S-3 1 s3-012604.txt FORM S-3 As filed with the Securities and Exchange Commission on February 3, 2004 Registration No. 333-[ ] -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------- Mpower Holding Corporation (Exact name of registrant as specified in its charter) Delaware 52-2232143 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 175 Sully's Trail, Suite 300 Pittsford, NY 14534 (585) 218-6550 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------- Russell I. Zuckerman, Esq. Senior Vice President, General Counsel and Secretary 175 Sully's Trail, Suite 300 Pittsford, NY 14534 (585) 218-6550 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copy to: Lisa L. Jacobs, Esq. Shearman & Sterling LLP 599 Lexington Avenue New York, New York 10022 (212) 848-4000 -------- Approximate date of commencement of proposed sale to the public: From time to time after this registration statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. |_| If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. |X| 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 number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_| CALCULATION OF REGISTRATION FEE --------------------------------------------------------------------- -------------------- ----------------------- ----------------- Proposed maximum Amount of Title of each class of Amount to be aggregate offering registration securities to be registered registered(1) price(1)(2) fee(3) --------------------------------------------------------------------- -------------------- ----------------------- ----------------- Mpower Holding Corporation Senior Debt Securities; Subordinated Debt Securities; Common Stock, par value $0.001 per share (5); Preferred Stock, par value $0.001 per share (5); Depositary Shares (5); Warrants (5)(6); Stock Purchase Contracts (5); and Stock Purchase Units (5) ............................................. (4) (4) (4) --------------------------------------------------------------------- -------------------- ----------------------- ----------------- Total............................................................ $250,000,000 (7) $250,000,000 $31,675 --------------------------------------------------------------------- -------------------- ----------------------- -----------------
(1) There are being registered under this registration statement such indeterminate number of shares of common stock and preferred stock, such indeterminate principal amount of debt securities, which may be senior or subordinated, of the registrant and such indeterminate number of warrants, depository shares, stock purchase contracts and stock purchase units of the registrant as shall have an aggregate initial offering price not to exceed $250,000,000 or the equivalent amount denominated in one or more foreign currencies. Any securities registered under this registration statement may be sold separately or as units with other securities registered under this registration statement. (2) Estimated for the sole purpose of computing the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the "Securities Act"). The proposed maximum initial offering price per security will be determined, from time to time, by the registrant in connection with the sale by the registrant of the securities registered under this registration statement. (3) Calculated pursuant to Rule 457(o) under the Securities Act of 1933. (4) Omitted pursuant to General Instruction II(D) of Form S-3 under the Securities Act. (5) Also includes such indeterminate number of shares of preferred stock, depositary shares, common stock, warrants, stock purchase contracts and stock purchase units as may be issued upon conversion of, or in exchange for, or upon exercise of, convertible or exchangeable securities as may be offered pursuant to the prospectus filed with this registration statement. (6) Warrants to purchase the above-referenced securities may be offered and sold separately or together with other securities. (7) Such amount represents (i) whether issued separately or as part of a stock purchase unit, (a) the initial offering price of any common stock, (b) the liquidation preference, or, if different, the initial offering price of any preferred stock, (c) the principal amount of the debt securities, and the issue price rather than the principal amount of any such securities issued at original issue discount, (d) the initial offering price of any warrants or depository shares and (e) the purchase price of any common or preferred stock under any stock purchase contract, and (ii) the initial offering price of any stock purchase units. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- The information in this prospectus supplement is not complete and may be changed. We may not sell these securities until the registration statement filed with the Security and Exchange Commission is effective. This prospectus supplement is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PROSPECTUS SUPPLEMENT (To Prospectus Dated , 2004) SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS SUPPLEMENT DATED FEBRUARY 3, 2004 [Mpower Logo] Mpower Holding Corporation Warrants to purchase 1,000,000 shares of Common Stock ------------------------ We are issuing by this prospectus supplement, from time to time to our independent contractor Master Sales Agents (the "Agents"), warrants to purchase 1,000,000 shares of our common stock, par value $0.001 per share, prices to be determined at the date of issue. We will issue the warrants to our Agents, some of whom will be initial participants in the warrant program (the "Program"). We may enter into similar arrangements with other Agents in the future who would then become participants in the Program. Each month, the Agents will have the right to receive the warrants to purchase our common stock offered by this prospectus supplement if they increase their baseline revenue by $10,000 or more over the previous month's baseline revenue. Each Agent who meets this goal will receive warrants to purchase shares of our common stock equal in number to the increase in baseline revenue. See "Description of the Warrants" below. Our common stock is quoted on the NASD Over-the-Counter Bulletin Board under the symbol "MPOW." On February 2, 2004, the closing price of our common stock was $1.62 per share. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense. ------------------------ The date of this prospectus supplement is , 2004. TABLE OF CONTENTS Prospectus Supplement About this Prospectus Supplement................S-1 Prospectus Supplement Summary...................S-2 Use of Proceeds.................................S-5 Capitalization..................................S-6 Common Stock Price Range and Dividends..........S-7 Description of the Warrants.....................S-8 Certain U.S. Federal Income Tax Consequences...S-13 Plan of Distribution...........................S-15 Legal Matters..................................S-16 Prospectus Where You Can Find More Information...............2 Forward Looking Statements........................3 Mpower Holding Corporation........................3 Risk Factors......................................4 Use of Proceeds..................................12 Government Regulations...........................13 Description of Debt Securities...................15 Description of Capital Stock.....................19 Common Stock............................19 Preferred Stock.........................20 Description of Depositary Shares.................24 Description of Warrants..........................27 Description of Stock Purchase Contracts and Stock Purchase Units....................29 Plan of Distribution.............................30 Legal Matters....................................30 Experts ........................................30 ------------------------ You should rely only on the information contained or incorporated by reference in this prospectus supplement and the accompanying prospectus. We have not authorized anyone to provide you with information other than that contained or incorporated by reference in this prospectus supplement or the accompanying prospectus. The information in this prospectus supplement and the accompanying prospectus may be accurate only as of their respective dates. We are offering to sell, and are seeking offers to buy, the warrants only in jurisdictions where offers and sales are permitted. The distribution of this prospectus supplement and the accompanying prospectus and the offering of the warrants in certain jurisdictions may be restricted by law. Persons outside the United States who come into possession of this prospectus supplement and the accompanying prospectus must inform themselves about and observe any restrictions relating to the offering of the warrants and the distribution of this prospectus supplement and the accompanying prospectus outside the United States. This prospectus supplement and the accompanying prospectus do not constitute, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy, any securities offered by this prospectus supplement and the accompanying prospectus by any person in any jurisdiction in which it is unlawful for such person to make such an offer or solicitation. About this Prospectus Supplement This document is in two parts. The first part is this prospectus supplement, which describes the specific terms of this warrant offering and also adds to and updates information contained in the accompanying prospectus and the documents incorporated by reference in the prospectus. The second part, the accompanying prospectus, gives more general information, some of which does not apply to this offering. If the description of this warrant offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information contained in or incorporated by reference into this prospectus supplement. Unless we have indicated otherwise, or the context otherwise requires, references in this prospectus supplement to "Mpower" are to Mpower Holding Corporation and not its subsidiaries. S-1 -------------------------------------------------------------------------------- Prospectus Supplement Summary The following information supplements, and should be read together with, the information contained in other parts of this prospectus supplement and the accompanying prospectus. You should read this summary information together with the more detailed information appearing elsewhere and incorporated by reference in this prospectus supplement and the accompanying prospectus to help you understand the warrants. You should carefully read this prospectus supplement and the accompanying prospectus to understand fully the terms of the warrants and the terms of the Program as well as the tax and any other considerations that are important to you in making a decision about whether to participate in the Program. Our Company We a competitive local exchange carrier (or "CLEC") offering local dial-tone, long distance, high-speed Internet access via dedicated Symmetrical Digital Subscriber Line, which we refer to in this prospectus as SDSL technology, voice over SDSL, Trunk Level 1, which we refer to in this prospectus as T1, Integrated T1 and Data-only T1, as well as other voice and data features. Our services are offered primarily to small and medium-sized business customers through Mpower's wholly owned subsidiary, Mpower Communications Corp. As of December 31, 2003, we provided services to small and medium-sized business customers in five markets: Los Angeles, California, San Diego, California, Northern California, Las Vegas, Nevada and Chicago, Illinois. Our network consists of 294 incumbent carrier central office collocation sites providing us access to more than 5.3 million addressable business lines. We have 280 central office collocation sites that are SDSL capable and 214 that are T1 capable. We have established working relationships with the following incumbent local exchange carriers, which we refer to in this prospectus supplement as ILEC's: Sprint, Verizon and Southwestern Bell Corporation (including its operating subsidiaries PacBell and Ameritech). We have over 258,000 lines in service. As of December 31, 2003, we had 732 employees. We were one of the first competitive communications carriers to implement a facilities-based network strategy. As a result, we own the network switches that control how voice and data communications originate and terminate, and lease the telephone lines, or transport systems, over which the voice and data traffic are transmitted. We install our network equipment at collocation sites of the ILEC from whom we rent standard telephone lines. Because we have already built our network, we believe we can sustain service in our markets at a comparatively low cost, while maintaining control of the access to our customers. Our business strategy is to deliver integrated voice and broadband data solutions. Specifically, we provide small and medium-sized business customers with a full suite of communications services and features, including local telephone service, long distance, broadband Internet via SDSL and T1, integrated on one bill, with the convenience of a single source provider. We have approximately 53,000 business customer relationships. A business customer relationship is defined by the number of bills we provide to our customers every month. For example, we have some business customers for whom we provide service at multiple locations and for whom we issue a single bill which we define as a single business customer relationship. Conversely, we have some business customers for whom we provide service at multiple locations and for whom we issue a separate bill for each location, which we define as a multiple business customer relationship. We are able to offer fully integrated and channelized voice and data products over a T1 connection through our existing equipment, interconnection agreements with ILECs, and network. In order to serve the largest portion of our target market, our combined voice and data network allows us to deliver services in several combinations over the most favorable technology: basic phone service on the traditional phone network, SDSL service, integrated T1 voice and data service, or data-only T1 connectivity. -------------------------------------------------------------------------------- S-2 RISK FACTORS You should carefully consider the risks described below and the additional risks discussed in the accompanying prospectus, as well as other information contained in this prospectus supplement and the accompanying prospectus and the documents incorporated or deemed incorporated by reference in this prospectus supplement and in the accompanying prospectus, before making an investment in the warrants or shares of our common stock. Risk Factors Related to Ownership of Our Common Stock We have historically recorded losses and negative cash flow. We recorded net losses of $21.1 million for the nine months ended September 30, 2003 and $94.4 million, $467.7 million and $244.7 million, respectively for the fiscal years ended December 31, 2002, 2001, and 2000. In addition, we had negative cash flow from operations of $8.3 million for the nine months ended September 30, 2003 and $124.2 million, $219.3 million and $141.3 million, respectively for the fiscal years ended December 31, 2002, 2001 and 2000. At the present time, we do not generate enough cash flow to cover our operating costs and capital expenditures. We cannot assure you that we will achieve or sustain profitability or generate sufficient positive cash flow from operations to meet our planned capital expenditures, working capital and any future debt service requirements. Volatility of our stock price. The prices for securities of CLECs have been highly volatile. The market price for our common stock and the value of your warrants to purchase our common stock could also fluctuate due to various factors. These factors include: o announcements of fluctuations in our operating results or one of our competitors' operating results; o market conditions for communications carriers; o changes in recommendations or earnings estimates by securities analysts; o announcements of new contracts or customers by us or our competitors, and timing and announcement of acquisitions by us or our competitors; o conditions and trends in the telecommunications industry; and o conditions in the local markets or regions in which we operate. In addition, many of the risks described elsewhere in this "Risk Factors" section and the "Risk Factors" section of the accompanying prospectus could materially and adversely affect our stock price and the value of your warrants. The stock markets have experienced price and volume volatility that has affected many companies' stock prices. Many companies have experienced wide stock price fluctuations that have often been unrelated to the operating performance of those companies. Fluctuations such as these may affect the market price of our common stock. The value of our common stock and the value of your warrants may be negatively affected by additional issuances of common stock by us, the issuance of additional warrants by us and general market factors. Issues or sales of our common stock or warrants to purchase our common stock by us will likely be dilutive to our existing common stockholders and warrant holders. There can be no certainty as to the effect, if any, that future issuances or sales of our common stock or warrants to purchase our common stock by us, or the availability of such common stock or warrants to purchase common stock for future issue or sale, would have on the price of our common stock prevailing from time to time or on the value of your warrants. Sales of substantial amounts of our common stock or warrants to purchase our common stock in the public or private market, a perception in the market S-3 that such sales could occur, or the issuance of securities exercisable or convertible into our common stock could adversely affect the prevailing price of our common stock. Certain provisions of our certificate of incorporation, by-laws and Delaware General Corporate Law may have anti-takeover effects. Our certificate of incorporation and by-laws contain provisions which may deter, discourage or make more difficult a takeover or change of control of Mpower by another corporation. These anti-takeover provisions include: o the authority of our board of directors to issue shares of preferred stock without stockholder approval on such terms and with such rights as our board of directors may determine, and o the requirement of a classified board of directors serving staggered three-year terms. We have also adopted a rights plan, which may make it more difficult to effect a change in control of Mpower and replace incumbent management. For additional information, see "Description of Capital Stock" in the accompanying prospectus. We have not paid dividends on our common stock. We have never paid a cash dividend on our common stock and do not plan to pay dividends on our common stock for the foreseeable future. As a holding company, our ability to pay dividends depends on a number of factors, including the earnings of, and cash flow available from, our operating companies. S-4 Use of Proceeds We are issuing the warrants to our Agents in consideration of increased sales by that Agent over a baseline revenue amount. See "--Description of Warrants." We will not receive any cash consideration for the issuance of the warrants at the time we issue the warrants to our Agents. However, at the time the Agent exercises the warrants, we will receive the exercise price in cash. We intend to use any amounts received at the time of exercise of the warrants for general corporate purposes. S-5 Capitalization The following table sets for the capitalization of Mpower as of September 30, 2003 on a historical basis. September 30, 2003 ---------------- Historical (in thousands) ---------------- Cash and cash equivalents........................... $36,629 Debt................................................ Current Debt................................... 1,460 Long-Term Debt................................. 2 ------- Total Debt................................ 1,462 Shareholders' Equity Common Stock................................... 78 Additional Paid-In Capital..................... 103,769 Accumulated Deficit (37,521) ------- Total Shareholders' Equity.......................... 66,326 ------- Total Capitalization................................ $67,788 ======= S-6 Common Stock Price Range and Dividends Our common stock is traded on the NASD Over-the Counter Bulletin Board under the symbol "MPOW." The following table sets forth on a per share basis, the intraday high and low sales prices for our common stock for the periods indicated. Price Range ----------------- High Low ---- --- 2001 First Quarter....................................... $9.94 $2.38 Second Quarter...................................... 3.01 0.90 Third Quarter....................................... 1.05 0.18 Fourth Quarter...................................... 1.15 0.09 2002 First Quarter....................................... 0.69 0.04 Second Quarter...................................... 0.06 0.02 Third Quarter....................................... 0.60 0.01 Fourth Quarter...................................... 0.42 0.07 2003 First Quarter....................................... 0.30 0.15 Second Quarter...................................... 1.22 0.15 Third Quarter....................................... 1.73 0.98 Fourth Quarter ..................................... 1.93 1.26 2004 First Quarter (through February 2, 2004)........... $1.75 $1.45 The last reported sale price for our common stock on the NASD Over-the Counter Bulletin Board on February 2, 2004 was $1.62 per share. S-7 Description of the Warrants The following is only a summary of the warrants and may not contain all the information that is important to you. We encourage you to read the form of stock purchase warrant filed as an exhibit to the registration statement of which this prospectus supplement is a part because it, and not this description, will define your rights as a holder of the warrants once we issue the warrants. Issuance of Warrants The Program described herein was adopted by Mpower's board of directors on January 27, 2004. The intent of the Program is to make available to independent contractors hired by us warrants to purchase shares of our common stock ("Warrant Shares") for their increase in baseline performance (as defined below). We will issue the warrants to our Agents who would be initial participants in the Program. We may enter into future contracts with other Agents who would then become participants in the Program. Each month, the Agents will be eligible to receive warrants to purchase our common stock offered by this prospectus supplement if they increase their baseline revenue (the revenue generated by each Agent was initially determined for such Agent on September 30, 2003) by $10,000 or more from the baseline month (the first such baseline month ending September 30, 2003). Each Agent who meets this goal will receive warrants to purchase shares of our common stock, with 10,000 shares being the minimum number of shares that are purchasable, equal in number to the increase in baseline sales. For example, if an Agent increases its baseline sales by $12,000 in any month, it will receive warrants to purchase 12,000 shares of our common stock. Each time an Agent receives a warrant grant, its baseline will be reset to the new baseline revenue amount and the Agent will be eligible for additional warrant grants if the Agent increases their revenue baseline by $10,000 over its new revenue baseline. The Agents who receive warrants to purchase our common stock under the Program will be entitled to subscribe for and purchase our common stock, par value $0.001 per share ("Warrant Shares"). Each warrant issued pursuant to the Program will be exercisable at a price per share (the "Exercise Price") equal to the average weighted price per share of Mpower's common stock on the date such warrant is issued (the "Warrant Date"), as quoted by any national or regional securities exchange on which Mpower's common stock is then listed or on any interdealer or over-the-counter quotation system on which Mpower's common stock is then quoted (a "Trading Market"), subject to adjustment as described in the warrant certificate. If Mpower's common stock is not then listed or quoted, the Exercise Price for each warrant issued pursuant to the Program will be the fair value, as determined in good faith by Mpower's Board of Directors, of a share of Mpower common stock on the Warrant Date. The warrants will be immediately exercisable upon their issuance. Termination of the Warrants The warrants will automatically expire at 5:00 p.m. New York City time on the date three years from the Warrant Date (the "Termination Date"). All warrants will be payable in U.S. dollars. We reserve the right, pursuant to the terms of the Mpartner Independent Agent Agreement, as amended (the "Agent Agreement") between us and the Agents, to cancel any unexercised Warrants issued under the Program upon the occurrence of any of the conditions for termination set forth in the Agent Agreement. In addition, if a customer or customers provided by an Agent disconnect(s) our service within one hundred and eighty (180) days of such customer's installation, we reserve the right to cancel, on a pro rata basis, any unexercised Warrants delivered to the Agent with respect to revenues that were calculated based on such customer's billings. In addition, if such customer disconnect(s) results in revised billings in any given month of less than $10,000 over that month's revenue baseline, we reserve the right to cancel all unexercised Warrants issued to that Agent in respect of such month. General Description of the Warrants Holders of the warrants may exercise the warrants at any time after the Warrant Date and on or before 5:00 p.m. New York City Time on the Termination Date by delivering to us, or such other office or agency as we may designate by notice in writing to the holder, a duly executed or facsimile copy of the Notice of Exercise Form that is attached to the warrant certificates, provided however, that surrender of the warrant certificate be made within five S-8 trading days of the date the Notice of Exercise Form is delivered to us and we have received payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier's check drawn on a United States Bank. Upon surrender of the warrant certificates, we will deliver or cause to be delivered, to or upon the written order of the holder, stock certificates representing the number of whole shares of our common stock to which the holder is entitled. These certificates will be delivered to the holder within the earlier of (i) ten trading days after the date on which the Notice of Exercise Form shall have been delivered by facsimile copy or (ii) three trading days from the delivery to us of each of the Notice of Exercise Form by facsimile copy, surrender of the warrant certificates and payment of the aggregate Exercise Price (the "Warrant Share Delivery Date"). A "trading day" is a day on which our common stock (a) is not suspended from trading on any national or regional securities exchange or association or over-the-counter market at the close of business and (b) has traded at least once on the national or regional securities exchange or association or over-the-counter market that is the primary market for the trading of our common stock. If the warrants are not surrendered or the aggregate Exercise Price is not received by us within five trading days after the date on which the Notice of Exercise Form was delivered by facsimile copy the delivery of the common stock certificates will be terminated or suspended to the extent that such period is exceeded. The Warrant Shares will be deemed to have been issued, and the holder or any other person so designated to be named as such shall be deemed to have become a holder of record of such shares for all purposes, as of the date the warrants have been exercised by payment to us of the Exercise Price and all taxes required to be paid by the holder, if any, prior to the issuance of such shares, have been paid. If we fail to deliver to the holder a certificate or certificates representing the Warrant Shares by the third trading day following the Warrant Share Delivery Date, then the holder will have the right to rescind such exercise. If less than all of the warrants evidenced by a warrant certificate are to be exercised, a new warrant certificate will be issued for the remaining number of warrants. Holders of warrants will be able to exercise their warrants only if a registration statement relating to the shares of our common stock underlying the warrants is then in effect, or the exercise of these warrants is exempt from the registration requirements of the Securities Act of 1933, and these securities are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of warrants or other persons to whom it is proposed that shares of our common stock be issued on exercise of the warrants reside. The registration statement to which this prospectus supplement and prospectus are a part concurrently register the Warrant Shares. No fractional shares or scrip representing fractional shares of our common stock will be issued upon exercise of the warrants. We will pay to the holder of the warrant at the time of exercise an amount in cash equal to such fraction multiplied by the Exercise Price. Restrictions on Exercise We will not issue any warrants to any Agent, and the holder will not have the right to exercise any portion of the warrants to the extent that after giving effect to the exercise of such warrants, the holder (together with the holder's affiliates), as set forth on the applicable Notice of Exercise Form, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to the issuance. For purposes of the foregoing sentence, the number of shares of our common stock beneficially owned by the holder and its affiliates shall include the number of shares of common stock issuable upon exercise of the warrants with respect to which the determination of such sentence is being made, but shall exclude the number of shares of common stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of the warrants beneficially owned by the holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of Mpower (including, without limitation beneficially owned by the holder or any of its affiliates). Except as set forth in the preceding sentence, for purposes of such limit, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act. To the extent that the limitation applies, the determination of whether the warrants are exercisable (in relation to other securities owned by the holder) and of which a portion of each warrant is exercisable shall be in the sole discretion of such holder, and the submission of a Notice of Exercise Form shall be deemed to be such holder's determination of whether the warrants are exercisable (in relation to other securities owned by such holder) and of which portion of each warrant is exercisable, in each case subject to such aggregate percentage limitation, and we will have no obligation to verify or confirm the accuracy of such determination. For purposes of the foregoing, in determining the number of outstanding shares of common stock, the holder may rely on the number of outstanding shares of common stock as S-9 reflected in (x) our most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by us or (z) any other notice by us or our transfer agent setting forth the number of shares of common stock outstanding. Upon the written or oral request of the holder, we will within two trading days confirm orally and in writing to the holder the number of shares of common stock then outstanding. In any case, the number of outstanding shares of common stock will be determined after giving effect to the conversion or exercise of our securities, including the warrants, by the holder or its affiliates since the date as of which such number of outstanding shares of common stock was reported. Non-transferability of Warrants Subject to compliance with applicable laws, the warrants issued under the Program are non-transferable, and may not be transferred in whole or in part, by the holder. The warrants will not be listed for trading on any securities exchange or other securities market. Adjustments of Exercise Price and Number of Warrant Shares (a) Stock Splits, etc. The number and kind of securities purchasable upon the exercise of the warrants and the Exercise Price will be subject to adjustment from time to time upon the happening of any of the following. In case we (i) pay a dividend in shares of common stock or make a distribution in shares of common stock to holders of our outstanding common stock, (ii) subdivide our outstanding shares of common stock into a greater number of shares, (iii) combine our outstanding shares of common stock into a smaller number of shares of common stock, or (iv) issue any shares of our capital stock in a reclassification of our common stock, then the number of Warrant Shares purchasable upon exercise of the warrants immediately prior thereto will be adjusted so that the holder will be entitled to receive the kind and number of Warrant Shares or other of our securities which it would have owned or have been entitled to receive had the warrants been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares which may be purchased, the holder will thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from the adjustment at an Exercise Price per Warrant Share obtained by multiplying the Exercise Price in effect immediately prior to the adjustment by the number of Warrant Shares purchasable immediately prior to the adjustment and dividing by the number of Warrant Shares resulting from such adjustment. Such an adjustment will become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case Mpower reorganizes its capital, reclassifies its capital stock, consolidates or merges with or into another corporation (where Mpower is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of Mpower), or sells, transfers or otherwise disposes of its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of the common stock of Mpower, then holders of the Warrants thereafter will have the right to receive, upon exercise of their Warrants, the number of shares of common stock of the successor or acquiring corporation or of Mpower, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of common stock of Mpower for which such warrants are exercisable immediately prior to such event. For these purposes, "common stock of the successor or acquiring corporation" includes stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and also includes any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. (c) Voluntary Adjustment by Us. We may at any time during the term of the Warrants reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by our board of directors. S-10 (d) Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of the warrants or the Exercise Price is adjusted, we will give notice thereof to the holder, which notice shall state the formula for calculating the number of Warrant Shares (and other securities or property) purchasable upon the exercise of the warrants and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. (e) Notice of Corporate Action. If at any time: 1. we take a record of the holders of our common stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or 2. there is any capital reorganization of Mpower, any reclassification or recapitalization of the capital stock of Mpower or any consolidation or merger of Mpower with, or any sale, transfer or other disposition of all or substantially all of the property, assets or business of Mpower to, another corporation or, 3. there is a voluntary or involuntary dissolution, liquidation or winding up of Mpower; Then, in any one or more of such cases, we will give to holders of the warrants (1) at least 20 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (2) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 20 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (1) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character thereof, and (2) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of common stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to the holder at the last address of such holder appearing on our books and delivered in accordance with Section 17(d) of the warrant certificate. Authorized Shares Mpower has authorized and reserved for issuance and will at all times reserve and keep available that number of shares of Mpower common stock as will be issuable upon the exercise of all outstanding warrants. These shares of Mpower common stock, when paid for and issued, will be duly and validly issued, fully paid and non-assessable, free of preemptive rights and free from all taxes, liens, charges and security interests with respect to the issuance thereof. Changes, Taxes and Expenses All incidental expenses and taxes in respect of the issuance of the certificates representing the Warrant Shares will be paid by the Holder exercising the warrant. We shall be authorized to deduct and withhold any taxes actually imposed under the Internal Revenue Code of 1986, as amended ("the Code"), or any applicable provision of state, local, or foreign tax law, on amounts paid or deemed paid in respect of the warrants, and any amounts so deducted and withheld shall be treated as paid by us to holders of the warrants in accordance with the terms thereof. Without limiting the foregoing, in the event that any applicable withholding tax may not be satisfied from the amounts paid or deemed paid in respect of the warrants, holders of the warrants will be required to pay to us the amount equal to the amount of such tax, or we may, to the extent required by applicable law, pay the amount of such tax out of our own funds and, except to the extent S-11 otherwise reimbursed, recoup or set-off the amount of such tax against any amounts otherwise owed by us to holders of the warrants. S-12 Certain U.S. Federal Income Tax Consequences The following discussion is a summary of the material U.S. federal income tax consequences of the issuance, ownership and disposition of the warrants, and of our common stock acquired upon the exercise of warrants, by Agents that are, for U.S. federal income tax purposes, citizens or individual residents of the United States or domestic corporations. The information provided below is based on the Internal Revenue Code of 1986, as amended (the "Code"), and regulations, rulings and judicial decisions all as in effect as of the date hereof, all of which may be repealed, revoked or modified with possible retroactive effect. This summary addresses only warrants that are received by Agents as compensation for services rendered, and only addresses common stock acquired upon exercise of such warrants and held as capital assets for U.S. federal income tax purposes (generally, property held for investment). This summary does not address all of the tax consequences that may be relevant to Agents in light of their particular circumstances, such as Agents that may be subject to special tax treatment, including but not limited to broker-dealers, tax-exempt organizations, foreign persons, partnerships or other pass-through entities for U.S. federal income tax purposes, persons that hold the warrants or our common stock acquired upon the exercise of a warrant as part of a straddle, hedge, conversion transaction or other integrated investment and persons whose functional currency is not the U.S. dollar. In addition, this summary does not address alternative minimum taxes or any aspects of state, local or foreign tax laws. An Agent receiving warrants pursuant to this prospectus supplement should consult its own tax advisor as to the particular tax consequences of the issuance, ownership and disposition of the warrants, and of our common stock acquired upon the exercise of warrants, including the application and effect of U.S. federal, state, local and foreign tax laws. Warrants Issuance of Warrants. An Agent will receive the warrants as compensation in connection with the performance of services. Accordingly, the U.S. federal income tax treatment of the warrants will be determined in accordance with the principles of Section 83 of the Code. Under Section 83 of the Code, if a warrant does not have a readily ascertainable market value on the date of issuance, the Agent will not recognize taxable income in respect of the warrant at the time of issuance. We intend to take the position that the warrants will not be considered to have a readily ascertainable fair market value on the date of issuance for purposes of Section 83 of the Code. Based on such position, an Agent will not recognize taxable income as a result of issuance of the warrants. No assurance can be given, however, that the Internal Revenue Service will agree with the above position. Agents are urged to consult their own tax advisors with respect to application of Section 83 of the Code to the receipt by them of the warrants. The remainder of this discussion assumes that the warrants will not have a readily ascertainable market value on the date of issuance for purposes of Section 83 of the Code. Exercise of Warrants. Upon the exercise of a warrant, an Agent generally will recognize ordinary compensation income under Section 83 of the Code in an amount equal to the difference between the fair market value of our common stock acquired on the date of exercise of the warrant (and any cash received in lieu of fractional shares of our common stock) and the exercise price of the warrant. The tax basis of our common stock acquired upon the exercise of a warrant generally will equal the exercise price of the warrant plus the amount includible in the Agent's income upon the exercise of the warrant. The holding period for such common stock will commence on the date on which the Agent exercises the warrant. Sale or Other Disposition of Warrants. If an Agent sells or otherwise disposes of a warrant, the Agent generally will recognize ordinary compensation income under Section 83 of the Code in an amount equal to the amount of cash and the fair market value of any property received on the sale or other disposition of the warrant. Expiration of Warrants. An expiration of a warrant without exercise will not be a taxable event for U.S. federal income tax purposes. Accordingly, an Agent will not recognize any taxable gain or loss upon the expiration of a warrant. Common Stock S-13 Dividends. Distributions made by us in respect of our common stock acquired upon the exercise of a warrant generally will be includable in the gross income of an Agent as ordinary dividend income to the extent of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent that the amount of the distribution exceeds the amount of such earnings and profits, the excess first will be treated as a tax-free return of capital to the extent of the Agent's adjusted tax basis in the common stock, and thereafter will be treated as capital gain. Subject to applicable limitations, dividends paid to Agents that are corporations may qualify for the dividends-received deduction. Pursuant to recently enacted legislation and subject to applicable limitations, dividends on our common stock paid to individuals may qualify for preferential U.S. federal income tax rates. Sale or Other Taxable Disposition of Common Stock. If an Agent disposes of our common stock received upon the exercise of a warrant in a taxable transaction, the Agent generally will recognize capital gain or loss equal to the difference between (i) the amount of cash and the fair market value of any property received upon such disposition and (ii) the Agent's adjusted tax basis in such common stock. Such capital gain or loss will generally be long-term capital gain or loss if the Agent held such stock for more than one year at the time of such disposition. Long-term capital gains of individuals are eligible for preferential rates of U.S. federal income taxation. The deductibility of capital losses is subject to limitations under the Code. Backup Withholding and Information Reporting Unless an Agent is an exempt recipient (such as a corporation), proceeds from the disposition of the warrants or our common stock received upon the exercise of a warrant and dividends on such common stock will be subject to information reporting and may also be subject to U.S. federal backup withholding tax (currently at the rate of 28%) if the Agent fails to provide us or our paying agent with its correct taxpayer identification number, certified under penalties of perjury, as well as certain other information, or otherwise fails to comply with applicable backup withholding requirements. Any amounts withheld under the backup withholding rules generally will be allowed as a credit against an Agent's U.S. federal income tax liability provided the required information is timely furnished to the Internal Revenue Service. S-14 PLAN OF DISTRIBUTION The shares of our common stock issuable upon exercise of the warrants are offered solely by us; no underwriters are participating in the offering. Warrants may be exercised by giving written notice to us and paying the exercise price as specified in the warrant certificate. S-15 Legal Matters The validity of our warrants issued hereunder will be passed upon for us by Shearman & Sterling LLP, New York, New York. In addition, certain U.S. federal tax consequences of for non-U.S. holders of our common stock will be passed upon for us by Shearman & Sterling LLP, New York, New York. S-16 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 Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED FEBRUARY 3, 2004 Mpower Holding Corporation Senior Debt Securities, Subordinated Debt Securities, Common Stock, Preferred Stock, Depositary Shares, Warrants, Stock Purchase Contracts and Stock Purchase Units This prospectus is part of a registration statement that we filed with the SEC utilizing a "shelf" registration process. Under this shelf process, we may, from time to time, sell the following types of securities described in this prospectus in one or more offerings up to a total dollar amount of $250,000,000: o our debt securities, in one or more series, which may be senior debt securities or subordinated debt securities, in each case consisting of notes, debentures or other unsecured evidences of indebtedness; o shares of our preferred stock; o depositary shares representing a fraction of a share of our preferred stock; o shares of our common stock; o warrants to purchase debt securities, preferred stock, depositary shares or common stock; o stock purchase contracts; o stock purchase units; or o any combination of these securities. This prospectus provides you with a general description of the securities we may offer. Each time we sell securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add, update or change information contained in this prospectus. We may sell the securities directly or to or through underwriters or dealers, and also to other purchasers or through agents or a combination of these methods. To the extent not described in this prospectus, the names of any underwriters or agents that are included in a sale of securities to you, and any applicable commissions or discounts, will be stated in an accompanying prospectus supplement. You should read both this prospectus and any prospectus supplement together with additional information described under the heading "Where You Can Find More Information" before you invest in our securities. Our principal executive offices are located at: Mpower Holding Corporation 175 Sully's Trail, Suite 300 Pittsford, NY 14534 (585) 218-6550 -------- Our common stock is traded on the NASD Over-the-Counter Bulletin Board under the symbol "MPOW." As of the date of this prospectus, none of the securities that we may offer by this prospectus are listed on any national securities exchange or automated quotation system. -------- Investing in our securities involves risks. See "Risk Factors" beginning on pg. 4. -------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2004. TABLE OF CONTENTS Page Where You Can Find More Information...........................................2 Forward Looking Statements....................................................3 Mpower Holding Corporation....................................................3 Risk Factors..................................................................4 Use of Proceeds..............................................................12 Government Regulations.......................................................13 Description of Debt Securities...............................................15 Description of Capital Stock.................................................19 Common Stock........................................................19 Preferred Stock.....................................................20 Description of Depositary Shares.............................................24 Description of Warrants......................................................27 Description of Stock Purchase Contracts and Stock Purchase Units.............29 Plan of Distribution.........................................................30 Legal Matters................................................................30 Experts......................................................................30 You should rely only on the information contained or incorporated by reference in this prospectus and in any accompanying prospectus supplement. No one has been authorized to provide you with different information. The securities are not being offered in any jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of the documents. When used in this prospectus, the term "Mpower" refers to Mpower Holding Corporation only, and not its subsidiaries. i WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any reports, statements or other information we file with the SEC at its public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings also are available to you at the SEC's web site at http://www.sec.gov. The SEC allows us to "incorporate by reference" the information we file with them into this prospectus, which means that we can disclose important information to you by referring you to those documents and those documents will be considered part of this prospectus. Information that we file later with the SEC will automatically update and supersede the previously filed information. We incorporate by reference the documents listed below and any future filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 (i) after the date of the filing of this registration statement and prior to its effectiveness and (ii) until this offering has been completed. o Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (our "2002 10-K Report"). o Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2003, June 30, 2003 and September 30, 2003 (collectively, our "10-Q Reports"). o Current Reports on Form 8-K filed on the following dates: April 22, 2003 (Items 2 and 7), May 8, 2003 (Item 5), July 16, 2003, and September 30, 2003 (Items 5 and 7). o The description of our common stock contained in our registration statement on Form 8-A, filed pursuant to Section 12(g) of the Securities Exchange Act of 1934 on July 30, 2002. You may request copies of these filings at no cost, by writing or telephoning our Legal Department at the following address: Mpower Holding Corporation 175 Sully's Trail, Suite 300 Pittsford, NY 14534 (585) 218-6550 Attention: General Counsel and Secretary 2 FORWARD LOOKING STATEMENTS This prospectus contains "forward-looking statements," which you can generally identify by our use of forward-looking words including "believe," "expect," "intend," "may," "will," "should," "could," "anticipate" or "plan" or the negative or other variations of these terms or comparable terminology, or by discussion of strategies that involve risks and uncertainties. We often use these types of statements when discussing: - our plans and strategies; - our anticipation of profitability or cash flow from operations; - the development of our business; - the expected market for our services and products; - our anticipated capital expenditures; - changes in regulatory requirements; and - other statements contained in this prospectus regarding matters that are not historical facts. We caution you these forward-looking statements are only predictions and estimates regarding future events and circumstances. Actual results could differ materially from those anticipated as a result of factors described in "Risk Factors" or other factors. We cannot assure you we will achieve the future results reflected in these statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus might not transpire. MPOWER HOLDING CORPORATION Mpower Holding Corporation is a competitive local exchange carrier offering local dial-tone, long distance, high-speed Internet access via dedicated Symmetrical Digital Subscriber Line, which we refer to in this prospectus as SDSL technology, voice over SDSL, Trunk Level 1, which we refer to in this prospectus as T1, Integrated T1 and Data-only T1, as well as other voice and data features. Our services are offered primarily to small and medium-sized business customers through our wholly owned subsidiary, Mpower Communications Corp. We have established working relationships with the following incumbent local exchange carriers, which we refer to in this prospectus as ILEC's: Sprint, Verizon and Southwestern Bell Corporation (including its operating subsidiaries PacBell and Ameritech). We were one of the first competitive communications carriers to implement a facilities-based network strategy. As a result, we own the network switches that control how voice and data communications originate and terminate, and lease the telephone lines, or transport systems, over which the voice and data traffic are transmitted. We install our network equipment at collocation sites of the ILEC from whom we rent standard telephone lines. Because we have already built our network, we believe we can sustain service in our markets at a comparatively low cost, while maintaining control of the access to our customers. We are a Delaware corporation. Our principal executive offices are located at 175 Sully's Trail, Suite 300, Pittsford, New York 14534. Our telephone number is: (585) 218-6550. 3 RISK FACTORS Before you invest in our securities, you should be aware of various risks, including the risks described below. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The risks and uncertainties described below or incorporated by reference in this prospectus are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business and operations. If any of the matters included in the following risks were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected. In such case, you could lose all or part of your investment. We have historically recorded losses and negative cash flow. We cannot assure you that we will achieve or sustain profitability or generate sufficient positive cash flow from operations to meet our planned capital expenditures, working capital and any future debt service requirements. We may need additional funds that we may not be able to obtain. If we cannot generate or otherwise obtain sufficient funds, if needed, we may not be able to grow our business or compete in the communications industry. We expect to fund any capital requirements through existing resources, internally generated funds and debt or equity financing, if needed. We cannot assure you we will be successful in raising sufficient debt or equity financing, if and when needed, on acceptable terms or at all. Future debt may create financial and operating risks for us. Debt we may incur in the future could have important consequences to you, including the following: o It could limit our ability to obtain additional financing for working capital, capital expenditures, and general corporate purposes; o It could require us to dedicate a substantial portion of our cash flow from operations to payments of principal and interest on our debt, thereby reducing the funds available to us for other purposes, including working capital, capital expenditures, and general corporate purposes; o It could make us more vulnerable to changes in general economic conditions or increases in prevailing interest rates; limiting our ability to withstand competitive pressures and reducing our flexibility in responding to changing business and economic conditions; o It could limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; o It could place us at a competitive disadvantage compared to our competitors that have less debt; o Our failure to comply with the restrictions contained in any of our financing agreements could lead to a default which could result in our being required to repay all of our outstanding debt; and o Future agreements which may govern the terms of debt we may incur may contain covenants that may restrict our ability to: - incur additional debt; - pay dividends and make other distributions; - prepay subordinated debt; - make investments and other restricted payments; 4 - create liens and sell assets; and - engage in transactions with affiliates. Our failure to comply with these covenants could lead to a default under the terms of our debt, requiring us to repay all of our then outstanding debt. Our operating results may fluctuate. Our annual and quarterly operating results may fluctuate as a result of numerous factors, many of which are outside of our control. These factors include: o delays in the generation of revenue because certain network elements have lead times that are controlled by incumbent carriers and other third parties; o the ability to develop and commercialize new services by us or our competitors; o the ability to deploy on a timely basis our services to adequately satisfy customer demand; o our ability to successfully operate and maintain our networks; o the rate at which customers subscribe to our services; o decreases in the prices for our services due to competition, volume-based pricing and other factors; o the development and operation of our billing and collection systems and other operational systems and processes; o the rendering of accurate and verifiable bills from the ILECs from whom we lease transport and resolution of billing disputes; o the incorporation of enhancements, upgrades and new software and hardware products into our network and operational processes that may cause unanticipated disruptions; and o the interpretation and enforcement of regulatory developments and court rulings concerning the 1996 Telecommunications Act, interconnection agreements and the antitrust laws. Our success depends on the effectiveness and retention of our management team. Our business is managed by a small number of key management personnel, the loss of some of whom could impair our ability to carry out our business plan. We believe our future success will depend in large part on our ability to attract and retain highly skilled and qualified personnel. We cannot assure you that our management team will remain with us. It may be difficult to find suitable replacements for any departing management personnel. We do not maintain key man insurance on any of our officers. If our equipment does not perform as we expect, it could delay our introduction of new services. In implementing our strategy, we may use new or existing technologies to offer additional services. We also plan to use equipment manufactured by multiple vendors to offer our current services and future services in each of our markets. If we cannot successfully install and integrate the technology and equipment necessary to deliver our current services and any future services within the time frame and with the cost effectiveness we currently contemplate, we could be forced to delay or abandon the introduction of new services. This could also affect our ability to attract and retain customers. 5 The failure of our operations support system to perform as we expect could impair our ability to retain customers and obtain new customers or could result in increased capital expenditures. Our operations support system is an important factor in our success. If our operations support system fails or is unable to perform, we could suffer customer dissatisfaction, loss of business or the inability to add customers on a timely basis, any of which would adversely affect our business, financial condition and results of operations. Furthermore, problems may arise with higher processing volumes or with additional automation features, which could potentially result in system breakdowns and delays and additional, unanticipated expense to remedy the defect or to replace the defective system with an alternative system. Our failure to manage growth could result in increased costs. We may be unable to manage our growth effectively. This could result in increased costs and delay our introduction of additional services. The development of our business will depend on, among other things, our ability to achieve the following goals in a timely manner, at reasonable costs and on satisfactory terms and conditions: o purchase, install and operate equipment; o negotiate suitable interconnection agreements with, and arrangements for installing our equipment at the central offices of, ILECs on satisfactory terms and conditions; o hire and retain qualified personnel; o lease suitable access to transport networks; and o obtain required government authorizations. Any significant growth will place a strain on our operational, human and financial resources and will also increase our operating complexity as well as the level of responsibility for both existing and new management personnel. Our ability to manage our growth effectively will depend on the continued development of plans, systems and controls for our operational, financial and management needs and on our ability to expand, train and manage our employee base. Our services may not achieve sufficient market acceptance to become profitable. To be successful, we must develop and market services that are widely accepted by businesses at profitable prices. Our success will depend upon the willingness of our target customers to accept us as an alternative provider of local, long distance, high-speed data and Internet services. Although we are in the process of rolling out additional products and services, we might not be able to provide the range of communication services our target business customers need or desire. Our failure to achieve or sustain market acceptance at desired pricing levels could impair our ability to achieve profitability or positive cash flow. Prices for data communication services have fallen historically, a trend which may continue. Accordingly, we cannot predict to what extent we may need to reduce our prices to remain competitive or whether we will be able to sustain future pricing levels as our competitors introduce competing services or similar services at lower prices. Our ability to meet price competition may depend on our ability to operate at costs equal to or lower than our competitors or potential competitors. There is a risk that competitors, perceiving us to lack capital resources, may undercut our rates, increase their services or take other actions that could be detrimental to us. If we are unable to negotiate and enforce favorable interconnection agreements, we could have difficulty operating profitably in our existing markets. We must renew favorable interconnection agreements with other companies, including ILECs, in the markets in which we operate. The rates charged to us under the interconnection agreements might not continue to be low enough for us to attract a sufficient number of customers and to operate our business on a profitable basis. 6 Our interconnection agreements provide for our connection and maintenance orders to receive attention on the same basis as the ILECs' customers and for the ILECs to provide adequate capacity to keep blockage within industry standards. Delays by the ILECs in connecting our customers to our network could result in customer dissatisfaction and loss of business. We rely on the timeliness of ILECs and competitive carriers in processing our orders for customers switching to our service and in maintaining the customers' standard telephone lines to assure uninterrupted service. The ILECs are our competitors and have limited experience leasing standard telephone lines to other companies. Therefore, the ILECs might not be able to provide and maintain leased standard telephone lines in a prompt and efficient manner as the number of standard telephone lines requested by competitive carriers increases. We may not be able to service our customers if we cannot secure sufficient telephone lines and cable to meet our future needs. We may not be able to renew our lease arrangements or obtain comparable arrangements from other carriers in our existing markets. Because we lease rather than construct telephone lines and cable in each of our markets, we would be unable to service our customers if we are not able to obtain sufficient telephone lines and cable. Our inability to lease sufficient telephone lines and cable could result in the loss of customers and the inability to add new customers. Our reliance on a limited number of equipment suppliers could result in additional expenses. We currently rely and expect to continue to rely on a limited number of third party suppliers to manufacture the equipment we require. If our suppliers enter into competition with us, or if our competitors enter into exclusive or restrictive arrangements with our suppliers it may materially and adversely affect the availability and pricing of the equipment we purchase. Our reliance on third-party vendors involves a number of additional risks, including the absence of guaranteed supply and reduced control over delivery schedules, quality assurance, production yields and costs. We cannot assure you that our vendors will be able to meet our needs in a satisfactory and timely manner in the future or that we will be able to obtain alternative vendors when and if needed. It could take a significant period of time to establish relationships with alternative suppliers for critical technologies and to introduce substitute technologies into our network. In addition, if we change vendors, we may need to replace all or a portion of the equipment deployed within our network at significant expense in terms of equipment costs and loss of revenues in the interim. We may not be able to compete successfully in the highly competitive telecommunications industry with competitors that have greater resources than we do. Our success depends upon our ability to compete with other telecommunications providers in each of our markets, many of which have substantially greater financial, marketing and other resources than we have. In addition, competitive alternatives may result in substantial customer turnover in the future. A growing trend towards consolidation of communications companies and the formation of strategic alliances within the communications industry, as well as the development of new technologies, could give rise to significant new competitors. We cannot assure you that we will be able to compete successfully. If we are not able to obtain or implement new technologies, we may lose business and limit our ability to attract new customers. We may be unable to obtain access to new technology on acceptable terms or at all. We may be unable to adapt to new technologies and offer services in a competitive manner. If these events occur, we may lose customers to competitors offering more advanced services and our ability to attract new customers would be hindered. Rapid and significant changes in technology are expected in the communications industry. We cannot predict the effect of technological changes on our business. Our future success will depend, in part, on our ability to anticipate and adapt to technological changes, evolving industry standards and the changing needs of our current and prospective customers. 7 A system failure or breach of network security could cause delays or interruptions of service to our customers and result in customer dissatisfaction. Interruptions in service, capacity limitations or security breaches could have a negative effect on customer acceptance and, therefore, on our ability to attract new customers and a negative effect on our business financial condition or results of operations. Our networks may be affected by physical damage, power loss, capacity limitations, software defects, breaches of security by computer viruses, break-ins or otherwise and other factors which may cause interruptions in service or reduced capacity for our customers. If we are unable to effectively deliver our services to a substantial number of customers, we may not achieve our revenue goals. We cannot guarantee that our network will be able to connect and manage a substantial number of customers at high transmission speeds. If we cannot achieve and maintain digital transmission speeds that are otherwise available in a particular market, we may lose customers to competitors with higher transmission speeds and we may not be able to attract new customers. While digital transmission speeds of up to 1.5 Mbps are possible on portions of our network, that speed may not be available over a majority of our network. Actual transmission speeds on our network will depend on a variety of factors many of which are beyond our control, including the distance an end user is located from a central office, the quality of the telephone lines, the presence of interfering transmissions on nearby lines and other factors. We may lose customers or potential customers because the telephone lines we require may be unavailable or in poor condition. Our ability to provide certain services to potential customers depends on the quality, physical condition, availability and maintenance of telephone lines within the control of the ILECs. If the telephone lines are not adequate, we may not be able to provide certain services to many of our target customers and our expected revenues will be diminished. In addition, the ILECs may not maintain the telephone lines in a condition that will allow us to implement certain services effectively or may claim they are not of sufficient quality to allow us to fully implement or operate certain services. Interference or claims of interference could result in customer dissatisfaction. Interference, or claims of interference by the ILECs, if widespread, could adversely affect our speed of deployment, reputation, brand image, service quality and customer satisfaction and retention. Technologies deployed on copper telephone lines, such as DSL, have the potential to interfere with other technologies on the copper telephone lines. Interference could degrade the performance of our services or make us unable to provide service on selected lines and the customers served by those lines. Although we believe our DSL technologies, like other technologies, do not interfere with existing voice services, ILECs may claim the potential for interference permits them to restrict or delay our deployment of DSL services. The procedures to resolve interference issues between competitive carriers and ILECs are still being developed. We may be unable to successfully resolve interference issues with ILECs. Our success will depend on growth in the demand for Internet access and high-speed data services. If the markets for the services we offer, including Internet access and high-speed data services, fail to develop, grow more slowly than anticipated or become saturated with competitors, we may not be able to achieve our projected revenues. The markets for business Internet and high-speed data services are in the early stages of development. Demand for Internet services is highly uncertain and depends on a number of factors, including the growth in consumer and business use of new interactive technologies, the development of technologies that facilitate interactive communication between organizations and targeted audiences, security concerns and increases in data transport capacity. In addition, the market for high-speed data transmission is relatively new and evolving. Various providers of high-speed digital services are testing products from various suppliers for various applications, and no industry standard has been broadly adopted. Critical issues concerning commercial use of DSL for Internet and high-speed data access, including security, reliability, ease of use and cost and quality of service, remain unresolved and may impact the growth of these services. 8 The desirability and marketability of our Internet service may be adversely affected if we are not able to maintain reciprocal relationships with other Internet service providers. The Internet is comprised of many Internet service providers and underlying transport providers who operate their own networks and interconnect with other Internet service providers at various points. As we continue the operation of Internet services, connections to the Internet will be provided through wholesale carriers. We anticipate that as our volume increases, we will enter into reciprocal agreements with other Internet service providers. We cannot assure you other national Internet service providers will maintain reciprocal relationships with us. If we are unable to maintain these relationships, our Internet services may not be attractive to our target customers, which would impair our ability to retain and attract customers. In addition, the requirements associated with maintaining relationships with the major national Internet service providers may change. We cannot assure you that we will be able to expand or adapt our network infrastructure to meet any new requirements on a timely basis, at a reasonable cost, or at all. We may incur liabilities as a result of our Internet service offerings. United States law relating to the liability of on-line service providers and Internet service providers for information carried on, disseminated through, or hosted on their systems is currently unsettled. If liability is imposed on Internet service providers, we would likely implement measures to minimize our liability exposure. These measures could require us to expend substantial resources or discontinue some of our product or service offerings. In addition, increased attention to liability issues, as a result of litigation, legislation or legislative proposals could adversely affect the growth and use of Internet services. Changes in laws or regulations could restrict the way we operate our business and negatively affect our costs and competitive position. A significant number of the services we offer are regulated at the federal, state and/or local levels. If these laws and regulations change or if the administrative implementation of laws develops in an adverse manner, there could be an adverse impact on our costs and competitive position. In addition, we may expend significant financial and managerial resources to participate in administrative proceedings at either the federal or state level, without achieving a favorable result. We believe incumbent carriers and others may work aggressively to modify or restrict the operation of many provisions of the Telecommunications Act. We expect ILECs and others to continue to pursue litigation in courts, institute administrative proceedings with the FCC and other state regulatory agencies and lobby the United States Congress, all in an effort to affect laws and regulations in a manner favorable to them and against the interest of competitive carriers. We believe that the recent changes in the make-up of the FCC and leadership changes in the Congress may create an atmosphere that is more favorable to the ILECs. For more details about our regulatory situation, please see "Government Regulations." We may face challenges to the use of the Mpower trademark. Other companies utilizing trademarks that are similar to our trademark may at some time challenge our use of the Mpower mark. A challenge to the mark could result in litigation to defend our mark and could ultimately require us to adopt a new trademark for our services and products. The prices we charge for our services and pay for the use of services of ILECs and other competitive carriers may be negatively affected in regulatory proceedings, which could result in decreased revenues, increased costs and loss of business. If we were required to decrease the prices we charge for our services or to pay higher prices for services we purchase from ILECs and other competitive carriers, it would have an adverse effect on our ability to achieve profitability and offer competitively priced services. We must file tariffs with state and federal regulators which indicate the prices we charge for our services. In addition, we purchase some tariffed services from ILECs and/or competitive carriers. The rates we pay for other services we purchase from ILECs and other competitive carriers are set by negotiations between the parties. All of the tariffed prices may be challenged in regulatory proceedings by customers, including ILECs, competitive carriers and long distance carriers who purchase these services. These negotiated rates are also subject to regulatory review. In April 2001, the FCC released an order establishing benchmark rates for competitive local carrier switched access charges. Under the order, competitive local carrier access rates that are at or below the benchmark rates will be presumed to be just and reasonable, and carriers like us 9 may impose them by tariff. Above the benchmark, these carriers' access service will be mandatorily detariffed, so the competitive local carriers must negotiate higher rates with long distance carriers. During the pendency of the negotiations, or if the parties cannot agree, the local carrier must charge the long distance carrier the appropriate benchmark rate. This could have an adverse impact on our expected revenues and operating results. The prices charged by incumbent carriers for unbundled network elements, collocations and other services upon which we rely are subject to periodic review by state regulatory agencies. Change in these prices may adversely affect our business. For more details about our regulatory situation, please see "Government Regulations." 10 RATIO OF EARNINGS TO COMBINED FIXED CHARGES The ratio of our earnings to our fixed charges was as follows for each of the periods indicated:
Predecessor Mpower Holding Predecessor Reorganized Reorganized Year ended December 31, Mpower Holding Mpower Holding Mpower Holding --------------------------------------- January 1, 2002 to July 31, 2002 to Nine Months Ended 1998 1999 2000 2001 July 30, 2002 December 31, 2002 September 30, 2003 ---- ---- ---- ---- ------------------ ----------------- ------------------ (0.30) (1.48) (2.09) (3.76) (0.86) 6.77 (12.92)
For purposes of calculating the ratio of earnings to fixed charges, "earnings" means the sum of: o our pre-tax income from continuing operations, o any income we received from less-than-fifty-percent-owned companies, and o our fixed charges, excluding capitalized interest. "Fixed charges" means the sum of: o the interest we pay on borrowed funds, o the amount we amortize for debt discount, premium, and issuance expense, and o an estimate of the interest within rental expense. As of the date of this prospectus, we have no preferred stock outstanding. As a result, our ratio of earnings to combined fixed charges and preferred stock dividends would have been the same as our ratio of earnings to fixed charges for the periods presented. ---------------- 1 Earnings were inadequate to cover fixed charges for each of the periods presented with the exception of the period from July 31, 2002 to December 31, 2002. The coverage deficiency totaled $46.554 million for the period from January 1, 2002 to July 31, 2002 and $17.982 million for the nine months ended September 30, 2003, and $424.101 million, $237.888 million $65.550 million and $31.002 million for the fiscal years ended December 31, 2001, 2000, 1999 and 1998, respectively. 11 USE OF PROCEEDS Unless we inform you otherwise in a prospectus supplement, we expect to use the net proceeds from the sale of securities for general corporate purposes. These may include, but are not limited to: o acquisitions; o reduction or refinancing of outstanding indebtedness or other corporate obligations; o capital expenditures; o working capital; or o any other lawful purpose. Pending any specific application, we may initially invest funds in short-term marketable securities or apply them to reduce short-term indebtedness. If we intend to use the proceeds of any offering to repay outstanding debt, we will produce details about debt that is being repaid in a prospectus supplement. 12 GOVERNMENT REGULATIONS Federal Regulation The Federal Communications Commission (the "FCC") regulates interstate and international communications services, including access to local telephone facilities to place and receive interstate and international calls. We provide these services as a common carrier. The FCC imposes more regulation on common carriers that have some degree of market power, such as incumbent local exchange carriers. The FCC imposes less regulation on common carriers without market power, including competitive common carriers like us. The FCC grants automatic authority to carriers to provide interstate long distance service, but requires common carriers to receive an authorization to construct and operate communications facilities, and to provide or resell communications services, between the United States and international points. The requirement that incumbent carriers unbundle their network elements has been implemented through rules adopted by the FCC. In January 1999, the United States Supreme Court confirmed the FCC's broad authority to issue these rules, but vacated a particular rule that defined the network elements the incumbent carriers must offer. In a November 1999 order, the FCC reaffirmed that incumbent carriers must provide unbundled access to a minimum of six network elements including local loop and transport facilities (the elements in primary use by us). In December 2001, the FCC initiated a review of the network element unbundling rules, which is discussed below. Also, in February 2002, the FCC requested comments on a number of issues relating to regulation of broadband Internet access services offered over telephone company facilities, including whether the incumbent carriers should continue to be required to offer the elements of these services on an unbundled basis. Any change in the existing rules that would reduce the obligation of incumbent carriers to offer network elements to us on an unbundled basis could adversely affect our business plan. In May 1997, the FCC released an order establishing a significantly expanded federal universal service subsidy program. The FCC is considering proposals to change the way contributions are assessed, but we cannot predict when or whether the FCC will act on these proposals. In November 2001, the FCC initiated two rulemaking proceedings to establish a core set of national performance measurements and standards for evaluating an incumbent carrier's performance in provisioning wholesale facilities and services to competitors. It sought comment on a set of specific performance measurements and on related issues of implementation, reporting requirements, and enforcement mechanisms. We cannot predict the ultimate outcome of these proceedings. We have intervened on behalf of the FCC in an appeal filed by AT&T seeking to overturn the FCC's declaratory ruling in CCB/CPD No. 01-02, in which the FCC concluded that a long distance carrier may not refuse a call from/to an access line served by a competitive local carrier with presumptively reasonable access rates. We have appealed the FCC's order in CC Docket No. 96-262, in which the FCC, among other things, established benchmark rates for competitive local carrier switched access charges. We cannot predict the outcome of these appeals. Verizon and SBC has have obtained authority to provide interLATA long distance services in substantially all of its their operating areas and SBC has obtained authority to provide interLATA long distance services in approximately half of its operating areas. During 2003, the regional Bell operating companies are likelyThis enables the regional Bell operating companies to complete this process and be authorized to compete throughout their operating areas with packages of bundled services, or "one stop shopping." With the completion of this process, incentives for incumbent carriers to improve service to competitive carriers like us in order to obtain interLATA long distance authority will be virtually eliminated while at the same time, the regional Bell operating companies will be in a position to become more efficient and attractive competitors. In December 2001, the FCC initiated a review of the current regulatory requirements for incumbent carriers' broadband telecommunications services. Incumbent carriers are generally treated as dominant carriers, and hence are subject to certain regulatory requirements, such as tariff filings and pricing requirements. In this proceeding, the FCC seeks to determine what regulatory safeguards and carrier obligations, if any, should apply when a carrier that is dominant in the provision of traditional local exchange and exchange access services provides 13 broadband service. A decision by the FCC to exempt the incumbent carriers' broadband services from traditional regulation could have a significant adverse competitive impact. In August 2003, the FCC released its Triennial Review Order in connection with the Commission's review of unbundled network elements or UNEs the incumbent carriers are required to sell to competitive carriers such as us at forward forward-looking or TELRIC (total Total element Element long Long run Run incremental Incremental costCost (TELRIC) rates, which reflect efficient costs plus a reasonable profit. Competitive carriers such as us may depend upon their ability to obtain access to these UNEs in order to provision services to their customers. The FCC ordered that it would de-regulate access to the incumbent carriers' fiber/broadband network but would continue to require that incumbents provide access to their copper network and to DS-1 and DS-3 loops and transport. We primarily buy access to the incumbents' copper network and to DS-1s/T-1s. Although the FCC found that competitive carriers are impaired without access to UNE loops and transport, the FCC provided state commissions with an analytical framework to determine impairment on a local basis. Portions of the order are being challenged by both incumbent carriers and competitive carriers. We have joined with other competitive carriers to challenge the exemption of incumbent carriers from broadband unbundling. While this does not presently impact us it could have a future significant adverse negative impact. The "triennial review" decision is complex and it will have a significant impact on telecommunications competition, but it is not possible at this time to predict the full extent of its impact upon us or our competition. After the passage of the Telecommunications Act of 1996, the FCC adopted its current pricing rules based on Total Element Long Run Incremental Cost (TELRIC) of a UNE. In September 2003, the FCC initiated a review of these rules applicable to the pricing of UNEs. The FCC review will determine whether the rules foster competition and investment. We cannot predict the outcome of this review. In May 1997, the FCC released an order establishing a significantly expanded federal universal service subsidy program. The FCC is considering proposals to change the way contributions are assessed, but we cannot predict when or whether the FCC will act on these proposals. State Regulation State regulatory agencies have jurisdiction over our intrastate services, including our rates. State agencies require us to file periodic reports, pay various fees and assessments and comply with rules governing quality of service, consumer protection and similar issues. These agencies may also have to approve the transfer of assets or customers located in the state, a change of control of our Company or our issuance of securities or assumption of debt. The specific requirements vary from state to state. State regulatory agencies also must approve our interconnection agreements with incumbent carriers. Price cap or rate of return regulation for competitive carriers does not apply in any of our current markets. However, we cannot assure you that the imposition of new regulatory burdens in a particular state will not affect the profitability of our services in that state. For example, recently enacted legislation in Nevada will limit the state public utility commission regulation of the incumbent carrier's broadband services and increase the incumbent carrier's flexibility in pricing its services, which could have a significant adverse competitive impact. In Illinois, recent passage of a bill would permit SBC to raise the rates it charges competitors to use its local lines. A federal court has issued a temporary restraining order barring implementation of this law pending the outcome of litigation filed by us and other carriers to strike down the law as violative of the Telecommunications Act and Supreme Court precedent. If the law is ultimately passed, it could also have a significant adverse competitive impact in that market. The FCC Triennial Review Order provides for state regulatory agencies to determine whether competitive carriers would be impaired if certain unbundled network elements - switching, transport, local loops - should be removed from the list of UNEs that incumbent carriers must provide. Since we utilize our own switches, a finding of non-impairment in connection with the switching UNE would not adversely impact us. The Triennial Review Order concluded that competitive carriers would be impaired without loops and transport UNEs. Regulatory dockets have been initiated in all states in the last quarter of 2003 to determine the impairment/nonimpairment issue on a local basis. Decisions are expected by the end of the third quarter of 2004. However, we cannot predict the outcome of these state proceedings. A finding of non-impairment by state regulatory agencies with respect to loops and transport UNEs could have a significant adverse negative impact. 14 DESCRIPTION OF DEBT SECURITIES We will issue debt securities in one or more series under an indenture between us and HSBC Bank USA, as trustee. The indenture may be supplemented from time to time. The indenture is a contract between us and HSBC Bank USA acting as trustee. The trustee has two main roles. First, the trustee can enforce your rights against us if an "Event of Default" described below occurs. Second, the trustee performs certain administrative duties for us. The indenture is summarized below. Because this discussion is a summary, it does not contain all of the information that may be important to you. We filed the indenture as an exhibit to the registration statement, and we suggest that you read those parts of the indenture that are important to you. You especially need to read the indenture to get a complete understanding of your rights and our obligations under the covenants described below under Limitation on Liens and Merger and Consolidation. Throughout the summary we have included parenthetical references to the indenture so that you can easily locate the provisions being discussed. The specific terms of each series of debt securities will be described in the particular prospectus supplement relating to that series. The prospectus supplement may or may not modify the general terms found in this prospectus and will be filed with the SEC. For a complete description of the terms of a particular series of debt securities, you should read both this prospectus and the prospectus supplement relating to that particular series. General The debt securities offered by this prospectus will be limited to a total amount of $250,000,000, or the equivalent amount in any currency. The indenture, however, does not limit the amount of debt securities that may be issued under it. Therefore, additional debt securities may be issued under the indenture. The prospectus supplement relating to any series of debt securities will, among other things, describe the following terms, where applicable: o the designation or title of the series of debt securities; o the total principal amount of the series of debt securities; o the percentage of the principal amount at which the series of debt securities will be offered; o the date or dates on which principal will be payable; o the rate or rates (which may be either fixed or variable) and/or the method of determining such rate or rates of interest, if any; o the date or dates from which any interest will accrue, or the method of determining such date or dates, and the date or dates on which any interest will be payable; o the terms for redemption, extension or early repayment, if any; o the currencies in which the series of debt securities are issued and payable; o the provision for any sinking fund; o any additional restrictive covenants; o any additional Events of Default; o whether the series of debt securities are issuable in certificated form; 15 o any special tax implications, including provisions for original issue discount; o any provisions for convertibility or exchangeability of the debt securities into or for any other securities; o whether the debt securities are subject to subordination and the terms of such subordination; and o any other terms. The debt securities will be unsecured obligations of Mpower. Senior debt securities will rank equally with Mpower's other unsecured and unsubordinated indebtedness. Subordinated debt securities will be unsecured and subordinated in right of payment to the prior payment in full of all of our unsecured and unsubordinated indebtedness. See "-- Subordination" below. In addition, Mpower's subsidiaries are separate and distinct legal entities and will have no obligation to pay any amounts due on the debt securities or to provide Mpower with the funds to satisfy its payment obligations. As a result, any debt securities that Mpower issues will be effectively subordinated to all existing and future indebtedness and other liabilities of Mpower's subsidiaries. Unless the prospectus supplement states otherwise, principal (and premium, if any) and interest, if any, will be paid by us in immediately available funds. The Indenture does not contain any provisions that give you protection in the event we issue a large amount of debt or we are acquired by another entity. Limitation on Liens If Mpower shall pledge or otherwise subject to any lien (as defined in the indenture as a "Mortgage") any of its property or assets, Mpower will secure the debt securities equally and ratably with (or prior to) the indebtedness secured by such Mortgage. This restriction does not apply to Mortgages securing such indebtedness which shall not exceed $ million in the aggregate at any one time outstanding and does not apply to: o Mortgages created or incurred to secure financing of Mpower's current or future receivables; o certain Mortgages created or incurred to secure financing of the export or marketing of goods outside the United States; o Mortgages on accounts receivable payable in foreign currencies securing indebtedness incurred and payable outside the United States; o Mortgages in favor of Mpower; o Mortgages in favor of governmental bodies to secure progress, advance or other payments, or deposits with any governmental body required in connection with the business of Mpower; o deposits made in connection with pending litigation; o Mortgages existing at the time of acquisition of the assets secured thereby (including acquisition through merger or consolidation) and certain purchase money Mortgages; and o any extension, renewal or replacement of any Mortgage or Mortgages referred to in the foregoing clauses, inclusive. (Section 10.04) Merger and Consolidation The indenture provides that no consolidation or merger of Mpower with or into any other corporation shall be permitted, and no sale or conveyance of its property as an entirety, or substantially as an entirety, may be made to 16 another corporation, if, as a result thereof, any asset of Mpower would become subject to a Mortgage, unless the debt securities shall be equally and ratably secured with (or prior to) the indebtedness secured by such Mortgage, or unless such Mortgage could be created pursuant to Section 10.04 (see "Limitation on Liens" above) without equally and ratably securing the Indenture Securities. (Sections 8.01 and 8.03) Events of Default and Notice Thereof The Indenture defines an "Event of Default" as being any one of the following events: o failure to pay interest for 30 days after becoming due; o failure to pay principal or any premium on its due date; o failure to make a sinking fund payment on its due date; o failure to perform any other covenant applicable to the debt securities for 90 days after notice; o certain events of bankruptcy, insolvency or reorganization; and o any other Event of Default provided in the prospectus supplement. An Event of Default for a particular series of debt securities will not necessarily constitute an Event of Default for any other series of debt securities issued under the indenture. If an Event of Default occurs and continues, the trustee or the holders of at least 25% of the total principal amount of the series may declare the entire principal amount (or, if they are Original Issue Discount Securities (as defined in the indenture), the portion of the principal amount as specified in the terms of such series) of all of the debt securities of that series to be due and payable immediately. If this happens, subject to certain conditions, the holders of a majority of the total principal amount of the debt securities of that series can void the declaration. (Section 6.01) The indenture provides that within 90 days after default under a series of debt securities, the trustee will give the holders of that series notice of all uncured defaults known to it. (The term "default" includes the events specified above without regard to any period of grace or requirement of notice.) The trustee may withhold notice of any default (except a default in the payment of principal, interest or any premium) if it believes that it is in the interest of the holders. Annually, Mpower must send to the trustee a certificate describing any existing defaults under the indenture. Other than its duties in case of a default, the trustee is not obligated to exercise any of its rights or powers under the indenture at the request, order or direction of any holders, unless the holders offer the trustee reasonable protection from expenses and liability. If they provide this reasonable indemnification, the holders of a majority of the total principal amount of any series of debt securities may direct the trustee how to act under the indenture. (Section 6.02) Modification of the Indenture With certain exceptions, Mpower's rights and obligations and your rights under a particular series of debt securities may be modified with the consent of the holders of not less than a majority of the total principal amount of those debt securities. No modification of the principal or interest payment terms, and no modification reducing the percentage required for modifications, will be effective against you without your consent. Subordination The extent to which a particular series of subordinated debt securities may be subordinated to our unsecured and unsubordinated indebtedness will be set forth in the prospectus supplement for any such series and the indenture may be modified by a supplemental indenture to reflect such subordination provisions. 17 Global Securities Unless otherwise stated in a prospectus supplement, the debt securities of a series will be issued in the form of one or more global certificates that will be deposited with The Depository Trust Company, New York, New York ("DTC"), which will act as depositary for the global certificates. Beneficial interests in global certificates will be shown on, and transfers of global certificates will be effected only through, records maintained by DTC and its participants. Therefore, if you wish to own debt securities that are represented by one or more global certificates, you can do so only indirectly or "beneficially" through an account with a broker, bank or other financial institution that has an account with DTC (that is, a DTC participant) or through an account directly with DTC if you are a DTC participant. While the debt securities are represented by one or more global certificates: o You will not be able to have the debt securities registered in your name. o You will not be able to receive a physical certificate for the debt securities. o Our obligations, as well as the obligations of the trustee and any of our agents, under the debt securities will run only to DTC as the registered owner of the debt securities. For example, once we make payment to DTC, we will have no further responsibility for the payment even if DTC or your broker, bank or other financial institution fails to pass it on so that you receive it. o Your rights under the debt securities relating to payments, transfers, exchanges and other matters will be governed by applicable law and by the contractual arrangements between you and your broker, bank or other financial institution, and/or the contractual arrangements you or your broker, bank or financial institution has with DTC. Neither we nor the trustee has any responsibility for the actions of DTC or your broker, bank or financial institution. o You may not be able to sell your interests in the debt securities to some insurance companies and others who are required by law to own their debt securities in the form of physical certificates. o Because the debt securities will trade in DTC's Same-Day Funds Settlement System, when you buy or sell interests in the debt securities, payment for them will have to be made in immediately available funds. This could affect the attractiveness of the debt securities to others. A global certificate generally can be transferred only as a whole, unless it is being transferred to certain nominees of the depositary or it is exchanged in whole or in part for debt securities in physical form. If a global certificate is exchanged for debt securities in physical form, they will be in denominations of $1,000 and integral multiples thereof, or another denomination stated in the prospectus supplement. 18 DESCRIPTION OF CAPITAL STOCK This section contains a description of our capital stock. The following summary of the terms of our capital stock is not meant to be complete and is qualified by reference to our restated certificate of incorporation. See "Where You Can Find More Information." Our certificate of incorporation permits us to issue up to 1,000,000,000 shares of common stock, par value $0.001 per share and up to 50,000,000 shares of preferred stock, par value $0.001 per share. As of January 15, 2004, there were 78,315,876 shares of common stock outstanding. The following description of our common stock and provisions of our certificate of incorporation and by-laws is only a summary, and we encourage you to review complete copies of our certificate of incorporation and by-laws, which we have previously filed with the SEC. Common Stock Holders of our $0.001 par value common stock are entitled to receive ratably such dividends and other distributions in cash, stock of any corporation or property of ours as may be declared thereon by the Board of Directors from time to time out of our assets or funds legally available therefore and shall be entitled, after payment of all prior claims, to receive ratably all of our assets upon the liquidation, dissolution or winding up. Each holder of common stock at every meeting of the stockholders shall be entitled to one vote in person or by proxy for each share of common stock held by such holder. Holders of common stock are not entitled to cumulative voting for the election of directors. There are no preemptive, conversion, redemption or sinking fund provisions applicable to our common stock. All outstanding shares of our common stock are fully paid and non-assessable. Our common stock is quoted on the NASD Over-the-Counter Bulletin Board under the symbol "MPOW." Dividends We have never paid a cash dividend on our common stock and do not plan to pay dividends on our common stock for the foreseeable future. As a holding company, our ability to pay dividends depends on a number of factors, including the earnings of, and cash flow available from, our operating companies. Delaware Law and our Certificate of Incorporation and By-law Provisions May Have an Anti-Takeover Effect Provisions in our certificate of incorporation, by-laws and Delaware law could make it harder for someone to acquire us through a tender offer, proxy contest or otherwise. We are governed by the provisions of Section 203 of the Delaware General Corporate Law, which provides that a person who owns (or within three years, did own) 15% or more of a company's voting stock is an "interested stockholder." Section 203 prohibits a public Delaware corporation from engaging in a business combination with an interested stockholder for a period commencing three years from the date in which the person became an interested stockholder unless: o the board of directors approved the transaction that resulted in the stockholder becoming an interested stockholder; o upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the voting stock of the corporation (excluding shares owned by officers, directors, or certain employee stock purchase plans); or o at or subsequent to the time the transaction is approved by the board of directors, there is an affirmative vote of at least 66.67% of the outstanding voting stock. Section 203 could prohibit or delay mergers or other takeover attempts against us and accordingly, may discourage attempts to acquire us through tender offer, proxy contest or otherwise. Our certificate of incorporation and by-laws include certain restrictions on who may call a special meeting of stockholders and prohibit certain actions by written consent of the holders of common stock. These provisions 19 could delay, deter or prevent a future takeover or acquisition of us unless such takeover or acquisition is approved by our board of directors. We have a staggered board of directors, so that it would take three successive annual meetings to replace all directors. Preferred Stock Our certificate of incorporation authorizes the Board of Directors to issue preferred stock in one or more series. The description of shares of each series of preferred stock, including the number of shares to be included in such series, any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption are to be determined as set forth in resolutions adopted by the Board of Directors establishing such series of preferred stock. Mpower may issue, without the approval of the holders of common stock, preferred stock which has voting, dividend or liquidation rights superior to the common stock and which may adversely affect the rights of holders of common stock. The issuance of preferred stock could, among other things, adversely affect the voting power of the holders of common stock and could have the effect of delaying, deferring or preventing a change in control of Mpower. Limitations on Liability and Indemnification of Officers and Directors Our certificate of incorporation limits the liability of directors to the fullest extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, including, without limitation, directors serving on committees of our board of directors. Directors remain liable for: o any breach of the director's duty of loyalty to its stockholders; o any act or omission not in good faith or which involves intentional misconduct or a knowing violation of the law; o any violation of Section 174 of the DGCL, which proscribes the payment of dividends and stock purchases or redemptions under certain circumstances; and o any transaction from which the directors derive an improper personal benefit. This provision, however, has no effect on the availability of equitable remedies such as an injunction or rescission. Additionally, this provision will not limit liability under state or federal securities laws. Our certificate of incorporation provides that we shall indemnify our officers and directors to the fullest extent permitted by such law. We believe that these provisions will assist us in attracting and retaining qualified individuals to serve as directors. Rights Agreement The terms of our rights agreement are complex and not easily summarized. This summary may not contain all of the information that is important to you. Accordingly, you should carefully read our rights agreement, as amended, that is incorporated by reference as an exhibit to the registration statement of which this prospectus is a part. The following description of the rights granted pursuant to the rights agreement does not purport to be complete and is qualified in its entirety by reference to our rights agreement. On July 10, 2003, our Board of Directors declared a distribution of one right for each outstanding share of common stock, par value $0.001 per share, to stockholders of record at the close of business on July 11, 2003 and for each share of Mpower common stock issued (including shares distributed from Treasury) by us thereafter and prior to the Distribution Date (as defined in the Rights Agreement between us and Continental Stock Transfer & Trust Company as Rights Agent, dated as of July 10, 2003 (the "Rights Agreement")). Each right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from us one one-thousandth of a share (a "Unit") of Series A Preferred Stock, par value $0.001 per share (the "Preferred Stock"), at a purchase price of $6.00 per Unit, subject to adjustment. The purchase price is payable in cash or by certified or bank check or money 20 order payable to Mpower, or by wire transfer of immediately available funds to the account of Mpower. The description and terms of the rights are set forth in the Rights Agreement. Initially, the rights will attach to all certificates representing shares of our outstanding common stock, and no separate Rights Certificates will be distributed. The rights will separate from our common stock and the Distribution Date will occur upon the earlier of (i) 10 days following a public announcement (the date of such announcement being the "Stock Acquisition Date") that a person or group of affiliated or associated persons (other than us, any Subsidiary of ours or any employee benefit plan of ours or such Subsidiary) (an "Acquiring Person") has acquired, obtained the right to acquire or otherwise obtained beneficial ownership of 15% or more of the then-outstanding shares of our common stock, and (ii) 10 business days (or such later date as may be determined by action of our Board of Directors prior to such time as any person becomes an Acquiring Person) following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 15% or more of the then-outstanding shares of our common stock. Until the Distribution Date, (i) the rights will be evidenced by our common stock certificates and will be transferred with and only with our common stock certificates, (ii) new common stock certificates issued after July 10, 2003 (also including shares distributed from treasury stock) will contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates representing our outstanding common stock will also constitute the transfer of the rights associated with our common stock represented by such certificates. The rights are not exercisable until the Distribution Date and will expire at the close of business on the tenth anniversary of the Rights Agreement (the "Final Expiration Date"), unless earlier redeemed by us as described below. As soon as practicable after the Distribution Date, Rights Certificates will be mailed to holders of record of our common stock as of the close of business on the Distribution Date and, thereafter, the separate Rights Certificates alone will represent the rights. In the event that (i) we are the surviving corporation in a merger with an Acquiring Person and shares of our common stock shall remain outstanding, (ii) a person becomes an Acquiring Person, (iii) an Acquiring Person engages in one or more "self-dealing" transactions as set forth in the Rights Agreement, or (iv) during such time as there is an Acquiring Person, an event occurs which results in such Acquiring Person's ownership interest being increased by more than 1% (e.g., by means of a reverse stock split or recapitalization) (each such event being a "Section 11(a)(ii) Event"), then, in each such case, each holder of a right will thereafter have the right to receive, upon exercise, Units of Preferred Stock (or, in certain circumstances, our common stock, cash, property or other securities of ours) having a value equal to two times the exercise price of the right. The exercise price is the purchase price multiplied by the number of Units of Preferred Stock issuable upon exercise of a right prior to the events described in this paragraph. Notwithstanding any of the foregoing, following the occurrence of any of the events set forth in this paragraph, all rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. In the event that, at any time following the Stock Acquisition Date, (i) we are acquired in a merger (other than a merger described in the preceding paragraph) or other business combination transaction and we are not the surviving corporation, (ii) any Person consolidates or merges with us and all or part of our common stock is converted or exchanged for securities, cash or property of any other Person or (iii) 50% or more of our assets or earning power is sold or transferred, each holder of a right (except rights which previously have been voided as described above) shall thereafter have the right to receive, upon exercise, common stock of the Acquiring Person having a value equal to two times the exercise price of the right. The purchase price payable, and the number of Units of Preferred Stock issuable upon exercise of the rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (ii) if holders of the Preferred Stock are granted certain rights or warrants to subscribe for Preferred Stock or convertible securities at less than the current market price of the Preferred Stock, or (iii) upon the distribution to the holders of the Preferred Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above). 21 With certain exceptions, no adjustment in the purchase price will be required until cumulative adjustments amount to at least 1% of the purchase price. We are not required to issue fractional Units. In lieu thereof, an adjustment in cash may be made based on the market price of the Preferred Stock prior to the date of exercise. At any time prior to the earlier of (i) 10 business days following the Stock Acquisition Date or (ii) the Final Expiration Date, our Board of Directors may redeem the rights in whole, but not in part, at a price of $0.0001 per right (the "Redemption Price"), payable, at the election of our Board of Directors, in cash or shares of our common stock. Immediately upon the action of our Board of Directors ordering the redemption of the rights, the rights will terminate and the only right of the holders of rights will be to receive the Redemption Price. Our Board of Directors, at its option, may exchange each right for (i) one Unit of Preferred Stock or (ii) such number of Units of Preferred Stock as will equal (x) the difference between the aggregate market price of the number of Units of Preferred Stock to be received upon a Section 11(a)(ii) Event and the purchase price divided by (y) the market price per Unit of Preferred Stock upon the Section 11(a)(ii) Event. Until a right is exercised, the holder thereof, as such, will have no rights as a stockholder of ours, including, without limitation, the right to vote or to receive dividends. While the distribution of the rights will not be taxable to stockholders or to us, stockholders may, depending upon the circumstances, recognize taxable income in the event that the rights become exercisable for Units of Preferred Stock (or other consideration). The Rights Agreement may be amended in any way by our Board of Directors at any time prior to the Distribution Date. After the Distribution Date, we may supplement or amend the Rights Agreement without the approval of rights holders in order (a) to cure any ambiguity, (b) to correct or supplement any defective or inconsistent provision, (c) to shorten or lengthen any time period as permitted by the Rights Agreement or (d) to change or supplement the Rights Agreement in any manner which would not adversely affect the interests of rights holders. A total of 100,000 shares of Preferred Stock will be reserved for issuance upon exercise of the rights. The Units of Preferred Stock that may be acquired upon exercise of the rights will be nonredeemable and subordinate to any other shares of preferred stock that may be issued by us. Each Unit of Preferred Stock will have a minimum preferential quarterly dividend rate of $0.01 per Unit but will, in any event, be entitled to a dividend equal to the per share dividend declared on our common stock. In the event of liquidation, the holder of a Unit of Preferred Stock will receive a preferred liquidation payment equal to the greater of $0.01 per Unit and the per share amount paid in respect of a share of our common stock. Each Unit of Preferred Stock will have one vote, voting together with our common stock. The holders of Units of Preferred Stock, voting as a separate class, shall be entitled to elect two directors if dividends on the Preferred Stock are in arrears for six consecutive fiscal quarters. In the event of any merger, consolidation or other transaction in which shares of our common stock are exchanged, each Unit of Preferred Stock will be entitled to receive the per share amount paid in respect of each share of our common stock. The rights of holders of the Preferred Stock to dividends, liquidation and voting, and in the event of mergers and consolidations, are protected by customary antidilution provisions. Because of the nature of the Preferred Stock's dividend, liquidation and voting rights, the economic value of one Unit of Preferred Stock that may be acquired upon the exercise of each right should approximate the economic value of one share of our common stock. The rights may have certain anti-takeover effects. The rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors unless the offer is conditioned on 22 a substantial number of rights being acquired. However, the rights should not interfere with any merger or other business combination approved by our Board of Directors because the rights may be redeemed by the Board of Directors at a nominal price of $0.0001 per right at any time on or prior to the tenth day after a public announcement made by either us or the acquiring person or group that such person or group has acquired beneficial ownership of 15% or more of our common stock (subject to extension by our Board of Directors). Thus, the rights are intended to encourage persons who may seek to acquire control of us to initiate such an acquisition through negotiations with our Board of Directors. However, the effect of the rights may be to discourage a third party from making a partial tender offer or otherwise attempting to obtain a substantial equity position in the equity securities of, or seeking to obtain control of, us. To the extent any potential acquirors are deterred by the rights, the rights may have the effect of preserving incumbent management in office. 23 DESCRIPTION OF DEPOSITARY SHARES We may elect to offer fractional shares of preferred stock rather than full shares of preferred stock. In that event, we will issue to the public receipts for depositary shares, and each of these depositary shares will represent a fraction (to be set forth in the applicable prospectus supplement) of a share of a particular series of preferred stock. The shares of any series of preferred stock underlying the depositary shares will be deposited under a deposit agreement between us and a bank or trust company selected by us. The depositary will have its principal office in the United States and a combined capital and surplus of at least $50,000,000. Subject to the terms of the deposit agreement, each owner of a depositary share will be entitled, in proportion to the applicable fraction of a share of preferred stock underlying the depositary share, to all the rights and preferences of the preferred stock underlying that depositary share. Those rights may include dividend, voting, redemption, conversion and liquidation rights. The depositary shares will be evidenced by depositary receipts issued under a deposit agreement. Depositary receipts will be distributed to those persons purchasing the fractional shares of preferred stock underlying the depositary shares, in accordance with the terms of the offering. The following description of the material terms of the deposit agreement, the depositary shares and the depositary receipts is only a summary and you should refer to the forms of the deposit agreement and depositary receipts that will be filed with the SEC in connection with the offering of the specific depositary shares. Pending the preparation of definitive engraved depositary receipts, the depositary may, upon our written order, issue temporary depositary receipts substantially identical to the definitive depositary receipts but not in definitive form. These temporary depositary receipts entitle their holders to all the rights of definitive depositary receipts. Temporary depositary receipts will then be exchangeable for definitive depositary receipts at our expense. Dividends and Other Distributions The depositary will distribute all cash dividends or other cash distributions received with respect to the underlying stock to the record holders of depositary shares in proportion to the number of depositary shares owned by those holders. If there is a distribution other than in cash, the depositary will distribute property received by it to the record holders of depositary shares that are entitled to receive the distribution, unless the depositary determines that it is not feasible to make the distribution. If this occurs, the depositary may, with our approval, sell the property and distribute the net proceeds from the sale to the applicable holders. Withdrawal of Underlying Preferred Stock Unless we say otherwise in a prospectus supplement, holders may surrender depositary receipts at the principal office of the depositary and, upon payment of any unpaid amount due to the depositary, be entitled to receive the number of whole shares of underlying preferred stock and all money and other property represented by the related depositary shares. We will not issue any partial shares of preferred stock. If the holder delivers depositary receipts evidencing a number of depositary shares that represent more than a whole number of shares of preferred stock, the depositary will issue a new depositary receipt evidencing the excess number of depositary shares to that holder. Redemption of Depositary Shares If a series of preferred stock represented by depositary shares is subject to redemption, the depositary shares will be redeemed from the proceeds received by the depositary resulting from the redemption, in whole or in part, of that series of underlying stock held by the depositary. The redemption price per depositary share will be equal to the applicable fraction of the redemption price per share payable with respect to that series of underlying stock. Whenever we redeem shares of underlying stock that are held by the depositary, the depositary will redeem, as of the same redemption date, the number of depositary shares representing the shares of underlying stock so 24 redeemed. If fewer than all the depositary shares are to be redeemed, the depositary shares to be redeemed will be selected by lot or proportionately or other equitable method, as may be determined by the depositary. Voting Upon receipt of notice of any meeting at which the holders of the underlying stock are entitled to vote, the depositary will mail the information contained in the notice to the record holders of the depositary shares underlying the preferred stock. Each record holder of the depositary shares on the record date (which will be the same date as the record date for the underlying stock) will be entitled to instruct the depositary as to the exercise of the voting rights pertaining to the amount of the underlying stock represented by that holder's depositary shares. The depositary will then try, as far as practicable, to vote the number of shares of preferred stock underlying those depositary shares in accordance with those instructions, and we will agree to take all actions which may be deemed necessary by the depositary to enable the depositary to do so. The depositary will not vote the underlying shares to the extent it does not receive specific instructions with respect to the depositary shares representing the preferred stock. Conversion or Exchange of Preferred Stock If the deposited preferred stock is convertible into or exchangeable for other securities, the following will apply. The depositary shares, as such, will not be convertible into or exchangeable for such other securities. Rather, any holder of the depositary shares may surrender the related depositary receipts, together with any amounts payable by the holder in connection with the conversion or the exchange, to the depositary with written instructions to cause conversion or exchange of the preferred stock represented by the depositary shares into or for such other securities. If only some of the depositary shares are to be converted or exchanged, a new depositary receipt or receipts will be issued for any depositary shares not to be converted or exchanged. Amendment and Termination of the Deposit Agreement The form of depositary receipt evidencing the depositary shares and any provision of the deposit agreement may at any time be amended by agreement between us and the depositary. However, any amendment which materially and adversely alters the rights of the holders of depositary shares will not be effective unless the amendment has been approved by the holders of at least a majority of the depositary shares then outstanding. The deposit agreement may be terminated by us upon not less than 60 days' notice whereupon the depositary shall deliver or make available to each holder of depositary shares, upon surrender of the depositary receipts held by such holder, the number of whole or fractional shares of preferred stock represented by such receipts. The deposit agreement will automatically terminate if (a) all outstanding depositary shares have been redeemed or converted into or exchanged for any other securities into or for which the underlying preferred stock is convertible exchangeable or (b) there has been a final distribution of the underlying stock in connection with our liquidation, dissolution or winding up and the underlying stock has been distributed to the holders of depositary receipts. Charges of Depositary We will pay all transfer and other taxes and governmental charges arising solely from the existence of the depositary arrangements. We will also pay charges of the depositary in connection with its duties under the deposit agreement. Holders of depositary receipts will pay other transfer and other taxes and governmental charges and those other charges, including a fee for any permitted withdrawal of shares of underlying stock upon surrender of depositary receipts, as are expressly provided in the deposit agreement to be for their accounts. Reports The depositary will forward to holders of depositary receipts all reports and communications from us that we deliver to the depositary and that we are required to furnish to the holders of the underlying stock. 25 Limitation on Liability Neither we nor the depositary will be liable if either of us is prevented or delayed by law or any circumstance beyond our control in performing our respective obligations under the deposit agreement. Our obligations and those of the depositary will be limited to performance in good faith of our respective duties under the deposit agreement. Neither we nor the depositary will be obligated to prosecute or defend any legal proceeding in respect of any depositary shares or underlying stock unless satisfactory indemnity is furnished. We and the depositary may rely upon written advice of counsel or accountants, or upon information provided by persons presenting underlying stock for deposit, holders of depositary receipts or other persons believed to be competent and on documents believed to be genuine. In the event the depositary receives conflicting claims, requests or instructions from any holders of depositary shares, on the one hand, and us, on the other, the depositary will act on our claims, requests or instructions. Resignation and Removal of Depositary The depositary may resign at any time by delivering notice to us of its election to resign. We may remove the depositary at any time. Any resignation or removal will take effect upon the appointment of a successor depositary and its acceptance of the appointment. The successor depositary must be appointed within 60 days after delivery of the notice of resignation or removal and must be a bank or trust company having its principal office in the United States and having a combined capital and surplus of at least $50,000,000. 26 DESCRIPTION OF WARRANTS The following is a general description of the terms of the warrants we may issue from time to time. Particular terms of any warrants we offer will be described in the prospectus supplement relating to such warrants. General We may issue warrants to purchase debt securities, preferred stock, depositary shares, common stock or any combination thereof. Such warrants may be issued independently or together with any such securities and may be attached or separate from such securities. We may issue each series of warrants under a separate warrant agreement to be entered into between us and a warrant agent. The warrant agent will act solely as our agent and will not assume any obligation or relationship of agency for or with holders or beneficial owners of warrants. A prospectus supplement will describe the particular terms of any series of warrants we may issue, including the following: o the title of such warrants; o the aggregate number of such warrants; o the price or prices at which such warrants will be issued; o the currency or currencies, including composite currencies, in which the price of such warrants may be payable; o the designation and terms of the securities purchasable upon exercise of such warrants and the number of such securities issuable upon exercise of such warrants; o the price at which and the currency or currencies, including composite currencies, in which the securities purchasable upon exercise of such warrants may be purchased; o the date on which the right to exercise such warrants shall commence and the date on which such right will expire; o whether such warrants will be issued in registered form or bearer form; o if applicable, the minimum or maximum amount of such warrants which may be exercised at any one time; o if applicable, the designation and terms of the securities with which such warrants are issued and the number of such warrants issued with each such security; o if applicable, the date on and after which such warrants and the related securities will be separately transferable; o information with respect to book-entry procedures, if any; o if applicable, a discussion of certain U.S. federal income tax considerations; and o any other terms of such warrants, including terms, procedures and limitations relating to the exchange and exercise of such warrants. 27 Amendments and Supplements to Warrant Agreement We and the warrant agent may amend or supplement the warrant agreement for a series of warrants without the consent of the holders of the warrants issued thereunder to effect changes that are not inconsistent with the provisions of the warrants and that do not materially and adversely affect the interests of the holders of the warrants. 28 DESCRIPTION OF STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS The following is a general description of the terms of the stock purchase contracts and stock purchase units we may issue from time to time. Particular terms of any stock purchase contracts and/or stock purchase units we offer will be described in the prospectus supplement relating to such stock purchase contracts and/or stock purchase units. Stock Purchase Contracts We may issue stock purchase contracts, including contracts obligating holders to purchase from us, and obligating us to sell to holders, a specified number of shares of common stock, preferred stock or depositary shares at a future date. The consideration per share of common stock, preferred stock or depositary shares may be fixed at the time that the stock purchase contracts are issued or may be determined by reference to a specific formula set forth in the stock purchase contracts. Any stock purchase contract may include anti-dilution provisions to adjust the number of shares issuable pursuant to such stock purchase contract upon the occurrence of certain events. Stock Purchase Units The stock purchase contracts may be issued separately or as a part of units ("stock purchase units"), consisting of a stock purchase contract and debt securities, trust preferred securities or debt obligations of third parties, including U.S. Treasury securities, in each case securing holders' obligations to purchase common stock, preferred stock or depositary shares under the stock purchase contracts. The stock purchase contracts may require us to make periodic payments to holders of the stock purchase units, or vice versa, and such payments may be unsecured or prefunded. The stock purchase contracts may require holders to secure their obligations thereunder in a specified manner. 29 PLAN OF DISTRIBUTION We may sell the securities to or through agents or underwriters or directly to one or more purchasers. Securities also may be sold by or through broker-dealers in connection with, or upon the termination or expiration of, equity derivative contracts between us or our affiliates and such broker-dealers or their affiliates. By Agents We may use agents to sell the securities. The agents will agree to use their reasonable best efforts to solicit purchases for the period of their appointment. By Underwriters We may sell the securities to underwriters. The underwriters may resell the securities in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. The obligations of the underwriters to purchase the securities will be subject to certain conditions. Each underwriter will be obligated to purchase all the securities allocated to it under the underwriting agreement. The underwriters may change any initial public offering price and any discounts or concessions they give to dealers. Direct Sales We may sell securities directly to you. In this case, no underwriters or agents would be involved. As one of the means of direct issuance of securities, we may utilize the services of any available electronic auction system to conduct an electronic "dutch auction" of the offered securities among potential purchasers who are eligible to participate in the auction of those offered securities, if so described in the prospectus supplement. General Information Any underwriters or agents will be identified and their compensation described in a prospectus supplement. We may have agreements with the underwriters, dealers and agents to indemnify them against certain civil liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments they may be required to make. Underwriters, dealers and agents may engage in transactions with, or perform services for, us or our subsidiaries in the ordinary course of their businesses. LEGAL MATTERS The validity of our securities issued hereunder will be passed upon for us by Shearman & Sterling LLP, New York, New York. EXPERTS The financial statements and related financial statement schedules incorporated in this prospectus by reference from Mpower's Annual Report on Form 10-K have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is incorporated herein by reference (which report expresses an unqualified opinion and includes an explanatory paragraph regarding the preparation of the consolidated financial statements in conformity with AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and an explanatory paragraph regarding a going concern uncertainty), and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 30 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution. The following table sets forth the estimated expenses in connection with the offering described in this registration statement. All expenses, except the SEC registration fee, are estimated. Securities and Exchange Commission registration fee... $ 31,675 Printing ............................................. 7,000 Accountants' fees .................................... 15,000 Blue Sky fees and expenses ........................... 3,020 Fees and expenses of Trustees ........................ 11,000 Rating Agency fees ................................... 1,000,000 Miscellaneous expenses ............................... 10,000 ---------- Total........................................ $1,077,695 ========== Item 15. Other Expenses of Issuance and Distribution. Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership or other enterprise, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by them in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interest of the corporation and, with respect to any criminal action or proceeding, if he or she had no reasonable cause to believe their conduct was unlawful. Section 145 further provides that a corporation similarly may indemnify any such person serving in any such capacity who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor, against expenses (including attorneys' fees) actually and reasonably incurred in connection with the defense or settlement of the action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made against expense in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. Our certificate of incorporation and by-laws provide that we shall, to the maximum extent permitted under Delaware law, indemnify any director or officer of the corporation who is or was made a party to any action or proceeding by reason of the fact that he or she is or was an agent of the corporation, against liability incurred in connection with such action or proceeding. We have entered into agreements with our directors, executive officers and some of our other officers implementing such indemnification. In addition, our certificate of incorporation limits, to the fullest extent permitted by Delaware law, the liability of directors for monetary damages for breach of fiduciary duty. We may also purchase and maintain insurance policies insuring our directors and officers against certain liabilities they may incur in their capacity as directors and officers. Item 16. Exhibits EXHIBIT INDEX Exhibit Number Description of Exhibit ------- ---------------------- 2.1 Findings of Fact, Conclusions of Law, and Order Under Section 1129 of the Bankruptcy Code and Rule 3020 of the Bankruptcy Rules Confirming Debtors' First Amended Joint Plan of Reorganization, dated July 17, 2002 (incorporated by reference to Mpower Holding Corporation's Registration Statement on Form S-4 filed with the Commission on April 13, 2001) 2.2 Debtors' First Amended Joint Plan of Reorganization dated May 20, 2002 (incorporated by reference to Mpower II-1 Holding Corporation's Registration Statement on Form S-4 filed with the Commission on April 13, 2001) 2.3 Debtors' First Amended Disclosure Statement dated May 20, 2002 (incorporated by reference to Mpower Holding Corporation's Registration Statement on Form S-4 filed with the Commission on April 13, 2001) 2.4 Amended and Restated Agreement and Plan of Merger among Mpower Communications Corp., Mpower Holding Corporation and Mpower Merger Company, Inc., dated as of April 12, 2001 (incorporated by reference to Mpower Holding Corporation's Registration Statement on Form S-4 filed with the Commission on April 13, 2001) 2.5 Asset Purchase Agreement, dated as of January 8, 2003, between Mpower and LDMI Telecommunications, Inc. (incorporated by reference to Mpower Holding Corporation's Current Report on Form 8-K filed with the Commission on April 22, 2003) 2.6 Amendment No. 1 to Asset Purchase Agreement, dated as of February 6, 2003, between Mpower and LDMI Telecommunications, Inc. (incorporated by reference to Mpower Holding Corporation's Current Report on Form 8-K filed with the Commission on April 22, 2003) 2.7 Asset Contribution Agreement, effective as of December 31, 2002, between Mpower and Xspedius Equipment Leasing, LLC (incorporated by reference to Mpower Holding Corporation's Current Report on Form 8-K filed with the Commission on April 22, 2003) 2.8 Asset Purchase Agreement, dated as of January 8, 2003, between Mpower, Florida Digital Network, Inc. and Southern Digital Network, Inc. (incorporated by reference to Mpower Holding Corporation's Current Report on Form 8-K filed with the Commission on April 22, 2003) 2.9 Acknowledgement and Amendment No. 1 to Asset Purchase Agreement, dated as of April 7, 2003, between Mpower, Florida Digital Network, Inc. and Southern Digital Network, Inc. (incorporated by reference to Mpower Holding Corporation's Current Report on Form 8-K filed with the Commission on April 22, 2003) 2.10 Asset Purchase Agreement, dated as of February 6, 2003, between Mpower and LDMI Telecommunications, Inc. (incorporated by reference to Mpower Holding Corporation's Current Report on Form 8-K filed with the Commission on April 22, 2003) 4.1 See the Second Amended and Restated Certificate of Incorporation and the Amended and Restated By-laws (incorporated by reference to Mpower Holding Corporation's Registration Statement of Form 8-A filed with the Commission on July 30, 2002.) 4.2 Form of New Key Employee Option Plan adopted by Mpower Holding Corporation (incorporated by reference to Mpower Holding Corporation's Registration Statement of Form 8-A filed with the Commission on July 30, 2002) +4.3 Form of Indenture relating to debt securities between Mpower and HSBC Bank USA +4.4 Form of senior debt security is included in Exhibit 4.3. Any additional form or forms of debt securities will be filed with the SEC +4.5 Specimen certificate for shares of common stock ++4.6 Form of Certificate of Designations of preferred stock +4.7 Form of Warrant ++4.8 Form of Stock Purchase Contract (including form of stock purchase contract certificate) and, if applicable, Pledge Agreement ++4.9 Form of Unit Agreement (including form of unit certificate) +5.1 Opinion of Shearman & Sterling LLP as to the validity of the securities being registered +12 Calculation of Ratio of Earnings to Fixed Charges of Mpower +23.1 Consent of Deloitte & Touche LLP +24.1 Powers of Attorney (included on signature page) +25 Statement of Eligibility on Form T-1 of HSBC Bank USA, as trustee for the debt securities _______________ + Filed herewith ++ To be filed as an exhibit to a Current Report on Form 8-K to be filed by Mpower in connection with a specific offering Item 17. Undertakings. The undersigned registrant hereby undertakes: II-2 (a)(1) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of this 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; provided, however, that notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) 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 the undertakings set forth in clauses (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by those clauses is contained in periodic reports filed by the registrant pursuant to Section 13 or 15 (d) of the Securities and Exchange Act of 1934 that are incorporated by reference in this registration statement; (b) That, for the 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 and Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(a) of the Securities Exchange Act of 1934) that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that the opinion of the Securities and Exchange commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) it is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue; and (d) The undersigned registrant hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) a of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under Section 305(b)(2) of the Trust Indenture Act. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, we certify that we have reasonable grounds to believe that we meet all of the requirements for filing on Form S-3 and have duly caused this registration statement to be signed on our behalf by the undersigned, thereunto duly authorized, in the town of Pittsford, State of New York, on January 31, 2004. MPOWER HOLDING CORPORATION By: /s/ Rolla P. Huff ------------------------------------- Rolla P. Huff Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities indicated on January 31, 2004. Power of Attorney Each individual whose signature appears below constitutes and appoints Rolla P. Huff and Russell I. Zuckerman, and each of them singly, his or her true and lawful attorneys-in-fact and agents with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign this registration statement and any and all amendments thereto, including post-effective amendments, and to file the same, with all exhibits thereto, any related registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all the said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Signature Title
/s/ Rolla P. Huff Chief Executive Officer and Chairman of the Board, ----------------------------------- principal executive officer Rolla P. Huff /s/Michael E. Cahr Director ----------------------------------- Michael E. Cahr /s/Michael M. Earley Director ----------------------------------- Michael M. Earley /s/ Robert M. Pomeroy Director ----------------------------------- Robert M. Pomeroy /s/ Richard L. Shorten, Jr. Director ----------------------------------- Richard L. Shorten, Jr. /s/ Anthony J. Cassara Director ----------------------------------- Anthony J. Cassara /s/ S. Gregory Clevenger Executive Vice President and Chief Financial Officer ----------------------------------- principal financial officer S. Gregory Clevenger /s/Michael J. Tschiderer Vice President of Finance, Controller and Treasurer ----------------------------------- principal accounting officer Michael J. Tschiderer