuant to Section 412 of the Code has
been made with respect to any Plan.
(b) No Claims. There are no pending or, to the best knowledge of
---------
Borrower, threatened claims, actions or lawsuits, or actions by any party (other
then routine claims for benefits), with respect to any Plan which have resulted
or could reasonably be expected to result in a Material Adverse Effect. There
has been no prohibited transaction under ERISA or the Code or violation of the
fiduciary responsibility rules under ERISA with respect to any Plan which has
resulted or could reasonably be expected to result in a Material Adverse Effect.
(c) No ERISA Event, Etc. (i) No ERISA Event has occurred or is
-------------------
reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension
Liability; (iii) neither Borrower nor any ERISA Affiliate has incurred, or
reasonably expects to incur, any liability under Title IV of ERISA with respect
to any Pension Plan (other than premiums due and not delinquent under Section
4007 of ERISA); (iv) neither Borrower nor any ERISA Affiliate has incurred, or
reasonably expects to incur, any liability (and no event has occurred which,
with the giving of notice under Section 4219 of ERISA, would result in such
liability) under Section 4201 or 4243 of ERISA with respect to a Plan; and (v)
neither Borrower nor any ERISA Affiliate has engaged in a transaction that could
be subject to Sections 4069 or 4212(c) of ERISA.
8.22 Taxes. Borrower has filed all tax returns and reports required to be
-----
filed, and has paid all taxes, assessments, fees and other governmental charges
levied or imposed upon it or its properties, income or assets otherwise due and
payable.
8.23 Regulated Entities. None of Borrower or any Person controlling
------------------
Borrower is an "Investment Company" within the meaning of the Investment Company
Act of 1940. Borrower is not subject to regulation under any federal or state
statute or regulation limiting its ability to incur Debt.
59
<PAGE>
Loan and Security Agreement
8.24 Margin Regulations. Borrower is not engaged in the business of
------------------
purchasing or selling Margin Stock or extending credit for the purpose of
purchasing or carrying Margin Stock.
8.25 Intellectual Property. Except as set forth on Schedule 8.13, (a)
--------------------- -------------
Borrower owns or is licensed or otherwise has the right to use all Proprietary
Rights that are reasonably necessary for the operation of its businesses,
without conflict with the rights of any other Person; (b) no slogan or other
advertising device, product, process, method, substance, part or other material
now employed, or now contemplated to be employed, by Borrower infringes upon any
rights held by any other Person; and (c) no claim or litigation regarding any of
the foregoing is pending or threatened, and no patent, invention, device,
application, principle or any statute, law, rule, any regulation, standard or
code is pending, or, to the knowledge of Borrower, proposed, which, in any case
or in the aggregate for all cases, could reasonably be expected to have a
Material Adverse Effect.
8.26 No Material Adverse Change. No Material Adverse Effect has occurred
--------------------------
since the date of the last audited Financial Statements of Borrower delivered to
Agent and the Lenders.
8.27 Full Disclosure. None of the representations or warranties made by
---------------
Borrower in the Loan Documents as of the date such representations and
warranties are made or deemed made, and none of the statements contained in any
exhibit, report, statement or certificate furnished by or on behalf of Borrower
in connection with the Loan Documents, contains any untrue statement of a
material fact or omits any material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they are made, not misleading.
8.28 Material Agreements. Each Material Agreement is in full force and
-------------------
effect, and except as disclosed on Schedule 1.1A hereto, Borrower is not in
-------------
default under any Material Agreement and, to its knowledge, no other party to
any Material Agreement is in default of its obligations thereunder. True and
correct copies of each Material Agreement have been delivered to Agent.
8.29 Governmental Authorization. No approval, consent, exemption,
--------------------------
authorization, or other action by, or notice to, or filing with, any
Governmental Authority is necessary or required in connection with the
execution, delivery or performance by, or enforcement against, Borrower of this
Agreement or any other Loan Document.
8.30 Year 2000. Borrower has implemented programs to evaluate, and if
---------
necessary, that are sufficient to resolve any Year 2000 Problem, which programs
are set forth on Schedule 8.30 hereto. Borrower hereby agrees to take all steps
-------------
and commit such resources as are necessary and/or appropriate to resolve any
Year 2000 Problem that it may have.
ARTICLE IX.
AFFIRMATIVE AND NEGATIVE COVENANTS
Borrower covenants to Agent and each Lender that, as long as any of the
Obligations remain outstanding or this Agreement is in effect:
9.1 Taxes and Other Debt. Borrower shall (a) file when due all tax
--------------------
returns and other reports which it is required to file; (b) pay, or provide for
the payment, when due, of all taxes, fees, assessments and other governmental
charges against it or upon its property, income and franchises, make all
required withholding and other tax deposits, and establish adequate reserves for
the payment of all such items, and provide to Agent and the Lenders, upon
request, satisfactory evidence of its timely
60
<PAGE>
Loan and Security Agreement
compliance with the foregoing; and (c) pay when due all Debt owed by it and all
claims of materialmen, mechanics, carriers, warehousemen, landlords and other
like Persons, and all other indebtedness owed by it and perform and discharge in
a timely manner all other obligations undertaken by it; provided, however, that,
as long as Borrower has notified Agent in writing, Borrower need not pay any
tax, fee, assessment or governmental charge, for which (i) it is contesting in
good faith by appropriate proceedings diligently pursued, (ii) Borrower has
established proper reserves as provided in GAAP, and (iii) no Lien (other than a
Permitted Lien) would result from such nonpayment.
9.2 Corporate Existence and Good Standing. Borrower shall maintain its
-------------------------------------
corporate existence and its qualification and good standing in all jurisdictions
where Borrower leases or owns any Real Property, or in which the failure to
maintain such qualification or good standing could reasonably be expected to
have a Material Adverse Effect.
9.3 Compliance with Law and Agreements; Maintenance of Licenses. Borrower
-----------------------------------------------------------
shall comply in all material respects with all Requirements of Law of any
Governmental Authority having jurisdiction over it or its business (including
all Telecommunications Laws and the Federal Fair Labor Standards Act). Borrower
shall obtain and maintain in full force and effect all licenses (including
Telecommunications Licenses), permits, franchises and governmental
authorizations necessary to own its property and to conduct its business as
conducted on the Closing Date or at any time thereafter, except for such
licenses and permits which, if not maintained, would not have a Material Adverse
Effect.
9.4 Insurance.
---------
(a) Insurance Requirements. Borrower shall maintain with financially
----------------------
sound and reputable independent insurers that are reasonably satisfactory to
Agent, insurance against loss or damage in accordance with Borrower's past
practices, including worker's compensation insurance, public liability insurance
and property and casualty insurance, in amounts that shall be satisfactory to
Agent and the Majority Lenders, which insurance and shall not be terminated or
reduced by Borrower in the absence of thirty (30) days prior notice to Agent.
(b) Loss Payee and Additional Insured. All casualty insurance
---------------------------------
maintained by Borrower shall name Agent as loss payee and all liability
insurance shall name Agent and the Lenders as additional insureds. Upon request
of Agent or any Lender, Borrower shall furnish to Agent, with sufficient copies
for each Lender, at reasonable intervals (but not more than once per calendar
year), a certificate of an officer of Borrower (and, if requested by Agent, any
insurance broker of Borrower) setting forth the nature and extent of all
insurance maintained by Borrower in accordance with this Section (and which, in
the case of a certificate of a broker, were placed through such broker). All
premiums for such insurance of Borrower shall be paid by Borrower when due. If
Borrower fails to procure such insurance or to pay the premiums therefor when
due, Agent may, and at the direction of the Majority Lenders shall, do so from
the proceeds of Revolving Loans.
(c) Notification of Loss. Borrower shall promptly notify the Agent
--------------------
and the Lenders of any material loss, damage or destruction to the Collateral,
whether or not covered by insurance. Agent is hereby authorized to collect all
casualty insurance proceeds directly, and after deducting from such proceeds the
reasonable expenses, if any, incurred by Agent in the collection or handling
thereof, Agent shall promptly apply such proceeds to the Obligations; provided,
however, that if no Default or Event of Default has occurred and is continuing,
Agent shall permit or require Borrower to use such money, or any part thereof,
to replace, repair, restore or rebuild the relevant property within one hundred
and eighty (180) days of the casualty and in a diligent and expeditious manner
with materials and workmanship of
61
<PAGE>
Loan and Security Agreement
substantially the same quality as existed before the loss, damage or
destruction; provided, however, that Borrower must first demonstrate to the
reasonable satisfaction of Agent and the Majority Lenders that (i) the funds
available to Borrower will be sufficient to complete such project in the manner
provided therein; and (ii) Borrower shall be able to meet all of its Obligations
(including its obligation to make principal and interest payments hereunder) at
all times during the repair or replacement of the property so lost, damaged or
destroyed.
9.5 Condemnation.
------------
(a) Notification of Proceeding. Borrower shall, immediately upon
--------------------------
learning of the institution of any proceeding for the condemnation or other
taking of any of its property, notify Agent of the pendency of such proceeding,
and agrees that Agent may participate in any such proceeding, and Borrower from
time to time will deliver to Agent all instruments reasonably requested by such
Agent to permit such participation.
(b) Collection of Proceeds. Agent is hereby authorized to collect all
----------------------
condemnation proceeds directly, and after deducting from such proceeds the
reasonable expenses, if any, incurred by Agent in the collection or handling
thereof, Agent shall promptly apply such proceeds to the Obligations; provided,
however, that if no Default or Event of Default has occurred and is continuing,
Agent shall permit or require Borrower to use such money, or any part thereof,
to replace, repair, restore or rebuild the relevant property within one hundred
and eighty (180) days of the condemnation event in a diligent and expeditious
manner with materials and workmanship of substantially the same quality as
existed before the condemnation event; provided, however, that Borrower must
first demonstrate to the reasonable satisfaction of Agent and the Majority
Lenders that (i) the funds available to Borrower will be sufficient to complete
such project in the manner provided therein; and (ii) Borrower shall be able to
meet all of its Obligations (including its obligation to make principal and
interest payments hereunder) at all times during the repair or replacement of
the property so condemned.
9.6 Environmental Laws.
------------------
(a) Conduct of Business. Borrower shall conduct its business in
-------------------
compliance with all Environmental Laws applicable to it, including, without
limitation, those relating to the generation, handling, use, storage and
disposal of any Contaminant. Borrower shall take prompt and appropriate action
to respond to any actual or alleged noncompliance with Environmental Laws.
(b) Defense of Environmental Claims. Borrower shall promptly respond
-------------------------------
to any Environmental Claims which may be asserted against Borrower.
(c) Status Reports. Borrower shall submit to Agent and the Lenders at
--------------
such times reasonably requested by Agent or the Lenders, an update of the status
of each material environmental compliance or liability issue then outstanding
with respect to Borrower. Agent or Lender may request copies of technical
reports prepared by Borrower and its communications with any Governmental
Authority which demonstrates whether Borrower is proceeding reasonably to
correct, cure or contest in good faith any alleged noncompliance or
environmental liability. Borrower shall, at Agent's or the Majority Lenders'
request and at Borrower's expense, (i) retain an independent environmental
engineer acceptable to Agent to evaluate a property at which Borrower may be
subject to any material environmental liability or responsibility, including
tests if appropriate, where the noncompliance or alleged noncompliance with
Environmental Laws has occurred and prepare and deliver to Agent, in sufficient
quantity for distribution by Agent to Lenders, a report setting forth the
results of such
62
<PAGE>
Loan and Security Agreement
evaluation, a proposed plan for responding to any environmental problems
described therein, and an estimate of the costs thereof; and (ii) provide to
Agent and the Lenders a supplemental report of such engineer whenever the scope
of the environmental problems, or the response thereto or the estimated costs
thereof, shall change in any material respect.
(d) Environmental Indemnity. In addition to any other indemnity
-----------------------
obligation of Borrower hereunder, Borrower agrees absolutely, unconditionally
and irrevocably, to fully and promptly indemnify, pay, discharge, save harmless
and reimburse each of Agent, the Lenders and their respective officers,
directors, shareholders and agents and each of the foregoing parties' respective
successors and assigns ("Lender Indemnitees"), upon demand, from and against any
------------------
and all direct or indirect losses, claims, demands, liabilities, expenses,
disbursements, judgments, actual, incidental and consequential damages, costs
and expenses (including without limitation, the fees and disbursements of
counsel and consultants), and any and all suits, proceedings, directives,
inquiries, citations, penalties, assessments, hearings or actions of any kind
whatsoever, unknown or known, fixed or contingent, asserted against or incurred
by a Lender Indemnitee by reason of, arising out of or in connection with, in
whole or in part, any of the following:
(i) The inaccuracy or breach of any of the representations set
forth in Section 8.18.
------------
(ii) The breach of any of the covenants set forth in Section
-------
7.3 or this Section.
- ---
(iii) Any past, present or future violation of any Environmental
Laws by Borrower.
(iv) Any actual or alleged Release, threatened Release or other
presence of any Contaminant on, from or into any of the Premises or any other
property owned or operated by Borrower.
(v) Any claim which may be asserted against any Lender
Indemnitee under or in connection with any Environmental Laws arising from such
party's relationship to Borrower, including any act or failure to act under or
pursuant to any of the Loan Documents.
The undertaking of Borrower in this Section shall survive the termination of
this Agreement and the payment of all Obligations hereunder.
9.7 Compliance with ERISA Borrower shall, and shall cause each of its
---------------------
ERISA Affiliates to:
(a) Maintain Plans. Maintain each Plan in compliance with the
--------------
applicable provisions of ERISA, the Code, regulations and published authorities
thereunder, and rulings and case law, and other federal or state law;
(b) Qualification. Cause each Plan which is qualified under Section
-------------
401(a) of the Code to maintain such qualification and to maintain in operation
and in force the tax-exempt status of the trust under such Plan;
(c) Contributions. Make all required contributions to any Plan in a
-------------
timely manner;
63
<PAGE>
Loan and Security Agreement
(d) Prohibited Transactions. Not engage in a prohibited transaction
-----------------------
under the Code or ERISA or violation of the fiduciary responsibility rules under
ERISA with respect to any Plan; and
(e) Sections 4069 and 4212(c). Not engage in a transaction that could
-------------------------
be subject to Section 4069 or 4212(c) of ERISA.
9.8 Mergers, Consolidations or Sales of Assets. Borrower shall not enter
------------------------------------------
into any transaction of merger whereby Borrower is not the surviving entity.
Borrower shall not enter into any reorganization or consolidation, or transfer,
sell, assign, lease or otherwise dispose of all or any part of its property, or
wind up, liquidate or dissolve, or agree to do any of the foregoing, except for
sales of Inventory in the ordinary course of business, and sales or other
dispositions of Equipment as permitted by Section 6.10(c).
---------------
9.9 Distributions; Capital Change; Restricted Investments and
---------------------------------------------------------
Expenditures.
- ------------
(a) Distributions. Borrower shall not directly or indirectly declare
-------------
or make, or incur any liability to make, any Distribution, except that Borrower
may: (i) declare noncash PIK (paid-in-kind) on its Series A Preferred Stock;
(ii) grant and permit the exercise of stock options under the Pac-West Telecomm,
Inc. 1999 Stock Incentive Plan; and (iii) make such earn-out payments as are
required under the Merger Agreement in an amount not to exceed twenty million
dollars ($20,000,000) in the aggregate.
(b) Changes in Capital Structure. Borrower shall not make any change
----------------------------
in its capital structure which could have a Material Adverse Effect.
(c) Restricted Investments and Expenditures. Borrower shall not make
---------------------------------------
or maintain any Restricted Investment or Expenditure, except for the following:
(i) Borrower may receive promissory notes or other instruments
that represent the obligation of Account Debtors with respect to Accounts that
are past due and are owed to Borrower; provided that the original of such
promissory note or other instrument promptly shall be delivered to Agent as
Collateral hereunder, together with any endorsement by Borrower that Agent may
request;
(ii) Borrower may repurchase the Permitted Repurchase Amount of
Bonds under the terms of the Indenture or make open market purchases of the
Permitted Repurchase Amount of Bonds, provided that (A) Borrower shall deliver
to Agent no less than two (2) Business Days prior written notice of such
proposed repurchase or purchase; (B) at the time of, and as a result of, such
repurchase or purchase, no Default or Event of Default shall have occurred and
be continuing or will occur; (C) Borrower shall be in compliance with all of its
financial covenants set forth in Section 9.20 hereof, calculated both before
------------
such proposed repurchase or purchase of the Bonds and calculated as if the Bonds
in the amount of the Permitted Repurchase Amount of Bonds has been repurchased
or purchased prior to the last day of the last Fiscal Quarter; and (D) the ratio
of (x) Total Debt for the most recently ended Fiscal Quarter, less all
nonrestricted cash in excess of five million dollars ($5,000,000), to (y) EBITDA
for the most recently ended rolling four (4) Fiscal Quarters shall be less than
6.25:1, calculated both before such proposed repurchase or purchase of the Bonds
and calculated as if the Bonds in the amount of the Permitted Repurchase Amount
of Bonds has been repurchased or purchased prior to the last day of the last
Fiscal Quarter; and
64
<PAGE>
Loan and Security Agreement
(iii) Borrower may make and maintain those other Restricted
Investments and Expenditures of Borrower existing as of the Closing Date that
are set forth on Schedule 9.9 attached hereto (not including the right to
------------
exercise any options or warrants described on such Schedule, unless the exercise
of such option or warrant would otherwise be permitted under this Section).
9.10 Material Adverse Effect. Borrower shall not enter into any
-----------------------
transaction which could have a Material Adverse Effect.
9.11 Guaranties. Borrower shall not make, issue, remain or become liable
----------
on any Guaranty, except Guaranties in favor of Agent for the benefit of the
Lenders.
9.12 Debt. Borrower shall not incur or maintain any Debt, other than: (a)
----
trade payables to suppliers and customers, accrued expenses and other current
liabilities (other than indebtedness for borrowed money) and current and
deferred income taxes payable incurred in the ordinary course of business; (b)
Capital Leases and short-term debt (which may include Debt evidenced by a
purchase money Lien, as described in clause (g) of the definition of "Permitted
Liens") in an amount not to exceed five million dollars ($5,000,000) in the
aggregate in each Fiscal Year; (c) Debt existing on the Closing Date and
described in Schedule 8.9 hereto; and (d) Debt approved in writing by Agent and
------------
the Majority Lenders.
9.13 Transactions with Affiliates. Except as set forth in the immediately
----------------------------
following sentence, Borrower shall not engage in any transaction with any
Affiliate, except for commercial transactions with Affiliates which are in the
ordinary course of business, in amounts and upon terms no less favorable to
Borrower than could be obtained in a comparable arm's-length transaction with a
third party who is not an Affiliate.
9.14 Investment Banking and Finder's Fees. Borrower shall not pay or agree
------------------------------------
to pay, or reimburse any other party with respect to, any investment banking or
similar or related fee, underwriter's fee, finder's fee or broker's fee to any
Person in connection with this Agreement. Borrower shall defend and indemnify
Agent and the Lenders against and hold them harmless from all claims of any
Person for any such fees, and all costs and expenses (including without
limitation, attorneys' fees) incurred by Agent and/or any Lender in connection
therewith. The undertaking of Borrower in this Section shall survive the
termination of this Agreement and the payment of all Obligations hereunder.
9.15 Business Conducted; Maintenance of Property. Borrower shall not
-------------------------------------------
engage directly or indirectly, in any line of business other than the business
in which Borrower is engaged on the Closing Date. Borrower shall maintain all of
its property that is necessary and useful in the conduct of its business in good
operating condition and repair, ordinary wear and tear excepted.
9.16 Liens. Borrower shall not create, incur, assume, permit or suffer to
-----
exist any Lien on any property now owned or hereafter acquired by it, except for
Permitted Liens.
9.17 Sale and Leaseback Transactions. Borrower shall not, directly or
-------------------------------
indirectly, enter into any sale and leaseback transaction or any other
arrangement with any Person providing for Borrower to lease or rent property
that Borrower has sold or will sell or otherwise transfer to such Person.
9.18 New Subsidiaries. Borrower shall not, directly or indirectly,
----------------
organize, create, acquire or permit to exist any Subsidiary other than those
listed on Schedule 8.5, except with the prior written
------------
65
<PAGE>
Loan and Security Agreement
consent of Agent and the Majority Lenders, and provided that such Subsidiary
executes and delivers to Agent a Subsidiary Joinder.
9.19 Fiscal Year; Accounting Method. Borrower shall not change its Fiscal
------------------------------
Year or its method of accounting.
9.20 Financial Covenants. Borrower shall maintain the following financial
-------------------
covenants:
(a) Total Debt to EBITDA. Borrower shall not permit its ratio of: (i)
--------------------
Total Debt for the most recently ended Fiscal Quarter, less all nonrestricted
----
cash in excess of five million dollars ($5,000,000), to (ii) EBITDA for the most
recently ended rolling four (4) Fiscal Quarters, to be greater than the
following:
(i) 9:1 at all times prior to December 31, 1999;
(ii) 7.75:1 between January 1, 2000 and December 31, 2000; and
(iii) 6:1 at all times from and after December 31, 2000.
(b) Minimum Interest Coverage. Borrower shall not permit its ratio
-------------------------
of: (i) EBITDA for the most recently ended rolling four (4) Fiscal Quarters, to
(ii) Interest Expense for the most recently ended rolling four (4) Fiscal
Quarters be less than 1.25:1 at all times; provided however, that Interest
Expense for Borrower's Fiscal Year ending on December 31, 1999, shall be reduced
by the amount held in the Interest Escrow Account held under (and as defined in)
the Indenture.
9.21 Use of Proceeds. Borrower shall use the proceeds of the Loans solely
---------------
to finance working capital, acquisitions and capital expenditures permitted
hereunder and other general corporate purposes, but not to finance operating
losses. Borrower shall not use any portion of the Loan proceeds, directly or
indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise
refinance any Debt of Borrower or others incurred to purchase or carry Margin
Stock or otherwise, (iii) to extend credit for the purpose of purchasing or
carrying any Margin Stock, or (iv) to acquire any security in any transaction
that is subject to Sections 13 or 14 of the Exchange Act.
9.22 Further Assurances. Borrower shall execute and deliver, or cause to be
------------------
executed and delivered, to Agent and/or the Lenders such documents and
agreements, and shall take or cause to be taken such actions, as Agent or any
Lender may, from time to time, request to carry out the terms and conditions of
this Agreement and the other Loan Documents. In this regard, but without
limiting in any way the generality of the immediately preceding sentence, (a) if
any Subsidiary is formed or acquired by Borrower after the Closing Date hereof,
Borrower shall cause such Subsidiary to execute and deliver to Agent a
Subsidiary Joinder and such other agreements, documents and instruments as Agent
may, from time to time, request; and (b) if any Schedule to this Agreement or
any Loan Document fails to list all current information applicable to such
Schedule, Borrower shall deliver to Agent an updated Schedule certified by an
officer of Borrower to be true an correct as of the date of delivery thereof, as
well as any other items or documents requested by Agent, including any
additional information regarding any matter disclosed in such updated Schedule.
9.23 Amendments to Documents. Borrower shall not modify, amend, supplement
-----------------------
or terminate or agree to modify, amend, supplement or terminate its Articles of
Incorporation nor any of the Material Agreements, without in each instance the
prior written consent of Agent and the Majority Lenders, which will not be
unreasonably withheld, except that, unless and until a Default or an Event of
66
<PAGE>
Loan and Security Agreement
Default has occurred and is continuing, Borrower may modify, amend or supplement
any Material Agreement, as long as such amendment, modification or supplement
could not result in a Material Adverse Effect, materially increase the burdens
or obligations of Borrower under such Material Agreement or adversely effect
Agent's Lien upon such Material Agreement; and provided that any right of
Borrower to modify, amend or supplement any Material Agreement shall terminate
upon the occurrence and during the continuance of a Default or an event of
Default hereunder.
ARTICLE X.
CONDITIONS OF LENDING
10.1 Conditions Precedent to Making of Loans on the Closing Date. The
-----------------------------------------------------------
obligation of the Lenders to make the initial Revolving Loans on the Closing
Date and the obligation of Agent to use reasonable efforts to cause to be issued
any Letter of Credit on the Closing Date and the obligation of the Lenders to
participate in Letters of Credit issued on the Closing Date are subject to the
following conditions precedent having been satisfied in a manner satisfactory to
Agent and each Lender:
(a) Loan Documents. The following Loan Documents shall have been
--------------
executed and delivered by each party thereto:
(i) This Agreement;
(ii) A Landlord Waiver executed by each landlord in respect
of the following Premises:
. 304 East Carson Street, Las Vegas, NY 89101;
. 624 South Grand, One Wilshire Building, 12th Floor,
Suites 1204, 1209, 1210 and 1214, Los Angeles, CA
90017;
. 1110 S. Wilson Way, Stockton, CA;
. 1624 Franklin, Suites 40, 100, 201, 203, 210, 214,
413 and Mezzanine, Oakland, CA 94612;
. 4202 and 4210 Coronado Avenue., Stockton, CA 95204;
. 4203 Coronado Avenue, Units 3 and 4, Stockton, CA
95204;
. 4211 Coronado Avenue, units D and F, Stockton, CA
95204;
. 770 L Street, Suite 170, Sacramento, CA 95813; and
. such other Premises as requested by Agent, if
Collateral located at such Premises has a value in
excess of five hundred thousand dollars ($500,000);
(iii) The Arbitration Agreement;
(iv) The Fee Letter;
(v) A Consent to Assignment, executed by Alcatel USA
Marketing, Inc., with respect to the Alcatel Software; and
67
<PAGE>
Loan and Security Agreement
(vi) A Deposit Control Agreement from each Deposit Bank listed on
Schedule 6.9(a) hereto.
- ---------------
(b) UCC-1s and other Perfection Documents. The following documents
-------------------------------------
shall have been executed and delivered to Agent:
(i) UCC-1 financing statements and fixture filings to be filed
in each applicable jurisdiction, which UCC-1 financing statements and fixture
filings shall have been filed in each applicable location; and
(ii) Intellectual Property filings, with respect to Borrower's
patents, trademarks and copyrights, to be filed in the United States Patent and
Trademark Office and the United States Copyright Office, as applicable.
(c) Loan Request; Certificates and Opinion. The following documents
--------------------------------------
shall have been executed and delivered to Agent:
(i) A Loan Request and a Borrowing Base Certificate with
respect to the proceeds of the initial Revolving Loan;
(ii) A Certificate pursuant to Section 2.2(d) hereof, setting
--------------
forth the account of Borrower to which Agent is authorized to transfer Loan
proceeds, and the names of the officers authorized to request Revolving Loans on
behalf of Borrower, along with a specimen signature of each such officer;
(iii) An Officer's Certificate for Borrower, certifying (and
attaching where applicable): (A) that the representations and warranties of
Borrower contained herein and in each other Loan Document are true and correct
as of the Closing Date; (B) that no Default, Event of Default or Material
Adverse Effect exists or has occurred since the date of the last Financial
Statements of Borrower that were delivered to Agent, or will occur as a result
of the execution of the Loan Documents; (C) that no default by Borrower under
any of the Material Agreements has occurred and is continuing; (D) to the
resolutions of the Board of Directors of Borrower attached thereto authorizing
the execution and delivery of the Loan Documents to which Borrower is a party,
and certifying that no other resolutions have been adopted with respect to the
transactions contemplated hereby; (E) to the copy of Borrower's articles of
incorporation attached thereto, as certified by the California Secretary of
State, and certifying that such articles of incorporation are in full force and
effect and have not been amended or modified except as attached; (F) to the copy
of Borrower's bylaws attached thereto, and certifying that such bylaws are in
full force and effect and have not been amended or modified except as attached;
(G) to the incumbency certificate (with specimen signatures) for the officers of
Borrower authorized to execute and deliver the Loan Documents to which Borrower
is a party, attached thereto; and (H) to the Good Standing Certificates for
Borrower attached thereto, as issued by the Secretary of State of the State of
California and the California Franchise Tax Board, and as issued by any
jurisdiction for which qualification to do business as a foreign corporation is
required of Borrower; and
(iv) An opinion of counsel to Borrower in the form of Exhibit 7
---------
hereto, addressed to Agent and the Lenders.
68
<PAGE>
Loan and Security Agreement
(d) Additional Deliveries and Conditions Precedent. The following
----------------------------------------------
documents shall have been delivered to Agent, and the following conditions
precedent shall have been satisfied, as applicable:
(i) Agent shall have received insurance certificates
evidencing that Borrower has obtained the insurance coverage required
hereunder;
(ii) Agent shall have received the results of UCC, tax and
judgment lien searches with respect to Borrower, which shall be
satisfactory to Agent;
(iii) All of the representations and warranties herein and
required to be set forth in the Secretary's Certificate pursuant to Section
-------
10.1(c)(iii) above shall be true and correct on and as of the Closing Date;
- ------------
(iv) Agent shall have received a copy of the resolutions of the
Board of Directors of Borrower authorizing the execution and delivery of the
Loan Documents to which Borrower is a party, a copy of the articles of
incorporation of Borrower as certified by the California Secretary of State, a
copy of the bylaws of Borrower, and original Good Standing Certificates for
Borrower issued by the Secretary of State of the State of California and the
California Franchise Tax Board, and good standing certificates issued by the
Secretary of State or equivalent state officer of any jurisdiction for which
qualification to do business as a foreign corporation is required of Borrower,
each of which shall have been attached to the Secretary's Certificate to be
delivered pursuant to Section 10.1(c)(iii) above, and each of which shall be in
--------------------
form and substance, and dated a recent date, as applicable, all as satisfactory
to Agent;
(v) Agent shall have received a copy of each of the Material
Agreements;
(vi) Borrower and each other party to the Loan Documents shall
have performed and complied with all covenants, agreements and conditions
contained herein and in the other Loan Documents required to be performed or
complied with by it on or before the Closing Date;
(vii) No Default or Event of Default shall exist on the Closing
Date, or would exist after giving effect to the Loans to be made on such date;
(viii) Agent and Lenders shall have had an opportunity, if they
so choose, to examine the books of account and other records and files of
Borrower and to make copies thereof, and to conduct a pre-closing audit which
shall include, without limitation, verification of Accounts and Availability,
and the results of such examination and audit shall have been satisfactory to
Agent and the Lenders in all respects;
(ix) Agent shall have received, in form and substance
satisfactory to Agent, such other evidence, documents, instruments, approvals
and opinions as Agent may reasonably request, including agreements with parties
to the Assigned Contracts or Material Agreements for the purpose of
subordinating the rights of any such parties thereunder in respect of the
Collateral;
(x) Borrower shall have paid all accrued and unpaid fees,
costs and expenses that are due and payable on the Closing Date, including the
fees required under the Fee Letter and all fees and expenses of Agent, the
Attorney Costs and all other expenses described in Section 15.5 hereof, to the
------------
extent invoiced before or on the Closing Date, plus such additional amounts as
shall constitute Agent's reasonable estimate of such costs and expenses incurred
or to be incurred by it
69
<PAGE>
Loan and Security Agreement
through the closing proceedings (provided that such estimate shall not
thereafter preclude final settling of accounts between Borrower and Agent); and
(xi) (A) the California Public Utilities Commission shall have
rendered its decision concerning the Local Interconnection Agreement, dated as
of March 15, 1996, by and between Pacific Bell and Borrower (the "CPUC
----
Decision"); (B) Borrower shall have certified to Agent that it has reviewed and
- --------
approved the CPUC Decision, in its sole discretion, as evidenced by the delivery
by Borrower to Agent of an authorization to deliver the Loan Documents executed
by Borrower and held in escrow by Graham & James, LLP, pending the delivery of
such authorization; and (C) Agent shall have independently reviewed and approved
the CPUC Decision, in its sole discretion, as evidenced by the delivery by Agent
to Borrower of an authorization to deliver the Loan Documents executed by Agent
and held in escrow by Graham & James, LLP, pending the delivery of such
authorization.
The acceptance by Borrower of any Loans made on the Closing Date shall
be deemed to be a representation and warranty made by Borrower to the effect
that all of the conditions precedent to the making of such Loans have been
satisfied, with the same effect as delivery to Agent and the Lenders of a
certificate signed by the Responsible Officer of Borrower, dated the Closing
Date, to such effect.
Execution and delivery to Agent by a Lender of a counterpart to this
Agreement shall be deemed confirmation by such Lender that (A) such Lender has
no objection to the closing of this transaction; and (B) the decision of such
Lender to execute and deliver to Agent an executed counterpart to this Agreement
was made by such Lender independently and without reliance on Agent or any other
Lender as to the satisfaction of any condition precedent set forth herein.
10.2 Conditions Precedent to Each Loan. The obligation of the Lenders to
---------------------------------
make each Loan, including the initial Revolving Loans on the Closing Date, and
the obligation of Agent to take reasonable steps to cause to be issued any
Letter of Credit and the obligation of the Lenders to participate in the Letters
of Credit, shall be subject to the further conditions precedent that on and as
of the date of each such extension of credit:
(a) Loan or Letter of Credit Request and Borrowing Base Certificate.
---------------------------------------------------------------
Borrower shall have delivered to Agent a Loan Request or a Letter of Credit
Request, as applicable, and a Borrowing Base Certificate as of the last Business
Day of the prior month.
(b) Statements True and Correct. The following statements shall be
---------------------------
true and correct, and the acceptance by Borrower of any extension of credit
shall be deemed to be a statement to the effect set forth in clauses (i) and
(ii), with the same effect as the delivery to Agent and the Lenders of a
certificate signed by an authorized officer of Borrower, dated the date of such
extension of credit, stating that:
(i) The representations and warranties contained in this
Agreement and the other Loan Documents are true and correct in all material
respects on and as of the date of such extension of credit as though made on and
as of such date, except to the extent Agent and Lenders have been notified by
either Borrower that any representation or warranty is not correct and the
Majority Lenders have explicitly waived in writing compliance with such
representation or warranty; and
(ii) No event has occurred and is continuing, or would result
from such extension of credit, which constitutes a Default or an Event of
Default.
70
<PAGE>
Loan and Security Agreement
(c) Revolving Loan Usage not Exceed Availability. The amount of the
--------------------------------------------
Revolving Loan Usage, after giving effect to the requested Revolving Loan and/or
Letter of Credit, shall not exceed the then Availability.
Anything contained in this Section to the contrary notwithstanding,
the foregoing conditions precedent are not conditions to each Lender
participating in or reimbursing Agent for such Lender's Pro Rata Share of any
Agent Advance to the extent that such Agent Advance is made in accordance with
the provisions of Section 2.3(b) hereof.
--------------
ARTICLE XI.
DEFAULT; REMEDIES
11.1 Events of Default. It shall constitute an event of default (an "Event
----------------- -----
of Default") if any one or more of the following shall occur for any reason:
- ----------
(a) Payment Default. Any failure of Borrower to pay the principal of,
---------------
or interest or premium on, the Obligations when due, or otherwise fail to pay
any other Obligations when due, whether upon demand or otherwise.
(b) Specific Covenant Default. Borrower shall fail to observe or
-------------------------
perform any of its covenants set forth in Sections 9.4 (with respect to
------------
insurance), 9.8 (with respect to mergers, assets sales, etc.), 9.11 (with
--- ----
respect to Guaranties), 9.12 (with respect to Debt), 9.16 (with respect to
---- ----
Liens), or 9.20 (with respect to financial covenants) hereof.
----
(c) Other Defaults. Borrower shall fail to observe or perform any
--------------
term, provision, covenant, agreement or obligation contained in this Agreement
but not specifically mentioned in this Section, or contained in any other Loan
Document to which it is a party, and such default shall continue for thirty (30)
days after Borrower knows or has notice of the existence thereof.
(d) Representation or Warranty Default. Any representation or
----------------------------------
warranty made by Borrower in this Agreement or in any of the other Loan
Documents, in any Financial Statement or in any certificate furnished by
Borrower at any time to Agent or any Lender shall prove to be untrue in any
material respect as of the date on which made or furnished.
(e) Other Debt Default; Bonds Default.
---------------------------------
(i) Any default shall occur with respect to, or any claim be
made under, the Indenture or the Bonds (or there shall occur any optional or
mandatory redemption or repurchase of the Bonds thereunder), which default shall
be an immediate Event of Default hereunder, regardless of any grace or cure
periods provided for therein, and Borrower specifically agrees that, at the
option of Agent and the Majority Lenders, in the event of any such default or
claim in respect of the Bonds or the Indenture, Borrower shall repay all of the
Obligations in full prior to making any payments to the trustee under the
Indenture or otherwise in respect of the Bonds; or
(ii) Any default shall occur with respect to, or any claim be
made under, any other Debt issued or guaranteed by Borrower in an outstanding
principal amount which exceeds, in the aggregate for all such Debt with respect
to which such default shall have occurred or claim made, five hundred thousand
dollars ($500,000), and such default shall continue for more than the period of
grace, if any, therein specified, if the effect thereof (with or without the
giving of notice or further lapse of time or both) is to permit the holders of
any such Debt to accelerate the maturity of any such Debt; or any such Debt
71
<PAGE>
Loan and Security Agreement
shall be declared due and payable or be required to be prepaid (other than by a
regularly scheduled required prepayment) prior to the stated maturity thereof.
(f) Bankruptcy. Borrower shall (i) file a voluntary petition in
----------
bankruptcy or file a voluntary petition or an answer or a notice of intention or
otherwise commence any action or proceeding seeking reorganization, liquidation,
arrangement or readjustment of its debts or for any other relief under the
federal Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
act or law, state, provincial or federal, now or hereafter existing, or consent
to, approve of, or acquiesce in, any such petition, action or proceeding; (ii)
apply for or acquiesce in the appointment of a receiver, assignee, liquidator,
sequestrator, custodian, trustee or similar officer for it or for all or any
part of its property; (iii) make an assignment for the benefit of creditors; or
(iv) be unable generally to pay its debts as they become due or be otherwise
insolvent under any applicable law.
(g) Involuntary Proceedings. An involuntary petition or notice of
-----------------------
intention shall be filed or an action or proceeding otherwise commenced seeking
reorganization, liquidation, arrangement or readjustment of the debts of
Borrower or for the enforcement of security or for any other relief under the
federal Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
act or law, state, provincial, or federal, now or hereafter existing and either
(i) such petition, action or proceeding shall not have been dismissed within a
period of sixty (60) days after its commencement, or (ii) an order for relief
against Borrower shall have been entered in such proceeding.
(h) Receivers and Liquidators. A receiver, assignee, liquidator,
-------------------------
sequestrator, custodian, trustee or similar officer shall be appointed for
Borrower or for all or any part of its property or a warrant of attachment,
execution or similar process shall be issued against any part of the property of
Borrower.
(i) Certificate of Dissolution. Borrower shall file a certificate of
--------------------------
dissolution under applicable state law or shall be liquidated, dissolved or
wound-up or shall commence or have commenced against it any action or proceeding
for dissolution, winding-up or liquidation, or shall take any corporate action
in furtherance thereof.
(j) Judgments. One or more judgments or orders for the payment of
---------
money for which the amount not covered by insurance is in excess of five hundred
thousand dollars ($500,000) shall be rendered against Borrower; or Borrower is
enjoined, restrained or in any way prevented by court order from continuing to
conduct all or any material portion of its business.
(k) Loss of Collateral. Any loss, theft, damage or destruction of any
------------------
item or items of Collateral or other property of Borrower occurs which: (i)
materially and adversely affects the property, business, operation, prospects,
or condition of Borrower; or (ii) is material in amount and not adequately
covered by insurance.
(l) Material Adverse Effect. There occurs a Material Adverse Effect,
-----------------------
in the reasonable judgment of Agent or the Majority Lenders.
(m) Failure of Loan Documents or Liens. For any reason other than the
----------------------------------
failure of Agent to take any action available to it to maintain perfection of
Agent's Liens pursuant to the Loan Documents (other than as a result of the
failure of Borrower or any other Person to cooperate with Agent with respect to
the maintenance of such Liens), any Loan Document ceases to be in full force and
effect or any Lien with respect to any of the Collateral intended to be secured
thereby ceases to be, or is not,
72
<PAGE>
Loan and Security Agreement
valid, perfected and prior to all other Liens (other than Permitted Liens) or is
terminated, revoked or declared void.
(n) ERISA Event. An ERISA Event shall occur with respect to a Pension
-----------
Plan or Multiemployer Plan, whether maintained on the date hereof or hereafter
established or assumed, which has resulted or could reasonably be expected to
result in liability of Borrower under the Code or Title IV of ERISA to the
Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of
five hundred thousand dollars ($500,000); (ii) the aggregate amount of Unfunded
Pension Liability among all Pension Plans at any time exceeds five hundred
thousand dollars ($500,000); or (iii) Borrower or any ERISA Affiliate shall fail
to pay when due, after the expiration of any applicable grace period, any
installment payment with respect to its withdrawal liability under Section 4201
of ERISA under a Multiemployer Plan if the outstanding balance of such
withdrawal liability at the time of such failure exceeds five hundred thousand
dollars ($500,000).
(o) Default in Material Agreement; Merger Agreement. Borrower shall
-----------------------------------------------
default in the performance of any of the terms or conditions of any of the
Material Agreements (including, without limitation, the Merger Agreement and all
documents executed in connection therewith and with the recapitalization of
Borrower), which default continues for more than the applicable cure period, if
any, with respect thereto, or any party shall terminate a Material Agreement or
send notice of its intent to terminate the same.
(p) Adverse Litigation. There is filed against Borrower any civil or
------------------
criminal action, suit or proceeding under any federal or state racketeering
statute (including, without limitation, the Racketeer Influenced and Corrupt
Organization Act of 1970), which action, suit or proceeding (i) is not dismissed
within one hundred twenty (120) days, and (ii) could result in the confiscation
or forfeiture of any material portion of the Collateral.
(q) Change in Management or Control. There shall occur a Change of
-------------------------------
Control, or any of Mr. Wallace W. Griffin or Mr. John K. La Rue shall cease for
any reason to be officers and/or directors of Borrower, whether by reason of
death, disability, resignation, action by the Board of Directors or otherwise.
11.2 Remedies.
--------
(a) Terminate Commitments; Acceleration, etc. If a Default or an
----------------------------------------
Event of Default exists, Agent may, and at the direction of the Majority
Lenders, shall, do one or more of the following at any time or times and in any
order, without notice to or demand on Borrower: (i) reduce the Maximum Amount or
the advance rates against Eligible Accounts and/or Eligible Equipment used in
computing the Availability, or reduce one or more of the other elements used in
computing the Availability; (ii) restrict the amount of or refuse to make
Revolving Loans; and (iii) restrict or refuse to arrange for Letters of Credit.
If an Event of Default exists, Agent, at the direction of the Majority Lenders,
shall do one or more of the following, in addition to the actions described in
the preceding sentence, at any time or times and in any order, without notice to
or demand on Borrower: (A) terminate the Commitments and this Agreement; or (B)
declare any or all Obligations to be immediately due and payable; provided,
however, that upon the occurrence of any Event of Default described in Sections
--------
11.1(f) (bankruptcy), 11.1(g) (involuntary proceedings),11.1(h) (receivers and
- ------- ------- -------
liquidators), or 11.1(i) (dissolution), the Commitments shall automatically and
-------
immediately expire and all Obligations shall automatically become immediately
due and payable without notice, demand or other action of any kind by any
73
<PAGE>
Loan and Security Agreement
Person; and (C) pursue its other rights and remedies under the Loan Documents
and applicable law.
(b) Actions by Agent. If an Event of Default exists: (i) Agent shall
----------------
have, for the benefit the Lenders, in addition to all other rights of Agent and
the Lenders, the rights and remedies of a secured party under all personal
property security laws, including, without limitation, the UCC; (ii) Agent may,
at any time, take possession of the Collateral and keep it on Borrower's
premises, at no cost to Agent or any Lender, or remove any part of it to such
other place or places as Agent may desire, or Borrower shall, upon Agent's
demand, at Borrower's cost, assemble or cause to be assembled the Collateral and
make it available to Agent at a place reasonably convenient to Agent; and (iii)
Agent may sell and deliver any Collateral at public or private sales, for cash,
upon credit or otherwise, at such prices and upon such terms as Agent deems
advisable (unless the Majority Lenders shall direct otherwise), and may, if
Agent deems it reasonable, postpone or adjourn any sale of the Collateral and by
an announcement at the time and place of sale or of such postponed or adjourned
sale without giving a new notice of sale. Without in any way requiring notice to
be given in the following manner, Borrower agrees that any notice by Agent of
sale, disposition or other intended action hereunder or in connection herewith,
whether required by the UCC or otherwise, shall constitute reasonable notice to
Borrower if such notice is mailed by registered or certified mail, return
receipt requested, postage prepaid, or is delivered personally against receipt,
at least five (5) Business Days prior to such action to Borrower's address
specified in or pursuant to Section 15.6. If any Collateral is sold on terms
------------
other than payment in full at the time of sale, no credit shall be given against
the Obligations until the appropriate Agent or Lender receives payment, and if
the buyer defaults in payment, Agent may resell the Collateral without further
notice to Borrower. In the event Agent seeks to take possession of all or any
portion of the Collateral by judicial process, Borrower irrevocably waives: (A)
the posting of any bond, surety or security with respect thereto which might
otherwise be required; (B) any demand for possession prior to the commencement
of any suit or action to recover the Collateral; and (C) any requirement that
Agent retain possession and not dispose of any Collateral until after trial or
final judgment. Borrower agrees that Agent has no obligation to preserve rights
to the Collateral or marshal any Collateral for the benefit of any Person. Agent
is hereby granted a license or other right to use, without charge, Borrower's
labels, patents, copyrights, name, trade secrets, trade names, trademarks, and
advertising matter, or any similar property, in completing production of,
advertising or selling any Collateral, and Borrower's rights under all licenses
and all franchise agreements shall inure to Agent's benefit. The proceeds of
sale shall be applied first to all expenses of sale, including attorneys' fees,
and then to the Obligations as set forth in Section 4.4 hereof. Borrower shall
-----------
remain liable for any deficiency.
(c) Waivers. If an Event of Default occurs, Borrower hereby waives
-------
all rights to notice and hearing prior to the exercise by Agent of Agent's
rights to repossess the Collateral without judicial process or to attach or levy
upon the Collateral without notice or hearing.
ARTICLE XII.
TERM AND TERMINATION
12.1 Term and Termination. The term of this Agreement shall end on the
--------------------
Termination Date. Upon instruction from the Majority Lenders, Agent may
terminate this Agreement without notice upon the occurrence of an Event of
Default. Upon the effective date of termination of this Agreement for any reason
whatsoever, all Obligations (including, without limitation, all unpaid principal
of, accrued interest on, Breakage Costs, if any, with respect to the Loans)
shall become immediately due and payable. Notwithstanding the termination of
this Agreement, until all Obligations are indefeasibly paid and performed in
full in cash, Borrower shall remain bound by the terms of this Agreement and
each of
74
<PAGE>
Loan and Security Agreement
the Loan Documents and shall not be relieved of any of its Obligations
hereunder, and Agent and the Lenders shall retain all their rights and remedies
hereunder (including, without limitation, Agent's Liens in and all rights and
remedies with respect to all then existing and after-arising Collateral).
ARTICLE XIII.
AMENDMENTS; WAIVER; PARTICIPATIONS;
ASSIGNMENTS; SUCCESSORS
13.1 No Waivers; Cumulative Remedies. No failure by Agent or any Lender to
-------------------------------
exercise any right, remedy, or option under this Agreement or any Loan Document
or any present or future supplement hereto or thereto, or in any other agreement
between or among Borrower and Agent and/or any Lender, or delay by Agent or any
Lender in exercising the same, will operate as a waiver thereof. No waiver by
Agent or any Lender will be effective unless it is in writing, and then only to
the extent specifically stated. No waiver by Agent or any Lenders on any
occasion shall affect or diminish Agent's and each Lender's rights thereafter to
require strict performance by Borrower of any provision of this Agreement.
Agent's and each Lender's rights under this Agreement will be cumulative and not
exclusive of any other right or remedy which Agent or any Lender may have under
any Loan Document, under any other agreement or under applicable law.
13.2 Amendment and Waivers.
----------------------
(a) Effective Waivers and Amendments. No amendment or waiver of any
--------------------------------
provision of this Agreement or any other Loan Document, and no consent with
respect to any departure by Borrower therefrom, shall be effective unless the
same shall be in writing and signed by the Majority Lenders (or by Agent at the
written request of the Majority Lenders) and Borrower and then any such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given; provided, however, that no such waiver, amendment or
consent shall, unless in writing and signed by the Requisite Lenders, Agent and
Borrower, do any of the following:
(i) increase or extend the Commitment of any Lender;
(ii) postpone or delay any date fixed by this Agreement or any
other Loan Document for any payment of principal, interest, fees or other
amounts due to the Lenders (or any of them) hereunder or under any other Loan
Document;
(iii) reduce the principal of, or the rate of interest specified
herein on any Loan, or any fees or other amounts payable hereunder or under any
other Loan Document;
(iv) change the percentage of the Commitments or of the
aggregate unpaid principal amount of the Loans which is required for the Lenders
or any of them to take any action hereunder;
(v) amend this Section or any provision of the Agreement
providing for consent or other action by the Majority Lenders or the Requisite
Lenders;
(vi) release Collateral other than as permitted by Section
14.11; or
(vii) change the definition of "Majority Lenders" or "Requisite
Lenders."
75
<PAGE>
Loan and Security Agreement
and provided, further, that no amendment, waiver or consent shall, unless in
writing and signed by Agent, affect the rights or duties of Agent under this
Agreement or any other Loan Document; and provided, further, that the limitation
contained in clause (v) above shall not be deemed to limit the ability of Agent
to make Revolving Loans in accordance with the provisions of Section 2.3(b)
--------------
hereof; and provided further, that in no event shall any Lender be required to
advance additional moneys to increase its own Commitment unless such Lender
shall have consented to such increase.
(b) Amendment by Less than Unanimous Consent. Notwithstanding
----------------------------------------
anything to the contrary contained in Section 13.2(a) above, in the event that
---------------
Borrower requests that this Agreement or any of the other Loan Documents be
amended or otherwise modified in a manner which would require the consent of the
Requisite Lenders and such amendment or other modification is agreed to by
Borrower, the Majority Lenders and Agent then, with the consent of Borrower,
Agent and the Majority Lenders, this Agreement or such other Loan Document may
be amended without the consent of the Lender or Lenders who are unwilling to
agree to such amendment or other modification (the "Minority Lenders"), to
----------------
provide for (i) the termination of the Commitment of each of the Minority
Lenders; (ii) the addition to this Agreement of one or more other Lenders, or an
increase in the Commitment of one or more of the Majority Lenders (it being
understood that no Lender shall be required to increase its Commitment other
than at its own election to do so), so that the Commitments after giving effect
to such amendment or other modification shall be in the same aggregate amount as
the Commitments immediately before giving effect to such amendment or other
modification; (iii) if any Loans are outstanding at the time of such amendment,
the making of such additional Revolving Loans by such new Lenders or such of the
Majority Lenders, as the case may be, as may be necessary to repay in full the
outstanding Loans of the Minority Lenders immediately before giving effect to
such amendment or other modification; and (iv) the payment of all interest, fees
and other obligations payable or accrued in favor of the Minority Lenders and
such other modifications to this Agreement or to such Loan Documents as
Borrower, Agent and the Majority Lenders may determine to be appropriate in
connection therewith.
13.3 Assignments; Participations.
---------------------------
(a) Lender's Assignment Rights. Any Lender may, with the prior
--------------------------
written consent of Agent and, as long as no Default or Event of Default has
occurred and is continuing, with the prior consent of Borrower (which consent
shall not be unreasonably withheld or delayed), assign and delegate to one or
more assignees (provided that no written consent of Agent or Borrower shall be
required in connection with any assignment and delegation by a Lender to an
Affiliate of such Lender) (each an "Assignee") all, or any ratable part of all,
--------
of the Loans, Commitments and other rights and obligations of such Lender
hereunder, in a minimum amount of five million dollars ($5,000,000); provided,
however, that (i) no such assignment shall be permitted if the Assignee is not a
bank lender exempt from applicable usury laws (and Agent may require that such
Assignee deliver an opinion to that effect as a condition to such assignment),
and any assignment to any bank or lender which is not so exempt from applicable
usury laws shall cause the assigning Lender and the Assignee to be Defaulting
Lenders hereunder until such assignment is rescinded or such Assignee receives
its exemption from applicable usury laws; and (ii) Borrower and Agent may
continue to deal solely and directly with such Lender in connection with the
interest so assigned to an Assignee until (A) written notice of such assignment,
together with payment instructions, addresses and related information with
respect to the Assignee, shall have been given to Borrower and Agent by such
Lender and the Assignee; (B) such Lender and its Assignee shall have delivered
to Borrower and Agent an Assignment and Acceptance in form and substance
satisfactory to Agent (an "Assignment and Acceptance"); and (C) the assigning
-------------------------
Lender or Assignee has paid to Agent a processing fee in the amount of three
thousand five hundred dollars ($3,500). Anything contained herein to the
contrary notwithstanding, the consent of Agent and Borrower
76
<PAGE>
Loan and Security Agreement
shall not be required if such assignment is to an Affiliate or Subsidiary of
such Lender or is in connection with any merger, consolidation, sale, transfer,
or other disposition of all or any substantial portion of the business or loan
portfolio of such Lender.
(b) Rights of Assignee. From and after the date that Agent notifies
------------------
the assigning Lender that an executed Assignment and Acceptance has been
received and that payment of the above-referenced processing fee has been
received, (i) the Assignee thereunder shall be a party hereto and to the extent
that rights and obligations, including, but not limited to, the obligation to
participate in credit support or other enhancement for Letters of Credit,
hereunder have been assigned to it pursuant to such Assignment and Acceptance
shall have the rights and obligations of a Lender under the Loan Documents; and
(ii) the assigning Lender shall to the extent that rights and obligations
hereunder and under the other Loan Documents have been assigned by it pursuant
to such Assignment and Acceptance relinquish its rights and be released from its
obligations under this Agreement (and in the case of an Assignment and
Acceptance covering all or the remaining portion of an assigning Lender's rights
and obligations under this Agreement, such Lender shall cease to be a party
hereto).
(c) Confirmation to Other Parties. By executing and delivering an
-----------------------------
Assignment and Acceptance, the assigning Lender and the Assignee thereunder
confirm to and agree with each other and the other parties to this Agreement as
follows: (i) other than as provided in such Assignment and Acceptance, such
assigning Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with this Agreement or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement or
any other Loan Document furnished pursuant hereto; (ii) such assigning Lender
makes no representation or warranty and assumes no responsibility with respect
to the financial condition of Borrower or the performance or observance by
Borrower or any other Person of any of its obligations under this Agreement or
any other Loan Document furnished pursuant hereto; (iii) such Assignee confirms
that it has received a copy of this Agreement, together with such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into such Assignment and Acceptance; (iv) such
Assignee will, independently and without reliance upon any of Agent, such
assigning Lender or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement; (v) such
Assignee appoints and authorizes Agent to take such action as agent on its
behalf and to exercise such powers under this Agreement and the other Loan
Documents as are delegated to Agent by the terms hereof, together with such
powers as are reasonably incidental thereto; and (vi) such Assignee agrees that
it will perform in accordance with their terms all of the obligations which by
the terms of this Agreement and the other Loan Documents are required to be
performed by it as a Lender.
(d) Deemed Amendment. Immediately upon each Assignee's making its
----------------
processing fee payment under the Assignment and Acceptance, this Agreement shall
be deemed to be amended to the extent, but only to the extent, necessary to
reflect the addition of the Assignee and the resulting adjustment of the
Commitments arising therefrom. The Commitment allocated to each Assignee shall
reduce such Commitments of the assigning Lender pro tanto.
(e) Participations. Any Lender, with the prior written consent of
--------------
Agent (which consent shall not be unreasonably withheld or delayed) and pursuant
to a participation agreement in form and substance satisfactory to such Lender,
may at any time sell to one or more commercial banks, financial institutions, or
other Persons not Affiliates of Borrower (a "Participant"), participating
-----------
interests in any Loans (each such participation to be in amount not less than
five million dollars ($5,000,000)), the
77
<PAGE>
Loan and Security Agreement
Commitment of that Lender and the other interests of that Lender (the
"originating Lender") hereunder and under the other Loan Documents; provided,
------------------
however, that (i) the originating Lender's obligations under this Agreement
shall remain unchanged; (ii) the originating Lender shall remain solely
responsible for the performance of such obligations; (iii) Borrower and Agent
shall continue to deal solely and directly with the originating Lender in
connection with the originating Lender's rights and obligations under this
Agreement and the other Loan Documents; (iv) no Lender shall transfer or grant
any participating interest under which the Participant has any right to exercise
the originating Lender's right, if any, to require or approve any amendment to,
or any consent or waiver with respect to, this Agreement or any other Loan
Document, except to the extent such amendment to, or consent or waiver with
respect to, this Agreement or of any other Loan Document would (A) extend the
final maturity date of the Loans hereunder in which such Participant is
participating; (B) reduce the interest rate applicable to Loans hereunder in
which such Participant is participating; (C) release all or a material portion
of the Collateral (except to the extent expressly provided herein or in any of
the other Loan Documents) supporting the Loans hereunder in which such
Participant is participating; (D) postpone the payment of, or reduce the amount
of, the interest or fees payable to such Participant; (E) change the amount or
due dates of scheduled principal repayments or prepayments or premiums in
respect of Loans hereunder in which such Participant is participating; (F)
increase the Maximum Amount above forty million dollars ($40,000,000); or (G)
increase the advance rate with respect to Revolving Loans in which such
Participant is participating, including the restoration of an advance rate after
the reduction thereof, provided that, the limitation contained in this clause
(G) shall not be deemed to limit the ability of Agent to make Revolving Loans in
accordance with the provisions of Section 2.3(b) hereof; and (v) all amounts
--------------
payable by Borrower hereunder shall be determined as if such originating Lender
had not sold such participation; except that, if amounts outstanding under this
Agreement are due and unpaid, or shall have been declared or shall have become
due and payable upon the occurrence of an Event of Default, each Participant
shall be deemed to have the right of setoff in respect of its participating
interest in amounts owing under this Agreement to the same extent as if the
amount of its participating interest were owing directly to it as a Lender under
this Agreement.
(f) Pledge in Favor of Federal Reserve Bank. Notwithstanding any
---------------------------------------
other provision in this Agreement, any Lender may at any time create a security
interest in, or pledge, all or any portion of its rights under and interest in
this Agreement in favor of any Federal Reserve Bank in accordance with
Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR (S)
203.14, and such Federal Reserve Bank may enforce such pledge or security
interest in any manner permitted under applicable law.
13.4 Additional Commitments. If (i) on the Closing Date the aggregate
----------------------
amount of the Commitments is less than forty million dollars ($40,000,000), and
(ii) subsequent to the Closing Date, additional Commitments satisfactory to
Agent have been obtained as contemplated by the terms hereof ("Additional
----------
Commitments"), then each Lender providing an Additional Commitment shall execute
- -----------
and deliver a signature page hereto setting forth such Lender's Commitment and
wire transfer information and simultaneously therewith shall become a party to
this Agreement and have all of the rights and obligations of a Lender under this
Agreement and the other Loan Documents. If and when any such Additional
Commitments are so made, the Maximum Amount shall be automatically adjusted in
accordance with the definition thereof.
78
<PAGE>
Loan and Security Agreement
ARTICLE XIV.
AGENT
14.1 Appointment and Authorization. Each Lender hereby designates and
-----------------------------
appoints Union Bank of California, N.A., as its Agent under this Agreement and
the other Loan Documents and each Lender hereby irrevocably authorizes Agent to
take such action on its behalf under the provisions of this Agreement and each
other Loan Document and to exercise such powers and perform such duties as are
expressly delegated to it by the terms of this Agreement or any other Loan
Document, together with such powers as are reasonably incidental thereto. Agent
agrees to act as such on the express conditions contained in this Article 14.
----------
The provisions of this Article 14 are solely for the benefit of Agent and the
----------
Lenders and Borrower shall have no rights as a third party beneficiary of any of
the provisions contained herein. Notwithstanding any provision to the contrary
contained elsewhere in this Agreement or in any other Loan Document, Agent shall
have no duties or responsibilities, except those expressly set forth herein, nor
shall Agent have or be deemed to have any fiduciary relationship with any
Lender, or each other, and no implied covenants, functions, responsibilities,
duties, obligations or liabilities shall be read into this Agreement or any
other Loan Document or otherwise exist against Agent. Except as expressly
otherwise provided in this Agreement, Agent shall have and may use its sole
discretion with respect to exercising or refraining from exercising any
discretionary rights or taking or refraining from taking any actions which Agent
is expressly entitled to take or assert under this Agreement and other Loan
Documents, including, without limitation, making the determinations contemplated
in Section 2.2(a) and Section 2.2(c).
-------------- --------------
14.2 Delegation of Duties. Agent may execute any of its duties under this
--------------------
Agreement or any other Loan Document by or through Agent-Related Persons,
employees, agents or attorneys-in-fact and shall be entitled to advice of
counsel concerning all matters pertaining to such duties. Agent shall not be
responsible for the negligence or misconduct of any agent or attorney-in-fact
that Agent selects as long as such selection was made without gross negligence
or willful misconduct.
14.3 Liability of Agent. None of Agent-Related Persons shall (a) be liable
------------------
for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document or the transactions
contemplated hereby (except for its own gross negligence or willful misconduct),
or (b) be responsible in any manner to any of the Lenders for any recital,
statement, representation or warranty made by Borrower, any Affiliate of
Borrower, or any director, officer, employee or representative thereof,
contained in this Agreement or in any other Loan Document, or in any Borrowing
Base Certificate, Loan Request, certificate, report, statement or other document
referred to or provided for in, or received by Agent under or in connection
with, this Agreement or any other Loan Document, or the validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement, any other Loan
Document, any Borrowing Base Certificate or any Loan Request, or for any failure
of Borrower or any other party to any Loan Document to perform its obligations
hereunder or thereunder. No Agent-Related Person shall be under any obligation
to any Lender to ascertain or to inquire as to the observance or performance of
any of the agreements contained in, or conditions of, this Agreement or any
other Loan Document, and No-Agent-Related Person shall be under any obligation
to inspect the properties, books or records of Borrower or any of Borrower's
Subsidiaries or Affiliates.
14.4 Reliance by Agent.
-----------------
(a) Reliance. Agent shall be entitled to rely, and shall be fully
--------
protected in relying, upon any Borrowing Base Certificate, Loan Request,
writing, resolution, notice, consent, certificate, affidavit, letter, telegram,
facsimile, telex or telephone message, statement or other document or
79
<PAGE>
Loan and Security Agreement
conversation believed by it to be genuine and correct and which appear to have
been signed, sent or made by the proper Person or Persons, and upon advice and
statements of legal counsel (including counsel to Borrower), independent
accountants and other experts selected by Agent. Agent shall be fully justified
in failing or refusing to take any action under this Agreement or any other Loan
Document unless it shall first receive such advice or concurrence of the
Majority Lenders as it deems appropriate and until such instructions are
received Agent shall act, or refrain from acting, as it deems advisable so long
as it is not grossly negligent or guilty of willful misconduct. Upon the written
request of the Majority Lenders, Agent agrees that it promptly will make demand
upon Borrower pursuant to Section 4.1 for repayment of the amount by which the
-----------
Revolving Loan Usage exceeds the Availability. If Agent so requests, Agent shall
first be indemnified to its reasonable satisfaction by the Lenders, in
proportion to their Pro Rata Shares, against any and all liability and expense
which may be incurred by it by reason of taking or continuing to take any such
action. Agent shall in all cases be fully protected in acting, or in refraining
from acting, under this Agreement or any other Loan Document in accordance with
a request or consent of the Majority Lenders (or, if a matter requires the
request or consent of the Requisite Lenders, at the request or with the consent
of the Requisite Lenders) and such request and any action taken or failure to
act pursuant thereto shall be binding upon all of the Lenders.
(b) Deemed Consent. For purposes of determining compliance with the
--------------
conditions specified in Section 10.1, each Lender that has executed this
------------
Agreement shall be deemed to have consented to, approved or accepted each
document or other matter either sent by Agent to such Lender for consent,
approval, acceptance or satisfaction, or required thereunder to be consented to
or approved by or acceptable or satisfactory to the Lender.
14.5 Notice of Default. Agent shall not be deemed to have knowledge or
-----------------
notice of the occurrence of any Default or Event of Default, except with respect
to defaults in the payment of principal, interest and fees required to be paid
to Agent for the account of the Lenders, unless Agent shall have received
written notice from a Lender or Borrower referring to this Agreement, describing
such Default or Event of Default and stating that such notice is a "notice of
default." Agent promptly will notify the Lenders of its receipt of any such
notice. Agent shall take such action with respect to any Default or Event of
Default as may be requested by the Majority Lenders in accordance with Article
-------
11; provided, however, that unless and until Agent has received such a request,
- --
Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default or Event of Default as it shall
deem advisable.
14.6 Credit Decision. Each Lender acknowledges that none of Agent-Related
---------------
Persons has made any representation or warranty to it, and that no act by Agent
hereinafter taken, including any review of the affairs of Borrower , shall be
deemed to constitute any representation or warranty by Agent-Related Persons to
any Lender. Each Lender represents to Agent that it has, independently and
without reliance upon Agent-Related Persons and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, prospects, operations, property, financial and
other condition and creditworthiness of Borrower, and all applicable bank
regulatory laws relating to the transactions contemplated hereby, and made its
own decision to enter into this Agreement and to extend credit to Borrower. Each
Lender also represents that it will, independently and without reliance upon
Agent-Related Persons and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this Agreement and
the other Loan Documents, and to make such investigations as it deems necessary
to inform itself as to the business, prospects, operations, property, financial
and other condition and creditworthiness of Borrower. Except for notices,
reports and other documents expressly herein required to be furnished to the
Lenders by Agent, Agent shall have no duty
80
<PAGE>
Loan and Security Agreement
or responsibility to provide any Lender with any credit or other information
concerning the business, prospects, operations, property, financial and other
condition or creditworthiness of Borrower which may come into the possession of
any of Agent-Related Persons.
14.7 Indemnification. Whether or not the transactions contemplated hereby
---------------
are consummated, the Lenders shall indemnify upon demand each of Agent-Related
Persons (to the extent not reimbursed by or on behalf of Borrower and without
limiting the obligation of Borrower to do so), in proportion to their Pro Rate
Shares, from and against any and all Indemnified Liabilities (as defined in
Section 15.9 hereof); provided, however, that no Lender shall be liable for the
- ------------
payment to any Agent-Related Person of any portion of such Indemnified
Liabilities resulting solely from such Person's gross negligence or willful
misconduct. Without limitation of the foregoing, each Lender shall reimburse
Agent upon demand for its Pro Rata Share of any costs or out-of-pocket expenses
(including reasonable Attorney Costs) incurred by Agent in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement,
any other Loan Document or any document contemplated by or referred to herein,
to the extent that Agent is not reimbursed for such expenses by or on behalf of
Borrower; provided, however, that to the extent indemnification payments made by
the Lenders pursuant to this Section 14.7 are subsequently recovered from or for
------------
the account of Borrower, Agent shall promptly refund such previously paid
indemnification payments to the Lenders entitled thereto. The undertaking in
this Section shall survive the payment of all Obligations hereunder and the
resignation or replacement of Agent.
14.8 Union Bank of California N.A., in its Individual Capacity. Union Bank
---------------------------------------------------------
of California, N.A, and any Agent-Related Person may make loans to, issue
Letters of Credit for the account of, accept deposits from, acquire equity
interests in, purchase receivables of, act as agent or administrative agent for
and generally engage in any kind of banking, trust, financial advisory,
underwriting or other business with Borrower, any of Borrower's Subsidiaries or
Affiliates or any Lender as though Union Bank of California, N.A, were not Agent
hereunder and without notice to or consent of the Lenders. The Lenders
acknowledge that, pursuant to such activities, Union Bank of California, N.A, or
Agent-Related Persons may receive information regarding Borrower or its
Affiliates that is subject to confidentiality obligations in favor of Borrower
or such other Person and that prohibit the disclosure of such information to the
Lenders, and the Lenders acknowledge that Agent shall be under no obligation to
provide such information to them. With respect to its Loans, Union Bank of
California, N.A, shall have the same rights and powers under this Agreement as
any other Lender and may exercise the same as though it were not Agent, and the
terms "Lender" and "Lenders" include Union Bank of California, N.A, in its
individual capacity.
14.9 Successor Agent. Agent may resign as Agent upon thirty (30) days'
---------------
prior notice to the Lenders. If Agent resigns under this Agreement, the Majority
Lenders shall appoint from among the Lenders a successor Agent for the Lenders.
If no successor agent is appointed prior to the effective date of the
resignation of Agent, the resigning Agent may appoint, after consulting with the
Lenders and Borrower, a successor agent from among the Lenders. Upon the
acceptance of its appointment as a successor agent hereunder, such successor
agent shall succeed to all the rights, powers and duties of the retiring Agent,
as the case may be, and the term "Agent" shall mean such successor agent and the
retiring Agent's appointment, powers and duties (but not any liabilities
incurred prior thereto) as Agent, as appropriate, shall be terminated. After any
retiring Agent's resignation hereunder as Agent, Agent shall mean such successor
agent and the retiring Agent's appointment, powers and duties as such Agent
shall be terminated. After any retiring Agent's resignation as Agent, the
provisions of this Article 14 shall
----------
81
<PAGE>
Loan and Security Agreement
inure to its benefit as to any actions taken or omitted to be taken by it while
it was such Agent under this Agreement. If no successor agent has accepted
appointment as Agent by the date which is thirty (30) days following the
retiring Agent's notice of resignation, the retiring Agent's resignation shall
nevertheless thereupon become effective and the Lenders shall perform all the
duties of Agent hereunder and under the other Loan Documents until such time, if
any, as the Majority Lenders appoint a successor Agent, in each instance, as
provided for above.
14.10 Withholding Tax.
---------------
(a) Foreign Lender. If any Lender is a "foreign corporation,
--------------
partnership or trust" within the meaning of the Code and such Lender claims
exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or
1442 of the Code, such Lender agrees with and in favor of Agent, to deliver to
Agent:
(i) if such Lender claims an exemption from, or a reduction
of, withholding tax under a United States tax treaty, properly completed IRS
Forms 1001 and W-8 before the payment of any interest in the first calendar year
during which interest may be paid under this Agreement;
(ii) if such Lender claims that interest paid under this
Agreement is exempt from United States withholding tax because it is effectively
connected with a United States trade or business of such Lender, two (2)
properly completed and executed copies of IRS Form 4224 before the payment of
any interest is due in the first taxable year of such Lender and in each
succeeding taxable year of such Lender during which interest may be paid under
this Agreement, and IRS Form W-9; and
(iii) such other form or forms as may be required under the
Code or other laws of the United States as a condition to exemption from, or
reduction of, United States withholding tax.
Such Lender agrees to promptly notify Agent of any change in circumstances which
would modify or render invalid any claimed exemption or reduction.
(b) Assignments or Participations by 1001 Lender. If any Lender
--------------------------------------------
claims exemption from, or reduction of, withholding tax under a United States
tax treaty by providing IRS Form 1001 and such Lender sells, assigns, grants a
participation in, or otherwise transfers all or part of the Obligations of
Borrower to such Lender, such Lender agrees to notify Agent of the percentage
amount in which it is no longer the beneficial owner of Obligations of Borrower
to such Lender. To the extent of such percentage amount, Agent will treat such
Lender's IRS Form 1001 as no longer valid.
(c) Assignment or Participation by 4224 Lender. If any Lender
------------------------------------------
claiming exemption from United States withholding tax by filing IRS Form 4224
with Agent sells, assigns, grants a participation in, or otherwise transfers all
or part of the Obligations of Borrower to such Lender, such Lender agrees to
undertake sole responsibility for complying with the withholding tax
requirements imposed by Sections 1441 and 1442 of the Code.
(d) Reduction in Withholding Tax. If any Lender is entitled to a
----------------------------
reduction in the applicable withholding tax, Agent may withhold from any
interest payment to such Lender an amount equivalent to the applicable
withholding tax after taking into account such reduction. If the forms or other
documentation required by paragraph (a) of this Section are not delivered to
Agent, then Agent
82
<PAGE>
Loan and Security Agreement
may withhold from any interest payment to such Lender not providing such forms
or other documentation an amount equivalent to the applicable withholding tax.
(e) Claim of Improper Withholding. If the IRS or any other
-----------------------------
Governmental Authority of the United States or other jurisdiction asserts a
claim that Agent did not properly withhold tax from amounts paid to or for the
account of any Lender (because the appropriate form was not delivered, was not
properly executed, or because such Lender failed to notify Agent of a change in
circumstances which rendered the exemption from, or reduction of, withholding
tax ineffective, or for any other reason) such Lender shall indemnify each of
Agent fully for all amounts paid, directly or indirectly, by it as tax or
otherwise, including penalties and interest, and including any taxes imposed by
any jurisdiction on the amounts payable to Agent under this Section, together
with all costs and expenses (including Attorney Costs). The obligation of the
Lenders under this paragraph shall survive the payment of all Obligations and
the resignation or replacement of Agent.
14.11 Collateral Matters.
------------------
(a) Release of Agent's Lien. The Lenders hereby irrevocably
-----------------------
authorize Agent, at its option and in its discretion to release any Agent's Lien
upon any Collateral: (i) upon the termination of the Commitments and payment and
satisfaction in full by Borrower of all Loans and reimbursement obligations in
respect of Letters of Credit, and the termination of all outstanding Letters of
Credit (whether or not any of such obligations are due) and all other
Obligations; (ii) constituting property being sold or disposed of by Borrower if
Borrower certifies to Agent that the sale or disposition is made in compliance
with Section 9.8 (and Agent may rely conclusively on any such certificate,
-----------
without further inquiry); (iii) constituting property leased to Borrower under a
lease which has expired or been terminated in a transaction permitted under this
Agreement; or (iv) otherwise constituting property having a value not greater
than five hundred thousand dollars ($500,000). Except as expressly provided
above, Agent will not release any of Agent's Liens upon the Collateral without
the prior written authorization of the Majority Lenders; provided, further, that
Agent shall not release Agent's Liens on Collateral having a value in the
aggregate in excess of one million dollars ($1,000,000) without the prior
written authorization of the Requisite Lenders. Upon request of Agent or
Borrower at any time, the Lenders will confirm in writing Agent's authority to
release any Agent's Liens upon particular types or items of Collateral.
(b) Execution of Releases. Upon receipt by Agent of any
---------------------
authorization required pursuant to Section 14.11(a) from (i) Agent, and (ii) the
----------------
Majority Lenders or Requisite Lenders, as applicable, of Agent's authority to
release any Agent's Liens upon particular types or items of Collateral, and upon
at least five (5) Business Days' prior written request by Borrower, Agent shall
(and is hereby irrevocably authorized by the Lenders to) execute such documents
as may be necessary to evidence the release of Agent's Liens upon such
Collateral; provided, however, that (A) Agent shall not be required to execute
any such document on terms which, in Agent's opinion, would expose Agent to
liability or create any obligation or entail any consequence other than the
release of such Liens without recourse or warranty; and (B) such release shall
not in any manner discharge, affect or impair the Obligations or any Liens
(other than those expressly being released) upon (or obligations of Borrower in
respect of) all interests retained by Borrower, including, without limitation,
the proceeds of any sale, all of which shall continue to constitute part of the
Collateral.
(c) No Obligation. Agent shall have no obligation whatsoever to any
-------------
of the Lenders to assure that the Collateral exists or is owned by Borrower or
is cared for, protected or insured or has been encumbered, or that Agent's Liens
have been properly or sufficiency or lawfully created,
83
<PAGE>
Loan and Security Agreement
perfected, protected or enforced or are entitled to any particular priority, or
to exercise at all or in any particular manner or under any duty of care,
disclosure or fidelity, or to continue exercising, any of the rights,
authorities and powers granted or available to Agent pursuant to any of the Loan
Documents, it being understood and agreed that in respect of the Collateral, or
any act, omission or event related thereto, subject to the terms and conditions
contained herein, Agent may act in any manner it may deem appropriate, in its
reasonable discretion and that Agent shall have no other duty or liability
whatsoever to any Lender as to any of the foregoing, except as otherwise
specifically provided herein.
14.12 Restrictions on Actions by Lenders; Sharing of Payments.
-------------------------------------------------------
(a) Setoffs. Notwithstanding any provision to the contrary in
-------
Section 15.13 hereof, as between Agent and the Lenders only (and without any
- -------------
intention to allow Borrower any right or benefit under this paragraph), each of
the Lenders agrees that it shall not, without the express written consent of
Agent, and that it shall, to the extent it is lawfully entitled to do so, upon
the request of Agent, set off against the Obligations, any amounts owing by such
Lender to Borrower or any accounts of Borrower now or hereafter maintained with
Agent or such Lender, as the case may be. Each of the Lenders further agrees
that it shall not, unless specifically requested to do so by Agent, take or
cause to be taken any action, including, the commencement of any legal or
equitable proceedings, to foreclose any Lien on, or otherwise enforce any
security interest in, any of the Collateral, the purpose of which is, or could
be, to give such Lender any preference or priority against the other Lenders
with respect to the Collateral.
(b) Excess Proceeds. If at any time or times any Lender shall
---------------
receive (i) by payment, foreclosure, setoff or otherwise, any proceeds of
Collateral or any payments with respect to the Obligations of Borrower to such
Lender arising under, or relating to, this Agreement or the other Loan
Documents, except for any such proceeds or payments received by such Lender from
Agent pursuant to the terms of this Agreement; or (ii) payments from Agent in
excess of such Lender's Pro Rata Share of all such distributions by Agent, such
Lender shall promptly (A) turn the same over to Agent, in kind, and with such
endorsements as may be required to negotiate the same to Agent, or in same day
funds, as applicable, for the account of all of the Lenders and for application
to the Obligations in accordance with the applicable provisions of this
Agreement; or (B) purchase, without recourse or warranty, an undivided interest
and participation in the Obligations owed to the other Lenders so that such
excess payment received shall be applied ratably as among the Lenders in
proportion to their respective Pro Rata Shares; provided, however, that if all
or part of such excess payment received by the purchasing party is thereafter
recovered from it, those purchases of participations shall be rescinded in whole
or in part, as applicable, and the applicable portion of the purchase price paid
therefor shall be returned to such purchasing party, but without interest except
to the extent that such purchasing party is required to pay interest in
connection with the recovery of the excess payment.
14.13 Agency for Perfection. Each Lender hereby appoints Agent and each
---------------------
other Lender as agent for the purpose of perfecting Agent's Liens and Lenders'
security interest in assets which, in accordance with Article 9 of the UCC, can
be perfected only by possession. Should any Lender obtain possession of any such
Collateral, such Lender shall notify Agent thereof and, promptly upon Agent's
request therefor, shall deliver such Collateral to Agent or in accordance with
Agent's instructions.
14.14 Payments. All payments to be made by any Lender to Agent shall be
--------
made by bank wire transfer or internal transfer of immediately available funds
to:
Union Bank of California N.A.
Monterey Park, California
84
<PAGE>
Loan and Security Agreement
Account Number: 070-196431
Account Name: Wire Transfer Clearing
Attn: Commercial Loan Operations
Reference: Pac-West Telecomm, Inc.
ABA Number: 122-000-496
or pursuant to such other wire transfer instructions as Agent may designate by
written notice to the Lenders.
14.15 Concerning the Collateral and the Related Loan Documents. Each
--------------------------------------------------------
Lender authorizes and directs Agent to enter into this Agreement and the other
Loan Documents relating to the Collateral, for the ratable benefit of the
Lenders in proportion to their Pro Rata Shares. Each Lender agrees that any
action taken by Agent, the Majority Lenders or the Requisite Lenders, as
applicable, in accordance with the terms of this Agreement or the other Loan
Documents relating to the Collateral, and the exercise by Agent, the Majority
Lenders or the Requisite Lenders, as applicable, of their respective powers set
forth therein or herein, together with such other powers that are reasonably
incidental thereto, shall be binding upon all of the Lenders.
14.16 Disclaimer by Lenders. By signing this Agreement, each Lender agrees
---------------------
as follows:
(a) No Representation or Warranty. Each Lender expressly agrees and
-----------------------------
acknowledges that neither Agent nor any Agent-Related Person (i) makes any
representation or warranty as to the accuracy of any report prepared or reviewed
by Agent, or any Borrowing Base Certificate or Loan Request, or (ii) shall be
liable for any information contained in any such report, Borrowing Base
Certificate or Loan Request.
(b) Not Comprehensive Audits or Examinations. Each Lender expressly
----------------------------------------
agrees and acknowledges that any reports prepared or reviewed by Agent and the
Borrowing Base Certificates are not comprehensive audits or examinations, and
agrees and acknowledges that Agent or other party performing any audit,
examination or review will inspect only specific information regarding Borrower
and will rely significantly upon Borrower's books and records, as well as on
representations of Borrower's personnel.
(c) Confidentiality. Each Lender expressly agrees to keep all
---------------
reports prepared or reviewed by Agent and all Borrowing Base Certificates
confidential in accordance with Section 15.14 hereof.
-------------
(d) Indemnification. Without limiting the generality of any other
---------------
indemnification provision contained in this Agreement, each Lender expressly
agrees: (i) to hold Agent, any other Lender and any Agent-Related Person which
has prepared, reviewed or approved any report, Borrowing Base Certificate or
Loan Request harmless from (A) any action the indemnifying Lender may take or
conclusion the indemnifying Lender may reach or draw (in the absence of gross
negligence or willful misconduct) from any such report, Borrowing Base
Certificate or Loan Request in connection with any Loans or other credit
accommodations that the indemnifying Lender has made or may make to Borrower;
and (ii) to pay and protect, and indemnify, defend and hold harmless, in
proportion to such indemnifying Lender's Pro Rata Share, each Agent, Agent-
Related Person and other Lender which has prepared, reviewed or approved any
such report, Borrowing Base Certificate or Loan Request (in the absence of gross
negligence or willful misconduct), from and against the claims, actions,
proceedings, damages, costs, expenses and other amounts (including, Attorney
Costs) incurred by Agent, Agent-Related Person or other Lender as the direct or
indirect result of any claim of a third party based upon preparation,
85
<PAGE>
Loan and Security Agreement
review or approval of such report, Borrowing Base Certificate or Loan Request.
Any Agent-Related Person may condition its release of any report prepared by it
upon its receipt of a release of liability and confirmation of the
indemnification hereunder from the recipient of such report.
ARTICLE XV.
MISCELLANEOUS
15.1 Cumulative Remedies; No Prior Recourse to Collateral. The enumeration
----------------------------------------------------
herein of Agent's and each Lender's rights and remedies is not intended to be
exclusive, and such rights and remedies are in addition to and not by way of
limitation of any other rights or remedies that Agent and Lenders may have under
the UCC or other applicable law. Each of Agent and the Lenders shall have the
right, in their sole discretion, to determine which rights and remedies are to
be exercised and in which order. The exercise of one right or remedy shall not
preclude the exercise of any others, all of which shall be cumulative. Agent and
the Lenders may, without limitation, proceed directly against Borrower to
collect the Obligations without any prior recourse to the Collateral. No failure
to exercise and no delay in exercising, on the part of Agent or any Lender, any
right, remedy, power or privilege hereunder, shall operate as a waiver thereof;
nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege.
15.2 Limitation of Liability. Borrower agrees that it will not assert
-----------------------
against Agent or any Lender any claim for consequential, incidental, special or
punitive damages in connection with this Agreement or any of the other Loan
Documents or the transactions contemplated hereby or thereby.
15.3 Survival of Representations and Warranties. All of Borrower's
------------------------------------------
representations and warranties contained in this Agreement and the other Loan
Documents shall survive the execution, delivery, and acceptance hereof and
thereof by the parties, notwithstanding any investigation by Agent or any
Lenders or their respective agents.
15.4 Other Security and Guaranties. Agent may, without notice or demand
-----------------------------
and without affecting Borrower's obligations hereunder, from time to time: (a)
take from any Person and hold collateral (other than the Collateral) for the
payment of all or any part of the Obligations and exchange, enforce or release
such collateral or any part thereof; and (b) accept and hold any endorsement or
Guaranty of payment of all or any part of the Obligations and release or
substitute any such endorser or guarantor, or any Person who has given any Lien
or other collateral as security for the payment of all or any part of the
Obligations, or any other Person in any way obligated to pay all or any part of
the Obligations.
15.5 Fees and Expenses.
-----------------
(a) Borrower's Obligation to Pay. Borrower agrees to pay to Agent
----------------------------
for its benefit, on demand, all costs and expenses that Agent pays or incurs in
connection with the negotiation, preparation, consummation, administration,
enforcement and termination of this Agreement, including, without limitation:
(i) Attorney Costs; (ii) costs and expenses (including attorneys' and
paralegals' fees and disbursements which shall include the allocated costs of
Agent's and Agent's in-house counsel fees and disbursements) in connection with
the negotiation, preparation, consummation, administration, enforcement and
termination of this Agreement and any amendment, restatement, supplement,
waiver, consent or subsequent closing in connection with the Loan Documents and
the transactions contemplated thereby; provided, however, that if Agent uses a
law firm or other external counsel with respect to any
86
<PAGE>
Loan and Security Agreement
matter, Borrower shall be obligated to reimburse Agent for the fees, expenses,
and disbursements of such law firm or other external counsel, but not also the
allocated cost of internal legal services of Agent with respect to such matter;
(iii) costs and expenses of Lien and title searches and title insurance; (iv)
taxes, fees and other charges and expenses (including attorneys' and paralegals'
fees and disbursements, which shall include the allocated costs of Agent's in-
house counsel fees and disbursements; provided, however, that if Agent uses a
law firm or other external counsel with respect to any matter, Borrower shall be
obligated to reimburse Agent for the fees, expenses, and disbursements of such
law firm or other external counsel, but not also the allocated cost of internal
legal services of Agent with respect to such matter) for recording and filing
financing statements and continuations and taking other actions in any location
where Collateral is or may become located or where Agent's Liens are to be
registered, filed or otherwise perfected, to perfect, protect and continue
Agent's Liens (including costs and expenses paid or incurred by Agent in
connection with the consummation of this Agreement and each Loan Document); (v)
sums paid or incurred to pay any amount or take any action required of Borrower
under the Loan Documents that Borrower fails to pay or take; (vi) costs of
appraisals, inspections and verifications of the Collateral and of Borrower's
operations, books and records, including, without limitation, travel, lodging,
and meals for inspections of the Collateral and Borrower's operations, books and
records by Agent's and the Lenders' officers, employees and agents plus Agent's
and Lenders' charges for field examinations and audits and the preparation of
reports thereof; (vii) costs and expenses of forwarding Loan proceeds,
collecting checks and other items of payment, and establishing and maintaining
lock-box, deposit accounts and any other payment accounts; (viii) costs and
expenses of preserving and protecting the Collateral; (ix) costs and expenses
(including attorneys' and paralegals' fees and disbursements, which shall
include the allocated cost of Agent's in-house counsel fees and disbursements;
provided, however, that if Agent uses a law firm or other external counsel with
respect to any matter, Borrower shall be obligated to reimburse Agent for the
fees, expenses, and disbursements of such law firm or other external counsel,
but not also the allocated cost of internal legal services of Agent with respect
to such matter) paid or incurred to obtain payment of the Obligations, enforce
Agent's Liens, sell or otherwise realize upon the Collateral, defend any claims
made or threatened against Agent or any Lender arising out of the transactions
contemplated hereby, correct any Event of Default, gain possession of, maintain,
handle, evaluate, preserve, store, ship, sell, prepare for sale and/or advertise
to sell the Collateral or any other property of Borrower, whether or not a sale
is consummated, and otherwise to enforce the provisions of this Agreement and
the other Loan Documents (with or without suit) and in connection with appellate
proceedings in any appeals court (including, without limitation, preparations
for and consultations concerning any of such matters); and (x) wire transfer
fees in connection with the forwarding of money by Agent to any Lender or
Borrower. The foregoing shall not be construed to limit any other provisions of
the Loan Documents regarding costs and expenses to be paid by Borrower.
(b) Charge to Borrower's Account. All of the foregoing costs and
----------------------------
expenses shall be charged to Borrower's Account as Revolving Loans if not paid
by Borrower within fifteen (15) days of Agent's request therefor.
15.6 Notices. Except as otherwise provided expressly herein, all notices,
-------
demands and requests that any party is required or elects to give to any other
shall be in writing, or by a telecommunications device capable of creating a
written record, and any such notice shall become effective (a) upon personal
delivery thereof, including, but not limited to, delivery by overnight mail and
courier service; (b) four (4) days after it shall have been mailed by United
States mail, first-class, certified or registered, with postage prepaid; or (c)
in the case of notice by facsimile or any other telecommunications device, when
properly transmitted, in each case addressed to the party to be notified as
follows, or in the case of a Lender, as set forth below such Lender's name on
the applicable signature page of this Agreement and/or Assignment and
Acceptance:
87
<PAGE>
Loan and Security Agreement
If to Agent: With a copy to:
UNION BANK OF CALIFORNIA, N.A. GRAHAM & JAMES LLP
1800 Harrison Street, Suite 1400 One Maritime Plaza, Third Floor
Oakland, California 94612-3429 San Francisco, California 94111
Attn: Gail Fletcher Attention: Jill Feldman, Esq.
Vice President & Relationship Manager Telephone No.: (415) 954-0200
Telephone No.: (510) 271-1747 Facsimile No.: (415) 391-2493
Facsimile No.: (510) 271-1764
If to Borrower: With a copy to:
PAC-WEST TELECOMM, INC. NEUMILLER & BEARDSLEE
4210 Coronado Avenue 5/th/ Floor, Waterfront Office Towers II
Stockton, California 95204 P.O. Box 20
Attn: Richard E. Bryson Stockton, CA 95201-3020
Chief Financial Officer Attn: Robert Morrison, Esq.
Telephone No.: (209) 926-3300 Telephone: (209) 320-8268
Facsimile No.: (209) 926-4444 Facsimile No.: (209) 320-8284
or to such other address as each party may designate for itself by like notice.
Failure or delay in delivering copies of any notice, demand, request, consent,
approval, declaration or other communication to the persons designated above or,
in the case of Lenders, designated on the signature pages of this Agreement to
receive copies shall not adversely affect the effectiveness of such notice,
demand, request, consent, approval, declaration or other communication.
15.7 Waiver of Notices. Unless otherwise expressly provided herein,
-----------------
Borrower waives presentment, protest and notice of demand or dishonor and
protest as to any instrument, notice of intent to accelerate the Obligations and
notice of acceleration of the Obligations, as well as any and all other notices
to which it might otherwise be entitled. No notice to or demand on Borrower
which Agent or any Lender may elect to give shall entitle Borrower to any or
further notice or demand in the same, similar or other circumstances.
15.8 Binding Effect. The provisions of this Agreement shall be binding
--------------
upon and inure to the benefit of the respective representatives, successors and
assigns of the parties hereto; provided, however, that no interest herein may be
assigned by Borrower without the prior written consent of Agent and each Lender.
15.9 Indemnity of Agent and the Lenders by Borrower. Borrower agrees to
----------------------------------------------
defend, indemnify and hold Agent, each Agent-Related Person and each Lender and
each of their respective officers, directors, employees, counsel, agents and
attorneys-in-fact (each, an "Indemnified Person") harmless from and against any
------------------
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, charges, expenses and disbursements (including Attorney
Costs) of any kind or nature whatsoever ("Losses") which may at any time
------
(including at any time following repayment of the Loans and the termination,
resignation or replacement of Agent or replacement of any Lender) be imposed on,
incurred by or asserted against any such Indemnified Person in any way relating
to or arising out of this Agreement, any other Loan Document or any document
contemplated by or referred to herein or therein, or the transactions
contemplated hereby, or any action taken or omitted by any such
88
<PAGE>
Loan and Security Agreement
Person under or in connection with any of the foregoing, including, without
limitation, (a) any Losses incurred by any Indemnified Person with respect to
any investigation, litigation or proceeding (including any insolvency proceeding
or appellate proceeding) related to or arising out of this Agreement, any other
Loan Document or the Loans or the use of the proceeds thereof, whether or not
any Indemnified Person is a party thereto; (b) any Losses incurred by any
Indemnified Person in connection with Agent's Lien upon, or any Indemnified
Person's use of, the Proprietary Rights Collateral; (c) any Losses incurred by
any Indemnified Person with respect to the Proprietary Rights Collateral; and
(d) any Losses incurred by any Indemnified Person in connection with any claim
against Borrower or any Affiliate of Borrower (all the foregoing, collectively,
the "Indemnified Liabilities"); provided, however, that Borrower shall have no
-----------------------
obligation hereunder to any Indemnified Person with respect to Indemnified
Liabilities resulting solely from the willful misconduct of such Indemnified
Person. The agreements in this Section shall survive the termination of this
Agreement and the repayment of all Obligations hereunder.
15.10 Final Agreement. This Agreement and the other Loan Documents are
---------------
intended by Borrower, Agent and the Lenders to be the final, complete, and
exclusive expression of the agreement between them. This Agreement supersedes
any and all prior oral or written agreements relating to the subject matter
hereof.
15.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which shall taken
together constitute one and the same agreement.
15.12 Captions. The captions contained in this Agreement are for
--------
convenience of reference only, are without substantive meaning and should not be
construed to modify, enlarge, or restrict any provision.
15.13 Right of Setoff. In addition to any rights and remedies of the
---------------
Lenders provided by law, if the Loans have been accelerated, each Lender is
authorized at any time and from time to time, without prior notice to Borrower,
any such notice being waived by Borrower to the fullest extent permitted by law,
to setoff and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held by, and other indebtedness at any time
owing by, such Lender to or for the credit or the account of Borrower against
any and all Obligations owing to such Lender, now or hereafter existing,
irrespective of whether or not Agent or such Lender shall have made demand under
this Agreement or any Loan Document and although such Obligations may be
contingent or unmatured. Each Lender agrees promptly to notify Borrower and
Agent after any such setoff and application made by such Lender and shall make
any and all such payments to and other arrangements within the other Lenders as
may be necessary or, in the discretion of Agent, desirable in order to provide
each Lender with its Pro Rata portion of such set-off and application.
15.14 Use of Name; Confidentiality. Borrower agrees that, subject to
----------------------------
Borrower's prior consent for uses other than in a traditional tombstone, which
consent shall not be unreasonably withheld or delayed, Agent and each Lender may
use Borrower's name in advertising and promotional material and in conjunction
therewith disclose the general terms of this Agreement. Agent and each Lender
agrees that the information provided by Borrower (the "Confidential
------------
Information") will be kept confidential and shall not, without prior written
- -----------
consent of Borrower, be disclosed by Agent or any Lender which has received such
Confidential Information in any manner whatsoever, in whole or in part, and such
Confidential Information shall not be used other than in connection with the
transactions described herein and in the other Loan Documents, or to enforce the
rights of Agent and the Lenders hereunder and under the other Loan Documents.
Notwithstanding anything to the contrary contained herein, Agent or any Lender
may disclose any such Confidential Information that (a) was or becomes generally
available
89
<PAGE>
Loan and Security Agreement
to the public other than as a result of disclosure by Agent or such Lender; (b)
was or becomes available on a nonconfidential basis from a source other than
Borrower; (c) was heretofore in the possession of Agent or such Lender on a
nonconfidential basis; or (d) is developed by Agent or such Lender independently
of any information furnished by Borrower hereunder, provided that such source is
not bound by a confidentiality agreement with Borrower known to Agent or such
Lender; provided, further however, that Agent and any Lender may disclose any
such information (i) at the request or pursuant to any requirement of any
Governmental Authority to which Agent or such Lender is subject or in connection
with an examination of Agent or such Lender by any such Governmental Authority;
(ii) pursuant to subpoena or other court process; (iii) when required to do so
in accordance with the provisions of any applicable requirement of law; (iv) to
the extent reasonably required in connection with any litigation or proceeding
(including, but not limited to, any bankruptcy proceeding) to which Agent, any
Lender or any of their respective Affiliates may be party; (v) to the extent
reasonably required in connection with the exercise of any remedy hereunder or
under any other Loan Document; (vi) to Agent's or such Lender's independent
auditors, accountants, attorneys and other professional advisors; (vii) to any
Affiliate of Agent or such Lender, or to any Participant or assignee under any
Assignment and Acceptance, actual or potential, provided that such Affiliate,
Participant or assignee agrees to keep such information confidential to the same
extent required of Agent and the Lenders hereunder; and (viii) as expressly
permitted under the terms of any other document or agreement regarding
confidentiality to which Borrower is party or is deemed party with Agent or any
Lender.
15.15 Severability. The illegality or unenforceability of any provision of
------------
this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
15.16 Governing Law; Dispute Resolution; Choice of Forum.
--------------------------------------------------
(a) California Law. This Agreement shall be interpreted and the
--------------
rights and liabilities of the parties hereto determined in accordance with the
internal laws and not the law of conflicts of the State of California.
(b) Arbitration; California Forum. All disputes under this
-----------------------------
Agreement shall be resolved in the manner set forth in the Arbitration
Agreement. Any legal action or proceeding with respect to this Agreement or any
other Loan Document may be brought in the courts of the city of San Francisco,
State of California or in the United States District Court for the Northern
District of California, and by execution and delivery of this Agreement, each of
Borrower, Agent and the Lenders consents, for itself and in respect of its
property, to the nonexclusive jurisdiction of those courts. Each of Borrower,
Agent and the Lenders irrevocably waives any objection, including any objection
to the laying of venue or based on the grounds of forum non conveniens, which it
may now or hereafter have to the bringing of any action or proceeding in such
jurisdiction in respect of this Agreement or any document related hereto.
Notwithstanding the foregoing: (i) Agent and the Lenders shall have the right to
bring any action or proceeding against Borrower or its property in the courts of
any other jurisdiction that Agent or the Lenders deem necessary or appropriate
in order to realize on the Collateral or other security for the obligations, and
(ii) each of the parties hereto acknowledges that any appeals from the courts
described in the immediately preceding sentence may have to be heard by a court
located outside those jurisdictions.
90
<PAGE>
Loan and Security Agreement
Borrower hereby waives personal service of any and all process upon it and
consents that all such service of process may be made by registered mail (return
receipt requested) directed to Borrower at its address set forth in Section 15.6
------------
and service so made shall be deemed to be completed five (5) days after the same
shall have been so deposited in the U.S. mails. Nothing contained herein shall
affect the right of agent or the Lenders to serve legal process by any other
manner permitted by law.
[Signature Pages Follow]
91
<PAGE>
Loan and Security Agreement
IN WITNESS WHEREOF, the parties have entered into this Loan and Security
Agreement as of the date first above written.
PAC-WEST TELECOMM, INC.,
as Borrower
By: /s/ Dennis Meyer
-----------------------------
Name: Dennis V. Meyer
---------------------------
Title: Vice President - Finance
--------------------------
UNION BANK OF CALIFORNIA, N.A.,
as the Administrative Agent
By: /s/ Gail Fletcher
-----------------------------
Name: Gail L. Fletcher
---------------------------
Title: Vice President
--------------------------
92
<PAGE>
Loan and Security Agreement
UNION BANK OF CALIFORNIA, N.A., Commitment: $20,000,000
as a Lender
Address for Notices:
By: /s/ Gail Flecther UNION BANK OF CALIFORNIA, N.A.
---------------------------
Name: Gail L. Fletcher Union Bank of California
-------------------------
Title: Vice President 1800 Harrison Street, Suite 1400
------------------------
Oakland, California 94612-3429
Attn: Gail Fletcher
Vice President & Relationship Manager
Telephone No.: (510) 271-1747
Facsimile No.: (510) 271-1764
Wire Transfer Instructions:
Union Bank of California N.A.
Monterey Park, California
Account Number: 070-196431
Account Name: Wire Transfer Clearing
Attn: Commercial Loan Operations
Reference: Pac-West Telecomm, Inc.
ABA Number: 122-000-496
93
<PAGE>
Exhibit 10.29
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of September
11, 1998 and effective as of the date of the closing of the transactions
contemplated by the Merger Agreement (as defined below) (the "Effective Date"),
--------------
is made by and between Pac-West Telecomm, Inc., a California corporation (the
"Company"), and Gregory Joksch ("Executive"). Capitalized terms used herein and
- -------- ---------
not otherwise defined herein have the meanings given to such terms in paragraph
14 hereof.
WHEREAS, the Company desires to employ Executive in the capacity and
on the terms and conditions set forth herein, and Executive desires to accept
such employment in such capacity and on such terms and conditions.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Executive, and Executive
----------
hereby accepts employment with the Company, upon the terms and conditions set
forth in this Agreement for the period beginning on the Effective Date and
ending as provided in paragraph 4 below (the "Employment Period").
-----------------
2. Position and Duties.
-------------------
(a) During the Employment Period, Executive shall serve as the "Vice
President -- Information Technologies" of the Company and shall have such
duties, responsibilities and authority as set forth herein and as shall be
determined by the Company's Chief Executive Officer and Executive Vice President
- -- Technology and Network Operations.
(b) Executive shall report to the Company's Chief Executive Officer or
his designee, and Executive shall devote his best efforts and his business time
and attention (on a full-time equivalent basis) to the business and affairs of
the. Company and its Subsidiaries. Executive shall perform his duties and
responsibilities to the best of his abilities in a diligent, trustworthy,
businesslike and efficient manner.
-1-
<PAGE>
3. Compensation and Benefits.
-------------------------
(a) Base Salary. During the Employment Period, Executive's base salary
-----------
shall be $110,000 for the first year after the Effective Date and $120,000 for
the second year after the Effective Date or such higher rate as the Board in its
sole discretion may designate from time to time (the "Base Salary"), which
-----------
salary shall be payable in regular installments in accordance with the Company's
general payroll practices and shall be subject to customary withholding and
other customary deductions.
(b) Bonuses. The Board shall award a bonus (the "Annual Bonus") to
------- ------------
Executive in an amount to be determined prior to each fiscal year by the Board
and Executive. The Annual Bonus may be structured, as agreed upon by Executive
and the Board in good faith, to provide for a portion of the Annual Bonus to be
paid upon the achievement by the Company of certain separate specific objectives
with such objectives generally designed to provide Executive with an Annual
Bonus of 25% of the Base Salary in a normal year. The Annual Bonus may exceed
25% of the Base Salary as determined by the Board in its discretion. Such Annual
Bonus shall be payable within 90 days following the end of each fiscal year
during the Employment Period based upon the Company having achieved such
specific objectives for such fiscal year determined by the Board and the
Executive in good faith prior to such fiscal year and based upon the Executive's
performance during such fiscal year.
(c) Benefits.
--------
(i) During the Employment Period, Executive shall be entitled
to participate in all of the Company's employee benefit plans and programs
for which similarly situated executive employees of the Company are
generally eligible (subject to the Company's right to amend, modify or
terminate any such plan or program in accordance with its terms and
applicable law and subject in each case to any applicable waiting periods
or other restrictions contained in such benefit plans or programs), which
shall include, but shall not be limited to, health insurance, dental
insurance and participation in the Company's 401(k) plan. The Company shall
match any contributions made by Executive to the Company's 401(k) plan to
the extent consistent with the Company's past practice and the terms of
such plan and to the extent consistent with applicable law.
(ii) Due to the fact that Executive will be required to be on
call continuously for emergency response and to travel extensively by
vehicle on company business, during the Employment Period, the Company
shall provide to Executive a reasonably priced car consistent with the
Company's past practice. Such company car shall be available for
Executive's use in a manner consistent with past practice. Executive
acknowledges and agrees that the Company may report all or a portion of the
cost of such car and its operation as additional compensation to Executive
if the Company reasonably believes the same may be required by applicable
income tax law.
-2-
<PAGE>
(iii) Executive shall be entitled to three (3) weeks of paid
vacation during each year of the Employment Period, in addition to legal
holidays. Vacation hereunder shall accrue from year to year based upon the
Company's then current policy for all employees as established from time to
time by the Board in its sole discretion.
(iv) The Company shall reimburse Executive for all reasonable
expenses incurred by him in the course of performing his duties under this
Agreement which are consistent with the terms of this Agreement and the
Company's policies in effect from time to time with respect to travel,
entertainment and other business expenses, subject to the Company's general
policies with respect to reporting and reasonable documentation of such
expenses.
(v) The Company shall provide Executive with a
telecommunication system at Executive's home for Executive's use on Company
business; provided that such telecommunication system can be provided to
-------- ----
Executive by the Company at a reasonable cost.
(d) Stock Options. Executive shall be eligible to participate in the
-------------
Company's employee stock option plans and other employee equity incentive plans
for which other similarly situated executive employees of the Company are
eligible. The amount of any awards under such plans to Executive shall be
determined by the Board in its sole discretion.
4. Term and Termination.
--------------------
(a) The Employment Period shall be for a term ending on the second
anniversary of the Effective Date (the "Term"); provided that, notwithstanding
---- -------- ----
anything in this Agreement to the contrary, expressed or implied, or Section
2924 of the California Labor Code or any similar provision of applicable law,
the Employment Period shall terminate prior to the expiration of the Term upon
(i) Executive's resignation for any reason (with such resignation being
effective 30 days after notice thereof is delivered by Executive to the
Company), (ii) Executive's death or Disability or (iii) termination of
Executive's employment by the Company with or without Cause.
5. Severance.
---------
(a) If the Employment Period is terminated by the Company without
Cause, Executive shall be entitled to receive an amount equal to his Base Salary
at the times set forth in this Agreement for the remainder of the Term (for
purposes of this Section 5(a), the "Severance Period"), so long as Executive has
----------------
not breached and does not breach the provisions of any of paragraphs 6, 7, 8, 9,
10 or 12 below during the time period set forth therein or in the agreement
referenced thereby.
-3-
<PAGE>
(b) If the Employment Period is terminated as a result of Executive's
Disability, Executive and/or his estate or beneficiaries, as the case may be,
shall be entitled to receive benefits under the Company's employee benefit
programs as in effect on the date of such termination to the extent permitted
thereunder and, in addition, shall be entitled to receive (i) an amount equal to
Executive's Base Salary at the times set forth in this Agreement for the one-
year period after the termination of the Employment Period and (ii) the amount
of any Annual Bonus otherwise payable to Executive pursuant to paragraph 3(b)
above for the fiscal year in which Executive's employment is terminated, except
that the amount of any such Annual Bonus otherwise payable pursuant to this
paragraph 5(b) shall be pro rated on the basis of the number of days during such
fiscal year that Executive was employed by the Company.
(c) If the Employment Period is terminated as a result of Executive's
death, Executive and/or his estate or beneficiaries, as the case may be, shall
be entitled to receive benefits under the Company's employee benefit programs as
in effect on the date of such termination to the extent permitted thereunder
and, in addition, shall be entitled to receive the amount of any Annual Bonus
otherwise payable to Executive pursuant to paragraph 3(b) above for the fiscal
year in which Executive's employment is terminated, except that the amount of
any such Annual Bonus Otherwise payable pursuant to this paragraph 5(b) shall be
pro rated on the basis of the number of days during such fiscal year that
Executive was employed by the Company.
(d) If the Employment Period is terminated by the Company for Cause or
if Executive resigns for any reason, Executive shall be entitled to receive his
Base Salary through the date of termination and the Company shall have no
further liability whatsoever to Executive.
(e) Except as otherwise expressly provided herein or as expressly
required under Section 4980B of the Internal Revenue Code of 1986, as amended,
all of Executive's rights to fringe benefits and bonuses hereunder shall cease
upon termination of the Employment Period.
6. Confidential Information; Nonsolicitation.
-----------------------------------------
(a) Executive agrees to execute on the date hereof and to be bound as
of the date hereof by the terms of the Company's form of confidentiality
agreement attached hereto as Exhibit A.
(b) Executive agrees that until the date which is one year after the
termination of the Employment Period, he shall not directly, or indirectly
through another Person, (i) induce or attempt to induce any employee of the
Company or any of its Subsidiaries to leave the employ of the Company or such
Subsidiary, or in any way interfere with the relationship between the Company or
any of its Subsidiaries and any employee thereof, (ii) hire any person who was
an employee of the Company or any of its Subsidiaries at any time during the
180-day period immediately prior to the date on which such hiring would take
place (it being conclusively presumed by the Company and Executive so as to
avoid any disputes under this paragraph 6(b) that any such hiring within such
180-
-4-
<PAGE>
day period is in violation of clause (i) above), or (iii) call on, solicit or
service any customer, supplier, licensee, licensor or other business relation of
the Company or any of its Subsidiaries in order to induce or attempt to induce
such Person to cease doing business with the Company or such Subsidiary. In
addition, during the Employment Period and thereafter, Executive shall not in
any way interfere with the relationship between any such customer, supplier,
licensee or business relation and the Company or any of its Subsidiaries
(including making any negative statements or communications about the Company or
any of its Subsidiaries).
7. Company's Ownership of Intellectual Property.
--------------------------------------------
(a) Executive acknowledges that all Work Product is the exclusive
property of the Company. Executive hereby assigns all right, title and interest
in and to such Work Product to the Company. Any copyrightable work prepared in
whole or in part by Executive will be deemed "a work made for hire" under
Section 201 (b) of the 1976 Copyright Act, and the Company shall own all of the
rights comprised in the copyright therein.
(b) The Company and Executive each acknowledge the applicability of
Section 2870 of the California Labor Code. Accordingly, the provisions of
paragraph 7(a) shall not apply to, and the term "Work Product" shall not
include, any invention that Executive developed entirely on his own time without
using the Company's equipment, supplies, facilities, or trade secret information
except for those inventions that either: (i) relate at the time of conception or
reduction to practice of the invention to the Company's or any Subsidiary's
business, or to the actual or demonstrably anticipated research or development
of the Company or any Subsidiary; or (ii) result from any work performed by
Executive for the Company or any Subsidiary. Set forth on the attached "Excluded
--------
Inventions Schedule" are the inventions Executive believes meet the criteria for
- -------------------
exclusion set forth above. Executive agrees to promptly advise the Company in
writing of any inventions developed after the Effective Date which Executive
believes meet the criteria for exclusion set forth above.
(c) Executive shall promptly and fully disclose all Work Product to
the Company and shall cooperate and perform all actions reasonably requested by
the Company (whether during or after the Employment Period) to establish,
confirm and protect the Company's right, title and interest in such Work
Product. Without limiting the generality of the foregoing, Executive agrees to
assist the Company, at the Company's expense, to secure the Company's rights in
the Work Product in any and all countries, including the execution of all
applications and all other instruments and documents which the Company shall
deem necessary in order to apply for and obtain rights in such Work Product and
in order to assign and convey to the Company the sole and exclusive right, title
and interest in and to such Work Product. If the Company is unable because of
Executive's mental or physical incapacity or for any other reason (including
Executive's refusal to do so after request therefor is made by the Company) to
secure Executive's signature to apply for or to pursue any application for any
United States or foreign patents or copyright registrations coveting Work
Product belonging to or assigned to the Company pursuant to paragraph 7(a)
above, then Executive hereby irrevocably designates and appoints the Company and
its duly authorized officers and agents
-5-
<PAGE>
as Executive's agent and attorney-in-fact to act for and in Executive's behalf
and stead to execute and file any such applications and to do all other lawfully
permitted acts to further the prosecution and issuance of patents or copyright
registrations thereon with the same legal force and effect as if executed by
Executive. Executive agrees not to apply for or pursue any application for any
United States or foreign patents or copyright registrations coveting any Work
Product other than pursuant to this paragraph in circumstances where such
patents or copyright registrations are or have been or are required to be
assigned to the Company.
8. Delivery of Materials Upon Termination of Employment. As requested
----------------------------------------------------
by the Company upon the termination of Executive's employment with the Company
for any reason, Executive shall promptly deliver to the Company all copies and
embodiments, in whatever form, of all Confidential Information and Work Product
in Executive's possession or within his control irrespective of the location or
form of such material and, if requested by the Company, shall provide the
Company with written confirmation that all such materials have been delivered to
the Company.
9. Subsequent Inventions. Executive understands and agrees that all
---------------------
Intellectual Property Rights made, conceived, developed, or reduced to practice
by Executive, either alone or jointly with others, shall be disclosed to the
Company by Executive for six (6) months following the termination of the
Employment Period. Employee further agrees that all Intellectual Property Rights
made, conceived, developed or reduced to practice within six (6) months
following such termination shall be presumed to have been conceived during
Executive's employment with the Company and with the use of the Company's
Confidential Information, but such presumption may be overcome by Executive by a
showing that such Intellectual Property Rights were conceived after the
Employment Period and without the use of any such Confidential Information. In
the event Executive is not able to rebut such presumption and prove that such
Intellectual Property Rights were conceived after the Employment Period and
without the use of Confidential Information, Executive agrees to assign all
right, title and interest in such Intellectual Property Rights to the Company.
10. Disclosure. Following the termination of the Employment Period,
----------
Executive shall communicate the restrictions contained in this Agreement to any
Person he intends to be employed by, provide consulting services to or otherwise
represent. Executive hereby consents to the Company's communication of the
restrictions contained in this Agreement to any such Person.
11. Enforcement Remedies.
--------------------
(a) If, at the time of enforcement of the covenants contained in
paragraphs 6, 7, 8, 9 or 10 (the "Protective Covenants"), a court shall hold
--------------------
that the duration or scope stated therein are unreasonable under circumstances
then existing, the parties hereto agree that the maximum duration or scope
reasonable under such circumstances shall be substituted for the stated duration
or scope and that the court shall be allowed to revise the restrictions
contained therein to cover the maximum period or scope permitted by law.
Executive has consulted legal counsel regarding the Protective Covenants and
based on such consultation has determined and hereby acknowledges that
-6-
<PAGE>
the Protective Covenants are reasonable in terms of duration and scope and are
necessary to protect the goodwill of the Company's business and the Confidential
Information. Executive further agrees that the Protective Covenants were a
material inducement to certain investors of the Company to enter into the Merger
Agreement and consummate the transactions contemplated thereby, and such
investors would not obtain the benefit of the bargain as set forth in the Merger
Agreement and the other agreements contemplated thereby if Executive breached or
challenged the validity of any of the Protective Covenants.
(b) If Executive breaches, or threatens to commit a breach of, any of
the Protective Covenants, the Company shall have the following rights and
remedies, each of which rights and remedies shall be independent of the others
and severally enforceable, and each of which is in addition to, and not in lieu
of, any other rights and remedies available to the Company at law or in equity:
(i) the right and remedy to have the Protective Covenants
specifically enforced by any court of competent jurisdiction (without the
need to post a bond or other security), it being agreed that any breach or
threatened breach of the Protective Covenants would cause irreparable
injury to the Company and that money damages would not provide an adequate
remedy to the Company; and
(ii) the right and remedy to require Executive to account for and
pay over to the Company any profits, monies, accruals, increments or other
benefits derived or received by Executive as the result of any
transaction(s) constituting a breach of the Protective Covenants.
(c) In the event of any breach or violation by Executive of any of
the Protective Covenants, the time period of such covenant with respect to
Executive (to the extent such covenant is limited in duration) shall be tolled
until such breach or violation is resolved.
12. Loss of Severance due to Competition.
------------------------------------
(a) The Executive shall not during the Employment Period and during
the period Executive is receiving any Severance Payment pursuant to paragraph
5(a) (the "Noncompete Period"), for himself or on behalf of any other person,
-----------------
firm, partnership, corporation, or other entity, engage, directly or indirectly,
either as an officer, director, employee, partner, consultant, individual
proprietor, agent, or otherwise (including, but not limited to, as an owner or
shareholder), in any business which (A) provides telecommunication services of
the type provided during the Employment Period by the Company and any of its
Subsidiaries (including, without limitation, (i) switched local service,
(ii)switched long-distance service, (iii)dedicated transport services, (iv) co-
locate and interconnect services and (v)data switched services and including,
without limitation, telecommunication services of the type provided by the
Company and any of its Subsidiaries to information service providers) or (B)
provides services of the type which the Company and any of its Subsidiaries have
taken significant actions during the Employment Period
-7-
<PAGE>
to begin providing or of the type the Company or any of its Subsidiaries have
indicated that they plan to begin providing in any business plan or similar
document delivered to Executive during the Employment Period, in each case
within any of the Restricted Territories (as defined below); provided that the
-------- ----
restrictions set forth in this paragraph 12 shall not prohibit Executive from
being a passive owner of not more than 5% of the outstanding stock of any class
of a corporation which is publicly traded; and provided further that the
-------- ------- ----
restrictions set forth in this paragraph 12 shall not restrict the activities of
Executive to the extent Executive has received the consent of the Board to such
activities.
(b) For purposes of this Agreement, "Restricted Territories" shall
---------- -----------
mean (i) the counties (or similar jurisdictions) in the states of Arizona,
California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and
Washington, the province of British Columbia, Canada and the territories and
jurisdictions of Mexico and (ii) any other jurisdictions in which the Company or
its Subsidiaries are engaged in business during the Employment Period or have
taken significant actions to begin engaging in business during the Employment
Period. Executive acknowledges that the business of the Company is contemplated
to be conducted in the jurisdictions set forth in subparagraph 12(b)(i)
(including as the same relates to the production, promotion, marketing and sale
of its products and services), and that the geographic restrictions set forth
above are reasonable and necessary to protect the goodwill of the Company's
business.
(c) If Executive breaches any of the provisions of this paragraph 12,
Executive and the Company acknowledge and agree that the Company's sole remedy
for such breach shall be the termination of the Severance Payments otherwise
payable to Executive pursuant to paragraph 5(a) hereof.
13. Executive's Representations. Executive hereby represents and
---------------------------
warrants to the Company that (a) the execution, delivery and performance of this
Agreement by Executive do not and shall not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which he is bound, (b) Executive is
not a party to or bound by any employment agreement, noncompete agreement or
confidentiality agreement with any other person or entity, and (c) upon the
execution and delivery of this Agreement by the Company, this Agreement shall be
the valid and binding obligation of Executive, enforceable in accordance with
its terms. Executive hereby acknowledges and represents that he has consulted
with independent legal counsel regarding his rights and obligations under this
Agreement and that he fully understands the terms and conditions contained
herein.
14. Definitions.
-----------
"Affiliate" of any particular Person means any other Person
---------
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
-------
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
-8-
<PAGE>
"Cause" means (A) Executive's theft or embezzlement, or attempted
-----
theft or embezzlement, of money or property of the Company or any of its
Affiliates, Executive's perpetration or attempted perpetration of fraud, or
Executive's participation in a fraud or attempted fraud, on the Company or any
of its Affiliates or Executive's unauthorized appropriation of, or Executive's
attempt to misappropriate, any tangible or intangible assets or property of the
Company or any of its Affiliates; (B) Executive's conviction for commission of a
felony or conviction for any crime involving acts which tend to insult or offend
community moral standards or public decency or that materially and adversely
affect the reputation or business activities of the Company or its Affiliates;
(C) Executive's substance abuse, including abuse of alcohol or use of illegal
narcotics, or other illegal drugs or substances, for which Executive fails to
undertake and maintain treatment within 15 days after requested by the
Corporation; (B) Executive's refusal to carry out the lawful instructions of the
Company's Chief Executive Officer or Executive Vice President -- Technology and
Network Operations following receipt of written notice of such instructions from
the Chief Executive Officer; or (E) Executive's material breach of any provision
of this Agreement which is incapable of cure or which is not cured within 15
days after written notice thereof to Executive.
"Confidential Information" means all information of a confidential or
------------------------
proprietary nature (whether or not specifically labeled or identified as
"confidential"), in any form or medium, that is or was disclosed to, or
developed or learned by, Executive in connection with Executive's prior
relationship with the Company or during the Employment Period and that relates
to the business, products, services, research or development of the Company or
its suppliers, distributors or customers. Confidential Information includes but
is not limited to the following: (i) internal business information (including
information relating to strategic and staffing plans and practices, business,
training, marketing, promotional and sales plans and practices, cost, rate and
pricing structures and accounting and business methods); (ii) identities of,
individual requirements of, specific contractual arrangements with, and
information about, the Company's suppliers, distributors and customers and their
confidential information; (iii) trade secrets, know-how, compilations of data
and analyses, techniques, systems, formulae, research, records, reports,
manuals, documentation, models, data and data bases relating thereto; and (iv)
inventions, innovations, improvements, developments, methods, designs, analyses,
drawings, reports and all similar or related information (whether or not
patentable). Confidential Information shall not include information that
Executive can demonstrate: (a) is publicly known through no wrongful act or
breach of obligation of confidentiality; (b) was lawfully known to Executive
prior to the time Executive began rendering services to the Company and its
predecessors; or (c) was rightfully received by Executive from a third party
without a breach of any obligation of confidentiality by such third party.
"Disability" means the inability, due to illness, accident, injury,
----------
physical or mental incapacity or other disability, of Executive to carry out
effectively his duties and obligations to the Company or to participate
effectively and actively in the management of the Company for a period of at
least 60 consecutive days or for shorter periods aggregating at least 120 days
(whether or not consecutive) during any twelve-month period, as determined in
the reasonable good faith judgment of the Board.
-9-
<PAGE>
"Intellectual Property Rights" means all inventions, innovations,
----------------------------
improvements, developments, methods, processes, designs, analyses, drawings,
reports and all similar or related information (whether or not patentable or
reduced to practice) and any copyrightable work, trade mark, trade secret or
other intellectual property rights which relate to the Company's or any of its
Subsidiaries' actual or anticipated business.
"Merger Agreement" means that certain Agreement and Plan of Merger,
----------------
dated as of the date hereof, by and among the Company, Executive and the other
parties signatory thereto, as amended and modified from time to time in
accordance with its terms.
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Subsidiary" means, with respect to any Person, any corporation,
----------
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by that Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control any managing director or general partner of such limited
liability company, partnership, association or other business entity.
"Work Product" means all inventions, innovations, improvements,
------------
developments, methods, processes, designs, analyses, drawings, reports, research
and development of existing or future products or services which were or are
conceived, reduced to practice, contributed to or developed or made by Executive
(whether alone or jointly with others) while employed (both before and after the
Effective Date) by the Company (or its predecessors, successors or assigns) and
its Subsidiaries and all similar or related information (whether or not
patentable or reduced to practice) and any copyrightable work, trade mark, trade
secret or other intellectual property rights, any of which relate to the
Company's or any of its Subsidiaries' actual or anticipated business.
15. Survival. The provisions set forth in paragraphs 5 through 24 of
--------
this Agreement shall survive and continue in full force and effect in accordance
with their terms notwithstanding any termination of the Employment Period.
16. Notices. Any notice provided for in this Agreement shall be
-------
deemed to have been given when delivered personally to the recipient, sent to
the recipient by reputable express
-10-
<PAGE>
courier (charges prepaid), telecopied (with hard copy to follow) or mailed to
the recipient by certified or registered mail, return receipt requested and
postage prepaid. Such notice will be sent to Executive or to the Company at the
address set forth below:
-11-
<PAGE>
Notices to Executive:
--------------------
Gregory Joksch
3008 Chavrey Circle
-----------------------
Stockton, CA 95209
-----------------------
Telephone: 209 926 3356
------------
Facsimile: 209 926 5556
------------
Notice to the Company:
---------------------
Pac-West Telecomm, Inc.
4210 Coronado Avenue
Stockton CA 95204
Attention: President
Telephone: (209) 926-3333
Facsimile: (209) 926-3125
or such address or to the attention of such other person as the recipient party
shall have specified by prior written notice to the sending party. Any notice
under this Agreement shall be deemed to have been given when so delivered or
mailed.
17. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein. The
Executive acknowledges and agrees that the covenants and agreements set forth in
this agreement were a material inducement to certain investors of the Company to
enter into the Merger Agreements and consummate the transactions contemplated
thereby, and such investors would not obtain the benefit of their bargain as set
forth in the Merger Agreement and the other agreements contemplated thereby as
specifically negotiated by the investors if Executive breached or challenged any
of the provisions of this Agreement. Therefore, notwithstanding anything to the
contrary expressed or implied in this paragraph 17 or elsewhere will not
directly or indirectly challenge the validity, legality or enforceability of any
provision of this Agreement.
18. Complete Agreement. This Agreement and the Merger Agreement
------------------
embody the complete agreement and understanding among the parties and supersede
and preempt any prior understandings, agreements or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
-12-
<PAGE>
19. No Strict Construction. The language used in this Agreement shall
----------------------
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
party. The use of the word "including" herein shall mean "including without
limitation."
20. Counterparts. This Agreement may be executed in separate
------------
counterparts (including by means of telecopies signature pages), each of which
is deemed to be an original and all of which taken together constitute one and
the same agreement.
21. Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of and be enforceable by Executive, the Company and
their respective heirs, successors and assigns, except that Executive may not
assign his rights or delegate his obligations hereunder without the prior
written consent of the Company.
22. Choice of Law. All issues and questions concerning the
-------------
construction, validity, enforcement and interpretation of this Agreement and any
schedules shall be governed by, and construed in accordance with, the laws of
the State of California, without giving effect to any choice of law or conflict
of law roles or provisions (whether of the State of California or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of California.
23. Consent to Personal Jurisdiction. Executive hereby expressly
--------------------------------
consents to the nonexclusive personal jurisdiction and venue of the state and
federal courts located in the federal Northern District of California for any
lawsuit filed against Executive by the Company arising from or relating to this
Agreement.
24. Amendment and Waiver. The provisions of this Agreement may be
--------------------
mended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
* * * * *
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement on the date first written above.
PAC-WEST TELECOMM, INC.
By: /s/ WW Griffin
--------------------------
Name: WALLACE W. GRIFFIN
------------------------
Its: President/CEO
-------------------------
By:__________________________
Name:________________________
Its:_________________________
_____________________________
GREGORY JOKSCH
-14-
<PAGE>
EXCLUDED INVENTIONS SCHEDULE
----------------------------
None.
-15-
<PAGE>
Exhibit 10.30
CONFIDENTIALITY AGREEMENT
This Confidentiality Agreement ("Agreement") is made between Pac-West Telecomm
---------
("Company") and Jason Mills (sic) ("Executive").
------- ---------
1. Confidential Information
------------------------
Pac-West Telecomm will disclose certain confidential and proprietary
information ("Confidential Information") to Executive. Confidential
------------------------
Information shall include any data, materials, products, technology,
computer programs, specifications, manuals, software, marketing plans,
business plans, financial information, customer lists, customer files,
promotional materials, employee information, and other information
disclosed or submitted, orally, in writing, or by any other media, to
Executive by Company. In addition, any analyses, compilations, studies,
data, information, documents or materials (collectively called "Work
----
Product") prepared by Executive for or on behalf of the Company shall be
-------
deemed to be proprietary and Confidential Information.
2. Executive's Obligations:
------------------------
A. Executive agrees that the Confidential Information is to be considered
confidential and proprietary to Company, and Executive shall hold the
same in confidence, shall not use the Confidential Information other
than for the purposes of his business with Company, and shall disclose
it only to Company's officers, directors, employees, customers,
suppliers, or other outside parties with a specific need to know for
purposes of Pac-West business operations and as required for Executive
to perform his assigned responsibilities. With the exception of the
aforementioned, Executive will not disclose, publish or otherwise
reveal any of the Confidential Information received from Company to
any party whatsoever except with the specific prior written
authorization of the Company's chief executive officer.
B. Confidential Information furnished in tangible form shall not be
duplicated by Executive except for purposes of this Agreement Upon the
request of Company, Executive shall return all Confidential
Information, including all Work Product, received or produced in
written or tangible form, including copies, or reproductions or other
media containing such Confidential Information.
3. Terms:
------
The obligations of Executive herein shall be effective during Executive's
employment and for three years after the date of separation from the
Company.
4. Governing Law and Equitable Relief:
-----------------------------------
This Agreement shall be governed and construed in accordance with the laws
of the State of California. Jurisdiction and venue in any action to enforce
the terms of this agreement and the obligations created hereunder shall be
deemed to have been made in and to be fully performed in San Joaquin
County, California. Executive agrees that in the event of any breach or
threatened breach by Executive, Company may obtain, in addition to any
other legal remedies which may be available, restraining orders and such
equitable relief as may be necessary to protect Company against any such
breach or threatened breach.
5. Separations:
-----------
All Confidential Information furnished to Executive will be returned to
Company upon separation from the Company.
6. Entire Agreement:
-----------------
This Agreement may not be modified except by written agreement signed by
both parties.
Executive
By: /s/ Gregory Joksch Date: 9/10/98
--------------------------- ---------
Social Security # ###-##-####
-------------
Pac-West Telecomm
By: /s/ W W Griffin Date: 9/10/98
--------------------------- ---------
Title: Pres./CEO
------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
San Francisco, California
August 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE
30, 1999 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 38,886,000
<SECURITIES> 20,066,000
<RECEIVABLES> 5,638,000
<ALLOWANCES> (463,000)
<INVENTORY> 629,000
<CURRENT-ASSETS> 68,232,000
<PP&E> 85,586,000
<DEPRECIATION> (9,576,000)
<TOTAL-ASSETS> 150,208,000
<CURRENT-LIABILITIES> 23,589,000
<BONDS> 150,062,000
48,649,000
0
<COMMON> 13,000
<OTHER-SE> (75,647,000)
<TOTAL-LIABILITY-AND-EQUITY> 150,208,000
<SALES> 0
<TOTAL-REVENUES> 30,264,000
<CGS> 0
<TOTAL-COSTS> 21,545,000
<OTHER-EXPENSES> (1,185,000)
<LOSS-PROVISION> 63,000
<INTEREST-EXPENSE> 8,502,000
<INCOME-PRETAX> 1,339,000
<INCOME-TAX> 535,000
<INCOME-CONTINUING> 804,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 804,000
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
<PAGE>
EXHIBIT 99.1
[Logo of Safeguard Scientifics, Inc.]
DIRECTED SHARE SUBSCRIPTION PROGRAM FOR
PAC-WEST TELECOMM, INC.
FOR HOLDERS OF
100 OR MORE SHARES OF
SAFEGUARD SCIENTIFICS, INC.
COMMON STOCK
ON ______ __, 1999
Holders of fewer than 100 shares of Safeguard Scientifics, Inc. common stock on
______ __, 1999 are not eligible to participate in this offer.
If you have any questions regarding the Directed Share Subscription Program,
please call Safeguard's automated investor relations line at (888) SFE-1200.
Please do not call Pac-West Telecomm with any questions regarding this program.
Only Safeguard's automated investor relations line or a Safeguard
representative will be able to answer your questions.
<PAGE>
____, 1999
Dear Safeguard Stockholder:
As you may know, we are undertaking an initial public offering of the
common stock of Pac-West Telecomm, Inc. We are permitting Safeguard Scientifics
to use its Directed Share Subscription Program so that we may offer you the
opportunity to buy our common stock at our initial public offering price. We
will be offering ________ shares and Safeguard Scientifics will be
offering _______ shares under the program.
Set forth below is a detailed description of how the program will work in
connection with our offering. Please review this description and the attached
prospectus carefully in deciding whether or not you wish to invest.
Who can subscribe
Only holders of 100 or more shares of Safeguard common stock as of
______ __, 1999 are eligible to purchase shares of our common stock in the
program. Holders of fewer than 100 Safeguard shares will not be eligible to
participate in this program.
You may not transfer your subscription offer
The offer to purchase shares in this program may only be transferred by
involuntary operation of law such as death or certain dissolutions. Number of
shares for which you may subscribe
To determine how many shares of our common stock you are eligible to
purchase, divide the number of shares of Safeguard common stock that you owned
as of ______ __, 1999 by 10 and round up to the nearest whole number. For
example, if you held between 991 and 1,000 shares of Safeguard common stock as
of this date, you may subscribe for 100 shares of our common stock. You would
have to have had at least 100 shares of Safeguard common stock to be eligible
to subscribe for 10 shares of our common stock. You may not subscribe for a
fractional share of our common stock.
Minimum Subscription Size
The minimum subscription that we will accept for any account is for 10
shares of our common stock. Therefore, holders of fewer than 100 shares of
Safeguard common stock as of ______ __, 1999 will not be able to purchase our
shares under the program. This limit applies to each of your accounts, not the
aggregate of all of your accounts. If as of August 31, 1999 you held 50 shares
of Safeguard common stock in one account and another 50 shares in a different
account, we will not consider you to be the owner of 100 shares of Safeguard
common stock. Since none of your accounts contained at least 100 shares of
Safeguard common stock, you would not be eligible to subscribe.
You are under no obligation to subscribe, but if you subscribe for any
shares it must be for at least 10 shares in each account. For example, if
you held 750 shares of Safeguard common stock in a single account as of
______ __, 1999 and you choose to purchase our shares under the program, you may
purchase between 10 and 75 shares.
Subscription Price
The price per share under the program will be the same price that all
investors will pay in our initial public offering. The price per share in the
initial public offering will be determined by negotiations between us and the
underwriters of our offering. The factors that we expect to consider in these
negotiations are described in the
<PAGE>
attached prospectus under the heading "Underwriting." We currently anticipate
that the offering price will be between $_______ and $______ per share.
Safeguard will inform you of the initial public offering price as described
below under "How to Subscribe."
Stock Purchase Agreement with Safeguard Scientifics
We intend to enter into a Stock Purchase Agreement with Safeguard. This
agreement will provide that if all ___________ of the shares offered by Pac-West
under the program are not purchased by Safeguard stockholders, then Safeguard
will purchase the remaining shares at our initial public offering price.
Safeguard will be able to transfer all or part of its obligation to purchase
these remaining shares to third parties.
How to Subscribe
TO PURCHASE SHARES UNDER THE PROGRAM, YOU MUST ADHERE TO THE FOLLOWING
PROCEDURES:
. Subscriptions and payments will only be accepted after we have
determined our initial public offering price. Any subscriptions or
payments received before then will be returned to you. Once a
subscription and payment have been received and accepted, you may not
revoke your subscription. We expect to determine the initial public
offering price in _________ 1999, but various factors could hasten or
delay us. We will close the initial public offering and stop accepting
subscriptions four business days after we determine the initial public
offering price.
. Time will not permit us to notify you directly of our initial public
offering price and closing date. Instead, Safeguard will take the
following actions:
. publicize the offering price and the closing date on its Web site
(www.safeguard.com) and through a press release;
. through its Web site, provide you with an opportunity to request
e-mail notification (either directly to you or your designated
representative);
. make every effort to notify each broker, bank, trust company or other
nominee that holds shares on behalf of Safeguard stockholders of the
offering price and closing date; and
. make available an automated investor relations line (888-SFE-1200) on
a 24-hour basis through which you can listen to the text of the press
release or request a faxed copy.
You will have to monitor these media to know when to place your order
and deliver payment.
Also, if you do not hold your Safeguard shares directly, you will need
to keep in close contact with your broker, bank, trust company or other
nominee that holds your Safeguard shares on your behalf since they will
need to process the subscription for our shares and payment on your
behalf.
2
<PAGE>
* We will stop accepting orders under the program at 5:00 p.m. New York
City time on the fourth business day after we determine the initial
public offering price. Subscriptions and payments that have not been
received by ChaseMellon Shareholder Services, L.L.C. by this deadline
will not be honored. For example, if we determine the initial public
offering price on a Thursday, ChaseMellon must receive all orders and
payments by 5:00 p.m. New York City time on the following Wednesday.
This deadline would be extended to the following Thursday if there was
an intervening holiday on which the Nasdaq National Market was closed.
* To place an order for our shares under this program, you will have to
take the following actions:
* If you hold your Safeguard shares in your own name
--------------------------------------------------
You must complete and sign the subscription form included with this
prospectus and return it with full payment to ChaseMellon. Your
subscription form and payment must be received by ChaseMellon before
5:00 p.m. New York City time on the fourth business day after we
determine the initial public offering price. We will not honor any
subscription form received by ChaseMellon after that date.
We suggest, for your protection, that you deliver your subscription
form and payment to ChaseMellon by overnight or express mail courier
(or by facsimile transmission if you intend to wire funds) as
follows:
By Hand Delivery:
ChaseMellon Shareholder Services, L.L.C.
Reorganization Department
120 Broadway - 13th Floor
New York, NY 10271
By Overnight or Express Mail Courier:
ChaseMellon Shareholder Services, L.L.C.
Reorganization Department
85 Challenger Road
Mail Drop Reorg
Ridgefield Park, NJ 07660
By Facsimile Transmission and Wire Transfer:
ChaseMellon Shareholder Services, L.L.C.
Facsimile Transmission: (201) 296-4293
To confirm fax, call: (201) 296-4860
Wire instructions: Wire to: The Chase Manhattan Bank, New York, NY
ABA #: 021000021
Attention: ChaseMellon Shareholder Services
Account: Reorg Account 323-859577
For: Safeguard Scientifics, Inc./Pac-West
Telecomm
Reference: FBO [insert your name as it appears on
the front of your subscription form]
You must pay the subscription price by valid check or money order in
U.S. dollars payable to "ChaseMellon Shareholder Services, L.L.C." or
by wire transfer. Until this offering has closed, your payment will
be held in escrow by ChaseMellon Shareholder Services, L.L.C.
ChaseMellon Shareholder Services will mail a copy of the final
prospectus to all direct Safeguard shareholders who subscribe for
shares in this program.
3
<PAGE>
. If you hold your Safeguard shares through a broker, bank, trust
company or other nominee
We will provide to each broker, bank, trust company, and other
nominee who holds Safeguard shares for the account of other persons
copies of the preliminary and final prospectus. Each of those
entities will be responsible for providing you with a copy of the
preliminary and final prospectus. Subscription forms will not be
distributed to Safeguard shareholders who hold their shares in a
brokerage account since the subscription offer will be distributed to
your account electronically.
After we determine the initial public offering price, you will have
to contact the broker, bank, trust company or other nominee that
holds your Safeguard shares if you wish to place an order and arrange
for payment. ChaseMellon Shareholder Services will be unable to
directly accept your subscription and payment. All subscriptions and
payments must be submitted through the broker, bank, trust company or
other nominee that holds your Safeguard shares.
We caution you that brokers and other nominees will require some time
to process subscriptions from Safeguard stockholders. Therefore,
they most likely will stop accepting subscriptions earlier than the
fourth business day after we determine the initial public offering
price.
. Safeguard will decide all questions as to the validity, form and
eligibility (including times of receipt, beneficial ownership and
compliance with minimum exercise provisions). Safeguard also will
determine the acceptance of subscriptions and the aggregate price.
Alternative, conditional or contingent subscriptions will not be
accepted. Safeguard reserves the absolute right to reject any
subscriptions not properly submitted. In addition, Safeguard may reject
any subscription if the acceptance of the subscription would be
unlawful. Safeguard also may waive any irregularities or conditions in
the subscription for our shares, and Safeguard's interpretation of the
terms and conditions of the program will be final and binding.
. We are not obligated to give you notification of defects in your
subscription. We will not consider a subscription to be made until all
defects have been cured or waived. If your subscription is rejected,
your payment of the exercise price will be promptly returned by
ChaseMellon.
. Sales under the directed share subscription program will close on the
same business day as the closing of the sale of the other shares offered
to the public. If you purchase your shares through a broker, bank, trust
company or similar nominee, we expect that your purchase will be
reflected in your account with the nominee as soon as practicable after
the expiration of the directed share subscription program. Otherwise,
ChaseMellon will mail a stock certificate to you as soon as practicable
after the expiration of the directed share subscription program.
Cancellation of Initial Public Offering
We may cancel our initial public offering at any time up until the closing.
If the initial public offering is canceled, Safeguard will publicize the
cancellation on its Web site and through a press release. The program gives you
no rights to purchase shares of our common stock if we cancel our initial public
offering and any funds previously submitted by you will be returned promptly.
Safeguard and/or Pac-West also may cancel or modify, in whole or in part, the
directed share subscription program.
Federal Tax Consequences
We believe that you will not be considered to have received a taxable
distribution of property as a result of your having the opportunity to
participate in this offering. The Internal Revenue Service is not bound by this
position, and you are encouraged to consult with your tax advisors about the
federal, state and other tax consequences of the program.
4
<PAGE>
Stabilization
The underwriters of our initial public offering may engage in certain
transactions that stabilize, maintain or otherwise affect the price of our
common stock. We make no representation as to the direction or magnitude of any
effect that these transactions may have on the price of our common stock. Please
refer to the attached prospectus under the heading "Underwriting" for a more
detailed description of stabilization.
Risk Factors
Investing in our common stock involves certain risks which are disclosed
beginning on page 7 of the attached preliminary prospectus.
Certain Restrictions
In managing the program, we and Safeguard will take reasonable steps to
comply with the laws of the different countries in which Safeguard stockholders
live. If compliance is too burdensome in one or more countries, Safeguard
stockholders residing in those countries will not be offered the opportunity to
purchase our shares under the program.
* * *
If you have any questions regarding the Directed Share Subscription Program,
please call Safeguard's automated investor relations line at (888) SFE-1200.
Please do not call Pac-West Telecomm with any questions regarding this program.
Only Safeguard's automated investor relations line or a Safeguard representative
will be able to answer your questions.
Sincerely,
Wallace W. Griffin
President and Chief Executive Officer
5
<PAGE>
EXHIBIT 99.2
October ____, 1999
Dear Broker:
As you may know, we are undertaking an initial public offering of our shares of
common stock. We are permitting Safeguard Scientifics, Inc. to use its Directed
Share Subscription Program to offer Safeguard stockholders the opportunity to
buy shares of our common stock at the initial public offering price. The price
per share under this program will be the same price that all investors will pay
in our initial public offering.
The enclosed questions and answers will provide you with the key terms of the
Directed Share Subscription Program.
If you have any questions regarding the Directed Share Subscription Program,
please call Safeguard's automated investor relations line at (888) SFE-1200.
Please do not call Pac-West Telecomm regarding this program. You also may find
information about this program on Safeguard's web site at www.safeguard.com.
Preliminary prospectuses for distribution to Safeguard stockholders are being
distributed through Corporate Investor Communications, Attention: Processing
Department, 111 Commerce Road, Carlstadt, NJ 07072-2586, telephone number (201)
896-1900. Please call Corporate Investor Communications if you do not receive a
sufficient number of prospectuses for distribution to Safeguard stockholders.
You should provide a copy of the preliminary prospectus to each Safeguard
stockholder on whose behalf you hold shares who is eligible to participate in
this program.
Sincerely,
Wallace W. Griffin
President and Chief Executive Officer
<PAGE>
SAFEGUARD SCIENTIFICS, INC.
DIRECTED SHARE SUBSCRIPTION PROGRAM
FOR PAC-WEST TELECOMM, INC.
Q: Who is eligible to participate in the directed share subscription program
for Pac-West Telecomm, Inc.?
A: Only record holders of at least 100 shares of Safeguard stock on ______ __,
1999.
Q: How was the opportunity to purchase IPO shares allocated to Safeguard
stockholders?
A: Safeguard stockholders received a subscription offer to purchase 1 share of
Pac-West for each 10 shares of Safeguard owned on August 31, 1999, subject
to the minimum purchase requirement.
If a Safeguard stockholder owned at least 100 shares of Safeguard common
stock but the number of shares was not evenly divisible by 10, Safeguard
will round up the subscription offer to the next whole number. The
Depository Trust Company will notify its participants of the date by which
the roundup requests must be submitted.
The offer to purchase shares under the directed share subscription program
is nontransferable and cannot be combined among multiple accounts.
There will not be an oversubscription privilege under this program.
Q: Is there a minimum purchase requirement?
A: The minimum subscription that will be accepted is for 10 shares of Pac-West
common stock. Therefore, holders of fewer than 100 Safeguard shares as of
______ __, 1999 will be unable to purchase shares in the directed share
subscription program for Pac-West.
Q: How will I know when the offering prices and what the expiration date for
the offering will be?
A: When the offering is declared effective by the SEC and the offering price is
set, Safeguard will
. issue a press release to the wire services
. send you an e-mail alert if you signed up for this on its Web page at
www.safeguard.com
. post this information on its Web page
. update its automated investor relations line (888) SFE-1200 through which
you will be able to listen to the text of the press release announcing
the price and the expiration date or request a faxed copy of the release
. notify the New York Stock Exchange and request that they notify all of
their members
. notify the Depository Trust Company, which will electronically notify all
of its participants
<PAGE>
Q: When can subscriptions and payment be submitted?
A: Subscriptions and payment will only be accepted by the offering agent after
the initial public offering price of the Pac-West common stock has been
determined. ChaseMellon Shareholder Services, L.L.C. is the offering agent.
Once a subscription and payment have been received and accepted by the
offering agent, the subscription may not be revoked.
The offering agent will stop accepting subscriptions and payments at 5:00
p.m. New York City time on the fourth business day after the IPO price has
been set.
The Depository Trust Company will handle subscriptions on behalf of its
participants. When you subscribe for shares of Pac-West through DTC's
automated subscription system, you will be required to confirm that you are
subscribing only on behalf of holders that meet the minimum per account
purchase requirement of 10 shares.
Q: When will the Pac-West shares purchased in the directed share subscription
program be distributed?
A: The offering agent is expected to distribute the shares to The Depository
Trust Company on the second business day following the expiration of the
directed share subscription program.
Q: Is there a cost basis attributable to the subscription offer?
A: We believe that Safeguard shareholders will not be considered to have
received a taxable distribution of property as a result of having the
opportunity to participate in the directed share subscription program.
However, the Internal Revenue Service is not bound by this position. We
encourage you to consult with your own tax advisor about the federal, state
and other tax consequences of this program.
<PAGE>
EXHIBIT 99.3
- -------------------
Subscription Number
- --------------------------- ------------------------ ------------------
Shares of Pac-West Telecomm Share Subscription Offer Record Date Shares
Eligible to Subscribe
SAFEGUARD SCIENTIFICS, Inc.
DIRECTED SHARE SUBSCRIPTION PROGRAM
- -------------------------------------------------------------------------------
Pac-West Telecomm, Inc.
SUBSCRIPTION FORM
The shareholder named above has the right to purchase, pursuant to the terms and
conditions of the Safeguard Scientifics, Inc. Directed Share Subscription
Program, the number of fully paid and non-assessable shares of common stock,
$0.001 par value, of Pac-West Telecomm, Inc. indicated above at a subscription
price that will be determined as outlined below. THE DIRECTED SHARE
SUBSCRIPTION PROGRAM WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON THE FOURTH
BUSINESS DAY AFTER THE INITIAL PUBLIC OFFERING PRICE IS DETERMINED. As
described in the preliminary prospectus accompanying this Subscription Form,
each holder of at least 100 shares of Safeguard Scientifics, Inc. common stock
may subscribe for one share of Pac-West Telecomm common stock for every 10
shares of Safeguard Scientifics common stock held as of , 1999, in
any account, rounded upward. The minimum subscription that we will accept is
for 10 shares of Pac-West Telecomm per any individual account. Therefore,
holders with accounts containing fewer than 100 shares of Safeguard common stock
as of , 1999, will not be able to subscribe for shares of Pac-West
Telecomm. The right to participate in this program and purchase shares of Pac-
West Telecomm is nontransferable except involuntarily by operation of law (e.g.,
death or certain dissolutions). Should an involuntary transfer occur by
operation of law, please contact ChaseMellon Shareholder Services, L.L.C., the
agent for the program, by telephone at 800-777-3674 for appropriate
instructions.
The subscription price per share under the program will be the same price that
all investors will pay in Pac-West Telecomm's initial public offering. The
price per share will be determined by negotiations between Pac-West Telecomm and
the underwriters of the offering. The factors to be considered in these
negotiations are described in the preliminary prospectus accompanying this
Subscription Form. Pac-West Telecomm currently anticipates that its initial
public offering price will be determined in , 1999 but various
factors could hasten or delay this determination. Time will not permit Pac-West
Telecomm to notify you directly of the subscription price and the expiration
date for this offering, but Safeguard Scientifics will take the actions
described in the accompanying preliminary prospectus to publicize this
information.
No offer to buy securities can be accepted, and no part of the subscription
price can be received, until the initial public offering price has been
determined and the registration statement, of which the preliminary prospectus
accompanying this Subscription Form is a part, has been declared effective. Any
Subscription Forms or payments received before then will be returned to you.
All persons electing to subscribe for shares of Pac-West Telecomm, Inc. must
complete the Election to Purchase on the reverse side of this Subscription Form
and return the Subscription Form, together with full payment of the subscription
price, to ChaseMellon at the addresses on the back of this Subscription Form.
If you do not properly complete and sign this Subscription Form, it may be
rejected. Once the Subscription Form and payment have been received and
accepted, your subscription may not be revoked by you. The Subscription Form
and full payment of the subscription price must be received by ChaseMellon no
later than 5:00 p.m. New York City time on the fourth business day after the
initial public offering price is determined. ChaseMellon will not honor any
subscriptions received after that time and date. If you do not wish to
subscribe for shares, you do not need to return this Subscription Form. Before
completing and returning this Subscription Form, you are urged to read carefully
the preliminary prospectus mailed to you with this Subscription Form for a more
complete explanation of the offering and for information about Pac-West
Telecomm. If Pac-West Telecomm cancels the initial public offering, you will
have no rights to purchase shares of Pac-West Telecomm and any funds previously
submitted by you will be returned. Pac-West Telecomm and/or Safeguard also may
cancel or modify, in whole or in part, the directed share subscription program.
<PAGE>
You should not return this Subscription Form or deliver any payment until after
Pac-West Telecomm has determined its initial public offering price. Any
subscription forms or payment received before then will be returned to you.
Once the initial public offering price has been determined, Safeguard
Scientifics will take actions to publicize the subscription price and the date
by which you must respond to the offer that has been made to you under this
program. If you wish to subscribe for shares at that time, you should complete
this Subscription Form and deliver payment of the subscription price to
ChaseMellon. ChaseMellon must receive the properly completed and signed
Subscription Form and full payment of the subscription price by 5:00 p.m. New
York City Time on the fourth business day after Pac-West Telecomm determines its
initial public offering price. ChaseMellon will stop accepting Subscription
Forms after that time and date. Once the Subscription Form and payment have been
received and accepted, your subscription may not be revoked by you. We suggest,
for your protection, that you deliver the completed Subscription Form and
payment of the subscription price to ChaseMellon Shareholder Services, L.L.C. by
overnight or express mail courier, or by facsimile transmission and wire
transfer. The addresses for ChaseMellon are as follows:
<TABLE>
<CAPTION>
<S> <C>
By Hand Delivery: By Overnight Delivery/Express Mail Courier
- ----------------- ------------------------------------------
ChaseMellon Shareholder Services, L.L.C. ChaseMellon Shareholder Services, L.L.C.
Attn: Reorganization Dept. Attn: Reorganization Dept.
120 Broadway, 13th Floor 85 Challenger Road, Mail Drop--Reorg
New York, NY 10271 Ridgefield Park, NJ 07660
By Facsimile Transmission and Wire Transfer: Wire to: The Chase Manhattan Bank, New York, NY
- -------------------------------------------- ABA # 021000021
ChaseMellon Shareholder Services, L.L.C. Attention: ChaseMellon Shareholder Services
Facsimile Transmission: (201) 296-4293 Account: Reorg Account 323-859577
To confirm fax, call: (201) 296-4860 For: Safeguard Scientifics, Inc./Pac-West
Telecomm
Reference: FBO [insert your name as it appears
on the reverse side of this form]
</TABLE>
- -------------------------------------------------------------------------------
SUBSCRIPTION FORM--ELECTION TO PURCHASE
Subject to the terms and conditions of the Directed Share Subscription Program
described in the preliminary prospectus, receipt of which is hereby
acknowledged, the undersigned hereby elects to purchase shares of common stock
of Pac-West Telecomm, Inc. as indicated below.
Number of shares purchased/1/ _______ (NOTE: _____ share minimum
required in each account)/2/
Per share subscription price $__________
Payment submitted (payable to
ChaseMellon Shareholder
Services, L.L.C.) 3 $__________
/1/You may only purchase up to the number of shares specified on the reverse
side of this form. If the amount submitted is not sufficient to pay the
subscription price for all shares that are stated to be purchased, or if the
number of shares being purchased is not specified, the number of shares
purchased will be assumed to be the maximum number that could be purchased
upon payment of such amount. Any remaining amount will be returned to the
purchaser.
/2/Any order for less than the minimum purchase requirement will be rejected.
/3/The subscription price must be paid by valid check or money order in U.S.
dollars payable to ChaseMellon Shareholder Services, L.L.C. or by wire
transfer as described above. The payment submitted should equal the total
shares purchased multiplied by the per share subscription price.
Shares of common stock of Pac-West Telecomm, Inc. will be issued promptly
following the expiration of the directed share subscription program. The shares
will be registered in the same manner set forth on the face of this Subscription
Form. If your shares are held in joint ownership, all joint owners must sign
this election to purchase. When signing as attorney, executor, administrator,
trustee or guardian, please give your full title as such. If signing for a
corporation, an authorized officer must sign and provide title. If signing for
a partnership, an authorized partner must sign and indicate title.
Please provide a telephone number at which you can be reached in the event that
we have questions regarding the information that you have supplied.
Daytime Telephone Number ( ) _____________________________
Evening Telephone Number ( ) _____________________________
(IF JOINTLY OWNED, BOTH MUST SIGN)
Dated:________________________, 1999 SIGNATURE(S):_______________________
------------------------------------
NOTE: The above signature(s) must
correspond with the name(s) as
written upon the face of this
Subscription Form in every
particular without alteration.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SUBSTITUTE FORM W-9
Department of the Treasury, Internal Revenue Service--Payer's Request for
Taxpayer Identification Number (TIN)
Failure to complete this form may subject you to 31% federal income tax
withholding.
<TABLE>
<S> <C>
Part 1: PLEASE PROVIDE YOUR TIN______________________________________________
TAXPAYER IDENTIFICATION NUMBER Social Security or Employer Identification Number
IN THE SPACE PROVIDED AT RIGHT
AND CERTIFY BY SIGNING AND Part 2: Check the box if you are awaiting a TIN [_]
DATING BELOW
</TABLE>
Part 3: CERTIFICATION--UNDER PENALTIES OF PERJURY, I CERTIFY THAT (1) the
number shown on this form is my correct taxpayer identification number (or a TIN
has not issued to me but I have mailed or delivered an application to receive a
TIN or intend to do so in the near future), (2) I am not subject to backup
withholding either because I have not been notified by the Internal Revenue
Service (the "IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends or the IRS has notified me that I am
no longer subject to backup withholding, and (3) all other information provided
on this form is true, correct and complete.
Dated: ________________________, 1999 SIGNATURE:____________________________
You must cross out item (2) above if you have been notified by the IRS that you
are currently subject to backup withholding because of underreporting interest
or dividends on your tax return. However, if after being notified by the IRS
that you were subject to backup withholding, you received another notification
from the IRS that you are no longer subject to backup withholding, do not cross
out item (2).
- --------------------------------------------------------------------------------
