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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-27743
PAC-WEST TELECOMM, INC.
(Exact name of registrant as specified in its charter)
California 68-0383568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1776 West March Lane, Suite 250 95207
Stockton, California (Zip Code)
(Address of principal executive offices)
(209) 926-3300
(Registrant's telephone number, including area code)
4210 Coronado Avenue
Stockton, California 95204
(Former Address)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of July 31, 2000, the Company had an aggregate of 35,865,693 shares of common
stock issued and outstanding.
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PAC-WEST TELECOMM, INC.
Table of Contents
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
June 30, 2000 and December 31, 1999..........................1
Condensed Consolidated Statements of Operations
and Comprehensive Income (Unaudited) - Three and
six month periods ended June 30, 2000 and 1999 ..............2
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six month periods ended June 30, 2000 and 1999...............3
Notes to Unaudited Condensed Consolidated Financial
Statements...................................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risks.....18
PART II OTHER INFORMATION
Item 1. Legal Proceedings...............................................19
Item 6. Exhibits and Reports on Form 8-K................................19
SIGNATURES...................................................................20
EXHIBIT INDEX................................................................21
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
PAC-WEST TELECOMM, INC.
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Current Assets:
Cash & cash equivalents $ 54,632,000 $ 82,688,000
Restricted cash -- 10,087,000
Short-term investments 80,300,000 70,138,000
Trade accounts receivable, net of allowances for doubtful
accounts of $946,000 at June 30, 2000 and
$675,000 at December 31, 1999, respectively 13,200,000 8,339,000
Accounts receivable from related parties 64,000 63,000
Income taxes receivable 663,000 195,000
Inventories 2,827,000 952,000
Prepaid expenses and other current assets 3,160,000 2,786,000
Deferred financing costs, net 853,000 864,000
Deferred tax assets 628,000 580,000
------------- -------------
Total current assets 156,327,000 176,692,000
Equipment, Vehicles and Leasehold Improvements, net 153,621,000 105,189,000
Costs in Excess of Net Assets of Acquired Businesses, net 17,782,000 210,000
Other Assets 7,886,000 8,009,000
------------- -------------
Total assets $ 335,616,000 $ 290,100,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable $ 62,000 $ 99,000
Accounts payable 41,839,000 13,158,000
Accrued payroll and related expenses 2,225,000 1,719,000
Customer deposits 650,000 --
Accrued interest on Senior Notes 8,438,000 8,435,000
Income taxes currently payable -- 520,000
Other accrued liabilities 3,189,000 1,269,000
------------- -------------
Total current liabilities 56,403,000 25,200,000
Long-Term Debt 150,000,000 150,017,000
Deferred Income Taxes 10,896,000 8,633,000
------------- -------------
Total liabilities 217,299,000 183,850,000
------------- -------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $0.001 par value; 50,000,000 shares authorized;
35,863,543 and 35,393,326 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 36,000 35,000
Additional paid-in capital 182,707,000 173,345,000
Notes receivable from stockholders (200,000) (233,000)
Retained earnings (deficit) (63,270,000) (66,897,000)
Unrealized losses on investments (180,000) --
Deferred stock compensation (776,000) --
------------- -------------
Total stockholders' equity 118,317,000 106,250,000
------------- -------------
Total liabilities and stockholders' equity $ 335,616,000 $ 290,100,000
============= =============
</TABLE>
See notes to these consolidated financial statements.
1
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PAC-WEST TELECOMM, INC.
Condensed Consolidated Statements of Operations
and Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended Six Month Period Ended
----------------------------- ----------------------------
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues (Note 3) $ 33,340,000 $ 15,848,000 $ 64,147,000 $ 30,264,000
------------ ------------ ------------ ------------
Costs and Expenses:
Cost of sales and operating 10,181,000 4,691,000 20,205,000 8,753,000
Selling, general and administrative 12,828,000 5,260,000 23,022,000 9,563,000
Depreciation and amortization 4,848,000 1,843,000 8,977,000 3,292,000
------------ ------------ ------------ ------------
Total costs and expenses 27,857,000 11,794,000 52,204,000 21,608,000
------------ ------------ ------------ ------------
Income from operations 5,483,000 4,054,000 11,943,000 8,656,000
Other Expense (Income):
Interest expense 4,697,000 4,452,000 9,344,000 8,502,000
Interest income (1,771,000) (658,000) (4,077,000) (1,185,000)
Other income (10,000) -- (18,000) --
------------ ------------ ------------ ------------
Total other expense, net 2,916,000 3,794,000 5,249,000 7,317,000
------------ ------------ ------------ ------------
Income before provision for income taxes 2,567,000 260,000 6,694,000 1,339,000
Provision for Income Taxes 1,250,000 103,000 3,069,000 535,000
------------ ------------ ------------ ------------
Net income 1,317,000 157,000 3,625,000 804,000
Accrued Preferred Stock Dividends -- (1,183,000) -- (2,325,000)
------------ ------------ ------------ ------------
Net income (loss) applicable to
common stockholders $ 1,317,000 $ (1,026,000) $ 3,625,000 $ (1,521,000)
============ ============ ============ ============
Basic net income (loss) per share $ 0.04 $ (0.06) $ 0.10 $ (0.09)
Diluted net income (loss) per share $ 0.04 $ (0.06) $ 0.10 $ (0.09)
Basic weighted average shares outstanding 35,693,856 17,587,458 35,637,123 17,587,458
Diluted weighted average shares outstanding 37,504,492 17,587,458 37,537,912 17,587,458
Comprehensive Income:
Net income $ 1,317,000 $ 157,000 $ 3,625,000 $ 804,000
Other comprehensive income (loss) from net
unrealized investment losses 39,000 -- (180,000) --
------------ ------------ ------------ ------------
Comprehensive income $ 1,356,000 $ 157,000 $ 3,445,000 $ 804,000
============ ============ ============ ============
</TABLE>
See notes to these consolidated financial statements.
2
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PAC-WEST TELECOMM, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Month Period Ended
------------------------------
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Operating Activities:
Net income $ 3,625,000 $ 804,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,977,000 3,292,000
Amortization of deferred financing costs 426,000 775,000
Amortization of deferred stock compensation 132,000 --
Unrealized loss on investments (180,000) --
Gain on disposal of vehicles (18,000) --
Interest earned on restricted cash (38,000) (370,000)
Provision for doubtful accounts (46,000) 63,000
Deferred income tax provision 2,223,000 165,000
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (2,690,000) (551,000)
Income taxes receivable (468,000) 1,597,000
Inventories (614,000) (182,000)
Prepaid expenses and other current assets (420,000) (1,000)
Other assets (265,000) (180,000)
Accounts payable and accrued liabilities 26,660,000 6,782,000
Accrued interest on Senior Notes 3,000 8,547,000
Income taxes payable (537,000) --
------------- -------------
Net cash provided by operating activities 36,770,000 20,741,000
------------- -------------
Investing Activities:
Purchases of equipment, vehicles and leasehold improvements (55,128,000) (21,908,000)
Proceeds from disposal of vehicles 29,000 --
Purchase of investments, net (37,000) (19,696,000)
Costs of acquisitions, net of cash received (9,612,000) --
------------- -------------
Net cash used in investing activities (64,748,000) (41,604,000)
------------- -------------
Financing Activities:
Proceeds from issuance of Senior Notes -- 150,000,000
Proceeds from stock option exercises 57,000 --
Proceeds from repayment of note receivable from stockholders 33,000 --
Payments for financing costs (114,000) (5,415,000)
Repayment of senior secured borrowings -- (100,000,000)
Principal payments on notes payable (54,000) (72,000)
------------- -------------
Net cash provided (used) by financing activities (78,000) 44,513,000
------------- -------------
Net increase (decrease) in cash and cash equivalents (28,056,000) 23,650,000
Cash and Cash Equivalents:
Beginning of period 82,688,000 15,236,000
------------- -------------
End of period $ 54,632,000 $ 38,886,000
============= =============
</TABLE>
See notes to these consolidated financial statements.
3
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PAC-WEST TELECOMM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. Basis of Presentation:
These accompanying unaudited condensed consolidated 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 and six month periods ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. The balance sheet at December 31, 1999 has been derived from the audited
balance sheet at that date, but does not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. These unaudited interim condensed consolidated 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, 1999.
These consolidated financial statements include the results of operations
of Napa Valley Telecom (Napa Telecom) and Installnet, Inc. and two other related
companies (collectively referred to as Installnet) since their acquisitions in
January and February 2000, respectively (see Note 2).
2. Organization:
Pac-West Telecomm, Inc. is a rapidly-growing provider of integrated
communications services in the western United States. Our customers include
Internet service providers (ISPs), small and medium businesses and enhanced
communications service providers, many of which are communications intensive
users.
In January 2000, the Company acquired the customer base and certain other
assets of Napa Telecom, a switch-based, long distance telecommunications
company which was headquartered in Napa Valley, California. In February 2000,
the Company acquired all of the outstanding stock of Installnet, which is
headquartered in Southern California. Installnet was primarily in the business
of telecommunications equipment installation. Costs in excess of net assets
acquired in these acquisitions were approximately $18.9 million (see Note 6)
plus additional payments not to exceed $2.0 million if certain revenue targets
are met. These acquisitions are being accounted for using the purchase method of
accounting. As of June 30, 2000, no revenue earnout milestones have been reached
under either of these agreements. Therefore, no accruals have been recorded for
any of these potential increases to the purchase prices.
3. Revenue Recognition:
Revenues from the sale of telecommunications products are recognized in the
month in which the service is provided, except for reciprocal compensation
generated by calls placed to ISPs connected through the Company's network. The
rights of Competitive Local Exchange Carriers (CLECs), such as the Company, to
receive this type of compensation is the subject of numerous regulatory and
legal challenges (see Note 16). Until this issue is ultimately resolved, the
Company will continue to recognize this revenue when received in cash or when
collectibility is reasonably assured.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition in financial statements, and will be effective
for the Company during the fourth quarter of 2000. We are currently evaluating
the impact of SAB 101 on our revenue recognition policies.
Revenues from the sale of telecommunications products are recognized upon
installation, or if no installation is required, upon shipment.
4
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4. Short-Term Investments:
All investments with an original maturity of greater than three months from
the date of acquisition are accounted for under Financial Accounting Standards
Board (FASB) Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company determines the appropriate classification at the
time of purchase. All investments as of June 30, 2000 were classified as
available-for-sale and appropriately carried at fair value. Realized gains and
losses are included in interest income in the accompanying statements of
operations. Differences between cost and fair value are recorded as unrealized
gains and losses as a separate component of stockholders' equity. At June 30,
2000, $180,000 was recorded as unrealized losses on investments.
5. Equipment, Vehicles and Leasehold Improvements:
Equipment, vehicles and leasehold improvements include network and other
communication equipment, office furniture and equipment, vehicles, leasehold
improvements, projects-in-progress and equipment deposits. 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 $630,000 and $658,000 was recorded during the six month periods
ended June 30, 2000 and 1999, respectively. Repair and maintenance costs are
expensed as incurred.
Equipment, vehicles and leasehold improvements at June 30, 2000 and
December 31, 1999 consist of the following:
June 30, 2000 December 31, 1999
------------- -----------------
Network and other communications
equipment........................ $100,389,000 $ 71,142,000
Office furniture and equipment....... 6,249,000 3,640,000
Vehicles.............................. 1,660,000 1,199,000
Leasehold improvements.............. 16,771,000 11,661,000
Projects-in-progress (Note 13)........ 51,201,000 32,405,000
------------ ------------
176,270,000 120,047,000
Less: Accumulated depreciation and
amortization...................
22,649,000 14,858,000
------------ ------------
Equipment, vehicles and leasehold
improvements, net.............. $153,621,000 $105,189,000
============ ============
6. Costs in Excess of Net Assets of Acquired Businesses:
Costs in excess of net assets of acquired businesses primarily related to
the acquisitions of Napa Telecom and Installnet as described in Note 2. These
costs consist of the following at June 30, 2000:
Napa
Telecom Installnet Other* Total
---------- ----------- -------- -----------
Costs in excess of net assets
acquired...................... $3,571,000 $15,301,000 $204,000 $19,076,000
Less: accumulated amortization... 360,000 900,000 34,000 1,294,000
---------- ----------- -------- -----------
Unamortized balance at
June 30, 2000................. $3,211,000 $14,401,000 $170,000 $17,782,000
========== =========== ======== ===========
* Acquired prior to January 2000.
The Napa Telecom costs in excess of net assets acquired are being amortized
over 60 months from January 1, 2000, and the Installnet costs in excess of net
assets acquired are being amortized over 84 months from February 1, 2000. The
amortization amounts are included within depreciation and amortization in the
accompanying statements of operations.
5
<PAGE>
7. Other Assets:
At June 30, 2000 and December 31, 1999, other assets consist of the
following:
June 30, 2000 December 31, 1999
------------- -----------------
Deferred financing costs............... $5,347,000 $5,648,000
Acquisitions of lease rights............ 1,386,000 1,513,000
Long-term portion of prepaid
expenses and deposits............. 1,153,000 848,000
----------- -----------
$7,886,000 $8,009,000
=========== ===========
Deferred financing costs consist primarily of capitalized amounts for
underwriter fees, professional fees and other expenses related to the issuance
and subsequent registration of the $150,000,000 Senior Notes. These deferred
financing costs are being amortized on a straight-line basis (which approximates
the effective interest method) over the estimated 10-year term of the notes
beginning January 29, 1999. Amortization of deferred financing costs for the six
month periods ended June 30, 2000 and 1999 was $426,000 and $775,000,
respectively, and was $213,000 and $150,000 for the three month periods ended
June 30, 2000 and 1999, respectively. These amortization amounts are included
within interest expense in the accompanying statements of operations.
Acquisition of lease rights pertain to the purchase of lease rights in 1999
for additional space in Los Angeles, which costs are being amortized over the
life of the lease.
8. Other Accrued Liabilities:
Other accrued liabilities at June 30, 2000 include $850,000 in acquisition
related hold-backs pertaining to the Napa Telecom acquisition, and $388,000 of
accrued accumulated warranty and maintenance on Installnet's equipment sales.
9. Income Taxes:
The Company's effective income tax rate for the three and six month periods
ended June 30, 2000 was 49% and 46%, respectively. These rates reflect the
applicable federal and state statutory income tax rates along with the tax
impact of the non-deductibility of certain acquisition related amortization. The
effective income tax rate for both the three and six month periods ended June
30, 1999 was 40%.
10. Other Comprehensive Income:
In September 1997, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes the disclosure requirements for comprehensive income and its
components within the financial statements. For the three and six month periods
ended June 30, 2000, there was $39,000 and $(180,000), respectively, of other
comprehensive income (loss) pertaining to net unrealized investment losses.
There were no items of other comprehensive income for the three and six month
periods ended June 30, 1999; therefore, comprehensive income was the same as net
income for those periods.
11. Other Recent Pronouncements:
In June 1998, the FASB 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 to have
a significant impact on the Company's financial statements in future periods.
6
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In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44 (Interpretation No. 44), "Accounting for Certain
Transactions involving Stock Compensation - an Interpretation of APB No. 25".
Interpretation No. 44 is effective July 1, 2000. Interpretation No. 44 clarifies
the application of Accounting Principles Board Opinion No. 25 for certain
issues, specifically, (a) the definition of an employee, (b) the criteria for
determining whether a plan qualifies as a compensatory plan, (c) the accounting
consequence of various modifications to the terms of a previous fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. We do not anticipate that the adoption of
Interpretation No. 44 will have a material impact on our financial position or
on the results of our operations.
12. Long-Term Debt:
Long-term debt at June 30, 2000 and December 31, 1999 consist of the
following:
June 30, 2000 December 31, 1999
------------- -----------------
Senior Notes........................... $150,000,000 $150,000,000
Notes payable, less current portion -- 17,000
------------ ------------
Total long-term debt.................. $150,000,000 $150,017,000
============ ============
The Company has a three-year senior credit facility expiring June 15, 2002
that provides for maximum borrowings of $40.0 million to finance working
capital, the costs in connection with the Company's planned capital expansion
and other corporate transactions. The borrowings are secured by substantially
all of the Company's assets. Borrowings under this senior credit facility bear
interest, at the Company's option, at (1) the Base Rate (as defined in our
senior credit facility) or (2) the LIBOR Rate (as defined in our senior credit
facility) plus between 2.25% and 3.5%. As of June 30, 2000, there were no
amounts outstanding under this facility and the borrowing rate would have been
8.89%.
13. Purchase Commitments:
At June 30, 2000, the Company had approximately $7.0 million of purchase
orders outstanding for network equipment due for delivery during 2000. These
purchase orders are cancelable up to 60 days prior to delivery without penalty
and are expected to be financed from existing cash and investments, from
internally generated cash flows, or from borrowings under the senior credit
facility.
The Company is in the process of implementing new billing and operations
support systems. Total estimated costs for these systems aggregate approximately
$15.0 million, of which approximately $11.1 million of the total cost has been
incurred through June 30, 2000 and $2.4 million and $1.5 million of the total
cost is expected to be incurred during the balance of 2000 and 2001,
respectively. The $11.1 million incurred to date is recorded in
projects-in-progress at June 30, 2000.
The Company is also in the process of implementing a new Oracle business
enterprise and financial software system. Estimated costs for this system are
$5.0 million, of which $1.3 million has been incurred and is recorded in
projects-in-process at June 30, 2000.
On June 30, 2000, the Company entered into an Indefeasible Right of Use
("IRU") agreement to acquire dedicated fiber optics circuits of OC-48 capacity
connecting major metropolitan areas in California. The IRU agreement is for a
term of 20 years and includes one dollar purchase options at the end of the
term. The total cost of the IRU is approximately $23.0 million of which $5.7
million was paid on July 28, 2000 and the balance is payable on June 30, 2001.
The purchase price of approximately $23.0 million is included in
projects-in-progress and in accounts payable at June 30, 2000.
7
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14. Stockholders' Equity:
Stock Options
As of June 30, 2000 an aggregate of 3,150,000 shares of common stock have
been reserved for option grants under the Company's 1999 Stock Incentive Plan,
the 1998 Griffin and Bryson Non-Qualified Stock Incentive Plans and the
Company's 2000 Non-Qualified Napa Valley Stock Incentive Plan. During the six
month period ended June 30, 2000, options to purchase 767,050 shares of common
stock were granted, options to purchase 93,938 shares of common stock were
canceled and options to purchase 26,624 shares of common stock were exercised.
The following table summarizes information about the Company's stock
options outstanding as of June 30, 2000:
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------
Weighted
Average Weighted
Contractual Weighted Number Average
Number Outstanding at Remaining Average Exercisable at Exercise
June 30, 2000 Life Exercise Price June 30, 2000 Price
----------------------- ----------- -------------- ------------- --------
2,494,138 8.9 $6.08 847,920 $3.42
377,000 9.6 $30.33 -- --
--------- -------
2,871,138 9.0 $9.27 847,920 $3.42
========= =======
15. Income (Loss) Per Share:
Diluted net income per share for the three month period ended June 30, 2000
has been determined as follows:
For the Three Month Period Ended
June 30, 2000
----------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------ ---------
Basic net income per share:
Net income applicable
to common stockholders $1,317,000 35,693,856 $0.04
=====
Effect of Dilutive Securities:
Stock options 0 1,810,636
-------------- ----------
Diluted net income per share:
Income available to common
stockholders $1,317,000 37,504,492 $0.04
============== ========== =====
8
<PAGE>
Diluted net income per share for the six month period ended June 30, 2000
has been determined as follows:
For the Six Month Period Ended
June 30, 2000
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic net income per share:
Net income applicable
to common stockholders $3,625,000 35,637,123 $0.10
=====
Effect of Dilutive Securities:
Stock options 0 1,900,789
---------- ----------
Diluted net income per share:
Income available to common
stockholders $3,625,000 37,537,912 $0.10
========== ========== =====
Diluted net income per share information for the three and six month
periods ended June 30, 1999 is presented in the accompanying statements of
operations as being the same as basic net income per share information since the
impact of the potential issuance of common stock from the exercise of common
stock options is antidilutive.
16. Legal Proceedings:
The Company has established interconnection agreements with certain
Incumbent Local Exchange Carriers (ILECs). The Telecommunications Act of 1996
requires ILECs to enter into interconnection agreements with 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.
Various ILECs have alleged, and are continuing to allege, that internet
traffic calls made to an ISP are not local calls, and as such are not covered by
the interconnection agreements.
The Company is a party to various legal proceedings, including the Pacific
Bell and California Public Utilities Commission (CPUC) and the Nevada Bell and
Public Utilities Commission of Nevada proceedings, relating to reciprocal
compensation payment and other interconnection agreement issues.
In addition, in February 1999 the Federal Communications Commission (FCC)
issued a Declaratory Ruling on the issue of reciprocal compensation for calls
bound to ISPs. 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 reciprocal compensation is owed. The FCC noted a
number of factors that would allow the state PUCs to leave their decisions
requiring the payment of compensation undisturbed. On March 17, 2000, the U.S.
Courts of Appeals for the District of Columbia vacated the FCC's declaratory
ruling and remanded the matter to the FCC. The court determined that the FCC has
not provided a reasonable basis for treating calls to ISP's differently from
other local calls, and therefore reciprocal compensation should apply.
Further, in February 2000 the CPUC commenced a separate generic proceeding
to develop its policy regarding reciprocal compensation.
9
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We 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 PUCs
proceedings, the possibility of future extended appeals or additional
litigation, and future decisions by the FCC, we continue to recognize the
revenue associated with reciprocal compensation billings to ILECs when received
in cash or when collectibility is reasonably assured.
17. Segment Reporting:
The following tables present consolidated revenues by service type:
Three Month Periods Ended
-------------------------------
June 30, June 30,
2000 1999
----------- -----------
Local services....................... $23,811,000 $12,150,000
Long distance service................ 4,210,000 1,901,000
Dedicated transport services......... 1,915,000 1,122,000
Product and services................. 2,699,000 263,000
Other................................ 705,000 412,000
----------- -----------
$33,340,000 $15,848,000
=========== ===========
Six Month Periods Ended
-------------------------------
June 30, June 30,
2000 1999
----------- -----------
Local services....................... $46,580,000 $22,812,000
Long distance service................ 8,134,000 3,780,000
Dedicated transport services......... 3,664,000 2,253,000
Product and services................. 4,458,000 608,000
Other................................ 1,311,000 811,000
----------- -----------
$64,147,000 $30,264,000
=========== ===========
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, this report
contains forward-looking statements, subject to uncertainties and risks, and as
a result, our actual results may differ materially from those discussed here.
These uncertainties and risks include among others, the successful execution of
our expansion activities into new geographic markets on a timely and
cost-effective basis; the pace at which new competitors enter our existing and
planned markets; competitive responses of the Incumbent Local Exchange Carriers
(ILECs); execution of interconnection agreements with ILEC's on terms
satisfactory to us; maintenance of our supply agreements for transmission
facilities; continued acceptance of our services by new and existing customers;
the outcome of legal and regulatory proceedings regarding reciprocal
compensation for Internet-related calls and certain of our product offerings;
the ability to attract and retain talented employees; and our ability to
successfully access markets, install switching electronics, and obtain the use
of leased fiber transport facilities and any required governmental
authorizations, franchises and permits, all in a timely manner, at reasonable
costs and on satisfactory term and conditions, as well as regulatory,
legislative and judicial developments that could cause actual results to differ
materially from the future results indicated, expressed, or implied, in such
forward-looking statements. These and other factors are discussed in our
Prospectus dated November 3, 1999, and in our annual report as of December 31,
1999, on Form 10-K as filed with the Securities and Exchange Commission (SEC).
Overview
Pac-West Telecomm, Inc. is a rapidly-growing provider of integrated
communications services in the western United States. Our customers include
Internet service providers (ISPs), small and medium businesses and enhanced
communications service providers, many of which are communications intensive
users. Our predecessor, also known as Pac-West Telecomm, Inc., began selling
office phone systems in 1980 and reselling long distance service to small and
medium businesses and residential customers in 1982. Beginning in 1986, our
predecessor began offering paging and telephone answering services to its
customers. Effective September 30, 1996, our predecessor transferred its
telephone and answering service divisions to us. Prior to September 30, 1996, we
did not conduct any operations and, since that time, we have disposed of the
answering service division and have focused our business strategy on operating
as a provider of integrated communications services. As discussed in Note 2 in
the accompanying financial statements, the Company acquired the customer base
and certain assets of Napa Valley Telecom ("Napa Telecom") in January 2000, and
acquired all of the outstanding stock of Installnet, Inc. and two related
companies (Installnet) in February 2000.
For the three and six month periods ended June 30, 2000, recognizing
compensation from other communications companies for completing their customers'
calls only to the extent such compensation was actually received in cash or when
collectibility was reasonably assured, we had net revenues of $33.3 million and
$64.1 million, respectively, and EBITDA of $10.3 million and $20.9 million,
respectively.
As of June 30, 2000, we had 151,957 lines in service, a 99% increase from
June 30, 1999. For the three and six month periods ended June 30, 2000 our
minutes of use were 5.6 billion and 11.0 billion, respectively, an increase of
60% and 67%, respectively, over the same periods in 1999.
Factors Affecting Operations:
Revenues. We derive our revenues from monthly recurring charges, usage
charges, initial non-recurring charges and sales and service of telephone
equipment. Monthly recurring charges include the fees paid by customers for
lines in service and additional features on those lines, as well as equipment
collocation
11
<PAGE>
services. Usage charges consist of fees paid by end users for each call made,
fees paid by ILECs as reciprocal compensation for completion of their customers'
calls through Pac-West, and access charges paid by carriers for long distance
traffic terminated by Pac-West. Initial non-recurring charges are paid by end
users, if applicable, for the installation of our service.
We derive a substantial portion of our revenues from reciprocal
compensation paid by ILECs with which we have interconnection agreements.
Reciprocal compensation revenue increased in recent fiscal quarters as a result
of increasing inbound call volume from our ISP and other customers, and, as
described below, the effect of certain ILEC's discontinuing the withholding of
certain reciprocal compensation payments. Such increases in revenues, however,
were partially offset by lower contractual rates for reciprocal compensation.
For the three and six month periods ended June 30, 2000, recorded reciprocal
compensation accounted for 44% and 45%, respectively, of our revenues. For both
the three and six month periods ended June 30, 1999, recorded reciprocal
compensation accounted for 42% of our revenues.
As recently as fiscal year 1999, two ILECs with which we have
interconnection agreements, Pacific Bell and GTE, refused to pay that portion of
reciprocal compensation due under their interconnection agreements that they
estimated was the result of inbound calls terminating to ISPs. These ILECs
contend that such ISP calls are not local calls within the meaning of their
respective interconnection agreements and claimed that no reciprocal
compensation was therefore payable. While these ILECs have been paying us the
full amount of our reciprocal compensation billings since the latter half of
1999, some of these payments may be subject to a reservation of rights to
appeal, contest or seek subsequent reimbursement of amounts previously paid by
them for reciprocal compensation.
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 1999 renewal agreement is significantly lower than
it was under our previous agreement. Based on current market conditions, we also
expect that the per minute reciprocal compensation rate will decline from
historic rates under interconnection agreements in the future.
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 ILEC or other Competitive
Local Exchange Carrier (CLEC). Our leased transport charges are the lease
payments we incur for the transmission facilities used to connect our customers
to our switches and to connect to the ILEC and other CLEC networks. Our strategy
of leasing rather than building our own transport facilities results in our
operating costs being a significant component of total costs and expenses.
Selling, General and Administrative Expenses. Our selling, general and
administrative ("S,G&A") expenses include network operation, 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 and premise leases. We
expect that these costs will grow significantly as we expand our operations and
that sales, marketing and administrative overhead will be a large portion of
these expenses during the start-up phase in each of our new markets.
12
<PAGE>
Quarterly Operating and Statistical Data:
The following tables summarize the results of operations as a percentage of
revenues for the three and six month periods ended June 30, 2000 and 1999. The
following data should be read in conjunction with the condensed financial
statements and notes thereto included elsewhere in this report:
Three Month Periods
Ended June 30,
--------------------
2000 1999
------ -------
Consolidated Statements of Operations Data:
Revenue.................................................. 100.0% 100.0%
Costs of sales and operating costs....................... 30.5% 29.6%
Selling, general and administrative
expenses............................................... 38.5% 33.2%
Depreciation and amortization expenses................... 14.5% 11.6%
Income from operations................................... 16.5% 25.6%
Net income............................................... 4.0% 1.0%
Six Month Periods
Ended June 30,
--------------------
2000 1999
------ -------
Consolidated Statements of Operations Data:
Revenue.................................................. 100.0% 100.0%
Costs of sales and operating costs....................... 31.5% 28.9%
Selling, general and administrative
expenses............................................... 35.9% 31.6%
Depreciation and amortization expenses................... 14.0% 10.9%
Income from operations................................... 18.6% 28.6%
Net income............................................... 5.7% 2.7%
The following table sets forth unaudited statistical data for each of the
specified quarters of 1999 and 2000. The statistical data for any quarter is not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------
1999 2000
--------------------------------------------- -------------------
Mar. 31 Jun. 30 Sept. 30 Dec. 31 Mar. 31 Jun. 30
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Ports equipped..................... 251,520 309,120 309,120 460,800 460,800 518,400
Lines sold to date................. 74,026 80,984 97,117 116,391 135,143 164,800
Lines in service to date........... 67,691 76,263 88,009 105,147 124,340 151,957
Estimated data lines (% of
installed lines)................. 85% 82% 76% 73% 72% 77%
Lines on switch %.................. 96% 96% 96% 96% 94% 96%
Internet service provider and
enhanced communications
service provider customer
lines collocated %............... 83% 81% 83% 83% 84% 88%
Quarterly minutes of use switched
(in millions).................... 3,116 3,523 4,020 4,552 5,378 5,626
Metropolitan statistical areas
served.......................... 25 25 25 25 26 26
Capital expenditures (in
thousands)...................... $3,633 $18,275 $11,371 $23,091 $11,610 $43,518
Employees (consolidated)........... 168 187 216 271 482 551
</TABLE>
13
<PAGE>
Three Month Period Ended June 30, 2000 Compared to the Three Month Period Ended
June 30, 1999:
Consolidated revenues for the three month period ended June 30, 2000
increased $17.5 million to $33.3 million from $15.8 million for the
corresponding period in 1999. The increase in revenues was primarily attributed
to an increase of $8.2 million in paid local interconnection revenues, an
increase of $1.9 million in recurring charges and installation charges billed
directly to ISPs, an increase of $2.3 million in local and long distance usage
revenues, of which $1.2 million was attributed to customers acquired in
connection with our acquisition of Napa Telecom in January 2000, and $2.1
million in product and service revenues from Installnet, which we acquired in
February 2000.
During the first half of 1999, we activated a new higher capacity switch in
Oakland, continued to expand our switching capacity in Los Angeles and finished
construction of a switching facility in Las Vegas. During the fourth quarter of
1999, we installed a second switching system at our Los Angeles facility and
constructed a switching facility in Seattle. During the second quarter of 2000,
we increased the capacity of our switching facilities in Oakland and Stockton.
As a result of additional switch capacities and increased utilization of our
expanded switch capacities, primarily attributable to ISP customers, our
revenues for the three month period ended June 30, 2000 increased 111% from the
three month period ended June 30, 1999. Additionally, the Company increased
access lines to small and medium businesses to 34,463 as of June 30, 2000, a
156% increase from the same period ended in 1999. The Company attributes this
growth to its increased sales force and continued strong demand for bundled
communications services.
The total number of access lines in service increased 99% to 151,957 as of
June 30, 2000 from 76,263 lines as of June 30, 1999. Billable minutes of use
were 5.6 billion during the three months ended June 30, 2000, up 60% from the
3.5 billion billed during the same period in 1999.
The number of inbound local calls and the minutes subject to reciprocal
compensation revenues in accordance with interconnection agreements increased
35% and 59% during the second quarter of 2000 over the second quarter of 1999,
respectively. The effect of these significant increases in inbound local calls
and minutes combined with Pacific Bell and GTE no longer withholding payment on
a portion of our billings, partially offset by lower contractual rates with
Pacific Bell, resulted in an $8.2 million, or 125%, increase in paid
interconnection revenues for the three month period ended June 30, 2000 over the
corresponding period in 1999.
Direct billings to ISPs also increased in the second quarter of 2000 by
$1.9 million, or 43%, from the three month period ended in 1999. Lines in
service to ISPs increased from 60,401 lines at June 30, 1999 to 110,630 lines at
June 30, 2000, an increase of 83%.
The $2.3 million increase in outbound local and long distance revenues,
including 800, 888, and 877 numbers and travel card calls, represented a 121%
increase for the three months ended June 30, 2000 over the corresponding period
in 1999. Internal growth accounted for 58 percentage points of increase and the
acquisition of Napa Telecom customers, acquired in January 2000, accounted for
63 percentage points of increase in outbound local and long distance revenues.
These increases are directly related to Pac-West's focus on providing services
to high-volume, telecommunications intensive users and small and medium
businesses.
Our consolidated cost of sales and operating costs for the three month
period ended June 30, 2000 increased $5.5 million, to $10.2 million from $4.7
million for the corresponding period in 1999. This increase in costs was
primarily due to an increase in network operations associated with a higher
level of telecommunications activity. In addition, we continue to make
significant investments in our telephone infrastructure to accommodate future
growth of our communications services. Of the $10.2 million in cost of sales and
operating costs incurred during the second quarter of 2000, $1.2 million was
attributable to Installnet and $1.0 million was attributable to Napa Telecom.
Excluding revenues and operating expenses attributable to these acquisitions,
cost of sales and operating costs represented 27% of revenues in the second
quarter of 2000 compared to 30% for the corresponding 1999 three month period.
Our consolidated S,G&A expenses for the three month period ended June 30,
2000 increased $7.5 million to $12.8 million from $5.3 million for the
corresponding period in 1999. The increase in S,G&A expenses was primarily a
result of additional employees hired to accommodate growth, including 76
employees in Pac-
14
<PAGE>
West's sales and marketing departments; 46 additional network employees; 21
service technicians; 49 customer service representatives; and 59 employees in
other administration and information technology functions. These new hires
increased the total number of Pac-West employees from 187 at June 30, 1999 to
551 at June 30, 2000, which includes Installnet's 113 employees. The acquisition
of Installnet accounted for $2.4 million of the increase in S,G&A expenses.
Excluding revenues and S,G&A expenses attributed to the two acquisitions,
Pac-West's S,G&A expenses were 34% of revenues for the three month period ended
June 30, 2000 as compared to 33% for the corresponding period in 1999.
Our consolidated depreciation and amortization expense for the three month
period ended June 30, 2000 increased $3.0 million to $4.8 million from $1.8
million for the corresponding period in 1999. The increase in depreciation and
amortization expense was primarily due to additional depreciation expense
incurred on purchases of equipment between periods. During the twelve month
period ended June 30, 2000, the Company purchased an additional $89.6 million of
equipment.
Our consolidated interest expense for the three month period ended June 30,
2000 slightly increased to $4.7 million from $4.5 million in the corresponding
period in 1999. Interest expense is net of amounts capitalized of $0.6 million
and $0.8 million for the three month periods ended June 30, 2000 and 1999,
respectively.
The Company's effective income tax rate for the three month period ended
June 30, 2000 was 49%. This rate reflects the applicable federal and state
statutory income tax rates along with the tax impact of the non-deductibility of
certain acquisition-related amortization expense. The effective income tax rate
for the three month period ended June 30, 1999 was 40%.
Six Month Period Ended June 30, 2000 Compared to the Six Month Period Ended June
30, 1999:
Consolidated revenues for the six month period ended June 30, 2000
increased $33.8 million to $64.1 million from $30.3 million for the
corresponding period in 1999. The increase in revenues was primarily attributed
to an increase of $16.4 million in paid local interconnection revenues, an
increase of $3.2 million in recurring charges and installation charges billed
directly to ISPs, an increase of $4.3 million in local and long distance usage
revenues, of which $2.6 million was attributed to customers acquired in
connection with our acquisition of Napa Telecom in January 2000, and $3.7
million in product and service revenues from Installnet, which we acquired in
February 2000.
As a result of additional switch capacities and increased utilization of
our expanded switch capacities, described above, our consolidated revenues for
the six month period ended June 30, 2000 increased 112% from the six month
period ended June 30, 1999. This increase in revenues was also the result of an
increase in access lines to small and medium businesses totaling 34,463 as of
June 30, 2000, a 156% increase from the same period ended in 1999. The Company
attributes this growth to its increased sales force and continued strong demand
for bundled communications services.
The total number of access lines in service increased 99% to 151,957 as of
June 30, 2000 from 76,263 as of June 30, 1999. Billable minutes of use were 11.0
billion during the six months ended June 30, 2000, up 67% from the 6.6 billion
billed during the same period in 1999.
The number of inbound local calls and the minutes subject to reciprocal
compensation revenues in accordance with interconnection agreements increased
39% and 66% during the first six months of 2000 over the first six months of
1999, respectively. The effect of these significant increases in inbound local
calls and minutes combined with Pacific Bell and GTE no longer withholding
payment on a portion of our billings, partially offset by lower contractual
rates with Pacific Bell, resulted in a $16.4 million, or 130%, increase in paid
interconnection revenues for the six month period ended June 30, 2000 over the
corresponding period in 1999.
Direct billings to ISPs also increased in the first six months of 2000 by
$3.2 million, or 38%, from the six month period ended 1999. Lines in service to
ISPs increased from 60,401 lines at June 30, 1999 to 110,630 lines at June 30,
2000, an increase of 83%.
15
<PAGE>
The $4.3 million increase in outbound local and long distance revenues,
including 800, 888, and 877 numbers and travel card calls, represented a 115%
increase for the six months ended June 30, 2000 over the corresponding period in
1999. Internal growth accounted for 47 percentage points of increase and the
acquisition of Napa Telecom customers, acquired in January 2000, accounted for
68 percentage points of increase in outbound local and long distance revenues.
These increases are directly related to our focus on providing services to high-
volume, telecommunications intensive users and small and medium businesses.
Our consolidated cost of sales and operating costs for the six month period
ended June 30, 2000 increased $11.4 million to $20.2 million from $8.8 million
for the corresponding period in 1999. This increase in costs was primarily due
to an increase in network operations associated with a higher level of
telecommunications activity. In addition, we continue to make significant
investments in our telephone infrastructure to accommodate future growth of our
communications services. Of the $20.2 million in cost of sales and operating
costs incurred during the first six months of 2000, $2.5 million was
attributable to Installnet and $2.0 million was attributable to Napa Telecom.
Excluding revenues and operating expenses attributable to these acquisitions,
cost of sales and operating costs represented 27% of revenues compared to 29%
for the corresponding six months in 1999.
Our consolidated S,G&A expenses for the six month period ended June 30,
2000 increased $13.4 million to $23.0 million from $9.6 million for the
corresponding period in 1999. This increase was primarily due to an increase in
headcount as we hired employees to accommodate our growth. Additional employees,
as described in further detail in the three month discussion above, increased
the number of employees from 187 at June 30, 1999 to 551 at June 30, 2000, which
includes Installnet's 113 employees. The acquisition of Installnet in February
2000 represented $3.3 million of the increase in S,G&A expenses. Excluding
revenues and S,G&A expenses attributed to the two acquisitions, our S,G&A
expenses were 33% of revenues for the six months ended June 30, 2000 as compared
to 32% for the corresponding period in 1999.
Our consolidated depreciation and amortization expense for the six month
period ended June 30, 2000 increased $5.7 million to $9.0 million from $3.3
million for the corresponding period in 1999. The increase in depreciation and
amortization expense was primarily due to additional depreciation expense
incurred on purchases of equipment between periods. During the twelve month
period ended June 30, 2000, the Company purchased an additional $89.6 million of
equipment.
Our consolidated interest expense for the six month period ended June 30,
2000 increased to 9.3 million from $8.5 million in the corresponding period in
1999. The increase in interest expense was primarily due to six months of
interest expense in the six month period ended June 30, 2000 on the $150 million
Senior Notes issued on January 29, 1999 compared to five months of interest
expense during the corresponding period in 1999. Interest expense is net of
amounts capitalized of $1.3 million and $1.4 million for the six month period
ended June 30, 2000 and 1999, respectively.
The Company's effective income tax rate for the six month period ended June
30, 2000 was 46%. This rate reflects the applicable federal and state statutory
income tax rates along with the tax impact of the non-deductibility of certain
acquisition-related amortization expense. The effective income tax rate for the
six month period ended June 30, 1999 was 40%.
Liquidity and Capital Resources:
Net cash provided by operating activities was $36.8 million for the six
month period ended June 30, 2000 compared to $20.7 million for the corresponding
period in 1999. This increase is primarily attributable to an increase in
accounts payable and income from operations excluding depreciation. On June 30,
2000 the Company entered into an Indefeasible Right of Use ("IRU") agreement to
acquire dedicated fiber optics circuits at a price of approximately $23 million.
This price is included in accounts payable at June 30, 2000. Of this amount,
$5.7 million was paid on July 28, 2000 and the balance is payable on June 30,
2001. (See Note 13 in the accompanying financial statements.) In addition,
income from operations excluding depreciation increased $8.5 million for the six
month period ended June 30, 2000 from the same six month period in 1999.
Partially offsetting these favorable impacts on operating cash flow was a $10.1
million semi-annual interest payment on the Senior Notes in the first quarter of
2000, increases in accounts receivable of $2.7 million, and a decrease in all
other accounts payable and accrued expenses of $3.1 million.
16
<PAGE>
Net cash used in investing activities was $64.7 million for the six month
period ended June 30, 2000 compared to $41.6 million for the corresponding
period in 1999. During the six month period ended June 30, 2000, the Company
invested approximately $55.1 million in new switching and related equipment, and
for network facilities, compared to $21.9 million during the corresponding
period in 1999. (See Note 13 in the accompanying financial statements.) In 1999,
$19.7 million of the proceeds from the senior note offering were used to
purchase short-term investments to fund the interest reserve trust account for
the first two scheduled interest payments on the Notes, and in 2000 the
remaining $10.2 million was redeemed to pay the second scheduled interest
payment. Also, in 2000, $9.6 million was paid to acquire Napa Telecom and
Installnet.
Net cash provided (used) by financing activities was $(78,000) for the six
month period ended June 30, 2000 compared to $44.5 million for the corresponding
period in 1999. Net cash provided in the six month period ended June 30, 1999
was primarily attributable to proceeds from the issuance of $150 million of our
Senior Notes, which were partially offset by the payoff of $100 million of
senior secured borrowings.
The local telecommunications service 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 were $55.1 million for the first six months of
2000, and $56.4 million for the year ended December 31, 1999. Of the capital
expenditures during 1999 and the first six months of 2000, $51.2 million was
included in projects-in-progress at June 30, 2000 and therefore is not being
depreciated until placed in service in 2000. We have budgeted to make additional
capital expenditures of approximately $56 million during the balance of 2000,
excluding acquisitions. The actual cost of our planned expansion will depend on
a variety of factors, including the cost of the development of our network in
each of our new markets, the extent of competition and pricing of the
telecommunications services in such markets and the acceptance of our services.
Accordingly, our actual capital requirements may exceed the amounts described
above.
Our senior credit facility provides for maximum borrowings of $40.0
million for working capital and other general corporate purposes, and bears
interest, at our option, at: (1) the Base Rate, as defined in our senior credit
facility; or (2) the LIBOR rate, as defined in our senior credit facility plus
between 2.25% and 3.5%.
As of June 30, 2000, there were no amounts outstanding under this facility
and the borrowing rate would have been approximately 8.89%. Our borrowings under
our senior credit facility will be secured by all of our assets. Our senior
credit facility has a three year term expiring June 2002.
Our principal sources of funds for the balance of 2000 are anticipated to
be current cash and short-term investment balances, cash flows from operating
activities, and if necessary, borrowings under the senior credit facility. We
believe that these funds will provide us with sufficient liquidity and capital
resources for us to fund our business plan for the balance of 2000. No assurance
can be given, however, that this will be the case. The foregoing statements do
not take into account additional acquisitions which, if made, are expected to be
funded through a combination of cash and equity. Depending upon our rate of
growth and profitability, especially if we pursue any significant acquisitions,
we may require additional equity or debt financing to meet our working capital
requirements or capital equipment needs. There can be no assurance that
additional financing will be available when required or, if available, will be
on terms satisfactory to us.
Instruments governing our indebtedness, including the senior credit
facility and the Senior Notes Indenture, contain financial and other covenants
that restrict, among other things, our ability to incur additional indebtedness,
incur liens, pay dividends or make certain other restricted payments, consummate
certain asset sales, enter into certain transactions with affiliates, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of substantially all of our assets. Such limitations, 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.
17
<PAGE>
Year 2000 Issues:
During 1999, management completed the process of preparing for the Year
2000 date changes. This process involved identifying and remediating date
recognition problems in computer systems, software and other operating
equipment, working with third parties to address their Year 2000 issues, and
developing contingency plans to address potential risks in the event of Year
2000 failures. To date, we have successfully managed the transition. Although
considered unlikely, unanticipated problems in our core business processes,
including problems associated with non-compliant third parties and disruptions
to the economy in general could still occur despite efforts to date to remediate
affected systems and develop contingency plans. Management will continue to
monitor all business processes, including interaction with our customers,
vendors and other third parties, throughout 2000 to address any issues and
ensure all processes continue to function properly.
ITEM 3. 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 June 30, 2000 we had $150
million of fixed rate notes outstanding, and consequently we currently have no
risk exposure associated with increasing interest rates on our debt. In
addition, we have a line of credit which may, at our option, have a variable
interest rate tied to LIBOR; however there were no amounts outstanding at June
30, 2000. We are however exposed to changes in interest rates on our investments
in cash equivalents and short-term investments. Substantially all of our
investments in cash equivalents and short-term investments are in money market
funds that hold short-term investment grade commercial paper, treasury bills or
other U.S. government obligations. Currently this reduces our exposure to
long-term interest rate changes. 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 $134.9 million of cash equivalents and short-term investments at
June 30, 2000 by approximately $1,349,000.
18
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
See Note 16 to the Unaudited Condensed Consolidated Financial Statements
included elsewhere in this Form 10-Q and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Factors Affecting
Operations--Revenues" for a description of certain legal proceedings involving
the Company.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed in connection with Item 601 of
Regulation S-K:
Exhibit
Number Description
------ -----------
10.41 Interconnection Agreement Between U S West Communications, Inc.
and Pac-West Telecomm, Inc. For Colorado dated May 8, 2000
10.42 Lease Agreement, dated March 8, 2000, by and between Stockton
March Partners and Pac-West Telecomm, Inc. for 1776 West March
Lane, Stockton, California
10.43 IRU Agreement, dated June 30, 2000, by and between Qwest
Communications Corporation and Pac-West Telecomm, Inc.
(Confidential Materials omitted and filed separately with
the Securities and Exchange Commission)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended June 30, 2000.
Note: ITEMS 2, 3, 4, and 5 are not applicable and have been omitted.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on August 11, 2000.
PAC-WEST TELECOMM, INC.
/s/ Richard E. Bryson
----------------------------------------
Richard E. Bryson
Chief Financial Officer
(Principal Financial Officer)
/s/ Dennis V. Meyer
----------------------------------------
Dennis V. Meyer
Vice President-Finance
(Principal Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.41 Interconnection Agreement Between U S West Communications, Inc. and
Pac-West Telecomm, Inc. For Colorado dated May 8, 2000
10.42 Lease Agreement, dated March 8, 2000, by and between Stockton March
Partners and Pac-West Telecomm, Inc. for 1776 West March Lane,
Stockton, California
10.43 IRU Agreement, dated June 30, 2000, by and between Qwest
Communications Corporation and Pac-West Telecomm, Inc.
(Confidential Materials omitted and filed separately with
the Securities and Exchange Commission)
27.1 Financial Data Schedule
21
