<PAGE>
As filed with the Securities and Exchange Commission on October 8, 1999
Registration No. 333-86607
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 1
to
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(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 Aggregate Amount of
be Registered Offering Price(1) Registration Fee(2)
- ------------------------------------------------------------------------------
<S> <C> <C>
Common stock, par value $0.001 per
share............................... $167,580,000 $46,588
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(2) $34,750 of the registration fee was paid with the initial filing.
---------------
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 OCTOBER 8, 1999
PRELIMINARY PROSPECTUS
12,600,000 Shares
Common Stock
-----------
This is the initial public offering of shares of common stock of Pac-West
Telecomm, Inc. Of the 12,600,000 shares of common stock being offered, we are
offering 9,100,000 shares to the public generally and 2,300,000 shares to
shareholders of Safeguard Scientifics, Inc., one of our principal shareholders.
In addition, Safeguard Scientifics is offering up to 1,200,000 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
$10.00 and $12.00 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 1,365,000 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 Securities, Inc.
The date of this prospectus is , 1999.
<PAGE>
[Pac-West logo]
OneCall. One Bill. One Company.
[Map of the United States Identifying Pac-West's Current Super POPs, Planned
Core Super POPs, Planned Satellite POPs, Current Leased Fiber, Planned Leased
Fiber, and Planned Fiber IRUs]
<TABLE>
<S> <C>
Current Core Super
POPs Current Leased Fiber
Planned Core Super
POPs Planned Leased Fiber
Planned Satellite
POPs Planned Fiber IRUs
</TABLE>
<TABLE>
<C> <C> <S>
Capitalizing on the
Meeting the Need for Bundled Growing Demand for
Communications Services Internet Access
SMALL AND MEDIUM BUSINESSES represent a [Picture of Computer with Pac-West logo)] Pac-West provides a wide
large and fast growing segment of the range of switched local
U.S. economy. Pac-West offers these services for INTERNET
businesses complete telecommunications SERVICE PROVIDERS
outsourcing--an affordable solution with (ISPs). Our Super POP
no capital network configuration
outlay: enables ISPs to save
money and offer
customers more local
telephone numbers--
giving them an important
competitive advantage.
Our products and
services for ISPs
include:
--System design --Dial-up access with a
local call
-- --Collocation services
Equipment, installation, and maintenance
--Voice, data, and long distance --Managed modem pools
--One bill, one call, 24/7 support --Internet backbone
connection
--Subscription service with multi-year --High-speed services,
contract including DSL
--Optional upgrades to emerging state-of-
the-art equipment
[Picture of Telephone]
Single Source Communications Solutions
[Picture of People Communicating] [Picture of Woman
Talking on Telephone]
Ready for a High-Speed Future Facilitating the Growth
of Telecommuting and the
Virtual Office
Pac-West is well positioned to capitalize [Picture of Cable] More and more employees
on the growing need for greater broadband are working from their
access. We offer ISPs affordable, high- homes, from the road, or
speed DSL and other broadband services-- in decentralized
so they can offer their business and branches. They depend on
residential subscribers the speed they ENHANCED SERVICE
demand PROVIDERS (ESPs) to keep
them in touch with the
central office through
convenient, efficient
data and voice services.
Pac-West offers ESPs a
robust remote access
platform--with a local
call in their service
area:
--IP fax
--Voicemail
--Paging
--Integrated messaging
--LAN and VPN Services
</TABLE>
<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,
small and medium 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 ten 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 small and medium business customers. These customers want technologically
advanced communication solutions from a single source. Our complete product
offering of system design, equipment installation and maintenance, voice, data
and long distance services, 24/7 support, subscription services with multi-year
contracts and optional upgrades to emerging state-of-the-art equipment directly
meets the needs of this under-served market. Our focus on small and medium
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 small and medium
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 small and medium business market. We believe that most small
and medium 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 or POP throughout our coverage area.
. remote access services, including mobile or remote office, virtual
office, distance learning 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.............................. 9,100,000 shares
Common stock offered in directed share
subscription program to shareholders of
Safeguard Scientifics:
by us....................................... 2,300,000
by Safeguard Scientifics.................... 1,200,000
--------------------
Total..................................... 12,600,000 shares
Common stock to be outstanding after the
offering..................................... 33,410,094 shares
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, 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 17,587,458 shares outstanding as of June 30, 1999 and includes
the 11,400,000 shares of common stock being sold by us in this offering and the
4,422,636 shares of common stock issuable upon conversion of our outstanding
convertible redeemable preferred stock at an assumed conversion price of $11.00
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;
. 1,428,700 shares of common stock issuable upon the exercise of
outstanding options with a weighted average exercise price of $1.48 per
share as of June 30, 1999; and
. 1,721,300 shares of common stock issuable upon the exercise of options
reserved for grant under our stock option plans as of June 30, 1999.
3
<PAGE>
Directed Share Subscription Program
Concurrently with our offering to the public generally and as a part of this
offering, we are offering 2,300,000 shares of our common stock and Safeguard
Scientifics is offering 1,200,000 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 $11.00 per share, (4) reflects a 10-for-1 stock
split that was effected on March 19, 1999 and (5) reflects a 1.4-for-1 stock
split effected on October 7, 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
11,400,000 shares of common stock offered by us in this offering at an assumed
initial public offering price of $11.00 per share, after deducting the
underwriting discount and estimated offering expenses payable by us, and the
conversion of our outstanding convertible redeemable preferred stock. The pro
forma numbers give effect to the conversion of our outstanding convertible
redeemable preferred stock into 4,422,636 shares of common stock at an assumed
conversion price of $11.00 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.
Except as discussed below, we recognize revenues for telecommunications
services when service is provided. Such revenues include reciprocal
compensation due under our new interconnection agreement with Pacific Bell.
Reciprocal compensation due under our previous interconnection agreements with
Pacific Bell and GTE is recognized as revenue only to the extent received in
cash. Pacific Bell and GTE have each refused to pay us the portion of
reciprocal compensation due under the prior agreements 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.................. $ 1.00 $ 32.11 $ (0.05) $ 23.49 $ (0.09)
Basic and diluted net
income (loss) per share
....................... $ 1.00 $ 32.11 $ (0.13) $ 23.49 $ (0.09)
Basic and diluted
weighted average shares
outstanding............ 140 140 5,203 140 17,587
Pro forma basic net
income (loss) per
share.................. $ (0.10) $ 0.04
Pro forma weighted
average shares
outstanding............ 6,420 21,904
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 $154,286
Restricted cash (2)...................................... 20,066 20,066
Working capital.......................................... 44,643 160,043
Equipment, vehicles and leasehold improvements, net...... 76,010 76,010
Total assets............................................. 150,208 265,608
Total long-term debt..................................... 150,062 150,062
Convertible redeemable preferred stock, including accrued
cumulative dividends of $3,649.......................... 48,649 --
Stockholders' equity (deficit)........................... (75,634) 88,415
</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
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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, refused to pay that portion of compensation
due under their prior agreements that they estimated was the result of inbound
calls terminating to Internet service providers. 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, which became effective on June 29, 1999. Pacific Bell 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. On October 6,
1999, Pacific Bell filed an appeal in federal district court in San Francisco
with respect to the California Public Utilities Commission decision. This
decision does not address reciprocal compensation under the prior agreement. On
September 9, 1999, Pac-West entered into a settlement agreement with Pacific
Bell regarding its claims for unpaid reciprocal compensation under its prior
interconnection agreement. Under the terms of the settlement agreement, Pacific
Bell agreed to pay $20.0 million to Pac-West and $20.0 million to certain
stockholders of Pac-West as of the date of the recapitalization in settlement
of those claims. As a result of these payments, the terms of our September 1998
recapitalization requiring additional distributions to certain of our
shareholders have been satisfied. As of September 30, 1999, the total amount of
reciprocal compensation which remains withheld by incumbent local exchange
carriers is approximately $11.2 million. 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 or otherwise contest the claims of GTE California. The
obligation of GTE or other local exchange carriers to pay this reciprocal
compensation under its current agreement 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.
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.
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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.
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.
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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.
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
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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, 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.
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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 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 4,422,636 shares of common stock at an assumed
conversion price of $11.00 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 86.3% of our common stock. Following consummation of this
offering and assuming all 3,500,000 shares offered pursuant to the directed
share subscription program are purchased by shareholders of Safeguard
Scientifics, these investors will own 53.2% 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
63.7% 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."
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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.
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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 $8.35
less than the assumed $11.00 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."
Anti-takeover provisions could make a third-party acquisition of us difficult.
Our bylaws provide that, following the closing of this offering, we will
have a classified board of directors, with each board member serving a three-
year term. The existence of a classified board could make it more difficult for
a third-party to acquire us without the approval of our board even where such
acquisition could have resulted in increased value to Pac-West shareholders.
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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.
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USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of our common
stock offered by this prospectus of approximately $115.4 million, or
approximately $129.4 million if the underwriters' over-allotment option is
exercised in full. These estimates are based on an assumed initial public
offering price of $11.00 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."
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DIRECTED SHARE SUBSCRIPTION PROGRAM
As part of this offering, we are offering 2,300,000 shares and Safeguard
Scientifics is offering 1,200,000 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, directly or through its wholly-
owned subsidiary Safeguard Delaware, Inc., will purchase these shares from us
at the closing of this offering. This purchase obligation may not be
transferred to anyone else and the only condition to the purchase obligation is
the consummation of the underwritten public 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 4,422,636 shares of common stock at
an assumed conversion price of $11.00 per share, Safeguard Scientifics
beneficially owned 3,547,219 shares or approximately 10.6% of our common stock.
After this offering, Safeguard Scientifics will beneficially own 2,347,219
shares or approximately 7.0% of our common stock, assuming that all 3,500,000
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 5,847,219 shares or approximately 17.5% 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 11,400,000 shares of
common stock offered by us in this offering at an assumed initial public
offering price of $11.00 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 4,422,636 shares of common stock at an assumed conversion price of
$11.00 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 $154,286
======== ========
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, 1,750,000 shares issued and
outstanding, including accrued cumulative dividends of
$3,649, actual and no shares issued and outstanding, as
adjusted................................................ 48,649 --
Stockholders' equity (deficit):
Common stock, $0.001 par value, 50,000,000 shares
authorized, 17,587,458 shares issued and outstanding,
actual, 33,410,094 shares issued and outstanding, as
adjusted.............................................. 18 33
Additional paid-in capital............................. 6,580 170,614
Notes receivable from stockholders..................... (233) (233)
Retained earnings (deficit)............................ (81,999) (81,999)
-------- --------
Total stockholders' equity (deficit)................. (75,634) 88,415
-------- --------
Total capitalization............................... $123,191 $238,591
======== ========
</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;
. 1,428,700 shares of common stock issuable upon the exercise of
outstanding options with a weighted average exercise price of $1.48 per
share as of June 30, 1999; and
. 1,721,300 shares of common stock issuable upon the exercise of options
reserved for grant under our stock option plans as of June 30, 1999.
18
<PAGE>
DILUTION
Our net tangible book value (deficit) as of June 30, 1999 was $(75,634,000)
or $(4.30) 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.
Our unaudited pro forma net tangible book value (deficit) on June 30, 1999
was approximately $(26,985,000) or $(1.23) per share of common stock. Pro forma
net tangible book value (deficit) is total assets minus the sum of liabilities
and intangible assets. Pro forma net tangible book value (deficit) per share is
net tangible book value divided by the total number of shares outstanding
before the offering and after giving effect to the conversion of all
outstanding shares of our convertible redeemable preferred stock upon the
closing of this offering.
After giving effect to adjustments relating to the offering, our unaudited
pro forma as adjusted net tangible book value on June 30, 1999 would have been
$88,415,000 or $2.65 per share. The adjustments made to determine pro forma as
adjusted 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 $11.00 per share; and
. the addition of the number of shares offered by this prospectus to the
number of common shares outstanding.
The following illustrates the pro forma increase in net tangible book value
of $3.88 per share and the dilution (the difference between the offering price
per share and net tangible book value per share) to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $11.00
Pro forma net tangible book value (deficit) per share as of
June 30, 1999............................................... $(1.23)
Increase per share attributable to the offering.............. 3.88
------
Pro forma as adjusted net tangible book value per share after
giving effect to the offering............................... 2.65
------
Dilution per share to new investors.......................... $ 8.35
======
</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 $11.00 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 22,010,094 65.9% $ 41,908,000 25.0% $ 1.90
New investors................. 11,400,000 34.1 125,400,000 75.0 11.00
---------- ----- ------------ -----
Total..................... 33,410,094 100.0% $167,308,000 100.0%
========== ===== ============ =====
</TABLE>
The calculations above exclude from the number of outstanding shares of
common stock:
. any shares of common stock to be issued pursuant to the underwriters'
over-allotment option;
. 1,428,700 shares of common stock issuable upon the exercise of
outstanding options with a weighted average exercise price of $1.48 per
share as of June 30, 1999; and
. 1,721,300 shares of common stock issuable upon the exercise of options
reserved for grant under our stock option plans as of June 30, 1999.
In addition, the calculations above assume the 2,300,000 shares offered by
us pursuant to the directed share subscription program are purchased by the
shareholders of Safeguard Scientifics and exclude 1,200,000 shares offered by
Safeguard Scientifics to its shareholders, for which no proceeds will be
received by us.
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
11,400,000 shares of common stock offered by us in this offering at an assumed
initial public offering price of $11.00 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
4,422,636 shares of common stock at an assumed conversion price of $11.00 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.
Except as discussed below, we recognize revenues for telecommunications
services when service is provided. Such revenues include reciprocal
compensation due under our new interconnection agreement with Pacific Bell.
Reciprocal compensation due under our previous interconnection agreements with
Pacific Bell and GTE is recognized as revenue only to the extent received in
cash. Pacific Bell and GTE have each refused to pay the portion of reciprocal
compensation due under the prior agreements 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................... $ 1.00 $ 32.11 $ (0.05) $ 23.49 $ (0.09)
Basic and diluted net
income (loss) per share. $ 1.00 $ 32.11 $ (0.13) $ 23.49 $ (0.09)
Basic and diluted
weighted average shares
outstanding............. 140 140 5,203 140 17,587
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,
small and medium 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 small and medium 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 Pac-West, 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. As of June 30, 1999, two incumbent local
exchange carriers with which we have interconnection agreements, Pacific Bell
and GTE, refused to pay that portion of reciprocal compensation due under their
prior agreement that they estimated was the result of inbound calls terminating
to Internet service providers. These incumbent local exchange carriers
contended that such Internet service provider calls are not local calls within
the meaning of their respective interconnection agreements and claimed that no
reciprocal compensation was 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 September 9, 1999, the Company entered
into a settlement agreement with Pacific Bell regarding its claims for unpaid
reciprocal compensation under its prior interconnection agreement. Under the
terms of the settlement agreement, Pacific Bell agreed to pay $20.0 million to
the Company and $20.0 million to certain stockholders of Pac-West as of the
date of the recapitalization in settlement of those claims. As a result of
these payments, the terms of our September 1998 recapitalization requiring
additional distributions to certain of our shareholders have been satisfied. As
of September 30, 1999, the total amount of reciprocal compensation which
remains withheld by incumbent local exchange carriers is approximately $11.2
million.
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 paid the full amount of our
billings for calls since the effective date of the new agreement. On August 25,
1999, we, along with the commissioners of the California Public Utility
Commission
22
<PAGE>
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 or otherwise contest the claims of GTE California.
The obligation of GTE or other local exchange carriers to pay this reciprocal
compensation under its current agreement is currently under review by both
state and federal regulators. 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 additional switch capacities, and increased utilization
of our expanded switch capacities, primarily attributable to Internet service
provider customers. In addition, new service orders from small and medium
businesses have continued to accelerate 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 in the first half of 1999 over the same period in 1998 to 60,401
lines in service by Internet service providers at June 30, 1999, from 28,108
lines in service at June 30, 1998.
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 our communications 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. Our total number of our employees increased 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 small and medium
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% in 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 was $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,
small and medium 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 small and medium 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 small and medium 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 small and medium
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 presently cover
approximately 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 $27.2 billion in local
exchange and long distance revenues in 1997 and currently has 1,176 Internet
service providers, over 600,000 small and medium businesses and about 8.4
million total business lines. We are expanding our network into Nevada with a
switch in Las Vegas and digital connections in all of Nevada's local access and
transport areas. We expect to have ten switches with operations in ten western
states, including California, Nevada, Arizona, Washington, Colorado, Texas,
Utah, Idaho, New Mexico and Oregon, by the end of 2000. We believe that the use
of communications services is rapidly expanding in each of these areas and that
we will be able to effectively use our experience in California and our
customer relationships to enter these markets.
33
<PAGE>
The following table sets forth certain information regarding the markets in
which Pac-West currently operates and our anticipated geographic network
buildouts. Internet service providers are often present in more than one state
and are therefore included in the total for each such state. Small and medium
businesses are defined as businesses with fewer than 100 employees. The
following information is taken from the electronic publication "Boardwatch.com"
and publications issued by the FCC and United States Small Business
Administration.
<TABLE>
<CAPTION>
1997 Telecommunications Revenues
1999 Target Customer Base ($ Millions)
--------------------------------------- --------------------------------------
Number of Number of
Services Internet Small & Total Local Local Long
Launch Service Medium 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 small and
medium 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, small and medium 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. We currently aggregate and
concentrate all of our network traffic into our high volume switching sites
called Super POPs. 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
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and 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 ten 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."
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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 small and medium 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 small and medium business market. We believe that small and
medium 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
small and medium businesses by offering a complete product offering of system
design, equipment installation and maintenance, voice, data and long distance
services, 24/7 support, subscription services with multi-year contracts, and
optional upgrades to emerging state-of-the-art equipment. 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.
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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
or POP throughout our coverage area.
. remote access services, including mobile or remote office, virtual
office, distance learning and training, and telecommuting. These services
include Internet protocol fax, voice mail, paging, integrated messaging,
and local area network and virtual private network, or VPN, services.
This allows 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.
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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, small and medium 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.
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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 small and medium business customers include regional banks, alarm
companies, universities, healthcare providers, real estate agencies, law firms
and others including Bank of Stockton, Bay Alarm, Coldwell Banker GRUPE and
Re/Max of Modesto.
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 services 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, and 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.
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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.
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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
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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. On September 15, 1999, the FCC adopted a decision in response to the
Supreme Court's remand. While the text of the decision has not been released,
information provided by the FCC indicates that the FCC concluded that seven of
eight previously identified network elements must be unbundled. The FCC deleted
access to operator and directory assistance service and determined that in the
most dense areas of the top 50 metropolitan areas in certain circumstances
local switching need not be unbundled.
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.
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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.
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
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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. 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
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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 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-two states have issued decisions either initially or on
reconsideration of existing decisions. In twenty 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 and
South Carolina are the only states 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 are 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
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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.
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 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.
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. 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 and on October 6, 1999, filed an appeal in
federal district court in San Francisco with respect to this decision although
they have paid the full amount of our billings for calls after the effective
date of the new agreement.
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
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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 incumbent local exchange carriers with which we have
interconnection agreements, Pacific Bell and GTE, refused to pay that portion
of reciprocal compensation due under their prior agreement that they estimated
was 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 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.
On September 9, 1999, Pac-West entered into a settlement agreement with
Pacific Bell regarding its claims for unpaid reciprocal compensation under its
prior interconnection agreement. Under the terms of the settlement agreement,
Pacific Bell agreed to pay $20.0 million to Pac-West and $20.0 million to
certain stockholders of Pac-West as of the date of the recapitalization in
settlement of those claims. As a result of these payments, the terms of our
September 1998 recapitalization requiring additional distributions to certain
of our shareholders have been satisfied. As of September 30, 1999, the total
amount of reciprocal compensation which remains withheld by incumbent local
exchange carriers is approximately $11.2 million. 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 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 or otherwise contest
the claims of GTE California. We cannot predict the outcome of
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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 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 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 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-two states have
issued decisions either initially or on reconsideration of existing decisions.
In twenty 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 and South Carolina 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, Oklahoma 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 and Arkansas
dismissed appeals on the grounds that the state commissions were 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 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
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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 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
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 September 3, 1999, the California Public Utilities Commission
released a 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 decision
defers the resolution of intercarrier compensation issues in such circumstances
to further evidentiary proceedings. 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."
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 main issues:
(1) the jurisdiction of calls placed to Internet service providers;
(2) reciprocal compensation rates; and
(3) term of the agreement.
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, which became
effective on June 29, 1999. Pacific Bell 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. On October 6, 1999, Pacific Bell
filed an appeal in federal district court in San Francisco with respect to the
California Public Utilities Commission decision. This decision does not address
reciprocal compensation under the prior agreement. A determination by the
California Public Utilities Commission or the federal court that determines
that such calls are not entitled to reciprocal compensation could result in a
significant loss of revenue to us.
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
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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 September 2, 1999, Nevada Bell appealed the
decision of the Public Utilities Commission of Nevada to the U.S. District
Court in Nevada. We intend to defend the validity of the decision before the
court.
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.
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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.
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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.
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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
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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.
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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."
Classes of the Board
Following the closing of this offering, our Board of Directors will be
divided into three classes of directors, with each class serving staggered
three-year terms. As a result, approximately one-third of our Board of
Directors will be elected each year. Within ten days of the consummation of
this offering, the sitting directors will select by either a random selection
process or by mutual agreement to divide themselves into three groups. See
"Description of Capital Stock--Certain Anti-Takeover, Limited Liability and
Indemnification Provisions."
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,
David G. Chandler, Mark J. DeNino and Samuel A. Plum. The compensation
committee consists of Samuel A. Plum, Mark J. DeNino, Dr. Jagdish N. Sheth and
Mark S. Fowler. The audit committee consists of David G. Chandler, Dr. Jagdish
N. Sheth and Mark S. Fowler.
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
35,000 shares of our common stock at a strike price of $2.14. 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>
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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
3,150,000 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. For the six month period ended June
30, 1999, options to purchase 469,000 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 1,428,700 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...... 350,000 61.5% $0.48 09/16/2008 105,000 267,000
Richard E. Bryson....... 218,750 38.5% $0.48 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.
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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 525,000 shares of common stock for an aggregate purchase price of
$250,000 and Mr. Bryson purchased 87,458 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 350,000 shares and 218,750 shares, respectively, of common
stock at a purchase price of $0.48 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
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(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."
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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,
112,553 shares of convertible redeemable preferred stock and 1,069,320 shares
of common stock and Bay Alarm Company received $57.4 million in cash, 399,053
shares of convertible redeemable preferred stock and 3,791,060 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.
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<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. On September 9, 1999, Pac-
West entered into a settlement agreement with Pacific Bell regarding its claims
for unpaid reciprocal compensation under its prior interconnection agreement.
Under the terms of the settlement agreement, Pacific Bell agreed to pay $20.0
million to Pac-West and $20.0 million to certain stockholders of Pac-West as of
the date of the recapitalization in settlement of those claims. As a result of
these payments, the terms of our September 1998 recapitalization requiring
additional distributions to certain of our shareholders have been satisfied. As
of September 30, 1999, the total amount of reciprocal compensation which
remains withheld by incumbent local exchange carriers is approximately $11.2
million. 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 or 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."
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.
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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
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<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.
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<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, Mr. La Rue has transferred 178,220 shares of common
stock to Mr. Mills. Subsequently, Mr. Mills transferred 178,220 shares of
common stock to John K. La Rue as trustee of an irrevocable trust.
In accordance with the terms of the Stock Transfer Agreement, dated
September 24, 1999, between Wallace W. Griffin and the Griffin Family Limited
Partnership, L.L.P., Mr. Griffin has transferred 280,000 shares of common stock
to the Griffin Family Limited Partnership, L.L.P.
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<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 June 30, 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) 2,006,340 shares of common stock held by TL Ventures III L.P., located
at the address shown below;
(b) 420,000 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) 65,520 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 4,422,636 shares of common stock at
an assumed conversion price of $11.00 per share.
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, L.P.
Since June 30, 1999, Jason R. Mills transferred 178,220 shares of common
stock to John K. La Rue as trustee of an irrevocable trust.
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>
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<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>
Percent
Shares Beneficially Beneficially
Owned Owned
------------------- -----------------
Before After
Beneficial Owner Number Offering Offering
---------------- ------------------- -------- --------
<S> <C> <C> <C>
Significant Stockholders:
Bay Alarm Company...................... 4,799,556 21.8% 14.4%
925 Ygnacio Valley Road
Walnut Creek, CA 94596
SCP Private Equity Partners, L.P....... 3,547,219 16.1 10.6
435 Devon Park Drive, Building 300
Wayne, PA 19087
William Blair Capital Partners VI,
L.P................................... 3,547,219 16.1 10.6
222 West Adams Street
Chicago, IL 60606
Safeguard 98 Capital, L.P. and related
entities.............................. 3,547,219 16.1 10.6
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
TL Ventures III L.P. and related equity
investors............................. 3,164,762 14.4 9.5
700 Building
435 Devon Park Drive
Wayne, PA 19087-1990
Directors and Named Executive Officers:
Richard E. Bryson...................... 87,458 0.4 0.3
David G. Chandler...................... 3,547,219 16.1 10.6
Mark J. DeNino......................... 3,164,762 14.4 9.5
Wallace W. Griffin..................... 875,000 3.9 2.6
John K. La Rue......................... 640,886 2.9 1.9
Jason R. Mills......................... 178,220 0.8 0.5
Samuel A. Plum......................... 3,547,219 16.1 10.6
Bruce A. Westphal...................... 4,799,556 21.8 14.4
All of Pac-West's directors and executive
officers as a group (18 persons)........ 16,840,320 76.5 50.4
</TABLE>
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<PAGE>
Selling Shareholder
Safeguard Scientifics may sell up to 1,200,000 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 4,422,636 shares of
common stock at an assumed conversion price of $11.00 per share, Safeguard
Scientifics will own 2,347,219 shares or approximately 7.0% 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 Scientifics purchases all of the shares offered by us in
the directed share subscription program, Safeguard Scientifics will
beneficially own 5,847,219 shares or approximately 17.5% of our common stock
after completion of this offering.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General Matters
The total amount of our authorized capital stock consists of 50,000,000
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 1,750,000 shares of convertible redeemable
preferred stock outstanding will be converted into common stock and
33,410,094 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 closing 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, $25.72, plus an amount
which accrues on a daily basis at a rate of 10% per annum on the original cost
of such shares, $25.72, 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 closing 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 closing 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.
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<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.
Certain Anti-Takeover, Limited Liability and Indemnification Provisions
Classified Board of Directors
Our bylaws provide that, following the closing of this offering, our Board
of Directors will be divided into three classes of directors, with each class
serving staggered three-year terms. As a result, approximately one-third of our
Board of Directors will be elected each year. The classified board provision
will help ensure the continuity and stability of our Board of Directors and our
business strategies and policies as determined by our Board of Directors. The
classified board provision could have the effect of discouraging a third party
from making an unsolicited tender offer or otherwise attempting to obtain
control of us without the approval of our Board of Directors even where such
acquisition could have resulted in increased value to Pac-West shareholders. In
addition, the classified board provision could delay shareholders who do not
like the policies of our Board of Directors from electing a majority of our
Board of Directors for two years.
No Shareholder Action by Written Consent: Board Vacancies
Our bylaws provide that shareholders may not vote by written consent in lieu
of a meeting to fill a vacancy on the Board of Directors.
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 First Union
National Bank.
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<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
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<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.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately following this offering, there will be 33,410,094 shares of our
common stock issued and outstanding. Of these shares, the 12,600,000 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
20,810,094 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
We expect to obtain from each of our directors, executive officers, and our
shareholders agreements to the effect that, subject to limited exceptions, such
directors, executive officers and shareholders will not 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, except Safeguard 98 Capital, L.P.
may, pursuant to the terms of a long term incentive plan, transfer
approximately 10% of its pre-offering holdings to Safeguard Scientifics'
employees, who will not be subject to a lock-up agreement.
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.
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<PAGE>
UNDERWRITING
Of the 12,600,000 shares of our common stock offered by this prospectus, we
are offering 9,100,000 shares to the public generally in an underwritten public
offering and 2,300,000 shares to the shareholders of one of our shareholders,
Safeguard Scientifics, and Safeguard Scientifics is offering up to 1,200,000
shares to its shareholders 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 Securities, Inc., 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 9,100,000 shares of common stock being purchased
by the underwriters does not include the 2,300,000 shares of common stock being
offered by us and the 1,200,000 shares of our common stock being offered by
Safeguard Scientifics to its shareholders 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 Securities, Inc....................................
---------
Total...................................................... 9,100,000
=========
</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 1,365,000 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
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<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.
We expect to obtain from each of our directors and executive officers and
our shareholders agreements to the effect that, subject to limited exceptions,
such directors, executive officers and shareholders will not 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, except
Safeguard 98 Capital, L.P. may, pursuant to the terms of a long term incentive
plan, transfer approximately 10% of its pre-offering holdings to Safeguard
Scientifics' employees, who will not be subject to a lock-up agreement.
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 1,365,000 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 1.4% of
our common stock, which was acquired in the recapitalization of Pac-West on
September 16, 1998. Banc of America Securities LLC and First Union Securities,
Inc. 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>
Directed Share Subscription Program
As part of this offering, we are offering 2,300,000 shares and Safeguard
Scientifics is offering up to 1,200,000 shares of our common stock beneficially
owned by it 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 has not participated in any discussions or negotiations with
the Company and the underwriters regarding the initial public offering price.
Safeguard will not have any right to seek indemnification from Pac-West
regarding its agreement to accept underwriter liability with respect to the
shares included in the directed share subscription program.
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, directly or through its wholly-
owned subsidiary Safeguard Delaware, Inc., will purchase these shares from us
at the closing of this offering. This purchase obligation may not be
transferred to anyone else and the only condition to the purchase obligation is
the consummation of the underwritten public offering. Although these shares
will have been 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 not to offer, sell or otherwise dispose of any shares of our common
stock purchased by it in the directed share subscription program for a period
of 180 days after the date of this prospectus. 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.
74
<PAGE>
Prior to this offering, Safeguard Scientifics beneficially owned 3,547,218
shares or approximately 10.6% of our common stock. After this offering,
Safeguard Scientifics will beneficially own 2,347,219 shares or approximately
7.0% 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 5,847,219
shares or approximately 17.5% 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 the underwriters, are estimated at
$ and are payable by us. The following table details these expenses. All
amounts shown are estimates, with the exception of the Securities and Exchange
Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $
NASD filing fee..................................................
Offering agent fees..............................................
Miscellaneous....................................................
--------
Total........................................................ $
========
</TABLE>
The total expenses for the offering, including the expenses associated with
the underwritten public offering, are estimated at $ .
LEGAL MATTERS
The validity of the common stock offered in this prospectus will be passed
upon on behalf of Pac-West by Neumiller & Beardslee, Stockton, California 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."
75
<PAGE>
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 Notes 12 and
13 for which the dates
are March 19, 1999 and
October 7, 1999,
respectively
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; 1,750,000
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--140,000........ 4,037,000 0
December 31, 1998, $0.001 par value:
Authorized shares--50,000,000
Issued and outstanding shares--17,587,458..... 0 18,000
Additional paid-in capital........................ 0 8,905,000
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.................. $ 1.00 $ 32.11 $ (0.05)
========== =========== ===========
Basic and diluted net
income (loss) per
share.................. $ 1.00 $ 32.11 $ (0.13)
========== =========== ===========
Basic and diluted
weighted average shares
outstanding............ 140,000 140,000 5,203,150
========== =========== ===========
</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).............. 140,000 4,037,000 0 0 0 4,037,000
---------- ----------- ----------- --------- ------------ ------------
Balance, October 1,
1996................... 140,000 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................... 140,000 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................... 140,000 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).............. 7,176,988 7,000 1,193,000 0 (86,771,000) (85,571,000)
Issuance of common
stock................. 9,658,012 10,000 4,708,000 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...... 612,458 1,000 291,000 (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................... 17,587,458 $ 18,000 $ 8,905,000 $(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.
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>
The largest supplier is also the largest ILEC, as shown above in the
concentration of revenues. See Note 8 for revenues from related parties.
F-11
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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 568,750 shares of the Company's
common stock. The exercise price of these options of $0.48 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 $0.06 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 $25.72 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 $0.757
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 525,000 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 87,458
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 3,150,000 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.
13. 1.4-for-1 Stock Split:
On October 7, 1999, the board of directors authorized a 1.4-for-1 split of
the Company's outstanding common stock and Preferred Stock. All share and per
share data have been restated to reflect the 1.4-for-1 split. In addition, on
October 7, 1999, the board of directors approved a resolution to increase the
authorized shares of common stock to 50,000,000 shares.
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; 1,750,000 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, 50,000,000 shares authorized
and 17,587,458 shares issued and outstanding.................. 18,000
Additional paid-in capital..................................... 6,580,000
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.................. $ 9.26 $ (0.06) $ 23.49 $ (0.09)
========== =========== =========== ===========
Basic and diluted
weighted average shares
outstanding............ 140,000 17,587,458 140,000 17,587,458
========== =========== =========== ===========
</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:
Stock Splits
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.
On October 7, 1999, the board of directors authorized a 1.4-for-1 split of
the Company's outstanding common and Preferred Stock. In addition, on October
7, 1999, the board of directors approved a resolution to increase the
authorized shares of common stock to 50,000,000 shares. All share and per share
data have been restated to reflect these stock splits.
Convertible Redeemable Preferred Stock
The Preferred Stock has preference over common stock in liquidation equal to
the liquidation value of $25.72 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 $2.085 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 3,150,000 shares of common stock have been reserved for
option grants. Options to purchase 873,250 shares of common stock were granted
and options to purchase 13,300 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>
568,750 9.3 $0.48 350,000 $0.48
859,950 9.7 $2.14 -- --
--------- -------
1,428,700 9.5 $1.48 350,000 $0.48
========= =======
</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 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.
On September 9, 1999, the Company entered into a settlement agreement with
Pacific Bell regarding its claims for unpaid reciprocal compensation under
their prior interconnection agreement. Under the terms of the settlement
agreement, Pacific Bell agreed to pay $20.0 million to the Company and $20.0
million to certain stockholders of the Company as of the date of the
recapitalization in settlement of those claims. As a result of these payments,
the terms of our September 1998 recapitalization requiring additional
distributions to certain of our shareholders have been satisfied.
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>
Our Diversified Customer Base
Pac-West has relationships with Internet Service Providers and Enhanced Service
Providers, as well as a growing roster of small and medium business customers.
<TABLE>
<S> <C>
One Main.com
logo jfax.com logo
concentric
network logo Splitrock logo
The Grid.com
logo REMAX of Modesto logo
Coldwell Banker
GRUPE logo EarthLink logo
Bank of Stockton logo
MindSpring logo frontier Global Center logo
</TABLE>
<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............................................................. 75
Experts................................................................... 76
Where You Can Find More Information....................................... 76
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[PAC WEST TELECOMM, INC. LOGO]
12,600,000 Shares
Common Stock
---------------
PROSPECTUS
---------------
Bear, Stearns & Co. Inc.
Banc of America Securities LLC
First Union Securities, Inc.
, 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........... $ 46,588
NASD filing fee............................................... 17,258
Nasdaq National Market original listing fee................... 75,000
Blue Sky fees and expenses (including attorneys' fees and
expenses).................................................... 15,000
Printing expenses............................................. 250,000
Accounting fees and expenses.................................. 300,000
Transfer agent's fees and expenses............................ 25,000
Legal fees and expenses....................................... 450,000
Miscellaneous expenses........................................ 71,154
----------
Total..................................................... $1,250,000
==========
</TABLE>
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 and 1.4 for 1 stock split on October 7, 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 112,553 shares of convertible redeemable preferred stock and
1,069,320 shares of common stock, and 399,053 shares of convertible redeemable
preferred stock and 3,791,060 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 298,438 shares of convertible
redeemable preferred stock and 465,500 shares of common stock in exchange
for its interests in PWT Acquisition Corp. and purchased 2,327,500 shares
of common stock for a total purchase price of $1,136,900.
. William Blair Capital Partners VI, L.P. acquired 298,438 shares of
convertible redeemable preferred stock and 465,500 shares of common stock
in exchange for its interests in PWT Acquisition Corp. and purchased
2,327,500 shares of common stock for a total purchase price of
$1,136,900.
. Safeguard 98 Capital, L.P. acquired 298,438 shares of convertible
redeemable preferred stock and 465,500 shares of common stock in exchange
for its interests in PWT Acquisition Corp. and purchased 2,327,500 shares
of common stock for a total purchase price of $1,136,900.
. TL Ventures III L.P. acquired 214,386 shares of convertible redeemable
preferred stock and 334,390 shares of common stock in exchange for its
interests in PWT Acquisition Corp. and purchased 1,671,950 shares of
common stock for a total purchase price of $816,686.67.
. TL Ventures III Offshore L.P. acquired 44,876 shares of convertible
redeemable preferred stock and 70,000 shares of common stock in exchange
for its interests in PWT Acquisition Corp. and purchased 350,000 shares
of common stock for a total purchase price of $170,957.50.
. TL Ventures III Interfund L.P. acquired 7,000 shares of convertible
redeemable preferred stock and 10,920 shares of common stock in exchange
for its interests in PWT Acquisition Corp. and purchased 54,600 shares of
common stock for a total purchase price of $26,670.00.
. EnerTech Capital Partners, L.P. acquired 32,176 shares of convertible
redeemable preferred stock and 50,190 shares of common stock in exchange
for its interests in PWT Acquisition Corp. and purchased 250,950 shares
of common stock for a total purchase price of $122,585.83.
. BankAmerica Investment Corporation acquired 26,415 shares of convertible
redeemable preferred stock and 41,179 shares of common stock in exchange
for its interest in PWT Acquisition Corp. and purchased 205,893 shares of
common stock for a total purchase price of $100,626.67.
. MIG Partners VII acquired 6,603 shares of convertible redeemable
preferred stock and 10,295 shares of common stock in exchange for its
interests in PWT Acquisition Corp. and purchased 51,473 shares of common
stock for a total purchase price of $25,156.67.
. Segal Holdings, Inc. received 11,623 shares of convertible redeemable
preferred stock and 18,130 shares of common stock in consideration for
services rendered and purchased 90,650 shares of common stock for a total
purchase price of $44,273.33.
. Skibo Family Limited Partnership received 525,000 shares of common stock
in consideration for a release.
On September 16, 1998, Pac-West sold 525,000 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 87,458
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 Securities, Inc.
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 Neumiller & Beardslee 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 Neumiller & Beardslee (included in Exhibit
5.1).
*24.1 Powers of Attorney (included on the signature page to
original filing).
27.1 Financial Data Schedule.
99.1 Prospectus Wrap 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>
- --------
* Previously filed.
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
99.4 Form of Letter from Pac-West to Safeguard Scientifics
shareholders describing the directed share subscription
program.
99.5 Form of Stock Purchase Agreement for the directed share
subscription program.
</TABLE>
(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 amendment No. 1 to the 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 October 8, 1999.
PAC-WEST TELECOMM, INC.
/s/ Richard E. Bryson
By: _________________________________
Richard E. Bryson
Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment No. 1 to the 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>
*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
*Dennis V. Meyer Vice President--Finance and Treasurer
___________________________________________ (Principal Accounting Officer)
Dennis V. Meyer
*Jerry L. Johnson Chairman of the Board of Directors
___________________________________________
Jerry L. Johnson
*John K. La Rue Director and Executive Vice President--
___________________________________________ Technology and Network Operations
John K. La Rue
*David G. Chandler Director
___________________________________________
David G. Chandler
*Mark J. DeNino Director
___________________________________________
Mark J. DeNino
*Mark S. Fowler Director
___________________________________________
Mark S. Fowler
*Samuel A. Plum Director
___________________________________________
Samuel A. Plum
*Dr. Jagdish N. Sheth Director
___________________________________________
Dr. Jagdish N. Sheth
*Bruce A. Westphal Director
___________________________________________
Bruce A. Westphal
</TABLE>
/s/ Richard E. Bryson
*By: ___________________________
Richard E. Bryson
Attorney-in-fact
II-8
<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 Securities, Inc.
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 Neumiller & Beardslee 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 Neumiller & Beardslee (included in Exhibit
5.1).
*24.1 Powers of Attorney (included on the signature page to
original filing).
27.1 Financial Data Schedule.
99.1 Prospectus describing the directed share subscription
agreement.
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.
99.4 Form of Letter from Pac-West to Safeguard Scientifics
shareholders describing the directed share subscription
program.
99.5 Form of Stock Purchase Agreement for the directed share
subscription program.
</TABLE>
- --------
* Previously filed.
<PAGE>
Exhibit 1.1
_________ Shares of Common Stock
PAC-WEST TELECOMM, INC.
UNDERWRITING AGREEMENT
----------------------
___________, 1999
BEAR, STEARNS & CO. INC.
BANC OF AMERICA SECURITIES LLC
FIRST UNION CAPITAL MARKETS CORP.
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
Pac-West Telecomm, Inc., a corporation organized and existing under
the laws of California (the "Company"), proposes, subject to the terms and
conditions stated herein, to issue and sell to the several underwriters named in
Schedule I hereto (the "Underwriters") an aggregate of ________ shares (the
"Firm Shares") of its common stock, par value $.001 per share (the "Common
Stock") and, for the sole purpose of covering over-allotments in connection with
the sale of the Firm Shares, at the option of the Underwriters, up to an
additional ______ shares (the "Additional Shares") of Common Stock. The Firm
Shares and any Additional Shares purchased by the Underwriters are referred to
herein as the "Underwritten Shares." The Underwritten Shares are more fully
described in the Registration Statement referred to below.
It is understood that certain shareholders of Safeguard Scientifics,
Inc. ("Safeguard"), an affiliate of one of the Company's principal shareholders,
Safeguard 98 Capital, L.P., are concurrently subscribing with the Company to
purchase up to an aggregate of _______ shares of Common Stock, _____ of which
will be newly issued shares of Common Stock (the "Primary DSSP Shares") and, to
the extent necessary to satisfy all purchases under the program, up to _____ of
which will be shares of Common Stock held by Safeguard 98 Capital, L.P. (the
"Secondary DSSP Shares" and, collectively with the Primary DSSP Securities, the
"DSSP Shares") pursuant to a directed share subscription program (the "Directed
Share Subscription Program"). The Underwritten Shares and the DSSP Shares are
hereinafter collectively called the "Shares." Only Safeguard shareholders
owning at least 100 shares of common stock of Safeguard as of September 7, 1999
are eligible to participate in the Directed Share Subscription Program. These
shareholders may subscribe for one share of the DSSP Shares for every ten
<PAGE>
shares of common stock of Safeguard held by them and may not transfer their
subscription rights to another person. The purchase price for each share of the
DSSP Shares will equal the public offering price per share of Common Stock of
the Company set forth on the cover page of the DSSP Prospectus (as defined).
Payments and deliveries of DSSP Shares under the Directed Share Subscription
Program will occur on the Closing Date (as defined). If any of the Primary DSSP
Shares are not purchased by shareholders of Safeguard, then Safeguard or its
designee will purchase those shares pursuant to a stand-by stock subscription
and indemnity agreement between Safeguard, Safeguard 98 Capital, L.P., Bear,
Stearns & Co. Inc. and the Company of even date herewith (the "Standby
Subscription Agreement").
Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriters that:
The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (No. 333-86607) covering
the registration of the Shares under the Securities Act of 1933, as amended (the
"Act"), including the related preliminary prospectus or prospectuses. Promptly
after execution and delivery of this Agreement, the Company will either (i)
prepare and file a prospectus in accordance with the provisions of Rule 430A of
the rules and regulations of the Commission under the Act and Rule 424(b) of the
rules and regulations of the Commission under the Act (the "Regulations") or
(ii) if the Company has elected to rely upon Rule 434 of the Regulations,
prepare and file a term sheet in accordance with the provisions of Rule 434 and
Rule 424(b). Two forms of prospectus are to be used in connection with the
offering and sale of the Shares: (i) a form relating to the Underwritten Shares
(the "Form of Primary Prospectus") and (ii) a form relating to the DSSP Shares
(the "Form of DSSP Prospectus"). The Form of DSSP Prospectus is identical to
the Form of Primary Prospectus except that a letter to the shareholders of
Safeguard Scientifics, Inc. detailing the procedures for the Directed Share
Subscription Program will be bound to the cover of the prospectus to be used in
that program. The information included in any such prospectus or in any such
term sheet, as the case may be, that was omitted from such registration
statement at the time it became effective but that is deemed to be part of such
registration statement at the time it became effective (i) pursuant to paragraph
(b) of Rule 430A is referred to as "Rule 430A Information" or (ii) pursuant to
paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form
of Primary Prospectus and Form of DSSP Prospectus used before such registration
statement became effective, and any prospectus that omitted, as applicable, the
Rule 430A Information or the Rule 434 Information, that was used after such
effectiveness and prior to the execution and delivery of this Agreement, is
herein called a "preliminary prospectus." Such registration statement,
including the prospectuses, financial statements and schedules, exhibits and all
other documents filed as a part thereof, as amended at the time of effectiveness
of the registration statement and including the Rule 430A Information and the
Rule 434 Information, as applicable, is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the
1933 Act Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final Form of Prospectus
and Form of DSSP Prospectus in the forms first furnished to the Underwriters for
use in connection with the offering of the Securities or used in the Directed
Share Purchase Program are herein called the
2
<PAGE>
"Primary Prospectus" and the "DSSP Prospectus," respectively, and collectively,
the "Prospectus."
At the time of the effectiveness of the Registration Statement or
the effectiveness of any post-effective amendment to the Registration Statement,
when the Prospectus is first filed with the Commission pursuant to Rule 424(b)
or Rule 434 of the Regulations, when any supplement to or amendment of the
Prospectus is filed with the Commission, when any document filed under the
Securities and Exchange Act of 1934 (the "Exchange Act") is filed and at the
Closing Date and the Additional Closing Date, if any, (as hereinafter
respectively defined), the Registration Statement and the Prospectus and any
amendments thereof and supplements thereto complied or will comply in all
material respects with the applicable provisions of the Act and the Regulations
and do not or will not contain an untrue statement of a material fact and do not
or will not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein (i) in the case of the
Registration Statement, not misleading and (ii) in the case of the Prospectus,
in light of the circumstances under which they were made, not misleading. When
any related preliminary prospectus was first filed with the Commission (whether
filed as part of the registration statement for the registration of the Shares
or any amendment thereto or pursuant to Rule 424(a) of the Regulations) and when
any amendment thereof or supplement thereto was first filed with the Commission,
such preliminary prospectus and any amendments thereof and supplements thereto
complied in all material respects with the applicable provisions of the Act and
the Regulations and did not contain an untrue statement of a material fact and
did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein in light of the circumstances
under which they were made not misleading. No representation and warranty is
made in this subsection (b), however, with respect to any information contained
in or omitted from the Registration Statement or the Prospectus or any related
preliminary prospectus or any amendment thereof or supplement thereto in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through you as herein stated
expressly for use in connection with the preparation thereof. If Rule 434 is
used, the Company will comply with the requirements of Rule 434.
Arthur Andersen LLP, who have certified the financial statements
and supporting schedules included in the Registration Statement, are independent
public accountants as required by the Act and the Regulations.
Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set forth in
the Registration Statement and the Prospectus, (i) there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or other) or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, and since the date of the
latest balance sheet presented in the Registration Statement and the Prospectus,
(ii) the Company has not incurred or undertaken any liabilities or obligations,
direct or contingent, which are material to the Company, except for liabilities
or obligations which are reflected in the Registration Statement and the
Prospectus, (iii) the Company has not issued or granted any securities, (iv)
the Company
3
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has not entered into any material transaction not in the ordinary course of
business and (v) the Company has not declared any dividends on its capital
stock.
Each of this Agreement and the Standby Subscription Agreement and
any other agreement relating to the Directed Share Subscription Program, and the
transactions contemplated herein and therein have been duly and validly
authorized by the Company, and this Agreement and the Standby Subscription
Agreement and any other agreement relating to the Directed Share Subscription
Program has been duly and validly executed and delivered by the Company.
The execution, delivery, and performance of this Agreement and
the Standby Subscription Agreement and any other agreement relating to the
Directed Share Subscription Program, and the consummation of the transactions
contemplated hereby and thereby do not and will not (i) conflict with or result
in a breach of any of the terms and provisions of, or constitute a default (or
an event which with notice or lapse of time, or both, would constitute a
default) under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company pursuant to, any
agreement, instrument, franchise, license or permit to which the Company is a
party or by which the Company or its properties or assets may be bound or (ii)
violate or conflict with any provision of the certificate of incorporation or
by-laws of the Company or any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its properties or assets
(including, without limitation, the Telecommunications Act of 1996, the Federal
Communications Commission (the "FCC") and any similar state or local regulations
or regulatory agencies). No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any court or
any public, governmental or regulatory agency or body (including, without
limitation, the FCC and any similar state and local regulatory agency) having
jurisdiction over the Company or any of its properties or assets is required for
the execution, delivery and performance of this Agreement, and the Standby
Subscription Agreement, any other agreement relating to the Directed Share
Subscription Program, or the consummation of the transactions contemplated
hereby or thereby, including the issuance, sale and delivery of the Shares to be
issued, sold and delivered by the Company hereunder and under the Directed Share
Subscription Program, except the registration under the Act of the Shares and
such consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the
Underwritten Shares by the Underwriters.
All of the outstanding shares of Common Stock are duly and
validly authorized and issued, fully paid and nonassessable and were not issued
and are not now in violation of or subject to any preemptive rights. The
Underwritten Shares, when issued, delivered and sold in accordance with this
Agreement and the DSSP Shares, when issued and delivered in accordance with the
Directed Share Subscription Program, will be duly and validly issued and
outstanding, fully paid and nonassessable, and will not have been issued in
violation of or be subject to any preemptive rights. The Company had, at
__________, 1999, an authorized and outstanding capitalization as set forth in
the Registration Statement and the
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Prospectus. The Common Stock, the Firm Shares, the Additional Shares and the
DSSP Shares conform to the descriptions thereof contained in the Registration
Statement and the Prospectus.
The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of California. The
Company has no subsidiaries and the Company does not own or control, directly or
indirectly, any corporation, association or other entity. The Company is duly
qualified and in good standing as a foreign corporation in each jurisdiction in
which the character or location of its properties (owned, leased or licensed) or
the nature or conduct of its business makes such qualification necessary, except
for those failures to be so qualified or in good standing which will not in the
aggregate have a material adverse effect on the Company. As of the date hereof,
(a) the Company has obtained competitive local exchange carrier ("CLEC")
regulatory approval in each of the following states: California, Nevada,
Washington, Oregon and Colorado and no such regulatory approval has been
withdrawn, and to the Company's knowledge no such regulatory approval is the
subject of any legal challenge (except as disclosed in the Prospectus) and (b)
the Company has not received any notice of rejection or denial, nor has it
withdrawn, any of its applications for CLEC approval in Arizona, where
applications for CLEC regulatory approval, as of the date of the Prospectus, are
pending approval. As of the date of the Prospectus, Arizona is the only state
where such applications have been filed and are pending approval. The Company
has all requisite power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses and permits of
and from all public, regulatory or governmental agencies and bodies, to own,
lease and operate its properties and conduct its business as now being conducted
and as described in the Registration Statement and the Prospectus, and no such
consent, approval, authorization, order, registration, qualification, license or
permit contains a materially burdensome restriction not adequately disclosed in
the Registration Statement and the Prospectus.
Except as described in the Prospectus, there is no litigation or
regulatory or governmental proceeding to which the Company is a party or to
which any property of the Company is subject or which is pending or, to the
knowledge of the Company, contemplated against the Company which might result in
any material adverse change or any development involving a material adverse
change in the business, prospects, properties, operations, condition (financial
or other) or, results of operations of the Company or which is required to be
disclosed in the Registration Statement and the Prospectus.
The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of its Common Stock to facilitate the sale or resale
of the Shares.
The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and the Prospectus
present fairly the financial position of the Company as of the dates indicated
and the results of its operations for the periods specified; except as otherwise
stated in the Registration Statement, said financial statements have been
prepared in conformity with generally accepted accounting principles
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applied on a consistent basis; and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein.
No holder of securities of the Company has any rights to the
registration of securities of the Company because of the filing of the
Registration Statement or otherwise in connection with the sale of the Shares
contemplated hereby.
The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.
There are no contracts or documents which are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits thereto which have not been so described or filed, as required.
The Company has reviewed its operations to evaluate the extent to
which the businesses or operations of the Company will be affected by the Year
2000 Problem (as defined); as a result of such review, the Company believes that
the disclosure in the Prospectus relating to the Year 2000 Problem is accurate
in all material respects. As used in this clause, the "Year 2000 Problem" means
any significant risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval, transmission or
other utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the case of
dates or time periods occurring prior to January 1, 2000.
Except as described in the Registration Statement, the Company
has not sold or issued any shares Common Stock during the six-month period
proceeding the date of the Prospectus, including any sales pursuant to Rule 144A
or under Regulations D or S of the Act.
The Company owns or possesses adequate rights to use all material
patent, patent applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights and licenses necessary for
the conduct of its business as now conducted and has no reason to believe that
the conduct of its business will conflict with, and has not received any notice
of any claim of conflict with, any such rights of others.
No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders, customers,
or suppliers of the Company on the other hand, which is required to be described
in the Prospectus and is not so described.
The Company has filed all federal, state, local and foreign
income and franchise tax returns required to be filed through the date hereof
and has paid all taxes due thereon, and no tax deficiency has been determined
adversely to the Company which has resulted in (nor does the Company have any
knowledge of any tax deficiency which, if determined adversely to the Company,
could reasonably be expected to result in) a material change or any
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development involving a material adverse change in the business, prospects,
properties, operations, condition (financial or other) or results of operations
of the Company or which is required to be disclosed in the Registration
Statement and the Prospectus.
There has been no storage, disposal, generation, manufacture,
transportation, handling or treatment of toxic wastes, hazardous wastes or
hazardous substances by the Company (or, to the knowledge of the Company, any of
its predecessors in interest) at, upon or from any of the property now or
previously owned or leased by the Company or its predecessors in violation of
any applicable law, ordinance, rule, regulation, order, judgment, decree or
permit or which would require remedial action under any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit, except for any
violation or remedial action which would not result in, or could not be
reasonably likely to result in, singularly or in the aggregate with all such
violations and remedial actions, a material change or any development involving
a material adverse change in the business, prospects, properties, operations,
condition (financial or other) or results of operations of the Company. There
has been no material spill, discharge, leak, emission, injection, escape,
dumping or release of any kind onto such property or into the environment
surrounding such property of any toxic wastes, solid wastes, hazardous wastes or
hazardous substances due to or caused by the Company or with respect to which
the Company has knowledge, except for any such spill, discharge, leak, emission,
injection, escape, dumping or release which would not result in or would not be
reasonably likely to result in, singularly or in the aggregate with all such
spills, discharges, leaks, emissions, injections, escapes, dumpings and
releases, a material change or any development involving a material adverse
change in the business, prospects, properties, operations, condition (financial
or other) or results of operations of the Company. The terms "hazardous
wastes", "toxic wastes", "hazardous substances" and "medical wastes" shall have
the meanings specified in any applicable local, state, federal and foreign laws
or regulations with respect to environmental protection, but shall include
without limitation asbestos and "PCBs."
The Company has (a) good and marketable title to all of the
properties and assets described in the Prospectus or the financial statements
included in the Prospectus as owned by it, free and clear of all liens, charges,
encumbrances and restrictions, except such as are described in the Prospectus or
as would not have a material adverse change in the business, prospects,
properties, operations, condition (financial or other) or results of operations
of the Company or which is required to be disclosed in the Registration
Statement or Prospectus, (b) peaceful and undisturbed possession under all
material leases to which it is a party as lessee, (c) all licenses,
certificates, permits, authorizations, approvals, franchises and other rights
from, and has made all declarations and filings with, all federal, state and
local authorities (including, without limitation, the FCC and similar state and
local agencies), all self-regulatory authorities and all courts and other
tribunals (each an "Authorization") necessary to engage in the business
conducted by the Company in the manner described in the Prospectus, except as
described in the Prospectus and except insofar as the failure to obtain any such
Authorization would not reasonably be expected to have a material adverse change
in the business, prospects, properties, operations, condition (financial or
other) or results of operations of the Company or which is required to be
disclosed in the Registration Statement or Prospectus, and no such Authorization
contains a materially burdensome restriction that is not disclosed in
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<PAGE>
the Prospectus and (d) not received any notice that any governmental body or
agency is considering limiting, suspending or revoking any such Authorization.
Except where the failure to be in full force and effect would not have a
material adverse change in the business, prospects, properties, operations,
condition (financial or other) or results of operations of the Company or which
is required to be disclosed in the Registration Statement or Prospectus, all
such Authorizations are valid and in full force and effect and the Company is in
compliance in all material respects with the terms and conditions of all such
Authorizations and with the rules and regulations of the regulatory authorities
having jurisdiction with respect thereto. All material leases to which the
Company is a party are valid and binding and no default by the Company has
occurred and is continuing thereunder and, to the Company's knowledge, no
material defaults by the landlord are existing under any such lease that could
reasonably be expected to result in a material adverse change in the business,
prospects, properties, operations, condition (financial or other) or results of
operations of the Company or which is required to be disclosed in the
Registration Statement or Prospectus.
Purchase, Sale and Delivery of the Shares.
On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, at a purchase
price per share of $_______, the number of Firm Shares set forth opposite the
respective names of the Underwriters in Schedule I hereto plus any additional
number of Underwritten Shares which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 9 hereof.
Payment of the purchase price for, and delivery of certificates
for, the Underwritten Shares shall be made at the office of Latham & Watkins,
Chicago, Illinois or at such other place as shall be agreed upon by you and the
Company, at 10:00 A.M. on the third or fourth business day (as permitted under
Rule 15c6-1 under the Exchange Act) (unless postponed in accordance with the
provisions of Section 9 hereof) following the date of the effectiveness of the
Registration Statement (or, if the Company has elected to rely upon Rule 430A of
the Regulations, the third or fourth business day (as permitted under Rule 15c6-
1 under the Exchange Act) after the determination of the initial public offering
price of the Shares), or such other time not later than ten business days after
such date as shall be agreed upon by you and the Company (such time and date of
payment and delivery being herein called the "Closing Date"). Payment shall be
made to the Company by wire transfer in same day funds, against delivery to you
for the respective accounts of the Underwriters of certificates for the
Underwritten Shares to be purchased by them. Certificates for the Underwritten
Shares shall be registered in such name or names and in such authorized
denominations as you may request in writing at least two full business days
prior to the Closing Date. The Company will permit you to examine and package
such certificates for delivery at the offices of Latham & Watkins, Chicago,
Illinois at least one full business day prior to the Closing Date.
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In addition, the Company hereby grants to the Underwriters the
option to purchase up to ______ Additional Shares at the same purchase price per
share to be paid by the Underwriters to the Company for the Firm Shares as set
forth in this Section 2, for the sole purpose of covering over-allotments in the
sale of Firm Shares by the Underwriters. This option may be exercised at any
time, in whole or in part, on or before the thirtieth day following the date of
the Prospectus, by written notice by you to the Company. Such notice shall set
forth the aggregate number of Additional Shares as to which the option is being
exercised and the date and time, as reasonably determined by you, when the
Additional Shares are to be delivered (such date and time being herein sometimes
referred to as the "Additional Closing Date"); provided, however, that the
Additional Closing Date shall not be earlier than the Closing Date or earlier
than the second full business day after the date on which the option shall have
been exercised nor later than the eighth full business day after the date on
which the option shall have been exercised (unless such time and date are
postponed in accordance with the provisions of Section 9 hereof). Certificates
for the Additional Shares shall be registered in such name or names and in such
authorized denominations as you may request in writing at least two full
business days prior to the Additional Closing Date. The Company will permit you
to examine and package such certificates for delivery at the offices of Latham &
Watkins, Chicago, Illinois at least one full business day prior to the
Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter shall
be the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number increased as set forth
in Section 9 hereof) bears to [insert the total number of Firm Shares being
purchased from the Company], subject, however, to such adjustments to eliminate
any fractional shares as you in your sole discretion shall make.
Payment for the Additional Shares shall be made to the Company by wire
transfer in same day funds at the offices of Latham & Watkins, Chicago, Illinois
or such other location as may be mutually acceptable, upon delivery of the
certificates for the Additional Shares to you for the respective accounts of the
Underwriters.
Offering. Upon your authorization of the release of the Firm
Shares, the Underwriters propose to offer the Underwritten Shares for sale to
the public upon the terms set forth in the Primary Prospectus. Under no
circumstances are the Underwriters intending to offer or offering any DSSP
Shares for sale.
Covenants of the Company. The Company covenants and agrees with
the Underwriters that:
If the Registration Statement has not yet been declared effective
the Company will use its best efforts to cause the Registration Statement and
any amendments thereto to become effective as promptly as possible, and if Rule
430A is used or the filing of the Prospectus is otherwise required under Rule
424(b) or Rule 434, the Company will file the Prospectus (properly completed if
Rule 430A has been used) pursuant to Rule 424(b) or Rule 434 within the
prescribed time period and will provide evidence satisfactory to you of such
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timely filing. If the Company elects to rely on Rule 434, the Company will
prepare and file a term sheet that complies with the requirements of Rule 434.
The Company will notify you immediately (and, if requested by you,
will confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or of the initiation, or the threatening, of any
proceedings therefor, (v) of the receipt of any comments from the Commission,
and (vi) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in any jurisdiction or
the initiation or threatening of any proceeding for that purpose. If the
Commission shall propose or enter a stop order at any time, the Company will
make every reasonable effort to prevent the issuance of any such stop order and,
if issued, to obtain the lifting of such order as soon as possible. The Company
will not file any amendment to the Registration Statement or any amendment of or
supplement to the Prospectus (including the prospectus required to be filed
pursuant to Rule 424(b) or Rule 434) that differs from the prospectus on file at
the time of the effectiveness of the Registration Statement before or after the
effective date of the Registration Statement to which you shall reasonably
object in writing after being timely furnished in advance a copy thereof.
If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would, in the judgment
of the Underwriters or the Company include an 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 the light of the circumstances
under which they were made, not misleading, or if it shall be necessary at any
time to amend or supplement the Prospectus or Registration Statement to comply
with the Act or the Regulations, the Company will notify you promptly and
prepare and file with the Commission an appropriate amendment or supplement (in
form and substance satisfactory to you) which will correct such statement or
omission and will use its best efforts to have any amendment to the Registration
Statement declared effective as soon as possible.
The Company will promptly deliver to you two signed copies of the
Registration Statement, including exhibits and all amendments thereto, and the
Company will promptly deliver to each of the Underwriters such number of copies
of any preliminary prospectus, the Prospectus, the Registration Statement, and
all amendments of and supplements to such documents, if any, as you may
reasonably request.
The Company will endeavor in good faith, in cooperation with you,
at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws relating to
the offering or sale of the Shares of such jurisdictions as you may designate
and to maintain such qualification in effect for so long as
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required for the distribution thereof; except that in no event shall the Company
be obligated in connection therewith to qualify as a foreign corporation or to
execute a general consent to service of process.
The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.
During the period of 180 days from the date of the Prospectus,
the Company will not, without your prior written consent, issue, sell, offer or
agree to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any Common Stock (or any securities convertible into,
exercisable for or exchangeable for Common Stock), and the Company will obtain
the undertaking of each of its officers and directors and such of its
shareholders as have been heretofore designated by you and listed on Schedule II
attached hereto not to engage in any of the aforementioned transactions on their
own behalf, other than the Company's sale of Shares hereunder, the Company's
issuance of Common Stock upon the exercise of presently outstanding stock
options, and Safeguard 98 Capital, L.P.'s sale of Shares under the Directed
Share Subscription Program.
During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its shareholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or any
national securities exchange.
The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus.
The Company will use its best efforts to cause the Shares to be
listed for inclusion in the National Association of Securities Dealers Automated
Quotation National Market System ("Nasdaq").
The Company will file with the Commission such reports on Form SR
as may be required pursuant to Rule 463 of the Regulations.
The Company, during the period when the Prospectus is required to
be delivered under the Act or Exchange Act, will file all documents required to
be filed with the Commission pursuant to the Act and the Exchange Act within the
time periods required by the Act and the Exchange Act and the rules and
regulations of the Commission thereunder.
Payment of Expenses. Whether or not the transactions contemplated
in this Agreement, the Standby Subscription Agreement and any other agreement
relating to the Direct Share Subscription Program are consummated or this
Agreement, the Standby Subscription Agreement and any other agreement relating
to the Direct Share Subscription
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Program is terminated, the Company hereby agrees to pay all costs and expenses
incident to the performance of the obligations of the Company under this
Agreement, the Standby Subscription Agreement and any other agreement relating
to the Direct Share Subscription Program, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any preliminary prospectus, the Prospectus and any amendments
or supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents (including this
Agreement and the Agreement Among Underwriters) and all other documents related
to the public offering of the Shares (including those supplied to the
Underwriters in quantities as hereinabove stated), (ii) the issuance, transfer
and delivery of the Underwritten Shares to the Underwriters, including any
transfer or other taxes payable thereon, (iii) the qualification of the Shares
under state or foreign securities or Blue Sky laws, including the costs of
printing and mailing a preliminary and final "Blue Sky Survey" and the fees of
counsel for the Underwriters and such counsel's disbursements in relation
thereto and (iv) filing fees of the Commission and the National Association of
Securities Dealers, Inc.
Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 6 "Closing Date" shall refer to the
Closing Date for the Firm Shares and any Additional Closing Date, if different,
for the Additional Shares), to the absence of any misstatement or omission from
any certificates, opinions, written statements or letters furnished to you or to
Latham & Watkins ("Underwriters' Counsel") pursuant to this Section 6, to the
performance by the Company of its obligations hereunder, and to the following
additional conditions:
The Registration Statement shall have become effective not later
than [if pricing pursuant to Rule 430A, 5:30 P.M., New York time, on the date of
this Agreement] [if pricing pursuant to a pricing amendment -- 12:00 P.M., New
York time on the date an amendment to the Registration Statement containing the
public offering price has been filed with the Commission], or at such later time
and date as shall have been consented to in writing by you; if the Company shall
have elected to rely upon Rule 430A or Rule 434 of the Regulations, the
Prospectus shall have been filed with the Commission in a timely fashion in
accordance with Section 4(a) hereof; and, at or prior to the Closing Date no
stop order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereof shall have been issued and no proceedings
therefor shall have been initiated or threatened by the Commission.
At the Closing Date you shall have received the opinions of
Kirkland & Ellis and [____________________], counsel for the Company, dated the
Closing Date addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
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incorporation. The Company is duly qualified and in good standing as a
foreign corporation in each jurisdiction in which the character or location
of its properties (owned, leased or licensed) or the nature or conduct of
its business makes such qualification necessary, except for those failures
to be so qualified or in good standing which will not in the aggregate have
a material adverse effect on the Company. The Company has all requisite
corporate authority to own, lease and license its respective properties and
conduct its business as now being conducted and as described in the
Registration Statement and the Prospectus and to consummate the
transactions contemplated by the Purchase Agreement, including without
limitation, the corporate power and authority to issue, sell and deliver
the Shares on the Closing Date.
The Company has an authorized capital stock as set forth in
the Registration Statement and the Prospectus. All of the outstanding
shares of Common Stock are duly and validly authorized and issued, are
fully paid and nonassessable and were not issued in violation of or subject
to any preemptive rights. The Shares to be delivered on the Closing Date
have been duly and validly authorized and, when delivered by the Company in
accordance with this Agreement, will be duly and validly issued, fully paid
and nonassessable and will not have been issued in violation of or subject
to any preemptive rights. The Common Stock, the Firm Shares, the
Additional Shares and the DSSP Shares conform to the descriptions thereof
contained in the Registration Statement and the Prospectus.
To such counsel's knowledge, there are not currently, and
will not be following the offering of the Shares, any outstanding
subscriptions, rights, warrants, calls, commitments of sale or options to
acquire, or instruments convertible into or exchangeable for, any capital
stock or other equity interest of the Company, except as described in the
Prospectus.
To such counsel's knowledge, there are no holders of
securities of the Company who, by reason of the execution by the Company of
this Agreement or the consummation by the Company of the transactions
contemplated hereby, have the right to request or demand that the Company
register securities held by them under the Securities Act.
The Underwritten Shares to be sold under this Agreement to
the Underwriters and the DSSP Shares to be sold under the Directed Share
Subscription Program are duly authorized for listing on the National
Association of Securities Dealers Automated Quotation National Market
System.
This Agreement and the Standby Subscription Agreement and
[any other agreement related to the Directed Share Subscription Program to
which the Company is party [list here]] have been duly and validly
authorized, executed and delivered by the Company.
There is no litigation or governmental or other action,
suit,
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proceeding or investigation before any court or before or by any
public, regulatory or governmental agency or body pending or to the best of
such counsel's knowledge, threatened against, or involving the properties
or business of the Company, which is of a character required to be
disclosed in the Registration Statement and the Prospectus which has not
been properly disclosed therein.
The execution, delivery, and performance of this
Agreement, and the Standby Subscription Agreement, [any other agreement
related to the Directed Share Subscription Program to which the Company is
party [list here]] and the consummation of the transactions contemplated
hereby and thereby by the Company do not and will not (A) conflict with or
result in a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or both, would
constitute a default) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company
pursuant to, any agreement, instrument, franchise, license or permit known
to such counsel to which the Company is a party or by which the Company or
its properties or assets may be bound or (B) violate or conflict with any
provision of the certificate of incorporation or by-laws of the Company,
or, to the best knowledge of such counsel, any judgment, decree, order,
statute, rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over the Company or any of
its properties or assets. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any court
or any public, governmental, or regulatory agency or body having
jurisdiction over the Company or any of its properties or assets is
required for the execution, delivery and performance of this Agreement, and
the Standby Subscription Agreement or any other agreement related to the
Directed Share Subscription Program or the consummation of the transactions
contemplated hereby or thereby, except for (1) such as may be required
under state securities or Blue Sky laws in connection with the purchase and
distribution of the Underwritten Shares by the Underwriters (as to which
such counsel need express no opinion) and (2) such as have been made or
obtained under the Act.
The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and schedules and other financial data included or incorporated
by reference therein, as to which no opinion need be rendered) comply as to
form in all material respects with the requirements of the Act and the
Regulations.
The Registration Statement is effective under the Act, and,
to the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereof has been issued and no proceedings therefor have been initiated or
threatened by the Commission and all filings required by Rule 424(b) of the
Regulations have been made.
The information in the Prospectus and Registration
Statement under the headings "Management," "Certain Relationships and
Related Transactions," "Description of Capital Stock," "Description of
Indebtedness," and
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"Shares Eligible for Future Sale" and Items 14 and 15 in Part II of the
Registration Statement are, to the extent that they summarize laws,
government rules, regulations or documents, correct in all material
respects.
The Company is not and, after giving effect to the
offering of the Shares and the application of the proceeds therefrom as
described in the Prospectus, will not be an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
In addition, such opinion shall also contain a statement
that such counsel has participated in conferences with officers and
representatives of the Company, representatives of the independent public
accountants for the Company and the Underwriters at which the contents and
the Prospectus and related matters were discussed and, no facts have come
to the attention of such counsel which would lead such counsel to believe
that either the Registration Statement at the time it became effective
(including the information deemed to be part of the Registration Statement
at the time of effectiveness pursuant to Rule 430A(b) or Rule 434, if
applicable), or any amendment thereof made prior to the Closing Date as of
the date of such amendment, contained an untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus as of its date (or any amendment thereof or supplement thereto
made prior to the Closing Date as of the date of such amendment or
supplement) and as of the Closing Date contained or contains an untrue
statement of a material fact or omitted or omits 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
(it being understood that such counsel need express no belief or opinion
with respect to the financial statements and schedules and other financial
data included or incorporated by reference therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to Underwriters'
Counsel) of other counsel reasonably acceptable to Underwriters' Counsel,
familiar with the applicable laws; (B) as to matters of fact, to the extent they
deem proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and, in their opinion, you and they are
justified in relying thereon.
At the Closing Date you shall have received the opinion of
Goodin, MacBride, Squeri, Schlotz & Ritchie, LLP, regulatory counsel for the
Company, dated the
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Closing Date addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
The Company validly holds all of the licenses, permits, and
authorizations, if any, required by the Federal Communications Commission
("FCC") and the California Public Utilities Commission, the Nevada Public
Utilities Commission, the Washington Public Utility Commission, the Oregon
Public Utility Commission and the Colorado Public Utility Commission
[others] (collectively the "State Telecommunications Agencies" or
individually, the "State Telecommunications Agency") for the provision of
telecommunications services as we understand those services to be provided
based on the declaration of an executive officer of the Company, except
where the failure to obtain or hold such license, permit, or authority
would not have a material adverse effect on the Company's business as
described in the Prospectuses.
The Company is not subject to any proceeding (including
rulemaking proceeding), pending complaint, or investigation, or, to the
best knowledge of counsel, any threatened complaint or investigation before
the FCC or any State Telecommunications Agencies based on any alleged
violation of the Company in connection with its provision or failure to
provide telecommunications service of a character required to be disclosed
in the Prospectuses that is not disclosed in the Prospectuses.
The statements in the Prospectuses under the headings of
"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," "We may not be able to compete effectively with the Bell
operating companies if they are permitted to enter the long distance
service market," "Business -- Competition," "-- Regulation," and "--
Regulatory Proceedings," regarding state and federal telecommunications
laws and regulations, fairly and accurately summarize the matters therein
described.
The Company has the consents, approvals, authorizations,
licenses, certificates, permits or orders of the FCC or any State
Telecommunications Agency, if any, required to consummate the transactions
contemplated in the Underwriting Agreement, and the Standby Subscription
Agreement and any other agreement relating to the Direct Share Subscription
Program, except where the failure to obtain the consents, approval,
authorizations, licenses, certificates, permits, or orders would not have a
material adverse effect on the Company's ability to consummate such
transactions.
Neither the execution nor delivery of the Underwriting
Agreement, and the Standby Subscription Agreement nor any other agreement
relating to the Direct Share Subscription Program, the consummation of the
transactions contemplated by such agreements, nor the sale of the Shares
contemplated thereby will
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conflict with or result in a violation of any order or regulation of the
FCC or any State Telecommunications Agency applicable to the Company,
except where the conflict or violation which would not have a material
adverse effect thereon.
All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be satisfactory in
form and substance to you and to Underwriters' Counsel, and the Underwriters
shall have received from Underwriters' Counsel a favorable opinion, dated as of
the Closing Date with respect to the issuance and sale of the Underwritten
Shares, the Registration Statement and the Prospectus and such other related
matters as you may reasonably require, and the Company shall have furnished to
Underwriters' Counsel such documents as they request for the purpose of enabling
them to pass upon such matters.
At the Closing Date you shall have received a certificate of the
Chief Executive Officer and Chief Financial Officer of the Company, dated the
Closing Date to the effect that (i) the condition set forth in subsection (a) of
this Section 6 has been satisfied, (ii) as of the date hereof and as of the
Closing Date the representations and warranties of the Company set forth in
Section 1 hereof are accurate, (iii) as of the Closing Date the obligations of
the Company to be performed hereunder on or prior thereto have been duly
performed and (iv) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company has not
sustained any material loss or interference with its business or properties from
fire, flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental proceeding,
and there has not been any material adverse change, or any development involving
a material adverse change, in the business prospects, properties, operations,
condition (financial or otherwise), or results of operations of the Company,
except in each case as described in or contemplated by the Prospectus.
At the time this Agreement is executed and at the Closing Date,
you shall have received a letter, from Arthur Andersen, LLP, independent public
accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Underwriters and in form
and substance satisfactory to you, to the effect that: (i) they are independent
certified public accountants with respect to the Company within the meaning of
the Act and the Regulations and stating that the answer to Item 10 of the
Registration Statement is correct insofar as it relates to them; (ii) stating
that, in their opinion, the financial statements and schedules of the Company
included in the Registration Statement and the Prospectus and covered by their
opinion therein comply as to form in all material respects with the applicable
accounting requirements of the Act and the applicable published rules and
regulations of the Commission thereunder; (iii) on the basis of procedures
consisting of a reading of the latest available unaudited interim consolidated
financial statements of the Company, a reading of the minutes of meetings and
consents of the shareholders and board of directors of the Company and the
committees of the board of directors subsequent to December 31, 1998, inquiries
of officers and other employees of the Company who have responsibility for
financial and accounting matters of the Company with respect to transactions and
events subsequent to December 31, 1998 and other specified procedures and
inquiries to a date not more than five
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days prior to the date of such letter, nothing has come to their attention that
would cause them to believe that: (A) the unaudited consolidated financial
statements and schedules of the Company presented in the Registration Statement
and the Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and, if applicable, the Exchange
Act and the applicable published rules and regulations of the Commission
thereunder or that such unaudited consolidated financial statements are not
fairly presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
consolidated financial statements included in the Registration Statement and the
Prospectus; (B) with respect to the period subsequent to[September 30], 1999
there were, as of the date of the most recent available monthly consolidated
financial statements of the Company, if any, and as of a specified date not more
than five days prior to the date of such letter, any changes in the capital
stock or long-term indebtedness of the Company or any decrease in the net
current assets or stockholders' equity of the Company, in each case as compared
with the amounts shown in the most recent balance sheet presented in the
Registration Statement and the Prospectus, except for changes or decreases which
the Registration Statement and the Prospectus disclose have occurred or may
occur or which are set forth in such letter or (C) that during the period from
[September 30], 1999 to the date of the most recent available monthly
consolidated financial statements of the Company, if any, and to a specified
date not more than five days prior to the date of such letter, there was any
decrease, as compared with the corresponding period in the prior fiscal year, in
total revenues, or total or per share net income, except for decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur or
which are set forth in such letter; and (iv) stating that they have compared
specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the Company set forth in
the Registration Statement and the Prospectus, which have been specified by you
prior to the date of this Agreement, to the extent that such amounts, numbers,
percentages, and information may be derived from the general accounting and
financial records of the Company or from schedules furnished by the Company, and
excluding any questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings, inquiries, and
other appropriate procedures specified by you set forth in such letter, and
found them to be in agreement.
The Standby Subscription Agreement, dated the date of this
Agreement, shall have been executed, substantially in the form reviewed by Bear,
Stearns & Co. Inc., and shall be in full force and effect.
Prior to the Closing Date and the Additional Closing Date, if
any, as the case may be, the Company shall have furnished to you such further
information, certificates and documents as you may reasonably request.
You shall have received from each person who is a director or
officer of the Company or such shareholder as have been heretofore designated by
you and listed on Schedule II hereto an agreement to the effect that such person
will not for a period of 180 days after the date of the Prospectus, directly or
indirectly, without your prior written consent, offer, sell, contract to sell,
swap, make any short sale, pledge, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Exchange Act, grant any option to
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purchase or otherwise dispose (or publicly announce the undersigned's intention
to do any of the foregoing) of any shares of Common Stock or other capital stock
of the Company, or any securities convertible into, or exerciseable or
exchangeable for, any shares of Common Stock or other capital stock of the
Company that the undersigned currently beneficially owns (within the meaning of
Rule 13d-3 under the Exchange Act), directly or indirectly, or may beneficially
own, directly or indirectly, in the future. The foregoing sentence shall not
apply to (a) transfers to immediate family members or trusts for the benefit of
such family members, or (b) bona fide gifts, provided that in either case, the
transferee agrees to be bound by this agreement, or (c) transfers of shares in
connection with a merger, recapitalization or consolidation of the Company so
long as securities received by the undersigned in consideration for any such
transaction become subject to the provisions of this agreement.
On or before the Closing Date, the Shares shall have been
approved for listing on the National Association of Securities Dealers Automated
Quotation National Market System.
Contemporaneously with the purchase by the underwriters of the
Underwritten Shares under this Agreement, Safeguard or Safeguard's shareholders,
pursuant to their respective agreements and the Standby Subscription Agreement,
as the case may be, shall have purchased the Primary DSSP Shares.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
canceled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
canceled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.
Indemnification.
The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act as
follows:
against any and all losses, liabilities, claims, damages and
expenses whatsoever as incurred (including but not limited to attorneys'
fees and any and all expenses whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or
any claim whatsoever, and any and all amounts paid in settlement of any
claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as
such losses, liabilities, claims, damages or expenses (or actions in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact
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contained in the Registration Statement for the registration of the Shares,
as originally filed or any amendment thereof, or any related preliminary
prospectus or the Prospectus, or in any supplement thereto or amendment
thereof, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading;
against any and all losses, liabilities, claims, damages
and expenses whatsoever as incurred (including but not limited to
attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in
settlement of any claim or litigation), joint or several, arising out of or
based upon (A) any untrue statement or alleged untrue statement of a
material fact included in the DSSP Prospectus wrapper material distributed
in connection with the reservation and sale of the DSSP Securities or the
omission of alleged omission therefrom of a material fact necessary to make
the statements therein, when considered in conjunction with the Prospectus
or preliminary prospectus, not misleading and (B) the reservation and sale
of DSSP Shares to shareholders of Safeguard in connection with the Directed
Share Subscription Program as described in the Prospectus and the
Registration Statement; and
against any and all losses, liabilities, claims, damages
and expenses whatsoever as incurred (including but not limited to
attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in
settlement of any claim or litigation), joint or several, to the extent of
the aggregate amount paid in settlement of any litigation, or any
investigation or proceeding by any governmental agency or body, commenced
or threatened, or of any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission or
in connection with any violation of the nature referred to in Section
7(a)(ii) (A) and (B) hereof; provided, however, that the Company will not
be liable in any such case to the extent, but only to the extent, that any
such loss, liability, claim, damage or expense arises out of or is based
upon any such untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon and in conformity with
written information furnished to the Company by or on behalf of any
Underwriter through you expressly for use therein. This indemnity
agreement will be in addition to any liability which the Company may
otherwise have including under this Agreement.
Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or
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litigation), jointly or several, to which they or any of them may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement for the registration of
the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein; provided,
however, that in no case shall any Underwriter be liable or responsible for any
amount in excess of the underwriting discount applicable to the Underwritten
Shares purchased by such Underwriter hereunder. This indemnity will be in
addition to any liability which any Underwriter may otherwise have including
under this Agreement. The Company acknowledges that the statements set forth in
the third and fourth sentences of the fourth paragraph and the eleventh
paragraph under the caption "Underwriting" in the Prospectus constitute the only
information furnished in writing by or on behalf of any Underwriter expressly
for use in the registration statement relating to the Shares as originally filed
or in any amendment thereof, any related preliminary prospectus or the
Prospectus or in any amendment thereof or supplement thereto, as the case may
be.
Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. Anything in
this subsection to the contrary notwithstanding, an indemnifying party shall not
be liable for any
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settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld.
Contribution. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Company any
contribution received by the Company from persons, other than the Underwriters,
who may also be liable for contribution, including persons who control the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, officers of the Company who signed the Registration Statement and
directors of the Company) as incurred to which the Company and one or more of
the Underwriters may be subject, in such proportions as is appropriate to
reflect the relative benefits received by the Company and the Underwriters from
the offering of the Underwritten Shares or, if such allocation is not permitted
by applicable law or indemnification is not available as a result of the
indemnifying party not having received notice as provided in Section 7 hereof,
in such proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Underwriters shall be deemed to be in the same proportion as (x)
the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company and of the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Section 8 were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
Section 8, (i) in no case shall any Underwriter be liable or responsible for any
amount in excess of the underwriting discount applicable to the Underwritten
Shares purchased by such Underwriter hereunder, and (ii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Notwithstanding the provisions of this Section 8
and the preceding sentence, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Underwritten Shares underwritten by it and distributed to the public were
offered to
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the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. For purposes of this Section 8, each
person, if any, who controls an Underwriter within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act shall have the same rights to
contribution as such Underwriter, and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to clauses (i) and (ii) of
this Section 8. Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such party
in respect of which a claim for contribution may be made against another party
or parties, notify each party or parties from whom contribution may be sought,
but the omission to so notify such party or parties shall not relieve the party
or parties from whom contribution may be sought from any obligation it or they
may have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.
Default by an Underwriter.
If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, to which the default relates shall be purchased by the
non-defaulting Underwriters in proportion to the respective proportions which
the numbers of Firm Shares set forth opposite their respective names in Schedule
I hereto bear to the aggregate number of Firm Shares set forth opposite the
names of the non-defaulting Underwriters.
In the event that such default relates to more than 10% of the
Firm Shares or Additional Shares, as the case may be, you may in your discretion
arrange for yourself or for another party or parties (including any non-
defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within 5 calendar days after
such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters and the Company for damages
occasioned by its or their default hereunder.
In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters, or
are to be purchased by
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another party or parties as aforesaid, you or the Company shall have the right
to postpone the Closing Date or Additional Closing Date, as the case may be for
a period, not exceeding five business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus or
in any other documents and arrangements, and the Company agrees to file promptly
any amendment or supplement to the Registration Statement or the Prospectus
which, in the opinion of Underwriters' Counsel, may thereby be made necessary or
advisable. The term "Underwriter" as used in this Agreement shall include any
party substituted under this Section 9 with like effect as if it had originally
been a party to this Agreement with respect to such Firm Shares and Additional
Shares.
Survival of Representations and Agreements. All representations
and warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Underwritten Shares to and by the Underwriters.
The representations contained in Section 1 and the agreements contained in
Sections 5, 7, 8 and 11(d) hereof shall survive the termination of this
Agreement and the Standby Subscription Agreement and any other agreement
relating to the Directed Share Subscription Program, including termination of
this Agreement pursuant to Section 9 or 11 hereof.
Effective Date of Agreement; Termination.
This Agreement shall become effective, upon the later of when (i)
you and the Company shall have received notification of the effectiveness of the
Registration Statement or (ii) the execution of this Agreement. If either the
initial public offering price or the purchase price per Share has not been
agreed upon prior to 5:00 P.M., New York time, on the fifth full business day
after the Registration Statement shall have become effective, this Agreement
shall thereupon terminate without liability to the Company or the Underwriters
except as herein expressly provided. Until this Agreement becomes effective as
aforesaid, it may be terminated by the Company by notifying you or by you
notifying the Company. Notwithstanding the foregoing, the provisions of this
Section 11 and of Sections 1, 5, 7 and 8 hereof shall at all times be in full
force and effect.
You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the obligations of the Underwriters to purchase the
Additional Shares at any time prior to the Additional Closing Date, as the case
may be, if (A) any domestic or international event or act or occurrence has
materially disrupted, or in your opinion will in the immediate future materially
disrupt, the market for the Company's securities or securities in general; or
(B) if trading on the New York or American Stock Exchanges or Nasdaq shall have
been suspended, or minimum or maximum prices for trading shall have been fixed,
or maximum ranges for prices for securities shall have been required, on the New
York or American Stock Exchanges by the New York or American Stock Exchanges, on
the Nasdaq by Nasdaq or by
24
<PAGE>
order of the Commission or any other governmental authority having jurisdiction;
or (C) if a banking moratorium has been declared by a state or federal authority
or if any new restriction materially adversely affecting the distribution of the
Firm Shares or the Additional Shares, as the case may be, shall have become
effective; or (D) (i) if the United States becomes engaged in hostilities or
there is an escalation of hostilities involving the United States or there is a
declaration of a national emergency or war by the United States or (ii) if there
shall have been such change in political, financial or economic conditions if
the effect of any such event in (i) or (ii) as in your judgment makes it
impracticable or inadvisable to proceed with the offering, sale and delivery of
the Firm Shares or the Additional Shares, as the case may be, on the terms
contemplated by the Prospectus.
Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, or telegraph, confirmed in writing by letter.
If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Underwritten Shares provided for herein is not consummated
because any condition to the obligations of the Underwriters set forth herein is
not satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all out-
of-pocket expenses (including the fees and expenses of their counsel), incurred
by the Underwriters in connection herewith.
Notices. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and , if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, New York, 10167, Attention: John Thomas; if sent to the Company, shall
be mailed, delivered, or telegraphed and confirmed in writing to the Company,
4210 Coronado Avenue, Stockton, California, 95204 Attention: Richard E. Bryson.
Parties. This Agreement shall insure solely to the benefit of,
and shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Section 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Shares from any of the Underwriters.
Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
Counterparts. This Agreement may be executed in counterparts,
each of which shall be an original and all of which together shall constitute
one and the same instrument.
25
<PAGE>
If the foregoing correctly sets forth the understanding between you
and the Company, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
PAC-WEST TELECOMM, INC.
By:
---------------------------
Name:
-------------------------
Title:
------------------------
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
BANC OF AMERICA SECURITIES LLC
FIRST UNION CAPITAL MARKETS CORP.
By:
Bear, Stearns & Co. Inc.
On behalf of themselves and the other Underwriters named in Schedule I hereto.
26
<PAGE>
SCHEDULE I
----------
Number of Firm
Name of Underwriter Shares to be Purchased
- ------------------- ----------------------
Bear, Stearns & Co. Inc.
Banc of America Securities LLC
First Union Capital Markets Corp.
[ ]
Total
=====================
27
<PAGE>
SCHEDULE II
-----------
Wallace W. Griffin
John K. La Rue
Richard E. Bryson
Brian K. Johnson
Joel E. Effron
Dennis V. Meyer
Jason R. Mills
Gregory Joksch
Jeff M. Webster
John F. Sumpter
H. Ravi Brar
Jerry L. Johnson
David G. Chandler
Mark J. DeNino
Mark S. Fowler
Samuel A. Plum
Dr. Jagdish N. Sheth
Bruce A. Westphal
Bay Alarm Company
SCP Private Equity Partners, L.P.
William Blair Capital Partners VI, L.P.
Safeguard 98 Capital, L.P.
(except Secondary DSSP
Shares subject to sale under the Directed
Share Subscription Program)
TL Ventures III L.P.
TL Ventures III Offshore L.P.
TL Ventures III Interfund L.P.
EnerTech Capital Partners, L.P.
Safeguard Scientifics, Inc.
[Names of additional shareholders subject to the lock-up provision]
28
<PAGE>
COMMON STOCK COMMON STOCK
NUMBER SHARES
------------ ------------
[LOGO OF PAC WEST]
------------ ------------
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN
OF THE STATE OF CALIFORNIA DEFINITIONS AND RESTRICTIONS
CUSIP 69371Y 10 1
THIS CERTIFIES THAT
BY
IS THE OWNER OF
COUNTERSIGNED AND REGISTERED:
FIRST UNION NATIONAL BANK TRANSFER AGENT
(Charlotte, North Carolina) AND REGISTRAR
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF
- ----------------------------PAC-WEST TELECOMM, INC.-----------------------------
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
AUTHORIZED SIGNATURE
Dated: [SEAL OF PAC-WEST]
/s/ Wallace W. Griffin
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
(R) NORTHERN BANK NOTE COMPANY
<PAGE>
PAC-WEST TELECOMM, INC.
A statement of the rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes and/or series of shares of stock of
the corporation and upon the holders thereof may be obtained by any shareholder
upon request and without charge, at the principal office of the corporation, and
the corporation will furnish any shareholder, upon request and without charge, a
copy of such statement.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TEN COM- as tenants in common UNIF GIFT MIN ACT-________________________ Custodian________________________
(Cust) (Minor)
TEN ENT- as tenants by the entireties
JT TEN- as joint tenants with under Uniform Gifts to Minors
right of survivorship and
not as tenants in common Act _________________________________________________________________
(State)
</TABLE>
For Value Received, ________________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
______________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
_______________________________________________________________________ Shares
of the common stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, ________________
X ______________________________________________
X ______________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE
WHATSOEVER.
SIGNATURE(S) GUARANTEED: ____________________________________________________
THE SIGNATURES SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBER-
SHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE, IF IT IS LOST, STOLEN, OR DESTROYED, THE
CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.
CFC Northern Bank Note Company, L.L.C.
Phone approval Proof Prepared On Above Date
necessitates Proof Approval
returning a signed
copy of the final
approved proof for P.O. Box 608
our records. By ___________________________ LaGrange, Illinois 60525
708/482-3900
Date _________________________ Fax 708/482-3332
<PAGE>
EXHIBIT 5.1
Robert C. Morrison
October 7, 1999
Pac-West Telecomm, Inc.
4210 Coronado Avenue
Stockton, California 95204
Re: Registration Statement on Form S-1 for Pac-West Telecomm, Inc.
filed on September 7, 1999 (File No. 333-86607)
Ladies/Gentlemen:
We have acted as special counsel to Pac-West Telecomm, Inc., a California
corporation (the "Company"), in connection with the registration by the Company
of up to 13,395,000 shares of the Company's Common Stock, par value $.001 per
share (the "Shares"), pursuant to a Registration Statement on Form S-1 (File No.
333-86607) originally filed on September 7, 1999, with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act") (such Registration Statement, as amended or supplemented and
together with any registration statement referred to in the next sentence, is
hereinafter referred to as the "Registration Statement"). This also relates to
any registration statement in connection with this offering that is to be
effective upon filing pursuant to Rule 462(b) under the Act, and the term
"Shares" as used herein includes any additional shares of the Company's Commons
Stock registered pursuant to such subsequently filed registration statement.
In that connection, we have examined originals, or copies, certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments as we have deemed necessary for the purposes of this
letter, including (i) the Amended and Restated Articles of Incorporation and
Certificates of Amendment thereto and By-Laws of the Company, (ii) minutes and
records of the corporate proceedings of the Company with respect to the Shares,
(iii) the Registration Statement and exhibits thereto, (iv) the September 29,
1999 draft of
<PAGE>
October 7, 1999
Page 2
- ------------------------
the form of underwriting agreement (the "Underwriting Agreement") to be entered
into among the Company and Bear, Stearns & Co. Inc., Bank of America Securities
LLC and First Union Capital Markets Corp. as representatives of the underwriters
and (v) such other documents and instruments as we have deemed necessary for the
expression of the opinions contained herein.
For purposes of this letter, we have assumed the authenticity of all documents
submitted to us as originals, the conformity to the originals of all documents
submitted to us as copies, and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the genuineness of the
signatures of persons signing all documents in connection with which this letter
is rendered, the authority of such persons signing on behalf of the parties
thereto and the due authorization, execution and delivery of all documents by
the parties thereto other than the Company. In preparing this letter we have
relied without independent verification upon: (i) information contained in
certificates obtained from governmental authorities; and (ii) factual
information provided to us by the Company or its representatives including but
not limited to all factual information set forth in the Registration Statement
and Exhibits. We have assumed that there has been no relevant change or
development between the dates as of which the information cited in the preceding
sentence was given and the date of this letter and that the information upon
which we have relied is accurate and does not omit disclosures necessary to
prevent such information from being misleading.
Our advice on every legal issue addressed in this letter is based exclusively on
the Corporate Law of the State of California and the federal law of the United
States, and represents our opinion as to how that issue would be resolved where
it to be considered by the highest court in the jurisdiction which enacted such
law.
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we are of the opinion
that the issuance of the Shares has been duly authorized and that (i) upon
effectiveness under the Act of the Registration Statement, and (ii) when
appropriate certificates representing the Shares are duly countersigned by the
Company's transfer agent/registrar and
<PAGE>
October 7, 1999
Page 3
- --------------------------
delivered against payment of the agreed consideration therefor in accordance
with the Underwriting Agreement, the Shares will be validly issued, fully paid
and nonassessable.
We hereby consent to the filing of this letter with the Commission as Exhibit
5.1 to the Registration Statement. We also consent to the reference to our firm
under the heading "Legal Matters" in the Registration Statement. In giving this
consent, we do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Act or the rules and regulations of
the Commission.
This letter is limited to the specific issues addressed herein, and no opinion
may be inferred or implied beyond that expressly stated herein. This letter
speaks as of the time of its delivery on the date it bears. We do not assume any
obligation to provide you with any subsequent opinion or advice by reason of any
fact about which we did not have knowledge at that time, by reason of any change
subsequent to that time in any law other governmental requirement or
interpretation thereof covered by any of our opinions or advice, or for any
other reason.
This is furnished to you in connection with the filing of the Registration
Statement and is not to be used, circulated, quoted or otherwise relied upon for
any other purpose.
Very truly yours,
NEUMILLER & BEARDSLEE
A Professional Corporation
BY: /s/ ROBERT C. MORRISON, Principal
<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
October 7, 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> 18,000
<OTHER-SE> (75,652,000)
<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 SEPTEMBER 7, 1999
Holders of fewer than 100 shares of Safeguard Scientifics, Inc. common stock on
September 7, 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>
October __, 1999
Dear Safeguard Stockholder:
As you may know, we are undertaking an initial public offering of the
common stock of Pac-West Telecomm. 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
September 7, 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 September 7, 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 1,001 shares of Safeguard common stock to be eligible
to subscribe for 101 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 September 7, 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 September 7, 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 September 7,
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 attached prospectus under the heading
"Underwriting." We currently anticipate that the offering price will be
2
<PAGE>
between $_______ and $______ per share. We 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 under the
program are not purchased by Safeguard stockholders, then Safeguard will
purchase the remaining shares at our initial public offering price.
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 late October or early November 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.
. 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
3
<PAGE>
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. If you choose to pay the subscription price by wire transfer,
you must fax a copy of your completed subscription form to the facsimile
number provided. We suggest, for your protection, that you also call the
number provided to confirm that ChaseMellon Shareholder Services received
your fax. 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.
. 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.
4
<PAGE>
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,
our transfer agent, First Union National Bank, 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 Telecomm 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.
Stabilization
The underwriters of our initial public offering may engage in certain
transactions that stabilize 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.
5
<PAGE>
Risk Factors
Investing in our common stock involves certain risks which are disclosed
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,
/s/ Wallace W. Griffin
Wallace W. Griffin
President and Chief Executive Officer
6
<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,
/s/ Wallace W. Griffin
----------------------------
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 September
7, 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 Telecomm for each 10 shares of Safeguard owned on September 7,
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
Telecomm common stock. Therefore, holders of fewer than 100 Safeguard shares
as of September 7, 1999 will be unable to purchase shares in the directed
share subscription program for Pac-West Telecomm.
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 site at
www.safeguard.com
. post this information on its Web site
. 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 Telecomm 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 Telecomm 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 Telecomm shares purchased in the directed share
subscription program be distributed?
A: The transfer agent for Pac-West is expected to distribute the shares to The
Depository Trust Company approximately two to three business days following
the expiration of the directed share subscription program.
Q: What are the tax consequences of receipt of the subscription offer and its
exercise?
A: Safeguard shareholders should consult their own tax advisors about the
federal, state and other tax consequences of the program. Nevertheless, we
believe that, as a result of having the opportunity to participate in the
DSSP, Safeguard shareholders will be considered to have received neither a
taxable distribution of property nor an adjustment to the basis in their
Safeguard shares. If a Safeguard shareholder exercises the subscription
offer, we believe the basis in the shares of the IPO company acquired upon
exercise will be the public offering price plus any processing fees incurred
by the shareholder in connection with the exercise of the subscription
offer. The Internal Revenue Service is not bound by this position.
<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 September 7, 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 September 7, 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 late October or early November 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 the actions described in the preliminary prospectus 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: 10 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).
- --------------------------------------------------------------------------------
<PAGE>
[SAFEGUARD SCIENTIFICS, INC. LOGO]
EXHIBIT 99.4
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945
Telephone: 610-293-0600
Toll Free: 1-877-506-7371
October 8, 1999
Dear Safeguard Shareholder:
This letter provides answers to the most frequently asked questions we've been
receiving regarding our directed share subscription program. We will continue
to post updates on our Web site (www.safeguard.com) and investor relations line
(1-888-SFE-1200).
Q: What is the directed share subscription program (DSSP) and how does it
benefit Safeguard shareholders?
A: The DSSP was pioneered by us to allow Safeguard shareholders who own at
least 100 shares in a single account on a given record date the opportunity
to participate in a portion of the IPO of a Safeguard partner company.
This opportunity to participate in an IPO, which is typically reserved
primarily for institutional investors, should provide Safeguard
shareholders with the potential for significant long-term appreciation as
direct shareholders of Safeguard partner companies.
Q: Will Safeguard shareholders be able to participate in the IPOs of all
Safeguard partner companies?
A: No. It is our goal to negotiate for the ability to use either the DSSP or a
rights offering in the IPOs of our partner companies. However, there may be
some offerings in which it would not be feasible to allocate a portion of
the shares to the DSSP, either because of the size of the offering, the
timing of the offering, the nature of Safeguard's role in the company, or
other reasons.
Q: Who will be eligible to participate in the DSSP?
A: Only holders of 100 or more shares of Safeguard stock in a single account
on the record date for an offering will be eligible to participate. This
minimum applies to each account, not the aggregate of all accounts.
Therefore, if you hold 50 shares of Safeguard stock in one account and 50
shares in a different account, you will not be considered to be the owner
of 100 shares of Safeguard stock.
Q: How will I know when a record date has been set?
A: We will announce record dates by issuing a press release, updating our Web
site and our investor relations line, and distributing e-mail alerts to
people who sign up for this on our Web site. We will set record dates
WITHOUT ANY ADVANCE NOTICE. Notice will be given only on the record date.
This means that anyone who is short shares of Safeguard stock on the record
date will also be short the IPO shares at the IPO price.
Q: Are any offerings currently pending?
A: We recently announced a September 7, 1999, record date for participation in
the DSSP for Pac-West Telecomm, Inc. The proposed DSSP ratio is an offer
to purchase one share of Pac-West for each ten Safeguard shares owned. If
the Pac-West offering is delayed or canceled, or if the DSSP for various
reasons cannot be implemented, the DSSP for the offering will be delayed or
canceled.
Headquartered in Stockton, California, Pac-West is an integrated
communications provider (ICP) committed to providing usage-intensive
customers, including Internet service providers (ISPs), medium and small
businesses, and enhanced communications service providers a single source
for all their telecommunications needs. Pac-West provides Internet access
and
<PAGE>
other Internet infrastructure services to ISPs, who can either collocate
and maintain their own equipment at Pac-West's switching sites, or
subscribe to an integrated managed modems service that includes access
lines, modems, routers, authentication service, and technical support. For
medium and small businesses, Pac-West designs, installs, and maintains
telephone equipment and provides bundled local, long distance, and data
services, including private line data transport and digital subscriber line
(DSL) service.
Bear, Stearns & Co. Inc., Banc of America Securities LLC, and First Union
Capital Markets Corp. will act as the managing underwriters of Pac-West's
initial public offering.
A registration statement relating to the common stock of Pac-West Telecomm
has been filed with the Securities and Exchange Commission but has not yet
become effective. These securities may not be sold nor may offers to buy
be accepted prior to the time the registration statement becomes effective.
This notice shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any state
in which the offer, solicitation, or sale would be unlawful prior to the
registration or qualification under the securities laws of any such state.
To the extent necessary to meet the 1 for 10 allocation ratio, Safeguard
expects to sell a portion of its Pac-West shares in the DSSP. The offering
will be made only by means of a prospectus, subject to the effectiveness of
the registration statement.
Q: Since you set a record date for the Pac-West Telecomm offering, why haven't
I received any information yet?
A: The record date only determines who will receive an offer to purchase
shares in the program. No offers will be distributed to you until a
preliminary prospectus is available, which will be approximately two to
three weeks before the offering is expected to go effective and price. For
Pac-West Telecomm, we presently expect preliminary prospectuses to be
available in mid-October 1999.
Q: How will you allocate the opportunity to purchase IPO shares to Safeguard
shareholders?
A: The offering ratio will vary from time to time but will be based on the
number of shares being offered under the DSSP in relation to the number of
Safeguard shares outstanding at the time of an offering. For the Pac-West
Telecomm DSSP, Safeguard shareholders will receive an offer to purchase one
share of Pac-West common stock for each 10 shares of Safeguard owned on the
record date. The ratio of shares offered to Safeguard shareholders may be
subject to reduction if the overall size of the offering is reduced.
If you hold at least 100 shares of Safeguard common stock but the number of
shares you own is not evenly divisible by the allocation ratio, we will
round up your subscription offer to the next whole number. For example, a
Safeguard shareholder with 275 shares of Safeguard will receive an offer to
purchase 27.5 shares of Pac-West, which will be rounded up to 28.
Offers to purchase shares under the DSSP
. are nontransferable and
. cannot be combined among multiple accounts.
Q: If I am affiliated with an NASD member, can I participate in the DSSP?
A: The NASD has granted an exemption from its free-riding rule for the DSSP
for Pac-West Telecomm. Therefore, holders of at least 100 shares of
Safeguard in a single account on September 7, 1999, including most
restricted persons under the NASD rule, will be permitted to participate in
the DSSP for Pac-West. The exemption does not cover officers and directors
of the managing underwriters of the Pac-West offering or employees of the
managing underwriters with access to non-public information about the
offering.
<PAGE>
Q: What information will I receive for each offering?
A: Approximately two to three weeks before an offering is expected to price,
the subscription offer will be mailed to you if you are a direct
shareholder or will be delivered electronically to your brokerage account
if you hold your Safeguard shares in street name. We also will distribute
a preliminary prospectus for the IPO company and an offering letter that
further explains the DSSP. The materials will include
. an anticipated price range
. the period of time during which we expect the offering to price
. the terms of the offering and
. a description of the IPO company and the risks involved in an
investment.
The anticipated price range and expected offering dates will be estimates
and cannot be guaranteed.
After an offering goes effective and the IPO price has been set, we also
will distribute a final prospectus for the IPO company.
Q: If I hold my Safeguard shares in a brokerage account, can you send the
prospectus and subscription information directly to me instead of sending
it through my broker?
A: The existing distribution channels do not permit us to distribute these
materials to you directly. However, you will be able to view a copy of the
prospectus on our Web site at www.safeguard.com once it becomes available.
Q: What happens if I move my Safeguard shares to a different brokerage account
after the record date for an offering but before I've received the
subscription offer?
A: The offer can only be distributed to the account in which your Safeguard
shares were held on the record date for an offering. However, if you
transfer your account to a different brokerage account after the record
date for an offering but before the subscription offer is received, the
Depository Trust Company has a procedure in place through which your broker
can request that the subscription offer be moved to your new account as
long as no actual transfer of beneficial ownership has occurred. Likewise,
the subscription offer can only be distributed to you directly if you are
holding your Safeguard shares in certificate form on the record date for an
offering.
Q: What if I don't receive any information from my broker?
A: You should be sure your broker is familiar with this program and can
provide you with prompt information. If the subscription offer does not
show up in your brokerage account or you do not receive the preliminary
prospectus and offer letter during the timeframe when we expect to have
these materials available, you should be sure to at least call your broker
for further information at that time.
Q: How will I know what the offering price and 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
. post this information on our Web site at www.safeguard.com
. send you an e-mail alert if you signed up for this on our Web site
(we encourage you to sign up for this if you have not already done so)
. update our automated investor relations line (1-888-SFE-1200) (if
you choose option #4, you will be able to listen to the text of our
six most recently issued press releases or request a faxed copy of a
release)
. notify the New York Stock Exchange, which will notify all of its
members
. notify the depository that holds stock on behalf of the brokerage
community, which will electronically notify all of its participating
brokers.
YOU WILL NOT RECEIVE DIRECT NOTICE FROM SAFEGUARD OR THE IPO COMPANY
<PAGE>
OF THE OFFERING PRICE AND THE EXPIRATION DATE. You will have to monitor one
of the above sources (press release, Safeguard's Web site, investor
relations line, or e-mail alerts, for which you must sign up on our Web
site) on which we will publicize the offering price and expiration date to
know when to deliver your subscription instructions and payment.
Q: How much time will I have to make a decision?
A: We will distribute the preliminary prospectus and other subscription
information approximately two to three weeks before an offering is expected
to price. No subscriptions or payment can be accepted prior to the date
the offering is declared effective and the IPO price is set.
Safeguard shareholders will have no more than four business days from when
the IPO price is set to subscribe to the offering. For those shareholders
who hold their shares in street name, we caution you that brokers will
require some time to process subscriptions from Safeguard shareholders.
Therefore, brokers most likely will stop accepting subscriptions earlier
than the fourth business day after the IPO price is determined.
Q: How do I subscribe for shares under this program?
A: If your Safeguard shares are held in a brokerage account, you must deliver
subscription instructions and payment through your broker. Only your
broker will be able to subscribe on your behalf. The offering agent will
be unable to directly accept your subscription and payment.
If you hold your Safeguard shares directly, you must follow the
instructions in the offer letter and subscription form you will receive
directly from Safeguard and submit your subscription and payment to the
offering agent noted on the subscription form.
In either case, you will have to be alert and monitor one of the sources
(press releases, Safeguard's Web site, automated investor relations line or
e-mail alerts, for which you must sign up on our Web site) on which
Safeguard will publicize the offering price and expiration date to know
when to deliver your subscription and payment. Time will not permit us to
notify you directly of the IPO price and expiration date.
All subscriptions and payments must be received by the offering agent by
5:00 p.m. New York City time on the fourth business day after the IPO price
has been set.
Q: What if I'm on vacation or otherwise unavailable when the offering is
priced?
A: If you will not be available when an offering is expected to price, you
should leave instructions with someone who will be able to act on your
behalf or contact your broker to determine how to make certain you will be
able to subscribe in a timely manner. The offering agent will stop
accepting subscriptions under the program at 5:00 p.m. New York City time
on the fourth business day after the offering has priced.
Q: Can I buy more shares of the IPO company than I've been offered?
A: No. We do not offer an oversubscription privilege under our DSSP. However,
you may purchase additional shares of the IPO company in the open market,
at market price, when trading commences.
Q: When will the shares purchased in the DSSP be issued?
A: Approximately six to seven business days after the IPO price has been set,
the shares of the IPO company purchased in the DSSP are electronically
distributed for delivery into street name shareholder accounts and stock
certificates are mailed to direct Safeguard shareholders.
<PAGE>
Exhibit 99.5
STOCK PURCHASE AGREEMENT
------------------------
THIS IS A STOCK PURCHASE AGREEMENT (the "Agreement") dated
___________, 1999, by and between SAFEGUARD SCIENTIFICS, INC., a Pennsylvania
corporation ("Safeguard"), SAFEGUARD 98 CAPITAL, L.P., a Delaware limited
partnership ("Safeguard 98"), PAC-WEST TELECOMM, INC., a California corporation
(the "Company") and BEAR, STEARNS & CO. INC. ("Bear Stearns").
Background
----------
A. The Company is contemplating an initial public offering (the
"Public Offering") of its common stock, par value $.001 per share (the "Common
Stock").
B. As part of the Public Offering, the Company will offer _________
shares of Common Stock (the "Offered Common Stock") to certain shareholders of
Safeguard pursuant to a directed share subscription program (the "Directed Share
Subscription Program").
C. In the event that any of the shares of Offered Common Stock are
not subscribed for or, if subscribed for, are not purchased by the shareholders
of Safeguard under the Directed Share Subscription Program, Safeguard and the
Company wish to provide for Safeguard's purchase of these remaining shares.
D. In the event that the shareholders of Safeguard subscribe for more
shares of Common Stock than the number of shares of Offered Common Stock,
Safeguard 98 will make an offer of up to _________ shares of common stock of the
Company, par value $.001 per share, owned by it prior to the Public Offering
(the "Safeguard Pac-West Stock"), and the Safeguard Pac-West Stock shall be
included in the Directed Share Subscription Program.
E. [_______________________] will act as the offering agent (the
"Offering Agent") for the Directed Share Subscription Program and as the
Company's transfer agent. The Offering Agent will determine the record date
shareholders eligible to participate in the Directed Share Subscription Program
and will collect subscriptions and subscription payments from the eligible
shareholders until 5:00 p.m. on the [third] [fourth] business day following the
date the Company determines the initial public offering price of its shares.
F. Bear Stearns has and will provide certain advisory services to the
Company, Safeguard and Safeguard 98 with respect to the Directed Share
Subscription Program and shall receive an advisory fee of 3% of the aggregate
initial offering price of all of the shares sold by either the Company or
Safeguard 98, as appropriate, for such advisory services.
ARTICLE 1.
THE TRANSACTION
---------------
1.1 Purchase and Purchase Price.
(a) In the event that any of the shares of Offered Common Stock are not
subscribed for or, if subscribed for, are not purchased by the shareholders of
Safeguard under the Directed Share
<PAGE>
Subscription Program, Safeguard shall, or shall cause its wholly-owned
subsidiary, Safeguard Delaware, Inc. to, purchase these remaining shares.
(b) The purchase price for the Common Stock (the "Purchase Price") shall
be equal to the product of (i) the aggregate number of shares of Offered Common
Stock, and (ii) the price per share of Common Stock sold pursuant to the Public
Offering.
(c) Safeguard shall transfer or Safeguard shall cause Safeguard Delaware,
Inc. to transfer or shall cause the Offering Agent to pay out of subscription
funds received, on behalf of Safeguard's shareholders participating in the
Directed Share Subscription Program, to the Company an amount equal to the
Purchase Price on the day of the closing of the Public Offering by wire
transfer.
(d) In the event that the shareholders of Safeguard subscribe for more
shares of Common Stock than the number of shares of Offered Common Stock,
Safeguard 98 shall make an offer of the Safeguard Pac-West Stock, and the
Safeguard Pac-West Stock shall be included in the Directed Share Subscription
Program.
1.2 Closing.
(a) Time and Place. The closing under this Agreement (the "Closing") will
take place at 10:00 a.m., Chicago, Illinois time, on the day of the closing of
the Public Offering, at the offices of Latham & Watkins, or at such other time,
date or place as the parties shall mutually agree. The date on which the Closing
occurs is sometimes referred to herein as the "Closing Date."
(b) Deliveries and Proceedings. On the Closing Date, the Company shall
instruct the transfer agent to accept instructions from Deirdre Blackburn, or
her designee at Safeguard, for:
(i) delivery of the subscription funds collected by the Offering
Agent to the extent not paid to the Company at the Closing;
(ii) delivery of the shares of Offered Common Stock purchased in the
Directed Share Subscription Program;
(iii)delivery to Safeguard of shares of Offered Common Stock not
purchased by Safeguard shareholders; and
(iv) the return to Safeguard 98 of any shares of Safeguard Pac-West
Stock that were not purchased in the Directed Share Subscription Program.
ARTICLE 2.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
The Company hereby represents and warrants to Safeguard, Safeguard 98
and Bear Stearns as follows:
2.1 Organization. The Company is a corporation duly incorporated, validly
existing and in good
<PAGE>
standing under the laws of the State of California.
2.2 Power and Authority. The Company has full corporate power and authority to
make, execute, deliver and perform this Agreement.
2.3 Authorization and Enforceability. The execution, delivery and performance
of this Agreement by the Company have been duly authorized by all necessary
corporate action on the part of the Company, and this Agreement constitutes the
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms.
ARTICLE 3.
REPRESENTATION AND WARRANTIES OF SAFEGUARD
------------------------------------------
Each of Safeguard and Safeguard 98 represent and warrant to the
Company and Bear Stearns as follows:
3.1 Organization. Safeguard is a corporation and Safeguard 98 is a limited
partnership duly incorporated or organized, respectively, validly existing and
in good standing under the laws of the Commonwealth of Pennsylvania and the
State of Delaware, respectively.
3.2 Power and Authority. Safeguard and Safeguard 98 each have full corporate
power and authority to make, execute, deliver and perform this Agreement.
3.3 Authorization and Enforceability. The execution, delivery and performance
of this Agreement by Safeguard and Safeguard 98 have been duly authorized by all
necessary corporate or limited partnership action on the part of Safeguard and
Safeguard 98, respectively, and this Agreement constitutes the legal, valid and
binding obligation of each of Safeguard and Safeguard 98, enforceable against
each of Safeguard and Safeguard 98 in accordance with its terms.
ARTICLE 4.
CONDITIONS TO CLOSING; TERMINATION
----------------------------------
4.1 Conditions Precedent to Obligations of Safeguard and Safeguard 98. The
obligations of Safeguard and Safeguard 98 to proceed with the Closing under this
Agreement are subject to the fulfillment prior to or at Closing of the following
conditions (any one or more of which may be waived in whole or in part by
Safeguard and Safeguard 98 at their option):
(a) Bringdown of Representations and Warranties. The representations and
warranties of the Company contained in this Agreement shall be true and correct
on and as of the time of Closing, with the same force and effect as though such
representations and warranties had been made on, as of and with reference to
such time, and Safeguard shall have received a certificate, signed by an
executive officer of the Company, to such effect.
(b) Performance and Compliance. The Company shall have performed all of
the covenants and complied with all of the provisions required by this Agreement
to be performed or complied with by it on or before the Closing, and Safeguard
and Safeguard 98 shall have received a certificate, signed by an executive
officer of the Company, to such effect.
<PAGE>
(c) Public Offering. The closing of the Public Offering shall occur
contemporaneously with the Closing under this Agreement.
4.2 Conditions Precedent to the Obligations of the Company. The obligations of
the Company to proceed with the Closing hereunder are subject to the fulfillment
prior to or at Closing of the following conditions (any one or more of which may
be waived in whole or in part by the Company at the Company's option):
(a) Bringdown of Representations and Warranties. The representations and
warranties of Safeguard and Safeguard 98 contained in this Agreement shall be
true and correct on and as of the time of Closing, with the same force and
effect as though such representations and warranties had been made on, as of and
with reference to such time, and Safeguard and Safeguard 98 shall have delivered
to the Company a certificate, signed by an executive officer of Safeguard and
Safeguard 98, to such effect.
(b) Performance and Compliance. Safeguard and Safeguard 98 shall have
performed all of the covenants and complied with all the provisions required by
this Agreement to be performed or complied with by it on or before the Closing
and Safeguard and Safeguard 98 shall have delivered to the Company a
certificate, signed by an executive officer of Safeguard and Safeguard 98, to
such effect.
(c) Public Offering. The closing of the Public Offering shall occur
contemporaneously with the Closing under this Agreement.
4.3 Termination.
(a) When Agreement May Be Terminated. This Agreement may be terminated at
any time prior to Closing:
(i) by mutual consent of Safeguard, Safeguard 98, the Company and
Bear Stearns; or
(ii) by Safeguard, Safeguard 98, the Company, or Bear Stearns if the
Company shall have withdrawn its Registration Statement on Form S-1 relating to
the Public Offering (Reg. No. 333-86607).
(b) Effect of Termination. In the event of termination of this Agreement
by Safeguard, Safeguard 98, the Company, or Bear Stearns as provided above, this
Agreement shall forthwith terminate and there shall be no liability on the part
of Safeguard, Safeguard 98, the Company, or Bear Stearns, except for liabilities
arising from a breach of this Agreement prior to such termination; provided,
however, that the obligations set forth in Section 5.2 hereof shall survive such
termination.
ARTICLE 5.
CERTAIN ADDITIONAL COVENANTS
----------------------------
5.1 Advisory Fee to Bear Stearns. In connection with the advisory services
provided by Bear Stearns relating to the Directed Share Subscription Program
administered as part of the proposed Public
<PAGE>
Offering by the Company, the Company hereby agrees to pay an advisory fee of 3%
of the aggregate initial offering price of all of the Offered Common Stock sold
as part of the Directed Share Subscription Program (up to ____ million shares),
and Safeguard hereby agrees to pay an advisory fee of 3% of the aggregate
initial offering price of all of the Safeguard Pac-West Stock sold as part of
the Directed Share Subscription Program (up to _______ million shares). All such
advisory fees shall be payable at the closing of the initial public offering by
wire transfer in immediately available funds. The Company agrees to pay all
costs and expenses of the underwriters, including the fees and expenses of Bear
Stearns' counsel, in connection with matters related to the Directed Share
Subscription Program. The parties hereto agree that any shares sold in the
Directed Share Subscription Program will be separate from and in addition to the
shares of Common Stock of the Company being underwritten by Bear Stearns.
The Company, Safeguard and Safeguard 98 each understand that this is
not a commitment by Bear Stearns to underwrite shares in the Public Offering,
which commitment would be evidenced by an executed underwriting agreement.
5.2 Indemnification.
(a) Safeguard hereby agrees to indemnify Bear Stearns, the Company and its
underwriters and each of their affiliates, officers, employees, representatives
and directors (the "Indemnified Persons") against, and hold them harmless from,
any loss, liability, claim, damage or expense, joint or several ("Losses"),
arising directly or indirectly, out of or in connection with, the Directed Share
Subscription Program, including, without limitation, (i) costs and expenses
associated with the failure of any shareholders of Safeguard to consummate
purchases of Offered Common Stock for which they have subscribed, (ii) any
claims by shareholders of Safeguard or other persons arising from the Directed
Share Subscription Program, and (iii) other costs and expenses, including
printing costs and legal fees and expenses, arising from the establishment,
execution and performance of the Directed Share Subscription Program.
Notwithstanding the foregoing, Safeguard shall not indemnify the Company
against, and the term "Losses" shall not include, liabilities arising from any
untrue or allegedly untrue statement of a material fact, or omission or alleged
omission of a material fact required to be stated to make the statements not
misleading, in the prospectus contained in the Company's Registration Statement
on Form S-1 (Reg. No. 333-86607) (the "Prospectus"), except for statements or
omissions regarding the Directed Share Subscription Program and except for any
materials related to the Directed Share Subscription Program delivered to
Safeguard's shareholders and not to other recipients of the Prospectus
generally. Safeguard agrees to reimburse the Indemnified Persons, as incurred,
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any Losses.
(b) Promptly after receipt by an Indemnified Person of notice of the
commencement of any action for which indemnification or contribution may be
sought hereunder, such Indemnified Person will notify Safeguard in writing of
the commencement thereof. The failure to so notify Safeguard will not relieve
Safeguard from liability under Section 5.1(a) above unless and to the extent
that Safeguard did not otherwise learn of such action and such failure results
in the
<PAGE>
forfeiture of substantial rights and defenses. Safeguard shall be entitled to
appoint counsel at Safeguard's expense to represent the Indemnified Person in
any action for which indemnification is sought (in which case Safeguard shall
not thereafter be liable for the fees and expenses of separate counsel retained
by the Indemnified Person except as set forth below); provided, however, that
such counsel shall be reasonably satisfactory to the Indemnified Person.
Notwithstanding Safeguard's election to appoint counsel to represent the
Indemnified Person in an action, the Indemnified Person shall have the right to
employ separate counsel (including local counsel), and Safeguard shall bear the
reasonable fees, costs and expenses of such counsel if (i) the use of counsel
chosen by Safeguard to represent the Indemnified Person would present such
counsel with a conflict of interest, (ii) the actual or potential defendants in,
or targets of, any such action include both Safeguard and the Indemnified Person
and the Indemnified Person shall have reasonably concluded that there may be
legal defenses available to it that are different from or in addition to those
available to Safeguard, (iii) Safeguard shall not have employed counsel
reasonably satisfactory to the Indemnified Person within a reasonable time after
notification of the commencement of such action or (iv) Safeguard shall have
authorized the Indemnified Person to employ separate counsel at the expense of
Safeguard.
(c) Safeguard shall not, without the prior written consent of the relevant
Indemnified Person, settle or compromise or consent to' the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder unless such settlement, compromise or consent includes an
unconditional release of such Indemnified Person from all liability arising from
such claim, action, suit or proceeding. An Indemnified Person may not settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder without the consent of
Safeguard, such consent not to be unreasonably withheld.
(d) In the event that the indemnity provided for in this Section 5.2 is
unavailable to or insufficient to hold harmless an Indemnified Person for any
reason, the Indemnified Persons and Safeguard shall contribute to the Losses
(including the legal and other expenses attributable to investigating or
defending same) to which the Indemnified Person may be subject in such
proportion as is appropriate to reflect the relative fault of the Indemnified
Person and Safeguard in connection with the statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations,
including that the Company performed the Directed Share Subscription Program as
an accommodation to Safeguard without any legal obligation to do so. Relative
fault shall be determined by reference to, among other things, whether any
untrue or allegedly untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information provided by the
Indemnified Person or Safeguard, the intent of the Indemnified Person and
Safeguard, and their relative knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The parties agree that
it would not be just and equitable if contribution was determined by any method
of allocation that does not take into account the equitable considerations
discussed above.
<PAGE>
ARTICLE 6.
MISCELLANEOUS
-------------
6.1 Nature and Survival of Representations. The representations, warranties,
covenants and agreements of the parties contained in this Agreement, and all
statements contained in this Agreement or any exhibit hereto or any certificate
or other document delivered pursuant to this Agreement or in connection with the
transactions contemplated hereby, shall be deemed to constitute representations,
warranties, covenants and agreements of the respective party delivering the
same. All such representations, warranties, covenants and agreements shall
survive the Closing.
6.2 Notices. All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if personally
delivered or, if mailed, when mailed by United States first-class, certified or
registered mail, postage prepaid, to the other party at the following addresses
(or at such other address as shall be given in writing by any party to the
other).
(a) If to Safeguard or Safeguard 98, to:
Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Attention: James A. Ounsworth, Esq.
(b) If to the Company, to:
Pac-West Telecomm, Inc.
4210 Coronado Avenue
Stockton, CA 95204
Attention: Richard Bryson
With a required copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60606
Attention: Jeff O'Connor, Esq.
(c) If to Bear Stearns, to:
Bear, Stearns & Co. Inc.
245 Park Avenue, 18th Floor
New York, NY 10167
Attention: John Thomas
With a required copy to:
Latham & Watkins
233 S. Wacker Drive
<PAGE>
Suite 5800
Chicago, IL 60606
Attention: Christopher Lueking, Esq.
6.3 Third Party Beneficiaries. Safeguard and Safeguard 98 acknowledge that
each of the underwriters of the Public Offering shall be a third party
beneficiary entitled to exercise the rights and remedies provided for herein
directly against Safeguard and Safeguard 98. The Company shall cooperate with
and assist each of the underwriters of the Public Offering with respect to any
action such underwriters of the Public Offering with respect to any action such
underwriters take to exercise such rights and remedies directly against
Safeguard and Safeguard 98.
6.4 Successors and Assigns. This Agreement, and all rights, powers and
obligations granted hereby, will bind and inure to the benefit of the parties
hereto and their respective successors and permitted assigns but shall not be
assignable or delegable by any party.
6.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York, without giving
effect to principles of conflicts of laws.
6.6 Headings. The headings preceding the text of the sections and subsections
hereof are inserted solely for convenience of reference, and shall not
constitute a part of this Agreement, nor shall they affect its meaning,
construction or effect.
6.7 Counterparts. This Agreement may be executed in two counterparts, each of
which shall be deemed an original, but which together shall constitute one and
the same instrument.
6.8 Further Assurances. Each party shall cooperate and take such action as may
be reasonably requested by the other party in order to carry out the provisions
and purposes of this Agreement and the transactions contemplated hereby.
6.9 Amendment and Waiver. The parties may by mutual agreement amend this
Agreement in any respect, and either party, as to such party, may (a) extend the
time for the performance of any of the obligations of the other party, (b) waive
any inaccuracies in representations by the other party, (c) waive compliance by
the other party with any of the agreements contained herein and performance of
any obligations by the other party, and (d) waive the fulfillment of any
condition that is precedent to the performance by such party of any of its
obligations under this Agreement. To be effective, any such amendment or waiver
must be in writing and be signed by the party against whom enforcement of the
same is sought.
6.10 Entire Agreement. This Agreement sets forth all of the promises,
covenants, agreements, conditions and undertakings between the parties hereto
with respect to the subject matter hereof, and supersedes all prior and
contemporaneous agreements and understandings, inducements or conditions,
express or implied, oral or written.
6.11 Interpretations. No party to this Agreement shall be considered the
draftsman. This Agreement has been reviewed, negotiated and accepted by all
parties and their attorneys and shall be construed and interpreted according to
the ordinary meaning of the words used so as fairly to accomplish the purposes
and intentions of all parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
SAFEGUARD SCIENTIFICS, INC.
By:
Name:
Title:
SAFEGUARD 98 CAPITAL, L.P.
By:
Name:
Title:
PAC-WEST TELECOMM, INC.
By:
Name:
Title:
BEAR, STEARNS & CO. INC.
By:
Name:
Title:
