<PAGE>
As filed with the Securities and Exchange Commission on July 8, 1999
Registration No. 333-76779
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
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 Identification No.)
ofincorporation or Classification Code
organization) Number)
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)
Copy to:
Jeffrey S. O'Connor, Esq.
Kirkland & Ellis
200 East Randolph Drive, Chicago, IL 60601
Telephone: (312) 861-2000
----------------
Approximate date of commencement of proposed sale to the public: The
exchange will occur as soon as practicable after the effective date of this
Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
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 Prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the SEC +
+is effective. This 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 JULY 8, 1999
PROSPECTUS
Pac-West Telecomm, Inc.
Exchange Offer for
$150,000,000
13 1/2% Senior Notes Due 2009
Expires 5:00 p.m., New York City time, , 1999, unless extended.
No public market exists for the outstanding notes or the new notes. We do not
intend to list the new notes on any securities exchange or seek approval for
quotation through any automated trading system.
For a discussion of risk factors that you should consider before
participating in this exchange offer, see "Risk Factors" beginning on page 12
of this prospectus.
Neither the SEC nor any state securities commission has approved the notes to
be distributed in this exchange offer, nor have any of these organizations
determined that this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 12
The Exchange Offer........................................................ 21
Use of Proceeds........................................................... 30
Capitalization............................................................ 31
Unaudited Pro Forma Financial Data........................................ 32
Selected Financial Data................................................... 34
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 36
Business.................................................................. 48
Management................................................................ 66
Certain Relationships and Related Transactions............................ 73
Principal Shareholders.................................................... 78
Description of Capital Stock.............................................. 80
Description of Indebtedness............................................... 81
Description of Notes...................................................... 82
Certain United States Federal Tax Considerations.......................... 115
Plan of Distribution...................................................... 119
Legal Matters............................................................. 119
Experts................................................................... 120
Where You Can Find More Information....................................... 120
Index to Financial Statements............................................. F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all of the information that is important to you. This
prospectus includes specific terms of the notes we are offering, as well as
information regarding our business and detailed financial data. Except as
otherwise stated, all share data gives effect to the ten for one stock split
which became effective as of March 19, 1999. We encourage you to read this
prospectus in its entirety.
The Exchange Offer
On January 29, 1999, Pac-West Telecomm, Inc. completed the private offering
of its $150,000,000 13 1/2% Series A Senior Notes due 2009.
In this exchange offer, you are entitled to exchange those notes for
registered new notes with substantially identical terms. The interest rate on
the old notes may be increased if certain conditions are not met. You should
read the discussion under the heading "--Summary of Terms of the New Notes" and
"Description of Notes" for further information regarding the new notes.
We believe that the new notes issued in this exchange offer may be resold by
you without compliance with the registration and prospectus delivery provisions
of the Securities Act of 1933. You should read the discussion under the
headings "--Summary of the Exchange Offer" and "The Exchange Offer" for further
information regarding the exchange offer and resale of notes.
Our Company
Pac-West is a rapidly growing competitive local exchange carrier providing
switched local and long distance telecommunications services and one-stop
integrated telecommunications services to Internet service providers, paging
companies and other inbound call service providers as well as medium and small
businesses.
We built our network to capitalize on the significant growth in national
Internet usage and in the related demand for switched local services by
regional and national Internet service providers, as well as the increasing
demand of medium and small businesses for customized and integrated
telecommunications services. We believe the structure and protocols of our
network and our presence in each California 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, paging companies and other inbound call service
providers. Our network enables these companies to provide their business and
residential customers with access to the Internet, paging and other services
from almost any point in California through a local call.
The fact that we own our switches and lease our fiber transport lines and
our focus on telecommunications intensive customers allows us to quickly enter
new markets and generate high network utilization, substantial revenues, strong
profit margins and positive cash flows. For the year ended December 31, 1998
and for the three month period ended March 31, 1999, we had net revenues of
approximately $42.2 million and $14.4 million and adjusted EBITDA, as defined,
of approximately $16.1 million and $6.1 million, respectively. Our revenues
include compensation from other telecommunications companies for completing
their customers' calls only to the extent such compensation is actually
received in cash because our right to receive such compensation is currently
being challenged. See "Risk Factors--Our right to receive reciprocal
compensation for calls to Internet service providers is currently being
challenged."
Our Strategy
Our objective is to become a leading provider of telecommunications services
to Internet service providers, paging companies and other inbound call service
providers as well as medium and small
3
<PAGE>
businesses in each of our target markets. We plan to do this by:
. Capitalizing on growing Internet service provider demand for local
services;
. Focusing on the medium and small business market;
. Expanding our direct sales force;
. Targeting California and the western United States;
. Deploying a capital-efficient network;
. Installing an advanced, uniform technology platform; and
. Expanding our customer base through potential acquisitions.
For more information relating to our strategy, see "Business--Strategy."
How to Contact Us
Our executive offices are located at 4210 Coronado Avenue, Stockton,
California 95204 and our telephone number is (209) 926-3300.
Summary of the Exchange Offer
The Initial Offering of Old Notes
Old Notes.................
We sold the old notes on January 29, 1999 to
NationsBanc Montgomery Securities LLC, CIBC
Oppenheimer Corp. and First Union Capital Markets,
a division of Wheat First Securities, Inc. in
accordance with a purchase agreement dated January
27, 1999. These initial purchasers of the notes
subsequently resold the notes to:
(1) qualified institutional buyers in accordance
with Rule 144A under the Securities Act of
1933; and
(2) qualified buyers outside the United States in
reliance upon Regulation S under the Securities
Act of 1933.
Registration Rights
Agreement................ You are entitled to exchange your old notes for new
notes with substantially identical terms. This
exchange offer is intended to satisfy these rights.
After this exchange offer is complete, you will no
longer be entitled to any exchange or registration
rights with respect to your old notes.
The Exchange Offer
The Exchange Offer........
We are offering to exchange $1,000 principal amount
of 13 1/2% Series B Senior Notes due 2009 of Pac-
West Telecomm, Inc. which have been registered
under the Securities Act of 1933 for each $1,000
principal amount of our outstanding 13 1/2% Series
A Senior Notes due 2009 which were issued in
January 1999 in a private offering. In order to be
exchanged, an old note must be properly tendered
and accepted prior to the expiration date. All old
notes that are validly tendered and not validly
withdrawn will be exchanged.
As of the date of this prospectus the aggregate
principal amount of old notes outstanding is $150
million.
We will issue new notes on or promptly after the
expiration of this exchange offer.
4
<PAGE>
General...................
The form and terms of the new notes are the same as
the form and terms of the old notes which they
replace, except that:
. the new notes bear a Series B designation and
a different CUSIP number from the old notes;
. the new notes have been registered under the
Securities Act of 1933 and, therefore, will
not bear legends restricting their transfer;
and
. the holders of new notes will not be entitled
to certain rights under the registration
rights agreement, including the provisions
providing for an increase in the interest
rate on the old notes in certain
circumstances relating to the timing of this
exchange offer, which rights will terminate
when this exchange offer is consummated. See
"The Exchange Offer--Purpose and Effect of
the Exchange Offer."
The new notes will evidence the same debt as the
old notes and will be entitled to the benefits of
the indentures. See "Description of Notes."
Resales...................
We believe that the new notes issued in this
exchange offer may be offered for resale, resold
and otherwise transferred by you without compliance
with the registration and prospectus delivery
provisions of the Securities Act of 1933 provided
that:
. the new notes are being acquired in the
ordinary course of your business;
. you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate
in the distribution of the new notes issued
to you in this exchange offer; and
. you are not an affiliate of ours.
If our belief is inaccurate and you transfer any
new notes issued to you in this exchange offer
without delivering a prospectus meeting the
requirements of the Securities Act of 1933 or
without an exemption from registration of your new
notes from such requirements, you may incur
liability under the Securities Act of 1933. We do
not assume or indemnify you against any such
liability.
Each broker-dealer that is issued new notes in this
exchange offer for its own account in exchange for
old notes which were acquired by such broker-dealer
as a result of market-making or other trading
activities, must acknowledge that it will deliver a
prospectus meeting the requirements of the
Securities Act of 1933 in connection with any
resale of the new notes. A broker-dealer may use
this prospectus for an offer to resell, resale or
other retransfer of the new notes issued to it in
this exchange offer.
Record Date...............
We mailed this prospectus and the related exchange
offer documents to registered holders of old notes
on , 1999.
5
<PAGE>
Expiration Date...... The exchange offer will expire at 5:00 p.m., New
York City time, , 1999, unless we decide
to extend the expiration date.
Conditions to the
Exchange Offer........... This exchange offer is not subject to any condition
other than that this exchange offer not violate
applicable law or any applicable interpretation of
the staff of the SEC.
Procedures for Tendering
Old Notes Held in the
Form of Book-Entry
Interests...........
The old notes were issued as global securities in
bearer form without interest coupons. The old notes
were deposited with Norwest Minnesota Bank, N.A.,
as book-entry depositary, when they were issued.
The Norwest Minnesota Bank, N.A. issued a
certificateless depositary interest, known as a
book-entry interest, in each note, which represents
a 100% interest in the note, to The Depositary
Trust Company. Beneficial interests in the notes,
which are held by direct or indirect participants
in DTC through the book-entry interests, are shown
on, and transfers of the notes can be made only
through, records maintained in book-entry form by
DTC and its participants.
If you are a holder of old notes held in the form
of a book-entry interest, and you wish to tender
your book-entry notes for new notes in accordance
with this exchange offer, you must transmit to
as exchange agent, on or prior to the
expiration date of this exchange offer:
either
. a properly completed and duly executed letter
of transmittal to tender for exchange Pac-
West 13 1/2% Senior Notes due 2009 in
accordance with this prospectus, a form of
which accompanies this prospectus, or a
facsimile of the letter of transmittal,
including all other documents required by the
letter of transmittal, to the exchange agent
at the address set forth on the cover page of
the letter of transmittal; or
. a computer-generated message transmitted by
means of DTC's automated tender offer program
system and received by the exchange agent and
forming a part of a confirmation of book
entry transfer in which you acknowledge and
agree to be bound by the terms of the letter
of transmittal;
and, either
. a timely confirmation of book-entry transfer
of your old notes into the exchange agent's
account at DTC, in accordance with the
procedure for book-entry transfers described
in this prospectus under the heading "The
Exchange Offer-- Procedures for Tendering,"
must be received by the exchange agent on or
prior to the expiration date; or
. the documents necessary for compliance with
the guaranteed delivery procedures described
below.
6
<PAGE>
Procedures for Tendering
Definitive Old Notes.....
Subject to certain conditions, if you are a holder
of old notes in definitive form, you are entitled
to receive, in exchange for your old notes, new
notes in definitive form which are in equal
principal amounts to your old notes. If you acquire
old notes in definitive form prior to the
expiration date, you must tender your old notes in
accordance with the procedures described in this
prospectus under the heading "The Exchange Offer--
Procedures for Tendering."
Untendered Old Notes......
If you are eligible to participate in this exchange
offer and you do not tender your old notes, you
will not have any further registration or exchange
rights and your old notes will continue to be
subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such
old notes could be adversely affected.
Special Procedures for
Beneficial Owners........
If you are the beneficial owner of book-entry notes
and your name does not appear on a security
position listing of DTC as the holder of such book-
entry notes or if you are a beneficial owner of
notes that are registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee and you wish to tender your notes, you
should contact such person in whose name your notes
are registered promptly and instruct that person to
tender on your behalf.
Guaranteed Delivery
Procedures............... If you wish to tender your old notes and time will
not permit your required documents to reach the
exchange agent by the expiration date of this
exchange offer, or the procedure for book-entry
transfer cannot be completed on time or
certificates for the old notes cannot be delivered
on time, you may tender your old notes in
accordance with the procedures described in this
prospectus under the heading "The Exchange Offer--
Guaranteed Delivery Procedures."
Withdrawal Rights.... You may withdraw the tender of your old notes at
any time prior to 5:00 p.m., New York City time on
, 1999.
Certain U.S. Federal Tax
Considerations...........
The exchange of old notes for new notes will not be
a taxable event for United States federal income
tax purposes.
Use of Proceeds...........
We will not receive any proceeds from the issuance
of new notes in accordance with this exchange
offer. We will pay all of our expenses incident to
this exchange offer.
Exchange Agent............
is serving as the exchange agent in
connection with this exchange offer.
7
<PAGE>
Summary of Terms of the New Notes
The form and terms of the new notes are the same as the form and terms of
the old notes except that the new notes will be registered under the Securities
Act of 1933 and, therefore, will not bear legends restricting their transfer
and will not be entitled to registration under the Securities Act of 1933. The
new notes will evidence the same debt as the old notes, and the same indenture
will govern both the new notes and the old notes.
New Notes............ Series B 13 1/2% Senior Notes due 2009 of Pac-West
Telecomm, Inc.
Maturity.................. February 1, 2009
Interest............. Semi-annually in cash in arrears on February 1 and
August 1, beginning on August 1, 1999.
Interest Reserve Account..
We have purchased and pledged to the trustee, as
security for the benefit of the holders of the
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 notes. We used approximately $19.7
million of the net proceeds of the private offering
of the old notes to acquire the pledged securities.
Optional Redemption.......
On or after February 1, 2004, we may redeem some or
all of the notes at any time at the redemption
prices described in the section "Description of
Notes" under the heading "Optional Redemption."
Prior to February 1, 2002, we may redeem up to 35%
of the notes with the proceeds of certain public
offerings of equity in Pac-West at the price listed
in the section "Description of Notes" under the
heading "Optional Redemption."
Ranking...................
The notes:
. are our general unsecured obligations;
. rank equal in right of payment with all our
existing and future unsecured senior
indebtedness;
. rank senior in right of payment to all our
future subordinated indebtedness;
. effectively rank junior to all of our secured
indebtedness to the extent of the value of
the assets securing such indebtedness; and
. are effectively subordinated to all
indebtedness, liabilities and other
obligations of our future subsidiaries.
Currently, we have no subsidiaries.
As of March 31, 1999, the notes were subordinated
to approximately $209,000 of our secured
indebtedness.
8
<PAGE>
Certain Covenants.........
We will issue the new notes under an indenture with
Norwest Bank Minnesota, N.A., as trustee. The
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.
See "Description of Notes--Certain Covenants."
Mandatory Offer to
Repurchase............... If we sell certain assets or experience a change of
control, we must offer to repurchase the notes at
the prices listed in the section "Description of
Notes."
Form of New Notes.... The new notes will be represented by one or more
permanent global securities in bearer form
deposited with Norwest Bank Minnesota, N.A., as
book-entry depositary, for the benefit of DTC. You
will not receive new notes in registered form
unless one of the events set forth under the
heading "Description of Notes--Book-Entry; Delivery
and Form" occurs. Instead, beneficial interests in
the new notes will be shown on, and transfers of
these will be effected only through, records
maintained in book-entry form by DTC with respect
to its participants.
9
<PAGE>
Summary Financial Data
This information was derived from both our audited and unaudited financial
statements and related notes contained elsewhere in this prospectus. The
unaudited financial data at March 31, 1999 and for the three month periods
ended March 31, 1998 and March 31, 1999 include certain adjustments, all of
which are normal recurring adjustments which we consider necessary for a fair
presentation of our results for these periods. The unaudited balance sheet data
as of March 31, 1999 includes the effect of our recapitalization as described
in Note 1 to the audited financial statements included elsewhere in this
prospectus and the private offering of the old notes. The results of our
operations for the three month period ended March 31, 1999 are not necessarily
indicative of the results of operations which we expect for the full 1999
calendar year.
Please read this summary along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," our audited and unaudited
financial statements with related notes and our unaudited pro forma financial
data with related notes contained elsewhere in this prospectus.
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 the new
notes.
We recognize reciprocal compensation as revenue only to the extent received
in cash. Pacific Bell and GTE, the two incumbent local exchange carriers with
which we have interconnection agreements, have each refused to pay the portion
of reciprocal compensation which they estimate is the result of inbound 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 no reciprocal compensation is due. See note 5 to the audited
financial statements and "Risk Factors--Our right to receive reciprocal
compensation for calls to Internet service providers is currently being
challenged."
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, $48,000 and $527,000 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 three month periods ended
March 31, 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 evaluating the
capacity of a company to service its obligations, as well as to compare a
company's results with those of similar companies. In addition, EBITDA is a
measure included in the restrictive covenants under our new senior credit
facility.
The terms of the notes do not restrict our discretionary use of funds
depicted by adjusted EBITDA. In addition, we have no intention to pay dividends
to our stockholders. However, we do need to reserve funds to service our
existing and future debt obligations, and, to the extent available, to fund
anticipated capital expenditures of $30 million to $50 million in 1999. Also
see the Statements of Cash Flows in the audited and unaudited financial
statements.
10
<PAGE>
<TABLE>
<CAPTION>
Period from
Commencement on Year Ended Three Month Period Ended
October 1, 1996 December 31, March 31,
to December 31, ---------------- --------------------------
1996 1997 1998 1998 1999
--------------- ------- ------- ----------- --------------
(unaudited) (unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues................ $4,232 $29,551 $42,211 $10,252 $ 14,416
Costs and expenses:
Operating costs........ 2,064 12,060 15,344 3,731 4,062
Selling, general and
administrative:
Selling, general and
administrative...... 1,519 7,367 10,779 2,002 4,303
Transaction bonuses
and consultant's
costs (1)........... -- -- 3,798 -- --
Depreciation and
amortization.......... 299 2,204 4,106 845 1,449
------ ------- ------- ------- --------
Income from
operations.......... 350 7,920 8,184 3,674 4,602
Interest expense........ (105) (932) (4,199) (377) (4,050)
Gain on disposal of
answering service
division............... -- 385 -- -- --
Costs of merger and
recapitalization (1)... -- -- (3,004) -- --
Other income (expense),
net.................... (11) 119 330 25 527
------ ------- ------- ------- --------
Income before
provision for income
taxes and
extraordinary item.. 234 7,492 1,311 3,322 1,079
Provision for income
taxes.................. 94 2,997 1,561 1,329 432
------ ------- ------- ------- --------
Income (loss) before
extraordinary item.. 140 4,495 (250) 1,993 647
Extraordinary item--loss
on early extinguishment
of debt, net of income
tax benefit of $278
(1).................... -- -- (417) -- --
------ ------- ------- ------- --------
Net income (loss).... $140 $4,495 $(667) $1,993 $647
====== ======= ======= ======= ========
Other Financial Data:
Reciprocal compensation
withheld............... -- $3,793 $32,591 $5,032 $13,401
Adjusted EBITDA......... 633 10,538 16,091 4,496 6,051
Adjusted EBITDA margin
%...................... 15.0% 35.7% 38.1% 43.9% 42.0%
Capital expenditures.... $3,899 $11,884 $42,466 $1,275 $3,633
Cash provided by (used
in):
Operating activities... 75 5,876 12,033 5,558 4,544
Investing activities... (1,682) (6,619) (42,031) (1,185) (23,329)
Financing activities... 1,549 3,658 41,631 (255) 44,921
Ratio of earnings to
fixed charges (2)...... 2.1x 5.8x 1.2x 6.6x 1.1x
Pro forma ratio of
earnings to fixed
charges (2)............ -- 1.1x
<CAPTION>
March 31, 1999
--------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................................... $ 41,372
Restricted cash (3)................................................. 19,844
Working capital..................................................... 60,053
Property, plant and equipment, net.................................. 59,528
Total assets........................................................ 134,311
Total debt.......................................................... 150,209
Convertible Redeemable Preferred Stock, including accrued cumulative
dividends of $2,466................................................ 47,466
Stockholders' equity (deficit)...................................... (74,608)
</TABLE>
- --------
(1) Transaction bonuses and consultant's costs, costs of merger and
recapitalization and the extraordinary item all relate to our
recapitalization.
(2) For purposes of this computation, earnings are defined as income before
provision for income taxes, extraordinary item and fixed charges (excluding
capitalized interest). Fixed charges are the sum of (A) interest costs
(including amounts capitalized), (B) amortization of deferred financing
costs and (C) the portion of operating lease rental expense that is
representative of the interest factor. On a pro forma basis, earnings were
insufficient to cover fixed charges by $394,000 for the year ended December
31, 1998.
(3) Restricted cash represents cash deposited in an interest reserve trust
account to fund the initial interest payments due under the notes.
11
<PAGE>
RISK FACTORS
Ownership of the old notes or the new notes involves a high degree of risk.
Holders of the old notes should consider carefully the risk factors below, as
well as the other information in this prospectus, before tendering their old
notes in this exchange offer.
Our substantial indebtedness could adversely affect our business and prevent us
from fulfilling our obligations under the notes.
We have a substantial amount of indebtedness and are highly leveraged. On an
unaudited basis, as of March 31, 1999, our borrowings and other long-term
obligations totaled $150,209,000, and we had a stockholders' deficit of
$(74,608,000). 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:
. make it more difficult for us to satisfy our obligations with respect to
the notes;
. increase our vulnerability to general adverse economic and industry
conditions;
. limit our ability to fund future working capital, capital expenditures,
marketing costs and other general corporate requirements;
. require us to dedicate a substantial portion of our cash flows from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flows to fund working capital, capital
expenditures, marketing efforts and other general corporate purposes;
. limit our flexibility in planning for or reacting to changes in our
business and the industry in which we operate;
. place us at a competitive disadvantage compared to our less leveraged
competitors; and
. limit our ability to borrow additional funds.
We may not be able to generate sufficient cash to service our indebtedness,
including the notes.
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, including the notes, and to fund capital
expenditures and marketing efforts. Our ability to generate cash from
operations is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. In addition, we may
need to refinance all or a portion of our indebtedness, including the notes, on
or before maturity. We may not be able to refinance this indebtedness on
commercially reasonable terms or at all.
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 negatively affect our growth, our ability to
compete in the telecommunications industry and our financial condition.
Failure to continue our expansion may 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, our financial condition and ability to meet our obligations under
the notes. 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;
12
<PAGE>
.lease adequate trunking 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.
An inability to manage our growth may 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. This could result from an inability to maintain the
quality of our operations, to control our costs, to maintain compliance with
all applicable regulations, to maintain effective quality controls, to expand
our internal management, technical, information and accounting systems, and to
attract, train and retain qualified personnel.
Our business is highly regulated, imposing substantial compliance costs and
restricting our ability to conduct our business.
Our provision of telecommunications services is heavily regulated at the
federal, state, and local levels. Compliance with these regulations impose
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.
Competition by Bell operating companies could adversely affect our business.
Federal law currently prohibits regional Bell operating companies, including
Pacific Bell and Nevada Bell, from engaging in in-region, inter-local access
and transport area 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 only companies such as Pac-West
currently are able to offer. See "Business--Regulation."
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 unbundled network elements, 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 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. See "Business--Regulatory
Proceedings--Interconnection Agreements."
13
<PAGE>
Our right to receive reciprocal compensation for calls to Internet service
providers is currently being challenged.
We derive a substantial portion of our revenues from reciprocal
compensation paid by incumbent local exchange carriers with which we have
interconnection agreements. Two incumbent local exchange carriers with which
we have interconnection agreements, Pacific Bell and GTE, have refused to pay
that portion of reciprocal compensation that they estimate is the result of
inbound traffic terminating to Internet service providers. If these challenges
to our right to receive reciprocal compensation for calls to Internet service
providers are successful, our business and financial condition could be
adversely affected. The total reciprocal compensation withheld by these
incumbent local exchange carriers and not included in revenues was $3.8
million, $32.6 million and $13.4 million for the years ended December 31, 1997
and 1998 and for the three month period ended March 31, 1999, respectively.
Other local exchange carriers with which we have interconnection agreements or
with which we may enter into interconnection agreements may also refuse to pay
this kind of reciprocal compensation in the future.
The applicability of reciprocal compensation to Internet service provider
calls is currently under review by both federal and state regulators,
including the California Public Utilities Commission. On June 24, 1999, the
California Public Utilities Commission adopted a decision in the arbitration
proceeding between us and Pacific Bell which held that reciprocal compensation
would be payable for Internet service provider calls under our new
interconnection agreement with Pacific Bell which became effective on June 29,
1999. Pacific Bell has requested rehearing of this decision. This decision
does not address reciprocal compensation withheld under the prior agreement.
We do not know at this time what other action Pacific Bell will take with
respect to this decision. Should Pacific Bell or any other local exchange
carrier ultimately prevail or federal or state regulations are established
contrary to our position regarding reciprocal compensation, our business and
financial condition could be adversely affected. See "Business--Regulatory
Proceedings--Jurisdiction over and Compensation for Internet Service Provider
Traffic."
In the event that all or a portion of the reciprocal compensation withheld
by Pacific Bell or GTE is paid, the terms of our recapitalization require us
to pay additional distributions to certain owners of up to $20.0 million. See
"Certain Relationships and Related Transactions--Recapitalization."
In local markets, we compete 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 also 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 also has proposed a rule that would give these carriers additional pricing
flexibility and deregulate competitive access services, as opposed to local
exchange services, either automatically or after certain competitive levels
are reached. Such a rule could allow them to offer discounts to large
customers through contract tariffs, engage in aggressive volume and term
discount pricing practices for their customers, and/or charge competitors
excessive fees for interconnection to their networks.
We may not be able to overcome these advantages and compete successfully
with the incumbent local exchange carriers.
14
<PAGE>
We face competition in local markets, putting downward pressure on prices.
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 face competition in long distance markets, putting downward pressure on
prices.
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.
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.
Finally, our competitors' cost 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 depend on Internet service providers for a significant portion of our
revenues.
For the three months ended March 31, 1999, nine of our fifteen largest
customers in terms of revenues are Internet service providers. As a result, a
significant reduction in usage by one or more of our key Internet service
providers 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, however, is intense, and we expect it will
continue to increase. We may not be able to increase or maintain our Internet
service provider customer base.
The technologies that we use may become obsolete, which would limit our
ability to compete effectively.
The telecommunications industry is subject to rapid and significant changes
in technology. If we do not replace or upgrade our technology and equipment
that becomes obsolete, we will not be able to compete effectively because we
will not be able to meet customer expectations.
The development of competing technologies, such as integrated services
digital network lines, cable modems, T-1 circuits and digital subscriber
lines, which provide significantly faster data transfer rates than the fastest
current dial-up modems, may give companies that provide these services a
competitive advantage. 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 and other personnel could negatively impact
our business prospects.
We believe that a critical component of our success will be the retention
of our key executive officers.
15
<PAGE>
Losing the services of one or more of Mr. Wallace W. Griffin, Mr. John K. La
Rue, Mr. Richard E. Bryson, Mr. Brian K. Johnson, Mr. Dennis V. Meyer, and Mr.
Jason R. Mills, could adversely affect our ability to manage our business and
our business prospects.
In addition, we must 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. We may not
be able to continue to hire and retain high quality personnel.
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. Such 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
and our financial condition. 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. Any damage or failure that causes interruptions in our
operations could have a material adverse effect on our business and our
financial condition. 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. We have not developed a formal disaster recovery plan.
We may face additional costs or a system failure due to Year 2000 issues.
The Year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. As a
result, many companies' software and computer systems may need to be upgraded
or replaced in order to comply with Year 2000 requirements. We believe that all
of our systems other than our long distance billing system and one of our
accounting systems are Year 2000 compliant. We have not yet completed our
review of our noncomputer systems for Year 2000 issues relating to embedded
microprocessors. To the extent that any Year 2000 issues exist, a system
failure may result and we may incur significant additional costs to replace or
upgrade noncompliant systems. We have not developed a formal disaster recovery
plan to recover data that may be affected by Year 2000 issues.
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
16
<PAGE>
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 and our
ability to meet our obligations under the notes.
Furthermore, the purchasing patterns of our major customers may be affected
by Year 2000 issues as companies expend significant resources to correct their
current systems for Year 2000 compliance. These expenditures may result in
reduced funds available for our services, which could have a material adverse
effect on our business and our ability to meet our obligations under the notes.
We are assessing the compliance efforts of our major customers and suppliers.
If the systems of certain of our customers and suppliers, particularly the
incumbent local exchange carriers, long distance carriers and others on whose
services we depend or with whom our systems interface, are not Year 2000
compliant, it would have a material adverse effect on us. We have not
developed, nor is it feasible to develop, a contingency plan to address the
above scenario. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issues."
Delays in implementing a new billing and operations support system could
adversely affect our business.
Our existing billing system is not adequate to meet our expected future
needs and is not Year 2000 compliant. Further, to improve our operating
processes and to meet expected growth, we will need to install an operations
support system. We are currently in the process of implementing both of these
systems. 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 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 and on our financial condition.
Because the notes are unsecured, you may not be fully repaid if we become
insolvent.
The new notes will not be secured by any of our assets. Therefore, you may
not be fully repaid if we become insolvent. Moreover, the indenture relating to
the notes permits us to incur secured debt. If we were to incur secured debt
and we become insolvent, the holders of the secured debt would receive payments
from the assets used as security before you receive payments.
Our new senior credit facility contains covenants which limit our management's
discretion in the operations of our business.
Our new senior credit facility contains 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 new senior credit facility requires us to meet certain
financial ratios.
17
<PAGE>
If we fail to comply with the restrictions of the new senior credit facility
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.
As of March 31, 1999, Safeguard 98 Capital, L.P., SCP Private Equity
Partners, L.P., TL Ventures III L.P., EnerTech Capital Partners, L.P. and
William Blair Capital Partners, L.L.C. collectively own approximately 63.5% of
our common stock. Some of our directors are affiliated with these investors.
Jerry L. Johnson is an officer of Safeguard Scientific, 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 TL Ventures III; and Samual A. Plum is a general
partner of SCP Private Equity Partners. In addition, Bruce A. Westphal, one of
our directors, is the Chairman of Bay Alarm Company, the owner of approximately
21.6% of our common stock. These investors may significantly influence and
ultimately make decisions that are adverse to your interests. For example,
these investors may want to pursue acquisitions, divestitures, or other
transactions which they believe could increase the value of their equity
investment in Pac-West, which may increase the financial risk to note holders.
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 Shareholders."
We have grown rapidly and have limited historical financial information
regarding our current operations. This makes it difficult for you to completely
evaluate our performance.
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 notes.
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 notes could
decline. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Quarterly Results."
18
<PAGE>
A decrease in a significant stockholder's holdings could result in a loss of
revenue generated by business from that stockholder.
Prior to our recapitalization, Bay Alarm Company held approximately 78.0% of
our common stock. As a result of our recapitalization, Bay Alarm reduced its
interest in Pac-West to 21.7% of our common stock and 22.8% of our outstanding
convertible redeemable preferred stock. Our sales to Bay Alarm Company and its
subsidiary, InReach Internet LLC, collectively accounted for approximately
7.1%, 6.4% and 4.5% of our revenues for the years ended December 31, 1997 and
1998 and for the three month period ended March 31, 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 Shareholders."
If we have a change of control, we may be unable to purchase all of the notes
you hold, even if they are validly tendered.
If a change of control occurs, we must offer to buy back all of the
outstanding notes for a price equal to 101% of the notes' principal amount,
plus any interest which has accrued and remains unpaid as of the repurchase
date. In that event, we may not have sufficient funds available to pay the
purchase price for all of the notes tendered by holders seeking to accept our
offer to purchase. In addition, our new senior credit facility prohibits us
from repurchasing the notes after a change of control until we first repay our
debt under the new senior credit facility in full. If we fail to repurchase the
notes in that circumstance, there will be defaults under both the notes and the
new senior credit facility. See "Description of Notes--Repurchase of the Option
of Holders--Change of Control" and "Description of Indebtedness."
A court may determine that the issuance of the notes was a fraudulent
conveyance, resulting in cancellation or subordination of the notes or
requiring the return of payments on the notes.
If a bankruptcy case or lawsuit is initiated by unpaid creditors of
Pac-West, the debt represented by the notes may be reviewed under the federal
bankruptcy law and comparable provisions of state fraudulent transfer laws. If
a court determines that the issuance of the notes constituted a fraudulent
conveyance, the notes could be canceled or made subordinate to all of our other
debt, and any payments made by us on the notes could be required to be
returned. A court could determine that a fraudulent conveyance had occurred if
we, at the time we issued the notes:
. received less than reasonably equivalent value or fair consideration for
the incurrence of such debt, and were insolvent or rendered insolvent by
reason of such incurrence; or
. were engaged in a business or transaction for which our remaining assets
constituted unreasonably small capital; or
. intended to incur, or believed that we would incur, debts beyond our
ability to pay such debts as they mature.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a debtor would be
considered insolvent if:
. the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets; or
. if the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become absolute
and mature; or
. it could not pay its debts as they become due.
19
<PAGE>
We believe that we received fair market value for the indebtedness received
in connection with the recapitalization and the old notes. On the basis of
historical financial information, recent operating history and other factors,
we believe that we, after giving effect to the recapitalization and offering of
old notes were not insolvent, do not have unreasonably small capital for the
business in which we are engaged and did not incur debts beyond our ability to
pay such debts as they mature.
There is no public market for the new notes, so you may not be able to sell
your new notes.
The new notes are being offered to the holders of the old notes. Prior to
this exchange offer, there has been no existing trading market for any of the
old notes and we expect that a trading market will not develop for the new
notes. We do not intend to apply for listing of the new notes on any securities
exchange or on the Nasdaq National Market. The new notes may trade at a
discount from their initial offering price, depending upon prevailing interest
rates, the market for similar securities, our performance and other factors. An
active market for the new notes may not develop. Consequently, the new notes
may be relatively illiquid, and you may be unable to sell your new notes.
Consequences of not tendering old notes in the exchange offer.
Upon consummation of the exchange offer, we will have no further obligation
to register your old notes. Therefore, if you do not tender your old notes in
the exchange offer, you will continue to hold restricted securities which may
not be offered, sold or otherwise transferred, pledged or hypothecated except
pursuant to Rule 144 and Rule 144A under the Securities Act of 1933 or pursuant
to another exemption from registration under the Securities Act of 1933
relating to the disposition of securities, provided that an opinion of counsel
is furnished to us that such an exemption is available. These restrictions
could adversely affect the trading market and price for the old notes.
Untimely or defective tenders of old notes may result in those notes not being
exchanged for new notes.
We will issue new notes in accordance with this exchange offer only after a
timely receipt of your old notes, a properly completed and duly executed letter
of transmittal and all other required documents. Therefore, if you want to
tender your old notes, please allow sufficient time to ensure timely delivery.
We are under no duty to give notification of defects or irregularities with
respect to the tenders of old notes for exchange.
Forward-looking statements may prove to be inaccurate.
Some of the statements contained in this prospectus are forward-looking. The
words "believe," "expect," "anticipate," "estimate," "plan," "future," and
other similar expressions generally identify forward-looking statements. They
include statements concerning:
. debt levels and ability to obtain financing and service debt;
. 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;
. 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.
20
<PAGE>
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
We originally sold the old notes on January 29, 1999 to the initial
purchasers of the notes in accordance with the purchase agreement. The initial
purchasers of the notes subsequently placed the old notes with:
(1) qualified institutional buyers in reliance on Rule 144A under the
Securities Act of 1933; and
(2) qualified buyers outside the United States in reliance upon
Registration S under the Securities Act of 1933.
As a condition of the purchase agreements, we entered into the registration
rights agreement. The registration rights agreement provides that:
(1) we will file an exchange offer registration statement with the SEC on
or prior to 90 days after the closing date;
(2) we will use our best efforts to have this exchange offer registration
statement declared effective by the SEC on or prior to 180 days after
the closing date;
(3) unless this exchange offer would not be permitted by applicable law or
SEC policy, we will commence this exchange offer and use our best
efforts to issue on or prior to 30 business days after the date on
which this exchange offer registration statement was declared effective
by the SEC, new notes in exchange for all notes tendered prior to the
expiration of this exchange offer; and
(4) if obligated to file a shelf registration statement to register the old
notes, we will use our reasonable best efforts to file the shelf
registration statement with the SEC on or prior to 30 days after such
filing obligation arises and to cause the shelf registration statement
to be declared effective by the SEC on or prior to 120 days after the
obligation arises.
For each old note surrendered to us in accordance with this exchange offer,
the holder of the old note will receive a new note having a principal amount
equal to that of the surrendered note. Interest on each old note will accrue
from the last interest payment date on which interest was paid on the old note
surrendered or, if no interest has been paid on such old note, from the date of
its original issue. Interest on each new note will accrue from the date of its
original issue.
Under existing interpretations of the staff of the SEC contained in several
no-action letters to third parties, the new notes will in general be freely
tradeable after this exchange offer without further registration under the
Securities Act of 1933. However, any purchaser of old notes who is our
affiliate or who intends to participate in this exchange offer for the purpose
of distributing the new notes:
(1) will not be able to rely on the interpretation of the staff of the SEC;
(2) will not be able to tender its old notes in this exchange offer; and
(3) must comply with the registration and prospectus delivery requirements
of the Securities Act of 1933 in connection with any sale or transfer
of the new notes, unless such sale or transfer is made in accordance
with an exemption from those requirements.
As contemplated by these no-action letters and the registration rights
agreement, each holder accepting this exchange offer is required to represent
to us in the letter of transmittal or agent's message that:
(1) the new notes are to be acquired by the holder or the person receiving
the new notes, whether or not that person is the holder, in the
ordinary course of business;
(2) the holder or the other person, other than a broker-dealer, is not
engaging and does not intend to engage, in a distribution of the new
notes;
(3) the holder or the other person has no arrangement or understanding with
any person to participate in the distribution of the new notes;
(4) neither the holder nor the other person is our affiliate within the
meaning of Rule 405 under the Securities Act of 1933; and
21
<PAGE>
(5) the holder or the other person acknowledges that if the holder or the
other person participates in this exchange offer for the purpose of
distributing the new notes it must comply with the registration and
prospectus delivery requirements of the Securities Act of 1933 in
connection with any resale of the new notes and cannot rely on those
no-action letters.
An agent's message is a message, transmitted by a book-entry transfer
facility to, and received by, the exchange agent forming a part of a
confirmation of a book-entry, which states that such book-entry transfer
facility has received an express acknowledgment from the participant in the
book-entry transfer facility tendering the old notes that such participant has
received and agrees:
(1) to participate in the automated tender option program;
(2) to be bound by the terms of the letter of transmittal; and
(3) that we may enforce such agreement against such participant.
As indicated above, each participating broker-dealer that receives a new
note for its own account in exchange for old notes must acknowledge that it:
(A) acquired the old notes for its own account as a result of market-making
activities or other trading activities;
(B) has not entered into any arrangement or understanding with us or any of
our affiliates, within the meaning of Rule 405 under the Securities Act
of 1933, to distribute the new notes to be received in this exchange
offer; and
(C) will deliver a prospectus meeting the requirements of the Securities
Act of 1933 in connection with any resale of such new notes. For a
description of the procedures for resales by Participant Broker-
Dealers, see "Plan of Distribution."
In the event that changes in the law or the applicable interpretations of
the staff of the SEC do not permit us to effect an exchange offer, or if for
any other reason we do not meet the time periods set forth in the second
paragraph of this section, we will:
(1) file the shelf registration statement covering resales of the old
notes;
(2) use our reasonable best efforts to cause the shelf registration
statement to be declared effective under the Securities Act of 1933;
and
(3) use our reasonable best efforts to keep effective the shelf
registration statement until January 29, 2001.
We will, in the event of the filing of the shelf registration statement,
provide to each applicable holder of the old notes copies of the prospectus
which is a part of the shelf registration statement, notify each holder when
the shelf registration statement has become effective and take certain other
actions as are required to permit unrestricted resale of the old notes. A
holder of the old notes that sells old notes in accordance with the shelf
registration statements generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers. The holder will also be subject to certain of the civil liability
provisions under the Securities Act of 1933 in connection with sales and will
be bound by the provisions of the registration rights agreement which are
applicable to a holder, including certain indemnification obligations. In
addition, each holder of the old notes will be required to deliver information
to be used in connection with the shelf registration statement and to provide
comments on the shelf registration statement within the time periods set forth
in the registration rights agreement in order to have its old notes included in
the shelf registration statement and to benefit from the provisions set forth
in the following paragraph.
If there is a registration default because:
(a) we fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for such
filing;
22
<PAGE>
(b) any of such registration statements is not declared effective by the
SEC on or prior to the target date specified for such effectiveness; or
(c) we fail to consummate this exchange offer within 30 business days of
the effectiveness target date with respect to this exchange offer
registration statement; or
(d) the shelf registration statement or this exchange offer registration
statement is declared effective but thereafter ceases to be effective
or usable for its intended purpose during the periods specified in the
registration rights agreement,
then we will pay additional interest, to each holder of notes, with respect to
the first 90-day period immediately following the occurrence of the first
registration default in an amount equal to $.05 per week per $1,000 principal
amount of notes held by such holder. The amount of the additional interest will
increase by an additional $.05 per week per $1,000 principal amount of notes
with respect to each subsequent 90-day period until all registration defaults
have been cured, up to a maximum amount of additional interest, if any, for all
registration defaults of $.50 per week per $1,000 principal amount of notes. We
will pay all accrued additional interest on each interest payment date to the
global note holder by wire transfer of immediately available funds or by
federal funds check and to holders of certificated securities by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
registration defaults, the accrual of additional interest will cease.
Following the consummation of this exchange offer, holders of the old notes
who were eligible to participate in this exchange offer but who did not tender
its old notes will not have any further registration rights and such old notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for such old notes could be adversely affected.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date. We will issue $1,000 principal amount of new notes in exchange
for each $1,000 principal amount of outstanding old notes accepted in this
exchange offer. Holders may tender some or all of their old notes in accordance
with this exchange offer. However, old notes may be tendered only in integral
multiples of $1,000.
The form and terms of the new notes are the same as the form and terms of
the old notes except that:
(1) the new notes bear a Series B designation and a different CUSIP number
from the old notes;
(2) the new notes have been registered under the Securities Act of 1933 and
hence will not bear legends restricting the transfer thereof; and
(3) the holders of the new notes will not be entitled to certain rights
under the registration rights agreement, including the provisions
providing for an increase in the interest rate on the old notes in
certain circumstances relating to the timing of this exchange offer,
all of which rights will terminate when this exchange offer is
terminated.
The new notes will evidence the same debt as the old notes and will be
entitled to the benefits of the indenture.
As of the date of this prospectus, $150,000,000 aggregate principal amount
of the old notes were outstanding. We have fixed the close of business on
, 1999 as the record date for this exchange offer for purposes of
determining the persons to whom this prospectus and the letter of transmittal
will be mailed initially.
Holders of old notes do not have any appraisal or dissenters' rights under
the General Corporation Law of California, or the indenture in connection with
this exchange offer. We intend to conduct this exchange offer in
23
<PAGE>
accordance with the applicable requirements of the Securities Exchange Act of
1934 and the related rules and regulations of the SEC.
We will be deemed to have accepted validly tendered old notes when, as and
if we have given oral or written notice thereof to the exchange agent. The
exchange agent will act as agent for the tendering holders for the purpose of
receiving the new notes from us.
If any tendered old notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth in this
prospectus or otherwise, the certificates for any such unaccepted old notes
will be returned, without expense, to the tendering holder thereof as promptly
as practicable after the expiration date of this exchange offer.
Holders who tender old notes in this exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes in
accordance with this exchange offer. We will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with this
exchange offer. See "--Fees and Expenses."
Expiration Date; Extensions; Amendments
The expiration date is 5:00 p.m., New York City time, on , 1999,
unless we extend this exchange offer, in which case the expiration date will be
the latest date and time to which this exchange offer is extended.
In order to extend this exchange offer, we will notify the exchange agent of
any extension by oral or written notice and will mail to the registered holders
an announcement thereof, each prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration date.
We reserve the right to:
(1) delay accepting any old notes, to extend this exchange offer or to
terminate this exchange offer if any of the conditions set forth below
under "--Conditions" will not have been satisfied, by giving oral or
written notice of such delay, extension or termination to the exchange
agent, or
(2) amend the terms of this exchange offer in any manner. Any such delay
in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the
registered holders.
Interest on the New Notes
The new notes will bear interest from their date of issuance. Holders of old
notes that are accepted for exchange will receive, in cash, accrued interest
thereon to, but not including, the date of issuance of the new notes. Such
interest will be paid with the first interest payment on the new notes on
February 1, 2000. Interest on the old notes accepted for exchange will cease to
accrue upon issuance of the new notes.
Interest on the new notes is payable semi-annually in arrears on each
February 1 and August 1, beginning on February 1, 2000.
Procedures for Tendering
Only a holder of old notes may tender such old notes in this exchange offer.
To tender in this exchange offer, a holder must complete, sign and date the
letter of transmittal, or a facsimile thereof, have the signatures on the
letter of transmittal guaranteed if required by the letter of transmittal or
transmit an agent's message in connection with a book-entry transfer, and mail
or otherwise deliver the letter of transmittal or the facsimile, together with
the old notes and any other required documents, to the exchange agent prior to
5:00 p.m., New York City time, on the expiration date. To be tendered
effectively, the old notes, letter of transmittal or an
24
<PAGE>
agent's message and other required documents must be completed and received by
the exchange agent at the address set forth below under "Exchange Agent" prior
to 5:00 p.m., New York City time, on the expiration date. Delivery of the old
notes may be made by book-entry transfer in accordance with the procedures
described below. Confirmation of the book-entry transfer must be received by
the exchange agent prior to the expiration date.
By executing the letter of transmittal, each holder will make to us the
representations set forth above in the fifth paragraph under the heading "--
Purpose and Effect of the Exchange Offer."
The tender by a holder and our acceptance thereof will constitute agreement
between the holder and us in accordance with the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal or
agent's message.
The method of delivery of old notes and the letter of transmittal or agent's
message and all other required documents to the exchange agent is at the
election and sole risk of the holder. As an alternative to delivery by mail,
holders may wish to consider overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure delivery to the exchange agent
before the expiration date. No letter of transmittal or old notes should be
sent to us. Holders may request their respective brokers, dealers, commercial
banks, trust companies or nominees to effect the above transactions for such
holders.
Any beneficial owner whose old notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner" included with the letter of transmittal.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an eligible institution unless the old notes
tendered pursuant thereto are tendered:
(1) by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the
letter of transmittal; or
(2) for the account of an eligible institution. In the event that
signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by
an eligible institution.
In order for an institution to be eligible, it must be a member firm of the
Medallion System.
If the letter of transmittal is signed by a person other than the registered
holder of any old notes listed in this prospectus, such old notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such old notes
with the signature thereon guaranteed by an eligible institution.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to us of its
authority to so act must be submitted with the letter of transmittal.
We understand that the exchange agent will make a request promptly after the
date of this prospectus to establish accounts with respect to the old notes at
the book-entry transfer facility, DTC, for the purpose of facilitating this
exchange offer, and subject to the establishment thereof, any financial
institution that is a participant in DTC's system may make book-entry delivery
of old notes by causing DTC to transfer such old notes into the exchange
agent's account with respect to the old notes in accordance with DTC's
procedures for such transfer. Although delivery of the old notes may be
effected through book-entry transfer into the exchange agent's account at DTC,
unless an agent's message is received by the exchange agent in compliance
25
<PAGE>
with the automated tender option program, an appropriate letter of transmittal
properly completed and duly executed with any required signature guarantee and
all other required documents must in each case be transmitted to and received
or confirmed by the exchange agent at its address set forth below on or prior
to the expiration date, or, if the guaranteed delivery procedures described
below are complied with, within the time period provided under the guaranteed
delivery procedures. Delivery of documents to DTC does not constitute delivery
to the exchange agent.
All questions as to the validity, form, eligibility, time of receipt,
acceptance of tendered old notes and withdrawal of tendered old notes will be
determined by us in our reasonable discretion, which determination will be
final and binding. We reserve the absolute right to reject any and all old
notes not properly tendered or any old notes our acceptance of which would, in
the opinion of our counsel, be unlawful. We also reserve the absolute right to
waive any defects, irregularities or conditions of tender as to particular old
notes. Our interpretation of the terms and conditions of this exchange offer,
including the instructions in the letter of transmittal, will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of old notes must be cured within such time as we
determine. Although we intend to notify holders of defects or irregularities
with respect to tenders of old notes, neither we, the exchange agent nor any
other person will incur any liability for failure to give such notification.
Tenders of old notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any old notes received by the
exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders, unless otherwise provided in the letter of
transmittal, as soon as practicable following the expiration date of this
exchange offer.
Guaranteed Delivery Procedures
Holders who wish to tender their old notes and:
(1) whose old notes are not immediately available;
(2) who cannot deliver their old notes, the letter of transmittal or any
other required documents to the exchange agent; or
(3) who cannot complete the procedures for book-entry transfer, prior to
the expiration date of this exchange offer,
may effect a tender if:
(A) the tender is made through an eligible institution;
(B) prior to the expiration date, the exchange agent receives from the
eligible institution a properly completed and duly executed notice of
guaranteed delivery, by facsimile transmission, mail or hand delivery.
A form of such notice accompanies this prospectus. The notice must set
forth the name and address of the holder, the certificate number(s) of
the old notes and the principal amount of old notes tendered. The
notice must state that the tender is being made thereby and must
guarantee that, within three New York Stock Exchange trading days after
the expiration date, the letter of transmittal or facsimile thereof
together with the certificate(s) representing the old notes, or a
confirmation of book-entry transfer of such old notes into the exchange
agent's account at DTC, and any other documents required by the letter
of transmittal will be deposited by the eligible institution with the
exchange agent; and
(C) such properly completed and executed letter of transmittal, or
facsimile thereof, as well as the certificate(s) representing all
tendered old notes in proper form for transfer, or a confirmation of
book-entry transfer of the old notes into the exchange agent's account
at DTC, and all other documents required by the letter of transmittal
are received by the exchange agent upon five New York Stock Exchange
trading days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
26
<PAGE>
Withdrawal of Tenders
Except as otherwise provided in this prospectus, tenders of old notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date.
To withdraw a tender of old notes in this exchange offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
exchange agent at its address set forth in this prospectus prior to 5:00 p.m.,
New York City time, on the expiration date. Any such notice of withdrawal must:
(1) specify the name of the person or entity having deposited the old notes
to be withdrawn;
(2) identify the old notes to be withdrawn, including the certificate
number(s) and principal amount of the old notes, or, in the case of old
notes transferred by book-entry transfer, the name and number of the
account at DTC to be credited;
(3) be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the old notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee with respect to
the old notes register the transfer of the old notes into the name of
the person withdrawing the tender; and
(4) specify the name in which any the old notes are to be registered, if
different from that of the depositor.
We will determine all questions as to the validity, form, eligibility and time
of receipt of withdrawal notices and our determination will be final and
binding on all parties. Any old notes so withdrawn will be deemed not to have
been validly tendered for purposes of this exchange offer and no new notes will
be issued with respect thereto unless the old notes withdrawn are validly
retendered. Any old notes which have been tendered but which are not accepted
for exchange will be returned to the holder thereof without cost to the holder
as soon as practicable after withdrawal, rejection of tender or termination of
this exchange offer. Properly withdrawn old notes may be retendered by
following one of the procedures described above under "--Procedures for
Tendering" at any time prior to the expiration date.
Conditions
Notwithstanding any other term of this exchange offer, we will not be
required to accept for exchange, or issue new notes for, any old notes, and may
terminate or amend this exchange offer as provided in this prospectus before
the acceptance of the old notes, if:
(1) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to this exchange offer
which we believe might materially impair our ability to proceed with
this exchange offer or any material adverse development has occurred in
any existing action or proceeding with respect to us or any of our
subsidiaries; or
(2) any law, statute, rule, regulation or interpretation by the staff of
the SEC is proposed, adopted or enacted, which we believe might
materially impair our ability to proceed with this exchange offer or
materially impair the contemplated benefits of this exchange offer to
us; or
(3) any governmental approval has not been obtained, which approval we
believe is necessary for the consummation of this exchange offer.
If we determine in our reasonable discretion that any of the conditions are
not satisfied prior to the expiration date, we may:
(1) refuse to accept any old notes and return all tendered old notes to the
tendering holders;
(2) extend this exchange offer and retain all old notes tendered prior to
the expiration of this exchange offer, subject, however, to the rights
of holders to withdraw such old notes (see "--Withdrawal of Tenders");
or
(3) waive such unsatisfied conditions with respect to this exchange offer
and accept all properly tendered old notes which have not been
withdrawn.
27
<PAGE>
Exchange Agent
has been appointed as exchange agent for this exchange offer.
Questions and requests for assistance, requests for additional copies of this
prospectus or of the letter of transmittal and requests for notice of
guaranteed delivery should be directed to the exchange agent addressed as
follows:
By Mail: Overnight Courier:
c/o c/o
Attn: Attn:
By Hand: Facsimile Transmission:
c/o For Information Telephone
Attn: (call collect):
Delivery to an address other than set forth above will not constitute a
valid delivery.
Fees and Expenses
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, additional solicitation may be made by
telegraph, telecopy, telephone or in person by our and our affiliates' officers
and regular employees.
We have not retained any dealer-manager in connection with this exchange
offer and will not make any payments to brokers, dealers, or others soliciting
acceptances of this exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection with this exchange offer.
We will pay the cash expenses to be incurred in connection with this
exchange offer. Such expenses include fees and expenses of the exchange agent
and trustee, accounting and legal fees and printing costs, among others.
Accounting Treatment
The new notes will be recorded at the same carrying value as the old notes,
which is face value, as reflected in our accounting records on the date of
exchange. Accordingly, we will not recognize any gain or loss for accounting
purposes as a result of this exchange offer. The expenses of this exchange
offer will be deferred and charged to expense over the term of the new notes.
Consequences of Failure to Exchange
The old notes that are not exchanged for new notes in accordance with this
exchange offer will remain restricted securities. Accordingly, such old notes
may be resold only:
(1) to us, upon redemption thereof or otherwise;
(2) so long as the old notes are eligible for resale in accordance with
Rule 144A, to a person inside the United States whom the seller
reasonably believes is a qualified institutional buyer within the
meaning of Rule 144A under the Securities Act of 1933 in a transaction
meeting the requirements of
28
<PAGE>
Rule 144A, in accordance with Rule 144 under the Securities Act of 1933,
or in accordance with another exemption from the registration
requirements of the Securities Act of 1933, and based upon an opinion of
counsel reasonably acceptable to us;
(3) outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act of 1933; or
(4) in accordance with an effective registration statement under the
Securities Act of 1933, in each case in accordance with any applicable
securities laws of any state of the United States.
Resale of the New Notes
With respect to resales of new notes, based on interpretations by the staff
of the SEC set forth in no-action letters issued to third parties, we believe
that a holder or other person who receives new notes, other than a person that
is our affiliate within the meaning of Rule 405 under the Securities Act of
1933, in exchange for old notes in the ordinary course of business and who is
not participating, does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the new
notes, will be allowed to resell the new notes to the public without further
registration under the Securities Act of 1933 and without delivering to the
purchasers of the new notes a prospectus that satisfies the requirements of
Section 10 of the Securities Act of 1933. However, if any holder acquires new
notes in this exchange offer for the purpose of distributing or participating
in a distribution of the new notes, such holder cannot rely on the position of
the staff of the SEC expressed in such no-action letters or any similar
interpretive letters, and must comply with the registration and prospectus
delivery requirements of the Securities Act of 1933 in connection with any
resale transaction, unless an exemption from registration is otherwise
available. Further, each participating broker-dealer that receives new notes
for its own account in exchange for old notes, where such old notes were
acquired by such participating broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of the new notes.
29
<PAGE>
USE OF PROCEEDS
This exchange offer is intended to satisfy certain of our obligations under
the registration rights agreement executed in connection with the issuance of
the old notes. We will not receive any cash proceeds from the issuance of the
new notes. In consideration for issuing the new notes contemplated in this
prospectus, we will receive old notes in the same principal amount with
substantially the same terms.
We received $145.2 million from the sale of the old notes (after deducting
the fees and expenses of the private offering of the old notes and this
exchange offer, but excluding $1.2 million in expenses incurred prior to the
closing of the private offering of the old notes. We used $100.0 million of the
net proceeds to repay an existing senior credit facility which matured on
January 29, 1999 and bore an annual interest rate of approximately 8%. We used
approximately $19.7 million to fund the interest reserve account for the notes.
We have and will continue to use the remaining net proceeds of the private
offering of the old notes, together with cash generated from operations, to
fund the costs of the initial phase of our planned expansion through the end of
1999 and for working capital and other general corporate purposes. Our
principal capital expenditure requirements for such expansion will include the
purchase and installation of switches, transmission equipment collocated in
incumbent local exchange carrier central offices and customer premise
equipment. We made capital expenditures of approximately $22.0 million during
the fourth quarter of 1998 and expect to make additional capital expenditures
of between $30.0 and $50.0 million during 1999, of which $3.6 million of
capital expenditures was incurred in the first quarter of 1999. The actual cost
and timing 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.
As part of our strategy, we may make strategic acquisitions, and a portion
of the proceeds from the private offering of the old notes may be used for such
purpose. We have no definitive agreement with respect to any acquisition,
although from time to time we have discussions with other companies and assess
opportunities on an ongoing basis.
30
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999,
which includes the effect of our recapitalization and the private offering of
the old notes. The old notes surrendered in exchange for the new notes will be
retired and canceled and cannot be reissued. Accordingly, issuance of the new
notes will not result in any increase or decrease in our indebtedness or any
additional net proceeds to us. Therefore, no effect has been given to the
exchange offer in this capitalization table and no pro forma balance sheet data
has been presented. This table should be read in conjunction with the "Selected
Financial Data" and the related notes thereto, and our financial statements,
including related notes thereto, included elsewhere in this prospectus. See
"Use of Proceeds."
<TABLE>
<CAPTION>
March 31, 1999
--------------
(unaudited)
(in thousands)
<S> <C> <C>
Cash and cash equivalents............................. $ 41,372
Restricted cash (1)................................... 19,844
========
Total debt (including current maturities):
13 1/2% Senior Notes due 2009....................... 150,000
Notes payable....................................... 209
New senior credit facility (2)...................... --
--------
Total debt........................................ 150,209
--------
Convertible redeemable preferred stock, including
accrued cumulative dividends of $2,466 (3)........... 47,466
Stockholders' equity (deficit):
Common stock........................................ 13
Additional paid-in capital.......................... 7,768
Notes receivable from stockholders.................. (233)
Retained earnings (deficit)......................... (82,156)
--------
Total stockholders' equity (deficit).............. (74,608)
--------
Total capitalization.............................. $123,067
========
</TABLE>
- -------
(1) Restricted cash represents cash deposited in an interest reserve trust
account to fund the initial interest payments due under the notes.
(2) Our new 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."
(3) See "Description of Capital Stock."
31
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma condensed statements of operations data for the year
ended December 31, 1998 and for the three month period ended March 31, 1999
give pro forma effect to the private offering of the old notes and this
exchange offer as if they had occurred on January 1, 1998. The unaudited pro
forma condensed statements of operations data do not purport to represent what
our results of operations would have been if the private offering of the old
notes and this exchange offer had occurred as of the date indicated or what
such results will be for any future periods. The unaudited pro forma financial
data is based upon assumptions that we believe are reasonable and should be
read in conjunction with the audited and unaudited financial statements and
accompanying notes thereto included in this prospectus.
PAC-WEST TELECOMM, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS DATA
Year Ended December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Historical Pro Forma
---------- ---------
<S> <C> <C>
Revenues.................................................. $42,211 $42,211
Operating costs........................................... 15,344 15,344
Selling, general and administrative expenses (1).......... 14,577 14,577
Depreciation and amortization expense..................... 4,106 4,106
------- -------
Income from operations.................................... 8,184 8,184
Interest expense (2)...................................... (4,199) (5,601)
Other expense, net (3).................................... (2,674) (2,674)
------- -------
Income (loss) before provision for income taxes and
extraordinary item....................................... 1,311 (91)
Provision for income taxes (4)............................ 1,561 1,000
------- -------
Loss before extraordinary item............................ $ (250) $(1,091)
======= =======
</TABLE>
Three Month Period Ended March 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Historical Pro Forma
---------- ---------
<S> <C> <C>
Revenues................................................... $14,416 $14,416
Operating costs............................................ 4,062 4,062
Selling, general and administrative expenses............... 4,303 4,303
Depreciation and amortization expense...................... 1,449 1,449
------- -------
Income from operations..................................... 4,602 4,602
Interest expense (2)....................................... (4,050) (3,963)
Other income............................................... 527 527
------- -------
Income before provision for income taxes .................. 1,079 1,166
Provision for income taxes (4)............................. 432 466
------- -------
Net income................................................. $ 647 $ 700
======= =======
</TABLE>
32
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS DATA
Year Ended December 31, 1998 and for the Three Month Period Ended March 31,
1999
(in thousands)
(1) Selling, general and administrative expenses for 1998 include transaction
bonuses and consultant's costs of $3,798.
(2) The pro forma interest expense as a result of the private offering of the
old notes is summarized as follows:
<TABLE>
<CAPTION>
Year Ended Three Month Period
December 31, Ended
1998 March 31, 1999
------------ ------------------
(unaudited)
<S> <C> <C>
Historical interest expense.............. $4,199 $4,050
Historical interest and amortization of
deferred financing costs associated with
historical borrowings repaid by the
private offering of the old notes....... (4,181) (4,047)
Interest related to the portion of the
notes assumed to replace Pac-West's
historical borrowings (at 13.5%)........ 4,983 3,810
Amortization of expected debt issuance
costs ($6.0 million over a 10 year
period)................................. 600 150
------ ------
Pro forma interest expense............... $5,601 $3,963
====== ======
</TABLE>
(3) Other expense, net for 1998 includes other costs of the merger and
recapitalization of approximately $3,004.
(4) An income tax benefit has been recorded in the pro forma adjustments for
the incremental increase in interest expense and for the amortization of
deferred financing costs associated with the private offering of the old
notes and this exchange offer using our effective income tax rate of 40%.
Note: The unaudited pro forma condensed statements of operations data is based
on:
(A) The notes replace substantially all historical borrowings outstanding
during the period presented, including the senior secured borrowings
and other long-term obligations being repaid by the proceeds of the
private offering of the old notes; and
(B) Interest expense related to the notes reflects the incremental interest
resulting from the portion of the notes being used to refinance Pac-
West's lower rate historical borrowings, see "Use of Proceeds."
33
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of: (1) our
predecessor's 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 (2) Pac-West for the period from our commencement on October 1, 1996
to December 31, 1996, the years ended December 31, 1997 and 1998 and for the
three month periods ended March 31, 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 at March 31, 1998 and 1999 and for the three month
periods ended March 31, 1998 and March 31, 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
unaudited balance sheet data as of March 31, 1999 includes the effect of our
recapitalization and the private offering of the old notes. The results of
operations for the three month period ended March 31, 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 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and the related notes
thereto appearing elsewhere in this prospectus.
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 the
1997 and 1998 calendar years only. 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 the new notes.
We recognize reciprocal compensation as revenue only to the extent received
in cash. Pacific Bell and GTE, the two incumbent local exchange carriers with
which we have interconnection agreements, have each refused to pay the portion
of reciprocal compensation which they estimate is the result of inbound traffic
terminating to Internet service providers. Pacific Bell and GTE argue that such
calls are not local within the meaning of their interconnection agreements and
therefore assert no reciprocal compensation is due. See Note 5 to the audited
financial statements and "Risk Factors--Our right to receive reciprocal
compensation for calls to Internet service providers is currently being
challenged."
"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, $48,000 and $527,000 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 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
three month periods ended March 31, 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 evaluating the capacity of a company to service its obligations,
as well as to compare a company's results with those of similar companies. In
addition, EBITDA is a measure included in the restrictive covenants under our
new senior credit facility. See the statements of cash flows in the audited and
unaudited financial statements. The terms of the notes do not restrict our
discretionary use of funds depicted by adjusted EBITDA. In addition, we have no
intention to pay dividends to our stockholders. However, we do need to reserve
funds to service our existing and future debt obligations, and, to the extent
available, to fund anticipated capital expenditures of $30 million to $50
million in 1999.
34
<PAGE>
<TABLE>
<CAPTION>
Predecessor Telephone and
Answering Service Divisions Pac-West Telecomm, Inc.
--------------------------------------- -------------------------------------------------------
Period from
Commencement
on
Nine Month October 1, Year Ended Three Month Period
Year Ended Year Ended Period Ended 1996 to December 31, Ended March 31,
December 31, December 31, September 30, December 31, ----------------- -----------------------
1994 1995 1996 1996 1997 1998 1998 1999
------------ ------------ ------------- ------------ ------- -------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
(dollars in thousands) (dollars in thousands)
<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 $10,252 $14,416
Costs and expenses:
Operating costs....... 2,959 3,498 4,202 2,064 12,060 15,344 3,731 4,062
Selling, general and
administrative:
Selling, general and
administrative....... 2,687 3,011 3,123 1,519 7,367 10,779 2,002 4,303
Transaction bonuses
and consultant's
costs (1)............ -- -- -- -- -- 3,798 -- --
Depreciation and
amortization......... 495 512 549 299 2,204 4,106 845 1,449
------- ------- ------- ------- ------- -------- ------- -------
Income from
operations........... 634 1,879 863 350 7,920 8,184 3,674 4,602
Interest expense....... (19) (93) (33) (105) (932) (4,199) (377) (4,050)
Gain on disposal of
answering service
division.............. -- -- -- -- 385 -- -- --
Costs of merger and
recapitalization (1).. -- -- -- -- -- (3,004) -- --
Other income (expense),
net................... 11 17 34 (11) 119 330 25 527
------- ------- ------- ------- ------- -------- ------- -------
Income before
provision for income
taxes and
extraordinary item... 626 1,803 864 234 7,492 1,311 3,322 1,079
Provision for income
taxes................. 250 722 345 94 2,997 1,561 1,329 432
------- ------- ------- ------- ------- -------- ------- -------
Income (loss) before
extraordinary item... 376 1,081 519 140 4,495 (250) 1,993 647
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) $ 1,993 $ 647
======= ======= ======= ======= ======= ======== ======= =======
Other Financial Data:
Reciprocal compensation
withheld.............. $ -- $ -- $ -- $ -- $ 3,793 $ 32,591 $ 5,032 $13,401
Adjusted EBITDA........ 1,129 2,388 1,431 633 10,538 16,091 4,496 6,051
Adjusted EBITDA margin
%..................... 16.7% 26.8% 16.4% 15.0% 35.7% 38.1% 43.9% 42.0%
Cash provided by (used
in):
Operating activities.. $ 1,018 $ 1,758 $ 1,092 $ 75 $ 5,876 $ 12,033 $ 5,558 $ 4,544
Investing activities.. (1,155) (1,266) (2,523) (1,682) (6,619) (42,031) (1,185) (23,329)
Financing activities.. 196 (350) 1,778 1,549 3,658 41,631 (255) 44,921
Ratio of earnings to
fixed charges (2)..... -- -- -- 2.1x 5.8x 1.2x 6.6x 1.1x
Pro forma ratio of
earnings of fixed
charges (2)........... -- 1.1x
Balance Sheet Data (as of end of
period):
Cash and cash
equivalents........... $ 257 $ 399 $ 746 $ 688 $ 3,603 $ 15,236 $ 7,721 $41,372
Restricted cash (3).... -- -- -- -- -- -- -- 19,844
Working capital
(deficit)............. (321) (219) 626 398 2,598 15,532 4,046 60,053
Property, plant and
equipment, net........ 2,311 3,065 5,883 9,483 19,079 57,294 19,419 59,528
Total assets........... 3,945 5,141 8,641 12,966 27,528 82,493 31,080 134,311
Total debt............. 1,106 591 3,256 7,022 15,672 100,248 15,417 150,209
Convertible redeemable
preferred stock,
including accrued
cumulative dividends
of $1,324 at December
31, 1998 and $2,466 at
March 31, 1999........ -- -- -- -- -- 46,324 -- 47,466
Stockholders' equity
(deficit)............. 1,445 2,526 4,037 4,177 8,672 (74,113) 10,665 (74,608)
</TABLE>
- -------
(1) Transaction bonuses and consultant's costs, costs of merger and
recapitalization and the extraordinary item all relate to our
recapitalization.
(2) For purposes of this computation, earnings are defined as income before
provision for income taxes, extraordinary item and fixed charges (excluding
capitalized interest). Fixed charges are the sum of:
(A) interest costs (including amounts capitalized),
(B) amortization of deferred financing costs and
(C)the portion of operating lease rental expense that is representative of the
interest factor. On a proforma basis, earnings were insufficient to cover
fixed charges by $394,000 for the year ended December 31, 1998. Due to the
significant changes in our operations since September 30, 1996, we believe
that the ratios of earnings to fixed charges of our predecessor's telephone
and answering service divisions are not meaningful and therefore are not
included in the table.
(3) Restricted cash represents cash deposited in an interest reserve trust
account to fund the initial interest payments under the notes.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a rapidly growing competitive local exchange carrier that provides
switched local and long distance telecommunications services and one-stop
integrated telecommunications services to Internet service providers, paging
companies and other inbound call service providers as well as medium and small
businesses. 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 size 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 competitive local exchange carrier. For the year ended December 31, 1998
and for the three month period ended March 31, 1999, recognizing compensation
from other telecommunications 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 $14.4 million and adjusted EBITDA
of approximately $16.1 million and $6.1 million, respectively.
Factors Affecting Operations
Revenues. We derive our revenues from monthly recurring charges, usage
charges and initial non-recurring charges and telephone equipment sales and
service. Monthly recurring charges include the fees paid by customers for lines
in service and additional features on those lines, as well as equipment
collocation services. Usage charges consist of fees paid by end users for each
call made, fees paid by incumbent local exchange carriers as reciprocal
compensation for completion of their customers' calls through another carrier,
and access charges paid by carriers for long distance traffic originated or
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 three month periods ended March 31, 1998 and 1999, recorded
reciprocal compensation accounted for approximately 37.4%, 37.1%, 41.8% and
42.1%, respectively, of our revenues. Two incumbent local exchange carriers
with which we have interconnection agreements, Pacific Bell and GTE, have
refused to pay that portion of reciprocal compensation that they estimate is
the result of inbound calls terminating to Internet service providers. These
incumbent local exchange carriers contend that such Internet service provider
calls are not local calls within the meaning of their respective
interconnection agreements and claim that no reciprocal compensation is
therefore payable. The total reciprocal compensation withheld by these
incumbent local exchange carriers and not included in revenues was $3.8 million
for the year ended December 31, 1997, $32.6 million for the year ended December
31, 1998 and $13.4 million for the three month period ended March 31, 1999. On
June 24, 1999, the California Public Utilities Commission adopted a decision in
an arbitration proceeding between us and Pacific Bell which held that
reciprocal compensation would be payable for Internet service provider calls
under our new interconnection agreement with Pacific Bell which became
effective on June 29, 1999. Pacific Bell has requested rehearing of this
decision. This decision does not address reciprocal compensation withheld under
the prior agreement. We do not know at this time what action Pacific Bell will
take with respect to this decision. In the event that all or a portion of the
withheld reciprocal compensation is paid, the terms of our recapitalization
require us to pay additional distributions to certain owners of up to $20.0
million. In 1999, the maximum cash distribution under the terms of the
recapitalization could be up to approximately $15 million net of the after tax
proceeds from the withheld reciprocal compensation. See "Certain Relationships
and Related Transactions."
36
<PAGE>
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. We also expect that the per minute reciprocal
compensation rate may decline significantly under any new interconnection
agreements. See "Risk Factors--A failure to establish interconnection
agreements on favorable terms would adversely affect our business" and "--Our
right to receive reciprocal compensation for calls to Internet service
providers is currently being challenged."
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 incurred 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 cost of
services 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
three month periods ended March 31, 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 income from operations was 28.4% of revenues for that period. The
net loss for 1998 includes the costs of the
37
<PAGE>
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.
----------- --------------------------
Three Month
Period
Ended March
Year Ended December 31, 31,
------------------------ ------------
1996 1997 1998 1998 1999
----------- ----- ----- ----- -----
(Unaudited) (Unaudited)
<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 36.4 28.2
Selling, general and
administrative expenses......... 35.8 24.9 34.5 19.5 29.8
Depreciation and amortization
expense......................... 6.5 7.5 9.7 8.3 10.1
Income from operations........... 9.4 26.8 19.4 35.8 31.9
Net income (loss)................ 5.1 15.2 (1.6) 19.4 4.5
</TABLE>
Three Month Period Ended March 31, 1999 Compared to Three Month Period Ended
March 31, 1998
Revenues for the three month period ended March 31, 1999 increased $4.1
million to $14.4 million from $10.3 million for the corresponding period in
1998. The increase in revenues was primarily attributed to an increase of $1.9
million in paid local interconnection revenues, an increase of $2.0 million in
recurring charges and installation charges billed directly to Internet service
providers, and an increase of $0.2 million in dedicated transport, i.e. private
line, revenues.
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. Our revenues
for the first quarter of 1999 significantly increased compared to the first
quarter of 1998 as a result of the increased utilization of this newly
installed switch capacity, primarily attributable to Internet service provider
customers. In addition, new service orders from medium and small businesses
have accelerated in the first quarter of 1999 as we have built our sales force.
The number of access lines sold increased 147% to 74,026 as of March 31,
1999 from 29,930 as of March 31, 1998. Billable minutes of use were 3.1 million
in the first quarter of 1999, up 107% from 1.5 million for the first quarter of
1998.
Inbound local calls and minutes subject to reciprocal compensation revenues
in accordance with interconnection agreements increased 69% and 100%,
respectively, for the first quarter of 1999 over the first quarter 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 quarter of 1999 as compared to paying 46% in 1998. The net effect
of those significant increases in inbound local calls and minutes, offset by
the lower payment percentage, resulted in the $1.9 million (46%) increase in
paid interconnection revenues.
The $2.0 million increase in the first quarter of 1999 over the first
quarter of 1998 in direct billings to Internet service providers represented a
96% year to year increase. Lines used by our Internet service providers
significantly increased from 1998 to 1999, from 24,519 lines in service by
Internet service providers at March 1, 1998 to 56,320 lines in service at March
1, 1999.
The $0.2 million (24%) increase in dedicated transport revenues primarily
related to increased data networking services for private corporate networks.
Our operating costs for the three month period ended March 31, 1999
increased $0.4 million to $4.1 million from $3.7 million for the corresponding
period in 1998. Our operating costs as a percentage of revenues
38
<PAGE>
decreased to 28.2% for the three month period ended March 31, 1999 from 36.4%
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 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.
Our selling, general and administrative expenses for the three month period
ended March 31, 1999 increased $2.3 million to $4.3 million from $2.0 million
for the corresponding period in 1998. As a percentage of revenues, our
selling, general and administrative expenses increased to 29.8% for the three
month period ended March 31, 1999 from 19.5% in the corresponding period in
1998. The increase in selling, general and administrative expenses was
primarily due to the addition of 46 employees in sales and marketing; an
increase in network operational, development and administration costs
including 19 additional network employees; and 18 additional employees in
other administration, customer service and information technology functions.
Total employees doubled from 84 at March 31, 1998 to 167 at March 31, 1999.
Our depreciation and amortization expense for the three month period ended
March 31, 1999 increased $0.6 million to $1.4 million from $0.8 million for
the corresponding period in 1998. Depreciation and amortization as a
percentage of revenues increased to 10.1% for the three month period ended
March 31, 1999 from 8.3% 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 balance of equipment acquired in
1998 and 1999 is placed in service, depreciation expense as a percentage of
revenues is expected to increase in subsequent quarters in 1999.
Our interest expense for the three month period ended March 31, 1999
increased $3.7 million to $4.1 million from $0.4 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 private offering of the old notes
consummated 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 old notes since January 29, 1999 is a higher interest
rate than the rates paid on the equipment financings outstanding in the first
quarter 1998.
Our combined effective federal and state tax rate was 40% for the first
quarter 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 1, 1997 to
34,799 lines in service at December 1, 1998.
39
<PAGE>
The $1.2 million increase in outbound local and long distance revenues
(including 800 number and travel card calls) represented a 23% increase 1998
over 1997. This increase is directly related to our focus on providing services
to high-volume, telecommunication intensive users and to medium and small
businesses.
The $0.8 million (25%) increase in dedicated transport revenues primarily
related to increased data networking services for private corporate networks.
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. Depreciation and amortization expense will increase during 1999
as a result of capital expenditures made during 1998 and additional capital
expenditures expected to be made in 1999.
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.
Interest expense will increase in 1999 as a result of the private offering of
the old notes. The increase in long-term debt in 1998 was primarily due to
$10.5 million of new borrowings during the year to finance capital
expenditures, 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.
40
<PAGE>
Both local interconnection revenues and billings to Internet service
providers were new types of revenues in mid 1996 with less than $1.0 million of
each type of revenue being recorded in 1996. Local and long distance usage
revenues increased 15% in 1997 over 1996, which increase was due to our focus
on business customers. Dedicated transport revenues increased 42% 1997 over
1996 primarily due to increased data networking services for private corporate
networks.
Our operating costs for 1997 increased $5.8 million to $12.1 million from
$6.3 million in 1996. Our operating costs as a percentage of revenues decreased
to 40.8% in 1997 from 48.3% in 1996. The decrease in operating costs as a
percentage of revenues was primarily due to an increase in revenues from
higher-margin, competitive local exchange carrier related services.
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 Results
The following tables set forth certain unaudited quarterly financial data
for the nine quarters ended March 31, 1999. In our opinion, the unaudited
financial information set forth below has been prepared on the same basis as
the audited financial information included elsewhere in this prospectus and
includes all normal recurring adjustments necessary to present fairly the
information set forth. The operating results for any quarter are not
necessarily indicative of the results for any future period.
We recognize reciprocal compensation only to the extent it is received in
cash. Pacific Bell and GTE, the two incumbent local exchange carriers with
which we have interconnection agreements, have each refused to pay the portion
of reciprocal compensation which they estimate is the result of inbound 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 no reciprocal compensation is due.
Other income (expense), net includes costs of the recapitalization of $2.9
million and $0.1 million, respectively, for the quarters ended September 30,
1998 and December 31, 1998. In addition, other income (expense), net, includes
interest income of $8,000, $6,000, $23,000, $53,000, $48,000, $80,000, $78,000
and $121,000 and $527,000 for the quarters ended March 31, June 30, September
30 and December 31, 1997 and March 31, June 30, September 30 and December 31,
1998 and March 31, 1999, respectively.
41
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
1997 1998 1999
---------------------------------- ----------------------------------- --------
Mar. 31 June 30 Sep. 30 Dec. 31 Mar. 31 June 30 Sep. 30 Dec. 31 Mar. 31
------- ------- ------- ------- ------- ------- ------- -------- --------
(unaudited, in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues................ $4,992 $6,421 $7,998 $10,140 $10,252 $9,680 $ 9,500 $ 12,779 $ 14,416
Costs and expenses:
Operating costs........ 2,549 3,032 3,160 3,319 3,731 4,060 3,867 3,686 4,062
Selling, general and
administrative:
Selling, general and
administrative...... 1,663 1,609 1,839 2,256 2,002 2,217 2,715 3,845 4,303
Transaction bonuses
and consultant's
costs............... -- -- -- -- -- -- 3,798 -- --
Depreciation and
amortization.......... 480 514 549 661 845 856 1,063 1,342 1,449
------ ------ ------ ------- ------- ------ ------- -------- --------
Income (loss) from
operations.......... 300 1,266 2,450 3,904 3,674 2,547 (1,943) 3,906 4,602
Interest expense........ (203) (200) (213) (316) (377) (409) (882) (2,531) (4,050)
Gain (loss) on disposal
of
answering service
division............... 403 -- -- (18) -- -- -- -- --
Other income (expense),
net.................... 10 10 27 72 25 22 (2,776) 55 527
------ ------ ------ ------- ------- ------ ------- -------- --------
Income (loss) before
provision for income
taxes and
extraordinary item.. 510 1,076 2,264 3,642 3,322 2,160 (5,601) 1,430 1,079
Provision (benefit) for
income taxes........... 204 430 906 1,457 1,329 864 (1,205) 573 432
------ ------ ------ ------- ------- ------ ------- -------- --------
Income (loss) before
extraordinary item.. 306 646 1,358 2,185 1,993 1,296 (4,396) 857 647
Extraordinary item--loss
on early extinguishment
of debt, net of income
tax benefit............ -- -- -- -- -- -- (417) -- --
------ ------ ------ ------- ------- ------ ------- -------- --------
Net income (loss).... $ 306 $ 646 $1,358 2,185 $ 1,993 $1,296 $(4,813) $ 857 $ 647
====== ====== ====== ======= ======= ====== ======= ======== ========
Other Financial Data:
Reciprocal compensation
withheld .............. $ -- $ -- $1,304 $ 2,489 $ 5,032 $7,823 $ 9,531 $ 10,205 $ 13,401
Adjusted EBITDA......... 1,185 1,784 3,003 4,566 4,519 3,403 2,921 5,248 6,051
Capital expenditures.... 1,424 764 1,948 7,748 1,275 6,588 13,031 21,572 3,633
Cash provided by (used
in):
Operating activities... 382 1,358 2,526 1,610 5,558 1,829 (1,172) 5,818 4,544
Investing activities... (590) (410) (557) (5,062) (1,185) (6,248) (12,984) (21,614) (23,329)
Financing activities... 155 (472) (63) 4,038 (255) 3,273 14,004 24,609 44,921
</TABLE>
Our quarterly operating results have fluctuated and will continue to
fluctuate 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 withheld by incumbent local exchange carriers, the
development of new services, the success of sales and marketing efforts,
changes in pricing policies by us or our competitors, and certain factors
relating to our acquisition strategy as further described under "--Liquidity
and Capital Resources."
Our revenues, income from operations, excluding transaction bonuses and
consultant's costs, and adjusted EBITDA declined in each of the second and
third quarters of 1998. The decline in revenues was due primarily to lower
reciprocal compensation received resulting from a reduction in the percentage
of reciprocal compensation paid under interconnection agreements. The
reciprocal compensation paid declined from 64% of total reciprocal compensation
billed in the fourth quarter of 1997 to 46% in the first quarter of 1998, 28%
in the second quarter and 25% in the third quarter. We expect that the per
minute reciprocal compensation rate may decline significantly under the new
interconnection agreements. In addition to lower reciprocal compensation
payments, our revenue growth was constrained throughout the first three
quarters of 1998
42
<PAGE>
because our three switching facilities were operating at close to full capacity
and we could not provision switch capacity for new customers or existing
customers seeking additional capacity. Income from operations and adjusted
EBITDA were negatively impacted by quarterly increases in selling, general and
administrative expenses excluding transaction bonuses and consultant's costs,
resulting from our decision to build our direct sales force, executive
management team and administrative staff to support future growth.
In the third quarter of 1998, we installed new higher capacity switches at
our Stockton and Los Angeles Pac-West switching sites. During the fourth
quarter of 1998, we expanded switch capacity to existing and new customers. Our
revenues, income from operations and adjusted EBITDA for the fourth quarter of
1998 and the first quarter of 1999 significantly increased compared to the
third quarter of 1998 as a result of the increased utilization of the newly
installed switch capacity, primarily attributable to Internet service provider
customers. In addition, new service orders from medium and small businesses
have accelerated in the fourth quarter of 1998 and the first quarter of 1999 as
we have built our sales force.
In view of the significant historical growth of our operations, we believe
that period-to-period comparisons of our financial results should not be relied
upon as an indication of future performance and that we may experience
significant period-to-period fluctuations in operating results in the future.
We expect to focus in the near term on building and increasing our customer
base and increasing our network utilization both through internal growth and
through acquisitions which may require us from time to time to increase our
expenditures for personnel, marketing, network infrastructure and the
development of new services.
Liquidity and Capital Resources
Net cash provided by operating activities was $4.5 million for the three
month period ended March 31, 1999 compared to $5.6 million for the three month
period ended March 31, 1998. This decrease primarily reflects lower net income
as well as a decrease in accounts payable due to a $2.6 million payment in
January 1999 for new switching equipment accrued for at December 31, 1998. 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 months
ended September 30, 1996 were $75,000 and $1,092,000, respectively.
Net cash used in investing activities was $23.3 million for the three month
period ended March 31, 1999 compared to $1.2 million for the three month period
ended March 31, 1998. During the three month period ended March 31, 1999, we
invested $3.6 million in new switching and related equipment as compared to
$1.3 million during the comparable 1998 quarter. Further, in the first quarter
of 1999, $19.7 million of the proceeds from the private offering of the old
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 $44.9 million for the three
month period ended March 31, 1999 compared to a net use of $0.3 million for the
three month period ended March 31, 1998. The net cash provided in the three
month period ended March 31, 1999 was primarily attributable to proceeds from
the $150 million private offering of the old 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
43
<PAGE>
from the sale of our common and 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 months 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 $3.6 million for the first quarter 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 are not being depreciated until placed in service in 1999. We expect
to make additional capital expenditures between $30.0 and $50.0 million during
1999. 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 not exceed the amounts described above. Planned
capital expenditure projects during 1999 include: completion of an upgraded and
expanded switch at the existing Oakland, California facility; construction of
switching facilities in Las Vegas, Nevada and Seattle, Washington; expansion of
existing switch in Los Angeles, California; and implementation of a new billing
and operation system support system.
We have entered into a new senior credit facility. This 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 new senior credit facility; or
(2) the Eurodollar rate, as defined in the new senior credit facility, plus
between 2.25 and 3.5%.
As of May 31, 1999, there were no amounts outstanding under this facility and
the borrowing rate would have been 7.69%. Our borrowings under the new senior
credit facility will be secured by all of our assets. The new senior credit
facility has a three year term. See "Description of Indebtedness."
Our principal sources of funds following this exchange offer are anticipated
to be current unrestricted cash balances, cash flows from operating activities
and borrowings under the new senior credit facility. In addition, 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 under the notes. See
"Description of Notes--Interest Reserve Account." These U.S. government
securities are classified as restricted cash. We believe that these funds will
provide us with sufficient liquidity and capital resources for us to meet our
financial obligations for the next year, including the payment of principal and
interest under the notes, as well as to provide funds for our working capital,
capital expenditures and other needs. No assurance can be given, however, that
this will be the case. Depending upon our rate of growth and profitability, 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. Our future operating performance and ability to
service or refinance the notes and to repay, extend or refinance the new senior
credit facility will be subject to future economic conditions and to financial,
business and other factors, many of which are beyond our control.
Instruments governing our indebtedness, including the new senior credit
facility and the 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,
44
<PAGE>
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.
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 $15.2 million of cash
equivalent investments at December 31, 1998 by approximately $152,000. We do,
however, have market risk exposure associated with the market price on the $150
million of 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 March 31, 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.
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.
45
<PAGE>
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 are currently assessing the potential
impact of Year 2000 issues on these computers, equipment and applications. We
expect to complete this evaluation by August 1999 and will then begin
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 long distance billing
program 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.
Costs of remediation. We currently anticipate that our total cost of
addressing our Year 2000 issues will be $150,000, of which approximately
$102,000 has been incurred and expensed through May 31, 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 with third-party suppliers of components and
our key subcontractors used in the manufacturing 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.
46
<PAGE>
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.
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.
47
<PAGE>
BUSINESS
Our Company
We are a rapidly growing competitive local exchange carrier providing
switched local and long distance telecommunications services and one-stop
integrated telecommunications services to Internet service providers, paging
companies and other inbound call service providers as well as medium and small
businesses. We built our network to capitalize on the significant growth in
national Internet usage and in the related demand for switched local services
by regional and national Internet service providers, as well as the increasing
demand of medium and small businesses for customized and integrated
telecommunications services. We believe the structure and protocol of our
network and, in California, our presence in each 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, paging companies and other inbound call service
providers. In California, our network enables these companies to provide their
business and residential customers with access to Internet service provider,
paging and other services from almost any point in the state through a local
call. Our network development strategy of owning our switches and leasing our
fiber transport lines and our focus on telecommunications intensive customers
allow us to quickly enter new markets and 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 was 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 in this large, established market. Management believes
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.
Our primary market is California. We own and operate switches in Los
Angeles, Oakland and Stockton, have local points of presence in all 11
California local access and transport areas, and have over 500 assigned local
prefixes and 5.0 million telephone numbers available for use. Pac-West's local
prefixes cover 246 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 $26.0 billion in local
exchange and long distance revenues in 1996 and has over 660 Internet service
providers, over 600,000 medium and small businesses and about 7.5 million total
business lines. Over the next two years, we intend to duplicate our proven
network and marketing strategy in other western states, including Nevada,
Arizona, Washington, Colorado, Texas, Utah, Idaho, New Mexico and Oregon. We
believe that the use of telecommunications 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.
48
<PAGE>
The following table sets forth certain information regarding the markets in
which Pac-West currently operates and our anticipated geographic network
buildouts. Since Internet service providers are often present in more than one
state, for purposes of presenting the total number of Internet service
providers, each Internet service provider is counted only once. Medium and
small businesses are defined as businesses with fewer than 100 employees.
<TABLE>
<CAPTION>
1997 Target Customer Base 1996 Revenues (in millions)
------------------------------------- --------------------------------------
Number of Number of
Internet Medium & Total Local Local
Launch Service Small Business Exchange Exchange Long Total
Period Providers Business Lines Intrastate Interstate Distance Market
------ --------- --------- ---------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current Markets:
California............. 1996 664 600,173 7,473,945 $ 8,423 $2,396 $15,142 $25,961
Planned Markets:
Arizona................ 1999 213 78,546 766,290 949 408 2,023 3,380
Colorado............... 2000 239 97,222 837,557 1,203 466 2,014 3,683
Idaho.................. 2000 111 27,562 173,788 254 132 546 932
Nevada................. 1999 166 29,854 398,604 322 154 894 1,370
New Mexico............. 2000 151 32,730 234,439 422 160 737 1,319
Oregon................. 1999 239 77,020 569,452 758 333 1,497 2,588
Texas.................. 2000 431 340,208 3,472,214 5,060 1,589 8,468 15,117
Utah................... 2000 170 36,888 340,687 404 182 739 1,325
Washington............. 1999 302 125,182 915,398 1,424 555 2,700 4,679
----- --------- ---------- ------- ------ ------- -------
Total Planned
Markets............. -- 845,212 7,708,429 10,796 3,979 19,618 34,393
--------- ---------- ------- ------ ------- -------
Total Pac-West
Markets............. 1,388 1,445,385 15,182,374 $19,219 $6,375 $34,760 $60,354
========= ========== ======= ====== ======= =======
</TABLE>
We focus on providing services to high-volume, telecommunications intensive
users and to medium and small businesses. Pac-West's customers include 76
regional and national Internet service providers, all of which have operations
in California. We believe that our greatest opportunity for rapid growth is to
continue to grow with and provide high quality services to our Internet service
provider customers. By building our network to meet demand from existing
Internet service provider customers that are increasing their capacity in
existing markets and expanding into new geographic markets, we believe we can:
(1) quickly achieve predictable, high utilization rates on newly deployed
network assets from high volume users;
(2) generate a high return on invested capital in a short period of time;
and
(3) enter new markets with a stable and growing revenue and cash flows base
upon which we can aggressively market to build a more diversified base
of revenue and customers.
Internet access service is one of the fastest growing segments of the global
telecommunications services market. International Data Corporation, a market
research firm, estimates that the number of Internet users worldwide reached 69
million in 1997 and will grow to over 320 million by the year 2002. The rapid
growth and development of the Internet has resulted in the creation of
approximately 5,000 national and local Internet service providers in the United
States. We believe that we are strategically positioned to become one of the
leading providers of telecommunications services to Internet service providers
in our target markets.
Pac-West believes many medium and small businesses have significant and
increasing needs for advanced telecommunication services that are not
adequately served by incumbent local exchange carriers or other competitive
local exchange carriers. Our target state markets have approximately 1.4
million medium and small businesses and approximately 15.2 million total
business lines in service. Many of our target customers want technologically
advanced telecommunications systems and low cost bundled services but do not
have the expertise to design, purchase and maintain these kinds of systems
themselves. We believe our complete product
49
<PAGE>
offering of system design, equipment selection and installation, and bundled
local and long distance services positions us to become a leading provider of
integrated telecommunications services to medium and small businesses, allowing
us to quickly penetrate our target markets and build customer loyalty.
Network
Our network strategy is to own our switches and lease our fiber transport
lines. We believe that this strategy provides 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. Our
network development strategy of owning our switches and leasing our fiber
transport lines and our high percentage of on-network customer traffic enable
us to rapidly generate revenues and positive cash flows while avoiding the risk
of stranding our capital in underutilized fiber transport equipment.
To meet demand for telecommunications 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 and protocol 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, paging companies and
other inbound call service providers. In California, our network enables our
customers to provide their business and residential customers with access to
Internet, paging and other services from almost any point in the state through
a local call. In this way, our customers can achieve statewide coverage with
significantly lower capital and operating expenses. Our switching sites offer
Internet service providers highly reliable, low cost tandem switching and the
ability to build lower cost networks by collocating equipment at our three
switching sites rather than in all 11 local access 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.
Our switching sites use Alcatel USA's tandem switches to switch calls
between originating locations and final destinations. Each port on a switch is
a data access point for entry or exit of information to and from the network.
As of March 1, 1999, we had an installed capacity of 187,000 ports and total
expandable capacity of 260,000 ports, all in California. By the end of the
second quarter of 1999, we expect to increase our California switching sites'
total expandable capacity to 345,000 ports. We plan to duplicate our network
strategy of owning our switches, leasing our fiber transport lines and
providing statewide local coverage in each of our target markets. We intend to
install new Pac-West switching sites in Nevada and Washington in 1999 and in
Arizona or Colorado in early 2000.
Leased Transmission Capacity. We 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. Management believes 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 telecommunications 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
50
<PAGE>
(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. in California and Nevada Bell in Nevada. See "--Regulation."
Strategy
Our objective is to become a leading provider of telecommunications services
to Internet service providers, paging companies and other inbound call service
providers as well as medium and small businesses in each of our target markets.
We plan to do this by:
Capitalizing on Growing Internet Service Provider Demand for Local Services.
Significant increases in dial-up access to the Internet have resulted in the
creation of approximately 5,000 national and local Internet service providers
in the U.S., which, in turn, has created strong demand for local access lines
nationwide. Pac-West currently has 76 regional and national Internet service
provider customers, all of which have operations in California. Many of these
Internet service providers already operate in several states and are continuing
to expand into additional markets. Also, many Internet service providers based
outside of our target markets are establishing a presence in California and
other western states. We intend to duplicate our proven network strategy in new
markets in order to serve the needs of our existing customers and attract new
customers entering those markets from other regions. The structure and protocol
of our network offers Internet service providers three primary 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.
We believe that by entering new markets with our existing customers, we can
reduce our risk, achieve predictable, high usage rates on our network assets,
and generate a high return on invested capital in a short period of time.
Focusing on Medium and Small Business Market. We believe that medium and
small businesses have significant and increasing needs for advanced
telecommunication services. Many of our target customers want technologically
advanced telecommunications 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 telecommunications services
by offering a complete product offering of system design, equipment selection
and installation along with bundled local and long distance services. We
believe that this product mix will enable us to quickly penetrate target
markets and build customer loyalty.
51
<PAGE>
Expanding Our Direct Sales Force. To achieve significant revenue growth in
the medium and small business services market, we have and will continue to
expand our direct sales force and use independent sales agents in selected
markets. From September 1998 to December 1998, our direct, internal sales force
increased from 25 to 46 professionals, and to 58 professionals as of March 1,
1999. 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.
Targeting California and Western United States. Our primary market is
currently California. After completing our planned expansion, we expect to
offer coverage throughout the Western United States, one of the fastest growing
regional markets for business telecommunications services in the country. We
select our 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 had
approximately 1,400 Internet service providers, 1.4 million medium and small
businesses and 15.2 million business lines in 1997, and generated approximately
$60.4 billion of local exchange and long distance revenues in 1996. 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.
Deploying a Capital-Efficient Network. Virtually all of our planned capital
expenditures are intended to accommodate our growing customer base and the
increasing needs of our existing customers. We believe this strategy reduces
capital deployment risks and will provide an attractive return on invested
capital. In addition, we believe that our strategy of leasing our fiber
transport lines provides us with significant cost and time-to-market advantages
over competitors who own rather than lease their transport.
Installing an Advanced, Uniform Technology Platform. We have chosen Alcatel
USA's digital tandem switches as a consistent central technology platform 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 and protocol 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.
Expanding Our Customer Base Through Potential Acquisitions. We may acquire
other competitive local exchange carriers or other telecommunications 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.
52
<PAGE>
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 services as the
telecommunications 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 telecommunications 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 three California 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.
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 expect to offer high-speed digital
subscriber line service to our Internet service provider and business
customers through a reseller relationship with a major digital subscriber
line supplier.
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. 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.
53
<PAGE>
Marketing. In its existing markets, Pac-West seeks to position itself 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. Management believes 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 services to high volume telecommunications users,
including Internet service providers, paging companies, call centers and medium
and small businesses. Nine of our top fifteen customers are Internet service
providers. For the year ended December 31, 1997 and 1998 and for the three
month period ended March 31, 1999, Internet service providers accounted for
approximately 16.2%, 23.3% and 28.4%, respectively, of our revenues, not
including reciprocal compensation related to terminating calls to Internet
service providers.
The following is a list of some of our Internet service provider and paging
customers:
<TABLE>
<CAPTION>
Internet Service Providers Paging Companies
-------------------------- ----------------
<S> <C>
Concentric Network Corp. Metrocall, Inc
EarthLink, Inc. PageMart Wireless, Inc.
Frontier Global Center, Incorporated California Wireless, Inc.
The Grid Inc.
InReach Internet LLC
JPS.Net Corp.
Mindspring Enterprises, Inc.
Slip.Net, Inc.
</TABLE>
Our business customers include regional banks, alarm companies, universities,
healthcare providers, real estate agencies, law firms and others.
Sales to Bay Alarm Company and InReach Internet LLC collectively accounted
for approximately 7.1%, 6.4% and 4.5%, respectively, of our revenues for the
year ended December 31, 1997 and 1998 and for the three month period ended
March 31, 1999. Mr. Bruce A. Westphal, who serves on our board of directors, is
the principal stockholder and serves as 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.
54
<PAGE>
Incumbent Local Exchange Carriers. In each of the markets we target, we will
compete principally with the incumbent local exchange carrier serving that
area, such as Pacific Bell and GTE in California. Some incumbent local exchange
carriers, including GTE, are offering long distance services to their local
telephone customers. The regional Bell operating companies, including Pacific
Bell, are actively seeking removal of federal regulatory restrictions that
prevent them from entering the long distance market. Many experts expect the
regional Bell operating companies to be successful in entering the long
distance market in a few states within the next two years and in most states
within a year or two thereafter. We believe the regional Bell operating
companies expect to offset market share losses in their local markets by
capturing a significant percentage of the in-region 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.
With respect to competitive access services, the FCC recently proposed a
rule that would provide for increased incumbent local exchange carrier pricing
flexibility and deregulation for such access services either automatically or
after certain competitive levels are reached. If the incumbent local exchange
carriers are allowed by regulators to offer discounts to large customers
through contract tariffs, engage in aggressive volume and term discount pricing
practices for their customers, and/or seek to charge competitors excessive fees
for interconnection to their networks, the income of competitors to the
incumbent local exchange carriers, including us, could be materially adversely
affected. If future regulatory decisions afford the incumbent local exchange
carriers increased access service pricing flexibility or other regulatory
relief, such decisions could also have a material adverse effect on competitors
to the incumbent local exchange carrier, including ourselves.
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.
55
<PAGE>
The changes in the Telecommunications Act of 1996 radically altered the
market opportunity for traditional competitive local exchange carriers. Because
many existing competitive local exchange carriers initially entered the market
providing dedicated access in the pre-1996 era, they had to build a fiber
infrastructure before offering services. Switches were added by most
competitive local exchange carriers since 1996 to take advantage of the opening
of the local market. With the Telecommunications Act of 1996 requiring
unbundling of the incumbent local exchange carrier networks, competitive local
exchange carriers are now able to enter the market more rapidly by installing
switches and leasing fiber transport capacity until traffic volume justifies
building facilities. New competitive local exchange carriers will not have to
replicate existing facilities and can be more opportunistic in designing and
implementing networks.
Competition for Provision of Long Distance Services. The long distance
telecommunications industry has numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline.
Internet Service Providers. The competition for Internet service provider
customers in the telecommunications industry is high and we expect that
competition will intensify. In addition, alternative competing technologies
regarding this service may emerge. Our competitors in this market include other
telecommunications companies, including integrated online services providers
with their own communications networks. Many of these competitors have greater
financial, technological, marketing, personnel and other resources than ours.
Competition from International Telecommunications Providers. Under the
recent World Trade Organization agreement on basic telecommunications services,
the United States and 68 other members of the World Trade Organization
committed themselves to opening their respective telecommunications markets
and/or 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.
56
<PAGE>
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 agreements and
providing guidelines for review of such agreements by state public utilities
commissions. On July 18, 1997, the Eighth Circuit vacated certain portions of
the interconnection decision, including provisions establishing a pricing
methodology and a procedure permitting new entrants to pick and choose among
various provisions of existing interconnection agreements between incumbent
local exchange carriers and their competitors. On October 14, 1997, the Eighth
Circuit issued a decision vacating additional FCC rules affecting the use of
combinations of an incumbent local exchange carrier's unbundled network
elements. On January 25, 1999, the Supreme Court reversed most aspects of the
Eighth Circuit's holdings with respect to FCC jurisdiction and, among other
things, declared that the FCC has general authority under the
Telecommunications Act of 1996 to promulgate regulations governing local
interconnection pricing, including regulations governing reciprocal
compensation. The Supreme Court also found that the FCC had the authority to
promulgate a pick and choose rule, and upheld most of the FCC's rules governing
access to unbundled network elements. The Court, however, remanded to the FCC
its designation of unbundled network elements based on the FCC's use of an
improper standard to determine whether an unbundled element must be made
available.
The Eighth Circuit decisions and their recent reversal by the Supreme Court
perpetuate continuing uncertainty about the rules governing the pricing, terms
and conditions of interconnection agreements. The Supreme Court's action in
particular may require or trigger the renegotiation of existing agreements.
Although state public utilities commissions have continued to conduct
arbitrations, and to implement and enforce interconnection agreements during
the pendency of the Eighth Circuit proceedings, the Supreme Court's recent
ruling and further proceedings on remand at the Eighth Circuit or the FCC may
affect the scope of state commissions' authority to conduct such proceedings or
to implement or enforce interconnection agreements. They could also result in
new or additional rules being promulgated by the FCC. Given the general
uncertainty surrounding the effect of the Eighth Circuit decisions and the
recent decision of the Supreme Court reversing them, there can be no assurance
that we will be able to continue to obtain or enforce interconnection terms
that are acceptable to us or that are consistent with our business plans.
The Telecommunications Act of 1996 is intended to increase competition. The
act opens the local services market by requiring incumbent local exchange
carriers to permit interconnection to their networks and establishing incumbent
local exchange carrier obligations with respect to:
Reciprocal Compensation. Requires all incumbent local exchange carriers
and competitive local exchange carriers to complete calls originated by
competing carriers under reciprocal arrangements at prices based on a
reasonable approximation of incremental cost or through mutual exchange of
traffic without explicit payment.
Resale. Requires all incumbent local exchange carriers and competitive
local exchange carriers to permit resale of their telecommunications
services without unreasonable restrictions or conditions. In addition,
incumbent local exchange carriers are required to offer wholesale versions
of all retail services to other telecommunications carriers for resale at
discounted rates, based on the costs avoided by the incumbent local
exchange carrier in the wholesale offering.
Interconnection. Requires all incumbent local exchange carriers and
competitive local exchange carriers to permit their competitors to
interconnect with their facilities. Requires all incumbent local exchange
carriers to permit interconnection at any technically feasible point within
their networks, on nondiscriminatory terms, at prices based on cost, which
may include a reasonable profit. At the option of the carrier seeking
interconnection, collocation of the requesting carrier's equipment in the
incumbent local exchange carriers' premises must be offered, except where
an incumbent local exchange carrier can demonstrate space limitations or
other technical impediments to collocation.
Unbundled Access. Requires all incumbent local exchange carriers to
provide nondiscriminatory access to unbundled network elements, including
certain network facilities, equipment, features, functions,
57
<PAGE>
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 have appealed the May 8th order.
Such appeals have been consolidated and transferred to the United States Court
of Appeals for the Fifth Circuit where they are currently pending. The FCC and
a federal-state joint board also are continuing to examine and revise various
aspects of universal service. We cannot predict the effect that further
regulatory or judicial revision of the universal service regime will have on
our business, financial condition or results of operations.
The Telecommunications Act of 1996 codifies the incumbent local exchange
carriers' equal access and nondiscrimination obligations and preempts
inconsistent state regulation. The Telecommunications Act of 1996 also contains
special provisions that eliminate the AT&T Antitrust Consent Decree and similar
antitrust restrictions on the regional Bell operating companies restricting the
regional Bell operating companies from providing long distance services and
engaging in telecommunications equipment manufacturing. The Telecommunications
Act of 1996 permitted the regional Bell operating companies to enter the out-
of-region long distance market immediately upon its enactment. Further,
provisions of the Telecommunications Act of 1996 permit a regional Bell
operating company to enter the long distance market in its traditional service
area if it satisfies several procedural and substantive requirements in those
states in which it seeks long distance relief. These requirements include
obtaining FCC approval upon a showing that the regional Bell operating company
has entered into interconnection agreements or, under some circumstances, has
offered to do so. The interconnection agreements must satisfy a 14-point
checklist of competitive requirements and the FCC must be
58
<PAGE>
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.
With limited exceptions, the current policy of the FCC for most interstate
access services dictates that incumbent local exchange carriers charge all
customers the same price for the same service. Thus, the incumbent local
exchange carriers generally cannot lower prices to those customers likely to
contract for their services without also lowering charges for the same service
to all customers in the same geographic area, including those whose
telecommunications requirements would not justify the use of such lower prices.
The FCC may, however, alleviate this constraint on the incumbent local exchange
carriers and permit them to offer special rate packages to very large
customers, as it has done in a few cases, or permit other forms of rate
flexibility. The FCC has adopted some proposals that significantly lessen the
regulation of incumbent local exchange carriers that are subject to competition
in their service areas and provide such incumbent local exchange carriers with
additional flexibility in pricing their interstate switched and special access
on a central office specific basis; and, as discussed in the following
paragraph, is considering expanding such flexibility.
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
59
<PAGE>
charges be just, reasonable, and not unreasonably discriminatory. In two orders
released on December 24, 1996, and May 16, 1997, the FCC made major changes to
the interstate access charge structure. In the December 24th order, the FCC
removed restrictions on incumbent local exchange carriers' ability to lower
access prices and relaxed the regulation of new switched access services in
those markets where there are other providers of access services. If this
increased pricing flexibility is not effectively monitored by federal
regulators, it could have a material adverse effect on our ability to compete
in providing interstate access services. The May 16th order substantially
increased the costs that price cap incumbent local exchange carriers subject to
the FCC's price cap rules, recover through monthly, non-traffic-sensitive
access charges and substantially decreased the costs that price cap incumbent
local exchange carriers recover through traffic-sensitive access charges. In
the May 16th order, which was upheld on appeal by the United States Court of
Appeals for the Eighth Circuit, the FCC also announced its plan to bring
interstate access rate levels more in line with costs. The plan will include
rules that may grant price cap incumbent local exchange carriers increased
pricing flexibility upon demonstrations of increased or potential competition
in relevant markets. The manner in which the FCC implements this approach to
lowering access charge levels 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, thirteen states have issued decisions either initially or on
reconsideration of existing decisions. In each case, 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 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. 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 and Oregon, an application is pending in
Arizona, and we intend to file applications for such authority in the near
future for Colorado, Idaho, Montana, Utah, New Mexico, Texas and Wyoming. 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.
60
<PAGE>
On October 22, 1998, the California Public Utilities Commission issued a
decision holding that local telephone calls placed to Internet service
providers terminate at the Internet service providers' modem and are thus local
calls entitled to reciprocal compensation. On November 30, 1998, Pacific Bell
and GTE filed applications for rehearing of the October 22, 1998 decision. The
California Public Utilities Commission may grant or deny rehearing, or may
commence a separate generic proceeding to develop its prospective policy
regarding reciprocal compensation. We cannot predict the outcome of these
California Public Utilities Commission proceedings or of future appeals, of
additional pending cases involving related issues, or of the applicability of
such proceedings to our interconnection agreement with Pacific Bell or GTE. As
a result, no assurance can be given that we will collect the reciprocal
compensation previously withheld by Pacific Bell and GTE or whether we will be
entitled to reciprocal compensation for these types of calls in the future.
Internet service providers currently form a significant part of our customer
base in California and adverse decisions in these proceedings could limit our
ability to serve this group of customers profitably and have a material adverse
effect on us.
We expect that reciprocal compensation will continue to represent a
significant portion of our revenues in the future although we expect that the
per minute reciprocal compensation rate may decline significantly under new
interconnection agreements. We are currently in the process of renegotiating
our interconnection agreement and the terms of our reciprocal compensation
arrangements with GTE, and no assurance can be given concerning the outcome of
these negotiations or any arbitration under Section 252 which may occur in the
absence of successful negotiations.
On November 16, 1998, Pacific Bell filed a Petition for Arbitration of an
interconnection agreement in accordance with Section 252(b) of the
Telecommunications Act of 1996. This agreement would replace the
interconnection agreement which was executed in 1996. This petition proposed
that telephone calls to Internet service providers be excluded from calls
subject to reciprocal compensation. This petition also proposed that calls made
to a number assigned to the calling party's rate center but routed to a second
rate center be deemed interexchange toll-free calls for which Pacific Bell
would be entitled to compensation for providing switched access. Pacific Bell
asserts that, because such calls would allow certain calling parties to
complete calls to Internet service providers or other customers in another rate
center without toll charges, these calls are essentially toll-free in nature. A
previous decision of general application issued by the California Public
Utilities Commission in October of 1998 held that calls to Internet service
providers are subject to the payment of reciprocal compensation. We have
asserted that because calls routed to a second rate center are placed by
dialing a number assigned to the calling party's rate center and not using 8XX
toll-free processing that these calls should not be considered toll-free. See
"Risk Factors--A failure to establish interconnection agreements on favorable
terms would adversely affect our business" and "--Our right to receive
reciprocal compensation for calls to Internet service providers is currently
being challenged."
On June 24, 1999, the California Public Utilities Commission adopted a
decision (D.99-06-088) which adopted the terms of the interconnection agreement
between Pac-West and Pacific Bell resulting from the arbitration process
commenced by the petition. The decision provides that until such time as the
October 1998 decision regarding reciprocal compensation is modified, reciprocal
compensation is payable by Pacific Bell for calls to Internet service provider
customers of Pac-West, and that Pacific Bell's position concerning toll free
calls was rejected. The decision also adopts per minute rate levels for
reciprocal compensation based on Pacific Bell's approved costs, and these rate
levels are substantially lower than the rates under the 1996 interconnection
agreement. The parties were ordered to sign an interconnection agreement
incorporating these and other results of the arbitration process, and the new
interconnection agreement became effective on June 29, 1999. Pacific Bell has
requested rehearing of this decision. This decision does not address reciprocal
compensation withheld under the prior agreement and we do not know at this time
what action Pacific Bell will take with respect to this 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
61
<PAGE>
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
July 6, 1999, an administrative law judge release a draft decision in this
proceeding finding that carriers can provide customers with local telephone
numbers for rate centers in which the customer is not located and where a
carrier has no physical facilities. The draft decision defers the resolution of
intercarrier compensation issues in such circumstances to further evidentiary
proceedings. After receiving comments, the California Public Utilities
Commission will vote on the draft decision at a meeting after August 6, 1999.
While the ultimate results of this proceeding are unknown, we expect that we
will not be prohibited from providing service using this method. See "Risk
Factors--A failure to establish interconnection agreements on favorable terms
would adversely affect our business," "--Our right to receive reciprocal
compensation for calls to Internet service providers is currently being
challenged" and "--We depend on Internet service providers for a significant
portion of our revenues."
Local Regulation
Our networks are subject to numerous local regulations such as building
codes and licensing requirements. Such regulations vary on a city by city and
county by county basis. To the extent we decide in the future to install our
own fiber optic transmission facilities, we will need to obtain rights-of-way
over private and publicly owned land and pole attachment authorizations. There
can be no assurance that such rights-of-way or authorizations will be available
to us on economically reasonable or advantageous terms. We could also be
subject to unexpected franchise requirements and could be required to pay
license or franchise fees based on a percentage of gross revenues or some other
formula.
Regulatory Proceedings
Litigation
On October 8, 1997, Pacific Bell filed a complaint against us in the San
Francisco County Superior Court seeking a declaratory ruling that the
interconnection agreement between it and ourselves does not require it to pay
reciprocal compensation for calls that its end users make to our Internet
service provider customers. Pacific Bell argued that such calls to Internet
service providers are not local calls within the meaning of the agreement even
though they are dialed and billed as local calls. In addition to the
declaratory ruling, Pacific Bell sought an accounting and restitution by Pac-
West of all payments Pacific Bell made to us under that agreement for calls
which we completed to Internet service providers. We filed a demurrer to the
complaint, seeking a stay of any further action by the court on the basis that
the California Public Utilities Commission has primary jurisdiction over the
complaint. The court granted our demurrer in part on October 23, 1997, staying
Pacific Bell's action pending California Public Utilities Commission review of
issues in Pacific Bell's complaint.
Jurisdiction over and Compensation for Internet Service Provider Traffic
We derive a substantial portion of our revenue from incumbent local exchange
carriers in the form of reciprocal compensation payments. For the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1999,
reciprocal compensation payments accounted for approximately 37.4%, 37.1% and
42.1%, respectively, of our revenue. We expect that reciprocal compensation
will continue to represent a significant portion of our revenue for the
foreseeable future. The two incumbent local exchange carriers with which we
have interconnection agreements, Pacific Bell and GTE, have refused to pay that
portion of reciprocal compensation that they estimate is the result of
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
62
<PAGE>
total reciprocal compensation withheld by these incumbent local exchange
carriers and not included in revenue was $3.8 million, $32.6 and $13.4 million
for the years ended December 31, 1997 and 1998 and for the three month period
ended March 31, 1999, respectively. See "Risk Factors--Interconnection
Agreements" and "--Reciprocal Compensation for Internet Access Service."
On November 21, 1997, we filed a complaint against Pacific Bell requesting,
among other things, that the California Public Utilities Commission order that
calls to Internet service providers are local calls and, more specifically,
that the agreement with Pacific Bell requires it to compensate us for
completing those calls. In March 1998, Pac-West and Pacific Bell filed cross-
motions by stipulation for summary judgment on all issues pending in this
proceeding. These motions are currently pending. We cannot predict the ultimate
outcome of the California Public Utilities Commission proceeding, future
appeals or additional pending cases. Therefore, we cannot assure you that we
will collect the withheld compensation from GTE or Pacific Bell or that we will
have the right to compensation for these types of calls in the future. If the
California Public Utilities Commission acts contrary to our position, the
ability to serve our customer base could be severely limited since a large part
of that base consists of Internet service providers. If the California Public
Utilities Commission acts contrary to our position, and it is determined that
the compensation associated with past Internet service provider traffic is
greater than the amount already withheld, we could be required to reimburse the
incumbent local exchange carriers the difference between these two amounts.
Thirty-one state commissions have addressed the issue of whether the
obligation to pay reciprocal compensation should apply to local calls to
Internet service providers. Every state commission to address this issue to
date except Massachusetts and Missouri has ruled that compensation is owed for
such calls. Several of these cases are being appealed. So far, U.S. District
courts in the states of Texas, Washington, Oregon 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.
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. We cannot predict the outcome of
the California Public Utilities Commission proceeding, future appeals or
additional pending cases. Therefore, we cannot assure you that we will collect
the withheld compensation from GTE or Pacific Bell or that we will have the
right to compensation for these types of calls in the future. If the California
Public Utilities Commission does act contrary to our position, our ability to
serve our customer base could be severely limited since a large part of that
base consists of Internet service providers. If the California Public Utilities
Commission acts contrary to our position and the compensation associated with
past Internet service provider traffic is greater than the amount already
withheld, we could be required to reimburse the incumbent local exchange
carriers for the difference between these two amounts.
On February 26, 1999, the FCC issued a declaratory ruling on the issue of
inter-carrier compensation for calls bound to Internet service providers. The
FCC ruled that the calls are jurisdictionally mostly interstate calls. The FCC,
however, determined that this issue did not resolve the question of whether
inter-carrier reciprocal compensation is owed for such calls under existing
interconnection agreements. The FCC noted a number of factors that would allow
the state public utilities commissions to require the payment of reciprocal
compensation. Since the issuance of the FCC decision, thirteen states have
issued decisions either initially or on reconsideration of existing decisions.
In each case, 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. 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
63
<PAGE>
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 service, the California Public
Utilities Commission held that any order adverse to us would be applied only on
a prospective basis and would not affect any contracts for services executed
prior to a final decision. On July 22, 1998, the California Public Utilities
Commission issued a ruling soliciting comments on the continuing propriety of
Pac-West's service methods. Specifically, the California Public Utilities
Commission inquired whether a carrier should be allowed to provide customers
with local telephone numbers for rate centers in which customers are not
located and where a carrier has no physical facilities and, if so, how inter-
carrier compensation should be accomplished for calls to such customers.
Comments were filed in August and September 1998. We often provide service to
our customers using this method. A prohibition on this service would impair our
ability to provide service to our customers. We presently claim reciprocal
compensation based on these calls. A California Public Utilities Commission
holding that such calls are not entitled to reciprocal compensation could
result in a significant loss of revenue to us.
Interconnection Agreements
We are currently in the process of renegotiating our interconnection
agreements which govern the terms of our reciprocal compensation arrangements
with GTE. We cannot give any assurances concerning the outcome of these
negotiations or any arbitration that may follow unsuccessful negotiations. On
November 16, 1998, Pacific Bell filed a petition for Arbitration of an
interconnection agreement in accordance with Section 252(b) of the
Telecommunications Act of 1996. In its petition, Pacific Bell requested
arbitration on three issues:
(1) the jurisdiction of calls placed to Internet service providers;
(2) reciprocal compensation rates; and
(3) term of the agreement.
On November 18, 1998, Pacific Bell filed a complaint against us at the
California Public Utilities Commission seeking unspecified compensation under
the interconnection agreement with us. This complaint, which was amended on
March 12, 1999, argues that many of the calls to our Internet service provider
customers are toll-free interexchange calls for which Pacific Bell is entitled
to compensation for providing switched access. Pacific Bell believes that a
call placed from a dialing party in one rate center to a number assigned to the
same rate center is potentially a toll call if such a call is routed for
completion in a second rate center. Because the dialing party is sometimes not
charged for this call, Pacific Bell believes these calls to be toll-free calls
for which Pacific Bell is entitled to compensation under the agreement. We
presently claim reciprocal compensation based on these calls. On June 24, 1999,
the California Public Utilities Commission adopted a decision in the
arbitration proceeding between us and Pacific Bell which held that reciprocal
compensation would be payable for Internet service provider calls under our new
interconnection agreement with Pacific Bell which became effective on June 29,
1999. Pacific Bell has requested rehearing of this decision. This decision does
not address reciprocal compensation withheld under the prior agreement. We do
not know at this time what other action Pacific Bell will take with respect to
this decision. A California Public Utilities Commission holding that such calls
are not entitled to reciprocal compensation could result in a significant loss
of revenue to us and an obligation to pay significant amounts to Pacific Bell.
64
<PAGE>
On October 12, 1998, we filed at the Public Utilities Commission of Nevada a
petition for arbitration of an interconnection agreement with Nevada Bell in
accordance with Section 252(b) of the Telecommunications Act of 1996. The
issues in this arbitration are whether reciprocal compensation is payable for
calls placed to Internet service providers and whether reciprocal compensation
is payable for a local-rated call placed by a dialing party in one local
calling area that is routed to a second local calling area for completion. On
April 8, 1999, the Public Utilities Commission of Nevada held that calls placed
to Internet service providers are subject to reciprocal compensation in the
same manner as other calls, but held that, under current Nevada regulatory
policy, calls routed from one local calling area to another local calling area
for completion should not be deemed local calls. Due to the geographic
centralization of Nevada populations within large local calling areas, we do
not believe that Public Utilities Commission of Nevada's ruling on the
classification of local calls will have a material effect on our planned
operations in Nevada.
On February 2, 1999, we filed at the California Public Utilities Commission
a petition for arbitration of an interconnection agreement with Citizens
Telecommunications Company of California, Inc., in accordance with Section
252(b) of the Telecommunications Act of 1996. The issues in this arbitration
are whether reciprocal compensation is payable for calls placed to Internet
service providers and what compensation arrangement should apply when calls are
exchanged through indirect interconnection over the facilities of a third party
carrier. A California Public Utilities Commission holding contrary to our
position could materially adversely affect our ability to economically serve
customers in Citizens Telecommunications Company of California, Inc.'s service
area.
We are not party to any other pending legal or regulatory proceedings that
we believe would, individually or in the aggregate, have a material adverse
effect on our financial condition or results of operations.
For additional information regarding regulatory matters, see "Risk Factors--
Reciprocal Compensation for Internet Access Service."
Employees
As of March 1, 1999, we had 147 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 March 1, 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 June 2002 33,000
equipment
Oakland, CA Equipment November 2003 9,971
Los Angeles, CA Equipment September 2006 8,458
</TABLE>
We have also entered into a lease in Las Vegas, Nevada, for 12,065 square
feet, to establish a new switching facility which we expect to be operational
in 1999. The Las Vegas lease will expire in 2009. Significant construction has
been substantially completed at that site.
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 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.
65
<PAGE>
MANAGEMENT
Executive Officers, Key Employees and Directors
Our executive officers, key employees and directors and their ages as of
March 1, 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........... 49 Executive Vice President--Technology and
Network Operations and Director
Richard E. Bryson........ 45 Chief Financial Officer
Brian K. Johnson......... 38 Vice President--Sales
Joel A. Effron........... 55 Senior Vice President--Sales and Marketing
Dennis V. Meyer.......... 60 Vice President--Finance and Treasurer
Jason R. Mills........... 27 Vice President--Network Operations
Gregory Joksch........... 42 Vice President--Information Technologies
Jeff M. Webster.......... 34 Vice President--Business Operations and
Regulatory Matters
Directors:
Jerry L. Johnson......... 51 Chairman of the Board of Directors
David G. Chandler........ 41 Director
Mark J. DeNino........... 45 Director
Samuel A. Plum........... 54 Director
Bruce A. Westphal........ 58 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 the recapitalization. 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 the
recapitalization. Since the recapitalization, 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.
66
<PAGE>
Brian K. Johnson has served as our Vice President of Sales since September
1998. Mr. Johnson will lead the expansion of our local and long distance
services. 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. Prior to joining Pac-West, 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 the recapitalization. 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 our and our predecessor's Vice President of
Operations since 1991. His current areas of responsibility include human
resource management and regulatory administration including tariffs, compliance
and reporting. 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.
Jerry L. Johnson has served as our Chairman of the board of directors since
the recapitalization. Since 1995, Mr. Johnson has been employed by Safeguard
Scientifics, where he is responsible for managing the operating portfolio
companies and the operations team. 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 5,000
management and engineering employees and 16,000 technical and clerical
employees. From 1983 to 1985, Mr. Johnson was President and CEO of Northwestern
Bell Information Technologies.
David G. Chandler has served as one of our Directors since the
recapitalization. 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 and Sweetwater Sound, Inc.
67
<PAGE>
Mark J. DeNino has served as one of our Directors since the
recapitalization. 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., CRW Financial, Inc., FlowWise Networks, Inc.,
GMT MicroElectronics Corporation, Argus Networks Inc., Neuron Data, Inc. and
Adaptive Media, Inc.
Samuel A. Plum has served as one of our Directors since the
recapitalization. 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 a Managing Director of 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 Metallurge Holdings, Inc.
Bruce A. Westphal has served as one of our Directors since the
recapitalization. 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.
All members of the board of directors set forth in this prospectus have been
elected in accordance with a stockholders agreement that was entered into in
connection with the recapitalization. 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."
68
<PAGE>
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 a Pac-West employee. Prior to that time
but in that same year, Mr. Griffin received additional compensation from Pac-
West 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 Other Annual All Other
Position Held Salary Bonus Bonus Payment Compensation Compensation
------------------ -------- -------- ----------- ----------- ------------ ------------
<S> <C> <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>
69
<PAGE>
Stock Incentive Plan
After the recapitalization, the executive committee of the board of
directors adopted 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 Pac-West 1999 Stock
Incentive Plan, the Board 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. After giving effect to
the Pac-West ten for one stock split, an aggregate of 2,250,000 shares of
common stock have been reserved for option grants under the Pac-West 1999 Stock
Incentive Plan, subject to adjustment upon the occurrence of certain events to
prevent any dilution or expansion of the rights of participants that might
otherwise result from the occurrence of such events. In 1998, in accordance
with their employment agreements and after giving effect to the Pac-West ten
for one stock split, options to purchase certain shares of common stock were
granted to Messrs. Wallace W. Griffin and Richard E. Bryson as described below.
Such options will be issued under the Pac-West 1999 Stock Incentive Plan. In
addition, in 1999, and after giving effect to the Pac-West ten for one stock
split, options to purchase 335,000 shares were granted under the Pac-West 1999
Stock Incentive Plan to Messrs. John K. La Rue, Dennis V. Meyer, Jason R. Mills
and Jeff M. Webster. No options were exercised during 1998.
The amounts shown for realizable potential value are calculated assuming
that the market value of the common stock was equal to the exercise price per
share as of the date of grant of the options. This value is the approximate
price per share at which shares of the common stock would have been sold in
private transactions on or about the date on which the options were granted.
The dollar amounts under these columns assume a compounded annual market price
increase for the underlying shares of the common stock from the date of grant
to the end of the option term of 5% and 10%. This format is prescribed by the
SEC and is not intended to forecast future appreciation of shares of the common
stock. The actual value, if any, a named officer may realize will depend on the
excess of the market price for shares of the common stock on the date the
option is exercised over the exercise price. Accordingly, there is no assurance
that the value realized by a named officer will be at or near the value
estimated above.
Option Grants in 1998
<TABLE>
<CAPTION>
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted to Price Appreciation
Underlying Employees Exercise or for Option Term
Options in Fiscal Base Price Expiration ---------------------
Name Granted (#) Year ($/Sh) Date 5% ($) 10% ($)
- ---- ----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Wallace W. Griffin...... 250,000 61.5% $0.67 09/16/2008 105,000 267,000
Richard E. Bryson....... 156,250 38.5% $0.67 10/30/2008 66,000 167,000
</TABLE>
Qualified 401(k) and Profit Sharing Plan
We maintain a tax-qualified 401(k) plan. Employees who are 21 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. Pac-West 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.
70
<PAGE>
Employment Agreements
Messrs. Wallace W. Griffin, John K. La Rue, Richard E. Bryson, Dennis V.
Meyer and Jason R. Mills 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>
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%
</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, and after giving
effect to the Pac-West ten for one stock split, Mr. Griffin purchased 375,000
shares of common stock for an aggregate purchase price of $250,000 and Mr.
Bryson purchased 62,470 shares of common stock for an aggregate purchase price
of $41,667. In each case, the executives purchased said shares through a
combination of cash and promissory notes, the payments of which notes were
secured by pledge agreements pledging all of stock so purchased. We have a
right to repurchase such shares in the event of the termination of such
executive's employment with us for any reason. In addition, their respective
employment agreements granted to Mr. Griffin and Mr. Bryson options to purchase
250,000 shares and 156,250 shares, respectively, of common stock at a purchase
price of $0.67 per share.
Upon termination by us without cause, as defined in the respective
employment agreement, that executive will be entitled to receive severance
payments which, subject to certain conditions, equal:
. in the case of Mr. La Rue, base salary for the remainder of the term of
employment under the employment agreement plus the one-year period
thereafter;
. in the case of Mr. Griffin, base salary for the greater of the remainder
of the term of employment under the employment agreement or the six-month
period thereafter;
. in the case of Mr. Bryson, base salary for one year following termination
plus our payment of all health insurance premiums with respect to Mr.
Bryson's continuation coverage rights under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended, or any similar statute or
regulation then in effect, for a maximum of the one-year period after
such termination;
. in the case of Mr. Meyer, base salary for the one-year period after such
termination; and
. in the case of Mr. Mills, 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
(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.
71
<PAGE>
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."
72
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Recapitalization
Our recapitalization was completed on September 16, 1998 in accordance with
the merger agreement between us, Bay Alarm Company and John K. La Rue, the
preexisting investors, and PWT Acquisition Corp. a corporation newly formed by
an equity investment group led by Safeguard 98 Capital, L.P. and William Blair
Capital Partners VI, L.P. to effect the recapitalization. PWT was capitalized
through an investment of approximately $31.5 million in preferred stock and
$0.9 million in common stock of PWT by certain equity investors, including
Safeguard 98 Capital, L.P., SCP Private Equity Partners, L.P., TL Ventures III
L.P., EnerTech Capital Partners, William Blair Capital Partners VI, L.P., and
Mr. Wallace W. Griffin, who was named our President and Chief Executive Officer
upon the completion of the recapitalization. Immediately following the merger,
we sold approximately $4.7 million of additional common stock to the equity
investors.
In accordance with the merger agreement:
(1) PWT was merged with and into Pac-West, with Pac-West being the
surviving corporation;
(2) the outstanding preferred stock of PWT Acquisition Corp. was converted
into our convertible redeemable preferred stock and the outstanding
common stock of PWT Acquisition Corp. was converted into Pac-West's
common stock;
(3) the existing stockholders received an aggregate of $73.6 million in
cash, shares of convertible redeemable preferred stock and common stock
having an aggregate value for purposes of the recapitalization of
approximately $15.5 million, and an aggregate of $400,000 for their
respective agreements not to compete with us following the
recapitalization; and
(4) we paid bonuses to certain of our executive officers and employees in
the aggregate amount of approximately $3.5 million.
Prior to the recapitalization, Mr. John K. La Rue and Bay Alarm Company held
22% and 78%, respectively, of our outstanding common stock. In connection with
the recapitalization, and after giving effect to the Pac-West ten for one stock
split, Mr. La Rue received approximately $16.2 million in cash, 80,395 shares
of convertible redeemable preferred stock and 763,800 shares of common stock
and Bay Alarm Company received $57.4 million in cash, 285,038 shares of
convertible redeemable preferred stock and 2,707,900 shares of common stock.
Immediately after the recapitalization, Mr. La Rue and Bay Alarm held 6.1% and
21.7%, respectively, of our outstanding common stock.
Under the merger agreement, Mr. La Rue and Bay Alarm Company will also be
entitled to receive additional consideration in the form of an earnout payment
in the event we achieve certain adjusted EBITDA levels following the
recapitalization. The amount of such payment will be based upon:
(1) our adjusted EBITDA for the earnout period from January 1, 1998 through
December 31, 1998, which includes the amount of unpaid reciprocal
compensation from Pacific Bell and GTE for the earnout period we
receive before December 31, 1999, if any; and
(2) the amount of unpaid reciprocal compensation for the earnout period we
receive from Pacific Bell and GTE after December 31, 1999.
The earnout payment will be equal to:
(1) $2.50 for every $1.00 that our adjusted EBITDA for the fiscal year
ended December 31, 1998, including any unpaid reciprocal compensation
related to the earnout period received on or prior to December 31,
1999, exceeds $17.0 million; plus
(2) the amount by which the sum of
(A) the amount of any unpaid reciprocal compensation we receive after
December 31, 1999 with respect to the earnout period plus
73
<PAGE>
(B) the amount our adjusted EBITDA during the earnout period
exceeds $17.0 million.
The earnout payment cannot exceed $20.0 million.
The earnout payment will be calculated and paid after the delivery of the
final audited financial statements for the earnout period and on each separate
occasion thereafter that we receive any unpaid compensation. Any earnout
payment will take into account any prior earnout payment made under the merger
agreement. The earnout payment is also subject to possible adjustment under the
merger agreement by agreement between us and Mr. LaRue and Bay Alarm Company as
a result of a material acquisition, divestiture or other material transaction
outside of the ordinary course of our business during the earnout period. No
earnout payment was payable as of December 31, 1998. In 1999, the maximum cash
distribution under the terms of the recapitalization could be up to
approximately $15 million, net of the after tax proceeds from the withheld
reciprocal compensation.
In accordance with the merger agreement, Mr. La Rue and Bay Alarm Company
have agreed to indemnify us and certain of our related parties for all
liabilities and other losses arising from, among other things:
(1) any breach by Pac-West of any representation, warranty, covenant or
agreement we made in the merger agreement or in any schedule, exhibit,
or other related document;
(2) any claims of any brokers, finders, our employees or consultants
relating to the transactions contemplated by the merger agreement not
specifically set forth in or contemplated by the merger agreement; or
(3) any claim by any person other than PWT Acquisition Corp. or its
affiliates with respect to, or arising as a result of, any
reorganization, liquidation, dissolution, recapitalization, non due
course borrowing, merger, consolidation, sale or purchase of assets or
similar transactions proposed prior to closing of the merger; provided
that Mr. La Rue and Bay Alarm Company receive notice of such loss
within the applicable time periods set forth in the merger agreement.
Subject to certain exceptions, Mr. La Rue and Bay Alarm Company do not have any
obligation to indemnify any of the indemnified parties from any losses caused
by the breach or alleged breach of any representation or warranty contained in
the merger agreement until the indemnified parties collectively suffer related
aggregate losses in excess of $500,000, which acts as a deductible. Mr. La Rue
and Bay Alarm Company have an obligation to indemnify the indemnified parties
for all losses suffered by any of the indemnified parties in excess of the
deductible, provided that Mr. La Rue and Bay Alarm Company do not have any
obligation to indemnify the indemnified parties from such aggregate losses in
excess of an indemnity cap of $15.0 million. Despite the above, breaches or
alleged breaches of certain post-closing covenants or agreements contained in
the merger agreement will not be subject to the deductible or the indemnity
cap.
The merger agreement contains representations and warranties typical of
those kinds of agreements, including, for example, those relating to corporate
organization and capitalization, the valid authorization, execution, delivery
and enforceability of all transaction documents, the financial statements, the
absence of material adverse changes in the business, assets, financial
condition and results of operations, the absence of material undisclosed
liabilities, tax matters, the quality and title of personal and real property,
material contracts, intellectual property, employee benefits plans,
environmental matters, compliance with laws, governmental authorizations,
permits and licenses and insurance matters. Generally, our representations and
warranties expire thirty days after receipt of the audited financial statements
for fiscal 1999 except that those relating to tax matters survive until the
expiration of the applicable statute of limitations and certain other
representations and warranties which survive indefinitely.
The foregoing summary of the material terms of the merger agreement and
related matters does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all of the provisions of the merger
agreement, including the definitions of certain terms therein and the exhibits
and schedules hereto.
74
<PAGE>
Consulting Agreement
On June 30, 1998, we entered into a Consulting Agreement with Wallace W.
Griffin which terminated September 16, 1998. In accordance with such agreement
Mr. Griffin provided financial and management consulting services to us and
received fees totaling approximately $60,000. In addition, in accordance with
the merger agreement, we reimbursed Safeguard for payments of $143,000 made to
Mr. Griffin in connection with services rendered prior to June 30, 1998. After
the recapitalization, Mr. Griffin became our President and Chief Executive
Officer in accordance with his employment agreement with us.
Shareholders Agreement
In connection with the recapitalization, all of our shareholders entered
into a shareholders agreement. This agreement provides for, among other things,
the nomination of and voting for a total of seven 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; and
(7) our chief executive officer.
Our shareholders have amended their shareholders agreement to increase our
board of directors to nine members. The two additional members will be
independent directors, one of whom would serve on our compensation committee
and one of whom would serve on our audit committee. The voting provisions of
the shareholders agreement will automatically terminate upon the consummation
of a sale of Pac-West or an underwritten public offering of shares or rights to
purchase shares of our common stock having an aggregate value of at least $15
million and which results in an equity valuation of Pac-West immediately prior
to such offering of at least $100 million. The shareholders agreement will
generally restrict 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 will require 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.
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
75
<PAGE>
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 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.
76
<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 $231,000, 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 three
month period ended March 31, 1999, respectively. In addition, Bay Alarm Company
provides us with security monitoring services at its normal commercial rates.
Bay Alarm Company has recently purchased the real property at which our Oakland
switch facility is located. In connection with that purchase, we have
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 $423,000, or 3.6%, 3.8%, 3.5% and 2.9%, 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 three month
period ended March 31, 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 principal stockholder and serves as
Chairman of the Board of InReach Internet.
Utility Telephone, Inc. is 100% owned by Mr. Jason R. Mills. We made a one-
time purchase of equipment from Utility Telephone, Inc. in June 1997 in the
amount of approximately $350,000.
In accordance with the terms of the La Rue/Mills Stock Transfer Agreement
dated November 23, 1998, and after giving effect to the Pac-West ten for one
stock split, Mr. La Rue has transferred 127,300 shares of common stock to Mr.
Mills. We and Mr. La Rue retain the right to repurchase this stock upon the
termination of Mr. Mills' employment with Pac-West for any reason. Upon
repurchase, the purchase price of Mr. Mills' stock will be at fair market value
unless he is terminated with cause, in which case the purchase price will be
the lesser of original cost or fair market value.
Loans from Significant Stockholder
Mr. John K. La Rue, our founder and President prior to the recapitalization,
made various loans to Pac-West from time to time during periods up to and
including 1995. The maximum amount loaned to us at any one time was $151,000.
These loans bore interest at 9.5% to 10.0% and did not contain specified
repayment terms. We repaid the balance of these loans in June 1997.
77
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding ownership of
our common stock and convertible redeemable preferred stock as of March 31,
1999, and after giving effect to the Pac-West ten for one stock split, by:
(1) each person who we know to own beneficially more than 5% of the
outstanding common stock or convertible redeemable preferred stock;
(2) each of our directors and named executive officers; and
(3) all of our directors and executive officers as a group.
Data shown on this chart relating to TL Ventures III L.P. and related equity
investors includes, after giving effect to the Pac-West ten for one stock
split:
(a) 153,133 shares of convertible redeemable preferred stock and 1,433,100
shares of common stock held by TL Ventures III L.P., located at the
address shown above;
(b) 32,054 shares of convertible redeemable preferred stock and 300,000
shares of common stock held by TL Ventures III Offshore L.P., located
at c/o Trident Trust Company (Cayman) Limited, P.O. Box 847, One
Capital Place, Fourth Floor, Grand Cayman, Cayman Islands; and
(c) 5,000 shares of convertible redeemable preferred stock and 46,800
shares of common stock held by TL Ventures III Interfund L.P., located
at c/o TL Ventures L.L.C., 800 The Safeguard Building, 435 Devon Park
Drive, Wayne, PA 19087-1515.
Safeguard Delaware, Inc. is the general partner of Safeguard 98 Capital,
L.P. and a wholly-owned subsidiary of Safeguard Scientifics, Inc. Each of these
entities may be deemed to beneficially own the shares owned by Safeguard 98
Capital.
All shares of stock shown in the following table for Messrs. Chandler,
DeNino, Plum and Westphal are owned by William Blair Capital Partners VI, L.P.;
TL Ventures III, L.P., TL Ventures III Offshore L.P. or TL Ventures III
Interfund L.P.; SCP Private Equity Partners, L.P. and Bay Alarm Company,
respectively. Mr. Chandler is a Managing Director of William Blair Capital
Partners VI, L.L.C., which is the sole general partner of William Blair Capital
Partners VI, L.P. Mr. DeNino is a Managing Director of 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 the principal stockholder and
Chairman 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.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087.
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>
78
<PAGE>
The data reflected in the following table for Mr. La Rue also reflects the
fact that, in accordance with the La Rue/Mills Stock Transfer Agreement dated
November 23, 1998, and after giving effect to the Pac-West ten for one stock
split, Mr. La Rue agreed to transfer 127,300 shares of his common stock to Mr.
Mills, subject to obtaining the necessary consents from certain other
stockholders of Pac-West in accordance with the terms of the shareholders
agreement. All necessary consents have been obtained.
<TABLE>
<CAPTION>
Shares of
Shares of Participating
Common Percent of Preferred Percent of
Beneficial Owner Stock Class Stock Class
---------------- --------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Significant Stockholders:
Bay Alarm Company........... 2,707,900 21.6% 285,038 22.8%
925 Ygnacio Valley Road
Walnut Creek, CA 94596
SCP Private Equity Partners,
L.P........................ 1,995,000 15.9 213,170 17.1
435 Devon Park Drive,
Building 300
Wayne, PA 19087
William Blair Capital
Partners VI, L.P........... 1,995,000 15.9 213,170 17.1
222 West Adams Street
Chicago, IL 60606
Safeguard 98 Capital, L.P.
and related entities....... 1,995,000 15.9 213,170 17.1
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
TL Ventures III L.P. and
related equity investors... 1,779,900 14.2 190,187 15.2
700 Building
435 Devon Park Drive
Wayne, PA 19087-1990
Directors and Named Executive
Officers:
David G. Chandler........... 1,995,000 15.9 213,170 17.1
Mark J. DeNino.............. 1,779,900 14.2 190,187 15.2
Wallace W. Griffin.......... 375,000 3.0 -- --
John K. La Rue.............. 254,600 2.0 80,395 6.4
Jason R. Mills.............. 127,300 1.0 -- --
Samuel A. Plum.............. 1,995,000 15.9 213,170 17.1
Bruce A. Westphal........... 2,707,900 21.6 285,038 22.8
All of Pac-West's directors
and executive officers as a
group (14 persons)........... 9,234,700 73.5% 981,960 78.6%
</TABLE>
79
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock, after giving effect to the ten for one stock
split of the issued and outstanding common and convertible redeemable preferred
stock which became effective on March 19, 1999, consist of 1,750,000 shares of
convertible redeemable preferred stock and 15,000,000 shares of common stock.
As of June 30, 1999, our outstanding equity securities consist of 1,250,000
shares of convertible redeemable preferred stock and 12,562,470 shares of
common stock. Set forth below is a summary of the material terms of our capital
stock.
Distributions. The convertible redeemable preferred stock has a preference
amount over the common stock with respect to any distribution by Pac-West to
the holders of our capital stock or with respect to any liquidation,
dissolution or winding up of Pac-West equal to the liquidation value of such
shares, $36, plus an amount which accrues on a daily basis at a rate of 10% per
annum on the original cost of such shares, $36, compounded quarterly, after
giving effect to the Pac-West ten for one stock split. 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.
Conversion Rights. The holders of a majority of the outstanding convertible
redeemable preferred stock have the right to convert all of the outstanding
convertible redeemable preferred stock into shares of common stock in
connection with the consummation of a public offering of our debt or equity
securities or rights to acquire any of our debt or equity securities offered to
the public. 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. Each
share of convertible redeemable preferred stock will be convertible into that
number of shares of common stock determined by dividing the preference amount
by the initial public offering price of the common stock.
Redemption Rights. The holders of a majority of the outstanding convertible
redeemable preferred stock have the right to require us to redeem the
convertible redeemable preferred stock at a redemption price equal to the
preference amount:
(1) at any time after December 31, 2003; or
(2) at any time with the net proceeds of a public offering. In addition,
any holder of the outstanding convertible redeemable preferred stock
may require us to redeem our shares of convertible redeemable preferred
stock with the net proceeds of a public offering.
Despite the above, the majority holders also have the right to require us to
redeem all or any portion of the convertible redeemable preferred stock in the
event that:
(1) we fail to make any required redemption payment for the convertible
redeemable preferred stock; or
(2) we default on any obligation or agreement causing an amount in excess
of $500,000 to become due prior to its stated maturity.
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 notes.
Voting Rights. 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. The shares of common stock will each entitle the
holder thereof to one vote per share on all matters to be voted upon by our
stockholders.
80
<PAGE>
DESCRIPTION OF INDEBTEDNESS
We have entered into a new senior credit facility providing 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
new senior credit facility has a three-year term 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 new senior credit facility will bear interest, at
our option, at:
(1) the base rate, as defined in the new senior credit facility, or
(2) the Eurodollar rate, as defined in the new senior credit facility, plus
between 2.25 and 3.5%. As of May 31, 1999, the borrowing rate under
this facility would have been 7.69%.
We will be required to pay the lender under the new senior credit facility a
commitment fee, payable in arrears on a quarterly basis, on the average unused
portion of the new 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 will pay 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 new 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 new senior credit facility, minimum interest coverage and maximum amount
of capital expenditures. The new 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, including the notes, liens and encumbrances and other matters
customarily restricted in such agreements.
The new 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 new senior credit facility to be
in full force and effect and change of control of Pac-West.
81
<PAGE>
DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description under
the subheading "Certain Definitions."
The form and terms of the new notes are the same as the form and terms of
the old notes, which they replace, except that:
(1) the new notes bear a Series B designation and a different CUSIP number
from the old notes;
(2) the new notes have been registered under the Securities Act of 1933
and, therefore, will not bear legends restricting the transfer thereof;
and
(3) the holders of new notes will not be entitled to certain rights under
the registration rights agreement entered into in connection with the
private offering of the old notes, including the provisions providing
for an increase in the interest rate on the old notes in certain
circumstances relating to the timing of this exchange offer, which
rights will terminate when this exchange offer is consummated.
We issued the notes under an indenture between ourselves and Norwest Bank
Minnesota, N.A., as trustee, in a private transaction that is not subject to
the registration requirements of the Securities Act of 1933. The terms of the
notes include those stated in the indenture and those made part of the
indenture by reference to the Trust Indenture Act of 1939.
The following description is a summary of the material provisions of the
indenture and the registration rights agreement. It does not restate those
agreements in their entirety. We urge you to read the indenture and the
registration rights agreement because they, and not this description, define
your rights as holders of these notes. Copies of the indenture and the
registration rights agreement are available as set forth below under the
subheading "Additional Information."
Brief Description of the Notes
The Notes
The notes:
. are Pac-West's general obligations;
. are effectively subordinated in right of payment to all of Pac-West's
existing and future secured Indebtedness to the extent of the value of
the assets securing such Indebtedness;
. are equal in right of payment to all of Pac-West's existing and future
unsubordinated, unsecured Indebtedness; and
. are senior in right of payment to any of Pac-West's future subordinated
Indebtedness.
The indenture permits us to incur additional Indebtedness, including secured
Indebtedness. We have entered into a new senior credit facility and secured our
borrowings under that facility with a first priority lien on substantially all
of our assets.
As of the date of the indenture, we have no subsidiaries. However, we may
establish subsidiaries in the future and our subsidiaries will not guarantee
these notes. The notes will therefore be effectively subordinated in right of
payment to the liabilities, including trade payables, of any future subsidiary
to the extent of the value of that subsidiary. In addition, under the
circumstances described below under the subheading "Certain Covenants--
Designation of Restricted and Unrestricted Subsidiaries," we may designate one
or more of our future subsidiaries as Unrestricted Subsidiaries. Unlike
Restricted Subsidiaries, Unrestricted Subsidiaries will not be subject to many
of the restrictive covenants in the indenture.
Principal, Maturity and Interest
We issued notes with a maximum aggregate principal amount of $150.0 million
in denominations of $1,000 and integral multiples of $1,000. The notes will
mature on February 1, 2009.
82
<PAGE>
Interest on these notes accrues at the rate of 13 1/2% per annum and is
payable semi-annually in arrears on February 1 and August 1, beginning on
August 1, 1999. We make each interest payment to the holders of record of these
notes on the immediately preceding January 15 and July 15.
Interest on these notes accrues from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest is computed on the basis of a 360-day year comprised of twelve 30-day
months.
Interest Reserve Account
A portion of our obligations under the notes is secured pending disbursement
in accordance with the Pledge Agreement by a pledge of a portfolio of U.S.
government securities. Upon the consummation of the private offering of the old
notes, we purchased and pledged to the trustee, for the benefit of the holders
of the notes, the Pledged Securities, which were in an amount intended to be
sufficient upon receipt of scheduled interest and principal payments, to
provide for payment in full when due of the first two scheduled interest
payments under the notes. We used approximately $19.7 million of the net
proceeds from the sale of the old notes to purchase the Pledged Securities. We
pledged the Pledged Securities as security for the payment of the principal of
and interest under the notes and all other of our Obligations under the
indenture and the notes. On each of the first two interest payment dates, the
trustee will apply the proceeds of a sufficient amount of Pledged Securities to
pay the interest then due.
Upon the acceleration of the maturity of the notes or upon certain
redemptions and repurchases of the notes, the trustee will apply the proceeds
of a sufficient amount of Pledged Securities to pay the amounts we owe to
holders of the notes at such time. Immediately following the earlier of:
(a) the payment in full of the two scheduled interest payment under the
notes; and
(b) the day on which all of the notes have been repurchased, redeemed or
defeased, if no Default or Event of Default is then continuing, the
remaining Pledged Securities, if any, will be released from the Pledge
and the outstanding old notes, if any, will be our unsecured
obligations.
The ability of holders of the notes to realize upon any such funds or receive
payment from the proceeds of the Pledged Securities may be subject to certain
bankruptcy law limitations in the event of our bankruptcy.
Methods of Receiving Payments under the Notes
If a holder has given wire transfer instructions to us, we will make all
principal, premium, if any, and interest payments on that holder's notes in
accordance with those instructions. All other payments on these notes will be
made at the office or agency of the Paying Agent and Registrar within the City
and State of New York unless we elect to make interest payments by check mailed
to the holders at their address set forth in the register of holders.
Paying Agent and Registrar for the Notes
The trustee will initially act as Paying Agent and Registrar. We may change
the Paying Agent or Registrar without prior notice to the holders of the notes,
and we or any of our Subsidiaries may act as Paying Agent or Registrar.
Transfer and Exchange
A holder may transfer new notes in accordance with the indenture. The
Registrar and the trustee may require a holder, among other things, to furnish
appropriate endorsements and transfer documents and we may require a holder to
pay any taxes and fees required by law or permitted by the indenture. We are
not required to transfer or exchange any note selected for redemption. Also, we
are not required to transfer or exchange any note for a period of 15 days
before a selection of notes to be redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes.
83
<PAGE>
Optional Redemption
At any time prior to February 1, 2002, we may redeem up to 35% of the
aggregate principal amount of notes originally issued under the indenture at a
redemption price of 113.50% of the principal amount thereof, plus accrued and
unpaid interest to the redemption date, with the net cash proceeds of one or
more underwritten public equity offerings of common stock of Pac-West in which
the gross proceeds to Pac-West are at least $20.0 million; provided that
(1) at least $97.5 million in aggregate principal amount of notes remains
outstanding immediately after the occurrence of such redemption,
excluding notes held by Pac-West and its Subsidiaries; and
(2) the redemption occurs within 45 days of the date of the closing of such
public equity offering.
Except in accordance with the preceding paragraph, the notes will not be
redeemable at our option prior to February 1, 2004.
After February 1, 2004, we may redeem all or a part of the notes upon not
less than 30 nor more than 60 days' notice, at the redemption prices set forth
below plus accrued and unpaid interest thereon, if any, to the applicable
redemption date, if redeemed during the twelve-month period beginning on
February 1 of the years indicated below. The redemption prices are expressed as
percentages of principal amount.
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2004.......................... 106.75%
2005.......................... 104.50%
2006.......................... 102.25%
2007 and thereafter........... 100.00%
</TABLE>
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each holder of notes will have the right to
require us to repurchase all or any part of that holder's notes in accordance
with the Change of Control offer. All repurchases in part will be in $1,000
increments. In the Change of Control offer, we will offer a Change of Control
payment in cash equal to 101% of the aggregate principal amount of notes
repurchased plus accrued and unpaid interest thereon, if any, to the date of
purchase. Within ten business days following any Change of Control, we will
mail a notice to each holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase notes on the Change
of Control payment date specified in such notice, in accordance with the
procedures required by the indenture and described in such notice. We will
comply with the requirements of Rule 14e-1 and any other securities laws and
regulations under the Securities Exchange Act of 1934 to the extent such laws
and regulations are applicable in connection with the repurchase of the notes
as a result of a Change of Control.
On the Change of Control payment date, we will, to the extent lawful:
(1) accept for payment all notes or portions thereof properly tendered in
accordance with the Change of Control offer;
(2) deposit with the Paying Agent an amount equal to the Change of Control
payment in respect of all notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to the trustee the notes so accepted
together with an officers' certificate stating the aggregate principal
amount of notes or portions thereof being purchased by Pac-West.
The Paying Agent will promptly mail to each holder of notes so tendered the
Change of Control payment for such notes, and the trustee will promptly
authenticate and mail, or cause to be transferred by book entry, to each holder
a new note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; provided that each such new note will be in a principal
amount of $1,000 or an integral multiple thereof.
84
<PAGE>
We will publicly announce the results of the Change of Control offer on or
as soon as practicable after the Change of Control payment date.
The provisions described above that require us to make a Change of Control
offer following a Change of Control will be applicable regardless of whether or
not any other provisions of the indenture are applicable. Except as described
above with respect to a Change of Control, the indenture does not contain
provisions that permit the holders of the notes to require that we repurchase
or redeem the notes in the event of a takeover, recapitalization or similar
transaction.
We will not be required to make a Change of Control offer upon a Change of
Control if a third party makes the Change of Control offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control offer made by Pac-West and
purchases all notes validly tendered and not withdrawn under such Change of
Control offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of all or substantially all of
our and our Subsidiaries' assets taken as a whole. Although there is a limited
body of case law interpreting the phrase "substantially all," there is no
precise established definition of the phrase under applicable law. Accordingly,
the ability of a holder of notes to require us to repurchase such notes as a
result of a sale, lease, transfer, conveyance or other disposition of less than
all of our and our Subsidiaries' assets taken as a whole to another person or
group may be uncertain.
Asset Sales
Pac-West will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless:
(1) Pac-West or the Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) such fair market value is determined by Pac-West's board of directors
and evidenced by a resolution of the board of directors set forth in an
officers' certificate delivered to the trustee; and
(3) at least 75% of the consideration therefor received by Pac-West or such
Restricted Subsidiary is in the form of cash or Cash Equivalents. For
purposes of this provision, each of the following will be deemed to be
cash:
(a) any liabilities as shown on Pac-West's or such Restricted
Subsidiary's most recent balance sheet of our or any Restricted
Subsidiary other than contingent liabilities and liabilities that
are by their terms subordinated to the notes, that are assumed by
the transferee of any such assets in accordance with a customary
novation agreement that releases Pac-West or such Restricted
Subsidiary from further liability; and
(b) any securities, notes or other obligations received by Pac-West or
any such Restricted Subsidiary from such transferee that are
contemporaneously, subject to ordinary settlement periods,
converted by Pac-West or such Restricted Subsidiary into cash to
the extent of the cash received in that conversion.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale, we
may apply such Net Proceeds at our option:
(1) to permanently reduce Indebtedness of ourselves or a Restricted
Subsidiary, other than Subordinated Indebtedness or intercompany
Indebtedness;
(2) to acquire all or substantially all of the assets of, or a majority of
the Voting Stock of, another person;
(3) to make capital expenditures; or
(4) to acquire other long-term assets
in the case of (2), (3) or (4), in or used or useful in a Permitted Business.
85
<PAGE>
Pending the final application of any such Net Proceeds, we may temporarily
reduce revolving credit borrowings or otherwise invest such Net Proceeds in any
manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds $5.0 million, we will make an Asset
Sale Offer to all holders of notes and all holders of other Indebtedness that
is ranked equally with the notes containing provisions similar to those set
forth in the indenture with respect to offers to purchase or redeem with the
proceeds of sales of assets to purchase the maximum principal amount of notes
and such other equally ranking Indebtedness that may be purchased out of the
Excess Proceeds. The offer price in any Asset Sale Offer will be equal to 100%
of principal amount plus accrued and unpaid interest, if any, to the date of
purchase, and will be payable in cash. If any Excess Proceeds remain after
consummation of an Asset Sale Offer, we may use such Excess Proceeds for any
purpose not otherwise prohibited by the indenture. If the aggregate principal
amount of notes and such other equally ranking Indebtedness tendered into such
Asset Sale Offer exceeds the amount of Excess Proceeds, the trustee will select
the notes and such other equally ranking Indebtedness to be purchased on a
proportionate basis. Upon completion of each Asset Sale Offer, the amount of
Excess Proceeds will be reset at zero.
Selection and Notice
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed, in compliance with the requirements of the
principal national securities exchange on which the notes are listed;
or
(2) if the notes are not so listed, on a proportionate basis, by lot or by
such method as the trustee will deem fair and appropriate.
No notes of $1,000 or less will be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion of
the old note will be issued in the name of the holder thereof upon cancellation
of the old note. Notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to accrue on
notes or portions of them called for redemption.
Certain Covenants
Incurrence of Indebtedness and Issuance of Convertible Redeemable Preferred
Stock
Pac-West will not, and will not permit any of its Restricted Subsidiaries
to, create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to, any
Indebtedness, including Acquired Debt. We will not issue any Disqualified Stock
and will not permit any of our Restricted Subsidiaries to issue any shares of
preferred stock. We may, however, incur Indebtedness, including Acquired Debt,
and may issue Disqualified Stock, if the Debt to Cash Flow Ratio for our most
recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock is issued would
have been greater than zero and less than 6.0 to 1. This will be determined on
a pro forma basis, including a pro forma
86
<PAGE>
application of the net proceeds therefrom, as if the additional Indebtedness
had been incurred, or the Disqualified Stock had been issued, as the case may
be, at the beginning of such four-quarter period.
So long as no Default will have occurred and be continuing or would be
caused thereby, the first paragraph of this covenant will not prohibit the
incurrence of any of the following items of permitted debt:
(1) the incurrence by Pac-West and any Restricted Subsidiary of term
Indebtedness under any Credit Facility; provided that the aggregate
principal amount of all term Indebtedness of Pac-West and the
Restricted Subsidiaries outstanding under all Credit Facilities after
giving effect to such incurrence does not exceed an amount equal to
$50.0 million less the aggregate amount of all repayments of term
Indebtedness under a Credit Facility that have been made by Pac-West or
any of its Restricted Subsidiaries since the date of the indenture;
(2) the incurrence by Pac-West and its Restricted Subsidiaries of Existing
Indebtedness;
(3) the incurrence by Pac-West of Indebtedness represented by the notes and
the new notes;
(4) the incurrence by Pac-West and its Restricted Subsidiaries of
Subordinated Indebtedness in an aggregate principal amount outstanding
at any one time not to exceed $100.0 million;
(5) the incurrence by Pac-West or any of its Restricted Subsidiaries of
Indebtedness to finance the cost to acquire equipment, inventory or
network assets, to the extent of the fair market value of the
equipment, inventory or network assets so acquired less, in the case of
an acquisition of Capital Stock, the Acquired Debt, if any, incurred in
connection with such acquisition;
(6) the incurrence by Pac-West of Indebtedness maturing after the Stated
Maturity of the notes and having an Average Life longer than the notes
in an amount not to exceed, at any one time outstanding, two times the
difference between:
(a) the sum of
(1) all net cash proceeds received by Pac-West after the date of the
indenture as a capital contribution or from the issuance and
sale of Equity Interests, other than Disqualified Stock, to a
person that is not a Subsidiary of Pac-West; and
(2) 80% of the fair market value of property, other than cash and
cash equivalents, received by Pac-West after the date of the
indenture as a capital contribution or from the issuance and
sale of Equity Interests, other than Disqualified Stock, to a
person that is not a Subsidiary of Pac-West,
and
(b) the sum of
(1) the amount of any capital contribution used in accordance with
clause 4(c)(ii) of the first paragraph, or clauses (2) or (8) of
the second paragraph, of the "--Restricted Payments" covenant
described below to make a Restricted Payment; and
(2) the amount of any capital contribution or net cash proceeds used
to consummate a transaction in accordance with which Pac-West
incurs Acquired Debt in an amount equal to at least 2 times the
amount of such capital contribution or, in the case of the
receipt of property, 2.5 times the fair market value thereof;
(7) the incurrence by Pac-West or any Restricted Subsidiary of Acquired
Debt;
(8) the incurrence by Pac-West or any of its Subsidiaries of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which
are used to refund, refinance or replace Indebtedness, other than
intercompany Indebtedness that was permitted by the indenture to be
incurred under the first paragraph of the covenant or clauses (2), (3),
(4), (5), (6) or (14) of this paragraph;
87
<PAGE>
(9) the incurrence by Pac-West or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Pac-West and any of its
Wholly Owned Restricted Subsidiaries; provided, however, that:
(a) if Pac-West is the obligor on such Indebtedness, such Indebtedness
must be expressly subordinated to the prior payment in full in cash
of all Obligations with respect to the notes; and
(b) (1) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a person other than
Pac-West or a Wholly Owned Restricted Subsidiary thereof; and
(2) any sale or other transfer of any such Indebtedness to a person
that is not either Pac-West or a Wholly Owned Restricted Subsidiary
thereof will be deemed, in each case, to constitute an incurrence of
such Indebtedness by Pac-West or such Restricted Subsidiary, as the
case may be, that was not permitted by this clause (9);
(10) the incurrence by Pac-West or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of:
(a) fixing or hedging interest rate risk with respect to any floating
rate Indebtedness that is permitted by the terms of this indenture to
be outstanding or
(b) protecting Pac-West and its Restricted Subsidiaries against changes
in currency exchange rates;
(11) the guarantee by Pac-West or any of the Restricted Subsidiaries of
Indebtedness of Pac-West or a Restricted Subsidiary of Pac-West that
was permitted to be incurred by another provision of this covenant;
(12) the incurrence by Pac-West or any of its Restricted Subsidiaries of
Indebtedness constituting reimbursement obligations with respect to
letters of credit issued in the ordinary course of business in respect
of workers' compensation claims or self-insurance, or other
Indebtedness with respect to reimbursement type obligations regarding
workers' compensation claims; provided, however, that obligations
arising upon the drawing of such letters of credit or the incurrence
of such Indebtedness are reimbursed within 30 days following such
drawing or incurrence;
(13) the incurrence of Indebtedness by Pac-West or a Restricted Subsidiary
under an agreement providing for indemnification, adjustment of
purchase price or similar obligations in connection with the
disposition of any business, assets or Restricted Subsidiary of Pac-
West, other than guarantees of Indebtedness incurred by any person
acquiring all or any portion of such business, assets or Restricted
Subsidiary for the purpose of financing such acquisition; provided
that:
(a) such Indebtedness is not reflected on the balance sheet of Pac-West
or any Restricted Subsidiary; and
(b) the maximum assumable liability in respect of all such Indebtedness
never exceeds the gross proceeds actually received by Pac-West and
its Restricted Subsidiaries in connection with such disposition;
(14) the incurrence by Pac-West or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount or accreted
value, as applicable, at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred in accordance with this clause (14), not to
exceed $10.0 million; and
(15) the incurrence by Pac-West's Unrestricted Subsidiaries of Non-Recourse
Debt; provided, however, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, such event will be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of Pac-West that was not permitted by this clause (15).
We will not incur any Indebtedness, including the above-described permitted
debt, that is contractually subordinated in right of payment to any of our
other Indebtedness unless such Indebtedness is also contractually subordinated
in right of payment to the notes on substantially identical terms; provided,
however,
88
<PAGE>
that none of our Indebtedness will be deemed to be contractually subordinated
in right of payment to any of our other Indebtedness solely by virtue of being
unsecured.
For purposes of determining compliance with this "Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant, in the event that an item of
proposed Indebtedness meets the criteria of more than one of the categories of
permitted debt described in clauses (1) through (15) above, or is entitled to
be incurred in accordance with the first paragraph of this covenant, we will be
permitted to classify such item of Indebtedness on the date of its incurrence
in any manner that complies with this covenant.
Restricted Payments
Pac-West will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution
on account of Pac-West's or any of its Restricted Subsidiaries' Equity
Interests, including, for example, any payment in connection with any
merger or consolidation involving Pac-West or any of its Restricted
Subsidiaries, or to the direct or indirect holders of Pac-West's or any
of its Restricted Subsidiaries' Equity Interests in their capacity as
such, other than dividends or distributions payable in Equity
Interests, other than Disqualified Stock, of Pac-West or to Pac-West or
a Restricted Subsidiary of Pac-West;
(2) purchase, redeem or otherwise acquire or retire for value, including,
for example, in connection with any merger or consolidation involving
Pac-West, any Equity Interests of Pac-West or any direct or indirect
parent of Pac-West or any Restricted Subsidiary of Pac-West, other than
any such Equity Interests owned by Pac-West or any Restricted
Subsidiary of Pac-West;
(3) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is
subordinated to the notes, except a payment of interest or principal at
the Stated Maturity thereof; or
(4) make any Restricted Investment, all such payments and other actions set
forth in clauses (1) through (4) above being collectively referred to
as "Restricted Payments", unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Default or Event of Default will have occurred and be continuing
or would occur as a consequence thereof; and
(b) Pac-West would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period,
have been permitted to incur at least $1.00 of additional
Indebtedness in accordance with the Debt to Cash Flow Ratio test
set forth in the first paragraph of the covenant described above
under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by Pac-West and its Restricted
Subsidiaries after the date of the indenture, excluding Restricted
Payments permitted by clauses (2), (3), (4) and (5) of the next
succeeding paragraph, is less than the sum, without duplication, of
(1) 50% of the Consolidated Net Income of Pac-West for the period,
taken as one accounting period, from the beginning of the first
fiscal quarter beginning after the date of the indenture to the
end of Pac-West's most recently ended fiscal quarter for which
internal financial statements are available at the time of such
Restricted Payment or, if such Consolidated Net Income for such
period is a deficit, less 100% of such deficit; plus
(2) 100% of the aggregate net cash proceeds received by Pac-West
since the date of the indenture as a contribution to its common
equity capital or from the issue or sale of Equity Interests of
Pac-West, other than Disqualified Stock, or from the issue or
sale of convertible or exchangeable Disqualified Stock or
convertible or exchangeable debt securities of Pac-West that
have been converted into or exchanged for such Equity Interests,
other than
89
<PAGE>
Equity Interests, or Disqualified Stock or debt securities, sold
to a Subsidiary of Pac-West, except to the extent such net cash
proceeds are used to incur Indebtedness in accordance with clause
(6) of the covenant described above under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock," or
to make a Restricted Payment in accordance with clause (2) or (8)
of the next succeeding paragraph, plus
(3) to the extent that any Restricted Investment that was made after
the date of the indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of:
(x) the cash return of capital with respect to such Restricted
Investment, less the cost of disposition, if any; and
(y) the initial amount of such Restricted Investment, plus
(4) 50% of any cash dividends received by Pac-West or any Restricted
Subsidiary after the date of the indenture from an Unrestricted
Subsidiary, to the extent such dividends were not otherwise
included in Consolidated Net Income of Pac-West for such period,
plus
(5) to the extent that any Unrestricted Subsidiary of Pac-West is
designated as a Restricted Subsidiary after the date of the
indenture, the lesser of:
(x) the fair market value of Pac-West's Investment in such
Subsidiary as of the date of such subsidiary's designation as
a Restricted Subsidiary; and
(y) the sum of the fair market value of Pac-West's Investment in
such Subsidiary as of the date on which such Subsidiary was
originally designated as an Unrestricted Subsidiary and the
amount of any Investments made in such Subsidiary subsequent
to such designation and treated as Restricted Payments by
Pac-West or any Restricted Subsidiary, plus
(6) $2.0 million.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would
have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other acquisition
of any Subordinated Indebtedness of Pac-West or any Restricted
Subsidiary or of any Equity Interests of Pac-West or any Restricted
Subsidiary in exchange for, or out of the net cash proceeds of the
substantially concurrent sale, other than to a Subsidiary of Pac-West,
of, Equity Interests of Pac-West, other than Disqualified Stock; except
to the extent such Net Cash Proceeds are used to incur Indebtedness in
accordance with clause (6) under the Limitation on Indebtedness or to
make Restricted Payments in accordance with clause 4(c)(ii) of the
first paragraph, or clause (8) of this paragraph, of this "Limitation
on Restricted Payments" covenant;
(3) the defeasance, redemption, repurchase or other acquisition of
Subordinated Indebtedness of Pac-West or any Restricted Subsidiary with
the net cash proceeds from an incurrence of Permitted Refinancing
Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of Pac-West to
the holders of its common Equity Interests on a proportionate basis;
(5) the making of any Earnout Payments in an amount not to exceed $20.0
million in the aggregate;
(6) the making of payments or distributions to dissenting stockholders in
accordance with applicable law in connection with a consolidation,
merger or transfer of assets permitted under the covenant described
below under the caption "--Merger, Consolidation or Sale of Assets";
(7) payments made to retire Capital Stock of Pac-West to the extent
necessary, as determined in good faith by a majority of Pac-West's
board of directors, to prevent the loss of, or to secure the renewal or
reinstatement of, any governmental license or authorization held by
Pac-West or any Restricted Subsidiary;
90
<PAGE>
(8) Investments in any person the primary business of which is related,
ancillary or complementary to the business of Pac-West and its
Restricted Subsidiaries on the date of such Investments; provided that
the aggregate amount of Investments made in accordance with this clause
(8) does not exceed the sum of:
(a) $20 million; and
(b) the amount of Net Cash Proceeds received by Pac-West after the
issue date as a capital contribution or from the sale of its
Capital Stock, other than Disqualified Stock, to a person who is
not a Subsidiary of Pac-West, except to the extent such Net Cash
Proceeds are used to incur Indebtedness in accordance with clause
(6) under the "Limitation on Indebtedness" covenant or to make
Restricted Payments in accordance with clause 4(c)(ii) of the first
paragraph, or clause (2) of this paragraph, of this "Limitation on
Restricted Payments" covenant, plus (z) the net reduction in
Investments made in accordance with this clause (8) resulting from
distributions on or repayments of such Investments or from the Net
Cash Proceeds from the sale of any such Investment, except in each
case to the extent any such payment or proceeds is included in the
calculation of Consolidated Net Income, or from such person
becoming a Restricted Subsidiary, valued in each case as provided
in the definition of "Investments", provided that the net reduction
in any Investment will not exceed the amount of such Investment;
and
(9) the repurchase, redemption or other acquisition or retirement for value
of any Equity Interests of Pac-West or any Restricted Subsidiary of
Pac-West held by any member of Pac-West's, or any of its Subsidiaries',
management in accordance with any management equity subscription
agreement or stock option agreement; provided that such repurchase,
redemption or other acquisition is made in connection with the
cessation of employment by Pac-West or any Restricted Subsidiary of a
manager or officer, and the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests will not
exceed $5.0 million in the aggregate.
The amount of all Restricted Payments, other than cash, will be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by Pac-West or such Restricted
Subsidiary, as the case may be, in accordance with the Restricted Payment. The
fair market value of any assets or securities that are required to be valued by
this covenant will be determined by the board of directors whose resolution
with respect thereto will be delivered to the trustee. The board of directors'
determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $5.0 million. Not later than the date of making any
Restricted Payment, Pac-West will deliver to the trustee an officers'
certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this "Restricted Payments"
covenant were computed, together with a copy of any fairness opinion or
appraisal required by the indenture.
Liens
Pac-West will not, and will not permit any of its Restricted Subsidiaries to
create incur, assume or suffer to exist any Lien of any kind securing
Indebtedness, Attributable Debt or trade payables on any asset now owned or
hereafter acquired, or any income or profit therefrom or assign or convey any
right to receive income therefrom except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
Pac-West will not, and will not permit any of its Restricted Subsidiaries to
create or permit to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock to
Pac-West or any of its Restricted Subsidiaries, or with respect to any
other interest or participation in, or measured by, its profits, or pay
any indebtedness owed to Pac-West or any of its Restricted
Subsidiaries;
91
<PAGE>
(2) make loans or advances to Pac-West or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to Pac-West or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) the indenture and the notes;
(2) applicable law;
(3) any instrument governing Indebtedness or Capital Stock of a person
acquired by Pac-West or any of its Restricted Subsidiaries as in effect
at the time of such acquisition, except to the extent such Indebtedness
was incurred in connection with or in contemplation of such
acquisition, which encumbrance or restriction is not applicable to any
person, or the properties or assets of any person, other than the
person, or the property or assets of the person, so acquired, provided
that, in the case of Indebtedness, such Indebtedness was permitted by
the terms of the indenture to be incurred;
(4) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(5) purchase money obligations for property acquired in the ordinary course
of business that impose restrictions on the property so acquired of the
nature described in clause (3) of the preceding paragraph;
(6) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by such Restricted Subsidiary
pending its sale or other disposition;
(7) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being
refinanced;
(8) Liens securing Indebtedness otherwise permitted to be incurred in
accordance with the provisions of the covenant described above under
the caption "--Liens" that limit the right of Pac-West or any of its
Restricted Subsidiaries to dispose of the assets subject to such Lien;
(9) provisions with respect to the disposition or distribution of assets or
property in joint venture agreements and other similar agreements
entered into in the ordinary course of business; and
(10) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business.
Merger, Consolidation, or Sale of Assets
Pac-West may not:
(a) consolidate or merge with or into another person, whether or not Pac-
West is the surviving corporation; or
(b) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of its properties or assets, in one or more related
transactions, to another person; unless:
(1) either:
(a) Pac-West is the surviving entity; or
(b) the person formed by or surviving any such consolidation or merger,
if other than Pac-West, or to which such sale, assignment,
transfer, conveyance or other disposition will have been made is an
entity organized or existing under the laws of the United States,
any state thereof or the District of Columbia;
92
<PAGE>
(2) the person formed by or surviving any such consolidation or merger, if
other than Pac-West, or the person to which such sale, assignment,
transfer, conveyance or other disposition will have been made assumes
all the obligations of Pac-West under the notes, the indenture and the
registration rights agreement in accordance with a supplemental
indenture reasonably satisfactory to the trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) except in the case of the merger of Pac-West with or into a Wholly
Owned Restricted Subsidiary or a merger entered into solely for the
purpose of reincorporating Pac-West in another jurisdiction, Pac-West,
or the person formed by or surviving any such consolidation or merger,
if other than Pac-West, will, on the date of such transaction after
giving pro forma effect thereto and any related financing transactions
as if the same had occurred at the beginning of the applicable four-
quarter period, be permitted to incur at least $1.00 of additional
Indebtedness in accordance with the Debt to Cash Flow Ratio test set
forth in the first paragraph of the covenant described above under the
caption "Incurrence of Indebtedness and Issuance of Preferred Stock."
In addition, Pac-West may not lease all or substantially all of its properties
or assets, in one or more related transactions, to any other person. This
"Merger, Consolidation, or Sale of Assets" covenant will not apply to a sale,
assignment, transfer, conveyance or other disposition of assets between or
among Pac-West and any of its Wholly Owned Restricted Subsidiaries.
Transactions with Affiliates
Pac-West will not, and will not permit any of its Restricted Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any
of its properties or assets to, or purchase any property or assets from, or
enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any Pac-
West Affiliate, unless:
(1) such Affiliate transaction is on terms that are no less favorable to
Pac-West or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by Pac-West or such
Restricted Subsidiary with an unrelated person; and
(2) Pac-West delivers to the trustee:
(a) with respect to any Affiliate transaction or series of related
Affiliate transactions involving aggregate consideration in excess
of $1.0 million, a resolution of the board of directors set forth
in an officers' certificate certifying that such Affiliate
transaction complies with this covenant and that such Affiliate
transaction has been approved by a majority of the disinterested
members of the board of directors; and
(b) with respect to any Affiliate transaction or series of related
Affiliate transactions involving aggregate consideration in excess
of $5.0 million, an opinion as to the fairness to the holders of
such Affiliate transaction from a financial point of view issued by
an accounting, appraisal or investment banking firm of national
standing.
The following items will not be deemed to be Affiliate transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment, noncompetition, confidentiality, indemnification or
similar agreement or arrangement entered into by Pac-West or any of its
Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of Pac-West or such Restricted
Subsidiary;
(2) transactions between or among Pac-West and/or its Restricted
Subsidiaries;
(3) payment of reasonable directors fees to persons who are not otherwise
Affiliates of Pac-West;
(4) any sale or other issuance of Equity Interests, other than Disqualified
Stock, of Pac-West;
(5) the sale of telecommunications services to any Affiliate on an arm's
length basis which is undertaken in the ordinary course of Pac-West's
business;
93
<PAGE>
(6) transactions in accordance with the Merger Agreement or any agreement
executed prior to the date of the indenture in connection therewith,
including for example the shareholders agreement and the registration
agreement, or any renewal, replacement, extension, amendment or other
modification thereof, provided such modifications are not, on balance,
disadvantageous to the holders of the notes;
(7) payments to Bay Alarm Company in accordance with the existing lease
between Pac-West and the Bay Alarm Company for Pac-West's Oakland
facility and for security monitoring services offered at Bay Alarm
Company's prevailing commercial rates; and
(8) Restricted Payments that are permitted by the provisions of the
indenture described above under the caption "--Restricted Payments."
Issuances of Guarantees by Restricted Subsidiaries
Pac-West will not permit any Restricted Subsidiary to guarantee, assume or
in any other manner become liable with respect to any Indebtedness of Pac-West
which is ranking equally with or subordinate in right of payment to the notes,
other than any Indebtedness incurred under a Credit Facility, unless:
(1) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the indenture providing for a guarantee of
payment of the notes by such Restricted Subsidiary; and
(2) such Restricted Subsidiary waives and will not in any manner whatsoever
claim, or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against
Pac-West or any other Restricted Subsidiary as a result of any payment
by such Restricted Subsidiary under its Subsidiary Guarantee; provided
that this paragraph will not be applicable to any guarantee of any
Restricted Subsidiary that existed at the time such person became a
Restricted Subsidiary and was not incurred in connection with, or in
contemplation of, such person becoming a Restricted Subsidiary.
If the Guaranteed Indebtedness is:
a. ranked equally with the notes, then the guarantee of such Guaranteed
Indebtedness will be ranked equally with, or subordinated to, the
Subsidiary Guarantee or
b. subordinated to the notes, then the guarantee of such Guaranteed
Indebtedness will be subordinated to the Subsidiary Guarantee at least
to the extent that the Guaranteed Indebtedness is subordinated to the
notes.
Despite the above, any Subsidiary Guarantee by a Restricted Subsidiary may
provide by its terms that it will be automatically and unconditionally released
and discharged upon:
(1) any sale, exchange or transfer, to any person that is not an Affiliate
of Pac-West, of all of Pac-West's and each Restricted Subsidiary's
Capital Stock in, or all or substantially all of the assets of, such
Restricted Subsidiary, which sale, exchange or transfer is not
prohibited by the indenture; or
(2) the release or discharge of the guarantee which resulted in the
creation of such Subsidiary Guarantee, except a discharge or release by
or as a result of payment under such guarantee; provided, that, with
respect to clause (2), such Restricted Subsidiary has no Indebtedness.
Designation of Restricted and Unrestricted Subsidiaries
The board of directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, all
outstanding Investments owned by Pac-West and its Restricted Subsidiaries in
the Subsidiary so designated will be deemed to be an Investment made as of the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of the covenant described above under the
caption "--Restricted Payments" or Permitted Investments, as applicable. All
such outstanding Investments will be valued at their fair market value at the
time of such designation. That designation will be permitted only if such
94
<PAGE>
Restricted Payment would be permitted at that time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The
board of directors may redesignate any Unrestricted Subsidiary to be a
Restricted Subsidiary if the redesignation would not cause a Default.
Sale and Leaseback Transactions
Pac-West will not, and will not permit any of its Restricted Subsidiaries
to, enter into any sale and leaseback transaction; provided that Pac-West or
any Restricted Subsidiary of Pac-West Restricted Subsidiary may enter into a
sale and leaseback transaction if:
(1) Pac-West or that Restricted Subsidiary, as applicable, could have:
(a) incurred Indebtedness in an amount equal to the Attributable Debt
relating to such sale and leaseback transaction under the Debt to
Cash Flow Ratio test in the first paragraph of the covenant
described above under the caption "--Incurrence of Additional
Indebtedness and Issuance of Preferred Stock"; and
(b) incurred a Lien to secure such Indebtedness in accordance with the
covenant described above under the caption "--Liens";
(2) the gross cash proceeds of that sale and leaseback transaction are at
least equal to the fair market value, as determined in good faith by
the board of directors and set forth in an officers' certificate
delivered to the trustee, of the property that is the subject of such
sale and leaseback transaction; and
(3) the transfer of assets in that sale and leaseback transaction is
permitted by, and Pac-West applies the proceeds of such transaction in
compliance with, the covenant described above under the caption "--
Repurchase at the Option of Holders--Asset Sales."
Limitation on Issuances and Sales of Equity Interests in Wholly Owned
Subsidiaries
Pac-West will not, and will not permit any of its Restricted Subsidiaries
to, transfer, convey, sell, lease or otherwise dispose of any Equity Interests
in any Wholly Owned Restricted Subsidiary of Pac-West to any person, other than
Pac-West or a Wholly Owned Restricted Subsidiary of Pac-West, unless:
(1) such transfer, conveyance, sale, lease or other disposition is of all
the Equity Interests in such Wholly Owned Restricted Subsidiary; and
(2) the cash Net Proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant described
above under the caption "--Repurchase at the Option of Holders--Asset
Sales."
In addition, Pac-West will not permit any Wholly Owned Restricted Subsidiary of
Pac-West to issue any of its Equity Interests, other than, if necessary, shares
of its Capital Stock constituting directors' qualifying shares, to any person
other than to Pac-West or a Wholly Owned Restricted Subsidiary of Pac-West.
Business Activities
Pac-West will not, and will not permit any Restricted Subsidiary to, engage
in any business other than Permitted Businesses.
Payments for Consent
Pac-West will not, and will not permit any of its Subsidiaries to pay or
cause to be paid any consideration to or for the benefit of any holder of notes
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of the indenture or the notes unless such consideration is
offered to be paid and is paid to all holders of the notes that consent, waive
or agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
95
<PAGE>
Reports
Whether or not required by the SEC, so long as any notes are outstanding,
Pac-West will furnish to the holders of notes, within the time periods
specified in the SEC's rules and regulations:
(1) all quarterly and annual financial information that would be required
to be contained in a filing with the SEC on Forms 10-Q and 10-K if Pac-
West were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report
on the annual financial statements by Pac-West's certified independent
accountants; and
(2) all current reports that would be required to be filed with the SEC on
Form 8-K if Pac-West were required to file such reports.
If Pac-West has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of Pac-West
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of Pac-West.
In addition, whether or not required by the SEC, Pac-West will file a copy
of all of the information and reports referred to in clauses (1) and (2) above
with the SEC for public availability within the time periods specified in the
SEC's rules and regulations, unless the SEC will not accept such a filing, and
make such information available to securities analysts and prospective
investors upon request.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest under the
notes;
(2) default in payment when due of the principal of or premium, if any,
under the notes;
(3) failure by Pac-West or any of its Subsidiaries to comply with the
provisions described under the captions "--Repurchase at the Option of
Holders--Change of Control" or "--Repurchase at the Option of Holders--
Asset Sales";
(4) failure by Pac-West or any of its Restricted Subsidiaries for 60 days
after notice from either the trustee or the holders of at least 25% in
aggregate principal amount of the outstanding notes to comply with any
of the other agreements in the indenture or the notes;
(5) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Pac-West or any of its Restricted
Subsidiaries, or the payment of which is guaranteed by Pac-West or any
of its Restricted Subsidiaries, whether such Indebtedness or guarantee
now exists, or is created after the date of the indenture, if that
default:
(a) is caused by a payment default due to failure to pay principal of
or premium, if any, or interest on such Indebtedness prior to the
expiration of the grace period provided in such Indebtedness on the
date of such default; or
(b) results in the acceleration of such Indebtedness prior to its
express maturity,
and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a payment default or the maturity of which has
been so accelerated, aggregates $5.0 million or more;
(6) failure by Pac-West or any of its Restricted Subsidiaries to pay final
judgments aggregating in excess of $5.0 million, which judgments are
not paid, discharged or stayed for a period of 60 days;
96
<PAGE>
(7) Pac-West asserts in writing that the Pledge Agreement ceases to be in
full force and effect before payment in full of the obligations under
that agreement; and
(8) certain events of bankruptcy or insolvency with respect to Pac-West or
any of its Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of bankruptcy
or insolvency, with respect to Pac-West, any Restricted Subsidiary that is a
Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding old notes
will become due and payable immediately without further action or notice. If
any other Event of Default occurs and is continuing, the trustee or the holders
of at least 25% in principal amount of the then outstanding old notes may
declare all the notes to be due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding old notes may direct the
trustee in its exercise of any trust or power. The trustee may withhold from
holders of the notes notice of any continuing Default or Event of Default,
except a Default or Event of Default relating to the payment of principal or
interest, if it determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of Pac-West with the
intention of avoiding payment of the premium that Pac-West would have had to
pay if Pac-West then had elected to redeem the notes in accordance with the
optional redemption provisions of the indenture, an equivalent premium will
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the notes. If an Event of Default occurs prior to
February 1, 2004, by reason of any willful action or inaction taken or not
taken by or on behalf of Pac-West with the intention of avoiding the
prohibition on redemption of the notes prior to February 1, 2004, then the
premium specified in the indenture will also become immediately due and payable
to the extent permitted by law upon the acceleration of the notes.
Pac-West is required to deliver to the trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, Pac-West is required to deliver to the trustee a statement
specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of Pac-West or
any Subsidiary, as such, will have any liability for any obligations of Pac-
West or the Subsidiaries under the notes or the indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each holder of notes by accepting a note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the notes. The waiver may not be effective to waive liabilities under the
federal securities laws.
Legal Defeasance and Covenant Defeasance
Pac-West may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes as legal
defeasance except for:
(1) the rights of holders of outstanding notes to receive payments in
respect of the principal of, premium, if any, and interest on the notes
when such payments are due from the trust referred to below;
97
<PAGE>
(2) Pac-West's obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee, and
Pac-West's obligations in connection therewith; and
(4) the legal defeasance provisions of the indenture.
In addition, Pac-West may, at its option and at any time, elect to have the
obligations of Pac-West and the Restricted Subsidiaries released with respect
to certain covenants that are described in the indenture as covenant defeasance
and thereafter any omission to comply with those covenants will not constitute
a Default or Event of Default with respect to the notes. In the event covenant
defeasance occurs, certain events, described under "Events of Default," will no
longer constitute an Event of Default with respect to the notes. These events
do not include non-payment, bankruptcy, receivership, rehabilitation and
insolvency events.
In order to exercise either legal defeasance or covenant defeasance:
(1) Pac-West must irrevocably deposit with the trustee, in trust, for the
benefit of the holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if
any, and interest on the outstanding notes on the stated maturity or on
the applicable redemption date, as the case may be, and Pac-West must
specify whether the notes are being defeased to maturity or to a
particular redemption date;
(2) in the case of legal defeasance, Pac-West will have delivered to the
trustee an opinion of counsel reasonably acceptable to the trustee
confirming that:
(a) Pac-West has received from, or there has been published by, the
Internal Revenue Service a ruling; or
(b) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel will confirm that,
the holders of the outstanding notes will not recognize income,
gain or loss for federal income tax purposes as a result of such
legal defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would
have been the case if such legal defeasance had not occurred;
(3) in the case of covenant defeasance, Pac-West will have delivered to the
trustee an opinion of counsel reasonably acceptable to the trustee
confirming that the holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of
such covenant defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would
have been the case if such covenant defeasance had not occurred;
(4) no Default or Event of Default will have occurred and be continuing
either:
(a) on the date of such deposit, other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit; or
(b) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st
day after the date of deposit;
(5) such legal defeasance or covenant defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument, other than the indenture, to which Pac-West or
any of its Restricted Subsidiaries is a party or by which Pac-West or
any of its Restricted Subsidiaries is bound;
(6) Pac-West must have delivered to the trustee an opinion of counsel to
the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
98
<PAGE>
(7) Pac-West must deliver to the trustee an officers' certificate stating
that the deposit was not made by Pac-West with the intent of preferring
the holders of notes over the other creditors of Pac-West with the
intent of defeating, hindering, delaying or defrauding creditors of
Pac-West or others; and
(8) Pac-West must deliver to the trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent relating
to the legal defeasance or the covenant defeasance have been complied
with.
Amendment, Supplement and Waiver
Without the consent of each holder affected, an amendment or waiver may not,
with respect to any notes held by a non-consenting holder:
(1) reduce the principal amount of notes whose holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes, other
than provisions relating to the covenants described above under the
caption "--Repurchase at the Option of Holders";
(3) reduce the rate of or change the time for payment of interest on any
note;
(4) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest under the notes, except a rescission of
acceleration of the notes by the holders of at least a majority in
aggregate principal amount of the notes and a waiver of the payment
default that resulted from such acceleration;
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to waivers
of past Defaults or the rights of holders of notes to receive payments
of principal of or premium, if any, or interest under the notes;
(7) waive a redemption payment with respect to any note, other than a
payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"; or
(8) make any change in the preceding amendment and waiver provisions.
Despite the above, without the consent of any holder of notes, Pac-West and
the trustee may amend or supplement the indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of Pac-West's obligations to holders of
notes in the case of a merger or consolidation or sale of all or
substantially all of Pac-West's assets;
(4) to make any change that would provide any additional rights or benefits
to the holders of notes or that does not adversely affect the legal
rights under the indenture of any such holder; or
(5) to comply with requirements of the SEC in order to effect or maintain
the qualification of the indenture under the Trust Indenture Act of
1939.
Concerning the Trustee
If the trustee becomes a creditor of Pac-West or any Restricted Subsidiary,
the indenture limits its right to obtain payment of claims in certain cases, or
to realize on certain property received in respect of any such claim as
security or otherwise. The trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the SEC for permission to
continue or resign.
99
<PAGE>
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
will occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
holder of notes, unless such holder will have offered to the trustee security
and indemnity satisfactory to it against any loss, liability or expense.
Book-Entry, Delivery and Form
The new notes issued to qualified institutional buyers, as defined in Rule
144A under the Securities Act of 1933, initially will be in the form of one or
more registered global notes without interest coupons. Upon issuance, these
U.S. global notes will be deposited with the trustee, as custodian for DTC and
registered in the name of DTC or its nominee, in each case for credit to the
accounts of DTC's direct and indirect participants. In addition, a registered,
coupon-less U.S. global note will be established to accommodate transfers to
institutional accredited investors, as defined in Rule 501(a)(1)(2)(3) or (7)
of Regulation D under the Securities Act of 1933. The new notes issued to non-
U.S. persons will initially be in the form of a separate Regulation S global
note. Beneficial interests in the Regulation S global notes may be transferred
to a person that takes delivery in the form of an interest in the U.S. global
notes and beneficial interests in the U.S. global notes may be transferred to a
person that takes delivery in the form of an interest in the Regulation S
global notes. See "--Transfers of Interests in One Global Note for Interests in
Another Global Note."
The global notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the global notes may be
exchanged for notes in certificated form in certain limited circumstances. See
"--Transfers of Interests in Global Notes for Certificated Notes."
Depositary Procedures
DTC has advised Pac-West that DTC is a limited-purpose trust company created
to hold securities for its direct participant organizations and to facilitate
the clearance and settlement of transactions in those securities between direct
participant organizations through electronic book-entry changes in the accounts
of direct participant organizations. The direct participant organizations
include securities brokers and dealers, including the initial purchasers of the
notes, banks, trust companies, clearing corporations and certain other
organizations, including Euroclear and CEDEL. Access to DTC's system is also
available to other indirect participant organizations that clear through or
maintain a direct or indirect, custodial relationship with a direct participant
organization. DTC may hold securities beneficially owned by other persons only
through the direct participant organizations or indirect participant
organizations and such other persons' ownership interest and transfer of
ownership interest will be recorded only on the records of the direct
participant organization and/or indirect participant organization, and not on
the records maintained by DTC.
DTC has also advised Pac-West that, in accordance with DTC's procedures:
(1) upon deposit of the global notes, DTC will credit the accounts of the
direct participant organizations designated by the initial purchasers
of the notes with portions of the principal amount of the global notes
allocated by the indirect participant organizations to such direct
participant organizations; and
(2) DTC will maintain records of the ownership interests of such direct
participant organizations in the global notes and the transfer of
ownership interests by and between direct participant organizations.
DTC will not maintain records of the ownership interests of, or the transfer of
ownership interests by and between, indirect participant organizations or other
owners of beneficial interests in the global notes. Direct participant
organizations and indirect participant organizations must maintain their own
records of the ownership interests of, and the transfer of ownership interests
by and between, indirect participant organizations and other owners of
beneficial interests in the global notes.
100
<PAGE>
Investors in the U.S. global notes may hold their interests therein directly
through DTC if they are direct participant organizations in DTC or indirectly
through organizations that are direct participant organizations in DTC.
Investors in the Regulation S global notes may also hold interests in the
Regulation S global notes through organizations that are direct participant
organizations in the DTC system.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a global note to such
persons. Because DTC can act only on behalf of direct participant
organizations, which in turn act on behalf of indirect participant
organizations and others, the ability of a person having a beneficial interest
in a global note to pledge such interest to persons or entities that are not
direct participant organizations in DTC, or to otherwise take actions in
respect of such interests, may be affected by the lack of physical certificates
evidencing such interests.
Except as described in "Transfers of Interests in Global Notes for
Certificated Notes," owners of beneficial interests in the global notes will
not have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
holders thereof under the indenture for any purpose.
Under the terms of the indenture, Pac-West and the trustee will treat the
persons in whose names the notes are registered, including notes represented by
global notes, as the owners thereof for the purpose of receiving payments and
for any and all other purposes whatsoever. Payments in respect of the
principal, premium and interest on global notes registered in the name of DTC
or its nominee will be payable by the trustee to DTC or its nominee as the
registered holder under the indenture. Consequently, neither Pac-West, the
trustee nor any agent of Pac-West or the trustee has or will have any
responsibility or liability for:
(1) any aspect of DTC's records or any direct participant organization's or
indirect participant organization's records relating to or payments
made on account of beneficial ownership interests in the global notes
or for maintaining, supervising or reviewing any of DTC's records or
any direct participant organization's or indirect participant
organization's records relating to the beneficial ownership interests
in any global note; or
(2) any other matter relating to the actions and practices of DTC or any of
its direct participant organizations or indirect participant
organizations.
DTC has advised Pac-West that its current payment practice for payments of
principal, interest and the like with respect to securities such as the notes
is to credit the accounts of the relevant direct participant organizations with
such payment on the payment date in amounts proportionate to such direct
participant organization's respective ownership interests in the global notes
as shown on DTC's records. Payments by direct participant organizations and
indirect participant organizations to the beneficial owners of the notes will
be governed by standing instructions and customary practices between them and
will not be the responsibility of DTC, the trustee or Pac-West. Neither Pac-
West nor the trustee will be liable for any delay by DTC or its direct
participant organizations or indirect participant organizations in identifying
the beneficial owners of the notes, and Pac-West and the trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee as the registered owner of the notes for all purposes.
Interests in the global notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and, therefore, transfers between direct
participant organizations in DTC will be effected in accordance with DTC's
procedures, and will be settled in immediately available funds. Transfers
between indirect participant organizations who hold an interest through a
direct participant organization will be effected in accordance with the
procedures of such direct participant organization but generally will settle in
immediately available funds.
DTC has advised Pac-West that it will take any action permitted to be taken
by a holder of notes only at the direction of one or more direct participant
organizations to whose account interests in the global notes are credited and
only in respect of such portion of the aggregate principal amount of the notes
as to which such
101
<PAGE>
direct participant organization or direct participant organizations has or have
given direction. However, if there is an Event of Default under the notes, DTC
reserves the right to exchange global notes, without the direction of one or
more of its direct participant organizations, for notes in certificated form,
and to distribute such certificated forms of notes to its direct participant
organizations. See "--Transfers of Interests in Global Notes for Certificated
Notes."
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Regulation S global notes and in the U.S. global notes
among direct participant organizations, it is under no Obligation to perform or
to continue to perform such procedures, and such procedures may be discontinued
at any time. Neither Pac-West nor the trustee will have any responsibility for
the performance by DTC or its respective Direct and indirect participant
organizations of their respective obligations under the rules and procedures
governing any of their operations.
The information in this section concerning DTC and its book-entry system has
been obtained from sources that Pac-West believes to be reliable, but Pac-West
takes no responsibility for the accuracy thereof.
Transfers of Interests in One Global Note for Interests in Another Global Note
Transfers involving an exchange of a beneficial interest in Regulation S
global notes for a beneficial interest in U.S. global notes or vice versa will
be effected by DTC by means of an instruction originated by the trustee through
DTC Deposit/Withdraw at Custodian system. Accordingly, in connection with such
transfer, appropriate adjustments will be made to reflect a decrease in the
principal amount of the one global note and a corresponding increase in the
principal amount of the other global note, as applicable. Any beneficial
interest in the one global note that is transferred to a person who takes
delivery in the form of an interest in the other global note will, upon
transfer, cease to be an interest in such first global note and become an
interest in such other global note and, accordingly, will thereafter be subject
to all transfer restrictions and other procedures applicable to beneficial
interests in such other global note for as long as it remains such an interest.
Transfers of Interests in Global Notes for Certificated Notes
An entire global note may be exchanged for definitive notes in registered,
certificated form without interest coupons if:
(1) DTC
(a) notifies Pac-West that it is unwilling or unable to continue as
depositary for the global notes and Pac-West thereupon fails to
appoint a successor depositary within 90 days; or
(b) has ceased to be a clearing agency registered under the Exchange
Act;
(2) Pac-West, at its option, notifies the trustee in writing that it elects
to cause the issuance of certificated notes; or
(3) there will have occurred and be continuing a Default or an Event of
Default with respect to the notes.
In any such case, Pac-West will notify the trustee in writing that, upon
surrender by the direct and indirect participant organizations of their
interest in such global note, certificated notes will be issued to each person
that such Direct and indirect participant organizations and DTC identify as
being the beneficial owner of the related notes.
Beneficial interests in global notes held by any Direct or indirect
participant organization may be exchanged for certificated notes upon request
to DTC, by such direct participant organization, for itself or on behalf of an
indirect participant organization, but only upon at least 20 days' prior
written notice given to the
102
<PAGE>
trustee by or on behalf of DTC in accordance with customary DTC procedures.
Certificated notes delivered in exchange for any beneficial interest in any
global note will be registered in the names, and issued in any approved
denominations, requested by DTC on behalf of such Direct or indirect
participant organizations, in accordance with DTC's customary procedures.
In all cases described herein, such certificated notes will bear the
restrictive legend referred to in "Notice to Investors," unless Pac-West
determines otherwise in compliance with applicable law.
Neither Pac-West nor the trustee will be liable for any delay by the holder
of the global notes or the DTC in identifying the beneficial owners of notes,
and Pac-West and the trustee may conclusively rely on, and will be protected in
relying on, instructions from the holder of the global note or the DTC for all
purposes.
Transfers of Certificated Notes for Interests in Global Notes
Certificated notes may only be transferred if the transferor first delivers
to the trustee a written certificate and, in certain circumstances, an opinion
of counsel confirming that, in connection with such transfer, it has complied
with any applicable restrictions on transfer.
Same Day Settlement and Payment
The indenture requires that payments in respect of the notes represented by
the global notes, including principal, premium, if any, and interest, be made
by wire transfer of immediately available funds to the accounts specified by
the holder of such global note. With respect to certificated notes, Pac-West
will make all payments of principal, premium, if any, and interest by wire
transfer of immediately available funds to the accounts specified by the
holders thereof or, if no such account is specified, by mailing a check to each
such holder's registered address. Pac-West expects that secondary trading in
the certificated notes will also be settled in immediately available funds.
Certain Definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified person,
Indebtedness of any other person existing at the time such other person is
merged with or into or became a Subsidiary of such specified person, but
excluding
Indebtedness secured by a Lien encumbering any assets acquired by such
person and excluding
(1) Indebtedness incurred in connection with, or in anticipation of
contemplation of, such other person merging with or into, or becoming a
Subsidiary of, such specified person; and
(2) Indebtedness extinguished, retired or repaid in connection with such
other person merging with or into or becoming a Subsidiary of such
specified person.
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition, "control,"
as used with respect to any person, will mean the possession of the power to
direct or cause the direction of the management or policies of such person,
whether through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the Voting Stock of a
person will be deemed to be control. For purposes of this definition, the terms
"controlling," "controlled by" and "under common control with" will have
correlative meanings.
103
<PAGE>
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, including, for example, by way of a sale and leaseback, other
than sales of inventory in the ordinary course of business consistent
with past practices; provided that the sale, conveyance or other
disposition of all or substantially all of the assets of Pac-West and
its Restricted Subsidiaries taken as a whole will be governed by the
provisions of the indenture described above under the caption "--
Repurchase at Option of Holders--Change of Control" and/or the
provisions described above under the caption "--Certain Covenants--
Merger, Consolidation or Sale of Assets" and not by the provisions of
the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of Pac-West's Restricted
Subsidiaries or the sale of Equity Interests in any of Pac-West's
Subsidiaries.
Despite the above, the following items will not be deemed to be Asset Sales:
(1) any single transaction or series of related transactions that:
(a) involves assets having a fair market value of less than $1.0
million; or
(b) results in net proceeds to Pac-West and its Restricted Subsidiaries
of less than $1.0 million;
(2) a transfer of assets between or among Pac-West and its Wholly Owned
Restricted Subsidiaries;
(3) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary
to Pac-West or to another Wholly Owned Restricted Subsidiary;
(4) disposals or replacements of obsolete telecommunications equipment in
the ordinary course of business; and
(5) a Restricted Payment that is permitted by the covenant described above
under the caption "Certain Covenants--Restricted Payments."
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value will be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Securities Exchange Act of 1934, except that in
calculating the beneficial ownership of any particular person, as such term is
used in Section 13(d)(3) of the Exchange Act, such person will be deemed to
have beneficial ownership of all securities that such person has the right to
acquire, whether such right is currently exercisable or is exercisable only
upon the occurrence of a subsequent condition.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at that time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents, however
designated, of corporate stock;
(3) in the case of a partnership or limited liability company, partnership
or membership interests, whether general or limited; and
(4) any other interest or participation that confers on a person the right
to receive a share of the profits and losses of, or distributions of
assets of, the issuing person.
104
<PAGE>
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof,
provided that the full faith and credit of the United States is pledged
in support thereof, having maturities of not more than six months from
the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities of
six months or less from the date of acquisition, bankers' acceptances
with maturities not exceeding six months and overnight bank deposits,
in each case, with any domestic commercial bank having capital and
surplus in excess of $500 million and a Thompson Bank Watch Rating of
"B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Corporation and in each
case maturing within six months after the date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) the sale, transfer, conveyance or other disposition, other than by way
of merger or consolidation, in one or a series of related transactions,
of all or substantially all of the assets of Pac-West and its
Subsidiaries taken as a whole to any person, as such term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934, other than a
Principal or a Related Party of a Principal;
(2) the adoption of a plan relating to the liquidation or dissolution of
Pac-West;
(3) the consummation of any transaction, including, for example, any merger
or consolidation, the result of which is that any person, as defined
above, other than the Principals and their Related Parties, becomes the
Beneficial Owner of more than 35% of the Voting Stock of Pac-West,
measured by voting power rather than number of shares;
(4) the first day on which a majority of the members of the board of
directors of Pac-West are not Continuing Directors; or
(5) Pac-West consolidates with, or merges with or into, any person, or any
person consolidates with, or merges with or into, Pac-West, in any such
event in accordance with a transaction in which any of the outstanding
Voting Stock of Pac-West is converted into or exchanged for cash,
securities or other property, other than any such transaction where the
Voting Stock of Pac-West outstanding immediately prior to such
transaction is converted into or exchanged for Voting Stock, other than
Disqualified Stock, of the surviving or transferee person constituting
a majority of the outstanding shares of such Voting Stock of such
surviving or transferee person immediately after giving effect to such
issuance.
"Consolidated Cash Flow" means, with respect to any person for any period,
the Consolidated Net Income of such person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized in
connection with an Asset Sale, to the extent such losses were deducted
in computing such Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such person and its
Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net
Income; plus
105
<PAGE>
(3) consolidated interest expense of such person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or
not capitalized, including, for example, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter of
credit or bankers' acceptance financings, and net payments, if any, in
accordance with Hedging Obligations, to the extent that any such
expense was deducted in computing such Consolidated Net Income; plus
(4) depreciation, amortization, including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period, and other non-cash expenses,
excluding any such non-cash expense to the extent that it represents an
accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period,
of such person and its Restricted Subsidiaries for such period to the
extent that such depreciation, amortization and other non-cash expenses
were deducted in computing such Consolidated Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such period,
other than items that were accrued in the ordinary course of business,
in each case, on a consolidated basis and determined in accordance with GAAP.
Despite the above, the provision for taxes based on the income or profits of,
and the depreciation and amortization and other non-cash charges of, a
Restricted Subsidiary of Pac-West will be added to Consolidated Net Income to
compute Consolidated Cash Flow of Pac-West only to the extent that a
corresponding amount would be permitted at the date of determination to be
dividended to Pac-West by such Restricted Subsidiary without prior approval,
that has not been obtained, in accordance with the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
"Consolidated Indebtedness" means, with respect to any person as of any date
of determination, the sum, without duplication, of:
(1) the total amount of Indebtedness of such person and its Restricted
Subsidiaries; plus
(2) the total amount of Indebtedness of any other person, to the extent
that such Indebtedness has been Guaranteed by the referent person or
one or more of its Restricted Subsidiaries; plus
(3) the aggregate liquidation value of all preferred stock of Restricted
Subsidiaries of such person,
in each case, determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any specified person for
any period, the aggregate of the Net Income of such person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income, but not loss, of any person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting
will be included only to the extent of the amount of dividends or
distributions paid in cash to the specified person or a Wholly Owned
Restricted Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary will be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental
approval, that has not been obtained, or by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders;
(3) the Net Income of any person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition will
be excluded;
106
<PAGE>
(4) the Net Income, but not loss, of any Unrestricted Subsidiary will be
excluded, whether or not distributed to the specified person or one of
its Subsidiaries, except for purposes of the covenant described under
the caption "--Certain Covenants--Restricted Payments," in which case
the Net Income of any Unrestricted Subsidiary will be included to the
extent provided under clause (1) of this definition;
(5) the portion of Net Income of any person attributable to the receipt of
Unpaid Reciprocal Compensation; and
(6) the cumulative effect of a change in accounting principles will be
excluded.
"Continuing Directors" means, as of any date of determination, any member of
the board of directors of Pac-West who:
(1) was a member of such board of directors on the date of the indenture;
or
(2) was nominated for election or elected to such board of directors with
the approval of a majority of the Continuing Directors who were members
of such board at the time of such nomination or election.
"Credit Facilities" means, with respect to Pac-West or any Restricted
Subsidiary, one or more debt facilities or commercial paper facilities, in each
case with banks or other institutional lenders providing for revolving credit
loans, term loans, receivables financing or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"Debt to Cash Flow Ratio" means, as of any date of determination, the ratio
of:
(a) the Consolidated Indebtedness of Pac-West as of such date to
(b) the Consolidated Cash Flow of Pac-West of the four most recent full
fiscal quarters ending immediately prior to such date for which
internal financial statements are available, determined on a pro forma
basis after giving effect to all acquisitions or dispositions of assets
made by Pac-West and its Restricted Subsidiaries from the beginning of
such four-quarter period through and including such date of
determination (including any related financing transactions and any Pro
Forma cost savings, as if such acquisitions and dispositions had
occurred at the beginning of such four-quarter period.
In addition, for purposes of making the computation referred to above,
(1) acquisitions that have been made by Pac-West or any of its Restricted
Subsidiaries, including through mergers or consolidations and including
any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the
Calculation Date, as defined herein, will be deemed to have occurred on
the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period will be calculated without giving
effect to clause (c) of the proviso set forth in the definition of
Consolidated Net Income; and
(2) the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, will be excluded.
"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms, or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof, or upon the
happening of any event, matures or is mandatorily redeemable, in accordance
with a sinking fund obligation or otherwise, or redeemable at the option of the
holder thereof, in whole or in part, on or prior to the date that is 91 days
after the date on which the notes mature. Despite the above sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require Pac-West to repurchase such Capital
Stock upon the occurrence of a change of control or an asset sale will not
constitute
107
<PAGE>
Disqualified Stock if the terms of such Capital Stock provide that Pac-West may
not repurchase or redeem any such Capital Stock in accordance with such
provisions unless such repurchase or redemption complies with the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
"Earnout Payments" means all earnout payments made after the date of the
indenture to former shareholders and employees of Pac-West in accordance with
the Merger Agreement.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"Existing Indebtedness" means the Indebtedness of Pac-West and its
Restricted Subsidiaries in existence on the date of the indenture, until such
amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the indenture.
"Guarantee" means a guarantee, other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, for example, by way of a pledge of assets or
through letters of credit or reimbursement agreements in respect thereof, of
all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any person, the obligations of
such person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such person
against fluctuations in interest rates.
"Indebtedness" means, with respect to any specified person, any Indebtedness
of such person, whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters
of credit, or reimbursement agreements in respect thereof;
(3) banker's acceptances;
(4) representing Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any property,
except any such balance that constitutes an accrued expense or trade
payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items, other than letters of credit
and Hedging Obligations, would appear as a liability upon a balance sheet of
the specified person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all indebtedness of others secured by a Lien on any
asset of the specified person, whether or not such indebtedness is assumed by
the specified person and, to the extent not otherwise included, the Guarantee
by such person of any indebtedness of any other person.
The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value thereof, in the case of any Indebtedness issued with
original issue discount; and
(2) the principal amount thereof, together with any interest thereon that
is more than 30 days past due, in the case of any other Indebtedness.
108
<PAGE>
"Investments" means, with respect to any person, all investments by such
person in other persons, including Affiliates, in the forms of direct or
indirect loans, including guarantees of Indebtedness or other obligations,
advances or capital contributions, excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business,
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If Pac-West or any Restricted Subsidiary of Pac-West sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of Pac-West such that, after giving effect to any such sale or
disposition, such person is no longer a Restricted Subsidiary of Pac-West, Pac-
West will be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Certain Covenants--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code, or equivalent statutes, of any jurisdiction.
"Merger Agreement" means the Agreement and Plan of Merger, dated as of June
30, 1998, by and among PWT Acquisition Corp., a California corporation, Pac-
West, Bay Alarm Company, a California corporation, and John K. La Rue.
"Net Income" means, with respect to any person, the net income or loss of
such person and its Restricted Subsidiaries, determined in accordance with GAAP
and before any reduction in respect of preferred stock dividends, excluding,
however:
(1) any gain, but not loss, together with any related provision for taxes
on such gain, but not loss, realized in connection with:
(a) any Asset Sale; or
(b) the disposition of any securities by such person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness
of such person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain, but not loss, together with any related
provision for taxes on such extraordinary gain, but not loss.
"Net Proceeds" means the aggregate cash proceeds received by Pac-West or any
of its Restricted Subsidiaries in respect of any Asset Sale, including, for
example, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale, net of the direct costs relating to
such Asset Sale, including, for example, legal, accounting and investment
banking fees, and sales commissions, and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof, in each case after
taking into account any available tax credits or deductions and any tax sharing
arrangements and amounts required to be applied to the repayment of
Indebtedness, other than Indebtedness under a Credit Facility, secured by a
Lien on the asset or assets that were the subject of such Asset Sale.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Pac-West nor any of its Restricted Subsidiaries:
(a) provides credit support of any kind, including any undertaking,
agreement or instrument that would constitute Indebtedness;
(b) is directly or indirectly liable as a guarantor or otherwise; or
(c) constitutes the lender;
109
<PAGE>
(2) no default with respect to which, including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary, would permit upon notice, lapse of time or both any holder
of any other Indebtedness, other than the notes, of Pac-West or any of
its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of Pac-West or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any business engaged primarily in the
development, ownership or operation of one or more telephone,
telecommunications or information systems or the provision of telephony,
telecommunications or information services, including, for example, any voice,
video transmission, data or Internet services, and any related, ancillary or
complementary business; provided that the determination of what constitutes a
Permitted Business will be made in good faith by the board of directors of Pac-
West.
"Permitted Investments" means:
(1) any Investment in Pac-West or in a wholly owned Restricted Subsidiary
of Pac-West;
(2) any Investment in Cash Equivalents;
(3) any Investment by Pac-West or any Restricted Subsidiary of Pac-West in
a person, if as a result of such Investment:
(a) such person becomes a wholly owned Restricted Subsidiary of Pac-
West; or
(b) such person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, Pac-West or a wholly owned Restricted Subsidiary
of Pac-West;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made in accordance with and
in compliance with the covenant described above under the caption "--
Repurchase at the Option of Holders--Asset Sales";
(5) any acquisition of assets solely in exchange for the issuance of Equity
Interests, other than Disqualified Stock, of Pac-West;
(6) loans and advances for business-related travel, moving or similar
expenses to employees and officers of Pac-West and its Restricted
Subsidiaries in the ordinary course of business;
(7) investments in securities of trade creditors or customers received in
accordance with any plan of reorganization or similar arrangement upon
the bankruptcy or insolvency of such trade creditors or customers;
(8) Investments in prepaid expenses, negotiable instruments held for
collection, and lease, utility, workers' compensation, performance and
other similar deposits; and
(9) other Investments in any person having an aggregate fair market value
(measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all
other Investments made in accordance with this clause (9) since the
date of the indenture, not to exceed $5.0 million,
provided, however, that the transfer from Pac-West to a Restricted Subsidiary,
or to an entity that becomes a Restricted Subsidiary, of the property, plant
and equipment that support or are necessary to Pac-West's operations in
California will not be a Permitted Investment.
"Permitted Liens" means:
(1) Liens on the assets of Pac-West and any Restricted Subsidiary securing
Indebtedness and other Obligations under Credit Facilities that were
permitted by the terms of the indenture to be incurred;
110
<PAGE>
(2) Liens on the property or assets of one or more Restricted Subsidiaries
of Pac-West securing Indebtedness of one or more Restricted
Subsidiaries of Pac-West that was permitted by the terms of the
indenture to be incurred;
(3) Liens in favor of Pac-West or its Restricted Subsidiaries;
(4) Liens on property of a person existing at the time such person is
merged with or into or consolidated with Pac-West or any Restricted
Subsidiary of Pac-West; provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the person merged into or
consolidated with Pac-West or the Restricted Subsidiary;
(5) Liens on property existing at the time of acquisition thereof by Pac-
West or any Restricted Subsidiary of Pac-West, provided that such Liens
were in existence prior to the contemplation of such acquisition;
(6) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(7) Liens to secure Indebtedness, including Capital Lease Obligations,
permitted by clause (5) of the second paragraph of the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock"
covering only the assets acquired with such Indebtedness;
(8) Liens existing on the date of the indenture;
(9) Liens for taxes, assessments, duties or governmental charges or claims
that are not yet delinquent or that are being contested in good faith
by appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision as
will be required in conformity with GAAP will have been made therefor;
(10) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed
by law incurred in the ordinary course of business for sums not yet
delinquent or being contested in good faith, if such reserve or other
appropriate provision, if any, as will be required by GAAP will have
been made in respect thereof;
(11) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and
other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance and
return-of-money bonds and other similar obligations, exclusive of
obligations for the payment of borrowed money;
(12) judgment Liens not giving rise to an Event of Default;
(13) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property that do not, in
the aggregate, materially detract from the value of such property or
interfere in any material respect with the use of such property in the
ordinary conduct of the business of Pac-West or any of its Restricted
Subsidiaries;
(14) Liens incurred in the ordinary course of business of Pac-West or any
Restricted Subsidiary of Pac-West with respect to obligations that do
not exceed $10.0 million at any one time outstanding and that:
(a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit other than trade credit in the
ordinary course of business; and
(b) do not in the aggregate materially detract from the value of the
property or materially impair the use thereof in the operation of
business by Pac-West or such Restricted Subsidiary;
(15) Liens upon specific items of inventory or other goods and proceeds of
any person securing such person's obligations in respect of bankers'
acceptances issued or created for the account of such person to
facilitate the purchase, shipment, or storage of such inventory or
other goods;
(16) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating
to such letters of credit and products and proceeds thereof;
111
<PAGE>
(17) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of Pac-
West or any of its Restricted Subsidiaries, including rights of offset
and set-off;
(18) leases or subleases granted to others that do not materially interfere
with the ordinary course of business of Pac-West and its Restricted
Subsidiaries; and
(19) Liens on assets of Unrestricted Subsidiaries that secure Non-Recourse
Debt of Unrestricted Subsidiaries.
"Permitted Refinancing Indebtedness" means any Indebtedness of Pac-West or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of Pac-West or any of its Restricted Subsidiaries (other than
intercompany Indebtedness; provided that:
(1) the principal amount or accreted value, if applicable, of such
Permitted Refinancing Indebtedness does not exceed the principal amount
of, or accreted value, if applicable, plus accrued interest on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded, plus the amount of reasonable expenses incurred in connection
therewith;
(2) such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes,
such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of
payment to, the notes on terms at least as favorable to the holders of
notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and
(4) such Indebtedness is incurred either by Pac-West or by the Restricted
Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Pledge Agreement" means the Pledge Agreement dated as of the date of the
indenture between Pac-West and the trustee, as amended from time to time.
"Pledged Securities" means the securities, which will be direct obligations
of or obligations guaranteed by the U.S. government, purchased by Pac-West with
a portion of proceeds from the notes and pledged to the trustee for the benefit
of the holders of the notes.
"Principals" means William Blair & Company, L.L.C., William Blair Capital
Partners VI, L.P., Safeguard Scientifics, Inc., SCP Private Equity Partners,
L.P., Safeguard 98 Capital, L.P., TL Ventures III L.P. and Mr. Wallace W.
Griffin.
"Pro Forma Cost Savings" means, with respect to any period, the net
reduction in cash operating costs achieved during or after such period and on
or prior to the date of determination that are directly attributable to an
asset acquisition, which savings will be calculated on a basis consistent with
Article 11 of Regulation S-X, as such Regulation is in effect on the date
hereof.
"Related Party" with respect to any Principal means:
(1) any controlling stockholder, 80% or more owned Subsidiary, or spouse or
immediate family member, in the case of an individual, of such
Principal; or
(2) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or persons beneficially holding an 80%
or more controlling interest of which consist of such Principal and/or
such other persons referred to in the immediately preceding clause (1).
112
<PAGE>
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a person means any Subsidiary of the referent
person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
in accordance with the Securities Exchange Act of 1934, as such Regulation is
in effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subordinated Indebtedness" means any Indebtedness of Pac-West and its
Restricted Subsidiaries which is subordinated in right of payment to the notes
and with respect to which no payments of principal, by way of sinking fund,
mandatory redemption, maturity or otherwise, including, for example, at the
option of the holder thereof, other than in accordance with an offer to
repurchase such Subordinated Indebtedness following a change of control, which
offer may not be completed until 45 days after completion of the Offer
described under "--Repurchase at the Option of Holders--Change of Control," are
required to be made by Pac-West and its Restricted Subsidiaries at any time
prior to the Stated Maturity of the notes.
"Subsidiary"' means, with respect to any person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock entitled,
without regard to the occurrence of any contingency, to vote in the
election of directors, managers or trustees thereof is at the time
owned or controlled by such person or one or more of the other
Subsidiaries of that person, or a combination thereof; and
(2) any partnership:
(a) the sole general partner or the managing general partner of which
is such person or a Subsidiary of such person or
(b) the only general partners of which are such person or of one or
more Subsidiaries of such person, or any combination thereof.
"Unpaid Reciprocal Compensation" means all amounts owing but not paid to
Pac-West as of December 31, 1998 by Pacific Bell or GTE California in
accordance with Pac-West's interconnection agreements with such parties.
"Unrestricted Subsidiary" means any Subsidiary of Pac-West that is
designated by the board of directors as an Unrestricted Subsidiary in
accordance with a Board Resolution, but only to the extent that such
Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding
with Pac-West or any Restricted Subsidiary of Pac-West unless the terms
of any such agreement, contract, arrangement or understanding are no
less favorable to Pac-West or such Restricted Subsidiary than those
that might be obtained at the time from persons who are not Affiliates
of Pac-West;
(3) is a person with respect to which neither Pac-West nor any of its
Restricted Subsidiaries has any direct or indirect obligation:
(a) to subscribe for additional Equity Interests; or
(b) to maintain or preserve such person's financial condition or to
cause such person to achieve any specified levels of operating
results;
113
<PAGE>
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of Pac-West or any of its Restricted
Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of Pac-West or any of its Restricted
Subsidiaries and has at least one executive officer that is not a
director or executive officer of Pac-West or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of Pac-West as an Unrestricted Subsidiary
will be evidenced to the trustee by filing with the trustee a certified copy of
the board resolution giving effect to such designation and an officers'
certificate certifying that such designation complied with the preceding
conditions and was permitted by the covenant described above under the caption
"--Certain Covenants--Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it will thereafter cease to be an Unrestricted Subsidiary for
purposes of the indenture and any Indebtedness of such Subsidiary will be
deemed to be incurred by a Restricted Subsidiary of Pac-West as of such date
and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption "Incurrence of Indebtedness and
Issuance of Preferred Stock," Pac-West will be in default of such covenant. The
board of directors of Pac-West may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation will
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of
Pac-West of any outstanding Indebtedness of such Unrestricted Subsidiary and
such designation will only be permitted if:
(1) such Indebtedness is permitted under the covenant described under the
caption "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference
period; and
(2) no Default or Event of Default would be in existence following such
designation.
"Voting Stock" of any person as of any date means the Capital Stock of such
person that is at the time entitled to vote in the election of the board of
directors of such person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying:
(a) the amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment
at final maturity, in respect thereof, by
(b) the number of years, calculated to the nearest one-twelfth, that
will elapse between such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any person means a Restricted
Subsidiary of such person all of the outstanding Capital Stock or other
ownership interests of which, other than directors' qualifying shares, will at
the time be owned by such person and/or by one or more Wholly Owned Restricted
Subsidiaries of such person.
114
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a discussion of certain material U.S. federal income tax
consequences of the acquisition, ownership and disposition of the notes. Unless
otherwise stated, this discussion is limited to the tax consequences to those
persons who are original owners of the notes and who are holders of such notes
as capital assets. The discussion does not purport to address specific tax
consequences that may be relevant to particular persons, including, for
example, financial institutions, broker-dealers, insurance companies, tax-
exempt organizations, and persons in special situations, such as those who hold
notes as part of a straddle, hedge, conversion transaction, or other integrated
investment. In addition, this discussion does not address U.S. federal
alternative minimum tax consequences or any aspect of state, local or foreign
taxation. This discussion is based upon the Internal Revenue Code of 1986, as
amended, the U.S. Treasury Department regulations promulgated under the
Internal Revenue Code of 1986, and administrative and judicial interpretations
of such code and regulations, all of which are subject to change, possibly with
retroactive effect. Pac-West will treat the notes as indebtedness for federal
income tax purposes, and the following discussion assumes that such treatment
is correct.
For purposes of this discussion, a U.S. holder is a holder of a note who is
a United States citizen or resident, a corporation or partnership created or
organized in or under the laws of the United States or any state, an estate the
income of which is subject to U.S. federal income taxation regardless of its
source, or a trust if a United States court exercises primary supervision over
its administration and one or more United States persons have the authority to
control all of its substantial decisions. A non-U.S. holder is a holder of a
note who is not a U.S. holder.
Prospective purchasers of the notes are urged to consult their tax advisors
concerning the United States federal income and estate tax consequences to them
of acquiring, owning and disposing of the notes, as well as the application of
state, local and foreign income and other tax laws.
Tax Consequences to U.S. Holders
Taxation of Interest
Interest paid under the notes will be includible in the income of a U.S.
holder in accordance with the U.S. holder's regular method of tax accounting. A
U.S. holder may be entitled to treat interest income under the notes as
investment income for purposes of computing certain limitations concerning the
deductibility of investment interest expense.
In the event of a change of control, a holder of a note will have the right
to require us to purchase such note at a price equal to 101% of the principal
amount thereof. The U.S. Treasury Department regulations provide that the right
of a holder of a note to require redemption of such note upon the occurrence of
a change of control will not affect the yield or maturity date of the note if,
based on all the facts and circumstances as of the issue date, it is
significantly more likely than not that a change of control giving rise to the
redemption right will not occur. We believe that the redemption provisions of
the notes will not affect the computation of the yield to maturity of the notes
and intends to report in a manner consistent with this belief.
We may redeem the notes at any time on or after February 1, 2004, and in
certain circumstances, may redeem a portion of the notes at any time prior to
February 1, 2002. Under the U.S. Treasury Department regulations, we are deemed
to exercise any option to redeem if the exercise of such option would lower the
yield of the debt instrument. We believe that we will not be treated as having
exercised an option to redeem under these rules and intend to report in a
manner consistent with this belief.
115
<PAGE>
Sale, Exchange or Retirement of the Notes
Upon the sale, exchange or retirement of the notes, other than on exchange
of old notes for new notes in accordance with this exchange offer, a U.S.
holder will recognize gain or loss equal to the difference between the amount
realized upon the sale, exchange or retirement, less a portion allocable to any
accrued and unpaid interest, which will be taxable as ordinary income, and the
U.S. holder's adjusted tax basis in the notes. A U.S. holder's adjusted tax
basis in the notes generally will be the U.S. holder's cost therefor, less any
principal payments received by such holder.
Gain or loss recognized by a U.S. holder on the sale, exchange or retirement
of the notes will be capital gain or loss. The gain or loss will be long-term
capital gain or loss if the notes have been held by the U.S. holder for more
than twelve months. Long-term capital gain is subject to a maximum federal tax
rate of 20%. The deductibility of capital losses by U.S. holders is subject to
limitation.
Exchange Offer
A U.S. holder will not recognize any taxable gain or loss on the exchange of
the old notes for new notes in accordance with this exchange offer, and a U.S.
holder's tax basis and holding period in the new notes will be the same as in
the old notes.
Tax Consequences to Non-U.S. Holders
Taxation of Interest
A non-U.S. holder generally will not be subject to U.S. federal income or
withholding tax on interest paid under the notes so long as such interest is
not effectively connected with the non-U.S. holder's conduct of a trade or
business within the United States, and the non-U.S. holder:
(1) does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of Pac-West;
(2) is not a "controlled foreign corporation" with respect to which we are
a "related person" within the meaning of the Internal Revenue Code of
1986, as amended; and
(3) satisfies the requirements of Sections 871(h) or 881(c) of the Internal
Revenue Code of 1986, as amended, as set forth below under "Owner
Statement Requirement."
If the foregoing conditions (1)-(3) are not satisfied, then interest paid under
the notes will be subject to U.S. withholding tax at a rate of 30%, unless such
rate is reduced or eliminated in accordance with an applicable tax treaty.
Sale, Exchange or Retirement of the Notes
Any capital gain a non-U.S. holder recognizes on the sale, exchange,
retirement or other taxable disposition of a note will be exempt from U.S.
federal income and withholding tax, provided that:
(1) the gain is not effectively connected with the non-U.S. holder's
conduct of a trade or business within the United States; and
(2) in the case of a non-U.S. holder that is an individual, the non-U.S.
holder is not present in the United States for 183 days or more during
the taxable year.
Effectively Connected Income
If the interest, gain or other income a non-U.S. holder recognizes on a note
is effectively connected with the non-U.S. holder's conduct of a trade or
business within the United States, the non-U.S. holder, although exempt from
the withholding tax previously discussed if an appropriate statement is
furnished, generally will be
116
<PAGE>
subject to U.S. federal income tax on the interest, gain or other income at
regular federal income tax rates. In addition, if the non-U.S. holder is a
corporation, it may be subject to a branch profits tax equal to 30% of its
"effectively connected earnings and profits," as adjusted for certain items,
unless it qualifies for a lower rate under an applicable tax treaty.
Federal Estate Taxes
A note held by an individual who at the time of death is not a citizen or
resident of the United States will not be subject to United States federal
estate tax as a result of such individual's death, provided that the individual
does not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of Pac-West entitled to vote and that the
interest accrued on such notes was not effectively connected with the non-U.S.
holder's conduct of a trade or business within the United States.
Owner Statement Requirement
Sections 871(h) and 881(c) of the Internal Revenue Code of 1986, as amended,
require that either the beneficial owner of a note or a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business and that holds a
note on behalf of such owner files a statement with Pac-West or its agent to
the effect that the beneficial owner is not a United States person in order to
avoid withholding of United States federal income tax. Under current
regulations, this requirement will be satisfied if Pac-West or its agent
receives
(1) a statement from the beneficial owner of a note in which such owner
certifies, under penalties of perjury, that such owner is not a United
States person and provides such owner's name and address; or
(2) a statement from the financial institution holding the note on behalf
of the beneficial owner in which the financial institution certifies,
under penalties of perjury, that it has received the owner statement
together with a copy of the owner statement.
The beneficial owner must inform Pac-West or its agent or, in the case of a
statement described in clause (2) of the immediately preceding sentence, the
financial institution, within 30 days of any change in information on the owner
statement. The Internal Revenue Service has amended the transition period
relating to recently issued U.S. Treasury Department regulations governing
backup withholding and information reporting requirements. Withholding
certificates or statements that are valid on December 31, 1999, may be treated
as valid until the earlier of their expiration or December 31, 2000.
Certificates or statements received under the currently effective rules will
fail to be effective after December 31, 2000.
Information Reporting and Backup Withholding
We will, where required, report to the holders of notes and the Internal
Revenue Service the amount of any interest paid under the notes in each
calendar year and the amounts of tax withheld, if any, with respect to such
payments. A noncorporate U.S. holder may be subject to information reporting
and to backup withholding at a rate of 31% with respect to payments of
principal and interest made on a note, or on proceeds of the disposition of a
note before maturity, unless such U.S. holder provides a correct taxpayer
identification number or proof of an applicable exemption, and otherwise
complies with applicable requirements of the information reporting and backup
withholding rules.
In the case of payments of interest to non-U.S. holders, current U.S.
Treasury Department regulations provide that the 31% backup withholding tax and
certain information reporting requirements will not apply to such payments with
respect to which either the requisite certification, as described above, has
been received or an exemption has otherwise been established, provided that
neither Pac-West nor its payment agent has actual knowledge that the holder is
a United States person or that the conditions of any other exemption are not in
fact satisfied. Under current U.S. Treasury Department regulations, these
information reporting and backup
117
<PAGE>
withholding requirements will apply, however, to the gross proceeds paid to a
non-U.S. holder on the disposition of the notes by or through a United States
office of a United States or foreign broker, unless the non-U.S. holder
otherwise establishes an exemption. Information reporting requirements, but not
backup withholding, will also apply to payment of the proceeds of a disposition
of the notes by or through a foreign office of a United States broker or
foreign brokers with certain types of relationships to the United States unless
such broker has documentary evidence in its file that the holder of the notes
is not a United States person and such broker has no actual knowledge to the
contrary, or the holder establishes an exemption. Neither information reporting
nor backup withholding generally will apply to payment of the proceeds of a
disposition of the notes by or through a foreign office of a foreign broker not
subject to the preceding sentence.
The Treasury Department has released new U.S. Treasury Department
regulations governing the backup withholding and information reporting
requirements. The new regulations would not generally alter the treatment of a
non-U.S. holder who furnishes an owner statement to the payor. The new
regulations may change certain procedures applicable to the foreign office of a
United States broker or foreign brokers with certain types of relationships to
the United States. The new regulations are generally effective for payments
made after December 31, 1999. Non-U.S. holders should consult their own tax
advisors with respect to the impact, if any, of the new final regulations.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the holder's
United States federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
118
<PAGE>
PLAN OF DISTRIBUTION
Each participating broker-dealer that receives new notes for its own account
in accordance with this exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes. This prospectus, as
it may be amended or supplemented from time to time, may be used by a
participating broker-dealer in connection with resales of new notes received in
exchange for old notes where such old notes were acquired as a result of
market-making activities or other trading activities. Pac-West has agreed that
for a period of one year after the expiration date of this exchange offer, we
will make this prospectus, as amended or supplemented, available to any
participating broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sales of the new notes by
participating broker-dealers. New notes received by participating broker-
dealers for their own account in accordance with this exchange offer may be
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the new
notes or a combination of such methods of resale, at market prices prevailing
at the time of resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such participating broker-dealer and/or the
purchasers of any such new notes. Any participating broker-dealer that resells
the new notes that were received by it for its own account in accordance with
this exchange offer and any broker or dealer that participates in a
distribution of such new notes may be deemed to be an "underwriter" within the
meaning of the Securities Act of 1933 and any profit on any such resale of new
notes and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act of 1933. The
letter of transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a participating broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act of
1933.
For a period of one year after the expiration date we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any participating broker-dealer that requests such documents in
the letter of transmittal.
Prior to this exchange offer, there has not been any public market for the
old notes. The old notes have not been registered under the Securities Act of
1933 and will be subject to restrictions on transferability to the extent that
they are not exchanged for new notes by holders who are entitled to participate
in this exchange offer. The holders of old notes, other than any such holder
that is an affiliate of Pac-West within the meaning of Rule 405 under the
Securities Act of 1933, who are not eligible to participate in this exchange
offer are entitled to certain registration rights, and we are required to file
a shelf registration statement with respect to such old notes. The new notes
will constitute a new issue of securities with no established trading market.
We do not intend to list the new notes on any national securities exchange or
to seek the admission thereof to trading in the National Association of
Securities Dealers Automated Quotation System. In addition, such market making
activity will be subject to the limits imposed by the Securities Act of 1933
and the Exchange Act and may be limited during this exchange offer and the
pendency of the shelf registration statements. Accordingly, no assurance can be
given that an active public or other market will develop for the new notes or
as to the liquidity of the trading market for the new notes. If a trading
market does not develop or is not maintained, holders of the new notes may
experience difficulty in reselling the new notes or may be unable to sell them
at all. If a market for the new notes develops, any such market may be
discontinued at any time.
LEGAL MATTERS
The validity of the new notes offered in this prospectus and certain other
legal matters will be passed upon on behalf of Pac-West by Kirkland & Ellis.
119
<PAGE>
EXPERTS
The financial statements and schedule included in this prospectus or
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, to the extent and for the periods
indicated in their reports, 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-4 under the Securities Act of 1933 with respect to the new notes
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 new notes,
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.
As a result of this exchange offer, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. 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.
120
<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-24
Interim Condensed Statements of Income (unaudited)......................... F-25
Interim Condensed Statements of Cash Flows (unaudited)..................... F-26
Notes to Interim Condensed Financial Statements (unaudited)................ F-27
</TABLE>
F-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Pac-West Telecomm, Inc.:
We have audited the accompanying balance sheets of Pac-West Telecomm, Inc.
(a California corporation) as of December 31, 1997 and 1998, and the related
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the three-month period from date of commencement (October 1, 1996) to
December 31, 1996, and for the years ended December 31, 1997 and 1998. In
addition, we have audited the statements of operations and cash flows of the
predecessor telephone and answering service divisions of Pac-West Telecomm,
Inc. (see Note 1) for the nine-month period ended September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pac-West Telecomm, Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for the three-month period from date of commencement (October 1, 1996) to
December 31, 1996, and for the years ended December 31, 1997 and 1998, and the
results of operations and cash flows of the predecessor telephone and answering
service divisions of Pac-West Telecomm, Inc. for the nine-month period ended
September 30, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Francisco, California,
February 10, 1999 except with respect to Note 12 for which the date is March
19, 1999
F-3
<PAGE>
PAC-WEST TELECOMM, INC.
BALANCE SHEETS
As of December 31, 1997 and 1998
ASSETS
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................... $ 3,603,000 $15,236,000
Trade accounts receivable, net of allowances for
doubtful accounts of $300,000 and $400,000 at
December 31, 1997 and 1998, respectively.......... 3,662,000 4,623,000
Accounts receivable from related parties........... 161,000 64,000
Income taxes receivable............................ 0 1,971,000
Inventories........................................ 330,000 447,000
Prepaid expenses and other current assets.......... 398,000 861,000
Deferred financing costs, net...................... 0 457,000
Deferred tax assets................................ 160,000 151,000
----------- -----------
Total current assets........................... 8,314,000 23,810,000
----------- -----------
Equipment, Vehicles and Leasehold Improvements:
Communications equipment........................... 17,193,000 29,817,000
Office furniture and equipment..................... 1,176,000 1,965,000
Vehicles........................................... 301,000 717,000
Leasehold improvements............................. 2,869,000 5,581,000
Construction-in-progress (Note 5).................. 0 25,597,000
----------- -----------
21,539,000 63,677,000
Less: Accumulated depreciation and amortization...... (2,460,000) (6,383,000)
----------- -----------
Equipment, vehicles and leasehold improvements,
net........................................... 19,079,000 57,294,000
----------- -----------
Other Assets, net.................................. . 135,000 1,389,000
----------- -----------
Total assets................................... $27,528,000 $82,493,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PAC-WEST TELECOMM, INC.
BALANCE SHEETS
As of December 31, 1997 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Current Liabilities:
Current portion of notes payable.................. $ 2,034,000 $ 132,000
Current portion of capital lease obligations...... 1,432,000 0
Accounts payable.................................. 1,159,000 5,147,000
Accrued payroll and related expenses.............. 331,000 846,000
Other accrued liabilities......................... 760,000 2,153,000
----------- ------------
Total current liabilities................... 5,716,000 8,278,000
----------- ------------
Senior Secured Borrowings and Other Long-Term
Obligations (Note 3)............................... 0 100,000,000
Notes Payable, less current portion................. 6,627,000 116,000
Capital Lease Obligations, less current portion..... 5,579,000 0
----------- ------------
Total long-term debt and capital lease
obligations................................ 12,206,000 100,116,000
----------- ------------
Deferred Income Taxes............................... 934,000 1,888,000
----------- ------------
Total liabilities........................... 18,856,000 110,282,000
----------- ------------
Commitments and Contingencies (Note 5)
Convertible Redeemable Preferred Stock, $0.001 par
value; 1,750,000 shares authorized; 1,250,000
issued and outstanding at December 31, 1998
(preference in liquidation of $45,000,000, plus
accrued cumulative dividends of $1,324,000)........ 0 46,324,000
Stockholders' Equity (Deficit):
Common stock:
December 31, 1997, no par value:
Authorized shares--10,000,000
Issued and outstanding shares--100,000........ 4,037,000 0
December 31, 1998, $0.001 par value:
Authorized shares--15,000,000
Issued and outstanding shares--12,562,470..... 0 13,000
Additional paid-in capital........................ 0 8,910,000
Notes receivable from stockholders................ 0 (233,000)
Retained earnings (deficit)....................... 4,635,000 (82,803,000)
----------- ------------
Total stockholders' equity (deficit)........ 8,672,000 (74,113,000)
----------- ------------
Total liabilities and stockholders' equity
(deficit).................................. $27,528,000 $ 82,493,000
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PAC-WEST TELECOMM, INC.
STATEMENTS OF OPERATIONS
For the Predecessor Telephone and Answering Service Divisions of Pac-West
Telecomm, Inc.
for the nine-month period ended September 30, 1996, and
for Pac-West Telecomm, Inc.
for the three-month period from date of commencement (October 1, 1996) to
December 31, 1996, and for the years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Predecessor Telephone
and Answering Service
Divisions
(Note 1) Pac-West Telecomm, Inc.
--------------------- ---------------------------------------------
Period from Date of
Nine-Month Period Commencement Year Ended Year Ended
Ended (October 1, 1996) to December December
September 30, 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 expense (income), 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)
- --------------------------------------------------
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PAC-WEST TELECOMM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the three-month period from date of commencement (October 1, 1996) to
December 31, 1996, and for the years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Notes Total
Common Stock Additional Receivable Retained Stockholders'
--------------------- Paid-in from Earnings Equity
Shares Amount Capital Stockholders (Deficit) (Deficit)
---------- ---------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1996................... 0 $ 0 $ 0 $ 0 $ 0 $ 0
Issuance of common
stock for
contribution of
predecessor telephone
and answering service
divisions by CalPage
(Note 1)............. 100,000 4,037,000 0 0 0 4,037,000
---------- ---------- ---------- --------- ------------ ------------
Balance, October 1,
1996................... 100,000 4,037,000 0 0 0 4,037,000
Net income for the
three-month period
from date of
commencement (October
1, 1996) to December
31, 1996............. 0 0 0 0 140,000 140,000
---------- ---------- ---------- --------- ------------ ------------
Balance, December 31,
1996................... 100,000 4,037,000 0 0 140,000 4,177,000
Net income for the
year ended December
31, 1997............. 0 0 0 0 4,495,000 4,495,000
---------- ---------- ---------- --------- ------------ ------------
Balance, December 31,
1997................... 100,000 4,037,000 0 0 4,635,000 8,672,000
Conversion to $0.001
par value stock...... 0 (4,037,000) 4,037,000 0 0 0
Effect of merger with
PWT Acquisition Corp.
and recapitalization
(Note 1)............. 5,126,420 6,000 1,194,000 0 (86,771,000) (85,571,000)
Issuance of common
stock................ 6,898,580 7,000 4,711,000 0 0 4,718,000
Accrued cumulative
dividends--preferred
stock................ 0 0 (1,324,000) 0 0 (1,324,000)
Issuances of common
stock for cash and
notes receivable..... 437,470 0 292,000 (233,000) 0 59,000
Net loss for the year
ended December 31,
1998................. 0 0 0 0 (667,000) (667,000)
---------- ---------- ---------- --------- ------------ ------------
Balance, December 31,
1998................... 12,562,470 $ 13,000 $8,910,000 $(233,000) $(82,803,000) $(74,113,000)
========== ========== ========== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
PAC-WEST TELECOMM, INC.
STATEMENTS OF CASH FLOWS
For the Predecessor Telephone and Answering Service Divisions of Pac-West
Telecomm, Inc.
for the nine-month period ended September 30, 1996, and
for Pac-West Telecomm, Inc.
for the three-month period from date of commencement (October 1, 1996) to
December 31, 1996, and for the years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Predecessor
Telephone and
Answering Service
Divisions
(Note 1) Pac-West Telecomm, Inc.
----------------- ----------------------------------------------
Nine-Month Period Period from Date of
Ended Commencement Year Ended Year Ended
September 30, (October 1, 1996) to December 31, December 31,
1996 December 31, 1996 1997 1998
----------------- -------------------- ------------ ------------
<S> <C> <C> <C> <C>
Operating Activities:
Net income (loss).......................................... $ 519,000 $ 140,000 $4,495,000 $ (667,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item--loss on early extinguishment of debt,
net of income tax benefit............................... 0 0 0 417,000
Costs of merger with PWT Acquisition Corp. and
recapitalization........................................ 0 0 0 3,004,000
Depreciation and amortization............................ 549,000 299,000 2,204,000 4,106,000
Amortization of deferred financing costs................. 0 0 0 1,438,000
Gain on disposal of answering service division........... 0 0 (385,000) 0
Gain on disposal of equipment............................ 0 0 (15,000) 0
Provision for doubtful accounts.......................... (19,000) 6,000 216,000 100,000
Deferred income tax provision............................ 0 93,000 711,000 963,000
Changes in operating assets and liabilities:
Increase in trade accounts receivable.................. (442,000) (413,000) (2,034,000) (1,061,000)
(Increase) decrease in accounts receivable from related
parties............................................... 200,000 (94,000) (67,000) 97,000
Increase in income tax receivable...................... 0 0 0 (1,971,000)
(Increase) decrease in inventories..................... (102,000) (177,000) 195,000 (117,000)
Increase in prepaid expenses and other current assets.. (17,000) (90,000) (175,000) (263,000)
(Increase) decrease in other assets.................... 45,000 (15,000) (56,000) 91,000
Increase (decrease) in accounts payable................ (267,000) 527,000 654,000 3,988,000
Increase (decrease) in accrued compensation and other
liabilities........................................... 626,000 (201,000) 133,000 1,908,000
---------- ---------- ---------- -----------
Net cash provided by operating activities............. 1,092,000 75,000 5,876,000 12,033,000
---------- ---------- ---------- -----------
Investing Activities:
Purchase of equipment, vehicles and leasehold
improvements.............................................. (2,730,000) (1,682,000) (7,103,000) (42,176,000)
Proceeds from disposal of answering service division....... 0 0 402,000 0
Proceeds from disposal of equipment........................ 207,000 0 82,000 145,000
---------- ---------- ---------- -----------
Net cash used in investing activities................. (2,523,000) (1,682,000) (6,619,000) (42,031,000)
---------- ---------- ---------- -----------
Financing Activities:
Proceeds from notes payable................................ 2,274,000 2,508,000 5,931,000 10,514,000
Repayments on notes payable................................ (87,000) (892,000) (1,332,000) (2,658,000)
Principal payments on capital leases....................... (366,000) (67,000) (730,000) (828,000)
Payment for deferred financing costs associated with
senior notes.............................................. 0 0 0 (1,195,000)
Proceeds from senior secured borrowings.................... 0 0 0 15,587,000
Increase in other long-term obligations.................... 0 0 0 9,000,000
Proceeds from issuance of common stock..................... 0 0 0 9,000
Merger with PWT Acquisition Corp. and recapitalization:
Proceeds from the issuance of preferred stock............ 0 0 0 31,844,000
Proceeds from the issuances of common stock.............. 0 0 0 5,968,000
Proceeds from senior secured borrowings.................. 0 0 0 75,413,000
Payments to existing stockholders........................ 0 0 0 (74,015,000)
Extinguishments of notes payable and capital leases...... 0 0 0 (23,159,000)
Payment for deferred financing costs..................... 0 0 0 (1,895,000)
Costs of merger with PWT Acquisition Corp. and
recapitalization........................................ 0 0 0 (2,954,000)
Repayment of loans payable to officers and stockholder..... (43,000) 0 (211,000) 0
---------- ---------- ---------- -----------
Net cash provided by financing activities............. 1,778,000 1,549,000 3,658,000 41,631,000
---------- ---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents.. 347,000 (58,000) 2,915,000 11,633,000
Cash and Cash Equivalents:
Beginning of period........................................ 399,000 746,000 688,000 3,603,000
---------- ---------- ---------- -----------
End of period.............................................. $ 746,000 $ 688,000 $3,603,000 $15,236,000
- --------------------------------------------------
========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Organization:
Pac-West Telecomm, Inc. (the Company) is engaged in the business of
providing switched local and long-distance telecommunications services and
"one-stop" integrated telecommunications services to Internet Service Providers
(ISPs), paging companies and other inbound call service providers, as well as
to medium and small businesses, principally within California.
The Company was incorporated in May 1996 in the state of California as a
wholly owned subsidiary of CalPage (a telephone, answering and paging services
company), also formerly named Pac-West Telecomm, Inc. CalPage transferred its
telephone and answering service divisions (the Predecessor Telephone and
Answering Service Divisions or the "Predecessor") to the Company effective
September 30, 1996 (the Initial Transfer). In conjunction with the Initial
Transfer, CalPage spun off the Company to the stockholders of CalPage. The
accompanying financial statements are presented on the same historical cost
basis as was used prior to the Initial Transfer.
During 1997, the Company sold the customer base and other assets of its
answering service division (see Note 10).
The success of the Company is highly dependent upon several factors. These
factors include the Company's ability to penetrate additional markets and to
manage network growth and technological change within the telecommunications
industry, the successful implementation of local and enhanced services to its
customers including ISPs, and competition from preexisting and new providers of
local and long-distance services, as well as positive and timely responses
regarding governmental regulations.
Additionally, the Company is managed by a limited number of key individuals,
several of whom are subject to employment contracts. The Company is also
dependent on the development of an effective sales force and the retention of
skilled and qualified personnel.
As of December 31, 1998, the Company's borrowings and other long-term
obligations totaled $100,248,000 and the Company had a stockholders' deficit of
$74,113,000. As discussed in Note 11, in January 1999, the Company issued
$150,000,000 of 13.5 percent senior notes due on February 1, 2009. A portion of
the proceeds from these notes was used to repay the senior secured borrowings.
The balance of the proceeds will be used for future capital expenditures and
working capital needs, including the establishment of an interest reserve to
cover certain initial interest payments due under the senior notes.
Basis of Presentation
The accompanying financial statements present the financial position of the
Company as of December 31, 1997 and 1998, and the results of its operations and
its cash flows for the period from commencement (October 1, 1996) to December
31, 1996, and for the years ended December 31, 1997 and 1998. In addition, the
accompanying financial statements present the results of the Predecessor's
operations and cash flows for the nine-month period ended September 30, 1996.
The Predecessor was a division of CalPage during the nine-month period ended
September 30, 1996. Accordingly, the results of the Predecessor's operations
and its cash flows were recorded and reported by CalPage as an integral part of
CalPage's total operations. The Company has used its best efforts to derive the
appropriate information from the books and records of CalPage and has by
necessity applied certain
F-9
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
assumptions in identifying and allocating costs and expenses to separately
report the results of operations and cash flows of the Predecessor for the
nine-month period ended September 30, 1996 in the accompanying financial
statements.
Allocated selling, general and administrative expenses for the nine-month
period ended September 30, 1996, were $1,111,000.
Assumptions used were based in part on headcount and job descriptions,
facility utilization, divisional revenues, and certain other causal
relationships between operating revenues and expenses. Management believes this
method is a reasonable allocation method and that the resulting amounts
approximate the amounts that would have been incurred if the Predecessor was
operated on a stand-alone basis. Revenues, direct costs, depreciation and
amortization and interest expense have been recorded based on the specific
activities of the Predecessor.
Due to the significant changes in the Company's operations since September
30, 1996, the Company believes that the financial information of the
Predecessor is not directly comparable to the Company's results of operations.
Merger and Recapitalization
On September 16, 1998, the Company completed a merger with PWT Acquisition
Corp. (PWT) and a recapitalization of the Company (the Transaction). PWT was
formed by a group of investors (the New Stockholders) for the purpose of
injecting additional equity into the Company and effecting the
recapitalization. In connection with the Transaction, PWT was merged into the
Company, with the Company being the surviving corporation.
In connection with the Transaction, Bay Alarm Company and Mr. John La Rue
(the Existing Stockholders) received cash payments of approximately $74 million
(primarily financed through senior secured borrowings--see Note 3), as well as
shares of newly issued preferred and common stock of the Company in exchange
for a substantial portion of their ownership interests. Additionally, at the
consummation of the Transaction, the Company paid transaction bonuses and
consultant's costs totaling approximately $3.8 million which are included in
the accompanying statements of operations. Under the terms of the Transaction,
the Existing Stockholders of the Company are entitled to receive additional
consideration up to $20 million in the event that the Company achieves certain
earnings targets (including receipt of certain billings under dispute--see Note
5) subsequent to the recapitalization. As of December 31, 1998, none of these
earnings targets were achieved and accordingly, no amounts have been accrued at
December 31, 1998 for payment of any additional consideration. Immediately
following consummation of the Transaction, the Existing Stockholders continued
to hold approximately 28 percent of the issued and outstanding common stock of
the Company. As a result of the continued significant ownership interests of
the Existing Stockholders, no adjustments have been made to the historical
carrying amounts of the Company's assets and liabilities as a result of the
Transaction.
F-10
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of the Transaction is as follows:
<TABLE>
<S> <C>
Issuance of convertible redeemable preferred stock*....... $ 31,844,000
Issuance of common stock, $0.001 par value................ 5,968,000
Proceeds from senior secured borrowings................... 75,413,000
-------------
Total sources of cash................................... 113,225,000
-------------
Payments to Existing Stockholders including $400,000 for
noncompete agreements*................................... (74,015,000)
Extinguishment of debt**.................................. (23,437,000)
Transaction bonuses and consultant's costs................ (3,798,000)
Transaction costs***...................................... (4,593,000)
-------------
Total uses of cash...................................... (105,843,000)
-------------
Net cash provided from Transaction...................... $ 7,382,000
=============
</TABLE>
- --------
*Net of $13,156,000 of noncash convertible redeemable preferred stock issued
as part of the Transaction payments to Existing Stockholders.
**Includes $695,000 of early extinguishment costs before income tax benefit
(see Note 4).
***Includes costs of merger with PWT Acquisition Corp. and recapitalization of
$3,004,000 (less amortization of noncompete agreements of $50,000 during
1998) and deferred financing costs incurred in connection with the senior
secured borrowings of $1,895,000; net of $256,000 of common stock issued as
payment for professional services provided.
In order to effect the above, the Company amended its articles of
incorporation such that the authorized capital of the Company consists of
15,000,000 shares of common stock and 1,750,000 shares of convertible
redeemable preferred stock (the Preferred Stock). The issued and outstanding
preferred stock and common stock of PWT was converted into Preferred Stock and
common stock of the Company, respectively, on a one-for-one basis.
2. Summary of Significant Accounting Policies:
Concentration of Customers and Suppliers
The relative concentrations of customers and suppliers are:
<TABLE>
<CAPTION>
Predecessor
(Note 1) Pac-West Telecomm, Inc.
------------------- --------------------------------------
Period from
Date of
Commencement
(October 1,
Nine-Month Period 1996) to Year Ended Year Ended
Ended September 30, December 31, December 31, December 31,
1996 1996 1997 1998
------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues (percent of
revenues):
Incumbent Local
Exchange Companies
(ILECs, see Note 5).. 2% 14% 37% 37%
Suppliers (percent of
operating costs):
Largest supplier...... 58 54 44 50
Next largest supplier. 9 11 9 7
</TABLE>
F-11
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The largest supplier is also the largest ILEC, as shown above in the
concentration of revenues. See Note 8 for revenues from related parties.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates. See
Note 1 for assumptions used for Predecessor financial reporting.
Regulation and Competition
Rates charged by the Company for certain telephone services are subject to
the approval of various regulatory authorities. Trends in the
telecommunications industry point toward increased competition in virtually all
markets and the continued deregulation or alternative regulation of
telecommunications services in many jurisdictions.
Revenue Recognition
Revenues are generally recognized when service is provided, installation is
completed, or if no installation is required, upon shipment. See Note 5 for
discussion of the revenue recognition policy related to certain billings under
dispute with two significant ILECs.
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
Commencement
Nine-Month Period (October 1, 1996) Year Ended Year Ended
Ended to December 31, December 31, December 31,
September 30, 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.
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).
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>
F-15
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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>
F-16
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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).
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 options under
the new 1999 Employee Stock Option Plan (see Note 11).
These employment agreements, which were approved by the Company's
stockholders in 1998 in connection with the Transaction (see Note 1), granted
options to two executives to purchase up to 406,250 shares of the Company's
common stock. The exercise price of these options of $0.67 per share
approximated the fair market value of the Company's common stock at the date of
grant. These options vest over various dates through October 2001 and expire at
various dates through October 2008.
The Company accounted for the option grants under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and accordingly, no compensation
cost has been recognized in the accompanying financial statements as the option
exercise price approximated the estimated fair market value of the stock on the
date of grant.
Had compensation cost for the options been determined in accordance with
SFAS No. 123, "Accounting for Stock Based Compensation," the Company's pro
forma net loss would have increased $3,000 to $670,000 for the year ended
December 31, 1998. No options were exercisable at December 31, 1998. The
weighted average fair value of options granted during 1998 was $0.09 and the
weighted average contractual life remaining at December 31, 1998 was 9.8 years.
F-17
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
F-18
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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
F-19
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
certain period after the Rights Offering closes, the Company's stockholders may
request that the Company register all or any portion of the stockholders'
common stock in the Company with the Securities and Exchange Commission (SEC),
when the offering value of the Company's securities in an initial public
offering is at least $25,000,000.
Convertible Redeemable Preferred Stock
On September 16, 1998, the Company, as discussed in Note 1, amended and
restated its articles of incorporation to allow for the issuance of the
1,750,000 shares of nonvoting $0.001 par value Preferred Stock. The Preferred
Stock has preference over common stock in liquidation equal to the liquidation
value of $36 per share, plus accrued dividends computed at a 10 percent rate,
compounded quarterly (the Preference Amount). After payment of the Preference
Amount, the Preferred Stock and the common stock share ratably in any
distribution by the Company. At December 31, 1998, $1,324,000 (or $1.059 per
outstanding share of Preferred Stock) is accrued for cumulative preferred
dividends.
The holders of a majority of the outstanding Preferred Stock have the right
to convert all of the outstanding Preferred Stock into shares of common stock
in connection with the consummation of a public 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-20
<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 Period Commencement
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-21
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
repayment terms. Interest expense related to these loans was $4,000 and $7,000,
for the period from commencement (October 1, 1996) to December 31, 1996, and
for the year ended December 31, 1997, respectively. Interest expense related to
these loans was $14,000 for the Predecessor's nine-month period ended September
30, 1996. The principal and related accrued interest were paid in full for all
such loans during 1997.
Bay Alarm Company (Bay Alarm)
Bay Alarm (a major stockholder of the Company) and its subsidiary, InReach
Internet, LLC, are collectively one of the Company's largest customers of
telephone network services, comprising approximately $396,000, $2,109,000, and
$2,680,000, or 9.4 percent, 7.1 percent and 6.4 percent of the Company's
revenues for the three-month period from commencement (October 1, 1996) to
December 31, 1996, and for the years ended December 31, 1997 and 1998,
respectively. Revenues from Bay Alarm and InReach Internet LLC comprised
approximately $891,000, or 10.2 percent of the Predecessor's revenues for the
nine-month period ended September 30, 1996.
The Company also had amounts due from Bay Alarm as of December 31, 1997 and
1998. These amounts are included in accounts receivable from related parties in
the accompanying balance sheets. The Company owed Bay Alarm $850,000 at the
date of commencement (October 1, 1996) related to debt assumed from the Initial
Transfer. This amount was repaid in full by December 31, 1996.
Bay Alarm provides the Company with security monitoring services at its
normal commercial rates. The Company has recorded $10,000, $48,000 and $58,000
as selling, general and administrative expense for these services for the
three-month period from commencement (October 1, 1996) to December 31, 1996,
and for the years ended December 31, 1997 and 1998, respectively. The
Predecessor recorded approximately $11,000 as selling, general and
administrative expense for services received from Bay Alarm for the nine-month
period ended September 30, 1996.
As outlined in Note 5, Leases, the company began leasing its facility in
Oakland from Bay Alarm during 1998. In addition to rent paid under this lease,
the company recorded selling, general and administrative expense of $59,000 for
the year ended 1998 for related utility charges.
Notes Receivable from Stockholders
In 1998, in connection with the Transaction, a stockholder of the Company,
who is also an officer, purchased 375,000 shares of common stock from the
Company for $250,000. The Company received $50,000 in cash from the stockholder
and entered into a note receivable for the remaining balance of $200,000.
Subsequent to the Transaction, another officer of the Company acquired 62,470
shares of common stock for $42,000. The Company received $9,000 in cash and
entered into a note receivable for the remaining $33,000 due from the officer.
The notes accrue interest at 5.54 percent and 5.12 percent, respectively,
compounded annually, with any unpaid accrued interest and principal due at the
earlier of (1) the sale of the above stock with proceeds received first applied
to unpaid interest, then to principal; (2) sale of the Company; (3) 60 days
from the date the stockholder is no longer an employee of the Company or a
subsidiary; or (4) September 16, 2003 and October 16, 2003, respectively.
9. Retirement Plan:
In October 1996, the Company adopted a 401(k) retirement plan (the Plan) for
all full-time employees who have completed six months of service. The plan year
is from January 1 to December 31, and the Company will contribute $0.50 for
every $1.00 contributed by the employee, subject to the Company's contribution
not exceeding 3 percent of the employee's salary. Participants become fully
vested after six years of service,
F-22
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
although they vest incrementally on an annual basis after two years of service
and until the six-year period is completed. The Company recorded selling,
general and administrative expense of $63,000 and $58,000 for the years ended
December 31, 1997 and 1998, respectively, for the Company's matching
contributions.
Employees of the Company previously contributing to the CalPage 401(k)
retirement plan (with identical provisions to the Plan) were able to roll their
accumulated benefits into the Plan at date of commencement (October 1, 1996),
with all prior employer contributions becoming fully vested on the date of
rollover.
10. Sale of Answering Service Division:
In March 1997, the Company sold the customer base and other assets of its
answering service division for $420,000, payable $200,000 in cash and a
promissory note of $220,000. The promissory note was paid in October 1997 at a
discount of $18,000. The Company recognized a net gain of $385,000 on the sale
in the year ended December 31, 1997.
11. Subsequent Events:
On January 29, 1999, the Company issued $150,000,000 of senior unsecured
ten-year notes (the Senior Notes) at par. The Senior Notes bear interest at
13.5 percent payable in semiannual installments, with principal due on February
1, 2009.
Proceeds of the Senior Notes were used to repay the senior secured
borrowings (see Note 3) and to establish an interest reserve account to cover
certain initial interest payments due under the Senior Notes.
The Senior Notes carry provisions that allow the Company, at its option, to
(i) redeem up to 35 percent of the notes with proceeds of certain public
offerings of equity prior to February 1, 2002, (ii) redeem all or part of the
notes at specified prices on or after February 1, 2004, or (iii) offer to
exchange the notes within 180 days from the issue date for a new issue of
identical debt securities registered under the Securities Act of 1933, as
amended (the Securities Act). The Company intends to register these notes under
the Securities Act during the first six months of 1999.
Basic covenants of these notes restrict the Company's future ability to pay
dividends, repurchase stock, pledge or sell assets as security for other
transactions, or engage in mergers and business combinations. The covenants
allow the Company to incur additional debt subject to various limitations.
In January 1999, the Company's Board of Directors approved the terms of the
1999 Employee Stock Option Plan (the 1999 Stock Plan) pursuant to which
qualified employees and members of the Board of Directors can be issued options
to purchase the Company's common stock at the fair market value at the date of
grant. An aggregate of 2,250,000 shares of common stock have been reserved for
option grants under the 1999 Stock Plan.
12. Ten-for-One Stock Split:
On March 19, 1999, the board of directors authorized a ten-for-one split of
the Company's authorized and outstanding common stock and Preferred Stock. All
share and per share data have been restated to reflect the ten-for-one split.
F-23
<PAGE>
PAC-WEST TELECOMM, INC.
INTERIM CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31,
ASSETS 1999
------ ------------
<S> <C>
Current Assets:
Cash and cash equivalents...................................... $ 41,372,000
Restricted cash................................................ 19,844,000
Trade accounts receivable, net of allowance for doubtful
accounts of $450,000.......................................... 4,597,000
Accounts receivable from related parties....................... 100,000
Income taxes receivable........................................ 544,000
Inventories.................................................... 450,000
Prepaid expenses and other current assets...................... 989,000
Deferred financing costs, net.................................. 600,000
Deferred tax assets............................................ 556,000
------------
Total current assets......................................... 69,052,000
Equipment, Vehicles and Leasehold Improvements, net.............. 59,528,000
Deferred Financing Costs, net.................................... 5,467,000
Other Assets..................................................... 264,000
------------
Total assets................................................. $134,311,000
============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C>
Current Liabilities:
Current portion of notes payable............................... $ 121,000
Accounts payable............................................... 2,492,000
Accrued payroll and related expenses........................... 694,000
Accrued interest on Senior Notes............................... 3,485,000
Other accrued liabilities...................................... 2,207,000
------------
Total current liabilities.................................... 8,999,000
Senior Notes and Other Long-Term Obligations..................... 150,088,000
Deferred Income Taxes............................................ 2,366,000
------------
Total liabilities............................................ 161,453,000
------------
Convertible Redeemable Preferred Stock, $0.001 par value;
1,750,000 shares authorized; 1,250,000 issued and outstanding
(preference in liquidation of $45,000,000, plus accrued
cumulative dividends of $2,466,000)............................. 47,466,000
Stockholders' Equity (Deficit):
Common stock, $0.001 par value, 15,000,000 shares authorized
and 12,562,470 shares issued and outstanding.................. 13,000
Additional paid-in capital..................................... 7,768,000
Notes receivable from stockholders............................. (233,000)
Retained earnings (deficit).................................... (82,156,000)
------------
Total stockholders' equity (deficit)......................... (74,608,000)
------------
Total liabilities and stockholders' equity (deficit)......... $134,311,000
============
</TABLE>
See notes to the interim condensed financial statements.
F-24
<PAGE>
PAC-WEST TELECOMM, INC.
INTERIM CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three-Month Period Ended
-----------------------------
March 31, 1998 March 31, 1999
-------------- --------------
<S> <C> <C>
Revenues $10,252,000 $14,416,000
----------- -----------
Costs and Expenses:
Operating....................................... 3,731,000 4,062,000
Selling, general and administrative............. 2,002,000 4,303,000
Depreciation and amortization................... 845,000 1,449,000
----------- -----------
Total costs and expenses...................... 6,578,000 9,814,000
----------- -----------
Income from operations........................ 3,674,000 4,602,000
Other Expense (Income):
Interest expense................................ 377,000 4,050,000
Interest income................................. (48,000) (527,000)
Other expense................................... 23,000 --
----------- -----------
Total other expense, net...................... 352,000 3,523,000
----------- -----------
Income before provision for income taxes...... 3,322,000 1,079,000
Provision for Income Taxes........................ 1,329,000 432,000
----------- -----------
Net income.................................... $ 1,993,000 $ 647,000
=========== ===========
</TABLE>
See notes to the interim condensed financial statements.
F-25
<PAGE>
PAC-WEST TELECOMM, INC.
INTERIM CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended
-----------------------------
March 31, 1998 March 31, 1999
-------------- --------------
<S> <C> <C>
Operating Activities:
Net income..................................... $ 1,993,000 $ 647,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 845,000 1,449,000
Amortization of deferred financing costs..... -- 625,000
Interest earned on restricted cash........... -- (148,000)
Provision for doubtful accounts.............. 20,000 50,000
Deferred income taxes provision.............. 300,000 73,000
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts
receivable................................ 1,059,000 (60,000)
Decrease in income tax receivable.......... -- 1,427,000
Increase in inventories.................... (40,000) (3,000)
Increase in prepaid and other current
assets.................................... (416,000) (128,000)
Increase in other assets................... (17,000) (120,000)
Increase (decrease) in accounts payable and
accrued liabilities....................... 485,000 (2,885,000)
Increase in accrued interest on Senior
Notes..................................... -- 3,485,000
Increase in income taxes payable........... 1,329,000 132,000
----------- -------------
Net cash provided by operating
activities.............................. 5,558,000 4,544,000
----------- -------------
Investing Activities:
Purchase of equipment, vehicles and leasehold
improvements.................................. (1,275,000) (3,633,000)
Purchase of investments (classified as
restricted cash).............................. -- (19,696,000)
Proceeds from disposal of equipment............ 90,000 --
----------- -------------
Cash used in investing activities........ (1,185,000) (23,329,000)
----------- -------------
Financing Activities:
Proceeds from issuance of Senior Notes......... -- 150,000,000
Payments for financing costs................... -- (5,040,000)
Repayment of senior secured borrowings......... -- (100,000,000)
Borrowings under notes payable and capital
leases........................................ 847,000 --
Principal payments on notes payable and capital
leases........................................ (1,102,000) (39,000)
----------- -------------
Net cash provided by (used in) financing
activities.............................. (255,000) 44,921,000
----------- -------------
Net increase in cash and cash
equivalents............................. 4,118,000 26,136,000
Cash and Cash Equivalents:
Beginning of period............................ 3,603,000 15,236,000
----------- -------------
End of period.................................. $ 7,721,000 $ 41,372,000
=========== =============
</TABLE>
See notes to the interim condensed financial statements.
F-26
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
March 31, 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 three-month period ended March 31, 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 construction 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 $624,000 was recorded during the three-month periods ended March 31, 1998
and 1999, respectively. Repair and maintenance costs are expensed as incurred.
Equipment, vehicles and leasehold improvements at March 31, 1999 consist of
the following:
<TABLE>
<S> <C>
Network and other communication equipment.................... $34,289,000
Office furniture and equipment............................... 2,267,000
Vehicles..................................................... 865,000
Leasehold improvements....................................... 6,062,000
Construction-in-progress..................................... 23,827,000
-----------
67,310,000
Less: Accumulated depreciation and amortization.............. (7,782,000)
-----------
Equipment, vehicles and leasehold improvements, net.......... $59,528,000
===========
</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 expected 10-year term of the Notes beginning January 29,
1999. Amortization expense for the three-month period ended March 31, 1999 was
$100,000, which is included in interest expense in the accompanying condensed
statements of income.
F-27
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
5. Income Taxes:
The provision for income taxes for the three month periods ended March 31,
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 March 31, 1999 consist of
the following:
<TABLE>
<S> <C>
Senior Notes................................................ $150,000,000
Notes payable, less current portion......................... 88,000
------------
Total....................................................... $150,088,000
============
</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 new three-year senior credit facility that will permit
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 will
be secured by substantially all of the Company's assets. Borrowings under this
new senior credit facility will bear interest, at the Company's option, at (1)
the Base Rate (as defined) or (2) the Eurodollar Rate (as defined) plus between
2.25 and 3.5%. 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 will contain 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.
7. Purchase Commitments:
At March 31, 1999, the Company has approximately $53,000,000 of purchase
orders outstanding for network 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
6) and from internally generated cash flows.
F-28
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
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. 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 three-month periods ended March
31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Month Period Ended
-----------------------------
March 31, 1998 March 31, 1999
-------------- --------------
<S> <C> <C>
Total amount billed to specified ILECs..... $ 9,322,000 $ 19,465,000
Amount withheld by specified ILECs and not
recorded as revenue in the Company's
statements of operations.................. (5,032,000) (13,401,000)
----------- ------------
Net amount recorded as revenue from the
specified ILECs........................... $ 4,290,000 $ 6,064,000
=========== ============
</TABLE>
The cumulative amount of reciprocal compensation withheld by the specified
ILECs and not recorded as revenue by the Company through March 31, 1999 is
$49,785,000.
9. Stockholders' Equity:
Ten-for-One Stock Split
On March 19, 1999, the board of directors authorized a ten-for-one split of
the Company's authorized and outstanding common stock and Preferred Stock. All
share and per share data have been restated to reflect the ten-for-one split.
Convertible Redeemable Preferred Stock
The Preferred Stock has preference over common stock in liquidation equal to
the liquidation value of $36 per share, plus accrued dividends computed at a 10
percent rate, compounded quarterly (the Preference Amount). After payment of
the Preference Amount, the Preferred Stock and the common stock share ratably
in any distribution by the Company. At March 31, 1999, $2,466,000 (or $1.973
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 Employee Stock Option Plan (the 1999 Stock Plan) pursuant to which
qualified employees and members of the Board of Directors can be issued options
to purchase the Company's common stock at the fair market value at the date of
grant. An aggregate of 2,250,000 shares of common stock have been reserved for
option grants under the 1999 Stock Plan.
F-29
<PAGE>
PAC-WEST TELECOMM, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
10. 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 three month periods ended
March 31, 1998 and 1999; therefore comprehensive income is the same as net
income for both periods.
11. 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.
12. 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>
Three Month Period
Ended
-----------------------
March 31, March 31,
1998 1999
----------- -----------
<S> <C> <C>
Local services................................... $ 6,855,000 $10,662,000
Long distance services........................... 1,583,000 1,879,000
Dedicated transport services..................... 910,000 1,132,000
Product and services............................. 503,000 345,000
Other............................................ 401,000 398,000
----------- -----------
$10,252,000 $14,416,000
=========== ===========
</TABLE>
13. Subsequent Event:
On June 24, 1999, the California PUC adopted a decision in the arbitration
proceeding described in Note 11 between the Company 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. However, this decision is subject to possible
petition for rehearing or appeal by Pacific Bell and does not address
reciprocal compensation withheld under the prior agreement. Management does not
know at this time what action Pacific Bell will take with respect to this
decision.
F-30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$150,000,000
Pac-West Telecomm, Inc.
Exchange Offer for
13 1/2% Senior Notes due 2009
----------------
PROSPECTUS
----------------
July , 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. 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.
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;
II-1
<PAGE>
(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 21. 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>
*2.1 Agreement of Merger, dated September 16, 1998, between PWT
Acquisition Corp. and Pac-West Telecomm, Inc., as amended.
*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.
*3.1 Amended and Restated Articles of Incorporation of Pac-West
Telecomm, Inc.
*3.2 Amended and Restated By-Laws of Pac-West Telecomm, Inc.
*4.1 Purchase 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 the notes.
*4.2 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% senior notes due 2009 will
be issued.
*4.3 Form of Series B 13 1/2% senior notes due 2009 (included
in Exhibit 4.2).
*4.4 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 the notes.
5.1 Opinion of Kirkland & Ellis 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.
*10.2 A/B Exchange 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.
*10.4 Stock Purchase Agreement, dated September 16, 1998,
between Pac-West and certain named investors.
*10.5 Pledge and Security Agreement, dated January 29, 1999,
between Pac-West and Norwest Bank Minnesota, N.A.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S> <C>
*10.6(a) Pac-West Telecomm, Inc. 1999 Stock Incentive Plan.
*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.
*10.7 Employment Agreement, dated June 30, 1998, between Pac-
West and John K. La Rue.
*10.8 Executive Agreement, dated September 16, 1998, between
Pac-West and Wallace W. Griffin.
*10.9 Executive Agreement, dated October 30, 1998, between Pac-
West and Richard E. Bryson.
*10.10 Employment Agreement, dated October 21, 1998, between Pac-
West and Dennis V. Meyer.
*10.11 Employment Agreement, dated September 14, 1998, between
Pac-West and Jason R. Mills.
*10.12 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and John K. La Rue.
*10.13 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and Wallace W. Griffin.
*10.14 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and Richard E. Bryson.
*10.15 Confidentiality Agreement, dated October 22, 1998, between
Pac-West and Dennis V. Meyer.
*10.16 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and Jason R. Mills.
*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.
*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.
*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.
*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.
*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.
*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.
**10.23 Loan and Security Agreement, dated June 15, 1999, between
Pac-West, Union Bank of California, N.A., and other
lenders as designated.
12.1 Statement regarding computation of ratio.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
*24.1 Powers of Attorney (included on the signature page to the
original filing).
*25.1 Statement of Eligibility of Trustee.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
II-3
<PAGE>
(b) Financial Statement Schedules.
The following financial statement schedules are included in this
registration statement:
Schedule II--Valuation and Qualifying Accounts
All other schedules for which the provision is made in the applicable
accounting regulations of the SEC are not required under the related
instructions, are inapplicable or not material, or the information called for
thereby is otherwise included in the financial statements and therefore has
been omitted.
Item 22. Undertakings.
(a) We will undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(A) To include any prospectus required by Section10(a)(3) of the
Securities Act of 1933;
(B) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(C) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (1)(A) and (1)(B) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
SEC by us pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment will be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time will be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) For purposes of determining any liability under the Securities Act of
1933, each filing of our annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement will be deemed to be the initial bona fide offering
thereof.
(c) 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.
(d) We will respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information
II-4
<PAGE>
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(e) We will supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it
became effective.
II-5
<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 its 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 July 8, 1999.
PAC-WEST TELECOMM, INC.
/s/ Wallace W. Griffin
By: _________________________________
Wallace W. Griffin
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment no. 1 to its registration statement has been signed by the following
persons in the capacities indicated as of July 8, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Wallace W. Griffin President, Chief Executive Officer and
___________________________________________ Director
Wallace W. Griffin (Principal Executive Officer)
/s/ Richard E. Bryson Chief Financial Officer (Principal
___________________________________________ Financial Officer)
Richard E. Bryson
/s/ Dennis V. Meyer Vice President--Finance and Treasurer
___________________________________________ (Principal Accounting Officer)
Dennis V. Meyer
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
Samuel A. Plum* Director
___________________________________________
Samuel A. Plum
Bruce A. Westphal* Director
___________________________________________
Bruce A. Westphal
</TABLE>
/s/ Richard E. Bryson
*By ____________________________
Richard E. Bryson
Attorney-in-fact
II-6
<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>
*2.1 Agreement of Merger, dated September 16, 1998, between PWT
Acquisition Corp. and Pac-West Telecomm, Inc., as amended.
*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.
*3.1 Amended and Restated Articles of Incorporation of Pac-West
Telecomm, Inc.
*3.2 Amended and Restated By-Laws of Pac-West Telecomm, Inc.
*4.1 Purchase 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 the notes.
*4.2 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% senior notes due 2009 will
be issued.
*4.3 Form of Series B 13 1/2% senior notes due 2009 (included
in Exhibit 4.2).
*4.4 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 the notes.
5.1 Opinion of Kirkland & Ellis 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.
*10.2 A/B Exchange 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.
*10.4 Stock Purchase Agreement, dated September 16, 1998,
between Pac-West and certain named investors.
*10.5 Pledge and Security Agreement, dated January 29, 1999,
between Pac-West and Norwest Bank Minnesota, N.A.
*10.6(a) Pac-West Telecomm, Inc. 1999 Stock Incentive Plan.
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.
*10.7 Employment Agreement, dated June 30, 1998, between Pac-
West and John K. La Rue.
*10.8 Executive Agreement, dated September 16, 1998, between
Pac-West and Wallace W. Griffin.
*10.9 Executive Agreement, dated October 30, 1998, between Pac-
West and Richard E. Bryson.
*10.10 Employment Agreement, dated October 21, 1998, between Pac-
West and Dennis V. Meyer.
*10.11 Employment Agreement, dated September 14, 1998, between
Pac-West and Jason R. Mills.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
*10.12 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and John K. La Rue.
*10.13 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and Wallace W. Griffin.
*10.14 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and Richard E. Bryson.
*10.15 Confidentiality Agreement, dated October 22, 1998, between
Pac-West and Dennis V. Meyer.
*10.16 Confidentiality Agreement, dated September 16, 1998,
between Pac-West and Jason R. Mills.
*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.
*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.
*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.
*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.
*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.
*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.
**10.23 Loan and Security Agreement, dated June 15, 1999, between
Pac-West, Union Bank of California, N.A., and other
lenders as designated.
12.1 Statement regarding computation of ratio.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
*24.1 Powers of Attorney (included on the signature page to the
original filing).
*25.1 Statement of Eligibility of Trustee.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
<PAGE>
Exhibit 5.1
[Kirkland & Ellis Letterhead]
July 8, 1999
Pac-West Telecomm, Inc.
4210 Coronado Avenue
Stockton, California 95204
Re: Series B 13 1/2% Senior Notes due 2009
---------------------------------------
Ladies and Gentlemen:
We are acting as special counsel to Pac-West Telecomm, Inc., a California
corporation (the "Company"), in connection with the proposed registration by the
Company of up to $150,000,000 in aggregate principal amount of the Company's
Series B 13 1/2% Senior Notes due 2009 (the "New Notes"), pursuant to a
Registration Statement on Form S-4, filed with the Securities and Exchange
Commission (the "Commission") on April 21, 1999 under the Securities Act of
1933, as amended (the "Securities Act") (such Registration Statement, as amended
or supplemented, is hereinafter referred to as the "Registration Statement"),
for the purpose of effecting an exchange offer (the "Exchange Offer") for the
Company's 13 1/2% Senior Notes due 2009 (the "Old Notes"). The New Notes are to
be issued pursuant to an Indenture (the "Indenture"), dated as of January 29,
1999, between the Company and Norwest Bank Minnesota, as Trustee.
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
opinion, including (1) the corporate and organizational documents of the
Company, (2) minutes and records of the corporate proceedings of the Company
with respect to the issuance of the New Notes, and (3) the Registration
Statement and exhibits thereto.
For purposes of this opinion, 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
opinion is rendered, the authority of such persons signing on behalf of the
parties thereto other than the Company and the due authorization, execution and
delivery of all documents by the parties thereto other than the Company. As to
any facts material to the opinions expressed herein which we have not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Company and others.
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we are of the opinion
that:
<PAGE>
(1) The Company is a corporation existing and in good standing under the
General Corporation Law of the State of California.
(2) The sale and issuance of the New Notes has been validly authorized by
the Company.
(3) When, as and if (a) the Registration Statement shall have become
effective pursuant to the provisions of the Securities Act, (b) the
Indentures shall have been qualified pursuant to the provisions of the
Trust Indenture Act of 1939, as amended, (c) the Old Notes shall
have been validly tendered to the Company, (d) the New Notes shall
have been issued in the form and containing the terms described in the
Registration Statement, the Indentures, the resolutions of the
Company's Board of Directors (or authorized committee thereof)
authorizing the foregoing and any legally required consents,
approvals, authorizations and other order of the Commission and any
other regulatory authorities to be obtained, and (e) the New Notes
have been authenticated by the Trustee, the New Notes when issued
pursuant to the Exchange Offer will be legally issued, fully paid and
nonassessable and will constitute valid and binding obligations of the
Company.
Our opinions expressed above are subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (1)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (2) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (3)
public policy considerations which may limit the rights of parties to obtain
certain remedies and (4) any laws except the laws of the State of New York and
on our review of the applicable provisions of the California Business
Corporation Act as such statute relates to the Company set forth therein. We
advise you that issues addressed by this letter may be governed in whole or in
part by other laws, but we express no opinion as to whether any relevant
difference exists between the laws upon which our opinions are based and any
other laws which may actually govern. For purposes of the opinion in paragraph
1, we have relied exclusively upon certificates issued by the California
Secretary of State and such opinions are not intended to provide any conclusion
or assurance beyond that conveyed by such certificates. We have assumed without
investigation that there has been no relevant change or development between the
respective dates of such certificates and the date of this letter.
We hereby consent to the filing of this opinion 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 Securities Act of the rules and regulations of
the Commission.
We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance of the New Notes.
2
<PAGE>
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the State of New York or the California Business Corporation Act be
changed by legislative action, judicial decision or otherwise.
This opinion 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 purposes.
Yours very truly,
/s/ Kirkland & Ellis
KIRKLAND & ELLIS
3
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(unaudited)
<TABLE>
<CAPTION>
Three Month Pro Forma
Period from Date of Pro Forma Period Ended Three Month
Commencement Year Ended Year Ended Year Ended ---------------------- Period
(October 1, 1996) to December 31, December 31, December 31, March 31, March 31, Ended March
December 31, 1996 1997 1998 1998 1998 1999 31, 1999
-------------------- ------------ ------------ ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Computation of Earnings:
Income (loss) before
provision for income
taxes and
extraordinary item.... $234,000 $7,492,000 $1,311,000 $ (91,000) $3,322,000 $1,079,000 $1,166,000
Net fixed charges
excluding capitalized
interest.............. 213,000 1,575,000 5,258,000 6,660,000 597,000 4,384,000 4,297,000
-------- ---------- ---------- ---------- ---------- ---------- ----------
Total earnings....... $447,000 $9,067,000 $6,569,000 $6,569,000 $3,919,000 $5,463,000 $5,463,000
======== ========== ========== ========== ========== ========== ==========
Computation of Fixed
Charges:
Interest expense....... $105,000 $ 932,000 $4,199,000 $5,601,000 $ 377,000 $4,050,000 $3,963,000
Capitalized interest... 0 0 303,000 303,000 0 624,000 624,000
Estimated interest
component of rental
expenses.............. 108,000 643,000 1,059,000 1,059,000 220,000 334,000 334,000
-------- ---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges.. $213,000 $1,575,000 $5,561,000 $6,963,000 $ 597,000 $5,008,000 $4,921,000
======== ========== ========== ========== ========== ========== ==========
Ratio of earnings to
fixed charges.......... 2.1x 5.8x 1.2x -- (a) 6.6x 1.1x 1.1x
</TABLE>
- --------
(a) On a pro forma basis earnings were insufficient to cover fixed charges by
$394,000 for the year ended December 31, 1998.
<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
July 7, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 41,372,000
<SECURITIES> 19,844,000
<RECEIVABLES> 5,147,000
<ALLOWANCES> (450,000)
<INVENTORY> 450,000
<CURRENT-ASSETS> 69,052,000
<PP&E> 67,310,000
<DEPRECIATION> (7,782,000)
<TOTAL-ASSETS> 134,311,000
<CURRENT-LIABILITIES> 8,999,000
<BONDS> 150,088,000
47,466,000
0
<COMMON> 13,000
<OTHER-SE> (74,621,000)
<TOTAL-LIABILITY-AND-EQUITY> 134,311,000
<SALES> 0
<TOTAL-REVENUES> 14,416,000
<CGS> 0
<TOTAL-COSTS> 9,764,000
<OTHER-EXPENSES> (527,000)
<LOSS-PROVISION> 50,000
<INTEREST-EXPENSE> 4,050,000
<INCOME-PRETAX> 1,079,000
<INCOME-TAX> 432,000
<INCOME-CONTINUING> 647,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 647,000
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99.1
LETTER OF TRANSMITTAL
to tender for exchange
13 1/2% Senior Notes due 2009
of
PAC-WEST TELECOMM, INC.
Pursuant to the prospectus, dated , 1999
This exchange offer and withdrawal rights will expire at 5:00 p.m., New York
City time, on , 1999 unless extended.
Please read the attached instructions carefully.
If you desire to accept the exchange offer, this letter of transmittal should
be completed, signed,
and submitted to the exchange agent:
By registered or By hand/overnight Facsimile transmission
certified mail: delivery: number:
(for Eligible
Institutions only)
Confirm receipt of
facsimile by telephone:
Delivery of this letter of transmittal to an address, or transmission via
facsimile to a number, other than as set forth above will not constitute a
valid delivery.
For any questions regarding this letter of transmittal or for any
additional information, you may contact the exchange agent.
The undersigned hereby acknowledges receipt of the prospectus, dated
, 1999, as it may be supplemented and amended from time to time,
of Pac-West Telecomm, Inc., a California corporation, and this letter of
transmittal, that together constitute Pac-West's offer to exchange $1,000
principal amount of its Series B 13 1/2% Senior Notes due 2009, which will
have been registered under the Securities Act of 1933, for each $1,000
principal amount of its outstanding 13 1/2% Senior Notes due 2009. Capitalized
terms used but not defined herein have the meanings ascribed to them in the
prospectus.
The undersigned hereby tenders the 13 1/2% Senior Notes due 2009 described
in Box 1 below pursuant to the terms and conditions described in the
prospectus and this letter of transmittal. The undersigned is the registered
owner of all the tendered notes and the undersigned represents that it has
received from each beneficial owner of the tendered notes a duly completed and
executed form of "Instruction to Registered Holder and/or Book-Entry Transfer
Facility Participant from Beneficial Owner" accompanying this letter of
transmittal, instructing the undersigned to take the action described in this
letter of transmittal.
Subject to, and effective upon, the acceptance for exchange of the tendered
notes, the undersigned hereby exchanges, assigns and transfers to, or upon the
order of, Pac-West all right, title, and interest in, to and under the
tendered notes.
<PAGE>
Please issue the new notes exchanged for tendered notes in the name(s) of
the undersigned. Similarly, unless otherwise indicated under "Special Delivery
Instructions" below (see Box 3), please send or cause to be sent the
certificates for the new notes (and accompanying documents, as appropriate) to
the undersigned at the address shown below in Box 1.
The undersigned hereby irrevocably constitutes and appoints the exchange
agent as the true and lawful agent and attorney in fact of the undersigned
with respect to the tendered notes, with full power of substitution (such
power of attorney being deemed to be an irrevocable power coupled with an
interest), to:
(1) deliver the tendered notes to Pac-West or cause ownership of the
tendered notes to be transferred to, or upon the order of, Pac-West, on the
books of the registrar for the tendered notes and deliver all accompanying
evidences of transfer and authenticity to, or upon the order of, Pac-West
upon receipt by the exchange agent, as the undersigned's agent, of the new
notes to which the undersigned is entitled upon acceptance by Pac-West of
the tendered notes pursuant to the exchange offer, and
(2) receive all benefits and otherwise exercise all rights of beneficial
ownership of the tendered notes, all in accordance with the terms of the
exchange offer.
The undersigned understands that tenders of the notes to be exchanged
pursuant to the procedures described under the caption "The Exchange Offer" in
the prospectus and in the instructions to this letter of transmittal will
constitute a binding agreement between the undersigned and Pac-West upon the
terms and subject to the conditions of the exchange offer, subject only to
withdrawal of such tenders on the terms set forth in the prospectus under the
caption "The Exchange Offer--Withdrawal of Tenders." All authority herein
conferred or agreed to be conferred shall survive the death or incapacity of
the undersigned and any beneficial owner(s), and every obligation of the
undersigned or any beneficial owner(s) hereunder shall be binding upon the
heirs, representatives, successors, and assigns of the undersigned and such
beneficial owner(s).
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, assign, and transfer the
tendered notes and that Pac-West will acquire good and unencumbered title to
the tendered notes, free and clear of all liens, restrictions, charges,
encumbrances, and adverse claims when the tendered notes are acquired by Pac-
West as contemplated by this letter of transmittal. The undersigned and each
beneficial owner will, upon request, execute and deliver any additional
documents reasonably requested by Pac-West or the exchange agent as necessary
or desirable to complete and give effect to the transactions contemplated
hereby.
The undersigned hereby represents and warrants that the information set
forth in Box 2 is true and correct.
By accepting the exchange offer, the undersigned hereby represents and
warrants that:
(1) the new notes to be acquired by the undersigned and any beneficial
owner(s) in connection with the exchange offer are being acquired by the
undersigned and any beneficial owner(s) in the ordinary course of business
of the undersigned and any beneficial owner(s),
(2) the undersigned and each beneficial owner are not participating, do
not intend to participate, and have no arrangement or understanding with
any person to participate, in the distribution of the new notes,
(3) except as otherwise disclosed in writing herewith, neither the
undersigned nor any beneficial owner is an "affiliate," as defined in Rule
405 under the Securities Act of 1933, of Pac-West, and
(4) the undersigned and each beneficial owner acknowledge and agree that
any person participating in the exchange offer with the intention or for
the purpose of distributing the new notes must comply with the registration
and prospectus delivery requirements of the Securities Act of 1933, in
connection with a secondary resale of the new notes acquired by such person
and cannot rely on the position of the staff of the Securities and Exchange
Commission set forth in the no-action letters that are discussed in the
section of the prospectus entitled "The Exchange Offer."
2
<PAGE>
In addition, if the undersigned or any beneficial owner of the tendered
notes is a broker-dealer, by accepting the exchange offer, the undersigned
hereby:
(1) represents and warrants that the broker-dealer acquired the old
notes for its own account as a result of market-making activities or other
trading activities and has not entered into any arrangement or
understanding with Pac-West or any "affiliate" of Pac-West (within the
meaning of Rule 405 under the Securities Act of 1933) to distribute the new
notes to be received in the exchange offer, and
(2) acknowledges that, by receiving new notes for its own account in
exchange for the tendered notes, where the tendered notes were acquired as
a result of market-making activities or other trading activities, the
broker-dealer will deliver a prospectus meeting the requirements of the
Securities Act of 1933 in connection with any resale of such new notes.
Holders of notes that are tendering by book-entry transfer to the exchange
agent's account at DTC can execute the tender through the DTC Automated Tender
Offer Program, for which the transaction will be eligible. DTC participants
that are accepting the exchange offer must transmit their acceptance to DTC,
which will verify the acceptance and execute a book-entry delivery to the
exchange agent's DTC account. DTC will then send an agent's message to the
exchange agent for its acceptance. DTC participants may also accept the
exchange offer prior to the expiration date of the exchange offer by submitting
a notice of guaranteed delivery or agent's message relating thereto as
described herein under Instruction 2, "Guaranteed Delivery Procedures."
[_]Check here if tendered notes are being delivered herewith.
[_]Check here if tendered notes are being delivered pursuant to a notice of
guaranteed delivery previously delivered to the exchange agent and complete
"Use of Guaranteed Delivery" below (Box 4).
[_]Check here if tendered notes are being delivered by book-entry transfer made
to the account maintained by the exchange agent with the book-entry transfer
facility and complete "Use of Book-Entry Transfer" below (Box 5).
3
<PAGE>
Please Read this Entire Letter of Transmittal
Carefully Before Completing the Boxes
Box 1
Description of Notes Tendered
(Attach additional signed pages, if necessary)
- --------------------------------------------------------------------------------
Name(s) and Address(es) of Certificate Aggregate Aggregate
Registered Note Holder(s), Number(s) of Principal Principal
exactly as Name(s) Appear(s) on the Tendered Amount Amount
Note Certificate(s) (Please fill Notes* Represented Tendered**
in, if blank) by
Certificate(s)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total
- --------------------------------------------------------------------------------
* Need not be completed by persons tendering by book-entry transfer.
** The minimum permitted tender is $1,000 in principal amount of the
tendered notes. All other tenders must be in integral multiples of $1,000
of principal amount. Unless otherwise indicated in this column, the
principal amount of all note certificates identified in this Box 1 or
delivered to the exchange agent herewith shall be deemed tendered. See
Instruction 4.
Box 2
Beneficial Owner(s)
- --------------------------------------------------------------------------------
State of Principal Residence of Each Principal Amount of Tendered Notes Held
Beneficial Owner of Tendered Notes for Account of Beneficial Owner
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4
<PAGE>
Box 3
Special Delivery Instructions
(See Instructions 5, 6 and 7)
To be completed only if new notes exchanged for the old notes and/or
untendered notes are to be sent to someone other than the undersigned, or to
the undersigned at an address other than that shown above.
Mail new note(s) and any untendered notes to:
Name(s):
-----------------------------------------------------------------------------
(please print)
Address:
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
(include Zip Code)
Tax Identification or
Social Security No.:
Box 4
Use of Guaranteed Delivery
(See Instruction 2)
To be completed only if the old notes are being tendered by means of a
notice of guaranteed delivery.
Name(s) of Registered Holder(s): ____________________________________________
Window Ticket No. (if any): _________________________________________________
Date of Execution of Notice of Guaranteed Delivery: _________________________
Name of Institution that Guaranteed Delivery: _______________________________
If Delivered by Book-Entry Transfer:
Account Number with DTC: __________________________________________________
Transaction Code Number: __________________________________________________
5
<PAGE>
Box 5
Use of Book-Entry Transfer
(See Instruction 1)
To be completed only if delivery of tendered notes is to be made by book-
entry transfer.
Name of Tendering Institution: ______________________________________________
Account Number: _____________________________________________________________
Transaction Code Number: ____________________________________________________
Box 6
Tendering Holder Signature
(See Instructions 1 and 5)
In Addition, Complete Substitute Form W-9
- -------------------------------------------------------------------------------
X____________________________________ Signature Guarantee
(If required by Instruction 5)
X____________________________________
(Signature of Registered Holder(s) Authorized Signature
or Authorized Signatory)
X____________________________________
Note: The above lines must be signed Name: _______________________________
by the registered holder(s) of the (please print)
old notes as their name(s) appear(s)
on the old notes or by person(s)
authorized to become registered
holder(s) (evidence of such
authorization must be transmitted
with this letter of transmittal). If
signature is by a trustee, executor,
administrator, guardian, attorney-
in-fact, officer, or other person
acting in a fiduciary or
representative capacity, such person
must set forth his or her full title
below. See Instruction 5.
Title: ______________________________
Name of Firm: _______________________
(Must be Medallion Signature
Guarantor as defined in Instruction
5)
Address: ____________________________
-------------------------------
-------------------------------
(Zip Code)
Name(s): ____________________________ Area Code and Telephone Number:
-------------------------------------
Capacity: ___________________________
Dated: ______________________________
Street Address: _____________________
--------------------------
(Zip Code)
Area Code and Telephone Number:
-------------------------------------
Tax Identification or Social
Security Number:
-------------------------------------
6
<PAGE>
Box 7
Broker-Dealer Status
- -------------------------------------------------------------------------------
Check this box if the beneficial owner of the old notes is a broker-
dealer and the broker-dealer acquired the old notes for its own account
as a result of market-making activities or other trading activities. If
this box is checked, regardless of whether you are tendering by book-
entry transfer through the DTC Automated Tender Offer Program, an
executed copy of this letter of transmittal must be received within
thirty days after the expiration date of the exchange offer by Pac-West
Telecomm, Inc., attention [ ], facsimile
[ ].
[_]
Payors' Name: [exchange agent]
- -------------------------------------------------------------------------------
Name (if joint names, list first and circle the name of
the person or entity whose number you enter in Part 1
below. See instructions if your name has changed.)
------------------------------------------------------------
Address
------------------------------------------------------------
City, State and ZIP Code
------------------------------------------------------------
List account number(s) here (optional)
------------------------------------------------------------
Substitute
Part 1--Please provide your taxpayer Social
Form W-9 identification number ("TIN") in the box Security
at right and certify by signing and Number
dating below.
Department of the Treasury or TIN
Internal Revenue Service
------------------------------------------------------------
Part 2--Check the box if you are NOT subject to backup
withholding under the provisions of section 3406(a)(1)(C)
of the Internal Revenue Code because (1) you have not
been notified that you are subject to backup withholding
as a result of failure to report all interest or
dividends or (2) the Internal Revenue Service has
notified you that you are no longer subject to backup
withholding. [_]
------------------------------------------------------------
CERTIFICATION--UNDER THE PENALTIES OF Part 3--
PERJURY, I CERTIFY THAT THE INFORMATION Awaiting
PROVIDED ON THIS FORM IS TRUE, CORRECT AND TIN [_]
COMPLETE.
Signature _______________________ Date ______
Note: Failure to complete and return this form may result in backup
withholding of 31% of any payments made to you pursuant to the exchange
offer. Please review the enclosed guidelines for certification of
taxpayer identification number on substitute Form W-9 for additional
details.
7
<PAGE>
PAC-WEST TELECOMM, INC.
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. Delivery of This Letter of Transmittal and the Old Notes. This letter of
transmittal is to be completed by registered holders of the old notes if
certificates representing such old notes are to be forwarded herewith pursuant
to the procedures set forth in the prospectus under "The Exchange Offer--
Procedures for Tendering," unless delivery of such certificates is to be made
by book-entry transfer to the exchange agent's account maintained by DTC
through its Automated Tender Offer Program. For a holder to properly tender
the old notes pursuant to the exchange offer, a properly completed and duly
executed copy of this letter of transmittal, including substitute Form W-9,
and any other documents required by this letter of transmittal must be
received by the exchange agent at its address set forth in this letter of
transmittal, and either:
(a) certificates for tendered notes must be received by the exchange
agent at its address set forth herein, or
(b) such tendered notes must be transferred pursuant to the procedures
for book-entry transfer described in the prospectus under the caption "The
Exchange Offer--Procedures for Tendering" (and a confirmation of such
transfer received by the exchange agent),
in each case prior to 5:00 p.m., New York City time, on the expiration date of
the exchange offer.
The method of delivery of certificates for tendered notes, this letter of
transmittal and all other required documents to the exchange agent is at the
election and risk of the tendering holder and the delivery will be deemed made
only when actually received by the exchange agent. If delivery is by mail,
registered mail with return receipt requested, properly insured, is
recommended. Instead of delivery by mail, it is recommended that the holder
use an overnight or hand delivery service. In all cases, sufficient time
should be allowed to assure timely delivery. No letter of transmittal or
tendered notes should be sent to Pac-West. Neither Pac-West nor the exchange
agent is under any obligation to notify any tendering holder of Pac-West's
acceptance of tendered notes prior to the closing of the exchange offer.
2. Guaranteed Delivery Procedures. If a registered holder desires to tender
the old notes pursuant to the exchange offer and
(a) certificates representing the tendered notes are not immediately
available,
(b) time will not permit such holder's letter of transmittal,
certificates representing the tendered notes and all other required
documents to reach the exchange agent on or prior to the expiration date of
the exchange offer, or
(c) the procedures for book-entry transfer cannot be completed on or
prior to the expiration date of the exchange offer,
the holder may nevertheless tender such notes with the effect that the tender
will be deemed to have been received on or prior to the expiration date of the
exchange offer if the procedures set forth below and in the Statement under
"The Exchange Offer--Guaranteed Delivery Procedures" (including the completion
of Box 4 above) are followed.
Pursuant to such procedures,
(a) the tender must be made by or through an Eligible Institution (as
defined below),
(b) a properly completed and duly executed notice of guaranteed
delivery, substantially in the form provided by Pac-West with this letter
of transmittal, or an agent's message with respect to a guaranteed delivery
that is accepted by Pac-West, must be received by the exchange agent on or
prior to the expiration date of the exchange offer, and
8
<PAGE>
(c) the certificates for the tendered notes, in proper form for transfer
(or a book-entry confirmation of the transfer of such tendered notes to the
exchange agent's account at DTC as described in the prospectus), together
with a letter of transmittal (or manually signed facsimile thereof)
properly completed and duly executed, with any required signature
guarantees and any other documents required by the letter of transmittal or
a properly transmitted agent's message, must be received by the exchange
agent within three New York Stock Exchange trading days after the date of
execution of the notice of guaranteed delivery.
Any holder who wishes to tender the old notes pursuant to the guaranteed
delivery procedures described above must ensure that the exchange agent
receives the notice of guaranteed delivery relating to such tendered notes
prior to 5:00 p.m., New York City time, on the expiration date of the exchange
offer. Failure to complete the guaranteed delivery procedures outlined above
will not, of itself, affect the validity or effect a revocation of any letter
of transmittal form properly completed and executed by an eligible holder who
attempted to use the guaranteed delivery process.
3. Beneficial Owner Instructions to Registered Holders. Only a holder in
whose name tendered notes are registered on the books of the registrar (or the
legal representative or attorney-in-fact of such registered holder) may
execute and deliver this letter of transmittal. Any beneficial owner of
tendered notes who is not the registered holder must arrange promptly with the
registered holder to execute and deliver this letter of transmittal on his or
her behalf through the execution and delivery to the registered holder of the
"Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner" form accompanying this letter of
transmittal.
4. Partial Tenders. Tenders of the old notes will be accepted only in
integral multiples of $1,000 in principal amount. If less than the entire
principal amount of the old notes held by the holder is tendered, the
tendering holder should fill in the principal amount tendered in the column
labeled "Aggregate Principal Amount Tendered" of the box entitled "Description
of the Old Notes Tendered" (see Box 1) above. The entire principal amount of
the old notes delivered to the exchange agent will be deemed to have been
tendered unless otherwise indicated. If the entire principal amount of all the
old notes held by the holder is not tendered, then the old notes for the
principal amount of the old notes not tendered and new notes issued in
exchange for any old notes tendered and accepted will be sent to the
registered holder at his or her registered address, unless a different address
is provided in the appropriate box on this letter of transmittal, as soon as
practicable following the expiration date of the exchange offer.
5. Signatures on the Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures. If this letter of transmittal is signed by the
registered holder(s) of the tendered notes, the signature must correspond with
the name(s) as written on the face of the tendered notes without alteration,
enlargement or any change whatsoever.
If any of the tendered notes are owned of record by two or more joint
owners, all such owners must sign this letter of transmittal. If any tendered
notes are held in different names, it will be necessary to complete, sign and
submit as many separate copies of the letter of transmittal as there are
different names in which tendered notes are held.
If this letter of transmittal is signed by the registered holder(s) of
tendered notes, and new notes issued in exchange therefor are to be issued
(and any untendered principal amount of old notes is to be reissued) in the
name of the registered holder(s), then such registered holder(s) need not and
should not endorse any tendered notes, nor provide a separate bond power. In
any other case, such registered holder(s) must either properly endorse the
tendered notes or transmit a properly completed separate bond power with this
letter of transmittal, with the signature(s) on the endorsement or bond power
guaranteed by a Medallion Signature Guarantor (as defined below).
If this letter of transmittal is signed by a person other than the
registered holder(s) of any tendered notes, such tendered notes must be
endorsed or accompanied by appropriate bond powers, in each case, signed as
the
9
<PAGE>
name(s) of the registered holder(s) appear(s) on the tendered notes, with the
signature(s) on the endorsement or bond power guaranteed by a Medallion
Signature Guarantor.
If this letter of transmittal or any tendered notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations, or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by
Pac-West, evidence satisfactory to Pac-West of their authority to so act must
be submitted with this letter of transmittal.
Signatures on this letter of transmittal must be guaranteed by a recognized
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program or the Stock Exchange Medallion
Program (each a "Medallion Signature Guarantor"), unless the tendered notes
are tendered:
(1) by a registered holder of tendered notes (or by a participant in DTC
whose name appears on a security position listing as the owner of such
tendered notes) who has not completed Box 3 ("Special Delivery
Instructions") on this letter of transmittal, or
(2) for the account of a member firm of a registered national securities
exchange, a member of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in
the United States (each of the foregoing being referred to as an "Eligible
Institution").
If the tendered notes are registered in the name of a person other than the
signor of the letter of transmittal or if the old notes not tendered are to be
returned to a person other than the registered holder, then the signature on
this letter of transmittal accompanying the tendered notes must be guaranteed
by a Medallion Signature Guarantor as described above. Beneficial owners whose
old notes are registered in the name of a broker, dealer, commercial bank,
trust company or other nominee must contact such broker, dealer, commercial
bank, trust company or other nominee if they desire to tender such old notes.
6. Special Delivery Instructions. Tendering holders should indicate in Box
3 the name and address to which the new notes and/or substitute the old notes
for principal amounts not tendered or not accepted for exchange are to be
sent, if different from the name and address of the person signing this letter
of transmittal. In the case of issuance in a different name, the taxpayer
identification or social security number of the person named must also be
indicated.
7. Transfer Taxes. Pac-West will pay all transfer taxes, if any, applicable
to the exchange of tendered notes pursuant to the exchange offer. If, however,
a transfer tax is imposed for any reason other than the transfer and exchange
of tendered notes pursuant to the exchange offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or on any other
person) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with this letter
of transmittal, the amount of such transfer taxes will be billed directly to
such tendering holder.
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the tendered notes listed in this letter
of transmittal.
8. Tax Identification Number. Federal income tax law requires that the
holder(s) of any tendered notes which are accepted for exchange must provide
the exchange agent (as payor) with its correct taxpayer identification number,
which, in the case of a holder who is an individual, is his or her social
security number. If the exchange agent is not provided with the correct
taxpayer identification number, the holder may be subject to backup
withholding and a $50 penalty imposed by the Internal Revenue Service. (If
withholding results in an over-payment of taxes, a refund may be obtained.)
Certain holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. See the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional instructions.
10
<PAGE>
To prevent backup withholding, each holder of tendered notes must provide
such holder's correct taxpayer identification number by completing the
Substitute Form W-9 set forth herein, certifying that the taxpayer
identification number provided is correct (or that such holder is awaiting a
taxpayer identification number), and that
(a) the holder has not been notified by the Internal Revenue Service
that such holder is subject to backup withholding as a result of failure to
report all interest or dividends or
(b) if previously so notified, the Internal Revenue Service has notified
the holder that such holder is no longer subject to backup withholding.
If the tendered notes are registered in more than one name or are not in the
name of the actual owner, consult the "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for information on
which taxpayer identification number to report.
Pac-West reserves the right to take whatever steps it determines are
necessary to comply with Pac-West's obligation regarding backup withholding.
9. Validity of Tenders. All questions as to the validity, form, eligibility
(including time of receipt), acceptance and withdrawal of tendered notes will
be determined by Pac-West, which determination will be final and binding. Pac-
West reserves the right to reject any and all old notes not validly tendered
or any old notes Pac-West's acceptance of which would, in the opinion of Pac-
West or its counsel, be unlawful. Pac-West also reserves the right to waive
any conditions of the exchange offer or defects or irregularities in tenders
of the old notes as to any ineligibility of any holder who seeks to tender the
old notes in the exchange offer. The interpretation of the terms and
conditions of the exchange offer (including this letter of transmittal and the
instructions hereto) by Pac-West shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of the
old notes must be cured within such time as Pac-West shall determine. Neither
Pac-West, the exchange agent nor any other person shall be under any duty to
give notification of defects or irregularities with respect to tenders of the
old notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of the old notes will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any old notes
received by the exchange agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
by the exchange agent to the tendering holders, unless otherwise provided in
this letter of transmittal, as soon as practicable following the expiration
date of the exchange offer.
10. Waiver of Conditions. Pac-West reserves the absolute right to amend,
waive or modify any of the conditions in the exchange offer in the case of any
tendered notes.
11. No Conditional Tender. No alternative, conditional, irregular, or
contingent tender of the old notes or transmittal of this letter of
transmittal will be accepted.
12. Mutilated, Lost, Stolen or Destroyed Old Notes. Any tendering holder
whose old notes have been mutilated, lost, stolen or destroyed should contact
the exchange agent at the address indicated herein for further instructions.
13. Requests for Assistance or Additional Copies. Questions and requests
for assistance and requests for additional copies of the prospectus or this
letter of transmittal may be directed to the exchange agent at the address
indicated in this letter of transmittal. Holders may also contact their
broker, dealer, commercial bank, trust company or other nominee for assistance
concerning the exchange offer.
14. Acceptance of Tendered Notes and Issuance of New Notes; Return of the
Old Notes. Subject to the terms and conditions of the exchange offer, Pac-West
will accept for exchange all validly tendered old notes as soon as practicable
after the expiration date of the exchange offer and will issue new notes as
soon as practicable thereafter. For purposes of the exchange offer, Pac-West
shall be deemed to have accepted tendered
11
<PAGE>
notes when, as and if Pac-West has given written or oral notice (immediately
followed in writing) thereof to the exchange agent. If any tendered notes are
not exchanged pursuant to the exchange offer for any reason, such unexchanged
old notes will be returned, without expense, to the undersigned at the address
shown in Box 1 or at a different address as may be indicated herein under
"Special Delivery Instructions" (Box 3).
15. Withdrawal. Tenders may be withdrawn only pursuant to the procedures
set forth in the prospectus under the caption "The Exchange Offer--Withdrawal
of Tenders."
12
<PAGE>
Exhibit 99.2
NOTICE OF GUARANTEED DELIVERY
in respect of
13 1/2% Senior Notes due 2009
of
PAC-WEST TELECOMM, INC.
Pursuant to the prospectus dated , 1999
The exchange agent for the exchange offer is:
By registered or certified mail:
By hand/overnight delivery:Facsimile transmission
number:
(for Eligible Institutions
only)
Confirm receipt of facsimile
by
telephone:
Delivery of this notice of guaranteed delivery to an address, or
transmission via facsimile to a number, other than as set forth above will not
constitute valid delivery.
As set forth in the prospectus, dated , 1999, as it may be
supplemented and amended from time to time, of Pac-West Telecomm, Inc. under
"The Exchange Offer--Guaranteed Delivery Procedures," and in the instructions
to the related letter of transmittal, this form, or one substantially
equivalent hereto, or an agent's message relating to the guaranteed delivery
procedures, must be used to accept Pac-West's offer to exchange its Series B 13
1/2% Senior Notes due 2009, which will have been registered under the
Securities Act of 1933, for its outstanding 13 1/2% Senior Notes due 2009, if
time will not permit the letter of transmittal, certificates representing the
notes to be tendered, or other documents to reach the exchange agent, or the
procedures for book-entry transfer cannot be completed, on or prior to the
expiration date of the exchange offer.
This form must be delivered by an Eligible Institution (as used herein) by
mail or hand delivery or transmitted via facsimile to the exchange agent as set
forth above. If a signature on the letter of transmittal is required to be
guaranteed by a Medallion Signature Guarantor as described in the instructions
to the letter of transmittal, such signature guarantee must appear in the
applicable space provided in the letter of transmittal. This form is not to be
used to guarantee signatures.
Questions and requests for assistance and requests for additional copies of
the prospectus may be directed to the exchange agent at the address above.
Holders may also contact their broker, dealer, commercial bank, trust company,
or other nominee for assistance concerning the exchange offer.
The exchange offer and withdrawal rights will expire at 5:00 p.m., New
York City time, on , 1999, unless extended.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tender(s) to Pac-West, upon the terms and subject to
the conditions set forth in the prospectus and the related letter of
transmittal (receipt of which is hereby acknowledged), the principal amount of
Pac-West's 13 1/2% Senior Notes due 2009 specified below pursuant to the
guaranteed delivery procedures set forth in the prospectus under "The Exchange
Offer--Guaranteed Delivery Procedures" and in Instruction 2 to the letter of
transmittal. The undersigned hereby authorizes the exchange agent to deliver
this notice of guaranteed delivery to Pac-West with respect to the notes
tendered pursuant to the exchange offer.
The undersigned understands that the tendered notes will be exchanged only
after timely receipt by the exchange agent of:
(1) the tendered notes, or a book-entry confirmation of the transfer of
the tendered notes into the exchange agent's account at the book-entry
transfer facility set forth below, and
(2) a letter of transmittal (or a manually signed facsimile thereof)
properly completed and duly executed, with any signature guarantees and any
other documents required by the letter of transmittal or an agent's message
within three New York Stock Exchange trading days after the execution
hereof.
The undersigned also understands that the method of delivery of this notice
of guaranteed delivery and any other required documents to the exchange agent
is at the election and sole risk of the holder, and the delivery will be
deemed made only when actually received by the exchange agent.
The undersigned understands that tenders of the notes to be exchanged will
be accepted only in principal amounts equal to $1,000 or integral multiples
thereof. The undersigned also understand that tenders of the notes to be
exchanged may be withdrawn at any time prior to the expiration date of the
exchange offer.
All authority conferred or agreed to be conferred by this notice of
guaranteed delivery shall not be affected by, and shall survive, the death or
incapacity of the undersigned, and every obligation of the undersigned under
this notice of guaranteed delivery shall be binding upon the heirs, executors,
administrators, trustees in bankruptcy, personal and legal representatives,
successors and assigns of the undersigned.
2
<PAGE>
PLEASE SIGN AND COMPLETE
Date: _______________________________
Signature(s) of Registered Holder(s) Address: ____________________________
or -------------------------------------
Authorized Signatory: _______________ Area Code and Telephone No. _________
------------------------------------- If the tendered notes will be
------------------------------------- delivered by book-entry transfer,
check book-entry transfer facility
below:
Name(s) of Registered Holder(s): ____
-------------------------------------
[_] The Depository Trust Company
-------------------------------------
Depository
Principal Amount of the Tendered Account No. _________________________
Notes: ______________________________
-------------------------------------
Certificate No.(s) of the Tendered
Notes
(if available) ______________________
This notice of guaranteed delivery must be signed by the holder(s) exactly
as their name(s) appear(s) on certificate(s) for the tendered notes or on a
security position listing as the owner of the tendered notes, or by
person(s) authorized to become holder(s) by endorsements and documents
transmitted with this notice of guaranteed delivery without alteration,
enlargement or any change whatsoever. If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer or other person
acting in a fiduciary or representative capacity, such person must provide
the following information.
Please print name(s) and address(es)
Name(s): ____________________________________________________________________
-----------------------------------------------------------------------------
Capacity: ___________________________________________________________________
Address(es): ________________________________________________________________
-----------------------------------------------------------------------------
Do not send the notes to be tendered with this form. The tendered notes
should be sent to the exchange agent together with a properly completed and
duly executed letter of transmittal.
3
<PAGE>
GUARANTEE
(Not to be used for signature guarantee)
The undersigned, a member of the Securities Transfer Agents Medallion
Program, the Stock Exchange Medallion Program or the New York Stock
Exchange, Inc. Medallion Signature Program (each, an "Eligible Institution")
hereby (1) represents that the above-named person(s) are deemed to own the
notes tendered hereby within the meaning of Rule 14e-4 promulgated under the
Securities Exchange Act of 1934, as amended, (2) represents that such tender
of the notes complies with Rule 14e-4 and (3) guarantees that the notes
tendered hereby are in proper form for transfer (pursuant to the procedures
set forth in the prospectus under "The Exchange Offer--Guaranteed Delivery
Procedures"), and that the exchange agent will receive (a) such notes, or a
book-entry confirmation of the transfer of such notes into the exchange
agent's account at the book-entry transfer facility, and (b) a properly
completed and duly executed letter of transmittal or facsimile thereof (or
agent's message) with any required signature guarantees and any other
documents required by the letter of transmittal within three New York Stock
Exchange trading days after the date of execution hereof.
The Eligible Institution that completes this form must communicate the
guarantee to the exchange agent and must deliver the letter of transmittal
and the tendered notes to the exchange agent within the time period shown
herein. Failure to do so could result in a financial loss to such Eligible
Institution.
Name of Firm: _______________________________________________________________
Authorized Signature: _______________________________________________________
Title: ______________________________________________________________________
Address: ____________________________________________________________________
-----------------------------------------------------------------------------
(Zip Code)
Area Code and Telephone Number: _____________________________________________
Dated: , 1999
4
<PAGE>
INSTRUCTIONS TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER
of
PAC-WEST TELECOMM, INC.
13 1/2% Senior Notes due 2009
To Registered Holder and/or Participant of the Book-Entry Transfer
Facility:
The undersigned hereby acknowledges receipt of the prospectus, dated
, 1999, as it may be amended or supplemented from time to time,
of Pac-West Telecomm, Inc., a California corporation, and the accompanying
letter of transmittal, that together constitute Pac-West's exchange offer.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to action to be taken by you relating to the exchange
offer with respect to Pac-West's 13 1/2% Senior Notes due 2009 held by you for
the account of the undersigned.
The aggregate face amount of the notes held by you for the account of the
undersigned is (fill in amount):
$ of Pac-West's 13 1/2% Senior Notes due 2009
__________
With respect to the exchange offer, the undersigned hereby instructs you
(check appropriate box):
[_]To tender the following notes held by you for the account of the
undersigned (insert principal amount of notes to be tendered, if any):
$
___________
[_]Not to tender any of the notes held by you for the account of the
undersigned.
If the undersigned instruct you to tender the notes held by you for the
account of the undersigned, it is understood that you are authorized (a) to
make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you) the representations and warranties contained in
the letter of transmittal that are to be made with respect to the undersigned
as a beneficial owner, including but not limited to the representations that
(1) the undersigned's principal residence is in the state of (fill in state)
, (2) the undersigned is acquiring the new notes in the
ordinary course of business of the undersigned, (3) the undersigned is not
participating, does not participate, and has no arrangement or understanding
with any person to participate in the distribution of the new notes, (4) the
undersigned acknowledges that any person participating in the exchange offer
for the purpose of distributing the new notes must comply with the
registration and prospectus delivery requirements of the Securities Act of
1933 in connection with a secondary resale transaction of the new notes
acquired by such person and cannot rely on the position of the staff of the
Securities and Exchange Commission set forth in no-action letters that are
discussed in the section of the prospectus entitled "The Exchange Offer--
Resale of the New Notes," and (5) the undersigned is not an "affiliate," as
defined in Rule 405 under the Securities Act of 1933, of Pac-West; (b) to
agree, on behalf of the undersigned, as set forth in the letter of
transmittal; and (c) to take such other action as necessary under the
prospectus or the letter of transmittal to effect the valid tender of such
notes.
[_]Check this box if the beneficial owner of the tendered notes is a
participating broker-dealer and has acquired the tendered notes for
its own account as a result of market-making activities or other
trading activities. If this box is checked, a copy of these
instructions must be received within thirty days after the expiration
date of the exchange offer by Pac-West Telecomm, Inc., attention
, facsimile .
<PAGE>
SIGN HERE
Name of Beneficial Owner(s): ________________________________________________
Signature(s): _______________________________________________________________
Name (please print): ________________________________________________________
Address: ____________________________________________________________________
------------------------------------------------------------------------
Telephone Number: ___________________________________________________________
Taxpayer Identification or Social Security Number: __________________________
Date: _______________________________________________________________________
2
